Felix Salmon

Counterparties: Why your house is getting more valuable

Ben Walsh
Nov 30, 2012 22:38 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Two things you don’t expect to see together are the nation’s highest foreclosure rate and a housing shortage. Yet as Bloomberg’s John Gittelsohn and Prashant Gopal report, that’s exactly what Stockton, California is experiencing right now. While there are lots of foreclosures, they’re not happening at heavily-discounted prices. “People see a foreclosed home for sale in this area and they’re going to jump on it”, said one longtime Stockton realtor.

There’s also evidence that Obama administration’s much-maligned foreclosure relief program is now picking up pace. Susan Wachter, a Wharton professor, was particularly impressed:

Changes to Obama’s loan-modification program had the biggest impact on reducing pending foreclosures since late 2010 by creating a template that lenders followed, Wachter said. That included incentives to compensate loan servicers for reducing principal on loans for delinquent borrowers. In January, the administration tripled the award to 63 cents for every $1 in writedowns.

Nationally, there’s been some very good housing news of late: the Case-Shiller home price index showed prices rising 3.6% nationally year-on-year. Especially impressive were the gains in areas that have been hard hit by the housing bubble: 20% in Phoenix, 7.6% in Detroit, and 7.4% in Miami.

Bill McBride of Calculated Risk points to new data showing that the government-supported refinance boom has been continuing. Refinancing has a smaller impact on the economy than does a boost in home sales, but it does provide a way for banks to finance a portion of the recovery by giving homeowners more cash to spend each month. In an economy that’s growing at less than 3% annually, even modest increases in consumer spending are helpful. One thing that certainly won’t help: unless Congress acts many of the very same homeowners who’ve gotten help from their lenders will see those savings taxed as income. — Ben Walsh

On to today’s links:

New Normal
The problem with the much-hyped return of US manufacturing: crappy pay – Felix

EU Mess
How Spain ended up with 25% unemployment – Sober Look

“It never gets easier, you just make more money” and 9 other rules for I-bankers – Epicurean Dealmaker

Tax Arcana
Most Americans pay less in total taxes than they would have 30 years ago – Binyamin Appelbaum

Jeff Gundlach is just waiting for “something to go kaboom” – Bloomberg

The Fed
Examining the dove-to-hawk ratio at the Fed – FT Alphaville

Financial Arcana
Wall Street is still trying to securitize energy efficiency loans to consumers – Slate

Philosopher Bankers
“Greg Davies, head of behavioral and quantitative investment philosophy for Barclays” – Forbes

An editor at TheStreet.com passed a stock tip to his dad, then the FBI called – WSJ

Citigroup is lowering bonuses and cutting more banking jobs – Bloomberg

7 ways of looking at the news that Mitt Romney’s dad got free McDonald’s for life – Gawker


@KenG – because money isn’t (for the time being) flowing into things measured by the CPI.

$40 billion a month is flowing into toxic MBS trash that cousin Benny is buying with QE3$ from his clan-members (and future paymasters) on The Street. Bet a bunch that the prices-paid for those dud-assets reflect this largess. We’ll just have to guess about that though – neither Benny nor his brethren will tell us who sold what, at what prices or on what terms – muppets don’t get to know that.

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Kroll: Even sleazier than we thought

Felix Salmon
Nov 30, 2012 21:25 UTC

It’s taken more than three years for the other shoe to drop, but boy what a shoe this is.

A bit of background: in June 2009, Bryan Burroughs raised questions in Vanity Fair about the role that Kroll played in protecting Ponzi schemester Allen Stanford:

Behind the scenes, Stanford was even more aggressive. As the company grew, he became renowned within law-enforcement circles for aggressive counter-intelligence… His greatest asset may have been a top security firm, Kroll associates, whose Miami office worked with Stanford for years. “Stanford was spending millions of dollars a year trying to figure out who was looking at him, and aggressively combating whoever it was,” recalls the former FBI agent. “Kroll was essentially running a propaganda campaign in defense of Stanford’s good name.

Kroll’s role in defending Stanford’s reputation, in both law-enforcement circles and the wider banking community, was an example of a controversial practice known within the private-security world as “reputational self-due diligence,” that is, vouching for a client’s good name… “It is, by all accounts, an exceedingly lucrative business… It is controversial, even inside the firm.”

The idea here was that if Stanford hired Kroll to protect and burnish the Stanford reputation, then he could continue to raise money for his Ponzi much more easily. But what exactly was Kroll doing for Stanford? Murray Waas has now found out, and it’s not pretty. Essentially, rather than simply sing the praises of Stanford, Kroll would make extremely aggressive ad hominem attacks against anybody who dared raise questions about the firm, including a former senior State Department official named Jonathan Winer.

Stanford asked Kroll’s Tom Cash for “an in depth profile, credit history, marriage, kids, work personal quirks”, and instructed Cash to “go after him as hard on as many fronts as possible”. Cash was happy to oblige, telling Stanford that “our info is wife by whom he had two children divorced him and ran off with another woman. Wife also was a lesbian”. (Incidentally, for anybody who thinks that Kroll is particularly good at finding out these things, none of that information was true — not only was the wife not a lesbian, the couple actually had three kids, not two.)

This kind of thing seems to have been quite common:

During the same period in which it targeted Winer, Kroll also tried its tactics on two former Stanford employees who sued him and threatened to talk to the Securities and Exchange Commission, the emails showed.

“I think we might be able to assist in this investigation which could get very significant unless we can discredit the accusers,” Cash wrote Stanford.

Earlier, after the newspaper Caribbean Week published an article critical of Stanford in 1996, Stanford directed Cash to “go for … the jugular” in investigating the story’s author.

Cash assured Stanford that Kroll had “three people working full time in developing information in the United States.” The newspaper soon published a retraction of the article.

Kroll even sent “undercover agents” to “infiltrate” meetings of Antiguan dissidents, since the dissidents were unhappy with Stanford’s influence on the island.

No wonder this kind of business is controversial: I have difficulty imagining that any clean executive would serially unleash dogs like these on their critics. What’s more, Kroll isn’t even disowning its activities:

Kroll, which has been referred to as Wall Street’s “private eye,” says its employees had no clue they were helping to conceal the second-biggest Ponzi scheme in U.S. history.

This makes it sound as though the attacks and spying would have been perfectly OK, if it weren’t for the fact that they were being done on behalf of a Ponzi artist. So a couple of questions for Kroll: are these techniques normal? How often do you use them? And where do you draw the line? Because it seems to me that what Cash did went way too far.


Like the comment above- is Kroll going to give back the money paid to it by Stanford for services since the money is now obviously proved to be from a ponzi scheme?

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The problem with the return of manufacturing

Felix Salmon
Nov 30, 2012 00:01 UTC

Charles Fishman has an upbeat cover story in the new Atlantic, talking about how manufacturing is making its way back from China to America. As the world demands an ever-more nimble manufacturing sector, able to produce smaller quantities of goods more quickly, it makes sense to make those goods here rather than be forced to spend a month shipping them over from China, especially with shipping costs rising. On top of that, Chinese manufacturing costs are rising too: inputs from labor to natural gas are getting much more expensive. (Natural gas costs four times as much in China as in the U.S., while James Fallows reports that a typical Foxconn salary is now $400 a month, three times what it was six years ago.)

Fishman’s enthusiasm for bringing the designers closer to the means of production — it really does make for much more efficient assembly lines — means that he papers over the reality of what America’s new manufacturing-sector workers are being paid:

Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

There’s a huge difference between $13.50 per hour and $21 per hour: the latter is something you can actually live on, something you can consider to be a career. The former is not. And that’s a problem, as Adam Davidson explains: the reason that people aren’t going to college to learn the skills needed on a modern manufacturing assembly line is simply that those skills aren’t valued highly enough. Even McDonald’s, where there were noisy strikes today, looks attractive in comparison:

Isbister doesn’t abide by strict work rules and $30-an-hour salaries. At GenMet, the starting pay is $10 an hour. Those with an associate degree can make $15, which can rise to $18 an hour after several years of good performance. From what I understand, a new shift manager at a nearby McDonald’s can earn around $14 an hour.

What we’re seeing here is the same thing that Seth Ackerman saw at Hostess: wages that are so low, the workers prefer to give up the work entirely, and take a better-paying job elsewhere.

In a piece for Salon, Jake Blumgart quoted a bakery worker who had been at the company for 14 years. “In 2005, before concessions I made $48,000, last year I made $34,000…. I would make $25,000 in five years if I took their offer. It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.”

What we have here is a situation where a company offered a wage in the marketplace and couldn’t get any workers to accept it. Consequently, it went out of business. The word “competitive” gets thrown around a lot, often with the murkiest of meanings, but in this case there can be no doubt at all that a company, Hostess, was unable to pay a competitive wage. Ninety-two percent of its workers voted to walk out on their jobs rather than accept its wage, and they stayed out even after they were told it was the company’s final offer.

All of which means that there are two enormous problems with the story that manufacturing is returning to the US. That might be true, but (a) it’s not creating many jobs, and (b) the jobs it is creating are not the good jobs which people want to have for many years. Instead, they pay $15ish per hour, which is what teenage babysitters make in New York.

Once upon a time, in the halcyon 1950s and 1960s, a man could have a blue-collar factory job and make enough money to support a whole family. Those days are over now, but they echo still in the dreams of manufacturing returning to the U.S. The idea is that were that to happen, good jobs would magically be created. Where the reality is that manufacturing jobs are not good jobs any more: you’re better off working in retail, whether you’re in the US or in China. And you don’t need to spend unpaid years in college learning technical skills to get a retail job.

So while I’m as excited about the Internet of Things as the next guy, and I love any economy where ideas can become products with unprecedented ease, I don’t think that this is a particularly good solution to the unemployment problem. It’s better than nothing, of course. But I do get worried when The Atlantic splashes the word “COMEBACK” all over its cover: that makes this phenomenon seem much happier than in truth it is.



The dirty little secret you never see referred to is that in unionized US plants workers are actually working only 5 or 6 hours out of 8 (based on 30 years of consulting and exposure to over a thousand plants here and abroad.

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Counterparties: No one likes Leveson

Ben Walsh
Nov 29, 2012 23:00 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

The eponymous inquiry led by Lord Justice Brian Leveson was intended to be a full account of the Hackgate scandal. It has now delivered a 1,987-page report, along with a more digestible 46-page summary, finding “significant and reckless disregard for accuracy” in the UK press. In the end, it recommended a continuation of self-regulation, with one significant caveat: the press would be licensed and overseen by Ofcom, which is part of the UK government.

John Cassidy notes that the “previous system of self-regulation, under which Fleet Street’s finest largely oversaw themselves, had been reduced to a bad joke”. But John Gapper thinks a regulatory role for Ofcom is a “badly misguided” proposal. And Michael Wolff, author of a Murdoch biography, is exasperated:

Oh, for God’s sake seems to me the fairest response…the inquiry calls for a goopy, bureaucratic, obfuscating oversight board, which could be perilous to the freedom of the press or as likely toothless.

What’s more, the report fails to take a stand on the very issues and people who caused the inquiry to be formed in the first place: the Murdochs.

The report has its odd moments — warning police officers against having drinks with journalists, for instance. It also grants outsize importance to print media, saying that blogs and twitter aren’t news and devoting just one page out of 2,000 to the internet.

Prime Minister David Cameron has rejected the proposal for Britian’s first statutory regulation of the press since the 16th century, saying he didn’t want to “cross the Rubicon” and impinge on free speech. That puts him at odds with members of his own coalition and the opposition Labour party.

The report won’t close the books on a scandal that has affected an estimated 4,775 people, 310 of whom have been publicly identified. Victims have accused Cameron of “ripping the heart and soul” out of the inquiry. — Ben Walsh

On to today’s links:

Long Reads
BuzzFeed’s awesomely designed story on the history of Pong – Chris Stokel-Walker
A great interactive feature on “the perfect terrorist” – Frontline

TINSTAAFL: NYC fast food workers launch one-day strike – Salon

It’s time for CEOs to stop obsessing over shareholder value – Economist
Is stock picking just another upper-middle class male hobby? – Felix

Is this the deal? $1.2 trillion in new revenue, $1.6 tillion in cuts and savings – Politico

A look at national fertility rates suggests the world’s population will peak in 2030 – Aleph Blog
Americans making a record low amount of Americans – Pew Social Trends

The Fed
Nominal GDP growth has been amazingly consistent at 4.1% for the last 3 years – Crossing Wall Street
James Bullard on price level targeting – St. Louis Fed

Light Touch
A new contender for the title of “Most Captured Regulator” – Jesse Eisinger

Human sacrifice, the original negative interest rate – FT Alphaville

Popular Myths
Millionaire-tax flight doesn’t really exist – Dylan Matthews

Best and Brightest
“An economic index I don’t understand is going up? Yay!” – The Onion

Yoko Ono is a ” reminder of what New York used to be before it was taken over by hedge fund types” – NYT

“Hey”: friendly yet borderline stalkerish email subject lines remarkably effective – Businessweek

Vox Pop
Naive, infirm US public would rather cut defense spending than healthcare – Matt Yglesias

How not to rank US cities

Felix Salmon
Nov 29, 2012 20:29 UTC

More than half the world now lives in cities, and nearly all the growth and value creation in the world comes from what Richard Florida calls “megaregions” centered on large conurbations. So it’s really useful to see which cities are doing well, and which are not.

Sadly, that’s not what we’re getting. Instead, we get things like “The 20 Richest Metros in America“, from The Atlantic, based on the metric of personal income per capita, or — and this is much worse — CNBC’s First Annual Recovery Road Trip, which spent much of this week counting down the top three cities in America, based on a highly convoluted and opaque methodology based loosely on stock-price appreciation.

The results of these exercises are always useless. Here’s a list of random cities! (This is the Atlantic’s list.)

  1. Bridgeport, CT
  2. Midland, TX
  3. San Francisco, CA

Here’s another list of random cities! (This is CNBC’s list.)

  1. Atlanta, GA
  2. Charlotte, NC
  3. Philadelphia, PA

Here, by contrast, is the actual league table for US cities:

  1. New York
  2. Los Angeles
  3. Chicago
  4. Washington
  5. Houston
  6. Dallas
  7. Philadelphia
  8. San Francisco
  9. Boston
  10. Atlanta
  11. Miami
  12. Seattle

As you’d expect, this league table changes only very slowly, but it does change: Philadelphia fell behind San Francisco, for instance, in 2008, but then regained its seventh-place position in 2009. And lower down the table there’s more movement: Pittsburgh has risen from 25th place to 22nd since 2007, for instance.

The problem is that because this league table doesn’t change very much, there’s not much news value in reporting it, and instead reporters are drawn to gimmicks. Similarly, if you wanted to use public-company stock-market capitalization as a metric, then the obvious thing to do would simply be to list the cities with the largest market caps. My guess is that it would look very similar to the metropolitan GDP league table, and therefore, again, not be all that newsworthy. So instead, CNBC decided to go with the amount that stock prices have fluctuated, a methodology akin to simply throwing darts at a list of cities.

If you want to do valuable reporting on the cities which are getting things right, then the thing to do is to look at the growth rates of America’s biggest metropolitan areas, see which areas are consistently outperforming, and ask why. It’s much less gimmicky. But it’s much more useful.


“If you want to do valuable reporting on the cities which are getting things right, then the thing to do is to look at the growth rates of America’s biggest metropolitan areas, see which areas are consistently outperforming, and ask why.”

How is this more valuable Mr. Salmon? Growth rates by what measure? Population growth? jobs? Income? Immigrants from Asia? ALSO, valuable for whom? Immigrants? Middle-class conservatives? Upper-class liberals? Lower-income midwesterners? Conservative southerners? Humor me.

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A rare (and temporary) pari passu victory for Argentina

Felix Salmon
Nov 28, 2012 23:16 UTC

This is the best news that Argentina could possibly have hoped for: the Second Circuit Court of Appeals — the same three judges which upheld Judge Griesa’s decision last time around — has decided that this time, he’s gone too far. Here’s their order:

If you recall, the big thing that Griesa did last week was to not put a stay on his order, forcing a showdown on December 15, when Argentina is due to make a $3 billion payment to its exchange bondholders. If Argentina made that payment, said Griesa, it would also have to pay its holdouts in full.

The Second Circuit, here, has said that Griesa was too hasty: it wants time to think a bit over what he’s done, and whether it’s just. So everything is “stayed pending further order” of the Second Circuit, and nothing is going to be decided for a while — at least until after February 27, when oral arguments will be heard. (Expect a packed-to-the rafters courtroom for that one.)

As a result, Argentina has three months’ breathing room — and every interested party in this case, which includes the US government and lots of people representing the hidden plumbing of the markets, will file an amicus brief.

What’s more, the Second Circuit also recognized the exchange bondholders as “interested non-parties” in the case, who can themselves appeal Griesa’s judgment — thereby setting up a Boies vs Olson showdown in February, with Argentina very much on the same side as David Boies, who’s representing the exchange bondholders, and against Ted Olson, who’s representing Elliott Associates.

At this point, handicapping the ultimate outcome is anybody’s guess, although whatever the Second Circuit decides you can be pretty sure that one side or the other will appeal it to the whole circuit, sitting en banc. As a result, don’t expect those Argentine credit default swaps to trigger any time soon: this case is going to be caught up in the law courts well into 2013.

My hope is that somewhere up the chain, principles of national sovereignty and smoothly-functioning markets will prevail, and Griesa will be overruled. But I have no idea where or when that might happen, or how likely it is. All I know for sure is that a lot of lawyers are going to be making an absolutely enormous amount of money in the next few months.


I don´t know why you are in Argentine side…
Are you one of that persons, that when somebody lose they laugh?
I would love to have your hope if you had invest 1 dolar in Argentine bonds
Imagen that person( 80 years old )whom they had stolen there money was your mother…
Why don´t you came and live here in Argentne?or Ecuador
So Ecuador is right also?
Yes you must come and live here make any kinds of investment and then tell me your hope.
This countries are robbers before than sovereigns

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Counterparties: Who is Fix the Debt?

Ben Walsh
Nov 28, 2012 22:53 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

America’s top CEOs agree on at least two things: America needs to do something about its debt and everyone needs to sacrifice. Under the auspices of the organization Fix the Debt, the (self-serving) CEOs of companies like Goldman Sachs, Honeywell, Microsoft and UPS have amassed a reported $43 million budget to convince Washington to avoid the fiscal cliff and to make broad cuts to bring down the national deficit.

The organization, which has Alan Simpson and Erskine Bowles as co-founders and policy gurus, says in its core principles that deficit-cutting policy should be enacted now, but implemented gradually. It’s also for reforming Medicare and Medicaid and “pro-growth tax reform, which broadens the base, lowers rates, raises revenue and reduces the debt”.

Fix the Debt’s website includes a set of “CEO Tools“, including a presentation that “you can leverage to communicate the debt story in a visual way”, and a sample letter to employees. Morgan Stanley’s James Gorman seems to have written his own version of that letter.

According to the WashPost’s Tom Hamburger, Fix the Debt has managed to displease both liberals and some business groups:

…at least three companies represented in Fix the Debt also belong to a separate coalition that has sought to cut corporate tax rates.

That agenda of cutting corporate taxes has drawn fire from some within the business community, especially small firms and partnerships that do not pay corporate taxes but instead pay taxes on business earnings according to individual income tax rates. These critics say that the chief executives in Fix the Debt are willing to see individual income tax rates rise – in particular, through the expiration of Bush era tax cuts for the wealthy at the end of year– because this could create flexibility in the federal budget for cutting corporate taxes during a tax reform effort proposed for next year.

There are also the familiar fingerprints of Pete Peterson, especially in the emphasis on cutting entitlements. Michael Hiltzik has called Peterson the most influential billionaire in US politics, and it’s easy to see why. Fix the Debt is project of the Committee for a Responsible Budget, which is, in part, funded by Peterson’s foundation. Many of the members of Fix the Debt’s coalition are similarly funded by Peterson and/or founded by his former employees. From 2007 to 2011, Ryan Grim and Paul Blumenthal report, Peterson has spent almost half a billion dollars of his own money crusading against the national debt. — Ryan McCarthy and Ben Walsh

On to today’s links:

An identical copy of a US entrepreneur’s security software ended up being used across China – Bloomberg

Crisis Retro
Bank of America’s CEO apparently can’t remember anything – Matt Taibbi

Mysteries Explained
Poor management killed Hostess, not unions – LAT

Lloyd Blankfein compares CEO efforts on the fiscal cliff to WWII – Joe Weisenthal
Fix the Debt is more concerned with protecting the Bush tax cuts than reducing the long-term deficit - Next New Deal
People are paying $80,000 to hear Simpson and Bowles speak for some reason – NYT

Bond Vigilantes
A concise guide to Argentina’s possible default, angry hedge funds and “legal colonialism” – Steven Davidoff
Why Elliot vs. Argentina is a domestic Argentine issue – Felix

Groupon’s board may be rethinking the value of the “youth and humor” of its CEO – WSJ

What it was like to be a woman at Goldman Sachs – Atlantic

New Normal
Federal student loans are making it too easy to borrow too much – WSJ

Crisis Retro
Mozilo admits Countrywide’s subprime loans were a “continuous catastrophe” in a 2006 email – Scribd

Nassim Taleb is rather fragile when it comes to parodies of Antifragile – Josh Brown

SAC Capital gets its Wells Notice – Reuters

The World Bank’s chief economist on inequality, taxation, and multi-player sudoku – Oxfam

“Something is wrong with my iPad: I still hate my life.” – McSweeney’s

Is stock-picking just another hobby for men?

Felix Salmon
Nov 28, 2012 20:55 UTC

I had a fascinating lunch, a couple of weeks ago, which lodged in my mind the idea that stock picking, at least when practiced by individuals, is best analyzed as an upper-middle-class hobby rather than as purely profit-focused investing activity. Once you start looking at it that way, suddenly a lot of behavior, which looks irrational under most lights, starts making a lot of sense.

For instance: subscriptions. These things are serious money-makers, whether they’re old-fashioned newsletters, whether they’re Barron’s subscriptions ($149/yr), or whether they’re slightly more high-tech products like the various subscription products at thestreet.com (between $152/yr and $1,040/yr), Minyanville (between $499/yr and $899/yr), or, now, at Seeking Alpha ($2,388/yr).

These prices aren’t always completely transparent (good luck trying to find the Minyanville prices on their website, for instance), but they’re high for a reason: they’re sending the message that the subscriptions are meant to make you money. At the same time, however, if you compare these sums to the sort of money that the upper-middle classes spend on, say, golf, then they don’t look quite so large. A golf habit is unlikely to cost you less than $5,000 a year, and can cost tens of thousands, not including the extra amounts that many people pay to buy real estate on the golf course.

What’s more, the number of golfers in America is significantly larger than the number of stock-pickers. This is a niche market, which means again that prices need to be high: you’re never going to sell millions of subscriptions to anything.

One thing worth noting here: stock picking, even more than golf, is an overwhelmingly male hobby. Put aside all the mathematics about how individual investors consistently underperform the market and pay enormous fees to various financial-service middlemen; all you really need to know is that if something is done only by men, it probably isn’t particularly sensible.

Still, the Seeking Alpha model is an interesting one: they’re basically crowdsourcing their subscription product, by offering their contributors between $100 and $500 per article (or more, if the article gets lots of page views), if they consider the post high-quality enough to qualify for the Seeking Alpha Pro product.

You can do the math: Seeking Alpha says that it wants to feature five “Alpha-Rich” articles per day on its pro site, for which it will pay $500 apiece. Let’s say it also features a couple of dozen Pro articles at $100 a pop: that adds up to an editorial budget of $5,000 per day, or about $1.25 million per year. Divide that by $2,388, allow some budget for in-house editors and the like, and the product looks like it will break even once it gets to about 600 subscribers. Which is not all that many, considering Seeking Alpha gets about 4 million visitors per month from the US alone.

I would never recommend any stock-picking subscription, just as I would never recommend stock-picking. But the Seeking Alpha model is quite a clever one: the articles are behind a paywall for 1-3 days, then they get opened up to the public, where they can accumulate a decent comment stream and give the author (as well as the subscription product) the oxygen of publicity. After that, they go back behind the paywall, because even old analysis is valuable when you’re dealing, as Seeking Alpha wants to do, primarily with undercovered small-cap stocks.

What’s more, it stands to reason that a crowdsourced product is likely to provide more value than product with just one or two authors: no individual can come up with that many insightful ideas, and Seeking Alpha Pro is able to prominently feature ideas from contributors who might only have one or two great analyses per year.

Still, the ultimate value of any such product is ultimately likely to be negative rather than positive, if only because once you’ve paid for it, you’re going to want to act on it. And the minute you start trading stocks on your own, you become the dumb money.

How much is the real cost of a subscription, then? The $2,388 a year is just the up-front cost, but on top of that you need to layer on your trading fees and your general underperformance. What’s more, if you’re subscribing to Seeking Alpha Pro, you’re probably subscribing to other products, too. Call it $5,000 a year, all-in.

Which is actually not that much, compared to other hobbies: I know people who can spend $5,000 on a single bicycle. If you’re into classic cars, $5,000 is nothing. And similarly, if you’re skiing or flying around in small planes or even just taking a luxury vacation once a year, $5,000 can be a relatively modest sum for a reasonably affluent person. And none of those hobbies come with the extra thrill of dreaming that they could end up being highly profitable.

One thing I would note, though: from a financial-media perspective, you’re limiting yourself enormously if you spend too much time chasing that small group of hobbyists — especially if you’re not trying to sell them subscriptions. Look at the enormous number of websites which put stock tickers next to company names, so that the hobbyists can see exactly what the stock in question is doing that day. It makes the site seem as though it’s targeted at silly males, rather than at a broader, smarter audience.

As a rule: if you want to attract women (and most men for that matter) as well as the stock-picking men, get rid of those tickers and sparklines and constant reminders of what the market did today. Most of the hobbyists are perfectly capable of reading a news article about Apple without being told what the company’s ticker symbol is. But the rest of us find such things incredibly annoying.


Sound investing is easy. Buy quality, let it ride.

Stock-picking is devilishly hard. Keeps me humble! HPQ anyone? :)

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The economics of artisanal chocolate

Felix Salmon
Nov 28, 2012 16:13 UTC
YouTube Preview Image

Who doesn’t like hanging out in a chocolate factory? My visit to Cacao Prieto, in Red Hook, was fascinating: what I wanted to do was understand the reason why artisanal chocolate (or artisanal coffee, or even artisanal mayonnaise, for that matter) seems to be such a fast-growing market these days.

Both Dan Preston, of Cacao Prieto, and Tim McCollum, of Madécasse, agreed that at the supply end of the chain, nothing much has changed. They’re using Victorian technology, largely (although Preston has built some clever new machines of his own), and relying much more on a simple back-to-basics approach than on anywhere that buzzwords like “scalable” might apply. That said, the marketing at least has got to be much easier these days; the Cacao Prieto website, in particular, is gorgeous, at a cost which would be a rounding error in the context of a big chocolate company’s ad budget.

And the demand end of the chain has changed a lot: as Dan says, there’s a whole new market now for what he calls “fine chocolate”, as opposed to “confections”. And truth be told, that split makes a hell of a lot more sense than, say, the creation of “super-premium vodka”, which is to all intents and purposes identical, in everything but price, to any other vodka. Chocolate, even more than coffee, has a depth and richness of flavor, when it’s carefully and lovingly made, which is easily worth six bucks. (Compare, for instance, the amount you’d pay for a very good coffee, or a very good glass of wine.) If you cultivate an audience of people who consider themselves connoisseurs, they will happily follow you to a world of unprecedented pricing.

On top of that, artisanal chocolatiers, much like Fair Trade coffee merchants, can tell a true story of how they’re doing a very good job of treating developing-world farmers with respect and high prices. That message resonates to differing degrees with different people, but at the margin it certainly helps.

Why are these kind of businesses cropping up now, in particular? I think there are a few reasons. Firstly, money has appeared to fund them for pretty much the first time. In a zero interest rate environment, risky businesses with little correlation to anything else look increasingly attractive — and on top of that, the number of socially responsible or impact investors is rising impressively, and chasing a relatively small number of opportunities.

Secondly, food prices in general have been making up a smaller and smaller proportion of household expenditures for generations now. Here’s food-price inflation, in blue, charted against personal consumption expenditures, in red: the gap just keeps on growing. And in that gap, there’s room for people to spend a little bit more on edible luxuries, without significantly increasing the proportion of their budget that goes to food.

Finally, consumers of pretty much any product, from duvets to dishwashers, tend to become increasingly sophisticated over time. The low end of the market becomes commoditized, and the margins migrate to the high end. This kind of chocolate doesn’t scale to Nestlé or Hershey size: as Dan explains in the video, Hershey was not able to maintain Scharffen Berger’s quality after they bought it. But both Cacao Prieto and Madécasse have room to grow a very great deal from where they are right now. Which is good news for their investors, and good news too for the many parts of America which have yet to discover the wonders of artisanal chocolate.


Cool video. One factor they didn’t go into is that with agricultural products like cacao and coffee, there are a number of varieties of beans with different qualities, some of which are more difficult and costly to produce, and limited in supply. The big industrial players like Nestle and Hershey can’t use the better grades simply because they cost too much and aren’t available in the gigantic quantities they need. They have to buy on the open commodity markets. Whereas the opposite is true for smaller operators: it is to their advantage to be selective about the suppliers they buy from.

And if you really want to do it, for a cost of about $1000 in gear, you can set yourself up with a countertop chocolate making operation in your own kitchen.

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