Wednesday, August 15, 2007

Ben Stein and the Markets (nutshell: Ben's wrong)

On Sunday Ben Stein wrote an Op-Ed for the New York Times that was conflating, confusing and confounding.I'll have some comments following these exerpts from:

Chicken Little’s Brethren, on the Trading Floor
...Much more to the point, the fears and terrors about subprime mortgages have helped knock off 6.7 percent of the stock market’s value in recent weeks. This amounts to about $1.1 trillion, or more than 30 times the losses so far in the subprime market. In other words, these subprime losses are wildly out of all proportion to the likely damage to the economy from the subprime problems.

...Then let’s take a peek at Bear Stearns. This venerable and clever financial house has taken some major hits on subprime mortgages lately. That is sad for the stockholders (I am a very small stockholder), and the price of Bear Stearns stock has tumbled.

A little over a week ago, news about Bear Stearns’ liquidity issues lowered the its market value by about more than $1 billion in one day. That is a big hit to a single company, to be sure, but then came the shocker: that news also helped wipe out hundreds of billions off the total value of United States stocks.

Mr. Stein is glossing over, at minimum, three issues that the sub-prime mess raises.

1) To the extent that sub-prime losses are held by publicly traded companies or their affiliated funds, the amount that should be subtracted from their market capitalization is not the recognized loss but the loss times their P.E. multiple (I shouldn't have to make an argument by definition, Ben knows this stuff). This gives you a much larger number.

2) The banks are reporting that they can't quantify the extent of their losses. What? Who are these guys?

They trade based on models. Here's a must read on modeling,
"Numerical Models, Integrated Circuits and Global Warming Theory",
it was written in regards to climate models but if you read it to the end you will:
a) have a pretty good understanding of some of the problems of modeling in general; and
b) you will think "This guy knows what he's talking about".

Short version on modeling errors? As Alfred Korzybski said "The map is not the territory"

3) With the lifting of the curtain, investors are able to take the measure of the Great and Powerful Oz.
A lot of these Wall Street types are revealed as arrogant windbags. See "hubris" (or see David Gaffen's MarketBeat post yesterday. He skewers 'em like a Canadian guide gutting fish. Very efficient.)
Goldman, Bear, Paribas are the peak of the finance world (and paid like it)
This revelation was not re-assuring to the markets and worthy of a P.E. haircut on the market all by itself.
I'd like to see Senator Levin get these guys under oath and ask "What were you thinking?"

I like Ben. He's usually a sharp straight-shooter.
I'd have liked to have the chance to win his money.
All of it.

Here's Ben's website.