Monthly Archives: December 2012

Wall Street Journal on internet pricing

December 24, 2012 By in economics, Industry Analysis, Retail Tags: , , , , , Leave a comment

The Wall Street Journal has an interesting, if somewhat disorganized, front-page article today on how internet retailers vary the prices and the selection of goods they offer to different customers.  The article addresses several different topics, which it doesn’t clearly distinguish:

—different pricing in different countries.  Who doesn’t do this?

—dynamic pricing, where prices of goods or services change depending on time and the availability of inventory.  Airline tickets  or hotel rooms are the model of this type of price change.  There have also been attempts by bricks-and-mortar stores to vary pricing by time of day, so that a gallon of milk costs 50% more at midnight than at noon–though I’m not aware of a single successful experiment of this type.

—customer assessment.  Four aspects:

—-The merchant uses the IP address of the customer as a proxy for zip code and offers different merchandise based on area demographics.

—-The merchant offers different merchandise depending on the device the customer uses to access the site–phone, tablet, PC.

—-The merchant offers different merchandise or pricing based on how the customer arrives on the site–mobile app, social media, search engine.

—-The merchant varies merchandise/pricing depending on the customer’s on-site behavior.

—proximity to bricks-and-mortar alternatives.  Here the online merchant varies pricing, based on how far away the customer is either to its own bricks-and-mortar store or to those of its rivals.

 

The first three of these seem to me to be staples of traditional retailing.  So it’s hardly surprising that once enabling technology became available these tactics would emerge in the online world.

The fourth is the problematic one.

There may be legal or ethical problems with charging higher prices in poor or rural areas where bricks-and-mortar alternatives aren’t readily available.  It seems to me, though, that this pricing behavior trains consumers not to use the sites of these merchants but to automatically go to online-only merchants like Amazon instead.

trading between now and yearend

December 21, 2012 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Trading Tags: , , , , , , , Leave a comment

Practically speaking, 2012 is already in the books for investment professionals around the world.  Many are already on vacation.  Many global stock markets will be closed for most of the handful of business days between now and December 31st–Wall Street being a notable exception.  On days that markets will be open, trading volume will doubtless be very light.

Is there anything useful we can do as individual investors during this deadest of all trading weeks?     …other than celebrating the holidays and resting up for the challenges of 2013, that is.

Yes, there is.

1.  If you haven’t done so already, check the year-to-date tax position in your brokerage account.  You may want to consider either selling losers to minimize taxable gains or winners to lessen realized losses.

I believe very strongly that transactions driven solely by taxes are invariably a bad thing.  But I also think that tax considerations can be a useful way of overcoming one’s psychological aversion to admitting a mistake (every rookie professional’s biggest stumbling block) and thereby be an excuse for exiting a bad investment.  Yes, it would be better to man up and just sell the loser, without rationalization.  But the most important thing is getting the weak stock gone.

2.  the “window dressing” phenomenon.  I guess there really are professional portfolio managers–most of them soon to hit the unemployment line–who buy trendy stocks to “dress up” their portfolios so they’ll be cosmetically more attractive right before meeting with their customers.  And there may be financially illiterate customers who are fooled by this.  But that’s not really what I’m talking about.

There’s also a type of illegal stock manipulation of small-cap stocks on the next-to-last or last trading day of the year that is euphemistically called window dressing.   The stock “magically” rises (or falls, if a short-seller is at work) ten or fifteen percent, often in the last half hour of trading–in a way that helps a manager, or group of managers, achieve a higher performance-based bonus.  Nowadays, this most often happens in smaller markets in the EU or in the Pacific.  But it also happens in the US on occasion.

In my experience, this is always a good chance to sell.  The stock in question invariably crashes back to earth the first day of the new year.

3.  the fiscal cliff.  As I’m writing this, the S&P 500 futures are down about 1.5% on worries that Washington won’t reach an agreement to soften the economic damage from already legislated tax increases and government spending cuts slated to go into effect on January 1st.

It’s possible that politicians are even hoping for a 5%-10% stock market decline to give them the political “cover” they feel they need in order to justify compromise to the ir constituents.

In my view, 1.5% isn’t enough to act on, but a larger decline would doubtless an excellent opportunity to buy a stock you want to own, but think is too expensive–or to add to a position you have strong conviction in but think is too small.

special dividends and (in)efficient markets

December 20, 2012 By in "carrying" the dividend, Current Market Thoughts, Dividend Discount Model, Dividends, double taxation, Recent Market Action Tags: , , , , , , , Leave a comment

As I’ve already blogged about, many US companies are paying large special dividends to shareholders before December 31st. Either that or they’ve accelerated payouts planned for 2013, distributing them this year instead.  The idea is to avoid the presumably much higher taxes the IRS will be levying on dividends next year.  Some companies, like COST, appear even to be borrowing money to fund distributions.

The after-tax value of a dividend payment in 2012 to a taxable shareholder is likely greater than one made in 2013.  In addition, it may be possible to manufacture a tax loss from the transaction as well–something that would add another bit of extra value.  So it’s not surprising that stocks paying special dividends should be strong performers in advance of the day they start trading ex dividend.

I’ve been noticing another feature they seem to have, however, that I hadn’t anticipated.  The stocks appear to be “carrying” a large part–and in one case I’m aware of, all–the special dividend.  Here’s what I mean:

If a company’s stock is trading at $100 a share the day before it goes ex a $10/share dividend, then in a flat market you’d expect the stock to drop to $90 when ex trading commences the next day.  But the current crop of special dividend stocks aren’t acting true to form.  They’re trading at $93 or $95 or higher instead.

What could be causing this behavior?

I haven’t seen any cases where important news breaks on the day the stock goes ex.  The only thing that I can see is that a buyer is no longer entitled to the special dividend.

I have only one explanation, and a semi-crazy one at that.  I’ve concluded that buyers don’t know that the stock has paid out a large dividend.  Buyers think instead that the stock has just made a large downward random fluctuation that makes it an attractive purchase.

I have two thoughts:

–what I’ve just described could never happen in an efficient market, which tells you something about how much attention Wall Street is currently paying to stocks; and

–I wish I’d thought of this possibility before companies started paying special dividends, rather than when they’re finishing up.

more on the CPI–Laspeyres vs. Paasche

December 19, 2012 By in Consumer Price Index (CPI), economics Tags: , , , , , , 1 Comment

the current CPI

As I wrote yesterday, the CPI is a Laspeyres index.  That is, it takes a fixed basket of goods and services from a base year and calculates the changes in the total cost of that basket over time. A Laspeyres index always overstates the effect of inflation, however.  That’s because it doesn’t take into account the fact that people respond to price changes in some things by switching to less expensive substitutes that let them maintain the same lifestyle at lower cost.

The government thinks this overstatement has historically been about 0.2% per year.  The Social Security Administration estimates possible future overstatement to be about 0.3% annually.

Actually, the situation with the CPI is slightly more complicated.  Since 1998, the Bureau of Labor Statistics has been using a method that allows it to adjust the CPI if it sees, say, the price of Fuji apples rise and people switch to cheaper Honeycrisp instead (the government collects price data on over 80,000 items and includes regional price variations as well).  But it won’t adjust if people stop buying apples and switch to bananas.  So the practical effects of this index improvement have been small.

The BLS also computes a CPI for the elderly, using the same methodology but using a basket of goods and services that senior citizens surveyed say they use.  Those prices appear to be rising at 0.1% a year faster than the CPI itself.

a Paasche index is a non-starter

Paasche indices start with the current basket of goods and services that people use.  It works from the present back to construct an index of past price changes in the current basket of items.

A Paasche index tends to understate the effects of inflation because it assumes that on day one of the period being considered consumers instantaneously respond to all price changes that will occur over the period.  Hard to do if the price changes haven’t happened yet.  Also, not much practical usefulness, since the index data are only available after the fact.

a chain-weighted CPI

That’s what the current discussion in Washington is about.  It enables the BLS to adjust the CPI on the fly to shifts in consumer buying patterns based on price-driven substitutions.  The BLS has had a chain-weighted CPI up and running since 2002.  But until now the possible savings in Social Security payments hasn’t seemed to Washington worth taking on a powerful lobbying group like the AARP or the (misplaced, in my view) ire of senior citizens.

the role of the Consumer Price Index (CPI) in Social Security …and in a lot of other things

December 18, 2012 By in economics, fiscal cliff, Uncategorized Tags: , , , , , , Leave a comment

The CPI…

The CPI, produced by the Bureau of Labor Statistics of the Labor Department, is the government’s attempt to measure the change in the prices of goods and services paid by urban consumers, who make up 87% of the country’s population.

The CPI is the result of extensive data collection efforts, both from consumers to find out what items they buy and from retail outlets to determine how the prices of those items change.

The CPI is everywhere.  It’s used to determine the annual cost of living adjustment for Social Security, as well as for COLAs in government and private retirement plans.  It’s often used for the same purpose in labor contracts.  It’s also used by the IRS to adjust Federal income tax brackets for inflation and to set threshold levels for public assistance programs like food stamps.

The CPI is now in the spotlight as a bone of contention in the debate over reduction in entitlement benefits, as a way to close the large Federal budget deficit.

…is a Laspeyres index

This means it investigates what consumers buy during a base period (for the current CPI, it’s 2007-08) in order to arrive at a fixed basket of goods and services that it regards as typical. It calculates the total cost of the basket.

From that point on, it periodically checks with retailers to get current prices, using them to update the cost of the original basket.  The ratio of the total cost in today’s dollars of the basket, divided by the cost of the same basket back in 2007-08 is the current CPI value.

What’s wrong with that?

It depends on your perspective, I guess.   But as economists knew, even when the CPI was introduced as the COLA mechanism for Social Security in 1975, the Laspeyres method systematically overstates changes in the cost of living.

That’s because it ignores the fact that consumers constantly change their market basket of goods and services as the prices of items go up and down.  They react to higher prices by switching to less expensive substitutes that they may be perfectly happy with.  The result of this substitution is that the rise in the price of a given item in the original basket doesn’t necessarily mean a rise in consumer expenditure.  But the CPI acts as if it always does.

examples

Suppose, for example, the BLS determines a family buys 10 pounds of chicken meat and 10 pounds of turkey.  Family members don’t really care which they eat.  If the price of chicken doubles and that of turkey remains unchanged, the family will stop buying chicken and buy 20 pounds of turkey instead.  So although the price of chicken has gone up the family’s food expense hasn’t.  Nevertheless, the CPI registers an increase.  The same for hamburger and turkey burger.

Or suppose the price of gasoline goes up and you join a carpool.  Or you buy a Hyundai instead of a Toyota.

Or you get fed up with cable and use Netflix and Hulu instead.

The CPI doesn’t pick up any of this.

a too-high COLA adds up

The Social Security Administration figures that using the current CPI upwardly biases cost of living adjustments by about 0.3 percentage points per year. Put another way, the 1.7% increase in benefits penciled in for 2013 should really only be 1.4%.  The rest is gravy for retirees.

Removing that upward bias from yearly Social Security COLAs would reduce total payments by an estimated $200 billion in the first decade.

the thin edge of the wedge?

Personally, I don’t consider this change in the way the cost of living adjustment for Social Security is calculated to be a big deal.  That’s because the use of the CPI has been the dirty little secret of legislators, Social Security recipients and labor negotiators for decades–although don’t try to tell that to a recipient.

Arguably, if a change to a more accurate cost of living measure for the Social Security COLA helps set the US back on a sounder fiscal footing, the subsequent rise of short-term interest rates to normal levels will benefit anyone with savings, especially seniors.

But once Social Security adopts another measure for COLAs, this sets the stage for replacement of the CPI elsewhere.  So the fight over Social Security may be more acrimonious than this program alone would warrant.