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But then our initial skepticism towards Europe’s new money quickly turned to admiration. The euro’s weaknesses were actually its great strength. Since no nation stood behind it, none would knock it down to get where it wanted to go. Just as the Europeans could never agree on sausages or military campaigns, they would never agree on the destruction of their money. If French wanted a weak euro to help enliven their economy, the Germans and the English would tell them to stop whining and show some backbone. If it were the English whose economy went soft and who wanted an easier money policy, likewise, the French would like nothing better than to deny it to them.

That is the charm of the Europeans; they detest each other mutually. The French would rather endure a depression themselves than spare the English one. And as for the Italians, the Irish, the Austrians…and all the other peoples at the periphery – well, they can just look out for themselves!

But rather than leave the European Central Bank weak and subservient, it actually makes it stronger and more independent. Its officials may have no more integrity than officials of the Federal Reserve. Their economic theories may be no better. But at least they are unresponsive. In central banking, the consequence of inertia and inactivity is almost always salutary.

While the Fed has cut rates…raised them…and then cut them again, the ECB has done nothing. And the euro has almost doubled from its low and now trades for $1.55.

Bill Bonner, The Daily Reckoning

Lex sent me an interesting book review at the Economist of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber. The gist of Bookstaber’s thesis is that, complexity of financial products, interconnectedness, along with liquidity and the resulting use of leverage, is bad for the financial markets:

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I think this is the coolest thing I’ve seen to hit the slow as morass world of education. Jonathan coined the phrase in response: “education arbitrage.” What a fantastic idea.

BOSTON (Reuters) - Private tutors are a luxury many American families cannot afford, costing anywhere between $25 to $100 an hour. But California mother Denise Robison found one online for $2.50 an hour — in India.

“It’s made the biggest difference. My daughter is literally at the top of every single one of her classes and she has never done that before,” said Robison, a single mother from Modesto.

Her 13-year-old daughter, Taylor, is one of 1,100 Americans enrolled in Bangalore-based TutorVista, which launched U.S. services last November with a staff of 150 “e-tutors” mostly in India with a fee of $100 a month for unlimited hours.

Taylor took two-hour sessions each day for five days a week in math and English — a cost that tallies to $2.50 an hour, a fraction of the $40 an hour charged by U.S.-based online tutors such as market leader Tutor.com that draw on North American teachers, or the usual $100 an hour for face-to-face sessions.

“I like to tell people I did private tutoring every day for the cost of a fast-food meal or a Starbucks’ coffee,” Robison said. “We did our own form of summer school all summer.”

Jonathan and Lex said it better than I can:

Jonathan: Agreed. The real story is that it potentially undercuts the entire
govt-schools system. If you have kids going from failure to excellent
performance based on a couple of hours’ tutoring per day, how much better
would they perform if they spent four or six hours every day with their
online tutors and blew off their schools entirely? That’s what parents will
be thinking. The teachers’ unions are going to try to make this kind of
tutoring illegal or so larded up with mandated bulls*** that it won’t be
effective. I don’t think the unions can succeed, however.

Yippee. Education arbitrage.

Lex: EDUCATION ARBITRAGE!

Those bast***s in the real, existing, Brezhnevite system we have here are going to EAT DEATH at long last.

This is the beginning of the market wedge that will split the whole rotten system apart.

I hope I hope I hope.

I hope that’s the reception TutorVista continues to get as it catches. Check out their website here. Outsourcing hits education, disintermediation with a vengence…

Hedge fund blowups fascinate me. You may have heard about the latest: Amaranth Advisors and Brian Hunter. It’s the biggest blowup since Long Term Capital Management in 1998. The markets barely blinked this time. The difference is that LTCM traded in bonds, and with bonds, banks give you much greater leverage - ie they lend you more money on margin. LTCM had 5 billion in equity, borrowed up to $125 billion, and leveraged up via derivatives to $1.25 trillion. LTCM borrowed about 20x-25x their equity. Hunter borrowed about 5x his equity. Assuming Amaranth let him run 1/3 of their portfolio, or $3 billion, Hunter borrowed about $12 billion off that $3 billion equity, for a combined $15 billion bet. With 5x leverage, a 20% decline wipes you out. Leverage kills if you get it wrong.

“Western nations yesterday pledged $500m (£263m) in aid to the Palestinians as the UN humanitarian chief warned an economic crisis meant the Gaza strip was a “ticking time bomb”.

A total of $114m will be spent on humanitarian aid. The remaining money will be used to meet a shortfall in UN emergency funding and to cover the reconstruction of infrastructure.”

In keeping with our tradition of celebrating the death of terrorist scum, some good news from Russia: Shamil Basayev, mastermind of the Beslan school massacre and Nord-Ost theater takeover, is no more.

Story.

Possible video.

Google News compilation.

Die terrorist scum.

This site, “Photos of the Great War”, has many photos from World War I.

Here’s a very good Opinion Journal oped piece on the Mid East economic boom thanks to the high price of oil.

The recent performance of Arab stock markets makes the Nasdaq of the late 1990s look like a slouch. Since January 2002, the Egyptian, Dubai and Saudi stock markets are up respectively by over 1,100%, 630% and 600%. Only four years ago, gulf companies were priced at around twice book value. Today they trade on an average of 44 times historic earnings and at over eight times book value. gulf banks are valued at over nine times book value, according to Credit Suisse.

Here’s a website with pictures of Dubai. Very impressive.

Photos from Visit Dubai at www.dubai-city.de

Henry Blodget is back, and he has a pretty good blog. Blodget was the CIBC/Merrill Lynch analyst who put the $400 price target on Amazon (AMZN) back during the .com boom. Turns out he’s a pretty good writer. He makes a good bear case for Google (GOOG):

Google’s major weakness is that it is almost entirely dependent on one, high-margin revenue stream. The company has dozens of cool products, but with the exception of AdWords, none of them generate meaningful revenue. From an intermediate-term financial perspective, therefore, they are irrelevant.

Blodget was considered the top analyst for the Internet sector back in his day. Like him or hate him, his writing is worth checking out if for no other reason than to get a different view.

Disclosure: I’m holding GOOG put options, which means I think GOOG’s stock price will decline. Do NOT construe any of the above as investment advice.

options trade that I have on. I’m holding a large chunk of the March 2006 $47.50 calls, and a smaller amount of March 2006 $50 calls. I picked up the $47.50 calls at an average basis of $3.20 per contract. I picked up the $50 calls for $1.90 this past Friday. Here’s my thinking:

Walmart stock’s volatility is extremely low. Being a Dow component helps. As a result, the option price is pretty cheap compared to even large cap tech stocks. The $47.50 calls cost me $3.20. It’s in the money by $2. So what I’m really paying for is $1.20 for the right to WMT’s upside from now until March 17, 2006. To put it in other words, if WMT is at $50.70 on or before March 17, 2006, I break even. Anything on top of that, and I’m making money.

Why do I like the $47.50’s? The $50 calls are not in the money. So I’m really paying $1.90 for the privilege to WMT’s upside from now until March. But the initial outlay is lower per contract. With the $45 calls, I would be paying 90 cents for that privilege, but the intial outlay is much higher since it’s further in the money.

For me, it’s like buying a $3 tech stock with the upside potential of Nasdaq, backed by the steadiness of a Dow component.

Buyer beware: options are extremely risky. Do not construe any of the above as investment advice.

Update: It seems Warren Buffet thinks Walmart is a value here as well.

WASHINGTON (Reuters) - Berkshire Hathaway Inc. (NYSE:BRK-A - News; NYSE:BRK-B - News), a company run by billionaire investor Warren Buffett, on Monday revealed previously undisclosed holdings of shares in Anheuser-Busch Cos. (NYSE:BUD - News) and Wal-Mart Stores Inc. (NYSE:WMT - News).

According to amended U.S. regulatory documents, Berkshire Hathaway disclosed that it held 44.7 million shares of Anheuser-Busch stock valued at about $1.9 billion and 19.9 million shares of Wal-Mart stock valued at about $874 million as of September 30.

It’s nice to have validation from the most influential value investor. Even better is that he has a legion of investors who follow his lead.

Update 2: Wal-Mart’s Black Friday numbers are better than expected, and they forecast November same-store sales growth to be 4.3%. This number is without new stores and former Wal-Marts converted to Wal-Mart Supercenters. It’s looking like a merry Christmas indeed.

I bought Lawson Software (LWSN) and Silicon Motion (SIMO) on Friday to get long. Both had stellar earnings beats, along with good charts.

One interesting thing I saw over the weekend on LWSN is that they have $248m of cash/mkt securities on their balance sheet with negligible debt. Current market cap according to Yahoo Finance is $856m. But since it’s profitable and cash flow positive, under M&A analysis, LWSN’s market cap is really closer to $608m since whoever buys them would pocket the cash and get the earnings stream. Assuming analyst estimates of 36 cents a share for FY06 earnings, and 105m diluted shares outstanding, LWSN should earn in the ballpark of $38 million. This makes its forward P/E closer to 16, rather than the current forward P/E of 22.5. Funny thing, Yahoo Finance’s market cap calc looks like 113m shares outstanding, but LWSN’s financials say 105m fully diluted. I’m guessing LWSN is more accurate, which would make LWSN’s true market cap closer to 793m. Call it a market inefficiency of info, ie more people look at Yahoo than SEC filings. Backing out cash, 793m-248m = 545m, brings forward P/E closer to 14. Downright cheap.

I’m hoping LWSN is a buy and hold. I won’t hesitate to sell if the market plunges, but this gives me comfort in holding the stock.

Some good news, the portfolio’s first full month performance (since inception/start of law school) as of this weekend is 15.5%. It was higher, but I’ll take that any day. So cheers, here’s to the return of Greed. Hopefully I won’t have to experience the return of Fear (and loathing).

Ding ding ding…

Update: I should have waited until the true “end of the month” to calculate 1 month returns like mutual funds do. It would have been 21% vs 15.5%. I love mark up day - good enough for a 5.5% improvement on returns today. But I bet my original calculation is a “cleaner” return than the potentially artificial end of month numbers. I should also write another post called “day trading for fun and profit”… I took advantage of the run up for some intraday gains. Not recommended, but it’s a way to play the gun up game, without the overnight risk.

I’ve highlighted what can go wrong with an investment. Here’s an example of what can go right: Novavax (NVAX), top gainer and most active for trading on Nasdaq today, up 33% on 51 million shares.

Novavax is an avian flu play. They have a potentially proprietary way of mass producing flu vaccines. I didn’t quite believe it, but vaccines are still made the same way as a century ago: “where the product must be incubated over months at a time using century-old chicken egg-based technology.” Novavax’s Virus-Like Particle (VLP)technology can cut that time down significantly.

If you’re into watching the market, the trading in NVAX is a sight to see. NVAX has 43.5 million shares outstanding. So today’s 51 million shares volume says a lot. What caused the jump? You name it: the avian flu scare in Europe, short squeeze, momentum traders, CNBC focus, shortage of flu vaccines last season from production problems, to name a few.

I smell a frenzy. Smokin’ hot.

Note: NVAX is a highly volatile small cap stock. Be careful. Do not construe any of the above as investment advice.

This is what I’ve been waiting for with Dana (DCN). Too bad I had to take a hit with the pop on Monday.

Dana Says Restatements to Reduce Profit by Up to $45 Million; Company Cuts Dividend

TOLEDO, Ohio (AP) — Dana Corp. said Tuesday that its planned financial restatements will reduce profit by as much as $45 million going back through 2004 and the auto parts maker slashed its quarterly dividend to one penny.

Dana shares fell 89 cents, or 12.8 percent, in after-hours trading. They fell 22 cents, or 3.1 percent, to $6.97 in the regular session on the New York Stock Exchange.

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Up this week are Ford (F) and Dana (DCN). I’m shorting both. The main reasons were this article, and Citigroup’s downgrade of Ford.

The article’s headline says it all: “October U.S. Auto Sales Plummet.”

New-vehicle sales were down 33 percent in the first nine days compared with the same period a year ago, and down 44 percent compared with the first nine days of September, the survey found.

Sales at No. 1 automaker General Motors Corp. were down 57 percent compared with early October 2004, while Ford Motor Co.’s sales were down 45 percent. The other seven major automakers also showed declines.

“The aftermath of the employee pricing programs is having a dramatic impact,” said Jeff Schuster, executive director of global forecasting at J.D. Power. “A lot could happen between now and the end of the month, but at this point, we’re on track for an October like we haven’t seen since the early 1990s.”

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Here’s my latest trading idea: short the homebuilders. It’s not the most original idea - more like the pink elephant in the room - but where there’s opportunity, doesn’t hurt to coin it. I’m currently shorting KB Homes (KBH) and Toll Brothers (TOL).
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Here’s a 1 day chart of today’s trading in Protein Design Labs (PDLI). Beautiful isn’t it?

Do you see the flat part of PDLI’s chart on the left, oh around 10:20am EST? That’s when I sold my 600 shares of PDLI, missing out on $800 of gains. Hurts don’t it? The market has a particular knack for making one feel stupid. My original reaction is a bit less academically objective; more along the lines of “AAARRRRRRRRRGGGGHHHH”…

So as a public service to the Chicagoboyz, here is a lesson in what not to do in the market. (Don’t worry, there’s a happy ending)
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Via Jerry Pournelle this quote from FrontPage Magazine:

Political correctness is communist propaganda writ small. In my study of communist societies, I came to the conclusion that the purpose of communist propaganda was not to persuade or convince, nor to inform, but to humiliate; and therefore, the less it corresponded to reality the better. When people are forced to remain silent when they are being told the most obvious lies, or even worse when they are forced to repeat the lies themselves, they lose once and for all their sense of probity. To assent to obvious lies is to co-operate with evil, and in some small way to become evil oneself. One’s standing to resist anything is thus eroded, and even destroyed. A society of emasculated liars is easy to control. I think if you examine political correctness, it has the same effect and is intended to.

“Little Lex” born today, 8 lbs. 3 oz. 21 in.

Hearty congrats to the proud Mom and Dad. May “Little Lex” grow up healthy, strong, and smart. Go get’em Tiger.

Here’s a witty read from Bessemer Venture Partners, speaking to the woulda should coulda in all of us. Some highlights:

“Bessemer Venture Partners is perhaps the nation’s oldest venture capital firm, carrying on an unbroken practice of venture capital investing that stretches back to 1911. This long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up.

eBay
“Stamps? Coins? Comic books? You’ve GOT to be kidding,” thought Cowan. “No-brainer pass.”

Federal Express
Incredibly, BVP passed on Federal Express seven times.

Google
Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?””