Wednesday, April 23, 2014

Nick Rowe and the Promise of Economics 2.0

     In my previous post on economics I had said that what I want from economics is good policy advice-in so many words this is what I was driving at. Nick though kind of offers a word of caution. 

     "Put it this way: it would be great if an intro economics text gave us the answer to every question we wanted to ask. But that's too much to hope for. In this case, it only gives us some useful tools for thinking about the question and about possible answers. But that makes it worthwhile. To go further, we would need to know more about the bus business."

     It would indeed! However, surely it can tell us something that we can actually use?! Speaking of Mankiw's text, I just came across this gem on the subject of what they call 'monopolistic firms.'

    "Imagine that you were to ask a firm the following question: "Would you like to see another customer come through your door ready to buy from you at your current price"

     Mankiw's answer: "A perfectly competitive firm would answer that it didn't care. Because price exactly equals marginal cost, the profit from an extra unit sold is exactly zero. By contrast, a monopolistically competitive firm is always eager to get another customer. Because its price  exceeds marginal cost, an extra unit sold at the posted price means more profit."

    Mankiw, Principles of Economics, 2nd edition, chapter 17, pg. 383. 

    Who knew I had so much in common with a monopolistic firm? It's this counterintutiveness of economics which is both maddeningly frustrating and totally fascinating-at least for me-at the same time. Sumner always likes to say that common sense plays no part in economics-I usually give him a hard time about that as I suspect he's an elitist who's trying to foist on the public the kind of miserable policies it would never vote for-but could be imposed perhaps via the monetary authorities; but then I'm cynical. 

    The fact that economists often believe counterintutitve things doesn't always make them right to be sure. I think of things like the minimum wage and the Civil Rights ACT as things most economists opposed and was as a public decided the economists were wrong-rightfully so I believe. 

    Still, what I'm interested in is just how much standard econ can be applied to these kinds of issues. In any case, I will go on. I've already got Krugman's textbook and then Paul Samuleson's in Que when I'm done with Mankiw. 

Tomorrow Morning's Market Will be all About Apple

     Apple certainly shook up the market this afternoon after the bell with its earnings beat with a totally unexpected 7 to 1 stock split announced and an increase in dividends. A lot of people love this move. Like Jim Cramer:

     "Apple posted quarterly earnings and revenue that topped estimates Wednesday and announced a 7-for-1 stock split, fueling the stock higher after a temporary halt."

     "The company posted earnings of $11.62 a share, on revenue of $45.6 billion, blowing past estimates for $10.18 a share on $43.53 billion in revenue, according to a consensus estimate from Thomson Reuters."
     "Apple also authorized a 7-for-1 stock split, addressing calls to share more of its cash hoard. While the split will not change the value of Apple's shares (seven shares at $75 each as opposed to one at $525 a share), it could make the company's stock more accessible to individual investors. Shareholders as of June 2 will get six additional shares for each Apple stock they own, and the new split-adjusted trade will take place starting June 9."
     "The board also approved a dividend increase of approximately 8 percent to $3.29 a share. The company additionally said it would boost the overall size of its capital return program to more than $130 billion by the end of 2015, up from its previous $100 billion plan."
     Some people love the move. Like 'activist investor' Carl Icahn expressed in his tweets:
     "Agree completely with 's increased buyback and extremely pleased with results. Believe we’ll also be happy when we see new products."
     "As we said at conference yesterday, we continue to believe remains meaningfully undervalued. Many analysts fail to understand company."
Not everyone was so impressed.
      "It's a company that's trying to please Wall Street," Max Wolff, chief economist and strategist at Citizen VC told CNBC's "Closing Bell." "It didn't used to have to. Now it does. I think it's a huge milestone that they've realized they do and they're throwing meat on that. I don't know how transformative it is."
      "Apple's announcement that it would buyback shares, increase its dividend, and split its stock seven for one sent the tech behemoths's shares higher after hours."
     "But the move does little to staunch fears that the company is losing the innovation game to rivals, Google in particular, said Trip Chowdhry, analyst at Global Equities Research."
      While it's ipad stocks surpised to the downside the iphone numbers were a major surprise to the upside. Jim Cramer is on board 
      "All told, you get these kinds of shareholder friendly initiatives and solid results and "it ignites an otherwise dormant stock. Positive surprises tend to do that," Cramer said.

     UPDATE: Cramer's reaction to Apple.
      As an investor this is notable for two reasons-one because with a 7 to 1 stock split in June, playing this stock becomes a lot more plausible and I'm intrigued myself. Also it's important as these bang out earnings are expected to be a major market mover tomorrow. 
     "It's a shareholder friendly move. I can't deny that, but I think for the long term you want to see companies invest in new products and growth," said Michael O'Rourke, chief market strategist at Jones Trading. "It falls in line with the financial engineering and aspects like that that are driving the tape and I don't think it's healthy." But he said the Apple news should be a positive for the market.

     UPDATE 2.0: I just came across this article at CNBC before the news of course, that wondered if Apple would get ''bruised' after earnings as this is 'what history shows' even if they beat.

      I love it-we get to see which is the road not traveled in real time. Unlike the debates among economists, sometimes you can prove a counterfactual wrong just by looking at what happened. 
     Right now I remain aggressively long in this market-probably too aggressive. I got lots of calls in both C and BAC as well as JNJ-that is Johnson and Johnson. The market has seemed very timid the last few days not wanting to do too much. However, JNJ has climbed over $100 finally-which is big as it took a long time for it to break that ceiling. Meanwhile, the market has seemed to not know what it wants to do with the bank stocks as they've been totally flat the better part of a week. However, BAC and especially C started to break out a little today. I notice that both C and JNJ are up exactly $.28 cents on considerable volume. I don't know whats causing this-normally you assume that the things are unrelated as the catalysts of one usually have little to do with the other. 

    However, if Apple has something to do with this, thank you Apple. I really only need some small moves in these positions to cash out big like I did the C puts a few weeks ago.

   The only way this could be it, is if a general bullish mood became irresistible so that most stocks as stocks rise-with only those who specifically having clearly bad news not joining in the action. In any case, while the bull position hasn't won for me yet-again, I've been a bull starting 4/7 a few weeks back-it's not been because of the bears-there's been no downside at all just that the banks have been stuck in consolidation mode. 

   If tomorrow can be a strong bull day it will be D-day 2.0 for me. 



Tuesday, April 22, 2014

Nick Rowe Drops By and the Promise of Economics

     He kindly dropped by and left some thoughts on my attempt to consider standard economics in relation to the Nice Bus company here in Nassau-on Long Island, Ny. I was pointing out that many think the  trouble with Nice-a private company that took over from the previous Metro Authority-that was kind of a quasi public-private kind of company-is that it's a private company that seeks a profit-since most of the bus lines aren't profitable but serve a public interest. Nick left these thoughts:

    'Chapter 15(?) monopoly, and the part of chapter 11(?) "Public Goods and Common Resources" where it talks about natural monopoly.

    'Assume that fixed costs are large, and marginal costs are small, so the ATC curve slopes downwards, with the MC curve always below the ATC curve.'

    'Draw a downward-sloping demand curve.'

    'The efficient quantity is where the demand curve cuts the MC curve (provided the area under the demand curve exceeds total costs), but this involves the producer making losses.'

     'One solution is price control plus subsidies. (Or maybe price discrimination, like where they sell bus passes, rather than a price per ride). Or public ownership.'

      'See especially the section near the end of chapter 15. The bits on regulation and public ownership.'

    I actually just finished that chapter a few days ago-now I'm in chapter 16 which is about oligopolies. According to Mankiw, oligopolies can be in the public interest provided they aren't successful in doing what would be in their own best interests-colluding with the rest of the oligopolies to achieve a de facto monopoly. 
    As for what Nick wrote-I'm must gratified I actually know what ATC and MC mean-marginal cost, average total cost; LOL. 

   It seems to me that Mankiw might just add up the consumer and producer surplus-in this case the producer would be the bus company-looking at it in this way might well look good according to this analysis. After all, no doubt many passengers would be 'willing' to pay more than the current $2.25 fare-he might even determine that 'total surplus' would be raised if Nassau County stopped leaning on Nice not to raise its prices. 

   Nick further left this comment:

   "Put it this way: it would be great if an intro economics text gave us the answer to every question we wanted to ask. But that's too much to hope for. In this case, it only gives us some useful tools for thinking about the question and about possible answers. But that makes it worthwhile. To go further, we would need to know more about the bus business."

     For me this is the whole promise of economics and what made me get into it around 2011the hope that it might help us with 'questions we want to ask'-particularly questions of public policy. I've always been a political animal but perhaps I got frustrated with a seemingly interminable debate among political opinions with seemingly no referee-ie, no one to help us know why we should consider one person right over the other. 

    Economics seemed in some sense to  be able to offer something like this. I guess maybe my hope for it-to help us come to informed policy decisions-is kind of like Descartes who had hopped back in the early 17th century that there would someday soon be a calculator not just for arithmetic but for morality as well. 

   The trouble with economics is you're never sure if a particular idea of standard econ is legitimate to use in a certain policy discussion or not. It's very possible it seems to me that based on the standard definition of total surplus one could declare a fare hike for Nice as in the public interest-after all, riding the bus is very 'inelastic-so a fare hike will only raise profits which will raise public surplus. 

    In any case, I appreciate Nick's input and I think that this is the kind of analysis we should try to do more of. I guess his recommendation of reading a text book is a good one after all-after this I have Krugman's  to read, and then Samuelson's-I'm not going to run out of reading material any time soon which is how I like it. 
    P.S. I really don't have such a strong opinion on the subject of Nice Bus myself-maybe it would be better to go back to the M TA, but I have to say I remember the MTA era and it was hardly a utopia. I don't think that the drivers are later with them than previous and in fact I think it may be the opposite. 

     It seems to me that the drivers may even overall be more polite-I seem to remember that once Nice was here you slowly saw the old pass time of watching passengers run all the way to the bus and bang on the doors before driving off and declaring its too late die out. I don't see the drive leave people they obviously could have picked up nearly as regularly as I used to. Again-I really am undecided on the question. 

Still a Bull Market? Dennis Cartman Thinks So

     Obviously it's just one man's opinion, still opinions are sometimes notable just based on who has them. When a long time player like Cartman says he is now 'pleasantly long and considering being aggressively long' I think you have to stand up and notice. Particularly as he's often very pessimistic and bearish and was sounding the alarm just a few weeks ago. 

    "I'm back to being pleasantly long," said Gartman Monday, on "Fast Money." "Two-and-a-half weeks ago, I became very scared and went to neutral...No question about that. Last week, I went back to being pleasantly long. I may even get to being aggressively long. The market wants to go higher.".

    "Gartman, publisher of the "Gartman Letter" said on "Fast Money" April 10 that market action on the morning of April 4 scared him out of the market. "I'm not sure what happened, but something happened between 11 and 11:15, that everything turned on a dime," he said at the time.
     "After a good two-week decline, after 50 big handles in the S&P (500), after going down and touching and barely going through and holding the 100-day moving average, you have to understand it's still a bull market," Gartman said.
     That's been my sense too-that the market wants to go higher. Certainly my own portfolio is 'aggressively long' to say the least-two weeks ago my big position was lots of puts in Citi. I made out big on that one-an initial investment of about $1,400 got to over $3,700. Since then though I no longer felt there was much down side.
    Right now I'm long Citi, BAC, and have bought 100 shares of the 'Chinese Twitter'-Weibo. My happiest postion though is Johnson and Johnson-JNJ. I bought 20 more calls in it yesterday-for a total of 40-and now I see JNJ which finally broke $100 yesterday is up $.56 in the premarket. If it opens up big as it is in the premarket I'll be able to get out of it today for another big gain. 
   Let's hope the market gets 'aggressively long' for C and BAC which have just been running in place the last 3 trading sessions. 


Monday, April 21, 2014

I've Listened to Nick Rowe but What Would Standard Economics Have to Say About Nice Bus?

     I have-Nick you can't say I didn't listen-you said those of us who want to criticize mainstream Macro should read a decent textbook so we actually know what it's about.

     Many at the time found this rather off-putting if not condescending, however, over time I decided it perhaps wasn't so unreasonable. To that end I'm currently reading Mankiw's Principles of Economics-it's the 1998 version as it was much more affordable than more recent versions-however, it doesn't look to me that you lose all that much-I was perusing a more recent version on line-that costs over one hundred dollars and most of it is the same.

    I'm also at the same time reading this book that Stephen Williamson recommended-I'm reading this one on Amazon Kindle-I always have a physical book which I read on the bus every day-and a book I read online at Amazon Kindle-'Big Ideas in Macroeconomics' by Kartik Arthreya. David Glasner had a pretty good decent look at it.

     Overall, he was not very impressed. SW later had a response to his response to the book-SW wasn't too impressed with Glasner's being unimpressed with the book.

     He thinks that the fact that criticism of the book amounted to 'another poor blogging performance'-he at least gave Glasner credit for reading the book unlike other critics-you can guess who these usual suspects are?

     Now that I'm reading I do think that Arthreya does a pretty good job of explaining some difficult ideas well. I think that what you do come away with is that you may think that ideas like Pareto optimization or Walrasian Equilibrium are all wrong but it's not so easy to really show how once you get into looking at it in more depth. Much of what he seems to say is that things like PO or WE aren't literally true but they are nevertheless very useful ideas and models and no one could actually get us a better model to work with. One thing that comes through clearly in both Mankiw and Arethya is a belief that free markets is the best way to allocate most goods and services-though neither claim that this is true for everything.

     Yesterday I had a chat with a bus driver on Nice Bus-the Nassau County bus line that was run by the MTA before but has now been taken over by the private company Veolia-which calls the bus company 'Nice Bus' now. The conversation turned here after I asked the bus driver why they don't consider expanding to having three N35s run per hour during the week rather than the current two.

    She explained that this would never happen as they already consider the N35 a money loser for them-I protested that it's pretty busy in the morning but she says that the rest of the day is slow-in fact they were talking about discontinuing the route at one point. This came a shock as without the N35 getting around Baldwin by bus would be more or less impossible and it certainly is a much more used bus than many others. Basically there are only a few lines that really pay-the N4, the N6, the N70-72 line, the N49. Now their agreement with Mangano and Nassau County disallows them to discontinue a route like the N35-but it does kind of give you an idea of the difference between a private company and a quasi public company like the MTA-the MTA is there not to turn a profit first and foremost but to make sure that residents have adequate transportation. Nice just wants a profit.

    To be sure, I don't know that standard theory is necessarily vanquished here-this is what I meant when I said it's not as easy to defeat as some 'heterodox' types think. Mankiw never claims that the government shouldn't do anything-he leaves scope for the government to run certain industries. Public transit might be seen as one of those exceptions to the rule that he and Artheya certainly acknowledge. Mankiw would agree with this in certain industries but perhaps not public transit. He had an argument in the book that costs could come down and services up if the private vans were given the right to do their thing by the authorities.

   Yet I see problems with this approach-if there were private vans picking everyone up, surely the area that the buses go would decrease rather than increase.




Saturday, April 19, 2014

So When Does the GOP Stop Trying to Repeal Obamacare and Start Trying to Save it?'

     I'm not sure and clearly we're not there yet, but the predictions of gloom and doom for the ACA just are just looking embarrassing already. They've been insisting that Obamacare would miss the target of sign ups and then when that was discovered to be not the case they claimed that it's only older people doing that or people who already have insurance. This prediction has also fallen flat.

     For now, they're trying to claim that the numbers are fraudulent but obviously this  crutch can't last forever. What happens when the ACA becomes like Social Security and Mediare-an entitlement that Americans don't want touched? Obviously they'll have to give up repealing it and start 'saving it' like they do for SS and Medicare-Ryan recently released another terrible budget including his plan to destroy Medicare-he claims he merely saves it. Let's hope this is the last Ryan budget we ever have to see.

    Here is Sumner on the ACA:

    "The share of the population that is uninsured has dropped sharply since last summer.  On the other hand the share of Americans lacking health insurance has risen in the 5 and 1/4 years since Obama was elected, from 15.4% to 15.6%.  On the other, other hand 3 or 4 million more Americans will have health insurance by 2014:3.  On the other, other, other hand that’s less than 2 percent of adults.  So the share lacking health insurance will still be almost as high as in the summer of 2008.  Or am I missing something?"

     "Now let’s consider the goal of Obamacare.  If the goal is to eliminate uninsuredness, then it seems to have failed.  But perhaps the goal is to eliminate involuntary uninsuredness.  After all, all of the sad stories we were told before the law was passed tended to focus on people who were unable to get treated for illness, or perhaps were financially devastated by the cost of treatment.  If I’m not mistaken that will no longer occur, as no one can be turned down for having pre-existing conditions.  Or is that assumption false?  If there is no involuntary uninsuredness, can we consider the problem solved?"

     "One objection might be that we need everyone covered, as otherwise the uninsured will tend to overuse emergency room services.  But unless I’m mistaken there are studies showing exactly the opposite, that when given health insurance people tend to use the ER more often.  Is that true?  If so, why do we need to have everyone covered?  Why isn’t it good enough to eliminate involuntary uninsuredness?  Is the fear a “death spiral” that drives the insurance companies out of business?”

     "In my view Obamacare did lots of bad things and two very good things.  The good things were eliminating involuntary uninsuredness and the Cadillac plan tax. I opposed the program, but have an open mind on how it will pan out.  We’ll know much more in 10 years. One key test is whether Congress will avoid “doc fixes” to the Cadillac plan tax."

     So he's on record as not guaranteeing it will fail. My guess is that in 10 years the GOP will be promising to fix Obamacare while accusing Democrats of trying to destroy it. By then they may even look back on fondly at Obama-this seems pretty remote right now but then it seemed remote that they'd ever embrace Clinton even less so his wife yet by 2010 there were in love with her too. 

       The GOP rule is you have to hate curent Democrats especially the one in the White House-in the future you can invoke them to criticize the current Democratic President of that time. 

Jim Cramer vs. Jim Cramer on the Market

     I remember a few years ago, when Jon Stewart brought Cramer on his show and reamed him out. I mean it was painful to watch.

     "Tonight we had the big face-off, the heavyweight bout, the Super Bowl square-off between CNBC's Jim Cramer and Comedy Central's Jon Stewart. Cramer was especially upset about being included in a segment TDS produced on the horrible and almost criminal reporting CNBC has been airing as THE go-to business network after CNBC's Rick Santelli attacked average working-class people who got caught up in the sub-prime mortgage crisis. Santelli dubbed them as "losers." Well, the only loser tonight was Cramer and CNBC.
Jim basically sat there, starry-eyed like a lost puppy, and was virtually silent throughout the three-segment show featuring him. He basically waved the white flag and said,"You got me."
Jon Stewart hammered Jim Cramer and his network, CNBC, in their anticipated face-off on "The Daily Show," repeatedly chastising the "Mad Money" host for putting entertainment above journalism.
"I understand that you want to make finance entertaining, but it's not a ... game," Stewart told Cramer, adding in an expletive during the show's Thursday taping. The episode was scheduled to air at 11 p.m. EDT on Comedy Central Cramer insisted he was devoted to revealing corporate "shenanigans," to which Stewart retorted: "It's easy to get on this after the fact."
At one point, Cramer sounded the reformed sinner, responding to Stewart's plea for more levelheaded, honest commentary: "How about I try that?" said Cramer. "I'll do that."
By the end, the two-segment interview went far beyond its allotted time. Comedy Central said the on-air version would be cut by about eight minutes, though the entire interview would be available unedited on on Friday.

     Yet I still never really thought that Stewart gets it. He saw it in terms of  Cramer and friends doing shoddy jounralism but that's not it. Cramer is not a news reporter and that's not why people tune into his show. He basically kind of is like a wolf retiring from the game of eating sheep to supposedly instruct the sheep how to evade wolves in the future. 

    I love his show. Now in the segment that got Stewart's ire Cramer might have seemed a little different than he does on his show. Yet I really had a totally different take on it than Stewart-I don't find this morally horrifying or repugnant. Here he is on that old segment of his he used to call Wall Street Confidential.

     I don't doubt that this is closer to the 'real Cramer'-but still, he's giving the public knowledge. It depends on how you approach it-Stewart is just some outraged muckraker on steroids-who seems to think he inhabits a very black and white moral universe-I watch Cramer for market knowledge. No question if you are trying to make money in the market he's a guy you want to listen to. That he doesn't tell the Mad Money audeince everything he knows is someting that doesn't stun me-I'd be stunned if it were the opposite. 

     When he talks about the ability of a hedge fund to put $5 million dollars in a stock before the market opens to raise a stock-and then take it all off once the market opens leading all the 'moron longs' as he calls them to jump out so he can win his own short position in a stock this is something worth knowing about. It enables a market particpant to perofrom better not worse. So I tend to disagree with Stewart. I'm a liberal-though even here I haven't been such a fan of his lately as he spends too much time bashing Obama and playing the 'both sides do it' game-but this is the market it's not PBS and now life wouldn't be better if Cramer tried to make his show a PBS segment. 

    Cramer still remembers it bitterly-or did back in 2011 two years after it happened. 

     "In the Times Magazine, Chafets asks Cramer about his dust-up with Stewart. Cramer's response doesn't exactly suggest that he's moved on: "The old me would have hit Stewart with a chair. I'm proud I didn't do that. I controlled myself. But maybe I shouldn't have. Maybe I should have taken the gloves off."
Actually, that's just a bit of what Cramer says. "After the interview, people like that, total strangers, would come up to me and say, 'Jim, I’m sorry,'" he tells Chafets. "That made me feel horrible, people feeling sorry for me. For six months it was on my mind all the time. I hurt so bad."

    "Cramer's conversation with Chafets takes place in a diner, and when he's talking about the Stewart feud, he raises his voice so loud that people start leaning in to listen. Eventually Cramer says he's over it: "I don't really think about it now." Then he goes on to compare it to a Kesselschlact, a German term that Nazis would use to t describe "battles of total annihilation." It sure sounds like he's made his peace."

     Here was a big New Yorker piece on Cramer where we get into the Cramer-Stewart dust up in more detail.

      P.S. I disagree with Stewart on Cramer a bit but not on Rick Santelli-whose 'famous rant' launched the Tea Party movement.' Certainly Santelli deserved to get skewered.