Manipulating The Facts

The lack of financial sophistication of so-called business journalists astounds me sometimes, particularly when they come from a reasonably credible publication like Business Week. This week Heather Green analyses a new finance blog concept by AOL called Blogging Stocks. Blogging Stocks is, as Green explains well enough, "a unique idea. AOL hired bloggers to write about product announcements, earnings releases, and commentary on 8 stocks initially. On its first day, the network will do live blogging of the Microsoft earnings call, for instance. (Good luck!)" This is interesting news, and worthy enough of publication.

But then Green launches into a bizzare analysis of conflict-of-interest ethics at the new blog:

So, what about the $64,000 question? Can the bloggers hold the stocks they are writing about?

Indeed. In fact, AOL encourages them to be stockholders, if not necessarily in the companies they're writing about. The key is that they have to sign a code of ethics, disclose their holdings and not trade on insider information, says Marty Moe of AOL Money & Finance.

Here's where my old school training kicks in. Different media outlets have different policies. But it's verboten for me to cover a company in which I have stock or that my family has stock in.

And yet....this is a new world. It's up to people following these blogs to decide whether they feel any stock manipulation is happening in the comments. That's like newsgroups already out there. But AOL will also be monitoring its bloggers, which is different and adds a need for a level of skeptism, I think.

This is not the first time a Business Week journalist, or even a professional business journalist for that matter, has posed the question of potential stock touting and market manipulation on behalf of bloggers.

There is a good reason AOL don't particularly care whether the writers for their new blog hold shares they are promoting, and that is that it would be impossible to manipulate most of them. Let me explain why.

Microsoft stock, for example, is bought and sold, on average, in quantities of between 59 million and 65.5 million shares a day, depending on whether your source is Yahoo or Google Finance. That figure equates to around between $1.4 and $1.6 billion worth of stock. Let's suppose then that one wanted to manipulate Microsoft stock through a blog post: assuming that a 10% increase in daily volume would move the stock up or down a few points (depending on whether your agenda was to encourage buying or selling), stock manipulation in this case would require parties who had read your post to cumulatively purchase or sell at least $150 million worth of Microsoft shares. Unless you're Jim Cramer or Barton Biggs, you'd be lucky to see someone part with $10,000 as a result of something you wrote about a share.

Which brings us to the next point made by those who claim that blogging may manipulate stock prices: suppose you hold a stock which has no volume, and you want to manipulate the price of it by encouraging a few punters to part with, say $5000 - $10,000. For a start, anyone remotely familiar with investing will look at this equity's daily volume and conclude that it's a dog, but even if they don't, the tout of the stock would never want their name  associated with it since it most likely is a complete dog and no one will ever listen to them ever again. Furthermore, even when did try to sell their own shares as a result of the price moving up on the back of their tip, they would be moving the price down by doing as and end up with pretty much what they paid for them.

Green's sensational conclusion that there "is a need for a level of scepticism" is just plain wrong: market manipualtion is nearly impossible if you have no name and no connections, and therefore not even worth speculating about. Business Week journalists ought to know this, and in the very unlikely chance they do not, should not be working there and writing about financial markets at all. It is, after all, about the most basic law of economics: supply and demand. Where this type of article looks sinister is in the fact that they are aware of this and are just trying to create sensationalism and hype to move stories: who, after all, is not interested in a story about AOL, market manipulation and blogs?

So how have message boards become instrumental in moving stock prices then? Not through ramping shares, but through the disclosure of genuine, secret insider information made on them that encourages buying in the stock, but that's a completely different thing altogether.

Growth Vs. Value

Crossing Wall Street makes a good point about tech giants Microsoft and Dell this week:

In less than a decade, Dell and Microsoft have gone from growth stocks to value stocks.

Shares of MSFT are getting ripped today (Friday) in the wake of the company's third-quarter earnings report. The company earned 28.6 cents a share, which rounds up to 29 cents, but that includes a 2.6-cent charge for stock options. The Street consensus was for 33 cents a share.

The stock is currently down over 11%, its worst day since 2000. As bad as Microsoft is, Dell just don't make no sense. The stock is down to $26 a share! One of the things I've learned about investing is that trends can go on longer than you think. Everytime you wonder, "how much more can this go on?" it will.

Dell was at this price eight years ago, yet the company's sales and income have tripled since then.

Generally, when there is more gowth in the market than value, this is what constitutes a bull market, and when there's more value than growth lying around, it's a bear market. A healthy market is a balance between growth and value, and so is a healthy company: it's a sign of a solid organisation when it makes it past the growth stage and into the value stage, since growth usually comes at a cost which investors end up overpaying for. The real challenge for organisations like Dell and Microsoft now is to create innovation in microcosms of their value chain and benefit from a variety of offshoots of growth without compromising on the core assets of the business which make them so competitively resistant to the short-term market trading cycles their younger growth siblings can't weather.

The same is going to be the case for markets in the Far East, where growth is outstripping value right now at an unprecedented pace. If the asset-rich  companies of say, the Shanghai stock exchange can somehow find a way to become innovative at the right price in the right areas of their value chains while the going is still hot, this would prevent the Chinese economy from the fast overheating it's currently experiencing.

This is easier said than done, however. The twist that makes the transition from growth to fair value so hard is that just when value companies are being pummeled by an exuberant short-term trading mentality, growth companies are usually being rewarded with massive valuations. What this ultimately means is that either value companies end up over-paying for the price of intellectual capital and innovation, or they end up short of the whole venture altogether and stuck with traditional value chains which keep them in the same rut they got themselves into in  the first place.

A possible way out of this vicious cycle remains yet to be proven in oil and energy companies.  Oil stocks have been rewarded hansomely for their increases in profits due to the high oil price over the past 18 - 24 months; if as a result of this capital injection they can show that they are funding and developing alternative solutions for newer, cleaner energy sources and capitalise on that investment once the price of the black liquid shrinks again, this will be a very positive example for large organisations to follow. It may, in fact, be the first time in history where organisations have successfully taken advantage of the disruption happening to their own traditional business models by siezing and taking control of it first.

The process requires leaving some cash on the table, and this is difficult for institutions like Microsoft and Dell, who still think of themselves as growth companies, to do. But ultimately, it's cash on the table or cash in a new entrant's pocket, or worst of all, a giant macro-level cash exodus - as Bill Gates knows only too well, and as many entrepreneurs in the currently growth rich Far Eastern economies are about to find out.

Cramer on Technology

Jim Cramer thinks the tech rally the market is enjoying at the moment is not sustainable:

The group's got no momentum going into the summer and given that there is no Vista in sight, you lose a lot of the reason to buy. The buying is concentrated in FTTP and some cell-phone stuff, mostly because of competitive forces (cable vs. telephone, telephone carrier vs. telephone carrier).

I think that anything away from those two sectors in tech is just a trade. I sure wish I could be more bullish, but PCs have become like mid-ranges in the previous decade; they don't work as a theme. And the Web seems to be off and on.

Cramer may well be right, but equally the rally has only just begun starting to happen, and it's worth bearing in mind that the way all rallies begin is in bouts of short term trading activity. Look back three years and even this type of short-term tech fad was a distant hope: the difference is that it's now a reality, even if it is only emerging in brief spurts over positive earnings periods.

Tech stocks are still a mixed bag when it comes to earnings quality but this isn't what counts  when it comes to the real momentum behind large capital gains in the sector - it's the risk the equities present relative to their reward potential, and right now, that risk/return trade-off looks pretty good to most investors with a sector price-to-earnings average  in the fourties.

Is E-Bay spinning off negative PR?

WSJ columnist and writer of Loosewire Andy Wagstaff questions the number of users E-bay-owned VOIP mega-brand Skype claims to have signed up:

Internet telephony folks Skype today says that it now has 100 million registered users. A press release (free registration required) says that this was achieved in “just two-and-a-half year's time [sic], and has nearly doubled in size from September 2005 when it had 54 million registered users.” This is truly impressive. But if this is the case, where the hell is everyone?

My Skype currently shows 3,633,607 users online. Admittedly this is during the Asian day, when traffic is not as high as when the Europeans and Americans wake up. But that’s less than 4% of registered users actually online ... I can’t help wondering whether the 100 million figure is a) a wild exaggeration, down to people registering twice, b) people registering and then ditching it or c) the number of users that appears in the Skype program is just not reflecting reality.

This sounds like a classic dot-com era piece of PR hardball: not exactly fictitious, but a little misleading. Considering that, according to parent company E-Bay's website, E-Bay's total number of customers is only 181 million, the likelihood of 100 million regular Skype users certainly sounds like an exaggeration. Those figures, put in perspective, mean that more than a third of E-Bay's customer base is not from their own sui-generic brand, but from that of a recent private acquisition. If this was the case then Skype executives would surely be playing a much more prominent role in the E-Bay boardroom than they do now, and it's unlikely VOIP would have come as such an easy acquisition. Butthen  the question begs: why the need to exaggerate? Skype was an impressive purchase, is an impressive brand in a disruptive industry: why imply that 100 million people are regularly using Skype?

A quick glance at the Reuters newswire might help to explain a few things. First of all, E-Bay's just gone and spent 365 million Swedish Kroner - about $60 million - on Tradera.com, a Swedish online auction site. In other words, E-Bay, despite its enormous global customer base, is having trouble cracking the Scandinavian marketplace and needs to acquire a competitor in order to establish market entry. Then one sees that E-Bay might "increase ad spending with (a) chosen partner (such as Yahoo! or Microsoft in a collaborative effort against Google) and provide access to the data it has collected about its consumers". Translate this piece of flamboyant PR into "E-Bay wants to justify more advertising to it's shareholders" and it makes more sense. To cap it all off, however, not only is E-Bay increasing it's spending on advertising and buying new competitors because it's brand isn't strong enough to penetrate certain regional markets, but it's second quarter earnings are expected to be below analyst's expectations this year. The press release even goes as far as to cite non-GAAP (generally accepted accounting principles) figures in the statement, an inclusion that quite frankly begs disbelief  as it tells investors nothing meaningful about the financial state of the company.

E-Bay's conundrum then is how to sell what by all accounts could be quite reasonably construed as negative PR by shareholders and the market as positive signals of growth. Boasting about extensive customer bases is an obvious way to do that.

The European Merger

Santiago Iñiguez, dean of the Instituto de Empresa and blogger over at BizDeansTalk raises an interesting point this week about the potential marketing strategy for business schools in Europe as they face the challenge of competing against aggresive competition from American and Australian institutions:

In order to enhance the visibility of European higher education and to attract more foreign students there may be two alternative strategies. The first one is investing in the promotion of the generic brand, i.e. “Europe”. The second one is to promote the best brands in European education, i.e. those universities or business schools with worldwide recognition, in order to position European education with premium brands and high quality and hence support the generic brand. The latest Financial Times MBA Ranking, listing the leading b-schools in Europe, has done more for European management education than many other marketing campaigns promoting European management. Given the fragmentation of European higher education I would recommend the second strategy to EU marketing officers.

The situation described above is one that many institutions in Europe face, from tourism to real estate to financial services, and is inherent in the problem of combining the many disparate micro-climates  which constitute the continent's one brand: "Europe". Indeed, the current situation is not unlike that of a post-merger scenario, where many different dominant brands, all posessing their own unique cultures and alliances and loyalties, scramble to promote themselves and their superior benefits over one another's at the expense of the organisation as a whole.

Professor Iñiguez is right, of course: it makes more sense to pick six or seven of the largest, most prestigious business schools in Europe and actively promote them as Europe's point of call for business education, making the assumption that the other institutions will benefit from the increase in applicants to the region, but in order for that to happen, it requires that those institutions which do not make the list don't try and 'undercut' the system and aggresively promote themselves around the status quo. For the first scenario, that of "investing in the promotion of (the) generic brand ... Europe" is the only viable option which European legislators have found available today by default of lack of cooperation between countries and institutions within the  EU: most European business schools, for example,  have an open statement of intent to become "Europe's largest/biggest/most powerful b-school".

Such aggresive self-promotion on the part of the individual brands leaves potential customers confused as to what actually is "the best", and instead the brightest candidates (in many cases even those whose initial preference was to live and study on the European continent), in the case of business schools, end up going to Harvard or Stamford: at least there they are assured of quality. What Professor Iñiguez proposes - that Europe concentrate its marketing of business schools to focus around a favoured few - requires those that are less than brilliant right now to take a back seat and cooperate. This is much easier said than done in a climate where ultimately, you are talking about sixteen countries which don't even share the same common language.

The answer, I suspect, lies where many Europeans are now scared to tread; in the re-formation of empirical elitist governing bodies such as the Ivy League institution in the United States. The concept is painfully familiar in European history but contrary to the mission of left-wing Brussels politicos , for more than anything else Brussels is bent on equality. Equality, however, comes at an ironic price, as most Europeans have found in demise of the quality of everything from the food they now purchase in supermarkets (tailored to specific sizes and colours at the expense of taste) to living standards (real estate has appreciated phenomenally in most major European cities and towns with the introduction of a single currency forcing many once comfortable Europeans to adopt a culturally deplete suburban lifestyle where one was previously not required). 

If EU legislators, participant institutions and organisations are to make the most of the single brand, there's going to have to be more give-and-take from those that are not really where they claim to be right now, and that means, in come cases, putting political ideals and personal aspirations on hold for while.

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Alcatel Lucent Finalising

Scott Moritz over at the Street.com is a little unimpressed with the Alcatel Lucent deal:

The postboom era hasn't been all that fruitful for Lucent. The stock has been stuck below $5 for more than three years. And at this point, Lucent is facing a wall rather than a lot of encouraging options.

True enough, Lucent stock has not exactly flown over the past five years, but then again, neither has that of any telecoms company. And getting together in the capacity of a merger with a company whose market cap is 40% higher than your own is a pretty soft wall to face.

Capital Momentum

Capital seems to be pouring in on the management end of capital markets:

WO of London’s most successful fund management groups revealed yesterday that money from investors has been flooding in over the past year.

New Star Asset Management, a conventional asset manager founded only six years ago, announced that it attracted a net £3.74 billion of inflows last year — or more than £10 million a day.

It's the start of another boom, which I predicted a little while back.