Felix Salmon

Charts of the day, US listings edition

Felix Salmon
Jan 25, 2011 23:50 UTC

My cunning plan to get my readers to do all the work for me in terms of finding graphs of the number of stocks listed on the NYSE and Nasdaq worked like magic! Here, from Second Market, is the chart for the NYSE:


And here’s the Nasdaq:


The big picture here is that both exchanges are declining in terms of number of listings, neither show any signs of recovering any time soon, and in both cases the decline in listings started before the dot-com bubble burst.

Inevitably there’s a bare minimum of listings which the US stock market will asymptotically approach. But this isn’t cyclical, it’s secular. We had our big equities boom from 1950 to 2000, and now it’s over. Even if valuations go back up, the cult of the US stock market as the best and obvious place to invest your money has gone forever, in a world where it’s easier, more lucrative, and less risky to buy bonds or foreign stocks or even commodities than it is to buy General Electric or eBay or Enron.

Update: As Traders Narrative notes, the charts come from a Grant Thornton report. Which was sent to me by Second Market.



Probably not discussed at Davos, but lots of really neat charts:

http://www.gmo.com/websitecontent/JGLett er_PavlovsBulls_4Q10.pdf

The second half on Graham – Dodds is where the good charts are.

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Is the era of the public company coming to an end?

Felix Salmon
Jan 25, 2011 12:52 UTC

One of the problems with Davos, and with ambitious conferences in general, is that all too often the subject of conversation becomes large and amorphous to the point of meaninglessness (“how to leverage leadership in a global economy”, or something like that). So well done to Henry Blodget, at the DLD conference in Munich, for taking his broadly-defined session (“Where is the Money?”) and focusing it with clarity and insight on the question of the disappointing market in IPOs, and the growing grey market in non-public securities.

Barry Silbert, of SecondMarket, made the strongest case possible that “the IPO market has been dying a slow death over the past ten years”, and that nowadays it’s pretty much impossible for a company worth less than $500 million to go public. So it makes sense that private exchanges like his are stepping in and allowing owners to start selling stakes without going through the hassle and expense of an IPO.

The attraction is clear: for one thing, as Silbert says, “the company gets to decide who the buyers and sellers are, and what information they want to disclose to investors.” And by being picky about possible buyers, it avoids the fate of many public companies whose stock is held largely by traders with a time horizon of weeks, days, or even seconds.

What was interesting was the very low degree of pushback that Silbert got. David Liu of Jefferies spent as much time on the downside of IPOs as he did on the upside. “The IPO windows are much tighter now than they’ve ever been, there are so many exogenous shifts in the global marketplace,” he said. “When we counsel companies on the IPO route, we spend a lot of time on the volatility, the quarterly earnings, everything.” He was much more bullish on the M&A market, generally, than the IPO market.

I asked the panel whether they agreed with the conventional wisdom in the media that Facebook is going to go public in 2012 when it starts releasing financial information to the SEC. No one did: they all thought there was a good chance that Facebook could stay private indefinitely.

That said, it’s also pretty clear that Facebook is exceptional in that respect: it’s important not to extrapolate from one hypothetical datapoint. Liu said that Facebook’s private valuation, at a p/e ratio somewhere north of 100, is higher than it would likely be trading at in the public markets. And if that’s the case, then the chances of an IPO seem pretty slim indeed: Facebook’s executives aren’t going to sell a large chunk of shares to the public at a significantly lower price than they could fetch privately.

Near the end of the panel, Silbert said that nine out of ten CEOs who had run both public and private companies would say that given the choice, they will never go public again. Somewhere in the audience, I’m sure, Arthur Sulzberger was quietly nodding.

My feeling is that there’s so much money flowing into the private markets these days, in the form of VC funds and super-angels, that tech companies have almost no need to tap the IPO markets any more. They make sense for things like banks and car makers, but in general the total number of listed companies, which has been falling steadily for a decade, will continue to fall for the foreseeable future. I tried to get that data once, and failed — does anybody have a graph of the total number of companies listed on the NYSE and the Nasdaq over time? The era of the public company has not yet come to an end, but it certainly feels as though it’s well past its peak.


I assume, Dollared, that you don’t believe you’ve actually provided much evidence for the position that it had “exactly zero effect”. I obviously would expect Sarbox neither to destroy American capitalism nor to trigger an explosion in growth and investment, but it does seem reasonable to me that it would dampen the alacrity with which management of private companies would seek to be publicly listed.

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Felix Salmon
Jan 24, 2011 23:18 UTC

Surowiecki devotes his column to warning against investing in Chinese small-caps — TNY

Chicago ballots are being printed tonight, without Rahm’s name — ChiTrib

The effect of the NYT front page: Terrified Investors Sold Out Of Munis At Record Pace Last Week — TBI


This post is very shallow and topical. What about the thousands of active employees in private companies who accrue compensation in the form of options? What is their outlet now that some companies prohibit active employees from selling their shares? Is there really more money in Venture Capital (angel through growth) then in the public markets?

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Debt collection math

Felix Salmon
Jan 24, 2011 22:51 UTC

Mark Gimein has an interesting analysis of the economics of Encore Capital Group, a company which buys up hundreds of thousands of busted credit cards and consumer loans for pennies on the dollar, then pushes them through assembly-line litigation to make a surprisingly small profit.

Gimein’s collections math looks like this:

$694 in collections per lawsuit
minus $283 in commissions to lawyers (40.8%)
minus $139 in court costs (20%)
$272 in collections after court and attorney costs

Gimein then looks at the very real downside of taking these debtors to court, and concludes that, societally speaking, it’s probably bigger than $272 per case. He concludes:

If indeed these social costs are excessive, one possible solution here—which I have not seen proposed—is simply to raise the costs of litigation. Just tripling filing fees and the like would cut into that $272 return enough to make most suits uneconomic for a company like Encore.

Some folks might worry that these costs are often assessed as part of the judgment against a debtor. In real life, though these kinds of lawsuits wind up recovering only a fraction of the judgement, so in practice for most suits it would be the plaintiffs—who’d have to budget for higher court expenses.

This would leave only those cases in which a substantial amount of money is at stake and the plaintiffs believe the debtor might realistically pay it—the cases, in other words, that the legal system is built for. Debt buyers have made mass litigation work by turning lawsuits into a low cost, high volume business. Those who worry about the social effects of this volume of litigation may want to think seriously about how to raise the costs.

Gimein’s point is well taken: very little societal good is served by companies which buy bad debt by the ton and push it through courts like so much meat through a grinder. But I’m not sure his proposed solution would work.

For one thing, Gimein’s figures show that after paying $139 in court costs, a creditor collects an average of $694. That’s actually a pretty high return on capital. The way that Encore works, it hires outside lawyers on a commission basis, and it still manages to make decent money, essentially just for providing the capital needed to pay the court costs and buy the debt in the first place. But even if Gimein managed to tweak things so that the Encore model wouldn’t work any more, there would always be lawyers willing to buy and litigate debt.

And raising filing fees and the like would certainly hit hard all of the debtors with relatively modest debts. People move house, they miss bills, their old cable company doesn’t have their new phone number, they think they’re contesting a charge, and then they don’t hear back and they think it’s settled — you know the score. For similar reasons they don’t find out about the court case — and then suddenly a contested $150 charge has become a $600 court judgment against them, once all those newly-inflated court costs are added in.

Maybe debt collectors would never litigate a sum so small, but I wouldn’t count on it, not when they’ve already set up their legal assembly line.

My feeling here is that the best course of action is to bring anybody litigating second-hand consumer debt under the remit of the Consumer Financial Protection Bureau. It’s a similar tactic; it just uses an increase in regulatory compliance costs instead of an increase in court costs. But it keeps the courts a place to go for justice, rather than somewhere with artificially high barriers to entry.


Again, if Encore, or any debt buyer, is operating efficiently, they are only litigating accounts that have a reasonable assurance that the consumer has an ability to pay. Perhaps society also suffers when the message is only pay those debts you find it convenient to pay, do not worry about the legal agreement you signed. Go ahead and enjoy that big screen HDTV even though you have not prioritized paying for it.

I understand the defense of debt buyers is difficult, given some of their tactics. To simply state that they buy debt with minimal information is patently irresponsible. There is a rigorous due diligence process for any portfolio of debt, and if there are doubts about the validity or chain of title to a portfolio, the debt buyers will walk. Like any business, there are good and bad players.

Having run two collection agencies, I can tell you my companies were meticulous about credit bureau reporting and complied with all laws pertaining thereto.

Dudeman, you have a very good point about the availability of credit, the lenders must always be held complicit in a certain percentage of the bad debt.

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The NYT’s bizarre iPad paywall

Felix Salmon
Jan 24, 2011 10:19 UTC

Russell Adams has some inside dope on the price the NYT is intending to charge with its paywall:

Under the new system, expected to be rolled out next month, the Times will sell an Internet-only subscription for unlimited access to the Times site, as well as a broader digital package that bundles the Times online with its application on the iPad…

The person familiar with the matter said the Times has considered charging around $20 a month for the digital bundle and less than half that for the Web-only offering…

Times Co. executives have said that only about 15% of the paper’s online readers are “heavy users,” meaning the vast majority probably won’t trigger a payment requirement.

This strikes me as peculiar. The idea seems to be that if you want to use the NYT iPad app at all, that’ll cost you a hefty $240 per year, over and above the cost of the iPad itself. But if you want to read the nytimes.com website on your iPad, that’s probably free — and even if you’re in the minority of power users, it’ll still be less than half the price of the app. Essentially, the NYT is doing everything it can to drive its iPad-owning readers away from the app and towards the built-in browser.

A handful of people might conceivably still choose to buy the bundle under these conditions — commuters, perhaps, who have a wifi-only iPad and want to read the NYT offline. But the fact is that the nytimes.com website is a vastly richer and more sophisticated offering than its iPad app, which doesn’t even have search or embedded hyperlinks, let alone archives.

It seems clear to me that if the NYT insists on charging significantly more for its iPad app than for full access to its website (which looks so great on the iPad that Apple uses it in its ads), then it’s essentially sounding the death knell for the chances of any further serious development work on the app. The number of people using the app will be tiny and that in turn will be used as an excuse to underfund it.

A much smarter approach, I think, would be to make the iPad app cheaper than a website subscription. The problem with website readers, from the NYT’s point of view, is that they generate a tiny fraction of the ad revenue generated by their print-edition-reading counterparts. That’s why the NYT wants to charge them a subscription fee: the old model of giving away the news and then selling the readers to advertisers no longer works.

But the iPad has the potential to change all that, with bright and glossy rich-media ads which are much more attractive to brand advertisers than a grubby picture in black and white on newsprint. The NYT should try to build up a large audience of rich early adopters who are using its iPad app and then sell that highly-desirable demographic at a premium to advertisers. Instead, it seems to be trying to keep its app readership as small as possible. Has it given up on in-app advertising before it even really started trying?


The USC Annenberg School for Communication & Journalism hosted media analyst Ken Doctor for a talk yesterday, and he touched on some of these points, specifically with the NYT’s pay-for-access plans and Apple’s changing apps policy.

Video clips are here: http://www.youtube.com/watch?v=RWfXxhXoE m8, and the relevant portion starts around 3:30.

More coverage here (and there’s a transcript pending!): http://annenberg.usc.edu/News%20and%20Ev ents/News/110125M2eDoctor.aspx

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Felix Salmon
Jan 22, 2011 19:28 UTC

How to balance the budget: first pass a balanced bill of tax and spending hikes. Then repeal the spending hikes — Mankiw

The Chinese princeling and his $32.4 million Australian tear-down — SMH

The WEF is asking for questions for Medvedev. I hope and doubt that a Khodorkovsky question will make it through — WEF

“Pictures of ruins are now Detroit’s most eagerly received manufactured good” — TNR

Why on earth is Immelt the jobs tzar? “GE may be wonderful in many respects, but US job creation isn’t one of them” — PDB, Nasiripour

Loss shows Bank of America still flailing — Fortune


Solar is one of the most promising technologies precisely because it does NOT need to be massively scaled. Put PV panels on enough roofs and you meet a few percent of our energy needs without adding to the transmission burden or building any new plants.

I also like the concept of natural gas fed fuel cell cogeneration systems for much the same reason. They have the potential for highly efficient energy conversion without adding power lines.

Is surely easier to build into new construction than to retrofit on a 100+ year old house, however.

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Labor vs capital datapoint of the day, NYC taxi edition

Felix Salmon
Jan 22, 2011 18:29 UTC

taxi.jpgNew York taxis are a textbook example of gains going to capital rather than to labor. They’re generally owned by one person — the person with the capital — and driven by another — the person with the labor. And the person with the capital has made out very well of late. When the stock market peaked in October 2007, medallions were trading at $425,000 apiece. (All data from this page.) By the time the market had plunged by more than half in February 2009, medallions had risen in value to $552,000. And they’ve only gone up in value since: in December 2010, the average medallion changed hands for $624,000; last Wednesday, a new all-time record was set for a corporate medallion which sold for $880,000.

Meanwhile, drivers earn nothing like that kind of money. Getting reliable statistics for taxi-driver income is not easy, but it seems to average out somewhere around $130 per shift — which is actually less than the the amount the drivers pay to lease the taxi. And remember that the owner leases out the car for two shifts per day, while the driver can only work one shift.

It’s pretty clear to me what’s happening here. The medallion owners hold the power, and will charge whatever they can to drivers. If anything happens (a fare hike, say) which improves drivers’ income, then the rents just get jacked up: there’s a lot of demand for taxi-driving jobs, and so essentially the owners just rent out their taxis to the drivers willing to pay the highest shift fee and therefore take home the lowest income.

When someone like Melissa Plaut, then, starts complaining about a proposed rule change on the grounds that it will reduce drivers’ income, I think that she’s missing the bigger picture. It’s the owners who reduce drivers’ income, by charging them as much money for the privilege of driving a cab as they can possibly get away with.

Meanwhile, it’s the mayor’s job to try to create a system where yellow cabs and livery cabs coexist to maximize the welfare of New Yorkers — the general population first, and the drivers second. The medallion owners come a distant third.

Somehow, annoyingly, the medallion owners always end up the winners here, and that doesn’t seem fair to me. None of them were hurting when medallions were fluctuating in value between $200,000 and $250,000 in the years from 1998 through 2003. And for the past eight years or so they’ve been laughing all the way to the bank.

If drivers have an issue with their income, then, they should take up their beef with the medallion owners. But instead, every time that the city proposes something to improve the taxi system more generally — like issuing more medallions, or putting credit-card readers in cabs, or putting meters in livery cars — the drivers reflexively side with the owners. Anything which might hurt medallion owners, they assume, will automatically hurt drivers as well.

Which I’d agree with, if it weren’t for the fact that drivers have signally failed to participate in the good fortune of the owners over the past decade. It’s time I think for the mayor to start putting in protections for cab drivers, which might get an important constituency on his side when it comes to making these kind of changes. Even if doing so annoys a handful of politically-powerful medallion owners.

Update: Plaut responds in the comments.


“I am a medallion owner, I own half of a corporation of two medallions. I bought it in 1977″

what did you pay for your medallion, 5k ? 10k ? 20k ?

I am surprised you did not sell it in the last year for a million or two and retire, ;)

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Treasury’s astonishing statement on US default

Felix Salmon
Jan 22, 2011 00:12 UTC

Four years ago, I started pushing back against the idea that whenever the government fails to make good on some obligation or other, that’s exactly the same thing as a bond default. Of course it isn’t: bond payments are a very special form of government obligation, involving specific sums of money to be paid in a specific manner on specific days. If you fail to make such payments, you’re in default. If a government takes money from, say, the military-salaries pot and uses it to make its bond payments, then that’s a drastic way of avoiding default. It’s a broken promise, to the servicemembers in question. But it’s not a default.

No one understands this better than Treasury. Just ask Tim Geithner himself, who was undersecretary for international affairs from 1998 to 2001, during the Asia and Russia crises. When he was dealing with sovereign defaults, there was a clear understanding that what mattered for such purposes was whether or not countries made their principal and coupon payments in full and on time. Domestic obligations, while important, were a separate issue — and in many cases the international community, led by Treasury and the IMF, would encourage countries to radically overhaul those obligations. No one at Treasury back then made the argument that such overhaul might itself be tantamount to default.

How things have changed now that the problem is domestic, rather than foreign. Neal Wolin has penned an astonishing blog entry at Treasury.gov:

Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments. It would therefore bring about the same catastrophic economic consequences Secretary Geithner has warned against.

Wolin really seems to be saying here that Illinois has already defaulted, since it’s late on many payments it’s legally obliged to make. And that a late Social Security check is just as bad in terms of America’s creditworthiness as a missed bond payment — even if Treasury is making all of its payments to the Social Security trust fund in a timely manner.

This is a dangerous and ill-advised rhetorical tack to take. For one thing, it’s false: the transfers made from a government to its citizens are qualitatively different from its bond payments to creditors, and if they’re missed the consequences are not nearly as catastrophic. On top of that, Wolin seems to be saying that Treasury has no particular desire to differentiate its bond obligations from any other obligations. Which, at the margin, increases the likelihood of a bond default. If bonds aren’t special — if they’re just one of many US government commitments — then bondholders should rightly worry that spending cuts might hurt them, too.

There may be some political or tactical reasons why it makes sense for Treasury to talk like this. But strategically, I fear, it could turn out to be very a big mistake indeed.


Ask China about how to default on sovereign debt ($260 billion worth) and how to do so free from a default penalty:


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Eisenhower charts of the day

Felix Salmon
Jan 21, 2011 22:09 UTC

My fabulous editor, Jim Ledbetter, had a party a couple of days ago for his new book about Dwight Eisenhower. He asked for the most famous passage from Eisenhower’s 1953 “Chance for Peace” speech to be turned into updated charts, so here you go:

schools.png power.png
hospitals.png highway.png
wheat.png homes.png

Sources: The price of a bomber, according to the Air Force, is $1.2 billion in 1998 dollars, which works out to about $1.6 billion today. It costs $18.5 million to build a school. For the power plant, I’m assuming energy usage of 11.4 kW per person (obviously this is up sharply from 1953) and a cost for building a power plant of $1,050 per kW, which works out at about $700 million. Hospitals are coming in at about $260 million apiece. Highway costs are about $10 million per mile.

A fighter costs $150 million; a bushel of wheat is $8. Destroyers run about $1.75 billion apiece; and construction costs on a new single-family home are $222,511.

And here’s the passage in question, which still carries enormous force:

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

This world in arms in not spending money alone.

It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.

It is two electric power plants, each serving a town of 60,000 population.

It is two fine, fully equipped hospitals.

It is some 50 miles of concrete highway.

We pay for a single fighter with a half million bushels of wheat.

We pay for a single destroyer with new homes that could have housed more than 8,000 people.

This, I repeat, is the best way of life to be found on the road the world has been taking.

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.


I’m not sure this ends up saying what I think you intended.

You’re arguing that military expenditure is destruction of capital (true) and is becoming increasingly expensive (which may or may not be true), but you are ignoring possible increases in efficiency in the production of consumption goods.

The cost differentials between relative expenditures could be caused by the increase in the bomber cost, or by a decrease in the the cost of producing the compared resource. I’d go back to the drawing board and include a comparison between the [real] cost difference between the 1950s item cost and the today cost, and then compare it to the bomber.

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