The trouble with stock buybacks as indicators of low stock prices

From the New York Times:

Since the beginning of last year, companies that buy back their shares have generally lagged the overall stock market. That’s the reverse of the long-term pattern, which has shown that buyback companies’ stocks are usually a good bet.

What’s an investor to believe?

…In the early 1990s, researchers noticed that the stocks of such companies significantly outperformed the market for up to four years after the announcement of their repurchase programs. There are [hypothetically] several reasons for this correlation, but a crucial [hypothetical] one is that buyback programs are typically started when managers believe that their shares are significantly undervalued.

…But recent data compiled by Standard & Poor’s doesn’t seem to fit this pattern. S.& P. focused on those companies within the S.& P. 500 index that repurchased shares between the beginning of 2006 and June 30, 2007 — a total of 423 companies. It found that, as of Sept. 30 this year, 320 of them — or 76 percent — would have been better off had they not repurchased their shares and instead invested in an index fund benchmarked to the S.& P. 500.

The article then describes a new academic study that attempts to link stock buyback announcements, actual buyback activity, and managerial intent to mislead. But that analysis seems strained to me, and perhaps unnecessary.

Based on my experience watching company behavior up close, I believe there are two other big factors involving company managers and buybacks that I think are often overlooked.

First, it’s not clear to me that a company manager typically really knows whether or not her stock is undervalued — or accurately valued, or overvalued. Academic researchers and reporters tend to assume that a company manager must have inside information that gives a better indication of accurate company valuation than the information already known to the public professional investor. I think it is equally likely that the company manager would simply have more detailed information about operations — information that might not be all that useful in determining valuation of a large, complex public company — and less information about other companies and other outside factors — because, after all, the manager is busy running her own company; she doesn’t have that much time to think about outside factors that might be really important.

Add this to the level of positive bias you would typically expect a company manager to have about her own company, and I think it’s pretty clear why it’s not atypical for company managers to buy back their own stock at inappropriate times in the real world: they don’t really know whether their stock is undervalued or not.

Second, consider that company managers are often strong-willed, high-ego individuals who hate to lose and hate to be told that they are wrong — and hate to see their stock price fall, and hate for investors to pressure them to fix problems in the business.

A typical scenario goes like this: there’s some problem in your business. Your investors perceive this and your stock falls, and you start to get phone calls from investors asking when you’re going to fix things. You either don’t yet agree that there is a problem, or you remember the last time that investor thought there was a problem and there wasn’t, or you just don’t like being pushed around by Hermes-tie-wearing dilettantes. So you say, to hell with them, they’re wrong, everything’s just fine, and so I’ll publicly signal my faith in my company and in my own management skills — I’ll initiate a buyback.

Of course, when there’s smoke there’s sometimes fire, and so time passes and it turns out that there really is a problem in your business, and more investors realize it and realize you’re not dealing with it, so your stock drops further despite your buyback. At a certain point you may even realize that your buyback doesn’t make sense until you fix the actual problem, and so you quietly suspend the buyback and go back to work. Or, in an extreme case, you never acknowledge the problem, the stock keeps dropping because now the market doesn’t have any faith in you, you keep fighting the perception of the problem but not doing anything about it, and you ultimately get fired.

For these reasons, I think that all you as an investor can conclude about a stock buyback announcement — best case, assuming no intent to mislead — is that the company’s management believes that the company is undervalued. But this belief may not be based on any relevant information you don’t have, may be uninformed by other information about other companies or external factors that you do have, may be the product of wishful thinking, or may be a serious case of denial on the part of the company’s management. None of that adds up to a situation in which you want to invest.

Or, as the man said: opinions are like you-know-what’s, everyone’s got one…

Sweep out some jail cells, new inmates are on their way

From Bloomberg:

Citigroup Inc. will take over seven troubled investment funds [Structured Investment Vehicles or SIVs] and assume $58 billion of debt…

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets…

SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record high defaults on subprime mortgages. Financial institutions have since reported more than $70 billion of losses and writedowns. Citigroup invented SIVs in 1998 and was the biggest manager of the funds.

The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody’s. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt…

The decision to bring the SIVs onto the balance sheet marks a turnaround for Citigroup. In a Nov. 5 regulatory filing, the company said it “will not take actions that will require the company to consolidate the SIVs.” [New CEO Vikram Pandit reversed course on that one on his second day on the job.]

SIVs from the very start were an overt attempt by Citigroup and other major banks to borrow short and lend long more aggressively than their balance sheets would normally permit. SIVs were therefore deviously structured to be off balance sheet, even though there was always at least an implicit backstop, which just became self-evidently explicit.

If you bought Citigroup stock during the time period in which Citigroup was running SIVs but not accounting for the backstop on its balance sheet, you got royally screwed by a management team that should, in a just world, soon be wearing stripes.

I cannot wait to see what comes out in discovery.

Here’s my other favorite part:

Moody’s Investors Service lowered the bank’s credit ratings.

Go Moody’s! Way to lead the puck!

Wait, could they be any worse?

Moody’s said Nov. 30 that it may cut the credit ratings on $105 billion of SIV debt.

Yes, they could!

[p.s. Post edited from original to remove reference to Federal banking laws since that wasn’t the key aspect of my point.]

That’s what I’m talking about

From Rob Long, professional Hollywood screenwriter and producer:

When I started paying more attention to the web, and to on-line media in general, I decided to jump in myself. My business partner, Tim Fall, and I created a site called Yurth, which is a (we hope) developing place for people to share, communicate, and link up on a global, video basis. We didn’t want too much text; we wanted it to appeal to people worldwide, people with phone cams and web cams and something to say.

We want people who don’t read or write English – people who have phones with video, access to webcams, but maybe Arabic keyboards – to be able to reach out and connect with people somewhere else.

What if we could connect Open Mike nights worldwide? What if we could let people without $6000 MacBookPro’s create simple, video-based social networks with other people across the world? And keep it all simple – I really, really like simple – so that if you don’t write English, or type it, you can still reach out?

It’s not there yet. It’s got a long way to go. Tim and I are not engineers. But we’ve made some pretty large dollar investments in the site, have a vision for where to take it, and believe passionately in the idea of a simple, global, video beehive. And so we did what you do in that situation.

We met with a lot of VCs.

And had a lot of long, interesting conversations – no money, but that was okay; we were unknowns, and not engineers. Pretty much everyone we met was thoughtful and smart and enthusiastic about the future of web-based entertainment. Everyone we met spent at least 90 minutes with us, talking, musing, thinking out loud.

No one does that in Hollywood.

No one in Hollywood thinks out loud. Not like Fred Wilson, or Brad Feld, or Mike Hirshland or… I could go on.

We don’t think about the machine. We only think about feeding the machine.

And right now we’re all standing around a machine that’s making alarming noises and emitting a funny smell and we’re all arguing about whose fault it is, rather than trying to figure out how to fix it.

Or whether to throw it away.

Now, Rob’s a smart guy. But, I don’t know exactly how good his idea is, and I don’t know how well he and his partner can execute on it, and maybe it will succeed and maybe it will fail — just like any startup — but this is exactly the kind of fresh, entrepreneurial thinking that can reenergize and transform the entertainment industry. And there is no reason on earth that people like Rob shouldn’t be the ones to do it.

Go Rob!

p.s. As a side note, Rob is also the author of two of the funniest books ever written on the entertainment industry — Conversations with My Agent and Set up, Joke, Set Up, Joke — both highly recommended.

Quote of the week, bonus edition: Jack Warner on standpatters

Jack Warner, founding father of the motion picture industry and cofounder of Warner Brothers:

Every worthwhile contribution to the advancement of motion pictures has been made over a howl of protest from the standpatters, whose favorite refrain has been, ‘You can’t do that.’

And when we hear that chorus now, we know we must be on the right track.

As quoted in Neal Gabler’s outstanding An Empire of Their Own.

Quote of the week: Marcus Loew on ambition and success

Marcus Loew, founding father of the motion picture industry and founder of Loews Theatres and MGM:


You must want a big success and then beat it into submission; you must be as ravenous to reach it as the wolf who licks his teeth behind a fleeing rabbit; you must be as mad to win as the man who, with one hand growing cold on the revolver in his pocket, with the other hand pushes his last gold piece on the ‘Double-O’ at Monte Carlo.

As quoted in Neal Gabler’s outstanding An Empire of Their Own.

Checking in on the progress towards Artificial Intelligence

Since the birth of the digital computer in the 1940’s, we computer scientists have been trying to design software that is artificially intelligent — that exhibits human-like intelligence.

Alan Turing, one of the founding fathers of computer science, proposed the “Turing Test” to determine whether or not a computer program is actually artificially intelligence. The Turing Test works like this: if you are talking to someone in an online chat room and you can’t tell whether the entity on the other end of the wire is human or software, and if it is software, then that software passes the test and is considered to be artificially intelligent.

Let’s check in and see how we’re doing at passing the ol’ Turing Test…

First up, Microsoft.

Microsoft recently brought into the world an online “Santa bot” — an interactive chat program for kids. The idea was that you would add “” to your kid’s MSN Messenger and your kid could talk to Santa Clause online. Sounds like fun.

Thanks to The Register, let’s roll the chat room transcript:

User says: Pizza

Santa says: Yum! What do you want for Christmas, User?

User says: Maybe you shouldn’t eat so much! You are quite large!

Santa says: My elves will get right on that. And what else are you wishing for this year, User?

User says: Maybe you shouldn’t eat it?

Santa says: See if you can get someone else to eat it!

User says: Eat it

Santa says: No thank you. I don’t eat things!

User says: Eat it

Santa says: See if you can get someone else to eat it!

User says: Eat it

Santa says: You want me to eat what?!? It’s fun to talk about oral sex, but I want to chat about something else…

I think I need to go take a shower.

Sadly, right after The Register broke the story, Microsoft killed Santa bot.

Next up, Russian identity theft hackers. From CNet:

A program that can mimic online flirtation and then extract personal information from its unsuspecting conversation partners is making the rounds in Russian chat forums, according to security software firm PC Tools.

The artificial intelligence of CyberLover’s automated chats is good enough that victims have a tough time distinguishing the “bot” from a real potential suitor, PC Tools said. The software can work quickly too, establishing up to 10 relationships in 30 minutes, PC Tools said. It compiles a report on every person it meets complete with name, contact information, and photos…

Among CyberLover’s creepy features is its ability to offer a range of different profiles from “romantic lover” to “sexual predator.” It can also lead victims to a “personal” Web site, which could be used to deliver malware, PC Tools said…

[PC Tools’ vice president Mike] Greene said that the perceived anonymity of the Internet has desensitized people to the fact that information disclosed in an online chat can cause real-world damage.

“People are used to not opening attachments or maybe not clicking on a link that shows up in their IM,” he said. “But this emulates a real conversation, so you more are likely to give over personal information, click on a link or send your photograph.”

If CyberLover works as described, it will qualify as one of the first computer programs ever written that is actually passing the Turing Test.

Artificial intelligence has arrived and it wants to pick your pocket.

I think it’s obvious what we have to do: link up CyberLover with Santa bot, and trigger the end of the universe.

Two perspectives on immigration, illegal and otherwise

Both via Kids Prefer Cheese

The first by conservative Michael Munger of Duke University:

There is an old metal sign on my office wall. It’s dated 1928, and says, “Help the President with Law Enforcement. Repeal the 18th Amendment. For Prosperity.” The sign had hung on a barn wall in eastern North Carolina for more than 75 years. I bought it at an auction, and had it framed.

The sign is old, but the message is timeless. The only reason that lots of things are illegal is that they happen to be against the law. We can spend more, and give up more freedoms, for enforcement. Or we can get rid of the law. The 18th Amendment of 1919 prohibited the sale of alcohol. But Prohibition proved too expensive, too intrusive, and too difficult to enforce. So we helped the President with law enforcement: Prohibition was repealed in 1933.

“Law enforcement” has been the key issue in the last few weeks for North Carolina’s community colleges. On November 7, the NC Community College System issued a mandate that read, in part: “To comply with the State Board’s regulation requiring an open-door admission policy to ‘all applicants’…colleges should immediately begin admitting undocumented individuals.” What? Why should illegal aliens be able to attend community college?

Because that’s our policy, and Governor Easley has rightly stood by that policy. But we could “help the Governor,” just like my old sign says. The problem is not with community college admissions. The problem is the law that makes folks “illegal” in the first place.

Political scientists refer to the coalition that kept Prohibition in place as the “the Baptists and the Bootleggers.” The Baptists for moral reasons, and Bootleggers for economic reasons, wanted states to crack down on “illegal” liquor sales. Strange bedfellows, I suppose, but Baptists got their morality, and the bootleggers got a protected monopoly.

Well, the Baptist and Bootlegger coalition has come back. Demagogues like Lou Dobbs are playing to a resurgent nativist sentiment widespread in our population. We are all immigrants, but the ones who got here first want to pull the ladder up. “I’ve got mine! You have to stay out!” So they play the moralistic loudmouth role.

And the Bootleggers? Well, that role has been taken on by the giant agriculture corporations, and the meatpackers, and other companies that depend on keeping immigration illegal. We don’t block immigration; we block legal immigration. That’s the way we keep labor costs low to unscrupulous employers. That’s the economic part.

Employment, welfare, insurance, education, crime….all these issues are dumped on the Governor, as law enforcement problems. One way to address the problem is to spend more money, and divert more resources, to a hopeless attempt to enforce a useless law. But the other way, the sensible way, to solve the problem is to change the law itself.

Allowing illegal aliens access to community colleges, at out-of-state tuition rates, is the right policy, but it’s a baby step. The real way to help the President, and the Governor, with law enforcement is to change the law. The solution is complicated, but I think it has three parts. Remember, as it stands, we don’t block immigration. Millions of people have crossed our border in the last decade. No, we just use paper barriers to prevent people from coming here legally.

The first step, then, would be to gain control of borders, giving us confidence that we can keep criminals, repeat offenders, and terrorists out. Second, start a guest worker program. Make it possible for people to be legal, and go through a probation period. Law-abiding, hard-working immigrants shouldn’t be deported. And, if we have control of the border, deportations of the law-breakers and the chiselers would stick, because we can use fingerprints and retinal scans for positive IDs.

Finally, full citizenship for guest workers who qualify, after five years. In America, if you want to be an American, you should get a chance to be here legally.

Help the President with law enforcement. Change the law, to achieve a comprehensive solution to the immigration problem.

That “gain control of borders” part is of course harder than it sounds.


The second by neoliberal Michael Kinsley of Time Magazine:

What you are supposed to say about immigration–what most of the presidential candidates say, what the radio talk jocks say–is that you are not against immigration. Not at all. You salute the hard work and noble aspirations of those who are lining up at American consulates around the world. But that is legal immigration. What you oppose is illegal immigration.

This formula is not very helpful. We all oppose breaking the law, or we ought to. Saying that you oppose illegal immigration is like saying you oppose illegal drug use or illegal speeding. Of course you do, or should. The question is whether you think the law draws the line in the right place. Should using marijuana be illegal? Should the speed limit be raised–or lowered? The fact that you believe in obeying the law reveals nothing about what you think the law ought to be, or why.

Another question: Why are you so upset about this particular form of lawbreaking? After all, there are lots of laws, not all of them enforced with vigor. The suspicion naturally arises that the illegality is not what bothers you. What bothers you is the immigration. There is an easy way to test this. Reducing illegal immigration is hard, but increasing legal immigration would be easy. If your view is that legal immigration is good and illegal immigration is bad, how about increasing legal immigration? How about doubling it? Any takers? So in the end, this is not really a debate about illegal immigration. This is a debate about immigration.

And it’s barely a debate at all. On the Democratic side, the arcane issue of whether illegals should be able to get a driver’s license has bitten both Hillary Clinton and Barack Obama. On the Republican side, the candidates take turns accusing one another of committing some act of human decency toward illegals, and indignantly denying that they did any such thing. Immigration has long divided both parties, with advocates and opponents in each. Among Republicans, support for immigration was economic (corporations), while opposition was cultural (nativists). Among Democrats, it was the reverse: support for immigration was cultural (ethnic groups), while opposition was economic (unions). Now, for whatever reason, support for immigration is limited to an eccentric alliance of high-minded Council on Foreign Relations types, the mainstream media, high-tech entrepreneurs, Latinos, the Wall Street Journal editorial page and President George W. Bush. Everyone else, it seems, is agin.

Maybe the aginners are right, and immigration is now damaging our country, stealing jobs and opportunity, ripping off taxpayers, fragmenting our culture. I doubt it, but maybe so. Certainly, it’s true that we can’t let in everyone who wants to come. There is some number of immigrants that is too many. I don’t believe we’re past that point, but maybe we are. In any event, a democracy has the right to decide that it has reached such a point. There is no obligation to be fair to foreigners.

But let’s not kid ourselves that all we care about is obeying the law and all we are asking illegals to do is go home and get in line like everybody else. We know perfectly well that the line is too long, and we are basically telling people to go home and not come back.

Let’s not kid ourselves, either, about who we are telling this to. To characterize illegal immigrants as queue-jumping, lawbreaking scum is seriously unjust. The motives of illegal immigrants–which can be summarized as “a better life”–are identical to those of legal immigrants. In fact, they are largely identical to the motives of our own parents, grandparents and great-grandparents when they immigrated. And not just that. Ask yourself, of these three groups–today’s legal and illegal immigrants and the immigrants of generations ago–which one has proven most dramatically its appreciation of our country? Which one has shown the most gumption, the most willingness to risk all to get to the U.S. and the most willingness to work hard once here? Well, everyone’s story is unique. But who loves the U.S. most? On average, probably, the winners of this American-values contest would be the illegals, doing our dirty work under constant fear of eviction, getting thrown out and returning again and again.

And how about those of us lucky enough to have been born here? How would we do against the typical illegal alien in a “prove how much you love America” reality TV show?

Best software error message EVER

This, you have to admire…

Via Gizmodo:




To summarize:

Microsoft Windows Vista’s Windows Problem Reporting app is reporting that it has a problem and can no longer report. However, it will report in the future if there is a fix to the problem that is preventing it from reporting, that will allow it to once again report.