Ugh… More on Facebook

Posted on by David Wright

I’m bored of talking about Facebook but I can’t stop myself.

Two essays (here and here) present the apotheosis of Facebook hating (as a business model). Here’s a quote that about sums it all up. I think.

Facebook is not only on course to go bust, but will take the rest of the ad-supported Web with it.

I say ‘I think’ because the authors present all kinds of complicated analysis extrapolating their hating on facebook to hating on display advertising in general. “It’s a bubble!” and whatnot.

I don’t know, I’m sure they’re very smart, but I can’t figure any of it out.

So let’s just leave it to the marketplace. There are two groups of businesses: those that advertise on Facebook and those that don’t. If Facebook’s products are awesome, it’s going to make its clients rich by making their businesses ridiculously successful. And those businesses will push out the non-Facebook businesses. And Facebook will rule the world.

If not, then the Facebook’s clients will fail from wasting time and money on Facebook ads and Facebook will have no clients. And Facebook will die.

So let’s just wait and see!

The Thrill Of The Chase

Posted on by David Wright

Well there is one inescapable fact about the Facebook IPO: there’s a lot of poop in this bed. Just about everyone seems in on it:

  • From a purely technical trade execution perspective, the NASDAQ was in complete chaos
  • The bankers PROBABLY mispriced the biggest tech IPO ever
  • The bankers ALLEGEDLY played fancy with revenue disclosure
  • The bankers DEFINITELY lost boatloads of dough ‘supporting’ FB shares on Friday so the institutions could scurry away once they realized their orders got filled
  • As with any headline-smashing bungle, the legal locusts approach

Good detail here.

Members of the peanut gallery giggle with shadenfreude when the big boys look like idiots, and why not? We spend enough of our time reading about their bonuses and driving by their mansions wondering what it’s like to be rich. Let’s have some fun, too.

But don’t pretend that you know better. It’s not just MS: every single major bank was involved in this mess. So either me and every other Monday Morning QB would do the same in their boots or whatever would stop us from doing the same would also prevent us from getting into those boots.

So what’s the story? Could it just be that everyone got so caught up in the hype? Who knows.

We do know that Facebook didn’t need the money. This was purely paying off back compensation so everyone would just shut up and get back to coding. To the God Emperor of Facebook, the IPO must have been the most annoying of distractions.

So social dynamics played a part: like with so much in life, salesmen only chase to sell you things you don’t need. Was this the most greatest game ever played of ‘Hard to Get’?

I wish I had a satisfying theory. In my mind, I keep coming back to Chris Dixon’s excellent evaluation, which I’ll quote again:

A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect – to monetize through another business model. If they do that, the company is probably worth a lot more than the expected $100B IPO valuation. If they don’t, it’s probably worth a lot less.

It’s early days for this company still and it may always be thus.

NFL Cities Buy Status

Posted on by David Wright

Of the 20 stadiums built since the Georgia Dome opened, four have been privately financed. Of the rest, the average public share is 73% of the total cost.

That’s the Economist on football stadiums. The impetus is the recent plan for the new home of the Falcons: $1bn split more or less evenly between taxpayers and the team. Why do taxpayers want to spend this kind of money on white elephants?

Well, mainly because there are only 32 football teams and economic capacity for a lot more than that. Forgetting ridiculous Green Bay and Canada-sapping Buffalo, the two low-end economic outliers, you get an effective minimum GDP for a mero area of about 60bn. Here’s my data and here’s my source.

Even ignoring LA (and San Bernardino and San Jose) there are no fewer than 15 metro areas with over 60bn GDP and no gridiron. Think any of these cities would chastely hold back if LA starts screwing up its next shot at an NFL team?

Remember, this ain’t the slums of Bangalore: the #1 job of a politician in the USA is to make his/her constituents feel like they’re high status. NFL owners, scarce asset firmly in their grips, are happy to play bidders off each other.

Addendum: here are the cities (note I added San Jose and San Francisco together in the San Fran row):

City 2010* Teams GDP/Team
New York-Northern New Jersey-Long Island, NY-NJ-PA 1,280,517 2 $640,259
Los Angeles-Long Beach-Santa Ana, CA 735,743 0
Chicago-Joliet-Naperville, IL-IN-WI 532,331 1 $532,331
Washington-Arlington-Alexandria, DC-VA-MD-WV 425,167 1 $425,167
Houston-Sugar Land-Baytown, TX 384,603 1 $384,603
Dallas-Fort Worth-Arlington, TX 374,081 1 $374,081
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 346,932 1 $346,932
San Francisco-Oakland-Fremont, CA 494,444 2 $247,222
Boston-Cambridge-Quincy, MA-NH 313,690 1 $313,690
Atlanta-Sandy Springs-Marietta, GA 272,362 1 $272,362
Miami-Fort Lauderdale-Pompano Beach, FL 257,560 1 $257,560
Seattle-Tacoma-Bellevue, WA 231,221 1 $231,221
Minneapolis-St. Paul-Bloomington, MN-WI 199,596 1 $199,596
Detroit-Warren-Livonia, MI 197,773 1 $197,773
Phoenix-Mesa-Glendale, AZ 190,601 1 $190,601
San Diego-Carlsbad-San Marcos, CA 171,568 1 $171,568
San Jose-Sunnyvale-Santa Clara, CA 168,517 0
Denver-Aurora-Broomfield, CO 157,567 1 $157,567
Baltimore-Towson, MD 144,789 1 $144,789
St. Louis, MO-IL 129,734 1 $129,734
Portland-Vancouver-Hillsboro, OR-WA 124,683 0
Pittsburgh, PA 115,752 1 $115,752
Tampa-St. Petersburg-Clearwater, FL 113,702 1 $113,702
Charlotte-Gastonia-Rock Hill, NC-SC 113,568 1 $113,568
Riverside-San Bernardino-Ontario, CA 109,818 0
Kansas City, MO-KS 105,968 1 $105,968
Cleveland-Elyria-Mentor, OH 105,625 1 $105,625
Indianapolis-Carmel, IN 105,163 1 $105,163
Orlando-Kissimmee-Sanford, FL 104,107 0
Cincinnati-Middletown, OH-KY-IN 100,594 1 $100,594
Columbus, OH 93,353 0
Sacramento-Arden-Arcade-Roseville, CA 92,873 0
Las Vegas-Paradise, NV 89,799 0
Hartford-West Hartford-East Hartford, CT 87,963 0
Austin-Round Rock-San Marcos, TX 86,029 0
Bridgeport-Stamford-Norwalk, CT 84,882 0
Milwaukee-Waukesha-West Allis, WI 84,574 0
San Antonio-New Braunfels, TX 82,036 0
Nashville-Davidson-Murfreesboro-Franklin, TN 80,898 0
Virginia Beach-Norfolk-Newport News, VA-NC 80,518 0
New Orleans-Metairie-Kenner, LA 71,476 1 $71,476
Salt Lake City, UT 66,456 0
Providence-New Bedford-Fall River, RI-MA 66,334 0
Memphis, TN-MS-AR 65,025 1 $65,025
Richmond, VA 64,321 0
Jacksonville, FL 60,303 1 $60,303
Louisville-Jefferson County, KY-IN 58,572 0
Oklahoma City, OK 58,339 0
Raleigh-Cary, NC 57,278 0
Birmingham-Hoover, AL 53,834 0
Honolulu, HI 51,327 0
Omaha-Council Bluffs, NE-IA 47,556 0
Rochester, NY 45,742 0
Buffalo-Niagara Falls, NY 45,150 1 $45,150
.
.
.
Green Bay, WI 15,270  1  15,270

Links on Data

Posted on by David Wright

CalculatedRisk rounds up some links on how data collection can come under political fire, which is, of course, terrifying. He also tells this story:

The Depression led to an effort to enhance and expand data collection on employment, and I was hoping the housing bubble and bust would lead to a similar effort to collect better housing related data. From the BLS history:

[T]he growing crisis [the Depression], spurred action on improving employment statistics. In July [1930], Congress enacted a bill sponsored by Senator Wagner directing the Bureau to “collect, collate, report, and publish at least once each month full and complete statistics of the volume of and changes in employment.” Additional appropriations were provided.In the early stages of the Depression, policymakers were flying blind. But at least they recognized the need for better data, and took action. All business people know that when there is a problem, a key first step is to measure the problem. That is why I’ve been a strong supporter of trying to improve data collection on the number of households, vacant housing units, foreclosures and more.

New data is useless and if we had more data on what happened in the Great Depression we might not be scratching our heads as much today. Here’s an example of a chart that tells some kind of story but really doesn’t have enough history to teach us much of use:

(The chart annoys me in that clearly these two datasets have radically different statistical properties: they don’t belong on the same scale, or probably not even the same chart.)

So Government datasets are excellent because they’re (mostly) impartial and consistently measured: I’d rather have a consistently flawed dataset that I can correct than one whose basis changes unpredictably throughout.

But it’s painful to audit data collection and analysis policies, which is why it took so long for economists to figure out the way the government measures productivity changes due to offshoring is garbage. Michael Mandel blew the top off of this recently and taught us all  a lesson.

But governments aren’t the only game in town. There are countless surveys of this and that group (architects, real estate agents, industrial producers, etc etc), which are ok, but big data is hopefully changing that, too. MIT’s Billion Prices Project is a ‘simple’ web scrape but is potentially a vastly better measure of inflation in the cost of goods. Check out their charts.

Hopefully data won’t be a bottleneck to knowledge some day.

addendum: Michael Mandel reports a huge revision in the domestically produced computers figures:

There are four important points here.

1) A big chunk of those computer shipments were supposedly going into domestic nonresidential investment. Post-revision, either the U.S. investment drought was deeper than we thought, or imports of computers were a lot bigger (see the recent PPI piece on Hidden Toll: Imports and Job Loss Since 2007).

2) The U.S. shift from the production of tangibles to the production of intangibles (think the App Economy) has been even sharper and more pronounced than we realized.

3) Budget cutbacks for economic statistics, such as the House Republicans are proposing, would increase the odds of big revisions like this one.

4) Bad data leads to bad policy mistakes, especially at times of turmoil. We need more funding for economics statistics, rather than less.

 

The Market is Smarter Than You

Posted on by David Wright

Two pretty different links here:

1. Scott Sumner is really starting to get good at nailing down his view. It’s been fun watching his writing sharpen up over the last few years. Nobody who cares about macroeconomics can afford to ignore his blog:

In recent months central banks have resorted to using the phony “credibility” issue.  The claim is that they had to fight hard in the 1970s and early 1980s to get markets to believe they were serious about inflation.

Fortunately, that is simply not true.   Markets have little difficulty figuring out what central banks are up to.  When the central bank wants to reduce inflation (as they did after 1981) markets believe them.  When they didn’t want to, markets didn’t believe they’d lower inflation.  There never was a credibility problem.

…I’ve frequently argued that interest rate targeting is like a car with a  steering wheel that locks when you need it most–on twisty mountain roads with no guardrail.  I’ve also argued that although we rarely hit the zero rate bound in past recessions, it may well become the norm in future recessions.

2. David Merkel (who holds the opposite macro philosophy to Sumner, incidentally) with a couple good stories. I like this comment:

rapid growth in financial institutions is rarely a good thing; it usually means that an error has been made.  Two, there is a barrier in many financial decisions, where responsible parties are loath to cry foul until it is way past obvious, because the cost of being wrong is high.

Insurance companies are excellent long term investments if they’re boring. They’re boring because they can’t really grow quickly, because if they do they will die.

The smartest P&C (Re)insurers I know of have a very simple strategy: sit on your hands for about 75% of your career and pray your investors don’t fire you for it. When the market turns step on the gas. Repeat.

The effectiveness of that strategy is proportional to how much you are in the business of assuming insurance risk. Think of the insurance world as a spectrum from support businesses (IT vendors, auditors, etc) which are more or less acyclical to Reinsurers which are completely beholden to the cycle.

From least to most insurance risk:

IT vendor -> broker -> MGA -> Berkshire Hathaway ->  insurer -> Reinsurers

BRK gets its own spot because  it’s an interesting mix of ‘normal’ businesses and insurance businesses. It’s the ability to put their capital to work in something that doesn’t care about the soft market that makes them unique. They DO something with that 75% of their time.

When the market is hard, insurance is an excellent business to be in: entrance is difficult, and the mass extinction of the turn scares the bejesus out of less skilled underwriters. Finding a strategy that lets you capitalize on that but doesn’t handcuff you to soft market valuations is a big deal.

Facebook IPO – Smart Money Slips Up?

Posted on by David Wright

The VCs and Zuck’s employees got paid today. But not by me.

Here’s one skeptical take.

The Facebook IPO has priced at $38, at the high end of its revised range, representing a market cap of $108.6B, assuming exercise of vested options.

The price is about 26 times trailing revenues and 104 times earnings, which discounts 66.2% compound annual growth over the next 10 years.  In comparison, Google grew at a 42.4% CAGR in the 8 years after it hit the $4B revenue milestone.

As consumer Internet use shifts decisively toward mobile platforms, Facebook’s ability to monetize their position is constrained by the control that Apple and Google have over 3rd party Apps.

GM’s repudiation of its Facebook ads is also troubling, calling into question the efficacy of ads, even on the browser platform.

Here’s some general detail:

“I think that the market was not there for this many shares,” said Michael Pachter of Wedbush Securities. “They priced it right if the goal was for the stock to trade flat [um… so they priced it properly? -DW], but it appears that the addition of 50 million shares on Wednesday night caused a supply/demand imbalance, and the market appetite wasn’t sufficient to support the stock above issue price.”

Some analysts believe the offering was priced too high, maximizing the return for the company itself, but not leaving sufficient room for an upside in trading — or that first-day pop that many Internet debuts have experienced.

If my company IPO’d with a first day pop I’d be spitting nails furious. Not today, and good. So what happens when there isn’t a pop? Well, it might mean you priced it correctly. It might also mean you priced it too high and the Investment Banks mask the error by aggressively making a market to support the flippers (via).

“Stabilization is the bidding for and purchase of securities by an underwriter immediately after an offering for the purpose of preventing or retarding a fall in price. Stabilization is price manipulation, but regulators allow it within strict limits – notably that stabilization may not occur above the offer price. For legislators and market authorities, a false market is a price worth paying for an orderly market.

They’re buying up those shares to save face. The beneficiaries? The lieutenants who got paid:

Multi-million dollar mansions and $100,000 Porsches are flying off local shelves in the Palo Alto, Santa Clara and Menlo Park areas of California. And the charge of luxury living is being led by a group of young entrepreneurs and techies as well as investors and venture capitalists that have scored famously from Facebook’s Nasdaq debut.

More Angel investors, more startups to come.

Addendum: holy cow, the WSJ has an awesome graphic of who sold:

Back When Everything Was New

Posted on by David Wright

Here is a series of photos from 1962, 50 years ago (pretty similar to today I’d say). A similar photo essay from 50 years before that, 1912, would present a much bigger change. From 50 years before THAT, 1862, maybe not as much.

This was an econoblog meme a little while ago and Scott Sumner had the best explanation…

Many key products were first invented in the late 1800s or early 1900s (electric lights, home appliances, cars, airplanes, etc) and were widely adopted by about 1973.  No matter how rich people get, they really don’t need 10 washing machines.  One will usually do the job.  So as consumer demand became saturated for many of these products, we had to push the technological frontier in different directions.  And that has proved surprisingly difficult to do.

You can’t really make airplanes 10 times bigger than the 747, at least in a cost effective way.  We went to the moon in 1969, but still don’t have much better propulsion technology.  The Titanic was much bigger than earlier ships, but 1000 feet is long is long enough.  The new ships are wider, but no one is building 3000 foot liners.  Improvements in cars are now incremental.

There are physical limits to the mechanical innovations that transformed the world between the 1910s and the 1970s. And we hit them.

THAT’s what the great stagnation is to me. THAT’s why we’re in a debt crisis now. THAT’s why everyone is scratching their heads at the biggest IPO of 2012.

Michael Bloomberg, Javascript Jockey

Posted on by David Wright

Here’s Jeff Atwood with some, perhaps needed, pushback on the whole “everyone should learn to code” thing. The final straw for him was Mayor Bloomberg’s recent tweet:

Jeff asks: if everyone needs to code, how would coding make the Mayor better at his job?

Most jobs don’t need coding today, that’s a fact. But here are some other arguments:

  • Substantially all productivity improvements in most industries are coming from coding.
  • There are people out there who would be excellent programmers today if they were exposed to programming at a young enough age.
  • The world needs more programmers solving programming problems.

My love affair with coding as a macro phenomenon isn’t about supporting today’s patters of production, it’s about supporting the rate of change of those patterns.

Michael Bloomberg, who owns a software company fercrissakes, should support this movement.

The Trickiest Tripwires in Analytics

Posted on by David Wright

1. Are my conclusions BS?

I admire this. The author found an interesting statistical anomaly and got some attention for it. Then she discovered it was actually all due to an error and published a retraction of the use of Benford’s law as a fraud detector.

2. How do I figure out causation?

Does teen pregnancy cause poverty or vice versa? Here’s Tim Taylor:

In an ideal experiment, one might want a research design in which a random sample of teenagers becomes pregnant and gives birth, and then you could track the outcomes. Of course, randomized pregnancy is an impractical research design! But here are four approaches used by clever economists to disentangle this question of cause and effect.

A within-family approach. Look at life outcomes for sisters who give birth at different ages. The result of this kind of study is “once background characteristics are controlled for, the differences are quite modest. Furthermore, even these modest differences likely overstate the costs of teen childbearing, since the sister who gives birth as a teen is likely to be “negatively” selected compared
to her sister who does not.”

Miscarriages.  Of those teens who become pregnant, some will suffer miscarriages. Compare women who are similar in measured characteristics of family background, but some of whom gave birth as teenagers while others had a miscarriage. It turns out that their life outcomes look quite similar: that is, giving birth as a teenager doesn’t appear to cause any additional decline in later life outcomes.

Age at first menstruation. Girls who menstruate earlier are at greater risk of becoming pregnant as teenagers. One can use a statistical approach to look at two groups of women who are similar in measured characteristics of family background, but where one group has a higher pregnancy rate because they began their menstrual cycle earlier. However, the life outcomes for these groups look quite similar; is not correlated with lower life outcomes: that is, a random chance of being more likely to give birth as a teenager (because of an earlier age of first menstruation) doesn’t appear to cause any additional decline in later life outcomes.

Propensity scores. Look at girls within a certain school, so that they live in more-or-less the same neighborhood. Using the available data, develop a “propensity score” that measures how likely a girl is to give birth as a teenager. Then compare the life outcomes for girls with similar propensity scores, some of whom gave birth and some of whom did not. There doesn’t seem to be a difference in life outcomes, again suggesting that giving birth as a teenager doesn’t much alter other life outcomes.

Today In Bailout-ology

Posted on by David Wright

A bailout, in principle, isn’t really THAT horrifying, really. It’s the way bailouts get done that is irritating. And in 2008, financial firms’ bondholders got 100 cents on the dollar to keep everyone out of the bankruptcy courts. That’s unpleasant.

Multiple, simultaneous bankruptcy, the story goes, would have been immensely disruptive; that’s what’s meant by the whole “bring the system down” and “destroy the financial system” and “financial armageddon” thing. I don’t know if the real driving force behind this fear (complexity of these firms’ interconnectedness) has been addressed, but I  know which way I’d bet.

Anyway, the 100% bailout for bondholders of financial firms stands in pale comparison to GM and Chrysler’s (secured) lenders, who apparently took a 71% haircut. Here’s more:

It seems clear that the federal government shouldered out bondholders, who would have received more in a standard bankruptcy procedure, and thus created some uncertainty about how bondholders of other large firms might be treated in the future. On the other side, the UAW retirement funds did much better out of the stage-managed bankruptcy than they probably would have done in a standard bankruptcy. Fiat appears to have gotten a better deal under the stage-managed bankruptcy of Chrysler than it would have received in a standard bankruptcy. The stage-managed bankruptcy did lead to cost-cutting measures like plant closures, fewer employees, and more competitive wages for GM and Chrysler, but presumably these changes would have happened under a standard bankruptcy procedure, too–and perhaps they would have happened in a way that led to greater competitiveness for the firm moving forward.

As a general principle, Uncle Sam is happy to dance around legal precedent (and legal laws?) and screw over bondholders. And there isn’t anything special about individual banks’ bankruptcy, either.

The problem, then, is the interconnectedness of financial firms. No politician has the stomach to let them all get wiped out at once. Nor the stomach to prevent such a crisis in the future.