From Larry Hite......

“We don’t really trade silver…we don’t trade the S&P…we trade the differences. We really are risk managers. We take on risks, try to exploit them and we leave when they turn against us. That is what we get paid for. Basically we are in the risk transfer business. We take on what people want to sell, sell what people want to buy and hope to make a profit. The reason why one goes to a portfolio is because there are real limits to perfect knowledge. I’ll give you an example. Say you knew which commodity, stock or currency would appreciate the most in the following year, and you knew exactly what its price would be. We did this experiment looking backwards in fact in our database. The question of when you take a position is how are you going to trade the line…how much of a position are you going to leverage. Now, if you have perfect knowledge, would you leverage 5 to 1, would you leverage 10 to 1, 2 to 1? Well it turns out that if you leverage more than 3 to 1 that you are a loser. Because we found that if you did 3 to 1 you would have, even with perfect knowledge, you could go down a third. So that, the only perfect knowledge you could have, would be if you knew every wiggle on the line. Then you would know exactly how much to leverage. But you don’t.”

From the WSJ - more compulsory reading......

NOVEMBER 6, 2009, 9:58 P.M. ET
The Man Who Predicted the Depression
Ludwig von Mises explained how government-induced credit expansions led to imbalances

By MARK SPITZNAGEL
Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

» Read More

In their report into the drivers of strong corporate performance Roberts J. and D. Young "The Role of the Board in Creating a High Performance Organisation" Corporate Research Forum 2005, note the Booz Allen work over the period 1999 to 2003 which shows that some 87% of the value loss occurring in the 360 worst performing companies losing was attributable to poor strategic decisions and only 13% could be attributed to regulatory and compliance failure.

This remarkable statistic might be "out" by a very significant margin and still the value to be gained from regulatory reform and various tightenings proposed by anxious but misinformed regulator politicians is but slight relative to what improved quality of strategic decisions might generate.... and to the extent that it is a distraction it likely imposes costs.

Better we shoot for the 87% by leaving the competitive processes which regulation is inclined to hinder work on improving strategic decisions which both prevent loss and add value.

Recently after the Berkshire Hathaway AGM.... the comments are not necessarily new but the passion is fired here by losses!!!!

By Erik Holm and Andrew Frye

May 4 (Bloomberg) -- Berkshire Hathaway Inc. Vice Chairman Charles Munger listed leverage, stupidity, “gross immorality,” and accounting practices among the causes for the current financial crisis.

Munger and Berkshire Chairman Warren Buffett spoke yesterday at a press conference one day after the Omaha, Nebraska-based firm’s annual shareholder meeting at the city’s Qwest Center. Excerpts from the press conference are below.

» Read More

What if other innovators had given up?

By L. GORDON CROVITZ WSJ April 20 2009 wsj

Modern cities were built through trial and error. As architects reached upward, there was the trial of inventing a safe elevator so that buildings could become skyscrapers. Early contraptions were used in factories and mines, but when cables broke they plummeted to the bottom of the shaft. In the 1850s, Elisha Graves Otis developed a safety device to keep elevators from falling, eventually giving people the confidence to use them.

» Read More

Pen-pushers are now outshining technology whizz-kids in India’s arranged marriage market as parents look to pair off their daughters with grooms who have more secure job prospects.

As the global financial crisis bites, public servants with steady employment are back in vogue as the ideal marriage partners, according to matrimonial website operators and matchmakers.

The trend reflects a deepening downturn in India’s IT outsourcing industry, with operators such as Wipro reporting this week its first quarterly decline in staff in its software division in recent memory.

“In the marriage stock market, IT workers and investment bankers are the toxic assets,” said Pratik Kumar, human resources head at Wipro, India’s third-largest IT outsourcing company.

Since it took off in the 1990s, the outsourcing industry, in which Indian companies manage the software and computer systems of clients overseas, has become more than just an engine of the country’s economy – it was also a driver of social change. It has spawned a generation of well-educated, mobile professionals with high levels of disposable income that until recently were considered highly desirable as marriage partners.

Since the recession, Indian families have been increasingly cautious about marrying their daughters off to overseas Indians because of the bad economy in the west. Now they are becoming wary of their own country’s “techies” and bankers.

“This is the first time we’ve seen a pullback from a steady increase in the acceptance of IT grooms,” said Gaurav Rakshit, business head at matrimony website Shaadi.com, where Indian families shop for spouses for their children.

Shaadi.com reported a 30 per cent shift away from IT grooms towards other industries, particularly civil servants and managers at state-owned companies who have higher job security and recently were awarded a large pay rise.

Top of the scale are civil servants, those from the ultra-elite Indian Administrative Service and Indian Police Service.

Kavita Reddy, a banker and mother of 26-year-old Bhavna, is one Bangalore parent who is becoming pickier when it comes to finding a life partner for her child. “A steady income leads to a happy life.

“I am not looking for someone from the finance market or the IT sector for my daughter, for obvious reasons. An IAS [officer] is the best. Doctor is the next.”

Additional reporting by Varun Sood in Mumbai

Copyright The Financial Times Limited 2009

From Henry Hazlitt's "Economics in One Lesson"

"The belief that labor unions can substantially raise real wages over the long run and for the whole working population is one the great delusions of the present age. This delusion is mainly the result of failure to recognize that wages are basically determined by labor productivity. It is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the "labor movement" in the latter two countries was far more advanced.

In spite of the overwhelming evidence that labor productivity is the fundamental determinant of wages, the conclusion is usually forgotten or derided by labor union leaders and by that large group of economic writers who seek a reputation as "liberals" by parroting them.

But this conclusion does not rest on the assumption, as they suppose, that employers are uniformly kind and generous men eager to do what is right. It rests on the very different assumption that the individual employer is eager to increase his own profits to the maximum. If people are willing to work for less that than are really worth to him, why should he not take fullest advantage of this?

Why should he not prefer, for example, to make $1 a week out of a workman rather than see some other employer make $2 a week out of him? And as long as this situation exists, there will be a tendency for employers to bid workers up to their full economic worth."

One rough - but no rougher than many other measures - is the Price Earnings ratio of the Standard and Poors 500.

Right now the 52 week summary shows the S&P500 P|E Ratio to be 15.6

Professor Jeremy Siegel has the long term (100 year plus) historical average P|E Ratio at 15.0

The following chart provides a general view of the averages.


In 1929 the average got (briefly) above 30.00

The average got as low as 7.00 during the Korean War, W.W. I and during the Carter stagflation.

Some care then, in assuming an unwarranted level of pessimism.

Here is the paper from which Chris Anderson wrote his extraordinary book "The Long Tail". This is a shorter version and the book contains the polishing etc. but the essence is here. This model probably represents the first time there has a serious challenge on any scale to the traditional volume revenue business model which has dominated commerce for centuries..... so its important to understand it.



And here is the paper.

Quote from a Senior recording Executive last week.... "The music industry is not decling, its growing. The recording industry is declining."

Correct - and the reasons are well known.

Sharp reminder of the numbers:

Top ticket at a Police reunion concert.... $900.00
Entire Police musical catalogue on CD... $100.00