Monday, June 16

Bias Alert: BusinessWeek & S&P - Brothers in shareholdings

Not many people may realize that BusinessWeek and S&P are owned by the same company: The McGraw-Hill Companies, Inc. This fact is disclosed in small, discolored font at the bottom of a story in BusinessWeek quoting...wait for it...S&P! In fact, ever since they became one company, BusinessWeek relies heavily on S&P for much of its perspective about the stock market and investing. There is not much problem with that except for a couple of small facts that people may want to consider:
1. This is basically free advertising for S&P. How many competing stock analysis services wouldn't love to be liberally quoted by the authoritative BusinessWeek? No doubt this drives revenues and customers for S&P that could go to alternative providers. Providers that might be better than S&P.
2. S&P may suck at investment analysis. Seriously, how did they do with rating CDOs and SIVs? Exactly.
This is what you call machinery of the market but I'm not sure this machinery works for anyone but McGraw-Hill shareholders. It certainly didn't work for investors in AAA-rated real-estate CDOs and SIVs!

Update: I didn't realize this, but S&P also owns an exchange for ABS' called ABSXchange! So they're making money on all sides of the structured securities market...sounds like motivation to rank structured securities highly to me. (How many people would want to buy securities that are rated junk? Not as many that want to buy investment-grade.)

Appearances can be deceiving (Great investors often do not seem the part...)

I came across an interesting passage in an article discussing John Paulson (and George Soros) today. (John Paulson is the hedge fund guy that predicted the subprime collapse and made a TON of money betting against the bull real estate market early.) The passage reads as follows:
"John did not make a strong immediate impact, but one comes to realise that great investors do not need to be good at presentations. George Soros is a prime example; he often ums and ahs and meanders away into unrelated areas before making his point. That sort of thing can obscure the impression that one might be in the presence of an investment genius."
This comment highlights one of the flaws that humans use to judge potential performance of others -- namely, that they are highly influenced by superficial heuristics. I've found that the most intelligent investors I know are not declaratively forceful (direct and to the point). I think this is because they understand that investment analysis is very complex and involves many turns of logic before arriving at a good investment decision. The world is not black and white and in investing, you're really betting on probabilities at the end of the day. When people try to simplify the process, they usually miss the critical factors and make a bad decision.
So, as a result of his comment, I'm a little skeptical of David Craig's capabilities. But then again, I'm reading this in a news outlet, so maybe the truth is different than what is being reported. And I'm amused that he would criticize George Soros for "uhming and ahing" when speaking. This is pure Baby Boomer "Dress for Success" superficial rules for evaluating others at work. Or should I say: at "not" work.

Friday, June 13

Dare I take the NAR's side??? OFHEO - Case-Shiller Discrepancies

As a defender of good data makes good conclusions, I find myself in the uncomfortable spot of agreeing with an opinion piece put out by the National Association of Realtors (NAR). This opinion piece starts to get at the real problem with Case-Shiller's data. I would argue that the Case-Shiller indexes have far too high of a bias towards subprime loans which heavily skews the data.
They link to a paper created by OFHEO that tries to reconcile their results to Case-Shiller's. I'll report on any findings after I've had time to digest.

CalculatedRisk picks up on the data mess...

CalculatedRisk, a blog that riles me up with their usual one-sided view of the market, points out the fact that the government is dealing with bad data. Granted: this post highlights that data manipulation can go both ways. As bad as Case and RealtyTrac are to the downside -- NAR, MBA and Hope Now tend to skew to the upside. Should we just average their results to get to the real data?
Which just highlights the need for real, objective data issued by professionals with no skin in the game. I raise this point because it's scary to think that our government is making policy and regulations based on skewed and biased data. What happened to their own data collecting capabilities? Expect more analysis of this topic in the future...

RIP Tim Russert -- One of the good ones...

I just launched this blog railing against bias and misinformation in the news. Unfortunately, one of the straightest shooters when it comes to politics, Tim Russert, just died today of a heart attack. I'm not much of a politics guy, but when I tuned in, I turned on Mr. Russert. His skillful questioning of both sides of the aisle was an asset to the American public that will be sorely missed...

Debunkr Debut (or "Why Case-Shiller and RealtyTrac are evil!")

Hello world! If you've come to this blog it's likely because of a link I've made to various other news items or blogposts discussing various economic, business or financial related topics. I'm sick and tired of seeing so much mis-information being passed to the public without any informed critical thinking applied to it. The news continues to pass along data and information from sources that are biased with conflicts of interest. Consider the recent spate of press about real estate foreclosures that are basically pass-throughs of press releases by S&P/Case-Shiller or RealtyTrac.
What's the problem? Well the problem is that both of the organizations make money by selling "data services" to investors. The conflict of interest comes in the fact that they probably sell more of these services based on two things: 1. The extreme nature of the market, and 2. How much publicity they get. What's the best way to get publicity? How about publishing biased data showing that the market is going to hell in a handbasket? They get so much press from their P.R. about the real estate market that they have become the de facto sources and the entire market is using for gospel. The underinformed general public takes this stuff as the whole truth and is believing every second of it. This is creating panic in the market and hurting otherwise intelligent, solvent and informed home owners.
Unfortunately, I am not a fan of biased data. I prefer objective analysis based on sound analytical techniques and comprehensive data sets. I can argue that Case-Shiller and RealtyTrac offer neither.
I am not here to argue that everything is okay in the real-estate world. I think that prices may decline significantly in certain areas of the country. However, I do not think that real estate prices are going to fall on a wholesale basis across the country. I believe that real estate, like politics, is local. There are different factors effecting each home and lot across the country that will make the price go or go down. Just because idiots overleveraged in certain areas of the country (I'm looking at you Stockton, Miami, Phoenix, Modesto and Las Vegas!), doesn't mean that Atherton, Manhattan, Seattle or many other areas will suffer the same fate. And I'm really pissed that the media can't stop painting the entire U.S. with the same broad brush.
If you talk to people who are actually buying and selling, there are many healthy areas in the country and the reality is that most housing prices are not down 30%+. Maybe some people are a few percent down here and there, but most houses weren't bought and sold 2005-2007 with toxic financings. Most houses are owned by people who have lived in their places for years with good old fashioned 30-yr fixed mortgages. But that's not something that the sensationalist media is going to tell you about. They would rather focus on a small minority of people who are facing disaster because of very poor personal finance decisions. Extrapolating the minority to the majority is dangerous because you'll do things like cause people to spending, slow down the economy and allow regulators to create horrible regulations that make small problems larger and create problems where there were none before.
If you're thinking this will be a real estate only blog, don't fret, real-estate is only the latest in a long line of financially-related topics that I plan on discussing. Please, please, please add to the conversation in the comments. If I have data wrong or if you have additional data that supports my argument, then by all means, let us hear it!