Follow Up on Twitter, Tweeter, and the Efficient Market Hypothesis

So I got curious after my previous post on all the folks mistakenly buying near-dead stock Tweeter, apparently thinking it was Twitter (which hasn't even had an IPO yet).  Are people really that careless (a diplomatic way of putting it)?  Or is there something else at work here, such that what appears to be a mistake is actually the work of highly refined minds?  Minds who understand that, over time, there may be enough mistaken purchases of Tweeter to justify an investment. 
   I did some quick research on how often a stock spikes when it is apparently mistaken for another stock.  I did not find much but the phenomenon is certainly not unheard of.  It is sometimes referred to as a "fat finger error."  Here is a link to an article discussing a spike in a Chinese stock when an investor apparently confused very similar ticker numbers:

 http://www.information-age.com/technology/information-management/1648323/fat-finger-error-sends-wrong-companys-shares-soaring


    But it is likely more than just a clumsy mistake in many instances.  I noticed that sometimes the press gets a ticker symbol wrong in an article.  One can imagine that some readers would be impressed by the company discussed and then cut and paste the mistaken ticker into their online broker's "buy" form.
    At the end of the day, we do not know what the real cause of the Tweeter spike was but it does raise some interesting questions.   

The Final Nail in the Efficient Market Hypothesis' Coffin

If you don't know what the Efficient Market Hypothesis is, you're probably not reading this.  If you believe in it, then I submit for your consideration the strange ride of the shares of Tweeter Home Electronics today.  The nearly illiquid, OTC shares of this recently bankrupt home electronics retailer soared about %1500 at one point today.  Why?  Because the smart money realized that Tweeter is back from the dead to take over retailing?  No, because apparently many folks believed that they were buying shares in Twitter, which announced it is filing for an IPO.  I've never really believed in the "smart money" but we now know there is some not so smart money.  Here is a link to an article on Tweeter's journey:

http://money.msn.com/business-news/article.aspx?feed=OBR&date=20131004&id=16968494

Of course, maybe there really is smart money behind this.  Maybe some research indicating that in the run-up to an IPO a lot of careless people buy stocks with similar names or ticker symbols to the new company.  Or maybe even after the IPO, careless folks buy similar stocks.  Maybe Tweeter really is a smart play.  And maybe, just maybe, this phenomenon could be duplicated with the next hot tech IPO, i.e. find a stock with a similar name in the run up to the IPO.

Facebook and the Future of Privacy

Wired magazine did a good piece on how a large portion of Facebook's earnings are coming from mobile ads and that the company apparently plans on increasingly moving toward "impression"-based advertising for revenue.  Translation:  charging advertisers every time you simply look at an ad (rather than click).  For this type of advertising to be tracked, however, Facebook has to know what you, yes you, are doing.  That has obvious privacy concerns.  Link to the article below:


http://www.wired.com/business/2013/05/facebook-is-growing-through-risky-business/

Follow-Up on FXCM, Forex, and Japan Stimulus

Modesty is a nice quality but it's not generally rewarded in the financial world.  So, I'll give myself a short, gentle tap on the back for my prediction that the the forex broker FXCM would rise in the wake of the Japan stimulus announcement.  I made that call on April 4 and FXCM has risen 6% since then (the stock was trading at $13.10 when I posted but ended the day at $13.44).   

Forex Trading in Wake of Japan Stimulus: FXCM

I've been thinking about a position in FXCM, a retail foreign exchange trading retail broker.  Now, I've jumped in after a recent pull back in the stock and today's announcement of a massive stimulus by the Bank of Japan, partly aimed at devaluing the Yen.  It would seem that this move could spur a wave of forex trading, as traders assess the effect of the Japan stimulus on currency markets.  We'll see.

Follow Up on My Post on Japanese Elections

In December 2012, I suggested you might want to think about some investments in Japan if Shinzo Abe was elected PM of Japan, because he could well push the country into a US-like central bank stimulus, in an effort to reduce the value of the Yen and boost Japanese exports.  This has now happened, as the Bank of Japan today announced a massive stimulus campaign:

http://money.msn.com/top-stocks/post.aspx?post=452506bc-5f54-43a3-b415-ab99a8de70b2

EWJ, an ETF I recommended at the time of my last post in December 2012, is up more than 10% since then and may now climb higher.

Can You Afford to Be on Facebook? Part II

Jon Evans at TechCrunch agrees with me on the possible dangers of being deeply involved in social media sites like Facebook.  Since he's a novelist, he paints an even scarier picture of your possible future than I did.  Here's a link to his article:


http://techcrunch.com/2013/03/30/big-data-could-cripple-facebook/

Can You Afford to Be on Facebook?

How would you like a potential employer to look at your Facebook "Likes" and conclude that you are not smart enough for the job?  Or, equally bad, that your sexuality is incompatible with the employer's views?  But, you say, nothing in your Likes speaks to these issues.  So you might think, but a joint study between Cambridge University and Microsoft Research predicted a large group of Facebook users' IQ's, sexual orientation, and other traits to a high degree of accuracy using their Facebook Likes.  Here is a link to an article on the study:

http://www.wired.com/gadgetlab/2013/03/facebook-like-research/

Not convinced of the method?  It really doesn't matter.  These studies are being done, they will be found on the internet (or otherwise) by employers, and quite probably incorporated into hiring decisions whether they are accurate or not. 

As this type of use is made of Facebook data, more people will have to ask themselves whether they can afford to be on Facebook.  And that is not a question that will be good for Facebook's business. 

Google's Other Search Engine

I like to try out the following statement on people to gauge their reaction:  "Youtube is the most valuable media property ever created."  Some people laugh, others pause for a moment before starting to argue with me.  I do not think the statement is far wrong.  According to some measures, Youtube captures 20% of all web traffic daily.  And all of those eyeballs get served with a large helping of ads.  What do you think most young people find more exciting, Youtube or network television?

To my point, NPR ran a story today in which a teenage girl was interviewed.  Youtube is her main source for discovering new music.  She did not refer to Youtube as a "video website" but rather as a "search engine" for finding music.  Oh, and she never, ever pays for music.  Youtube is probably more valuable than the entire music industry right now for this reason, among others.  Anecdotal evidence, to be sure, but this isn't the first time I thought this about Youtube.  Why?  Because it is also my number one source for discovering and listening to music.

Compare this with Pandora and Spotify, darlings of internet radio, both of whom are struggling to make a profit because no one wants to pay for their services. 

And Youtube is not just music, of course.  Want to see an interview with Dean Martin from 1969?  A clip from the 1975 World Series?  Footage of an A-10 in combat over Afghanistan?  Where are you going to go?  And each day, the density of videos on Youtube increases.  Microsoft and other companies are trying to nibble into Google's main search product.  But is there any competitor for Youtube?  No, because the barrier to entry is growing with each video posted.  And it will keep growing...

The Other Social Network: Google+

I've made no secret about my like of Google as a company on this site.  Who else is at the cutting edge of search, driverless cars, and server technology?  And Youtube is a rather valuable property, given that 15-20% of daily internet traffic resides there.  And this isn't all the company is doing -- not by a long shot.  As an example, Google+, the company's relatively young effort to get back into social networking is gaining traction rapidly.  An article this morning in Wired notes that Google+'s growth rate mirrors that of Facebook in its early days. 

http://www.wired.com/business/2012/12/google-grows-like-facebook/

Yes, Google has had some missteps and may not have the respect for privacy that we would like (although, they are not alone among internet companies in this).  When all is said and done, a long-term investment in Google seems like a really good idea to me.  I've already put my money where my mouth is on this one.

An Opportunity in the Japanese Elections?

In recent years, many investors have argued that things can't get much worse for Japan and it might be time to invest in the country's stocks.  Then things have gotten worse.  I sense a new cycle of analysis on Japan over the last month or so and, with it, a potential short-term driver for an upswing in Japanese stocks.  Here are the key points in my analysis:

1.  Japan is likely to hold elections on December 16, 2012, which may usher in a new government, including a new Prime Minister.  Shinzo Abe, who may win election as Japan's Prime Minister, has been calling for the Bank of Japan to take steps to weaken the Yen. A weaker Yen would help some of the large Japanese exporters, such as the Toyota, Honda, Panasonic, etc.  Perhaps under pressure, he has backed off these statements.  Markets, however, are likely to regard Abe as a driver of a weaker Yen.

2.  James Hunt of Tocqueville Value Fund points out the dismal returns on Japanese equities over the last 12 years and possibly correctly identifies this as a contrarian signal (the other alternative is that the returns already price in bumps due to undervaluation and contrarian buying and Japanese stocks are precisely where they should be).  According to Hunt:

"During the last 12 years – not a magic timeframe, but one which roughly corresponds with my stewardship of Tocqueville’s International strategy – the total return for the Nikkei 225 Index in US$ terms has been approximately zero. At the same time, the consolidated EBIT margin for the companies that comprise the index has gone from roughly 9.5% to 11.4% , aggregate earnings for profitable companies have gone from Yen 438 billion to Yen 608 billion and, importantly, the return on equity has increased from around 6% to around 10%. Correspondingly, the price to earnings ratio for profitable Nikkei 225 companies has gone from 24x to 15x, while the price/book value has compressed from 1.7x to 1.1x and the dividend yield has increased from 0.8% to 2.3%."

http://www.tocqueville.com/insights/sun-also-rises


3.  The Press has been focused on the upcoming Japanese election and on gloom and doom.  The ultimate disrespect:  a recent story noting that adult diapers outsold infant diapers in Japan last year for the first time (a result of Japan's aging population and low birth rate):


http://www.businessweek.com/articles/2012-11-23/japanese-stocks-yes-they-really-think-so

So what's the trade here?  It's a risky one but you could wait to see if Shinzo Abe is elected Prime Minister and then invest in select Japanese exporters, an index fund tied to the Nikkei, or more deviously an ETF that is inversely correlated with the value of the Yen (see here for some ideas:  http://www.indexuniverse.com/sections/blog/15184-japan-etfs-for-a-yen-rout-.html).  A last point.  This is probably not a party to be late to if you're looking for quick returns.  The election is on December 16, 2012 in Japan, which is 14 hours ahead of US Eastern Time.  In searching Google, I found no analysis of when we might expect to learn of the results.  One might guess early morning Eastern time, Sunday, with markets closed.  Probably a good idea to set up a Google alert to tell you when the results have come in.  A neat algorithm would start queuing trades immediatley upon news of Abe's victory and do nothing if he's defeated.  Beyond my current technical expertise but some of you might be capable.  Good luck.

Word to Investors (and Sleepy Citizens): The FIRE Economy Is Alive and Well

Slate ran an article on November 26, 2012, claiming that 88% of the earnings growth in the S&P 500 companies came from just 10 companies, with nearly 60% of that growth coming from 4 among this 10:  Bank of America, Apple, AIG, and Goldman Sachs.  And keep in mind that Citi and Wells Fargo were also among these top 10.  Here is the article:

http://www.slate.com/blogs/moneybox/2012/11/26/apple_aig_goldman_sachs_and_bank_of_america_provided_most_of_2012_s_earnings.html

What conclusions can we draw from this:

 1.  Apple, which was the biggest single contributor to earnings growth, is one heck of a company to be able to generate these kinds of earnings in a world where the only other folks who can make money are banks and insurers.

2.  These figures may be skewed because large banks and insurers had their earnings sharply depressed in recent years.

3.  The financial collapse has done little to stop the inordinate flow of profits to the FIRE (Finance, insurance, real estate) sector of the economy. 

Mortgage Insurance Part 4: The Dangers of Number Blindness

Since I already purchased both RDN and MTG based on some of the analysis I've written about in previous posts on mortgage insurance, I'm soon going to turn my attention to other opportunities.  Before I do, however, I wanted to write a final piece on mortgage insurance because it illustrates the divide between two approaches to investing.  Namely, the tension between a numbers-based approach and an approach based on a realpolitick assessment of the state of the world and a particular industry.

Oliver Davies has done some nice analysis on Seeking Alpha, which concludes that RDN is at risk of insolvency and is certainly a much riskier investment than MTG, due to slow-paying claims and inadequate reserving (among other factors).  See here for Mr. Davies' summary of his thoughtful research:

http://seekingalpha.com/article/1003411-radian-responds-to-barron-s

A comment to this article illustrates the divide of perspectives that I mentioned, however:

"So right. Radian has made it through the housing crisis and out the other side. Now that real estate and all tangential markets are improving, the Fed will definitely question their reserve assumptions and try to close them down. What better way to usher in the housing recovery everyone is waiting for than taking down one of the premier MI issuers. Sheer genius.

P.S. I'm sure Fannie Mae almost hired S.A. Ibrahim a couple of months ago because they detested his MI practice. You are definitely onto something here. Have you proposed this to Fox News yet?"

This comment's tone is unfortunately typical of  many comments on Seeking Alpha but, I must say, despite its tone and lack of deep numerical analysis, I side with the commenter and not Mr. Davies.  The federal government wants to keep private mortgage insurers in business and the fact that Radian has survived this long suggests to me that they are going to survive longer.  Mr. Ibrahim's apparently cordial relationship with the Fed is just icing here.

Thus, an investor must be careful about being blinded by the numbers, particularly in certain industries.  Let me put it another way:  if you've lived through the last 4 years in this country, do you still believe that a company's reported numbers can reliably determine that company's chances of survival -- particularly when that company is a financial institution or insurer?    

Follow Up on Mortgage Insurer Stocks As Junk Bonds

I've done some further reading on the mortgage insurance situation and it is interesting enough to merit a second post.  The below article is a good overview of the competing interests trying to stake claims in the mortgage insurance arena after 3 of the main players were shut down by regulators in the last few years (one of them, PMI).

http://www.bloomberg.com/news/2012-08-22/arizona-regulator-sues-nmi-showing-watchdog-influence-mortgages.html

Let me give you what I believe are the most salient points:

• The Arizona Department of Insurance, acting as the receiver of the defunct PMI, has sued upstart would-be mortgage insurer NMI Holdings from improperly appropriating PMI assets. The suit could hinder NMI from selling mortgage insurance;

My thought:  former PMI employees are anxious to get back in the business

• Private mortgage insurers, which have lost more than $18 billion since mid-2007, wrote $40.1 billion of coverage last quarter, or almost 10 percent of the $405 billion of new loans.

My thought:  I'm absolutely astounded that the industry wrote more coverage last quarter than the amount of losses suffered during the housing crash

• MGIC’s preliminary ratio of risk relative to capital breached the level some regulators require to write new policies as of June 30, the insurer said Aug. 2.

My thoughts:  MGIC should probably be shut down but is being allowed to continue to operate

• Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co (JPM), private-equity firm Pine Brook and reinsurer PartnerRe Ltd. are among backers of the industry’s other startup, Essent Guaranty Inc. The Radnor, Pennsylvania-based firm raised $600 million in 2009 and 2010 and began writing policies last year, providing 5.3 percent of coverage in the first half of this year.

My thoughts:  Goldman and JP Morgan see an opportunity in mortgage insurance.  The management team at Essent looks like it's been poached from other major mortgage insurers. 

One more thought, not from the article.  There was significant insider buying of shares in August of this year.  See http://seekingalpha.com/article/789171-why-i-bought-mgic-investment-corp-for-a-trade.
 
This is starting to look even more interesting.  I will continue to follow this industry.

Mortgage Insurer Stocks: Like Junk Bonds?

I recently ran across an article which mentioned the private mortgage insurer, MGIC.  I hadn't thought about the company in years.  Not since shorting it in the wake of the financial crisis and watching it pleasantly sink from about $38 to $24 before bailing out.  Only to regret my impatience later when it went nearly to zero.  At the time, although I was a major doomsayer, I did not foresee the complete collapse of the housing market.

Later, when the full scale of the disaster became evident, I was given to making pronouncements like:  "There is no way the mortgage insurers can survive.  Their liabilities are insurmountable."  And then just the other day, I was reminded of these thoughts after not thinking about the private mortgage insurance industry for several years.  My first reaction was "how are these mortgage insurers still in business?"  Some quick research revealed that not all of them are.  PMI, one of the major players, was seized and is now apparently a historical note.  But MGIC and Radian, two other big insurers, have survived.  The following article attempts to detail how this miracle could be:

http://seekingalpha.com/article/862831-radian-group-management-is-misleading-investors

I'm still not convinced but, that being said, if MGIC and Radian have survived the last four years, then it seems to me there are two possibilities.  One, they are getting ready to die, as PMI did last year.  Or two, they can survive anything and may very well run up if the housing market recovers to some degree.  In no way shape or form do I believe the housing market will make a significant recovery any time soon (I'll save my reasons supporting this assertion for another day).  However, the mortgage insurers would benefit from even a minor recovery in the housing market.  The article above details how MGIC is in much better position than Radian.  Some of the commenters believe otherwise.  In any event, if these two are still around, they may survive until the sun shines again...

The Temptations of Brains (Hewlett-Packard)

Hewlett-Packard has taken a beating lately and rightfully so.  It has had a string of leadership issues and a ton of layoffs.  See the link below for a complete condemnation of the company:

http://theforvm.org/diary/m-aurelius/meg-whitman-job-creator

But...

It still has some very good brains left and it seems to recognize that, if it's to survive, the company must focus on R&D.  See below:

http://www.wired.com/wiredenterprise/2012/02/hp_calculator/

And...HP has brains across a range of scientific and engineering disciplines.  And who knows what patents already in the company's trove will prove relevant and valuable?  So, I have to repeat the conclusion I reached in my tech dogs post:  HP might be worth a long term investment at its current price.  Risky but not that risky -- what are the chances the company will be out of business before it experiences a significant rise in stock price?  Fairly low, I would say. 

All HP has to do is have one or two big successes, led by their brains, to rise again.  They are also in volatile businesses in which the company that was dead last 5 years ago can be No. 1 today.   

Corning (GLW): I'll be Watching

There is an interesting article on Corning and its focus on R&D in today's Wired magazine online.  The link follows.  The last time I recall Wired doing a piece like this was on MolyCorp (MCP), miner of rare earth metals.  The MolyCorp article portrayed the company ready to skyrocket because of the scarcity of rare earth metals in the West (as opposed to China) and MCP's purported lock on rare earth metals mining.  MCP did skyrocket -- for about a day.  It then proceeded to lose about half its value in a stunningly short period of time.  Today's Corning article makes a compelling case for the company as the type of R&D focused enterprise worth investing in.  We shall see how the stock performs in the aftermath of this article...


http://www.wired.com/wiredscience/2012/09/ff-corning-gorilla-glass/

The Dangers of Generalizing

This is not strictly a post on investments but more on habits of mind.  An interview with a White, Southern woman who voted twice for George W. Bush and believes that President Obama is Muslim is a cautionary example of drawing conclusions from too little data or, more precisely, stereotyping.  Based on my description, one might expect that the woman in question is voting for Mitt Romney.  Wrong.  She is voting for Obama, despite her views on the President's religion.  Why?  Because she makes $28,000 a year and doesn't like Romney because, in her mind, he was born rich.  The interview with her is here:

http://news.yahoo.com/southern-whites-troubled-romneys-wealth-religion-050312040.html

The lesson obviously applies in a wider context.  Moreover, it confirms my personal belief that Americans are a more complex group than our leaders (and possibly the rest of the world) believe.  The access to internet and media available to all levels of American society will only magnify this effect going forward.  Indeed, the Republicans are running into some difficulty now in trying to appeal to disparate groups in American society.

A Crack in My Love of Google

I regularly tout Google as the long-term winner of our current tech battleground.  There is its search dominance, its ownership of Youtube (one of the most valuable media properties ever created in my opinion), and Android, just to name a few assets.  Not to mention that it's pushing the envelope in server design and snapping up small tech outfits, one of which might turn out to be a goliath.  Yet, there are some cracks in the facade.  Google has shown something of  a disregard for privacy rights and there are comments like these from programmers, which worry me:

"Google does have an office in Manhattan. You should definitely apply there - I don't think it's an interesting company to work for anymore (and their recruiters are second only to Facebook's in how pathetically desperate they seem when they contact me), but the interview process is really fun."

See more of this thread at http://developers.slashdot.org/comments.pl?sid=2357190&cid=36936764

Hmmm... anecdotal but troubling if programmers no longer find Google interesting. 

Tech Dogs, Lessons of the Past, and a Possible Portfolio

Wired magazine recently ran an interesting article on how Apple was derided as a terrible and failing company in 1997:

http://www.wired.com/business/2012/07/not-dead-yet-the-crappy-company-that-could-have-made-you-rich/.

Some of the quotes from that time period about Apple were absolutely damning.  How wrong they were.  So what, you say, it's too late to capitalize on that information?  Yes, but the point of the article is that there are a number of one-time 800 pound gorillas in the tech space that again look like terrible and failing companies:  HP, Nokia, RIMM (Blackberry), and Yahoo.  Why not create a portfolio of them?  Not all of them will likely rise from the ashes but only one has to experience an Apple-like turnaround to carry the day.  If I had to pick the most likely to do it, I'd go HP, Nokia, RIMM and Yahoo in that order.  Why?  Because HP still has a lot of patents and a lot of engineers.  Same for Nokia and Blackberry to some extent but in a more confined space:  mobile (although a good space to be in if you must be confined).  Yahoo lacks truly valuable technology but has brand and users.