Tuesday, June 30, 2009

HSX: Week of June 30, 2009

Continuing and expanding the tradition that was apparently started last week, we have two movies opening on Wednesday this week. Neither of them is as big as Transformers 2: Revenge of Michael Bay, but then again, not much could possibly be.

First up is another sequel, "Ice Age 3: Dawn of the Dinosaurs," (ICEA3). I have a theory that, in any given trilogy, one of the three movies will be bad. Evidence for this includes the Matrix and Godfather movies. However, there is also evidence to the contrary, notably the original three Star Wars movies. So this might be a winner. The stock is at H$176, down H$5 for today, but right near the high, after a long and steady climb up. It's being released in digital 3-D, which is always helpful. It's opening over a five-day weekend, so the adjust will be [Previous Box Office + (2.7*Box Office Fri-Sun)]. The strike price is H$60, for Friday-Sunday. The call (IA3CA) is at H$6 and change. The put (IA3PU) is at $H1.35 and sinking. The call predicts weekend BO of $66 million, which translates into a stock price of H$178. But that's without the Wednesday and Thursday BO. If the options are right, then the stock is seriously undervalued. It's only at 33% on rottentomatoes.com, so maybe my theory of one of a trilogy being a bad movie applies here. But it's Fourth of July weekend, so $60 million for an animated feature is not unrealistic
Stock: Long
Call: Long
Put: Short

Johnny Depp returns as an outlaw, but not a pirate this time. He's John Dillinger, one of the Public Enemies (PUBNM). Christian Bale plays one of the FBI agents in pursuit of him, although I haven't seen much of Bale in the marketing. The stock is at H$109, with the same formula as ICEA3. The strike price is H$35 for Friday-Sunday, again just like Ice Age. The call (PUBCA) is, again just like Ice Age, H$6 and change. The put (PUBPU) is at H$2.52, a high, so the signals are a little more mixed. But again, the prediction of the options is roughly in line for the BO for just the weekend, excluding Wednesday and Thursday. What is very different about this movie from ICEA3 is that the trend is not good - the high was H$141, a long ways from where it is today. It's at 56% on rottentomatoes.com, and that might actually matter for this movie; as an "adult drama," it's somewhat more important to pay attention to the critics. The positive reviews are decent but not stellar, but the negative reviews are fairly harsh.

This movie needs to do at least $15 million on Wednesday and Thursday, plus $35 million Friday-Sunday, to make its price. That's possible, although I am not optimistic that it will beat the $41 million predicted by the call. However, I have a policy of not shorting a call unless it's clear that the movie will not make the strike price, because of the danger of being caught by a major surprise on the upside. Johnny Depp is still a major star, and he's good for this role. Crucially, it's unlike anything out there - not much in the way of special effects, which is occasionally refreshing. Let's be optimistic.
Stock: Long
Call: Long
Put: Short
Update Wednesday morning: PUBNM is tanking. It's down H$8 this morning, a very strong sign that it's not going to do very well. I am reversing my positions on the stock and the put. I'm keeping the call long, but I'm also going to short it. I have it long at the IPO price, H$2, but I'm shorting it at the current price H$5.64. I think it's a safe bet at this point that it won't make $40 million this weekend, or at least not a great deal more than that. We'll see how this works out.

Update Sunday night: Well, that hurts. I bet seriously wrong on ICEA3; it adjusted down H$30. I don't want to think about too much, but I should have paid attention to my theory that in a trilogy that is basically an excuse to make money, one of the three movies will be bad. Looks like that is the case here. It made $25 million in the first two days, then $42 million over the weekend. Pretty good, but nowhere near what the stock and options were predicting. I should also remember another rule: with a price like this, there is more potential on the downside than the up.

I did, however, bet right on PUBNM; it $14 million in the first two days, and then $36; it adjusted down H$14. At least I got that one right.

Franken wins!

Al Franken has won the Minnesota Senate election, at long last. The Minnesota Supreme Court has ruled unanimously in his favor, and Norm Coleman has conceded. What a long strange trip it's been. This is the seat formerly held by Paul Wellstone, who died just before the election in 2002.

It still feels bizarre to call Al Franken a Senator, although of course it was odd to call Ronald Reagan President.

On a completely different topic, I linked to Talking Points Memo for this story, partially because I saw it there first, and partially because I wanted to give them props for doing such a great job covering this story lo these many months. I suspect that there are other bloggers who are doing the same. Which is good news for TPM, not such great news for traditional media sites, like nytimes.com. Which is probably why TPM is hiring seven new people, in addition to their regular interns. One less reason to worry about the future of journalism in this country, but one more reason to worry about the future of newspapers.

Monday, June 29, 2009

Stars falling from the sky

One meme in Hollywood this summer is that the movie business seems to be going through a shift of sorts. Movies featuring movie stars are failing, while the most successful movies are those without stars. The LA Times examines this trend, and, unfortunately, engages in some utterly trivial, completely inside-Hollywood analysis.
The studios, which for years have banked on richly paid stars to open their movies, are now witnessing a new reality: even the most reliable actors can be trumped by what Hollywood executives like to call "high concepts" (a bachelor party gone awry), movies based on brand-name products (Hasbro's Transformers toys), and reinvented franchises (not your father's "Star Trek")
I have name for this current batch of "high concept" movies.

I call them "good movies."

And this, quite simply, is the secret of how to make money in Hollywood: make a good movie for a reasonable cost. That's it. Of course, making a good movie is not simple, just like writing a good book or painting a good picture is not simple. But there is no secret beyond that to making money in Hollywood. Whether or not "Transformers 2: Revenge of the Fallen" is a good movie is debatable, but it clearly delivers substantial entertainment value.

People who believe that casting movie stars is the secret to making money on a movie confuse correlation and causation.

Correlation is when a moviegoer says to herself "I have seen Julia Roberts in good movies before, so if Julia Roberts is in a movie, then there is a good chance that it will be good, and that I will enjoy it." If you eat an apple and enjoy it, then there is a good chance that you will enjoy the next apple. But that is not guaranteed - you may have liked that particular apple more than the next apple you eat.

Causation is when a moviegoer says to himself "I have seen Tom Cruise in good movies before, so if Tom Cruise is in a movie, that automatically means that it is good, and I can be sure that I will enjoy it." If you drop an apple, it will fall to the ground. If you drop another apple, it will also fall to the ground, because it is affected by gravity, which is the cause that makes the apple fall. As long as you are standing on the planet Earth, that will not change.

But there is no such thing as causation in the relationship between movie stars and whether or not the movies that they are in will make money, because there is no causal relationship between movie stars and whether or not the movies they are in will be good movies. Movie stars have a combination of qualities: good looks, talent, and the ability to choose good roles for themselves, and good movies for themselves to be in. Julia Roberts and Harrison Ford are both great examples of this. Both of them have demonstrated very good taste when it comes to picking roles for themselves over the years. So moviegoers have strong associations between Julia Roberts and Harrison Ford and good movies. But neither of them has a perfect track record. About the only actor I can think of who has a near-perfect record of choosing good roles is Meryl Streep.

Casting Julia Roberts does not mean that the movie will be good, or that audiences will automatically assume that it is a good movie. Casting Julia Roberts means that audiences will notice the movie, and pay some attention to it, and start out with a favorable impression of it (at least many people). That's it.

People do not go to see movies strictly to see the actors and actresses who are in them. They go to see the movie itself. The movie itself is a package, and the stars are parts of that package. Important parts, to be sure, but only parts.

People go to see movies for one reason: they want to see a good movie. They may want to see a comedy, a tragedy, an action-adventure movie, a thriller, or a horror movie. They may want to laugh, cry, or be terrified. But at the end of the day, they want to see a good movie. Putting a movie star in it increases the chances that audiences will perceive it as a good movie. But putting a movie star in a movie does not guarantee that it will be a good movie. And good movies do not necessarily have to have movie stars in them. Consider the following list:

The Graduate
Star Wars
Raiders of the Lost Ark
Back To The Future
The Usual Suspects
Four Weddings and a Funeral
Shakespeare In Love
Pulp Fiction

What do those movies have in common? Each of those is a great movie. And not one of them featured an actor or actress who was an A-list star at the time of the movie's release. The closest any of those has to a star is John Travolta in Pulp Fiction, but he was considered a has-been at the time, and this was his comeback role. Some of those are utterly cliched. Jaws? Jaws is about a giant creature that terrorizes people, with the creature created with mechanical effects. The same description can be applied to King Kong, Godzilla, and a thousand other cheesy B movies. There is one thing that distinguishes Jaws from those thousand other movies: it's a damn good movie.

High concept? Consider Titanic. It's based on one of the worst ideas for a movie ever made. "I know, let's spend $200 million on a movie about one of the worst man-made disasters ever, cast two unknowns, and make it a tragic love story, with one of the main characters dying a horrible death almost immediately after they fall in love." Great! Let's go! Sounds like a winner!

By the standards of Hollywood that the LA Times recites, Titanic should not have been a successful movie. Kate Winslet was a total unknown. She wasn't even particularly svelte. Leonardo DiCaprio had been in a bunch of art house movies. But it's the most successful movie of all time.

The article quotes a number of Hollywood executives. They all try to provide solid analysis, but they somehow manage to make trendy marketing concepts sound like bad post-modernism.
"The world has changed, throwing conventional wisdom out the window," said former studio marketing executive Peter Sealey. "The star-power opening is fading in importance and the marketing and releasing of movies is going into new territory where the masses are molding the opinion of a movie. People no longer say, 'It's a Tom Cruise movie, let's go see it!' With social networking, you know everything about a movie before it comes out."
Let me quote part of that again: "the marketing and releasing of movies is going into new territory where the masses are molding the opinion of a movie."

In other words, the opinion of the customer matters. Moviegoers are now finding out whether or not a movie is good very quickly, before the marketing has a chance to work its seductive magic.

The opinion of the customer matters. Hey guys, welcome to capitalism. News flash: figuring out what the customer wants and delivering it is your job as a studio executive.

I don't think that every studio executive in Hollywood is this obsessed with marketing, but I have noticed a tendency in the LA Times, particularly in the business section, to engage in this kind of analysis. The problem with trying to analyze trends in the movie business strictly in terms of marketing is that you end up with some serious nonsense:
"Movie stars in the right films provide a certain amount of value from a marketing point of view," he said. "But there is no star power that you can throw at a movie that gives you the kind of brand awareness you get from pre-sold titles."
But "Star Trek" was not a pre-sold title. The last few Star Trek movies were forgettable. "The Hangover" is about the farthest thing from a "pre-sold" title. "Terminator: Salvation" is a pre-sold title, part of a franchise, with star power, and yet it's not doing all that well. "The Proposal" is a movie with a somewhat silly premise, without a great deal of originality. But it's a good movie, it works, and it's making money. The woman in the lead in this romantic comedy is in her 40's, and there's a joke in the movie about the fact that she doesn't have a very big bust. She's not funny or charming; she's very unpleasant through most of the movie. But she's the lead in a successful romantic comedy.

Adult dramas are allegedly not doing terribly well. But the examples cited here, "State of Play," "Duplicity," and "The Soloist" all sounded very cliched to me, which is why I didn't see any of them. Corporate and political conspiracies? Yawn. An inspirational movie about a black homeless guy? Please. Not finding myself excited about that one. I don't care who is in them - if I think they're cliched and boring, I'm not going to go see them.

The basic problem with trend analysis is that trends are, by definition, ephemeral. Movies are the ultimate trend-resistant industry because they are one industry defined by a constant demand for the new. That's why it's a "creative" industry - customers want something that has just been created. Very soon after a trend starts, if indeed it is a trend, customers will be bored by it.

I'm sure all of the executives quoted in this article are highly educated. But there is such a thing as too much of a good thing.
"There's something to be said for chemistry between actors, and you don't need to be a star to have chemistry," said Oren Aviv, Disney's production president, suggesting that is exactly what the casts of "Proposal," "Star Trek" and "Hangover" all have in common -- "combined with an idea that people connect with."
"There's something to be said for chemistry between actors." Well, yeah. Sort of like there is something to be said for baseball players who can hit the ball. "[A]n idea that people connect with." Somehow it's impossible for these people to say "You know, what people want is to see good movies." Like there is this urge to sound deep and profound, an urge that apparently interferes with the operation of common sense.

Maybe the problem is that the LA Times needs to figure out something to say about movies on a constant basis, and there just isn't that much to say. Good movies are more likely to make money than bad ones. The definition of what is a good movie changes, and is different for different people, but good movies make money. That's the formula, folks. Trying to find lots of different ways to say it just ends up sounding like you are on the wrong side of the sublime/ridiculous divide.

Someone once said that movies are a great art form, but a terrible business. What they meant was that business is about finding the rules that will determine how to make money, and then following those rules. But art is about finding the rules of what makes good art at a particular time, and then breaking them.

Businesspeople want stability and certainty. Artists want the freedom to be creative, to be daring and different.

But it's not even that simple. Good artists do follow some rules; good businesspeople do too. But great artists follow certain rules, and then break others. Great businesspeople do the same thing. The first trick is knowing what rules to follow, and what rules to break. The second trick is getting the great artists together with the great businesspeople. The last trick is figuring out what the audience wants before the audience knows that it wants it.

Daily Kos hate mail: a classic

Kos has a great feature that he's been running for a couple of months. Every Saturday, he collects the most abusive hate mail that he has received that week, and posts it, thereby holding up various conservative idiots for ridicule. I think it's a brilliant strategy. One of Kos' great virtues as an activist is that he makes it clear that he thinks progressives/liberals/Democrats should not be afraid of conservatives/Republicans, and he makes it equally clear that he has nothing but disdain for liberals who ARE afraid of conservatives. I strongly agree with him on this, and am very thankful that he makes this effort. Every now and then I think he's a tad intemperate, but that's trivial.

In these posts, he usually has a solid collection of incoherent screeds, riddled with spelling and grammatical errors, almost always including some gay bashing. The last couple of weeks have been a little thin - apparently word has gotten out that sending Kos this kind of garbage does not do the Fox News causes a lot of good. But this week he got a classic. It reminds me of a contest I heard about years ago. The idea was to create the ultimate tabloid newspaper headline. I think the winner said something about an alien having Elvis's baby on the moon (plus other elements) - they managed to work in just about every National Enquirer cliche. This email works in just about every hate mail cliche possible. Great entertainment value. Kos also includes a poll about this email, just for added fun.

Obama and gay rights: Stonewall edition

Frank Rich wrote about gay rights and Obama yesterday, the anniversary of the Stonewall riots. He confessed that he didn't hear anything about Stonewall when it happened, despite his personal interest in civil rights. I don't blame him; I don't think I heard about Stonewall at the very least until I was in college. Rich is frustrated with Obama's lack of action on gay rights, as many liberals are. He comes up with a couple of explanations, and favors this one:

But the most prevalent theory is that Obama, surrounded by Clinton White House alumni with painful memories, doesn’t want to risk gay issues upending his presidency, as they did his predecessor’s in 1993.
Undoubtedly. But I cannot figure out why Rich doesn't go just a little deeper, and look into the Congressional politics. It's really quite simple. There are a number of Democratic senators and representatives, primarily from the South, who absolutely do not want to vote on any gay issues this year. Claire McCaskill from Missouri, Kay Hagan from North Carolina, and Mark Warner from Virginia are probably in this group. I haven't checked out their positions on gay rights, but I would be very surprised if they are pushing for the repeal of either DOMA or DADT. For Obama to push for the repeal of DOMA right now would be a gift to certain Republicans, to say nothing of Rush Limbaugh and Glen Beck. For some of those senators and congresspeople, voting for an expasion of gay rights, particularly gay marriage, might cost them enough votes to lose them an election. That's a very high price.

I've said it before, and I'll say it again: Obama is being very careful on the repeal of DOMA and DADT because he doesn't want to lose. If he pushes for a repeal of either, and it fails, there will not be another opportunity for at least five years.

Andrew Sullivan is, of course, passionate about this, but I also think he's a little blinded by his own passion. A couple of weeks ago, more frustrated than usual, he wrote

Of course these things can be done. If anyone high up in the Obama administration or the Pelosi-Reid Congress gave a damn, much would have been done.
No, they can't. There is still much work to be done, and there are still many people who are adamantly opposed to gay marriage. There has been amazing progress on gay rights just this year, but let's not forget that Prop. 8 passed in California last year. And it didn't just pass in California: it passed in Los Angeles County, one of the most liberal counties in the country.

Sullivan has a list of things that he thinks supporters of gay rights should do to pressure Obama and the Democrats. I think a much more fruitful approach would be to compile a list of minor things that Obama can do to support gay rights - a checklist, if you will, and then demand action on each of those. Many of them will not require Congressional action. Obama is already working through some of those, and they require a lot of work in the bureaucracy. There are two rationales for this approach. First, it gets a lot of things done. Second, it will lay the ground work for the more dramatic action of repealing DOMA and DADT by showing that gay rights can be expanded, and the politicians supporting such expansion can survive.

Mark Sanford and the future of newspapers

I haven't been blogging much over the last couple of weeks because I was working on some other stuff. So now I am going to catch up on some things I missed.

First up is Mark Sanford. The governor of South Carolina went out of town for a few days and, beyond anyone's expectations, came back to become much more famous (and infamous) than he was previously. Then, the next day, two very famous people died, and he was off the public's radar.

I don't want to condemn the man, or even comment on the blatant hypocrisy of a man who runs as a pro-family values candidate and then cheats on his wife. I do find it interesting that the public seems to have a finely nuanced understanding of these scandals. Some people are run out of office forthwith; see Spitzer, Eliot. Some survive, although they are damaged. See Clinton, Bill, and Vitter, David. Americans seem to be able to make fine distinctions based on the facts of the case. Bill Clinton cheated on his wife, but didn't break any laws in the process, and already had a reputation as a womanizer. Most people decided that it was a matter better left to he and Hillary. Spitzer, on the other hand, was a figure of rectitude, quite self-righteous, and broke laws. He didn't just get a blowjob; he crossed state lines and hooked up with a prostitute. The public understood that Spitzer was worse than Clinton.

What I found fascinating about the Sanford story were a couple of minor details about how it was covered. I first noticed it at TPM. The earliest post about it that I can find is from Monday, June 22nd. I remember thinking that it was odd that TPM was paying any attention to it - so the governor of South Carolina is incommunicado, so what? But then it started getting interesting very quickly. So that was a good catch on the part of TPM. I would not have known about it unless TPM caught it, because I have no reason to check in on South Carolina politics unless something very interesting is going on, and TPM found something very interesting very quickly.

What is more interesting is that this had great benefits for The State, South Carolina's major daily. They caught onto the story very early, and the traffic for their Website apparently just boomed. They've got a good timeline.

In the pre-Internet days, this would have been good for The State, but they could not have made that much money off of it, at least not right away. They would have sold more newspapers, but newspaper companies don't make a lot of money off of selling the physical copies of their newspaper; the price of the paper basically covers the cost of producing it. I delivered newspapers when I was a kid, and the paper didn't get the full price of the paper. First, subscriptions are discounted. Second, I took a cut of the price as my pay. So for a twenty-five cent newspaper delivered to someone's door, the paper might get only twelve cents.

Pre-Internet, The State would benefit by generating publicity for itself. It might win an award or two. And it might win over a few more subscribers. But suppose it sells 200,000 daily copies (that's a guess, but it's probably not far off). Management knows that this is a hot story, so they print an extra 20,000 copies, or 10% more, for three days. That extra 60,000 or so copies might slightly raise the average number of papers it sells, which might slightly increase the rates it charges advertisers. But there would not be an immediate, tangible benefit for the paper itself. I doubt they can charge the advertisers more for selling extra copies, although I suppose it's possible.

Today, however, the benefit is clear, immediate, and very tangible. Pre-Internet, The State would not have been able to sell extra papers in, say, New York or Washington, let alone another country, like, say, Argentina. Now, however, they generated a huge amount of traffic around the country, and around the world, almost instantaneously.

The best part for this newspaper is that that extra traffic on their Website generates extra revenue for very little extra cost. The primary cost is bandwidth, which is cheap and getting cheaper. Newspapers have one advantage on the Web, which is that they deliver valuable information primarily in the form of text, which takes up a minimal amount of bandwidth. But their ads are in the form of pictures, text, and video. Presumably they charge dramatically more for a video ad than for a simple picture. So the more bandwidth they use for delivering ads, the more money they make. They can control how much text and pictures they deliver, so they can control the amount of bandwidth they use in terms of content versus ads.

The other costs involved here - i.e., paying the reporters and editors, as well as other overhead - are already taken into account. There are no extra costs involved in covering this particular story. All they have to do is send a reporter to an airport that is fairly close, make a bunch of phone calls, and set up a video camera at the governor's press conference.

This whole episode bodes well for newspapers than can move quickly and cover a story like this. And there will always be stories like this. The State had emails between the governor and his lover. Why? Because someone had forwarded the emails to this particular newspaper. Why? Because if you have information that could potentially be very embarrassing to a political figure, you send it to a newspaper. Why? Because they know how to handle it, and they will give it the broadest possible exposure. The State did not release these emails because they could not be authenticated. Which sounds like they did their job - they checked out the information they had, performed some basic investigative journalism, and then made a responsible editorial decision. Someone also called the paper and gave them a heads up that he had been seen on a flight to Argentina, which is presumably why they had a reporter waiting for him at the airport when he came back.

All of this works to newspapers' strengths - they have reporters ready to move at a moment's notice, they have writers and editors who understand the situation and can provide context quickly. Newspapers have always been highly invested in finding malfeasance and scandal. What's different today is that they can make money off of breaking news much faster than they could before. Which means that they have that much more incentive to break that news themselves.

Tuesday, June 23, 2009

HSX: June 24, 2009

I'm posting on a Tuesday because there is a big movie opening tomorrow, Wednesday, and it's going to get a fair amount of attention. That would be Transformers 2 (TFMR2). HSX is having technical problems, so I can't link to the stock (correction: HSX was having technical problems, they have been solved). This is not surprising, since they are launching v4 tomorrow. Supposedly they are going to be down for only a day or so. I think it's kind of a weird decision to launch a new version on the day one of the biggest blockbusters of the year opens. You would think that they would choose a slow kind of day to make this transition. But no! I know the strike price is H$100, but I'm not sure how they are calculating that, over three or five days. I also seem to recall that the price of the stock was around H$340. Last time I checked, a day or two ago, both of the options were around H$2. I'm just going to go way long.
Update Wednesday morning: the call is at H$5 plus change and rising, the put is at H$2 or so and falling. Why the put managed to get above the IPO price is beyond me. Screen counts? We don't need to stinking screen counts. Critics? I cannot imagine a movie less immune to critical consensus. I'm not even going to bother with either screen counts or critics. There are action adventure blockbusters with artistic merit. This is not one of them. This is the ultimate guilty pleasure.
Stock: Long
Call: Long
Put: Short

Update Monday morning: Well, the movie gods smiled on Michael Bay and the Transformers, even if the critics didn't. It cleared $201 million over five days, a rather spectacular opening. It adjusted up H$54, also rather spectacular, considering the stock was already in the stratosphere. I didn't blog about My Sister's Keeper, because of the upgrade on Wednesday and Thursday, and because I was traveling on Friday. But it did fairly well, opening with $12 million, and adjusting up H$5. I had the call short and was long the put, with a strike price of H$10. So I got burned on the options, but I was long on the stock, so that mostly worked out.

Friday, June 19, 2009

The WaPo fires Froomkin

The Washington Post fired Dan Froomkin, one of my favorite writers on washingtonpost.com. Wow, what a bad move. Glenn Greenwald has a great takedown on the sheer stupidity. That just boggles my mind. I loved reading his posts.

The first problem with this is that the Post apparently expects us to believe that this is because Froomkin wasn't generating good numbers in terms of traffic. I don't buy that for a second. Why? I have no idea what Froomkin's numbers were. But I don't buy it because I have long believed that I should be skeptical of claims from those in power. I believe this particularly because of the experience of two Washington Post reporters. Apparently Fred Hiatt, WaPo editor, didn't learn the lessons of Woodstein as well as some of the rest of us.

Another reason I am skeptical is that this looks like a blatantly political move. Again, why? Because Froomkin was a highly opinionated political writer. To justify firing someone like him, there has to be clear and substantial evidence of either egregious journalistic misconduct, personal problems, or clear evidence of his failure to generate business. I haven't seen anything of the kind. There has not been any allegation of any kind of misconduct, personal or professional, and if he wasn't bringing in the numbers, let's see those numbers. But back to the political: this looks political because he was a political player. When you fire someone who is a key player in the nation's politics, it is going to look political. That's how the game works. If you don't want it to look political, you damn well better have your cover story airtight.

The final reason I think this is stupid because Froomkin can, and probably will, move to another media property. He has a wide and loyal constituency, and this firing instantly gives him a certain degree of credibility. To say nothing of lots of publicity. If anything, it makes him more valuable. The smart thing would be for the NY Times to snap him up. If he's successful at The Times, that will expose the WaPo's cover story as nonsense. He could easily set up his own blog. He could easily go on a speaking tour. He could work for The Atlantic, or TPM. Josh Marshall would love to have him on board. If he drives traffic to any of those sites, the problem will clearly be with the WaPo, not him.

I've been reading the WaPo for well over 20 years. I have very fond memories of reading it when I lived in DC. I have particularly fond memories of the contests in the Style section. I used to read David Broder and actually learn something about politics. I've been clinging to my faith in it despite the criticism of the Washington press corps from bloggers. I used to visit washingtonpost.com at least once a day, if not more. I've been frustrated by the site, because I think it just pales in comparison to nytimes.com. But now I have one less reason to visit it. Actually, two. I have two fewer reasons to visit washingtonpost.com. The first reason is that one of my favorite writers is no longer there. The second reason is that I no longer trust it as well as I once did.

Wednesday, June 17, 2009

HSX: Week of June 19, 2009

Summer has been here for a while in the movies, but it's still technically not quite here. Just around the corner, tho! Just a couple of days!

This weekend is actually a bit of a lull in the summer movie season, by which I mean that there aren't any blockbusters opening. Two comedies, no action adventure. No explosions, at least none that I have seen in the trailers.

It's been a while since we've had a good romantic comedy, and one of the reigning queens of the genre, Sandra Bullock, is in the role of a demanding boss in The Proposal (PROSL). Good romantic comedies put their characters in two diametrically opposed roles. This is one reason I like romantic comedies that have one of the characters playing a criminal; that's a good obstacle to overcome. Trying to get along with a horrible boss is a problem that most people can identify with. The stock is at H$71, just slightly off its high, but the trend has been very steadily upwards. Strike price is H$25, with the call at H$4 and change, and the put below a buck. It's at 53% on rottentomatoes.com, which is a little disappointing but not surprising. Unless it bombs, I am interested. It also has basically no competition. $25 million sounds about right. $30 million may be optimistic, but I'm going to go long on the call because of the danger of shorting with lots of upside potential.
Stock: Long
Call: Long
Put: Short

Jack Black is usually good for a few laughs, if you like his sense of humor. He's playing the mentor - of sorts - to Michael Cera in Year One (YEAR1). But his schtick also seems to be wearing thin. Maybe it's me. I like him, but I thot he was horribly miscast as Kate Winslet's love interest in The Holiday (particularly when the opposite pairing was Cameron Diaz and Jude Law). This is clearly his kind of vehicle, but it also looks like it could be basically a string of one-liners. The director, Harold Ramis, has a rather good track record (Groundhog Day), but he's also not a young man anymore, so I'm not sure how well he's going to do making a movie for guys who have clear and recent memories of puberty. Stock is at H$52, and has been dropping steadily for a while. That's down from a high of H$77. So much for the hype. The trailer has some laughs, but there's always a danger that those are the only laughs in the movie. The strike price is H$25, which is just flat-out absurd. The call is H$1.09, but that's down from a high of H$3.95. Which means that, in the last week, someone thot that this was going to do $30 million this weekend, while the stock was predicting a $20 million opening weekend. Somebody is going to lose money there. The put is H$4.73, and even that might be a bargain. Rottentomatoes.com has it at 36%, and the positive reviews read like they are straining not to be too harsh. I think this movie will be lucky to do $15 million, let alone $20 million. I am shorting the call, because there is basically zero potential for any surprises on the upside.
Stock: Short
Call: Short
Put: Long

Update Monday night: $30 million wasn't optimistic for PROSL, it was on the wasn't optimistic enough. A $34 million opening weekend will win any girl's heart, and any guy's. Way to go, Ms. Bullock, and welcome to the A list, Mr. Reynolds. Or at least the B+ list!

I was a little too pessimistic for Jack Black and Michael Cera, who managed to open just slightly above the halted price, so YEAR1 moved up a bit on the adjust. It cleared $20 million. So I was a little wrong on that one, but right about everything else. 5 out of 6 ain't bad.

Technical note: HSX launches v4 on Wednesday, which should be exciting. Hopefully this time they will get it right.

Obama takes a small step on gay rights

President Obama today signed an executive order extending some federal benefits to domestic partners of federal employees. It's a small step, but Obama made a point of announcing it himself, to highlight his continued commitment to the cause of gay rights. Good call on his part, as lots of gay rights activists are not happy with him right now.

Unfortunately for those activists, Obama cannot repeal DOMA by himself. There are still something like 40 states that ban gay marriage. There are still a number of moderate Democrats who really, really do not want to vote on this issue, because it might cost them their jobs.

The genius of a move like this is that it actually does some good, but doesn't really give the right enough to take him on. It's a bureaucratic thing, and it won't be noticed by many people. A few more of these, and all of a sudden you're talking about real change.

Oh, look, a scandal

Sen. John Ensign yesterday admitted to having an affair with a staffer. Oops. Not good for the presidential ambitions! It is somehow not surprising that he is the senator from Nevada. Insert bad "what happens in Vegas" joke here.

This is another example of why Republicans place too much faith in capitalism. Rational self-interest clearly didn't work here. Let's see, a few months of clandestine fun vs. ruining your life. Not hard to run that cost-benefit analysis! Of course, there's no point in gloating since this is not a strictly Republican problem. But it seems a little more complicated than just a fling - the woman and her husband both worked for Ensign, each in a highly sensitive position. It's a reminder that the news doesn't stop, even when there is a potential revolution on the other side of the world. Stay tuned!

Sunday, June 14, 2009

Today in Los Angeles

Sometimes I feel like I have to take a step back from life, take a deep breath, and realize what an amazing thing it is to be living in the 21st Century in the United States of America.

Today in Los Angeles, three notable things happened:
1. The Los Angeles Lakers won their 15th NBA championship. Go Lakers! It just occurred to me that "Lakers" is an odd name for a team that is based in a desert. Regardless, they won! Congrats Kobe, Phil, and the rest of the team!
2. There was a gay pride march on the 40th anniversary of the Stonewall riots, with the mayors of Los Angeles and San Francisco both in attendance.
3. Not far from the gay pride march, there were protests by Iranians against the results of the elections in Iran. Los Angeles has a large Iranian population. The Mayor of the most famous LA suburb, Beverly Hills, is an Iranian Jew (what makes him particularly cool is that both of his kids went to USC).

Celebration, protest, and revolution.

One hell of a day.

Revolution in Iran

I have to admit that I wasn't paying close attention to the elections in Iran until they started happening. I wasn't expecting much. Boy was I wrong.

I don't have much to say, except that, if you are at all interested in this story, just keep reading Andrew Sullivan. Constantly. The NY Times' blog The Lede has also been comprehensive and extraordinary.

The one thing that seems clear is that the people running Iran, the clerics, do not understand democracy. You can't promise a fair election, get people's hopes up, and then steal it this blatantly. People do not rebel when they are oppressed and beaten down; they rebel when they are hopeful that they are beaten down and oppressed and suddenly some kind of hope arrives. That's when they rebel.

I vaguely remember the Shah going down. What I remember is that it seemed to take a long time - he hung in there as long as he could. That will probably be what happens here. This is not over, not by a long shot. There are a number of Iranians who really did vote for Ahmadinejad and really do believe that he is on their side. He may very well be on their side, but there seem to be a lot more Iranians who believe that he stole this election.

One thing that makes me proud is that a lot of the inventions that are being used to circumvent the government's attempt to control the people - Twitter, Facebook, Flickr - were invented by Americans. If you really get down to it, the same can be said of the Internet itself. And, going way back, even the telephone.

I have to admit that when I first heard about Twitter, I didn't think it was an interesting idea. Too shallow, kind of silly. I don't think that any more.

As Andrew Sullivan keeps posting, "Know hope."

Friday, June 12, 2009

Obama losing ground on gay rights

I've been grudgingly supportive of some of Obama's positions on gay rights that I don't necessarily agree with. I can see why he's dragging his feet on repealing DADT, and I think he sees problems supporting gay marriage, because it will make him a lightning rod for homophobia, at a moment when he doesn't need another reason to piss off moderates and the right.

But he does owe his gay supporters, and he hasn't done much to repay them, or even much to advance the cause of gay rights. This is starting to disappoint.

The latest is a brief filed by the DoJ in a case in California. Andrew Sullivan, by far Obama's most articulate conservative gay supporter, is not happy. AmericaBlog rips the Administration's case to pieces.

A couple of thots, trying to square this with my admiration for Obama:

This is a brief written by someone in the DoJ. Obama quite probably didn't read it. I would be surprised if he were aware of it before today - the DoJ probably files briefs like this every day. In some sense, there is a principle that the civil service lawyers in the DoJ, not the political appointees, should be allowed to make the strongest case possible for the government. They do not care about the political consequences, and they shouldn't.

But this is policy by other means. The Obama DoJ can not make these arguments if they want to avoid the political headaches.

Even if the Obama administration wants to take a hands-off approach to letting the DoJ make the best argument the lawyers think they can, the administration should be prepared to deal with the fallout from the gay community. There are thousands of people who gave lots of time and money to Obama.

Now for some seriously counter-intuitive thinking: Maybe this is a tough-love move by the Obama administration. Maybe they are playing devil's advocate in public. Maybe they are saying to the gay community - OK, you want marriage, and repeal of DADT? Fight for it. Lay the groundwork. Provide us with some political cover.

This makes some sense, because the gay community did not do much fighting last fall over Prop 8. I got the feeling that many members of the gay community, and their liberal friends thot that gay rights in California were a done deal. I include myself in the latter group - I just about assumed that defeating Prop. 8 was a foregone conclusion - this is California in 2009, right?

I'm not sure the gay community realizes the stakes for the Obama administration. Obama won in 2008 because he won states like Indiana, Virginia, and North Carolina. If he is too closely associated with gay rights, he could easily lose those. And with them, the election.

If I sound schizophrenic on this issue, it's because I am. I am strongly supportive of gay rights, and I am strongly supportive of the Obama administration. I don't think Obama did the right thing with this brief in California, but I'm also not sure that Obama himself had much to do with it. But I do think he should do something about it. He needs to placate some very pissed off -and very legitimately pissed off - solid supporters.

Update: Laurence Tribe, the constitutional scholar at Harvard, is somewhat supportive of the Administration. He's paying attention to the details of this particular case. It's worth quoting him at length:
As someone who wants to see DOMA dismantled and invalidated, I would love it if this ninth circuit case would evaporate into the ether.

Even though I personally believe that DOMA is unconstitutional, I think that this particular lawsuit is very vulnerable; it’s not anywhere near as strong as the one that was brought in the federal district court in Massachusetts [a suit filed by Gay and Lesbian Advocates and Defenders].

In an environment where the Supreme Court is still quite conservative, what makes a suit a strong one is that it finds a point of entry in which it’s possible to invalidate a law in a number of its applications by using more of a scalpel that might appeal to five justices rather than a bludgeon that will almost certainly ask more of the court than it is willing to do.

What’s strong about the Massachusetts case is that these are concrete situations of people who are legally married under the laws of states like Massachusetts or Vermont, and who are being discriminated against by the federal government with respect to federal benefits simply because they are same-sex couples. There’s no other difference between them and other couples in that state, and the court could agree with that without accepting any of the broader theories advanced in the [Smelt] lawsuit in the central district of California, which is basically a bet-the-farm lawsuit that almost dares a conservative Supreme Court to slap it down.

A strategic Justice Department interested in a litigation strategy that has some realistic chance of success certainly would not have taken [the Smelt] case as the one in which the constitutional vulnerabilities of DOMA should be explored.
He also understands the political reality, and sympathizes with gay groups. But he also understands the legal reality, and how it intersects with the political reality. This was not a good case for challenging DOMA. The disappointment of gay rights groups is an example of what I call the "magic wand" theory of social change. That's the idea that a president can arrive at the White House, start waving a magic wand, and voila! solve all the problems of the world. Doesn't work like that, folks. Again, Tribe is worth quoting at length:
The important point here is that the solicitor general traditionally seeks to dismiss lawsuits against federal laws whenever there is a plausible basis to do it. A lot of the outcry about the administration’s position doesn’t take that institutional reality into account.

It doesn’t surprise me very much because I understand the frustration of some of the groups. They have lived under the burden of DOMA, of “don’t ask, don’t tell,” for a long time, and they understandably hoped that this would be an administration that would side with them on these issues.

And I think the frustration of having to wait so long for a progressive and intelligent president who, nonetheless, occasionally does some things that people find disappointing on matters that cut deeply into where they live -- it’s understandable that would lead to some strong reactions in this case.
The other problem is that this is vastly more important to gay rights groups than it is to Obama. Whether or not a gay person can get married has a major impact on their lives. It has a much greater and more immediate impact than, say, whether or not there is peace between the Israelis and Palestinians. But peace in the Middle East is vastly more important to Obama than whether or not a couple million Americans can get married. It is also far more immediate for Obama; he has a chance to achieve peace in the Middle East right now, and he can't afford to let this chance slip away. Gay marriage is an issue that will be around for a long time. And the odds of repealing DOMA in the next year are, honestly, slim to none. Not while there are still something like 40 states with anti-gay marriage laws on their books.

Thursday, June 11, 2009

HSX: Week of June 12, 2009

This week, we've got two movies featuring stars who may or may not be past their prime, and who have each had to make a comeback or two.

First up is Eddie Murphy, he of the once-raunchy comedies, starring in Imagine That (IMGTH), about an executive who discovers that his daughter has a magical blanket that helps him turn his life around. Or something wholesome and heartwarming like that. The LA Times analyzed its prospects in an article that is fairly harsh. However, I did discover a good new Website, www.moviereviewintelligence.com, which aggregates movie reviews, but does so in a much more analytical and comprehensive way than Rotten Tomatoes. So that was good.

The stock is at H$38, up H$2 today, but that's down from H$50. Strike price is H$15, which now sounds way too optimistic. The call is below a buck, and the put is at H$4. So the market is thinking somewhere around $10 million for the weekend. Little girls is a fairly narrow demographic, even if you include their parents. The First Parents might be tempted to see it, since they are in the target demographic, insofar as they are still in any demographic but their own, but I doubt Barack and Michelle will be tempted to make this a date night. It's at 31% on rottentomatoes.com, and the positive reviews are just barely that. It's on 2,800 screens, a good wide release, but I don't think that's going to matter. Eddie Murphy's career is running on fumes at this point. I'm going with $9 million.
Stock: Short
Call: Short
Put: Long

Next up is The Taking of Pelham 123 (TP123), starring Denzel Washington, who has never been less than a star, and John Travolta, who has had his ups and downs in terms of movie-stardom. I have to say that I am impressed by the trailer, the casting, and the concept. The fact that it takes place in a subway car gives it a nice claustrophobic feel. That also means that there isn't much room for action, which means that the tension will, hopefully, be between our two leads. The stock is at H$73, down H$3 today, and down from a high of H$82. In other words, the stock has stayed high, but hasn't been moving up dramatically. Strike price is H$30, which looks right. The call is floating near H$4, while the put is - this is a little odd - in basically the same territory. Hmmmm. Mixed signals there. It's at 41% on rottentomatoes.com, with the positive reviews fairly tepid, and the negative reviews scorching. More hmmm. I'm getting a little nervous about this one. Denzel Washington and John Travolta are both stars, but stars haven't been selling movies this year. I'm thinking $25 million would be a good bet.
Stock: Short
Call: Short
Put: Long

Well, I got everything right. That's a nice feeling. IMGTH is clearly a bomb, only pulling in $5.7 million. TP123 looks solid, but not a breakout hit; I nailed the prediction exactly. At least according to the numbers as of now. We'll see what the final numbers are tomorrow, but right now, it feels good to have my numbers match so close to what is being reported.

And, of course, the Lakers won the NBA Championship tonight!

Wednesday, June 10, 2009

Recession hitting colleges - time to challenge some assumptions

The recession is hitting starting to hit colleges and universities hard. The NY Times profiles Reed College, in Oregon, which had to deny admission to some students because the college couldn't offer them enough financial aid. Officials there are hoping that this is a temporary setback:

Reed has put off drastic measures like spending more of its endowment, closing some departments or selling some real estate near campus. Instead, college officials are counting on the economy to turn around quickly
I think that is wishful thinking at best. Delusion seems to be the order of the day here. The problem is not that the economy is in a downturn. The problem is that the business model for elite liberals arts colleges is broken. It simply is no longer sustainable to charge people $50K a year for an education, and expect to be able to continue charging ever more. It's time to challenge some assumptions.

Consider some other industries with broken business models: American car companies, and newspapers. For years, the UAW demanded, and got, job security in its contracts with the Big Three. The "jobs bank" was part of that - workers were paid to sit around factories, instead of being fired. Sound familiar? Guaranteed job security is also what tenure is about. GM, Ford, and Chrysler have had trouble adapting to new economic realities because they did not have the flexibiilty to make the changes that they needed to. And they were forced to put the interests of workers ahead of the interests of customers. Is it in the best interest of customers of American car companies for auto workers to be able to retire after 30 years? No, it's not. Running a corporation always involves balancing the interests of employees and customers, but these kinds of demands made it impossible for the Big Three to try to fine-tune that balance. Same thing with their dealers. Instead of managing change gradually, the Big Three were forced to change very drastically and very suddenly, with disastrous results for thousands of employees who had demanded job security.

Colleges are going to face the same problem with tenure. There are conflicts between the interests of students and professors. But giving professors tenure makes balancing those interests very difficult, if not impossible, for colleges and universities. That has not mattered for a very long time, in part because a college education was so valuable that it we, as a society, could afford to cut colleges some slack. For many students, it didn't really matter what they studied - a college degree was a ticket to at least a solid, middle class existence. This was particularly true for many decades, even centuries, in this country, because having a college degree was rare enough that just having it gave a person a huge advantage in the marketplace. So many people could learn something esoteric and obscure, graduate from college with a useless degree, and still get a good job. That is becoming less and less possible.

Part of the reason is that it's now no longer rare or even unusual for Americans to go to college. It's now fairly common. That means that the advantages conferred on college graduates are not as great. Supply is now more equal to demand, so the value is not what it once was. Which means that we are going to have to think much more carefully about the value of a college education.

The other industry going through wrenching changes is the newspaper industry. The parallels between higher education and newspapers are obviously much closer than between car companies and the liberal arts. The products of both are primarily in the form of the written word. There are, of course, differences. Newspapers publish quickly and almost disposably, while college professors take a long time to write essays that are supposed to last. Colleges have small, captive audiences who pay huge amounts; newspapers have diverse, widespread audiences who pay very little or, in the case of their Websites, nothing.

But creation and dissemination of intellectual property is at core of each's value proposition. The processes by which intellectual property is created, stored, and distributed are, of course, undergoing radical change. Newspapers have not adapted well, and it shows. Colleges are different in large part because of the different timelines that defines each. Students stay in college for several years, but are then alumni for the rest of their lives. The feedback loop for newspapers is virtually instantaneous; the feedback loop for colleges lasts decades.

The challenge for newspapers is blindingly obvious; news is very easy to find and distribute, which makes it very cheap. The challenge for colleges and newspapers is much more obscure; it's not clear exactly how to replicate Harvard, which has been around for centuries. That's a fairly large barrier to entry for competitors.

The competition that colleges like Reed should be most worried about, however, is not going to come from other colleges. It is going to come from completely different sources. The NY Times used to compete with the Wall Street Journal and the Washington Post; now it competes with Talking Points Memo and other blogs. Reed's value proposition derives in large part from its reputation as a place where great ideas are discussed. Such a description, however, no longer applies in any kind of a unique or interesting way strictly to colleges and universities. Great ideas are being discussed in lots of places. Reed's competitors are not other colleges. Its competitors are Google, McKinsey, the NY Times, and Time Warner. As well as a million other companies delivering intellectual content.

The first step in solving a problem is acknowledging that it exists. Liberal arts colleges are far from taking even that basic step.

But no college president wants to be first to make major changes in the college experience; Reed, for example, is not abandoning plans for a new performing arts center. “If we’re going to change our ways, we’re really going to need to be pushed,” Mr. Diver said, referring to colleges generally. “It’s not going to well up from within.”
That's for damn sure. This is, in a sense, the silver lining of this deep recession; it is going to force colleges to start facing some unpleasant realities. For example, that their students are basically customers. This attitude, from Reed's president, is indicative of how much work needs to be done, how much old attitudes are in the way:

“The catering to consumer tastes — I keep trying to say, we are in the education business,” Mr. Diver said, describing the pressure to keep up with wealthier colleges and expressing a frustration rarely voiced publicly by college presidents. “The whole principle behind higher education is, we know something that you don’t. Therefore, we shouldn’t cater to them.”
I find that absurd. Yes, you know something that students don't. But they are paying you. Moreover, many of them are going into debt to pay you, which means that they are going to be paying you for years. Question for Mr. Diver: do you want your students to make donations when they are alumni? Then you should try to make sure that they are happy when they are students. Which means that you need to cater to them.

Time to challenge some assumptions.

Sign Sonia Sotomayor's cast!

The DNC has set up a Website for people to virtually sign Sonia Sotomayor's cast. Talk about turning lemons into lemonade! Sign it here.

Quote of the day

"Sarah Palin, governor of Alaska and GOP "It" girl, can warm up the Republican base like a hot toddy in a duck blind."

-Kathleen Parker, in the WaPo. Parker goes on to explain that the good governor of Alaska seems to be coming up a little short in the competency department, not being able to answer her mail competently, among other things. Somehow not surprising.

Tuesday, June 9, 2009

Best. Colbert. Report. Ever.

Stephen Colbert spent the week in Iraq. He interviewed General Ray Odierno, the four-star general, who told him that he needed a haircut. But Stephen didn't want to take orders from some four-star general.

So the CINC stepped in. That would be the Commander in Chief. The President. You gotta love a President who can score these kinds of style points.

The Colbert ReportMon - Thurs 11:30pm / 10:30c
Obama Orders Stephen's Haircut - Ray Odierno
Colbert Report Full EpisodesPolitical HumorStephen Colbert in Iraq

Sotomayor and DADT

Sonia Sotomayor's nomination to be a Supreme Court justice looks like it's in good shape. There are a few fanatics out there attacking her, like Rush Limbaugh, but I think most conservatives are coming to terms with the fact that, barring something bizarre, she's a slam dunk. GOP senators in the southwest have to be nervous about voting against her and possibly alienating large chunks of the Hispanic vote. That would not be a good idea in places like Texas and Arizona.

I think this is potentially good news for repealing the Don't Ask Don't Tell policy (DADT). Why? They don't seem to be related. Bear with me.

Obama is currently spending a lot of political capital. He has been spending it for several months now. That's normal for a president early in his term. But what is also normal is that they don't get much of a return on spending that political capital until later.

Obama is spending massive amounts of political capital. He needs to spend massive amounts more, particularly on solving the Israel-Palestine problem. But he hasn't gotten any return on any of this spending of political capital yet. We don't know if the stimulus is working. GM and Chrysler are bankrupt, and we have no idea if they will be able to come back. We are still in Iran and Afghanistan. We are running huge deficits.

Putting Sonia Sotomayor on the Supreme Court will require spending very little political capital on Obama's part, but will deliver great returns. He doesn't really have to spend any political capital. Hispanics will be forever grateful to him for this. She will probably be on the Court for decades.

But changing DADT will be the exact opposite political equation: it will require large amounts of political capital, and will deliver good, but probably not great, returns. Gays and lesbians are mostly already in his court. They will be disappointed if he doesn't deliver on repealing DADT. OTOH, some moderates and conservatives will be upset about it. Obama is going to have to spend not just a fair amount of political capital changing it, but a fair amount of his time, as well. He is going to have to lay the groundwork. He is going to have to make it a priority.

Before he can spend that kind of political capital, Obama needs a return on the investment of political capital that he has already spent. Which is where Sotomayor comes in. Putting her on the Court will be one of his first major victories, a very early return on spending political capital.

More importantly, Sotomayor represents a victory over the obnoxious idiots dominating the conservative mediaspace right now. Newt Gingrich, a man who was washed up 10 years ago, is making headlines. He is spending some of his own political capital opposing Sotomayor and Obama.

Let's imagine that Sotomayor gets 80 votes in the Senate. Not an unreasonable supposition. That's a solid victory for Obama. Now let's suppose she gets 90 votes, because, honestly, there's really not much reason to oppose her. That's a decisive victory for Obama. Moreover, it's embarrassing for Gingrich and other conservative activists, because they will have spent time and energy on a hopeless and futile cause. And a black guy with a funny name, and a Hispanic woman, will have achieved a historic victory over some stupid white guys. That will marginalize Gingrich and Limbaugh, and make Republicans in the Senate slightly more wary of taking on Obama on social and cultural issues.

I don't know how much political capital Obama will spend on repealing DADT after Sotomayor's confirmation. He does have to take it on at some point. But I am fairly confident that he won't even get seriously started until that vote is taken to put the first Hispanic woman on the Supreme Court.

Monday, June 8, 2009

The Idiocy of the Efficient Market Hypothesis

In the NY Times today is a great article about challenges to the Efficient Market Hypothesis (EMH), a theory of academic financial research about how the stock market operates. EMH, in this version, says that all information that is relevant to the price of a stock is always available to all parties. Therefore, the price of a stock always reflects a judgment about its worth based on this totality of information. Therefore, the markets are efficient, because the price of a stock always reflects a perfect understanding of its current situation.

I don't know why anyone takes this idea seriously, because I think it's complete nonsense. Hogwash. Garbarge. Worthless trash.

The first problem is this idea that all information about a company is always available to every investor. That's not physically possible. There is vastly more information about a company, available in a veritable cornucopia of formats, than one human being could possibly synthesize. The information that is available in an SEC report is the tiniest shred of a sliver of the totality of information about that company. And that's true of just about any company.

Even more important than the information about a company that the company can provide is the information that it cannot provide, particularly about two key groups: its competitors, and its customers. Few companies really know what their competitors are up to, until the information becomes public. Same thing with their customers.

But what really bugs me about EMH is this idea that decisions about investments are made based on information that the investor has access to. This is just an incredibly stupid idea. No one makes investment decisions based strictly on the information they have at hand. They make investment decisions based on what that information tells them about the future.

Every investment decision is a decision about the future. Will this stock go up or down? That will be determined in the future. The events that determine whether a stock goes up or down will take place in the future. It is not physically possible to have access to that information.

Every investment decision is based on a prediction, not knowledge. Investors use their knowledge to try to refine their predictions, but they are still estimates and guesses.

The last contradiction that exposes the inadequacy of EMH is the simple fact of the stock market's existence. Every time a security is traded, there are two sides to the transaction - a buyer, and a seller. Each has the exact opposite opinion of what will happen in the future. The buyer thinks the stock will go up. The seller thinks the stock will go down. That's a shade simplistic; the seller may think that the stock is going to go up, just not as much as she would like. But the point is that each has a different idea about what is going to happen to the particular security. If there were not that difference of opinion, there would not be a transaction. If information about a security were truly complete and perfect, we could not have a stock market, because everyone would agree about the value of the security, and everyone would be on the same side of the transaction. But we do have markets for financial products, because we do have differences of opinion about what will happen in the future.

I understand that there are different versions of EMH, and I may very well be attacking a straw man. But this has been bothering me for years. I heard about EMH a long time ago, and haven't really had a chance to vent about this until now. So I feel better now.

Quote of the day

“You have no idea how many women are disappointed by me."

-Bob Woodward, responding to an interviewer's question about what it was liked to be played by Robert Redford in All the President's Men.

Rush Limbaugh wants to boycott GM

This has to be the stupidest idea Rush Limbaugh - a very stupid man - has come up with in a long time. He wants his listeners to boycott GM, because he wants Obama's policies to fail.

The mind boggles. This is capitalism in its purest form. Limbaugh only wants Obama's policies to fail because that would make him, Rush Limbaugh, look good. This argument has absolutely nothing to do with any kind of ideological purity or even any kind of vague, tenuous connection to reality. It is strictly about what is in Rush Limbaugh's best interests.

This argument isn't even about what is in his listeners' best interests. As American taxpayers, they have an interest in GM succeeding, so they can get back the money that they have invested in GM. Many of them drive GM cars, and would presumably want to have a relatively easy time say, having their cars fixed. That would be much more difficult if GM fails. There are probably a number of Rush Limbaugh listeners who work for GM, are related to someone who does, or who live in a town dominated by a GM plant.

But Rush Limbaugh does not care about any of those people. He only cares about himself. Self-interest in its rawest form.

What is truly stupid is a headline from a Website driving this: "BOYCOTT OF GM PRODUCTS UNTIL PRIVATE OWNERSHIP IS RESTORED."

Seriously? Um, guys, I don't know if you've noticed, but if you successfully boycott GM products, then it will go bankrupt, and there will not be any private ownership of GM, because there will be no GM. This sounds like the logic of that commander in Vietnam: we had to destroy the village in order to save it.

The only way to restore GM to private ownership is to make it profitable, because then the government will sell it. Because the Obama administration wants to sell its GM stock at a profit. Like the good capitalists that they are.

This may be what is driving Rush Limbaugh and his friends completely off the deep end: Obama is trying to save a major capitalist institution. And he is trying to do it through capitalist means: imposing market discipline, for one thing, and making hard but necessary choices about resource allocation, for another. So far, Obama is a better capitalist than anyone who has been chairman of GM for decades. The Obama administration is cutting dealerships and brands. That is called "making tough decisions." It's what great CEOs and other leaders are supposed to be good at. But which, alas, Rick Wagoner and his predecessors were not all that good at. People in Detroit have known for years that GM had too many brands and too many dealerships. Among other problems. But no one CEO was powerful enough to kill off the unwanted brands or dealers. It took a POTUS to do that. But he did it.

Keep it up, Rush. Keep tying yourself in knots. Keep alienating large sections of your core constituency. Refusing to admit that you're wrong has this tendency to wreak havoc on a person's ability to understand reality. And reality, Rush, is stronger than you.

Thursday, June 4, 2009

HSX: Week of June 6, 2009

We've got three comedies opening this weekend, although they are very different kinds of comedies.

First up is Will Ferrell doing what he does well, playing a ridiculous buffoon, in Land of the Lost (LANDL). I like Will Ferrell, but I am not optimistic about this movie. Variety's review calls it a "laborious mess." The stock is at H$65 and change, down H$6 1/2 - at one point it was down H$8. Whoa, not good. It's at 18% on rottentomatoes.com. I'm not even going to bother to check on the screen count. The strike price is H$30, with the call at H$4.47, down H$1.38, and off a high of H$5.90. The put is at H$2.78, and up more than a half today. That means that lots of people were buying the hype up until today, and now everyone is bailing on it. I vaguely remember the TV show in the 70's. I asked my Mom if she remembered me and my siblings watching it way back then. She had no idea what I was talking about. So she obviously has no interest in seeing this whatsoever. I think she's one of the lucky ones this time around. This looks like a total bomb. I think it will be lucky to crack $20 million at the box office.
Stock: Short, and short now
Call: Short
Put: Long

Only slightly more sophisticated, but with better prospects, is The Hangover (HNGOV), about three guys at a bachelor party in Vegas who lose the groom and have to find him. I find this intriguing, if not necessarily my style. Not a completely original idea, but unusual enough to grab my attention. Sounds like there are myriad opportunities for chaos, mayhem, misunderstandings, and the accompanying jokes. The stock is at H$79.65, only down H$1 1/2 today. If LANDL bombs as badly as I think it will, this should benefit from some overflow. Strike price is H$30, which strikes me as a tad optimistic, but not overly so. The call is at H$4 and change, down H$1 today. That also strikes me as a tad optimistic, but I'm going to go long with it, because it's dangerous to short a call on something that is demonstrating potential like this one. The put, however, is also strong, at H$3.43, up 3/8 today. It's at 83% on rottentomatoes.com, which is just about unheard of for a movie like this. There also isn't really any competition. I think the world needs some good laughs right now. Let's aim high. $35 million.
Stock: Long
Call: Long
Put: Short

Finally, counterprogramming rather strongly but still within the comedy genre is My Life In Ruins (MLFRU). Nia Vardalos, she of "My Big Fat Greek Wedding" fame, returns to the land of the ancients, only this time literally. She's an American tour guide, out to reconnect with her soul, or whatever it is that she lost in her divorce. Light, fluffy, and utterly safe, as long as it's not terrible, I'm sure it will attract a fair number of people in a certain demographic. That would be the demographic that has absolutely no interest in either LANDL or HNGOV. Stock is H$11.48, only down 1/2 today, and mostly up of late. Strike price is H$5, because that is about as low as they can set it. Still, the call is only at H$1.61, down 1/2 today. Not great, but not unexpected. Even that low of a price on the call predicts a stock price of H$16. The put is H$1.74, unchanged, because, honestly, there isn't really that much room for the put to go to. This movie, after all, should make at least $4 million, even though the reviews are harsh (9% on rottentomatoes.com) Vardalos does seem very nice, and she does have lots of goodwill left over. I'm cautiously optimistic.
Stock: Long
Call: Long
Put: Short

Update Friday morning: MLFRU is down H$0.52, and I am getting nervous. Short. LANDL is up H$4, but I think that's because it was down so far yesterday. Keep the short.

Update Sunday night: This was a good weekend, I nailed all three adjusts. I forgot to adjust my predictions for the MLFRU options after I changed my mind about the stock, but that's a minor detail. Actually, I basically broke even on MLFPU, so I really only lost about H$20K on MLFCA. Since I made well over H$2 million on the three stocks, and about H$200K on HOVCA, I'm feeling good. HNGOV is, in fact, a bona fide hit, and LANDL is, in fact, a bomb. MLFRU came in at the low end of fairly minimal expectations, but Nia Vardalos will probably see herself on Lifetime a few times.

Monday, June 1, 2009

GM, bankruptcy, the self-referential problem, the Red Wings, and brains vs. brawn

General Motors has declared bankruptcy. I'm not going to link to any of the zillion of articles on it, because it's too depressing to have to read about it yet again.

Except for Dan Neil's article. He has a great take on it, recounting GM's glorious couple of decades, the '50's and 60's. He has an intriguing idea as to what was the turning point for GM:

I have my own theory. In 1999-2000, GM had a golden opportunity to right its ship by backing Democratic presidential candidate Al Gore. This might seem counter-intuitive. . .
Yes and no. It is counterintuitive in the immediate sense, because Al Gore wasn't really a Detroit kind of guy. He is quite the egghead, very cerebral and sensitive. The quintessential liberal intellectual type. But he was in favor of universal healthcare, which, as Neil points out, could have saved GM a bundle.

I think Neil is capturing something here, although he doesn't quite put his finger on it.

Something else happened in Detroit over the weekend, much more trivial, but a reason for celebration: the Detroit Red Wings won the first game of the Stanley Cup playoffs. Neil's colleague on the sports pages, Helene Elliott, put it this way:

the Red Wings on Saturday withstood the young Pittsburgh Penguins' energetic middle period by using their brains as much as their brawn.
Brains vs. brawn. The classic human dilemma. Whether to conquer with brute force or win through better planning and strategy. Hands vs. head. Football players vs. computer geeks. White collar vs. blue collar.

Pickup truck vs. sedan. Gas-guzzling but macho vs. small but efficient.

The Big Three have spent the last few years making oodles of money off of pickup trucks and big cars. I think the reason for this may be found in the ranks of their employees. GM, Ford and Chrysler have something like a million retirees. They have several hundred thousand current employees. Their dealers and parts suppliers employ another several hundred thousand. Throw in their retirees, and you easily have at least another million. Most of those employees and retirees have families, spouses, wives, kids, parents, brothers, sisters, etc.

Almost all of those people get a discount when they buy a new American car.

Then there are people who have other reasons to buy American cars, like politicians. If you are an elected official in Michigan, and you want to keep your job, you drive an American car.

I'm guesstimating here, but let's say that there are somewhere between 6 and 7 million people in this country with a direct economic interest in buying an American car. At least two million employees and retirees of the Big Three, their dealers and suppliers. Each of those has an average of two family members who buy a car. That's another four million, for six million. Then another million miscellaneous. 6 to 7 million. Most of them with some kind of discount. Let's say each one buys a new car every three years (Big Three executives used to be famous for getting a new car every year). That's two million cars a year going to this customer base. Until recently, cars were sellling at an annual rate of about 16 million a year in the US. If the Big Three were selling half of that, they were selling 8 million cars a year. 2 million of those would be a quarter. So a quarter of the Big Three's cars were being sold to people with a direct economic interest in buying American cars. People, in other words, who were already sold on them, and needed very little convincing.

Talk about insular. Most of those cars were being sold to blue collar workers, or retired blue collar workers. In other words, old white guys with little education beyond high school. How many black lesbians with advanced degrees do you think there are among the Big Three retirees? Not a whole lot.

Sound familiar? Big Three employees, retirees, and, effectively, customers, were and are the same constituency as the Republican party. It is no coincidence that the GOP and the Big Three are collapsing at the same time. It is, on the other hand, intensely ironic that Obama is the instrument of destruction of the one, and yet the savior of the other. Irony is 9/10th of the law.

Brawn vs. brains. The GOP and the Big Three represent brawn. Muscles. It is also no coincidence that Dick Cheney has emerged as the face of the Republican party these days, after being so invisible during the Bush administration. It is also no accident that Bush, his father, and Cheney were all in the oil business. They represent the "brute force" school of capitalism (although maybe "school" in the wrong word). Men (and it's almost always men) make money by the application of brute force - drilling for oil, mining, making steel, or, as (I think) Alfred Sloan put it, "bending metal and thereby adding value to it."

It is no coincidence that Cheney is the most forceful advocate of torture, the ultimate application of brute force to try to get something done, and that he is spending so much time attacking Obama. Obama represents brains. Obama represents the triumph of the intellectual, the egghead, the geek. But at this moment in history, he also represents a repudiation of the "brute force school," essentially because he has already begun to expose the flaws of that approach to life.

GM has failed in part because its employees believed their own hype, that there was something special about American cars. There are special American cars, sure - the Corvette, the Mustang, the Jeep. Those are arguably the three most iconic American cars ever - each has been made for decades. And each is a very macho car.

My family history is deeply intertwined with that of Detroit and the automotive industry. One of my great-grandfathers was the construction foreman on Henry Ford's mansion. My paternal grandfather started out life as a coal miner, moved up to the assembly line at Ford, went to trade school at Ford, and became an engineer. He only finished eighth grade, but all four of his kids went to college, and three of them have Master's degrees. I was going to be the first one in the family to earn a Ph.d.

My grandfather worked hard on the assembly line. But he also worked hard to make sure that that was exactly the kind of job that I would never have to have. I disagreed with my grandfather on just about every topic in politics, but I am forever grateful to him.

The old white guys whose world is disappearing are scared and angry because they don't understand this new world, and they don't feel like they have a place in it. What many of them don't appreciate, and what the rest of us should be grateful for, is their role in creating it.

Brains has triumphed over brawn because that is what brawn has been working towards. Not just in America, but all over the world, and not just in the last few years, but forever.

History always marches on, but sometimes it tramples. Conservatives celebrate capitalism because it holds people accountable. But they don't like the process of being held accountable any more than the rest of us.