Results tagged “economics” from karlo.org

If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.

The more I think about this article about the DJIA from The Big Picture, the more it bothers me.

The Dow Jones Industrial Average (DJIA) has always been my least-favorite of the broadly-quoted marked indices, despite being the one that the mainstream media follows most closely. First of all, it's price-weighted -- a relic of the days when the index was calculated by hand rather than computers. If one of the components splits its stock (which should be an entirely inconsequential even from an equity value and market cap perspective), it suddenly has half the weight in the index it did before, simply because it now has half the stock price and twice the shares. Second, the index only has 30 "representative" stocks, and it's not transparent why some companies are included and others are not -- it's not the top 30 largest companies, as some might think.

Now there are number of financial and industrial giants whose stocks have fallen below the $10 minimum that DJIA gives as its guideline for when a component will be replaced. (A $3.50 price for Citigroup means that it has 1/25th the weight of IBM, trading at over $90.) With the financials underweighted in the DJIA but in reality continuing to drag down the markets, the DJIA is now going to increasingly outperform the broad market... and the press will likely continue to report the "Dow" as the gospel for the state of the market until they either focus on this situation, or the index is corrected and fallen angels like Citigroup and GM are kicked out to the curb.

Customer Lifetime Value (CLV) is a key concept for any business, but it's especially important for Internet sites where there is a daily decision to be made about how much to pay for user acquisition and at what point advertising becomes too expensive to be profitable. Seth Godin made the very valid point earlier this month that online, the idea of an "advertising budget" is nonsensical: either an ad campaign produces positive ROI by creating customer value that exceeds the cost of customer acquisitions, and you run that campaign until the cows come home, or it doesn't and you don't run it at all.

Crucial to that concept is coming up with some kind of metric for what a customer is worth to you. The basic concept is that the average acquired customer will make a certain number of purchases (or view a certain number of ad-supported pages) before they leave due to attrition or competition. By figuring out how much profit a user will generate, we can estimate how much we should be paying to acquire them.

As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting Martingale, without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

-- Semyon Dukach, The real cause of the financial crisis, and the real solution -- an MIT Blackjack Team perspective

In the bond industry, they have a saying: "YBG, IBG" -- You'll be gone, I'll be gone. Remuneration and favoring of short-term performance will always encourage investors to pursue low-risk, high-cost bets in the market. It reminds me of all the funds out there with side-pocket vehicles for things like earthquake insurance. In 9 out of ten years, they are adding a healthy bit of "alpha" to their perceived returns. But in that 10th year, look out.

Frustrated emergency-room doctor Paul Hochfeld explores why U.S. health care costs so much and argues that a single-payer system is a good solution.

"The majority of Americans want some form of a national health plan. Lobbyists continue to foster the political wisdom (myth?) that embracing anything that resembles a single payer system is political suicide. Reality check: our health care system will remain broken until the focus shifts from profits to health. That won't happen until somebody, other than insurance companies, takes control. This is now a political problem. Our citizens need to make enough noise and put enough pressure on our politicians to get them to listen to us, instead of the lobbyists."

Marissa and I watched "A Crude Awakening" last night via Apple's iTunes movie store. (It's quickly becoming apparent to me that downloading is so far superior to the NetFlix model it's not even funny. I'd rather watch what's available via download than pick from the broader NetFlix catalog but have to wait 2 days for it to arrive, and there's never an inventory issue.)

The movie is definitely worth watching, regardless of your view on the "peak oil" theory and/or climate change. Frankly it doesn't even touch on the environmental / "Inconvenient Truth" component of fossil fuel usage - it simply examines the history of production peaking in the US and other previous "oil center" nations and the reasons why the current leading producers have heavy incentives to overstate their reserves (and may be doing so by 100% or more of their actual remaining reserves.) It also touches on the immense economic implications this would have for the markets and world economies, both developed and developing -- the global economy is massively dependend on the availalability of cheap energy, especially for the transportation of raw and finished goods worldwide. There would also be huge implications for newer cities in the US and abroad that developed around the "car economy" - think anywhere but the East Coast and maybe Chicago, basically.

One of the best quotes: "...will my grandchildren know what it's like to fly in a airplane?"

"A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don't have to work to build for the future. They can strike it rich for nothing."

David Brooks - The Great Seduction by Debt - NYTimes.com

(At the same time the government is doing this, they're criticizing housing lenders for encouraging people to gamble on rising housing prices continuing to ascend. I'm not a fan of the subprime lenders, but at least the odds there were a little better than the lottery.)