L1037 and the Resiliency of a Great Tradition

We passed a pleasant evening last night in the company of Note by Note, Ben Niles' engaging documentary about the construction of "L1037," a Steinway concert grand. It's a lovely piece of work--the movie, but of course also the piano--not impaired by the fact that it's a giant infomercial for Steinway, because what does it matter whether Steinway gets an infomercial or not anyway?  As many have noted it is also an elegy--threnody?--to old-fashioned craft where guys (and yes, some women) get to do jobs they enjoy  for a decent piece of change.  The nearest comparison I can think of is those shots you get at the HD operas of backstage crews at the Met, although I suspect the Met crews get paid better, and that the Steinway crews exercise more skill.  

Our enjoyment was  not greatly dampened by the thought that the old family firm is just now being sold to an LBO house at a 33 percent premium over the recent trading price.  A spokesman for the buyer says  they are “not contemplating any changes to any of the manufacturing operations,” and one's natural first thought is: yeah, right.  The obvious path in a deal like this is to replace all the brass fittings with plastic and then trade off the brand name until it wears out at which time you throw it away.  But maybe not: Warren Buffett did business with Katherine Graham for a generation without ever trying to tell her how to run The Washington Post (and now that I think of it, the top guy at the shop that bought Steinway is also a director of the New York Times).  So we shall see.

Chez Buce is not favored with a Steinway, grand or otherwise, but we do have a lovely little Petrof upright; Mrs. Buce likes to tickle the ivories while I prepare dinner which is win-win as far as we're concerned. We bought it a few years back for about $6,000.  The tuner told us last week we could sell it for $26,000, which would make it the best investment we ever undertook.  But unlike the Steinways, we are not disposed to sell.

Seeing the Steinway show and eyeing our prized Petrof, I was prompted to do a bit of Googling. I learn that Petrof was a Bohemian who went down to Vienna to learn the piano trade, and built a firm which (so far as I can tell) remains in family hands today--a demographic not unlike Mrs. Buce's grandfather, although he never owned a piano company, or a piano.  And here's another fact that should have dawned on me before: evidently Petrof was confiscated by the Commies in 1948, returning to private (family) hands only after 1989.  I'd love to know more about that: were the Reds smart enough to realize that they had a golden goose, best left undisturbed?

But the history does offer a thread of consolation: if Petrof can survive the Soviet Minotaur, maybe Steinway can survive an Wall Street buyout.

Oh Those Guys! Nu Skin

Joe Nocera at the NYT has a typically crisp and professional piece up this morning about yet another company whose main business appears to be cozying up to the powerful and well-connected so as to enhance the cozyer's private gain.  In this  case the company is a peddler of skin-care products and the ranks of the "rich and powerful" conclude the fellah who wants to be the Republican President of the United States.

The name of the outfit is "Nu Skin," and it took about five seconds before the bell went off and I muttered "oh those guy!"    Those guys indeed.  Travel back to me now if you will to the fall of 1996, when I picked up a visiting gig at Cardozo Law School on Fifth Avenue just above Washington  Square (thanks, David!).  My brief included the basic course in business associations.  It was not part of my regular portfolio but I figured I could handle it and indeed as I recall, I brought it off well enough.  

But about six weeks into the semester, it sank in on me that if you're going to teach the chillun' anything about the Corporation in American Life, you really ought to show them a 10-K or an S-1--an annual report or a prospectus--so they can get some sense of how the money moves.   One day I uttered my insight in class and added: look, one or more of you must work in a financial printing house--see if you can scare me up a stack of samples that we can use for discussion.

Sure enough, a couple of days later a nice lady showed up at my door with a crate, and you know where this is going: Nu Skin.  A public offering of stock.  I dove in with curiosity and enthusiasm.

Boy, what an eye-opener.  Although in fairness, I don't remember anything about Ponzi multi level marketing schemes or unsupported product claims, the stuff of the Nocera piece.

What I do remember--and I grant I am deploying a 16-year-old recollection, but it's pretty vivid--what I do remember was what looked to me like one of the most brazen displays of self-dealing I'd ever seen.  The prospectus, as I remember it, said in essence: if you give us your money, we will pass it on to an unnamed third person who may (heh!) have some relationship to the principals of this company.  If he makes a profit, he may give some back.

Hoo hah, are we talking teaching moment, or what?  I've long marveled at the essence o f the American investment regime: we give our hard earned dollars to total strangers and expect them to behave with it.  The whole point of securities law is to try to impose some limit on the recipient so as to keep him from just flipping out his cigarette lighter and setting fire to the stuff.  Here was a scheme that seemed tailor-made to make sure that those protections didn't do their job.

I paid no attention to Nu Skin after this particular episode.  I do see from a quick check at Yahoo Finance  that anyone who wanted to take a flutter on Nu Skin could have bought it (on Nov. 22, 1996) for $30.88 an ridden it all the way down (by Dec. 1, 2000) all the way down to $4.75.  Would that have been the moment when Mitt Romney was trying to peddle them as a sponsor to the Salt Lake Olympics?  Whatever.  In any event, then and now this seems to be one skin that shows up already ribbed and lubricated.

You Want to Run Into the Room Shouting "No-o-o-o!"

Here's Walter Hamilton with the most unsettling domestic news of the day:

Americans worried about running out of money in their golden years are trying a new investment strategy: day trading their retirement funds.

Let's all agree on how crashingly, suicidally dumb this is, even as we feel a pang of compassion for the poor guy who is sufficiently desperate that he'll attempt such a misbegotten strategy.

But then let's take a moment for the very smart Felix Salmon who thinks it isn't really happening:

suspect that day-trading retirement funds is extremely unlikely to actually become a Thing. People just don’t have the time or the self-discipline to do something like that — especially once you find out what’s involved. Because most 401(k) plans deliberately make it very difficult to do this kind of thing, these plans can only really be put into effect if you have two or even three accounts to trade. And if this kind of activity catches on, chances are the fund administrators will put an end to even the existing loopholes. These accounts are designed for buy-and-hold retirement funds, not for trading.

Maybe, particularly if he is right about the practical difficulties. But "self-discipline" is precisely the quality you will not find in the compulsive devoted day-trader: rather, self-discipline is precisely what keeps you away from this beguiling but lethal chimera.

Felix does give the gratifying example of a young man on the customer complaints desk at Wells Fargo who trades in and out on Wells stock. "The chances of this working out for him are pretty much exactly zero," declares Felix, emphatically and I think correctly. But the guy's 29; if he gets burned a few times now, he may get chastened before he really needs the money.

Although it'a not precisely on point, Felix does also mention the most import single rule of employer plans do not buy your employer's stock. Nothing personal; he may be a fine fellow with a lot of prospects. But you've already got your wetware, your human capital, tied up in the job; buying the stock also just makes you the classic underdiversified investor. If they need to pump and dump sell the stuff, they'll give you all that blather about how you want to "show loyalty" and need "skin in the game" Don't believe a word of it. Indeed, one reason the boss wants to go into the mergers and acquisitions game is precisely that his portfolio is by nature undiversified, and for exactly the same reason. He may be stuck with the company stock; if so his only hope may be to diversify at wholesale by buying somebody else. His problem; don't let it be yours. If you still doubt me (and why would you take investment advice from me), go read a guy who really knows what he is talking about.

A Facebook Footnote

What I offer here is no real secret but nobody else seems to be picking up on it so I guess it falls to me.

Specifically--we're hearing all this talk about how the Facebook IPO implies a company that is "worth" perhaps $100 billion.  But unless  miss something simple and vital, that number is a "market cap"--share price times market cap.

Yet everybody knows that market cap is a fantasy number. It implies (assumes) a flat demand curve--that each share will sell at the same price of all shares.

A moment's reflection should be enough to persuade the observer that this will be the case, if at all, only by accident.  Most of the time, the more shares offered, the lower the price. Sometimes (buyer trying to corner the market), the more shares purchased, the higher the price. Either way, the curve is non-flat.

So even if Facebook does go out at the anticipated numbers, it doesn't imply much of anything at all about the value of the company as a whole.

One group does gain from all the hubba hubba, though: those who hold shares already.  By conventional standards, the Facebook offer is  tiny--perhaps five percent of all shares.  Restricted demand plus unrestricted hype means the new issue is indeed likely to go out the door at  heart-stopping price--enriching nobody so much as those who already own shares who just have to stand by and bath in the warm spray of the market pop.

End of message. Just sayin'.  

Who?

Okay, I'm sitting here at breakfast scanning my fave financial blogger, Barry Ritholtz, when I find him doing a shout-out for (coffee-nose moment) – Jim Cramer?

Wha? Say again? Ther noise machine? The pompous, petulant little narcissist who leaves you pining for Glen Beck? Jim Cramer?

Well, let me put that in perspective. When I say “pompous, petulant little narcissist,” I don't mean to suggest that I ever actually watched Jim Cramer—not, that is, for more time than it took to pick up a brick and throw it at the screen. But isn't that enough to understand just how foul and pestiferous little incubus he is?

Evidently not. Ritholtz says:

He is the guy who first conceived of Democratizing financial research and reportage. Whatever money he made for clients as a hedge fund manager is far outweighed by his contribution to you, the modern investor.

No kidding? I mean—I don't particularly mind the hedge fund money per se; if I wasted my time on that sort of thing, I wouldn't have any hours left in my day. But if we're truly going to protect ourselves against the crimes of the plutocracy, we're going to have to submit ourselves to the ministrations of... Jim Cramer?'

But isn't that why I cancelled cable?

God help us.

Meditation on Risk and Return

Here's an issue about investment risk and return  that has been bugging me since a conversation with a guy who really should know better.

Start with the basics.  We take it for granted that investors do not like risk; that they will take risk if compensated, and compensation means  a higher rate of interest.  Oh, and for present purposes, interest=volatility.

So far, fine.  Now, consider AnnCo, the pension manager surveying its record over the past 10 years.  The risk-free rate is five percent; AnnCo took some risk and got eight percent.  Oh wait, AnnCo actually got eight percent per year "with notably rare exceptions," i.e., years seven, eight, nine and ten.  Did AnnCo do better than risk-free?   Obviously not.  Risk-free has accumulated $1.63 on a dollar over 10 years; AnnCo, just $1.59 (AnnCo's 10-year mean is 4.7 percent).

You knew that?  Course you did.  Grownups understand  it easily enough although it's surprising how ofen the point gets lost in discussion.   But try this.   PenCo  finds it averaged 7.75 percent over the last 20 years; therefore it thinks it is justified in using 7.75 as its estimate going forward.

Is this a fair analysis?  I think not.  Seems to me the real question is "what was the risk-free rate of return over the last 20 years."  One way to answer the question is to ask, "what kind of return would have have earned if you had bought Treasuries in 1991?"  The envelope, please--turns out that 10 year Treasuries were yielding over seven percent; 30s over eight.  So at 7.75 percent, PenCo isn't even beating risk-free.  Does anybody think the next 20 years will give us 7.75 percent risk-free?  Treasuries sure don't; Bloomberg tonight quotes 10s at 3.17 percent, 30s at 4.31 percent.  So for a 20, figure about half the 7.75 percent rate.

H/T again to Ignoto without whom this post would have been far more trivial and less interesting. 

John Mauldin Tries to Answer a Question

I've become a fan of the John Mauldin investment letters.  He preaches a kind of unterrified tough-love style of investment analysis, with an obligatto of "this too will pass."   I can't say I actually take his advice--I'm still an almost compulsively passive investor.  But reading him can have a consolatory effect.

Mauldin can be pompous and a bit full of himself although perhaps that comes with the territory, particularly if you are successful at it, as he seems to be.  But he strikes me as reasonably conscientious at attending to critics and doubters.  Here, for example, he offers up (from a skeptic) what you'd have to call a well-formulated  cry of pain:

[P]oliticians in DC, you, and your guest pundits warn us that the world as we know it will end if we don't somehow reduce the average Joe's Social Security, pension, Medicare and Medicaid benefits. Oh and let’s not forget the budget, which is being argued in Washington as I type this. The line is that we have to make drastic reductions to spending on domestic programs, on our schools, on our infrastructure, on unemployment entitlements, on all the things that serve to give working people a chance at a dignified life. You're a smart guy. You can recognize what is fair and what is greed and excess. When the nation is as troubled as it is today and yet the wealthy are living even better than they did 30 years ago, what does that say about America?

 Over to you, John.   Do we really have to strip ourselves and our neighbors to the parched bones, so the toffs can feast on ortolans and whipped cream?   Mauldin doesn't like to be cut up into snippets so I won't try to give him to you  here.  But if you're curious as to how he might response, go read the full unvarnished version here. 

If You Build it , they will--What?

Link: http://snipurl.com/23miw7

Somebody is hacking Andrew Samwick's blog:

New Hampshire Public Radio ran a story yesterday about Governor Lynch's request that hospitals in the state stop building new facilities. Normally, governors never miss an opportunity to encourage new business in their state, because in most markets, greater investment leads to better services or lower prices.

Does Samwick believe that?  Does anybody?  Isn't the history of statecraft the chronicle of costly and vainglorious monuments to the narcissistic folly of the leading elite?  Isn't the planet just littered with this stuff?  And at a more tawdry level, isn't the disease of modern health care rooted (at least in part) in the wretched excesses of overbuilding that we inflicted on ourselves under Hill-Burton.

Ah well, I suppose the pyramids did provide employment for bricklayers.    And did their bit for tourism.

I met a traveller from an antique land
Who said: "Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things.
The hand that mocked them, and the heart that fed.
And on the pedestal these words appear:
'My name is Ozymandias, King of Kings:
Look on my works, ye mighty, and despair!'
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away

How Goldman Wins the Battle at Facebook Gulch

Review the bidding:Goldman Sachs (and a partner) offered to pay $500 million for a slice of Facebook which the press tells us implies a total valuation for the company of $50 billion.  Goldman says it intends to flog offer the stock to a small circle of friends.  Then poor timorous Goldman says no wait, we might get in trouble the bureaucrats; we'll offer it only to investors overseas.  Jonathan Macey blames the bullies in Washington and calls it "The SEC's Facebook Fiasco."  Macey does have the good grace to concede that Goldman doesn't lose a penny by its shift of strategy, but I'll go a step further: for Goldman I'd call it a big win.

 For starters, I haven't noticed anybody explaining just how $500 mill translates into $50 bill, but I suppose it goes like this: 500m/50b = 0.01  = one percent. Goldman is buying one percent of Facebook (yes?), so the whole business must be 500m/0.01. Yes? Well: yes if we assume a flat demand curve; if, that is, we assume that all shares of Facebook would sell for the price of each share of Facebook.

Of course we won't know because nobody is offering to sell all of Facebook, and will no until sometime a lot closer to the next ice age.   What it does do is ramp up the hubba hubba around what is already the hottest current property on the investment scene.

I know memories are short but isn't this beginning to sound a lot like the forces that drove the dot-com bubble in the 90s?   You'd hype the stock, you'd have your "public" offering,  but then nobody would be able to find any shares.  You'd actually release five, maybe 10, percent of all shares.  So everybody is avid for a product that very nearly does not exist.  The consequence is that you capture the most optimistic investors at the highest possible price.  Everyone else is left just kicking themselves that they didn't get a piece and just aching for the day when the finally get to climb on board.

So what have we get here?  Small (indeed, tiny) float, check; agressive hype ($50 billion!) and an old-fashioned barrel-house tease (C'mon you know you want it!  Oops, you can't have it just yet!  Watch while somebody else has some fun!).

Of course I haven't a clue precisely what will happen next.  I'm assuming public offering.  I'm assuming a blaze of publicity.  I'll bet any number of these first-round investors will come climbing over the bodies of their grandmothers to get in the second chance.  And one way or another, I'm assuming that Goldman will be there at every juncture, its palm open and out and on its face a contented grin.

Today's One-liner

This is one of the true benefits of having a brain tumor.  Everyone wants to hear what you have to say.

Former Wall Street bond salesman Gordon Murray, dying of brain cancer,  who is spending his finite hours writing a book of investment advice.  (Link).  The secret?  Apparently "mutual funds, diversify."  Making Murray, as ron Lieber says "one of the highest-ranking Wall Street veterans to take back much of what he and his colleagues worked for during their careers."

Aftherthought:  Makes me remember my sometimes friend Arthur Leff, master one-linerist who died many years ago, way too young.  Leff had cancer and he knew it was terminal but it was weirdly asymptomatic.  He also had phlebitis which hurt like hell.  He told (I hear second hand) his colleague Harry Wellington: Goddamit Harry, not only am I dying but I'm sick.