Looking Good?

I have to confess, I'm not usually the first to jump on the animal rights bandwaggon - despite having had family pets throughout my life - but when it comes to the fashion industry, the arguments over business ethics are a lot tougher to justify than in the realms of science.

Hong Kong blog Flagrant Harbour has posted a video of a minx being stripped of its fur for the lucrative retail mark-up value from stores in Bond Street to Fifth Avenue. Here is the blog's accurate description of the video:

It shows a mink being stunned with a blow to the head then stripped of its skin from its hind legs to its snout and then left to die.

Looking like something out of a horror movie you see it lying there, at one point looking directly at the camera lens, clearly in unimaginable terror and agony.

Even though I was warned I was not prepared for the impact this video clip would have on me. I only watched it once. I can never watch it again. If you watch this (and I must seriously warn you, it is obscenely graphic) and you are not affected by this then you need mental help.

The fashion industry, time and time again, gets away with what in any other industry would be considered disgusting, unnaceptable or downright fraudulent practices. The stripping of animals' furs like the Minx in this video is no exception. In society's mutated Victorian value system, it's perfectly glamorous to wear a fur coat whilest simulataneously shunning the big energy conglomerates which now go to enormous lengths to protect the environment for what are usually quite unintentional and accidental hazards anyway.

This is not the only fault with the fashion industry: there is no regulation in place on the marketing, development or product endorsement levels, with many of the big brands being run on practices barely a cut above 1950's Brooklyn numbers' rackets. This does no service to the long-term viability of the industry as a whole or to society's perception of corporate standards, and a sharp overhaul and review is what's required if we're to keep things efficient.

Flagrant Harbour posts a disclaimer before the video saying:

PLEASE BE WARNED - THIS VIDEO IS VERY DISTRESSING

along with the following addendum:

If you wear fur, watch this. If you know someone who wears fur, show them this. Know what you paid for.

This video is indeed distressing, but assuming you are a perfectly healthy, intellectually agile person, I encourage you to watch all of it, because it's the reality of an industry which continually flaunts rule after rule, and receives audacious aplause for it while providing so little of any use to society in return. And I second the above notion; if you do wear fur, you will throw it away after this. You won't even have the temerity to sell it on e-bay.

Video.

Thanksgiving and Guest Blogging

Seeing as it's Thanksgiving, I'm filling in for a friend and guest-blogging over at Iowa Voice this weekend. Come and see if you are so inclined.

Happy Thanksgiving if you are from the United States.

GOOGLE hits $500: MSFT hits 2-Year High: NASDAQ at 5-Year High

QUICK NEWS UPDATE (when is the media going to cover all this?)

Just as I predicted, Google stock has broken $500 for the first time today, valuing the search engine giant at over $155 billion:

This is what I said a couple of weeks ago:

Trading at 473.99 at the time of writing, having beaten Wall Street's expectation on Q3 earnings hansomely only a week ago, it's worth putting under the microscope. This is a company which made a 90% jump in Q3 earnings on the year to $733.4 million, and a revenue increase of 70% to $2.69 billion. While that sounds impressive, the company blew $1.65 billion of those dollars on Youtube, and unknown and untested brand only weeks ago. That's another six month's record earnings at the same level to make the acquisition profitable in absolute terms, without dividends, and without re-investment in its own business. And that's if the concept succeeds. NewsCorp bought MySpace on even more tenuous terms less than three months ago.

All this financing action looks very much like a replay of 1995/6, when Netscape and Yahoo! stacked up one-billion dollar plus IPO prices, except that's it happening in the form of trade sales rather than IPO's. That's predicatble enough. The tech bubble of the 1990's may not have endured, but the impression that the internet is a growth and medium catalyst for hundreds of industries didn't lose any lustre.

My guess is, despite Google's precarious revnue model, the stock spikes $500 before the year end, and a few more 'social networking' sites start charging precarious valuations based on their own one year busines models.

Microsoft has hit $30 for the first time in two years today too, making for a two year high:

This benchmarks are extremely significant as a guage of investor appetite for tech. The NASDAQ has hit another five-year high today too. It's only up from here.

New Product Launches

If there's one time you want to buy a stock, it's right before a major product launch. This has been the case for a long time: if you'd bought AOL a week before the launch of any of the Harry Potter movies, or Coca-Cola a week before the launch of Coke Zero, or even Mc Donald's a week before the launch of the chicken burger, you'd be up.

The latest candidate to fulfill this recurring product-launch prophecy has been Sony. The launch of the Playstation 3 has generated nothing short of hysteria, from people charging up to $650 on Craigslist for a place in the queue to get one of the new consoles, to a young democrat Senator's aid using the name of his employer to get some leverage on first-mover advantage on the product. As a result, the company's stock has picked up the best of it over the past couple days.

The following chart shows Sony benchmarked against the NASDAQ over the past six months:

It's pretty safe to call that underperformance. Now look at Sony benchmarked against the same index over the past five days:

In one of the NASDAQ's best weeks since the bull market of the late 90's, Sony stock has practically doubled the performance of the index. Video gaming fans would be best off buying the stock first, then using the gains to get the new Playstation.

11/15: Record Day For Markets

November 15, 2006 may well be remembered as the day U.S. markets turned, although the media are being somewhat sanguine about it. In short, yesterday was a record day for all markets - the Dow, the S&P, the NASDAQ, and for the big new tech stocks like Google.

The Dow broke another all-time high, trading up to 12,326.10 and closing at 12,251.71. That's the first time the Dow has broken the 12,300 mark intra-day and the first time it's closed above 12,250 in the history of the market (the following is a three month chart because it shows the closes better):

The NASDAQ had an equally historic day, reaching a new high since the tech bubble of 2,442.75 and breaking an intra-day of 2,450 for the first time since then:

The S&P however is the really exciting one, since this is the market critics of the recent bull run have been using to justify their bearish views. Only until the S&P starts breaking records, goes the argument, does this rally mean anything (initially it was the same argument used for the NASDAQ until that started breaking records). Yesterday, the S&P broke a six-year high, and was only 8% off an all-time high of 1,530.09 on intra-day trading:

As an addendum, search engine giant Google was 15 cents off reaching the landmark $500 a share that analysts have been speculating about since the summer (yesterday was another all-time for Google too, incidentally): 

I expect we will see the stock break $500 before the week's end, just as I said a few weeks ago.

It's getting harder and harder to justify bearish views, and now the talk is all about a bubble, mainly by people who don't understand that a bubble requires the employment of excessive leverage (amongst other things), which there isn't right now.

I have pointed out here many times that a bull rally was only to be expected with lowering commodity prices and a sharp increase in private investment - despite lower GDP, which is feeding that spike in the private investment curve. The equity markets will continue to get the best of it - my predicition is that the NASDAQ tops 3,000 before year's end. And even then it's still cheap.

*UPDATE* Welcome back Instapundit readers! This is a blog about the economy, which is really to say it's about everything from politics to the arts to technology too, because that's really the jist of the economy. There's also a greater analytical scope on markets here than you'll find in most places. As always, please feel free to take a look around, comment and of course, come back.

**UPDATE** The same warm welcome is extended to Ace of Spades HQ readers, Memeorandum readers, and Townhall readers.

What The Democrats Need To Do

Contrarian approaches don't always pay off, particularly when it comes to politics. Last night I called the midterm results completely wrong, assuming that American people would come in line behind the Republicans based on some solid recent economic fundamentals. Unfortunately, and ironically for the republicans, this vote appeared to be less about the economy and more about politics. The question now is therefore: what should the Democrats aim to achieve in their majority in the House for the first time in 12 years, and possible majority in the Senate?

A lot of policymakers are pretty chuffed right now with the election turn-out - record numbers of midterm voters made it to the ballot box yesterday to cast their decision in this overheated political climate. This is however, not necessarily the best of news. At times when political interest is at its highest, it usually means  there's a climate of political instability in the air. This has been the case for the past few years: with the war in Iraq, lots of banter about Iran and North Korea making progress on nuclear development, and terrorism fears abounding, Americans have become more and more politically minded.

This new mindset undermines the competitive advantage of the United States: it's economic prowess. For when politics becomes the cause celebre of the moment, the political instability insinuated by all the interest usually rubs off on things like high commodity prices, depressed equity valuations, and slow private investment growth as people become less risk assuming. Where the Republicans have made some unequivocal progress is in recent economic affairs like tax cuts, appointing an ex-investment banker as Chairman of the Federal Reserve, and encouraging private investment through a myriad of economic climatic tweaks which is now starting to pay off, and the equity markets are getting the best of it. Where the Republicans have fallen short of progressive actions is in the more traditional moral areas of debate such as abortion and stem cell research, which has undermined the scientific progress of the last twenty-so years and hence the potential capital infusions these innovative new measures normally attract.

If the Democrat party really wants to do the best possible job then it would be wise not to start with immediate and more traditionally left-wing measures such as trying to reverse tax cuts and increase state spending, but rather to reverse the general trend of politicisation the U.S. has veered towards as of late like Bill Clinton did. By opening up the channels to science and embracing recent economic growth in the market economies - steering clear of inflation-related arguments to promote political agendas for state spending - the party could end up doing a lot of constructive work. That means admitting to some degree that what the Republicans have done economically has been sensible and rational.

Most of all, the party needs to shift the current focus of concentartion away from America's place in the political world and towards it's role as a great economic ambassador. If there's less political zealousness in two years at election time, the Democrats have done their job right.

The Money Is On The Republicans

At every political election, there's always the same crowd of political 'experts', pundits and journalists who tour the nation offering up their two cents worth of 'considered opinion' on whose going to win. The chief problem with listening to such people is that they have nothing at stake should they be proved wrong - in fact, quite the opposite is often true: the camaraderie have a whole legion of articles and analysis and books to publish after having used the election campaign to trade up their brands and often end up cashing in. In essence, the experts two cents is worth just about that.

The U.S. midterms today are no different. For months, the usual crowd have been chiming in with primetime TV show appearances, book launches and fancy after-dinner speeches with nothing much more to offer than a self-serving call to applaud and confuse.

It often pays therefore to look at people who do have a stake in the outcome, and who have nothing to gain and everything to lose should they be proved wrong; those people, in other words, with cold cash riding on the outcome. 

I've been arguing recently that with the growth in the economy at the apex of its current upward-looking tipping point, people are probably more likely to go with the Republicans full-hog than anything else: after all, it's only another two years and if the tipping point doesn't crest just how people want it to, then they can always change their minds at that point. That's logical enough, and sensible thinking; after all, it was the Republicans who appointed the new Federal Reserve Chairman Bernanke, and he's done a commendable job so far in garnering support at both the private and public levels of the economy, and the tax cuts have released a lot of much-needed liquidity into the economy. (The fact that this liquidity took some time to take effect is only natural by the way, and it was poor economic thinking on the Democrats' part to start pointing the finger to tax cuts not working barely a year after they had been made). In other words, why spoil the party when it's just getting started?

This is why today's New York Times article on the Dow (via Iowa Voice) is particularly cringeworthy:

The Dow Jones industrial average rose 119.51 points, or 1 percent, to 12,105.55, snapping a losing streak that followed a record high on Oct. 26. Speculation that Democrats may take control of the House of Representatives and the Senate from Republicans in elections today aided the rebound.

Well, I'd love it if someone could tell me the last time the markets rose on the back of an expected Democrat victory. Ask yourself this question if you are unsure: why would the Dow, which has rallied to an all-time high under a Republican House and Senate, rally on the expectation that a rival party proposing to reverse tax cuts is going to get in? In fact, the markets are saying exactly the opposite of what the New York Times would like to think it would.

Markets tend to squeeze hubris towards the final hours, and indeed, this is what the markets seem to be implying today. The numbers in the stock market  say more than any journalist can write now - with a greater degree of accuracy.

$35.1 Million for Instapundit.com

With all this interest in social networking sites around, and creative new private equity concepts in general, it's about that time in history again when leaving your prestigious investment banking job to go and start a private equity venture capital or buy-out fund focusing on overlooked online assets doesn't seem like such a bad idea if you have the contacts and a bit of chutzpah.

On top of that list of overlooked online assets are perhaps the big blogs. With increasing numbers of readers who demonstrate great brand loyalty, clicking on hundreds of links a day and even taking time out to blog on their own smaller platforms what the 'A-listers' have to say and offer up, the big blogs offer some lucrative potential cross-promotion and marketing concepts. Plus, as an increasingly sizeable number of readers turn to the big blogs for political news before any other source, the potential for search can even be expolited down the road. That's a whole pile of growth. And at considerably less risk, one could argue than other newer social networking sites offer too; most big blogs like Glenn Reynold's Instapundit have been around for at least five years - middle age by online standards, especially in light of My Space, You Tube, Facebook and the rest which haven't even tested their brand stickiness for half that time.

With this in mind, I e-mailed Glenn Reynolds earlier today, asking him how much he'd be willing to let his blog go for, either including or excluding him in the package. "I dunno," he replied. "Make me an offer! Er, a big one ..." Well, after some valuation calcs, it appears the law professor is right to ask for piles of cash, and this indeed is exactly what he may well find himself with in the next couple of years.

There are several ways to calculate the value of Instapundit, but the most accurate one would be based on growth versus current private market value for similar sites offering the same growth features. There's the traditional link-based blog calculator, which puts Instapundit at just under three and half million dollars, but there's a lot wrong with this. Principally, it's based on a formula developed from the AOL-Weblogs Inc. deal several years ago, when the private market for new online tech wasn't nearly so bullish. It's also based on links and their individual component values, but we now know that VC's are less interested in links and current ad revenues than they are in potential market share maximisation (You Tube has very little outside links and doesn't make any money at all).

Let's start with the News Corp-MySpace deal, then. Earlier this year News Corp paid $580 million for My Space, which then had a core r base of around 18.5 million. That's a value of about $31 a head per r, based on forward growth so far of about 25%, meaning News Corp's My Space nominal valuation model peaks at just under $40 per r. Based on those figures, let's assume that Instapundit's average CORE daily readership are the rs, which is about 150,000. That's a valuation for Instapundit of $5.87 million. But this figure doesn't take into account the fact that that deal created a wave of private equity deals for online r bases which led to an instant industry growth in valuation of about 250%. Basically, that's what you could have bought Instapundit for just right after the News Corp/MySpace deal. In a minute you'll wish you had.

Next to follow suit was Facebook, for which a private venture capital firm paid for 25% of the company on a valuation of $550 million for a r base of only 7 million. That put the price of rs at $78 a head (and in all honesty, Facebook's rs probably had less than that in their bank accounts); for Instapundit, that means a valuation of $11 million. Using the Viacom's previously outright rejected offer price of $750 million, Instapundit's value rockets to $16 million.

But then Google got in on the act and paid $1.65 billion for YouTube. Here is a company that hasn't even turned a profit yet, and has less than 10 million rs so far. So that's $165 per r, or a value for Instapundit of $24.7 million. Using these recent deals as the basis for blog calculations are sensible: blogs are interactive, they are essentially 'hang-outs' for online communities, and could certainly be developed that way if the owners wanted them to be. Plus, Instapundit's r base is considerably more sophisticated and wealthy than any of the above social networking sites, which means more demand for search and higher margins on rs.

Now, Instapundit has an annual r growth of 50%, and valuation growth for online sites is about 100% excluding the YouTube deal. Using those stats alone, we can estimate Instapundit's readership to reach a conservative 225,000 average in the next 18 months, at an industry average of growth to $156 a head (and what's more, the average Instapundit reader has considerably more than that in his/her bank account meaning plenty of ad/cross promotion bucks and elite education which is good for search habits). That puts Instapundit at a current valuation of $35.1 million.

Assuming Glenn Reynolds stays for another five years (as is the case with most PE buy-outs), that's not bad at all for ten year's work.

*UPDATE* Welcome back Instapundit readers who came by for the recent Dow and NASDAQ (links are to posts) analysis last week, and welcome to those who have never visited here before! This is a blog about the economy, which is really to say it's about everything from politics to the arts to technology too, because that's really the jist of the economy. There's also a greater analytical scope on markets here than you'll find in most places. As always, please feel free to take a look around, comment and of course, come back.

**UPDATE** For some good election news and opinions, go and see Brian over at Iowa Voice.

In The Bullring

US productivity is down, markets are down for the first time since June 2005 for five straight days (report). Then again, oil is down, sharply, and the Dow is hanging in there above that 12,000 threshold it reached last week and the Federal Reserve is still worried about inflation which means the economy must be growing. Most people are, understandably, walking around with question marks in their heads.

I pointed out a few days ago that productivity was unlikely to be up very much while private investment - which propells broader economic growth and hence inflation - was in the throws of massive expansion, because you don't get material produce - financial or industrial - until that private investment starts paying dividends in terms of earnings and produce. This is why GDP growth was down. Think of it from a personal point of view and it's easier to understand. If you start an online widget business and invest all the savings you have from last year's salary into that business, you don't get paid until either you a) earn something from selling some widgets online, or b) float your online widget company on the stock market and cash in some of your shares. That's productivity and GDP, and it's what's going on this year. It's also a very, very bullish sign for markets, which are all about earnings premiums, not current day scenarios.

To demonstrate this, I plotted some charts. This first one shows all the data from 1970 to present day of US private investment against US GDP growth (both nominal so no one like Daniel Gross over at Slate rehashes the cry me a river debate over nominal vs. real numbers):

There are several points of interest here. First of all, broadly speaking, look how the US has become a much more investment-heavy economy over the years. GDP growth having slowed is only natural, by the way, since it's the old law of 'it takes more to double 1 than to double 100'. The very fact that GDP growth even reaches levels of those thirty years ago says some bold things about the US economy. But most curiously, look how pre-1982 bull market and pre-1995 bull market GDP made a rapid decline as the private investment curve did the opposite and angled even steeper. This illustrates the point I'm making well; GDP declines rapidly if private investment goes up because there's not a lot being actually produced during that time. However, it comes back up a year to three years later, which is about the time all those private companies start paying out stock or dividends and selling some products. But most presciently of all, look how the curve on the private investment line has steepened up dramatically in the last few years. This, accompanied by short-term GDP growth decline, indicates a raging bull market is in the making. It's an EXACT replay of 1995 and 1981.

A scatterplot shows the correlations between the two sets of numbers:

There's a pretty solid negative correlation between GDP growth and private investment. What this means is that it's private investment which is negatively affecting GDP growth, just as discussed above. But what this scatterplot shows most revealingly of all is that this is particularly the case in bull markets, where the scatterplots are huddled together in a downward formation. The huddling effect we are seeing now - low GDP, steepening private investment curve - is the signal of good things to come in the market.

Not converted yet? Let's look at the Dow in terms of historical GDP growth and private investment:

The last two bull markets followed huge declines in GDP growth (the label should say GDP growth but it was late and I got lazy).

This is the Dow against private investment:

... and this one says it all. The Dow, which as I pointed out the other day with charts, leads the NASDAQ, is led by private investment growth: both of the last bull markets followed sharp increases in private investment. The action is actually a little more complicated than that, because private-stage investment and the markets are reflexive - mutually re-inforcing one another - after some time, but neverthless, the piggy bank start to swell first in private enterprise. What is truly alarming is how steep the PI curve has got, especially in correlation with GDP growth decline.

America needs to stop worrying about productivity, and start worrying about what to do with all the productivity when it comes about in the next three or so years, or it may find itself back in an enormous bubble. This is what happened in the late 1990's; productivity materialised, but was fed into productively non-existent assets, which killed the productivity cycle.

Either way, another bull market is coming.