Author Archives: umbrown

Amazon, now delivering your Groceries?

I am sure that many of you have heard about some of the new directions that Amazon is taking itself. The list from recent memory includes jumping the price of their Amazon Prime service by twenty dollars a year, discussing using drones to deliver your orders faster than you could get a pizza delivered, increasing the offerings of their streaming service and most recently releasing Fire TV; a device to stream to your TV.

This mindset is anything but new for Amazon. When the company started, they were only an online bookseller. Today they have expanded to a giant company with a market cap of close to $150 billion. With that size, it is not surprising that they have the ability to simultaneously stretch themselves in many directions to see what is profitable and what has the potential to be their newest “bread and butter” operation.

The motivation for this post was Amazon’s newest announcement. They will be offering a home barcode scanner for ordering groceries. I have read about online grocery ordering and delivery services in the past, but there were always a few drawbacks that came to mind. For example, there are a lot of foods that I like but don’t know the name of the brand that makes them. I only recognize them when I am at the store. Another disadvantage to online grocery shopping is that many people shop by walking down the aisles and buy whatever food sounds good. They don’t have the faintest idea of what they are going to buy when they enter the store. This doesn’t really translate to an ordering online model, or at least it hasn’t until now.

With such a massive company trying their hand at online grocery ordering, I am sure that Amazon will find a way to provide an easy – to – use website to go along with the scanners so that the experience can be as close to going to the store as possible, without actually taking the time to do it. While there are drawbacks to this alternative way of grocery shopping, there are obviously a lot of benefits and I think that the scanners have the ability to eliminate many of the issues online grocery shopping presents.

Out of all of the recent directions that Amazon has been exploring, I think that this one is the most “out there” but also has a huge potential. Demand will be strong among those who live in a big city where transportation to a grocery store is an issue, as well as tech-savvy elderly or disabled people who find it too much of a hassle. It will really come down to Amazon’s ability to find a good pricing strategy that makes the service minimally burdensome financially but also profitable for them. If they can do this, I think they will experience a second wave of rapid growth while simultaneously making America a little lazier.

(Revised) Bitcoin; why should we care?

I haven’t mentioned Bitcoin in a blog post in a while so I thought now would be a good time to revisit my very first blog post of the semester. While the title may no longer be relevant as I think Professor Kimball convinced us that Bitcoin and, more broadly, digital currency is something that we should all care about, I think there are some new developments in the Bitcoin world that are worth discussing.

Although I am sure that many of you are a lot more familiar with Bitcoin now than in the beginning of the semester, I will still leave this bitcoinbasic.com explanation here to reference.

There are plenty of digital currencies out there, many of which have similarities to Bitcoin, but none have drawn the attention or market value that Bitcoin has over the last year. Aside from the millions made by those who owned Bitcoins when they could be purchased for fractions of a penny or mined with greater success, why should we care about Bitcoin?  For starters, this image of a college student that appeared on a College Gameday broadcast received over $20,000 worth of Bitcoin from generous Bitcoin users.

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((credit: theverge.com article One college football sign netted over $20,000 in donations for a Bitcoin enthusiast))

As I mentioned in the original post, Bitcoin was receiving a lot of attention from central bankers and lawmakers around the world. This continues to be the case, as just a couple days ago, China has “ordered the country’s commercial banks and payment companies to close Bitcoin trading accounts in two weeks” While there were many reasons for this decision, a central argument against Bitcoin for the Chinese government was the “potential threat to financial stability” and the ability of Bitcoin to get around some of their capital and currency controls. The end result, however, is that Bitcoin will be harmed if governments worldwide follow suit and take similar stances towards the digital currency.

The United Stance is also continuing to give attention to Bitcoin. A couple of hours ago the House Small Business Committee has a hearing on the effects of Bitcoin on small businesses. A couple of days ago, the IRS decided that Bitcoin is property, not currency, causing the price to slip about 17 percent.

Another issue that I discussed in the original post was the volatility of Bitcoin. While this would still be considered highly volatile for other more standard assets, Bitcoin’s price jumps have settled down considerably over the last couple of months. While volatility is still a concern, it is a good sign for Bitcoin that its price is no longer jumping up and down by tens of percents every day.

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The issues discussed above would be cleared up overnight if you changed the word “Bitcoin” to “United States Digital Dollar”. The backing of a legitimate government in the creation of their own digital currency would cause the price to fluctuate no more than its paper equivalent. Additionally, it would be difficult for foreign governments to make policy against a digital currency that had the backing of the United States government. While my opinion on the impact of Bitcoin hasn’t changed a whole lot, my reasoning for Bitcoin’s importance has. I used to be confident that Bitcoin itself would become an alternative to government regulated currencies. After continuing to read articles and think about the policy implications of negative interest rates if governments adopt digital currencies, I realize that Bitcoin alone isn’t all that important but the idea of digital currency will be Bitcoin’s legacy that has the potential to change the future of currency and monetary policy.

(revised) Accessories and Tech Companies to Pair Up, Add Value

In A Random Walk Down Wall Street, Malkiel makes mention of corporations merging and creating an inflated stock price out of thin air. He goes into detail explaining how the math behind it all works but the end result was a company with a higher share price, lower P/E ratio and the hopes that another fool would be willing to take the stock off of investors hands at a later date. This is all part of his “castles in the air” theory.

One of the examples Malkiel gives is that companies whose businesses were completely unrelated but would still attempt to merge together. While Malkiel’s argument is strong and I tend to agree with it, this made me think of examples of companies that don’t necessarily merge together, but pair up to make a product. Oftentimes this can seem to create real value for both parties involved. One type of pairing of companies that I would expect to see on the rise is between tech companies and companies that make wearable accessories like watches, sunglasses, etc.

I am sure that many of you have heard about Fitbit, the bracelet / exercise assistant that recently had a massive recall because the material of the bracelet caused rashes and skin irritations for many users. They are now facing a class action law suit. The technology wasn’t the issue, it was the material. I am sure that this problem wouldn’t have happened had Fitbit paired up with a company who specializes in making bracelets. This would allow the tech companies to focus on what they do best, the bracelet company to focus on what it does best and the end result would have been an all around better product.

A simple google search for “wearable technology” will reveal how much this market being talked about. While solar powered dresses may be a bit of a stretch, other more practical forms of wearable technology are picking up a lot of attention. As a user of the galaxy smartphone, the galaxy smart watch has intrigued me, although my reservation on buying one is that I already own a watch that I think looks nicer. If Samsung would pair up with Citizen to make a wearable watch that I like as much as my current watch, maybe I would rethink my decision not to purchase one.

Today on the Wall Street Journal, I read that google will be pairing up with Ray Ban and Oakley for its google glass. This is exactly the kind of pairing up of companies that has the potential to create real value. The article outlined the benefits of such an arrangement; notably the ability to get google glass in front of millions and convince consumers that google glass is a consumer product for every day use, not just specialized uses like a doctor to record interactions with patients. While I don’t have the same fondness for sunglasses as my wrist watch, I can imagine that this move will make many consider google glass who otherwise wouldn’t have. I expect this arrangement to pay off for both parties. Prior to this, expensive sunglasses are something that many purchase once and they last for many years. Adding the features of google glass may drive more repeat customers who have a pair of luxury brand sunglasses but want the functionality that is now possible thanks to this partnership with google.

In the near future, I expect to see other companies follow suit and pair up to create stylish, wearable technology that can improve our lives and change the ways that we interact with technology.

Vote with your conscience or with your party?

With midterm elections coming up, 33 of the 100 senate seats along with all 435 seats in the house are up for grabs and many congressman are undoubtedly trying to vote along party lines to keep their constituents happy and ensure their chances of (re)election. While spending cuts and deficit reduction are on everyone’s mind, no one from either party wants to tackle entitlement reform. That said, certain entitlements need to be expanded during times of economic hardship, although not everyone would agree on this. While there are the automatic spending increases like unemployment benefits that act as a safety net so that the American people don’t have to wait for Congress to pass something so they can eat, sometimes more needs to be done.

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The above data from FRED shows that the initial claims for unemployment benefits. As you can see, the recession peak is leveling off with lower levels of newly jobless. While this would indicate that the economy is recovering, the long term unemployed are still struggling. The Senate and House are considering extending benefits for the long term unemployed now, although there is opposition from Republicans. While there are Republicans from states with high unemployment in support of the extension, the majority of Republicans are opposed to it.

John Boehner, the speaker of the House, said that his opposition to the bill stems from its lack of helping people get back to work and the fact that provisions to pay for the additional spending haven’t been figured out. While that may be true, it will take a long time for these people to get back to work, and waiting for other spending cuts to pay for the bill is stalling on an issue that needs attention now.

While I understand the need to limit spending, in the midst of a recovery certain things need to be taken care of. This issue should be nonpartisan and I think that the Republicans are making a mistake in opposing this bill. While they don’t want to rock the boat before their elections, I think that in this case proving that they can rise above political pressures to help the American people who are still struggling could only help them in the eyes of voters. Even Ben Bernanke has expressed concern over the issue while serving as Chairman of the Fed, which is supposed to be immune to political pressures. His message is clear regardless of party ideology: the Long Term Unemployed need help now.

 

Accessories and Tech Companies to Pair Up, Add Value

In A Random Walk Down Wall Street, Malkiel makes mention of corporations merging and creating an inflated stock price out of thin air. He goes into detail explaining how the math behind it all works but the end result was a company with a higher share price, lower P/E ratio and the hopes that another fool would be willing to take the stock off of investors hands at a later date. This is all part of his “castles in the air” theory.

One of the examples Malkiel gives is that companies that did completely unrelated things would attempt to merge together. While Malkiel’s argument is strong and I tend to agree with it, this made me think of examples of companies that don’t necessarily merge together, but pair up to make a product. Oftentimes this can seem to create real value. One type of pairing of companies that I would expect to see on the rise is between tech companies and companies that make wearable accessories like watches, sunglasses, etc.

I am sure that many of you have heard about Fitbit, the bracelet / exercise assistant that recently had a massive recall because the material of the bracelet caused rashes and skin irritations for many users. They are now facing a class action law suit. The technology wasn’t the issue, it was the material. I am sure that this problem wouldn’t have happened had Fitbit paired up with a company who specializes in making bracelets. A simple google search for “wearable technology” will reveal how fast this market is growing and being talked about. As a user of the galaxy smartphone, the smart watch has intrigued me, although my reservation on buying one is that I already own a watch that I think looks nicer. If Samsung would pair up with Citizen to make a wearable watch that I like as much as my current watch, maybe I would rethink my decision not to purchase one.

Today on the Wall Street Journal, I read that google will be pairing up with Ray Ban and Oakley for its google glass. This is exactly the kind of pairing up of companies that has the potential to create real value. The article outlined the benefits of such an arrangement as having the ability to get google glass in front of millions and convince consumers that google glass is a consumer product for every day use, not just specialized uses. While I don’t have the same fondness for sunglasses as my wrist watch, I can imagine that this move will make many consider google glass who otherwise wouldn’t have. I expect this arrangement to pay off for both parties, and I expect to see other companies follow suit and pair up to create stylish, wearable technology.

Russia’s Capital Outflow Problem

The United States’ sanctions against Russia may actually benefit Putin and the Russian economy as a whole, argues Politico magazine. The article outlines a problem that has hurt Russia economically over the last two few decades. As in many countries, there is an incentive for the wealthiest Russians to place their assets in offshore accounts. Since a little over 100 Russians hold over 35 percent of the country’s wealth, the money that these oligarchs send offshore accounts for massive capital outflows.

While some Russians laughed the sanctions off, including one of Putin’s aides who said that the only thing he needed from America was Tupac’s music, which he could download online, the sanctions make holding assets abroad risky for these wealthy Russians. If they are forced into bringing their wealth back to the Russia, they will have to invest in Russian businesses and other projects. This kind of action strengthens Russian’s economy and also reinforces Putin’s power. If the Russian wealthy can hide their money offshore, Putin cannot control their money nor them. With all of this money back home, Putin assures that these oligarchs won’t do anything that would put them in jail and have the government confiscate their assets. This kind of effect would be much needed as Putin’s Russia is facing a lot of economic difficulties, including a very weak Ruble.

While all of the ongoings with the Crimea have shaken the Russian markets (which was down about two and a half percent today), Putin seemed eager to defy the United States’ sanctions against Russia. These sanctions were criticized for being too weak, but if Putin thought that he stood to gain from defying them anyways, it didn’t matter how strong the sanctions were; it will benefit him anyways.

While Russia’s capital outflows may be turning around, the European economy may be harmed in all of this, as the Wall Street Journal argues. This would stem from European reliance on Russia’s energy exports and over $150 billion in European bank claims in Russia.

Whatever the collateral damage on the European economy, Putin clearly was eager to march into the Crimean peninsula, heightening tensions with the United States and other countries. With Putin’s dominating control over Russia, it would be surprising to me if he didn’t see a benefit to doing this, lending credence to the opinion of the Politico article; that Putin stands to gain by bringing Russian money back to Russia: mostly in his control over the Russian elite. There is a reason that some think he is the most powerful man in the world.

Government Intervention in Bubbles

Upon completion of Burton G. Malkiel’s A Random Walk Down Wall Street, I was thinking about the various bubble scenarios listed throughout the first part of the book, where investor’s were betting on “castles in the air” hoping that a greater fool would come along to pass their overpriced stocks to. At one point when discussing the “tronics bubble” in the 60’s, Malkiel quips that the SEC never got involved in the massive speculation because they couldn’t force people not to throw their money into these overpriced stocks.

When I read that, I remember wondering if there are any other countries where outrageous speculation is curbed by regulators. The only example I could think of is the KRX in South Korea, where there is a daily price limit. Since 1998, a stock traded on the KRX is not allowed to fluctuate by more than 15 percentage points on any given day. Before that, there were even stricter limits. While this doesn’t force investors to make sound investment decisions, it does prevent the “castle in the air” from crashing to the ground before they can do something about it. While Malkiel mentioned stocks fluctuating over 50 percent a day during some bubbles, it would take 3 or 4 days before an asset could fluctuate that much on the KRX exchange.

While this obviously puts a limit on daily volatility, I was wondering if this kind of regulation would cause the stock prices to fluctuate less when looking at a longer time horizon. I checked google finance (which for some reason, only gives data on the KRX since mid 2005). The KRX actually dropped more during the 2008 financial crisis, although it also recovered quicker and the returns in the KRX index have been greater than any of the three major U.S. exchanges’ indexes.

This also led me search for other countries that have similar regulations on assets. I found examples where there are daily price limits on futures and options, but none for the securities themselves. Whatever the case, I thought the book was very easy to read and provided good, memorable examples. If I took anything away from the book, it is that I hope to hold assets in the future that don’t need daily price limits to not fluctuate more than 15 percent per day and that slow, boring, steady returns are much more desirable. From the litany of bubbles in the past, it also aptly demonstrates that human’s desire for rapid wealth creation will ensure that bubbles are not something that will go away.

Bershidsky Wrong on Video Game Market

Bloomberg published an article today in their “view” section by Leonid Bershidsky called “Why Sony’s Playstation 4 is Really a Loss“. The article outlined the reasons why the Playstation won this round of “console wars” after the Nintendo’s Wii U was a flop and they are outselling Microsoft’s XBox One. He then went on to explain why that didn’t matter as the video game market for consoles is shrinking.

I completely disagree with this opinion. I thought that this was a really poor point to be making, especially when he says that Sony has already sold 6 million PS 4 units and is on track to beat the 9.1 million that it took the Playstation 3 a year to sell. While his point about people spending more and more of their video game time on games on their tablet or smartphone is true, I think that the console will always have a large market.

Some of us may be content playing flappy birds until we are so frustrated that we want to throw our phone out the window, and others are so hooked on their video games that we will buy a 3000 dollar gaming laptop for World of Warcraft habits. In between those two extremes are millions of people who need more gaming than the basics that are provided by smartphone apps but who aren’t dedicated enough to buy a gaming computer and hook it up to their TV. These are the millions of people who have bought console systems generation after generation and will continue to do so for the foreseeable future.

Even with negative publicity and bad reputations that games such as Grand Theft Auto have received, their sales are still massive. Just last year, Grand Theft Auto V broke the single day sales record for any video game ever. That certainly doesn’t sound like a declining market to me. While this game was released for the last generation of consoles, I am sure that Rockstar (the maker of the Grand Theft Auto series) will roll something out for this generation of consoles (although that may be a few years down the road) and when it does, there will be people who had held off on this generation of consoles give in and shell out the few hundred dollars just to be able to play the game.

As Bershidsky correctly pointed out, the Playstation 4 still has competition from the PS 3 on sales, but I don’t doubt that effect will start to wear off as game developers begin to roll out more games that are only for the new systems and avid gamers will want to be part of it.

Random Events in Finance

As I am sure that almost all of you have heard, there was a Malaysian Airlines flight that went missing a few days ago en route to China. The flight carried 239 passengers and crew and still has not been found. Since there are some articles pointing out that fake or stolen passports were used to board the plane by a couple of passengers, obviously there are concerns about those two hijacking the plane or causing it to go down. Whatever the case, this will obviously have an impact on Malaysia Airlines financially (and possibly the airline industry as a whole).

The hard part for those working at Malaysia Airlines is that this isn’t really the company’s fault. This could have happened to any airline and if it turns out that the men who boarded the flight with stolen passports had anything to do with it, it was probably the fault of whatever government agency handles that in Malaysia (I’ve never been out of the country so I’m assuming there’s some kind of TSA equivalent there). Nevertheless, this caused their stock price to fall 4 percent today and may fall more depending on the outcome of the search for the plane. This is the equivalent of 50 million dollars of market value that vanished today alone. This got me thinking that, while there are ways to mitigate risk in investing, these types of events can’t be accounted for.

I was searching for other examples of seemingly random events effecting stock prices and stumbled on another interesting (and much more upbeat) example involving the hit “Gangnam Style” by Korean artist PSY. Interesting fact: PSY’s father is the CEO of a semiconductor company. A couple of years ago when that song was a chart topper, that company (called D I Corps) stock price more than doubled from 1500 won to 3600 won. While this obviously created a lot of value for the company’s investors, PSY’s father held 10 percent of the company at the time. As a bit of an aside, while reading about this, I found out that South Korea’s market regulations don’t allow a stock price to fluctuate by more than 15 percent on any given day, but when the article was written, D I Corp hit that limit for 3 consecutive days.

Anyways, I thought that it was interesting to think about these kind of seemingly random events and their influence on a stock price and noting that, although rare, these events are one example of why risk can never be entirely eliminated.

Since this stuff interests me and I we have to comment on each other’s posts anyways, if any of you can think of any other examples of random events effecting a stock price, feel free to share them below.

Facebook wasting no time with WhatsApp

Many of us were stunned when we heard the price tag on WhatsApp, the mobile messaging service that Facebook announced it would acquire last week for $19 billion. Investors must see this move as potentially very profitable, as their stock price made no sudden moves with this announcement, and is actually up about 5 percent since the announcement last week. As the deal cost Facebook about 10 percent of their market cap of roughly $180 billion, it is no surprise that they are quickly making moves to monetize WhatsApp and their half a billion users.

Shifting focus from the standard messaging service that WhatsApp has exclusively offered since it was started, there will soon be a voice calling component to WhatsApp. Now the mobile messaging service will be also competing with services like FaceTime and Skype, owned by Apple and Microsoft respectively.

One reason for the popularity of WhatsApp is that in many countries outside of the United States, messaging services don’t come standard with mobile phone contracts. Thus, users have turned to WhatsApp, the almost free messaging service. While I was skeptical of this move by Facebook at first, this piece of information has me thinking that the $19 billion may have been a smart investment. Consider the following scenario: WhatsApp begins to charge users a monthly fee of $9.99 a month in a country where text messaging doesn’t come free with the mobile contract. Instead, to add this service, Verizon, AT&T or other carriers charge $10 extra per month. Given no alternatives and assuming that demand for messaging services is extremely (if not perfectly) inelastic, then all rational consumers would elect to pay the 9.99 to whatsApp.

While in the real world this is obviously more complicated and there are a lot of other factors like competition from other apps, I would argue that whatsApp would still be used over other messaging services who would similarly try to undercut them on price. A comparable situation is when google tried to roll out google+, a social network to compete with Facebook. Myself and many friends tried it and I remember preferring many of the features to Facebook, as did others. The problem is that it didn’t have everyone on it and Facebook did. Slowly, people gave up on google+ leaving it the ghost town of a social network that it is today. Just as google+ was missing something, namely all of your friends, any competition would face similar problems where not everyone would adopt the new service leaving you unable to message those people. WhatsApp has created a dominant brand in the messaging world to the point where, even if they do choose to drastically increase their revenue by charging users a monthly fee, they have already established themselves to the point of market dominance and it would take a long time for that to change even as potentially superior alternatives roll out.

While there are obviously other ways to squeeze billions out of WhatsApp, I think that charging a monthly fee that is cheaper than mobile carriers would make them very profitable very quickly.