Weekend Musings: On Models, Non-farm Payrolls and ADP

“All models sweep dirt under the rug. A good model makes the absence of the dirt visible.” Emanuel Derman

There’s been a lot of talk buried in the reaction from Friday’s job report and the disparity between the BLS’s report and the ADP report; some people say that it’s irrelevant and offer up a misguided list of reasons. Others seem to recognize that the ADP number is meant to be used as an input into the overall picture and not the end all to be all when it comes to “forecasting” the NFP number.

June Employment Notes

Many people have summed up today’s unemployment number as dismal, disappointing and “lackluster”. The number in my opinion is plain awful and personally infuriating. I said I was looking for +30k jobs Thursday evening and it looks like I got that and a little more. Here are the numbers at a glance:

	May	June	Change
Civ. Unemployment Rate	9.1%	9.2%	0.1%
All Nonfarm Employees (Seas. Adj)	130999k	131017k	18k
All Nonfarm Employees (Non Seas. Adj.)	131703k	132079k	376k
Civ. Emp. Population Ratio	58.4%	58.2%	-0.2%
All Unemployed	13914k	14087k	173k
Mean Wks Unemp.	39.7	39.9	0.2
Civilian Participation Rate	64.2%	64.1%	-0.1%
Median Wks Unemp.	22	22.5	0.5
U6 Rate	15.8%	16.2%	0.4%
Manufacturing Emp.	11701k	11707k	6k
Government Employment	22103k	22064k	-39
Construction Emp.	5522k	5513k	-9

A Closer Look At Arbitrary Numbers & Taxes

In the past week I’ve read at least 4 popular authors talk about increasing taxes on “the rich,” a group defined by – for reason(s) completely unbeknownst to me – one of two thresholds, either $250,000/year or belonging to the top 1% of earners (somewhere around $400,000-$500,000/year/household).  I have no problem increasing taxes on the SUPER rich, say, over $1,000,000/year, but to suggest that we should increase taxes on almost every successful doctor, dentist, lawyer, and small-to-medium business owner in the country seems a bit ludicrous to me.  Those who don’t make this magical $250,000/year may consider this outrageous, but many people who make that much, while certainly not poor by any stretch of the imagination, aren’t living anything like the opulent life of the guy in the DirectTV commercials.

What Happened To The USA: AT&T Edition

I normally don’t write opinion pieces like this, but after seeing the recent news this weekend regarding AT&T instituting bandwidth “soft limits” of 150/250GB per month – it made me think of what “innovation” has become in this country. You’re familiar with the history of AT&T (Ma Bell) and the rapid progression of telephony technology in the past century. America (along with AT&T/Western Electric) led the world in innovation in this space and they continue to hold their own against the Asian and Canadian infrastructure providers.

DO Diligence

Image Copyright Goddard (etc)

Riddle me this: how could a relatively “bit player” of a hedge fund – Paulson & Co – with little-to-no prior mortgage investing experience do the research/diligence to uncover “The Greatest Trade Ever,” yet somehow massive institutional investors somehow get a pass because they “don’t have the resources to conduct their own diligence?”

That is bullshit of the highest order.

Some thoughts – My SOTU Address

Life’s difficult right? Bad decisions, regrets?
I’m going to depart from the regular posts here at Stone Street and I’m going to address everyone – the friends, the haters and the skeptics. I take things personally, I’ve never hidden that fact. This week – nay, this month is a time that is difficult for me and a few others. Some of you will mock this – some of you will know exactly what I mean; that’s ok.

A Free Lesson on e-Publishing for The New York Times, And/Or: Things That Are Not News

I’m feeling generous & in the holiday spirit so let’s just say blogs – and best practices that evolved from them – didn’t achieve any real popularity until 2006.  Even if I temper my already low, low expectations from the MSM and specifically the New York Times, 4+ years is a LONG time to apparently be in the media business without picking-up on prevailing trends in that business, like in-line citation of source material, for example.  Whereas blogs and the more forward-thinking members of the 4th Estate understand that when you mention an article, like this one, you don’t link to your own site, you like to the article or website of the subject of said article.  The NYT has this really annoying, hypocritical habit of mentioning something or someone, yet the hyperlink goes not to the web presence of said thing/person, but to an internal index of articles on that topic/person.  Bloomberg does the same thing, but I don’t see them abuse it nearly as much as the NYT does, and let’s be honest, more often than not, Bloomberg has much better internal information than does the Grey Lady.

If we’re talking about computer programs that “read” text found in news and attempt to gauge sentiment and initiate trades based on that analysis, why not mention some of the products or talk about how this is hardly news?  I recall reading several articles over the past 5+ years on this subject, and Reuters has offered such services since at least 2007, as I learned with a 20-second google search.  Even if we’re to compare apples to apples (insofar as such a comparison is even possible with the NYT on one side), FT/Alphaville touched-upon this topic 11 months ago!  Putting aside how painfully the NYT coverage ignores their ignorance/laziness for a second, I want to look back at this particularly annoying paragraph from the NYT article that illustrates, quite clearly, just how badly the NYT just doesn’t get it, “it” being web-publishing best practices:

Tech-savvy traders have been scraping data out of new reports, press releases and corporate Web sites for years. But new, linguistics-based software goes well beyond that. News agencies like Bloomberg, Dow Jones and Thomson Reuters have adopted the idea, offering services that supposedly help their Wall Street customers sift through news automatically.

The hyperlink for “Thomson Reuters” goes to http://topics.nytimes.com/top/news/business/companies/thomson-reuters-corporation/index.html?inline=nyt-org, which looks like this:

Perhaps this is a bad example, as that NYT page about Thomson Reuters is likely a decent resource for readers totally and ignorantly unfamiliar with one of the largest news and data providers on the planet…a faux pas for which there’s really little excuse, especially for anyone who’s ever visited Times Square in New York City…

Thomson Reuters, never heard of him...

The NYT (and other MSM business sections’) management inexplicably still has this mostly-deluded idea that they need to keep eyeballs within the nyt.com domain – and certainly never ever under ANY circumstances send eyeballs to competitors – at all costs, even if it means delivering an inferior product, in this case, an article that could have been made significantly better with a few hyperlinks pointing to other websites/articles.

This is not news, nor, unfortunately, is this the most egregious example of the NYT’s utter lack of understanding of how this whole internet thing works.  Remember this, when popular object of my scorn Gretchen Morgenson proclaimed that Greece’s troubles were caused by CDS instead of FX Swaps?.  Even worse, the link in her article on CDS pointed – no surprise – to NYT’s internal page “about Credit Default Swaps,” which even in an updated version, reads as if it was written by monkeys.  Honestly, linking to Wikipedia would be a significant improvement!  Like several orders of magnitude better!  (On a side note I have to thank Gretchen, because that is the most popular post on this website!)

The point is, ladies & gentlemen, that even lowly bloggers like myself understand that best practices dictate when you mention someone/something, you link to it.  Period.  This is a simple evolution of those annoying MLA (etc) documentation standards we were all forced to use growing-up, and the rationale is the same: if you say something, back it up.  This is ESPECIALLY true when the author is not a subject-matter expert (even tangentially), but a journalist, and the subject matter at hand isn’t common knowledge, as is the case here.

I find it painfully hypocritical that the NYT (and many of its employees who hold themselves in such high esteem) claim(s) to uphold the highest journalistic standards, yet routinely and consistently makes a mockery of them.  As several journalist friends/acquaintances are keen to remind me, not every reader or viewer is an expert; on the contrary, a significant number are closer to laymen than professionals, and thus articles & television segments are published/produced with that in mind.  Fine, but there is a vast and serious difference between “dumbing it down” to appeal to/inform a wider audience and speaking with authority without actually having any.

I’m certain defenders of traditional journalism, its standards, practices, and conventions will immediately reply that there are several experts quoted in the article.  Big freaking deal.  That isn’t good enough any more.  I can easily claim to and convince several journalists that I’m an expert in several fields with which I’m only moderately familiar.  If you want to establish someone as a subject matter expert, throw in a link to their website.  For example, this article quoted a man for whom I have the utmost respect but did him a disservice by introducing him poorly and incompletely and worse, not linking to his complete bio, which is – guess what – readily available here, on his website, where readers could – had the NYT linked to it – read about Roger’s qualifications and credibility instead of taking the NYT’s abridged word for it.

“It is an arms race,” said Roger Ehrenberg, managing partner at IA Ventures, an investment firm specializing in young companies, speaking of some of the new technologies that help traders identify events first and interpret them.

Ironically, there’s another arms race going on, and its between thick-headed traditional media types and those who adapt to a shifting landscape, who understand that old paradigms are dead or dying, who embrace the ability of the Web to help them (or us, I should say) better-inform readers than ever-before.  Some people get it*.  Alas, it appears not many of them have much sway at the New York Times.

*An curious phenomenon, considering the recent expansion of the Sorkin-edited Dealbook, which while far from perfect in respect to the issues discussed above, is far ahead of the “regular” articles on the NYT website.

I’ll Take “People Who Shouldn’t Be Writing About Finance or Economics” for $1,000, Alex

So this happened earlier today:

This, from a guy with 15,000+ twitter followers and a popular blog, who writes about Finance and Economics?  I remember back when the first transaction was created some non-finance people questioned this (and the non-finance media let them know), and that was one thing.  Now, two+ years later, this guy is so ignorant about basic freaking things about the Fed and its operations he has to not only take to twitter to get an answer (as if one was never given!) but then talks about Taibbi as if he’s some sort of authority?!?!

Unbelievable!

That he couldn’t even Google “Maiden Lane LLC” to get his answer makes it even worse.  Wikipedia spells it out in the 3rd sentence!

Ok, I’ll be fair: I tend to ask alot of questions on twitter, but I’d like to think I’m seldom called-out (deservedly, at least) for stuff like this.  I have dozens (and dozens…) of posts I’ve started but never finished over the years because part-way through, I realized I had no standing or expertise from which to speak authoritatively (or even intelligently) on the subject.  For other posts, really many if not most, I have to do some semblance of research, even if it’s just Googling a company to get some basic info like important dates or quotes or what-have-you.

Not to toot my own horn, but as a simple fact, those of you who’ve followed me know that I openly encourage and invite people to correct me if I say something incorrect or incomplete, and more importantly, if proven wrong have no problem admitting as much in an open forum.  (On a side note, most critiques of what I write are from people who seem to read half a post – or less – and thus miss the point entirely, sigh…)

This guy, though, doesn’t appear to have such a filter nor the knowledge to know that he does not know.  I follow him on twitter for kicks and because alot of people I follow do, but I’ve read maybe 1 or 2 of his posts to date, so I decided to go check some of his recent posts to try to get an idea of what this guy actually does – or doesn’t – know.

I try as much as possible to give people the benefit of the doubt, that I’m seeing something out of context or whatever I’m looking at represents a brain-fart or a post written while massively hungover, but here, I’m kind of at a loss.  What am I supposed to do with this post?  The title isn’t bad, and actually piqued my interest to the point where I was expecting something fundamentally sound with a creative, optimistic bend.  Unfortunately, we instead get crap like this:

But a businessman with a good idea who needs capital doesn’t need a tax cut to get that capital, he needs a loan or an equity investment. This is what we have a financial system for. Sergey Brin doesn’t need to first get rich, then finance Google out of his own pocket. He just needs to start Google and that’s how he gets rich.

Yes, all it takes is an idea et voila, Money Money Money!!!!!  Money as far as the eye can see!  One good idea and magically every good idea becomes a successful business that can employ all of our needy job-seekers.  Yes, thinks makes sense, tell me more…

The thing of it is, though, that your idea really only works if you have some customers. If everyone in Yuma, Arizona is unemployed then even a very competent proprietor of a dry cleaning establishment is going to have a hard time expanding his business. He won’t take out a loan to expand, he won’t get an equity investment to expand, and he won’t invest his own money in an expansion. You can give the guy all the money you want, and he won’t invest in expanding his business. That’s because unemployed people don’t need much dry cleaning and also don’t have much money to spend on dry cleaning.

So let’s go through the assumptions in this little scenario:

1. You own a local business; people from far-off geographies are unlikely to be customers,
2. Everyone, EVERYONE in your geographic area is unemployed,
3. You had/have an installed customer base who frequented your business,
4. Upon everyone becoming unemployed (presumably all at once?), they stopped visiting your business because they have zero interviews, zero reason to get “dressed-up,” etc,
5. Instead of closing, selling, or trying to expand your business into other geographies (particularly natural/adjacent ones), you continue to stay open despite a dwindling if not non-existent customer base.

It’s unfortunate his assumptions are so utterly ridiculous and unrealistic because I actually agree – in concept – with his first sentence, although I’d reword it to say that “The thing of it is, though, that your idea really only works if you have some customers willing to pay enough to more than cover your expenses.”

He continues:

A guy with $0 and a good idea and a lot of potential customers will find a way to start his business. A guy with $1 billion and a good idea and no potential customers is just a guy sitting on a huge stockpile of cash.

Um, not to nitpick, but if the guy with $1bn has a good idea and no potential customers then it isn’t actually a good idea, at least in terms of how we measure good ideas in a capitalistic society.  Hell, even if its a non-profit, if there’s no target market for your service/product that still doesn’t mean its a good idea.

Look: I seldom tear-into anyone (besides Gretchen Morgenson, because she’s earned that honor), but I’m really fed-up with these quasi-intellectual usually political/philosophical liberal “free-thinking” types trying to write about Finance and Economics.  I’m not saying you need to have a relevant degree or work experience – there’s many who have neither but do fantastic work regardless – but don’t invent your own constructs and theories in the fields or ignore existing and widely-accepted ones for crying out loud!

Sure, in a perfect world every “good idea” would automatically be welcomed by the market with open arms (and wallets) and grow into a fantastically successful enterprise, but alas, this is not a perfect world; there are economic, legal, pragmatic, and other realities within which we must operate (or at the very least consider).

And lastly, he concludes:

Things like the availability of credit matter, but credit is currently available. What’s not available is customers with money and an inclination to spend it. More government spending and more money-creation will lead to more purchases, more customers, more business expansion, and more hiring. Then people with good ideas will make a lot of money and complain about their high taxes.

Sure, credit availability matters, and while lenders aren’t blindly allowing deadbeats with no income, job or assets to borrow uncontrollably anymore, credit is available, it’s just not available to everyone in unlimited amounts (this trend towards underwriting standards is for the better if it continues, by the way).  While Per-Capita Disposable Personal Income is down slightly from where it peaked in the 2nd quarter of 2008 (in 2005 dollars; in current-dollars  it was at it’s highest point this most recent quarter), it’s certainly still a huge part of GDP, as a matter of fact, per-capita personal spending was higher in the most recent quarter (2010q3) than it was in right before the S&P 500 peaked on October 9,  2007!

I’m not even going to touch the “more government…” sentence as that alone could be a series of posts, but do you see now what we’re dealing with?  People like Yglesias like to talk in vague, “theoretical” terms without any care for things like facts and data, and even more maddening, people like this are read and quoted as experts, EXPERTS, despite being easily written-off as nothing more than a hack spouting off uninformed rhetoric as truth.

Now again, in the interest of fairness, this is limited sample from which to draw any solid conclusion, so for now, I’m simply putting Yglesias on Ratings Watch: Negative, instead of downgrading him (several notches) outright to junk.

I don’t mean to hate on Yglesias, rather, I hope this post gets back to him and ideally, makes him realize that if he’s going to write whatever fun-sounding rhetoric he thinks should be the way it is, he at least has to support that view with some sort of facts or historical precedent or something, anything really.

Why Didn’t Economists Predict The Collapse?

I’m not going to go through this whole debate because it’s largely been beaten to death (although I still haven’t seen a really great explanation or set thereof), but this one paper (with a fantastically small sample size of 19) seems to indicate that one simple tweak to regulations academic/professional Economists are subject to may help us avoid this problem again.

Economists, especially those that like to tell Congress, the SEC, etc how Wall Street should be regulated may be due for a taste of their own medicine.  How about we make all economists, from Krugman to the whole Squam Lake Group, to the National Association of Realtor’s economist adhere to something similar (if not more strict) than SEC Reg FD (Fair Disclosure)?

What? One of the members of Stanford faculty and an economist on the Squam Lake group is on Moody’s Ratings Board?  He should have to explicitly make that aware every time he speaks, writes, and appears in the media.  The National Association of Realtors’ economist cites statistics/predictions 20% rosier than anything “independent” economists do?  Fine, but everytime the media quotes the NAR’s #’s, they should have to explicitly state the painfully obvious conflict of interest.

Now, I’m not nearly so naive as to expect this will happen within my lifetime or ever, but regardless, the fact is that these economists appear to the public, our lawmakers, regulators, and the media as (among the most) unbiased commentators, yet unless I’m mistaken, they have no formal, legal requirement to disclose conflicts of interest?  On what planet does that make sense?  Largely, these men and women went to the same schools, had the same professors/mentors, were taught and adhere to similar, if not the same ideologies, etc.  The public has a right to know about any and all conflicts of interest these economists may have, end of story.  If you’re a econ professor at the University of Chicago, you shouldn’t be allowed to identify yourself as such if you also happen to be a consultant to several investment banks.  That’s all I really have to say on the matter right now.

To The Cloud…Or Not; Winning The Microsoft Way…Or Not

Many of you have likely seen Microsoft’s new “to the cloud” commercials and, if you’re even remotely aware of what’s been going on in the software/tech space, wonder how Mr. Softy expects novice home computer users to know what, exactly, “the cloud” is, what it does, and how it does it.  It’s one thing to advertise their enterprise solutions assuming the reader/viewer already knows whatsup, but it’s entirely different in the consumer market, where the average home PC users can’t even write a 1-term excel formula, let alone understand and use cloud computing.  I decided to do what I’d imagine many consumers would do when they see an interesting commercial, searched for it on the internet (via google, screw bing) for “Windows Cloud.”  There’s a nice little “To The Cloud: Get Started” button prominently displayed on Microsoft’s website, a nice start from a web-design standpoint, easily directing consumers to “the goods.”  Unfortunately, instead of the “Cloud computing for dummies” tutorial/introduction, I found this:

So, let’s just summarize:

1. Microsoft tries to get home PC consumers to buy MSFT products by advertising the power of mysterious and all-powerful “cloud,”
2. Microsoft does not, in any way, shape, or form, explain what this “cloud” is during their oft-repeated TV commercials,
3. A visit to Microsoft’s website to learn more about what aforementioned “cloud” actually is tells one that in order to find out, one must first buy/download/install Windows 7.

Now this “trust us, buy now, don’t ask questions, you’ll figure out why and thank us later” sales strategy is not new, however it is seldom used to this degree (successfully, that is) in the software/tech space.  As a matter of fact, I can’t think of any other campaign of this scale made use of such a advertising/sales strategy, besides Apple, but their websites are always much better/more informative in my opinion.  (This is not to say there aren’t examples, just that I can’t recall any others  As always, if you can, be sure to let me know by email or in the comments).

In fairness to Microsoft, I played around on the website a little more and there are some more quick videos (~30 seconds +/-) showing what you can do with Windows 7, e.g. viewing a photo gallery on your computer and with a few clicks upload them directly to Facebook.  This may seem like magic to those with only the most basic level of computer literacy, but its hardly revolutionary, to put it nicely.

Perhaps Microsoft (and whoever did the ad campaign) decided that instead of showing/telling consumers what this new “cloud” technology/idea is, they’d just show consumers what they can do with it (putting aside for now/forever what, exactly, “it” is).  In the first version of this post, the above sentence was a question, but having taken some time to re-watch the ads and think about it, I’m convinced MSFT and their Ad agency partners must have simply decided there was no real way to explain what “the cloud” is to stupid consumers, so instead, they’d just show all the nifty things people can do with ease “in the cloud.”

If this is, in fact, the case (or something like it), I’m not so sure I agree.  If my Mom can figure out Facebook, it’s not exactly a leap of genius to understand the idea that when you, for instance, upload a picture to Facebook, it can be accessed from anywhere with an internet connection, as opposed to when you just had it on your home computer (drive), and could only access it from there.  Indeed, a 5 second google search (my time, not google’s, of course) brought me to this, from a book apparently called “20 Things I Learned About Browsers & the Web,” which succinctly (in an extremely simple manner) explains cloud computing in about a paragraph of “Curious George” size/style typeface.

Check it out:

I don’t necessarily disagree with the cynical approach of pushing Windows “cloud” capabilities without explaining what they are, but I think a little education/knowledge could go a long way for Mr. Softy.  Especially true now, in the social media age, consumers do not want to be made to feel stupid or uninformed.  Introducing new terms to them without giving them a little information (like in the image above) may be a major faux pas; had they instead devoted some time/effort to educating the consumer, bringing them into the fold, making them feel like they’re part of the cloud computing phenomenon, I think the campaign would be FAR more effective.

All of 1 of my ~650 Facebook friends “likes” Windows 7, as do about 1.1 million others.  Impressive but I think extrapolating true adoption or even fan-dom from Facebook “likes” even as a proxy is a dangerous if not downright silly practice.

Microsoft has a long and storied history of pushing “technology” onto consumers, which you can read about on Wikipedia, Techcrunch, or several books I’m sure have been published on the topic, but most of this was done before Facebook, before Youtube, before Blogs (well, mainstream ones at least), and before Twitter.  I’ve studied social media failures, or, as it were, business strategy failures magnified by social media (mis-steps), and this, while not nearly as egregious as others I’ve seen, may very well be on one of my future list of FAIL.

This story is still being written, so, I may be proven wrong in my skepticism, but alas, only time will tell..