Tag economics

Share buybacks: Big cos say "We don't know what to do with the cash anyway!" and why it's good for startups.

Stock buybacks are the biggest force influencing equities since 2009 — over $2 trillion have been done.

Some are probably good, but many aren't. In 2011, Warren Buffet wrote about how you can tell: (via Seeking Alpha blogger Chuck Carnevale)

Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated.

Clearly a lot of buybacks fail the 2nd criteria — but there are so many boards and management teams that are compensated by EPS that the share buybacks keep happening even when the price is not a discount. A natural result when incentive structures meet personal self-interest. One blogger points out, it's actually a form of managers looting their companies. 
By using large stock buybacks to manage the short-term objectives that trigger higher compensation for themselves. By using those stock buybacks to manipulate the share price, which allows them to use inside information to time their own stock sales. By using buybacks to funnel most of the company’s profits back to shareholders (including themselves).  They use the stock market to loot their companies.
It's a claim echoed by the Atlantic in February of this year in an article called "Stock Buybacks Are Killing the American Economy." Rather than new jobs, new factories, new products, it's straight back into the financial system.

Since the companies themselves have no specific better ideas about how to use the capital to grow in real terms (e.g. real new products that drive real new revenue) all their professional managers can do is buy shares back regardless of price. In this world, buybacks are directly related to Thiel's ideas around indeterminate optimism of the markets, where companies are encouraged to be as profitable as possible.

Who cares if you're buying back at a ridiculous price? We don't know what to do with the cash anyway. 

This is interesting because a traditional criticism of whether we're in a bubble is whether P/E ratios are high or low. The E part is Earnings Per Share, and so if managers manipulate the denominator for both P/E and EPS, they can make it seem like things are fine (and get their quarterly bonus to boot!) when functionally there's little happening. 

On the bright side, the lack of innovation in traditional incumbent businesses means that startups have a chance in more arenas than ever. If big companies have management that won't take the risk of failure, and aren't hiring teams to attack new markets, then it's wide open for new players to get capital, hire people, and make these things happen. 

If buybacks are killing the economy, then startups will save it. Pretty sweet if you ask me. 

Chart via Factset
More reading here: ValueWalk 

How Wage Slaves vs. Entrepreneurs look at money

Really amazing analysis of business, interpersonal communications, and life coming out of ribbonfarm.com.

In particular, this latest piece on capital is brilliance.

My conception of money completely changed in the years and months leading up to work Posterous. The bargain when working as an employee is completely different. Its very easy to spend money like water when times are good and you've got a steady, reliable, and more than adequate. Its a renewable resource that in the moment seems to be infinite.

But if you want to make it on your own, you can't look at each dollar as something to be spent on your own happiness. That latte won't really make you happy. The only thing that may really make you happy is to be able to reinvest the money into yourself. It is, as Venkatesh points out above, building material for your dreams.

Palantir Finance releases public demo of its powerful market analysis platform

Years ago, I left a stable job at Microsoft to join some friends working on hardcore software problems in the finance space. From the ground up, it was created to be a fresh approach to the often stale and murky waters of financial software out there. Even today, the best market analysis software falls into one of the following three buckets: barely a step up from teletype terminals, an homage to the early days of Windows 2.0 dialog box hell, or homegrown one-off software mired by hopelessly bad UI.

We set out to create a v1, new-code-from-scratch product that we built and designed from the bottom up. Yesterday, Palantir released a public and usable demo of the basic elements of their advanced financial platform. You can play with it on your computer today for free.

Click here to get started or you can read more about it below.

Disclaimer: While no longer affiliated with the company, I am a shareholder. And a fan.

Starting from scratch, the most basic building block of the platform was the Chart Tool. Existing charting tools made it incredibly hard to zoom in and out, and view and compare time series all on one page.

We wanted something that could be easily added to and compared. Why was it that before this chart tool, you had to plot time series on your own in Excel in order to adjust and correct data? You couldn't look at a graph of 10 years of data at the minute-by-minute resolution. You could only zoom in and out by fixed orders of magnitude (one year, 3 years, etc). So the Chart tool was designed to be able to show all time series of any asset class over any resolution and any time period. With finance, it's all time series anyway, right? Value x at time t. Every time series should be a first-class comparable object.

From there, we realized the financial markets were so complex that there was actually a huge data exploration problem. Traders had to memorize hundreds if not thousands of ticker symbols. Isn't that what computers are for? Being able to instantly search millions of time series became a priority, so we built this -- an extremely simple instrument selector that let you search and find all financial time series of any asset class all in one time series selector.

Being programmers, we added a dot-notation concept that became really handy when trying to understand what was going on. For instance, most time series movement can be attributed to macro factors -- e.g. the whole of tech is going up or down. What if we just wanted to know when Google became anti-correlated with XLK, the Tech SPDR index. Easy. We just type GOOG.correl(XLK, 30) to get the 30 day correlation between the two time series. We could do the same for MSFT too and see it all on one subplot.

From there, it's a hop skip away from extracting time periods in which GOOG was highly correlated vs. not highly correlated. With time periods, you could start doing backtests on trading strategies. We used to joke that there should be a "Make Money" button. With tools like this, it's not that far off.

That was just a super abbreviated tour of just one or two of the hundreds of powerful features that make Palantir Finance the essential next wave in understanding the markets. Hundreds of thousands of man hours were poured into this tool, and it's awesome to see it functioning on my own computer once again -- though I'm certain only a rare few lines of my early prototype code are still in there. ;-)

For a much much more complete tour of the basics of the software, see also the Joyride Tour/Tutorial. If you have any interest in economics, finance, or what the markets are doing, you should check it out while it's online.

I consider myself incredibly lucky to have been there for the birth of this software, and I can't wait to see where the Palantir guys take it next.

Mint.com is like Nielsen / Comscore for consumer spending

Originally built as a Quicken-competitor, Mint.com just became a lot more interesting. It's a case study in having aggressive terms of service that declare company ownership over data. When you own data, you can do a lot more than just provide a service to a web consumer.

Like make aggregate graphs like the above. Mint has direct access to the realtime spending habits of all their users. As such, they are able to forecast consumer spending *AND* revenues of large public companies sooner than everyone else. It's almost like insider trading. They will have information nobody else has access to. If you see Mint CEO Aaron Patzer making a killing on the stock market, I wonder if the SEC will come calling.

Mint proves that when it comes to making money with user-generated / user-provided content, opportunities can come in unexpected ways.

The Bailout is more costly than the Race to the Moon, wars in Iraq, Korea and Vietnam, Marshall Plan, combined

Barry Ritholtz (who is an avid Posterous user, by the way, go subscribe!) puts together yet again some sobering news for those interested in what's really happening out there.

In 12 months, we've outlayed more public funds than the largest, most expensive government projects in 206 years.

Dang, we should have just gone to Mars instead.