Oil prices falling

The Houston economy is still very affected by the price of crude. The price has finally declined below $50 to about $48.

As I love Houston, I do hope that the price of oil stays as a reasonable level long-term. However, sustained short-term oil price plunges create buying opportunities in the real estate market as the economy suffers. I'll be watching the price of oil.

Merck

Merck is trading at about $26 or $27. This is about a 75% decrease from the stock's January 2001 high.

Merck obviously has troubles. It faces expensive litigation even if it wins, and possible regulatory review. It has lost the earnings of one of its primary performers. According to rumors, Merck resumes are floating around the industry.

I still haven't done a thorough investigation of how I think the stock should be valued. However, my gut is telling me that the market is overreacting. Traders have a tendency to do this. The PE is 8.5, the dividend yield is almost 6%. Even if the price can only hold steady, 6% yield is pretty good.

Product lines for PR

This story makes me laugh:

Jones Soda Co. takes the idea of a liquid diet to a new low. How does Green Bean Casserole Soda strike you? And how about an aggressively buttery-smelling Mashed Potato Soda?

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Even the creators of the fizzy concoctions at this small Seattle soda company can hardly stomach the stuff. But last year's unexpected success of the Turkey & Gravy Soda means another round of bizarre food-flavored soft drinks.

As an added bonus, they're calorie-free.

This week Jones Soda Co. launches a full meal deal of five Thanksgiving soda flavors, from the bile-colored Green Bean Casserole to the sweet — but slightly sickly — Fruitcake Soda. Last year's Turkey & Gravy is also back on the menu.

I think this is a PR stunt.

Jones is a smart, quirky company. They make "gourmet" sodas, which are generally very tasty. I believe they are from the Northwest, and seem to love that quirky semi-hippie vibe from up there. Their problem isn't so much in keeping customers; it's in getting the distribution that allows them to go after customers. Jones isn't available many places so far, but I'm sure they'd like to build some brand recognition for places that they go in the future.

And look -- they've managed to get very good coverage. Most newspapers have picked up the story!

Probably last Vegas post

When you've been to Vegas for the first time, it makes you think. As I wrote yesterday, they turned one simple idea -- legal gambling -- into a huge enterprise. Today Las Vegas is a booming metropolis, but it has no industry. It is mainly populated by the people who work at casinos and the entrepreneurs who offer services to those who work at casinos. Plus some retirees who like warm weather, low cost of living, and gambling.

My guess is that Vegas provides an excellent opportunity for lower middle class of the West to get middle class service jobs. Then they have kids and the kids have the opportunity for social mobility. Given my experience, this seems particularly true for immigrants.

A couple of the suburbs looked pretty cute. I thought Henderson and Boulder City looked like a nice place to live. They were cute, suburban, and not far from some beautiful views. Living in the mountains is fun.

What I wasn't fond of: being a single guy on the street, you get mobbed by people trying to give you cards for hookers. I'm smart enough to not take things from people on the street.

I also had four different occasions on the street late at night of black guys my age walking up to me and saying in a low voice "chronic, man, chronic." Yeah... I've never done drugs and I don't think now is the time to start, buddy.

The glitz was also underwhelming to me, perhaps because I had my expectations raised by so many other people. I have to say though...it's amusing that even the McDonalds and Motel6 have neon flashing signs.

More Vegas

I'm not entirely sure of the history behind Nevada's gambling. It is obviously libertarian on gambling and prostitution. The Wild West generally had a pretty libertarian bent, in general.

I do wonder if the folks who originally made these laws envisioned the potential for business. Were they thinking like entrepreneurs? Or were they just degenerate gamblers?

Election over

With the election over, productivity can resume.

Personally, I know my productivity slumps significantly during election time. I keep politics out of this blog, but I'm a news junkie. When it's election time, I can't resist.

Being out of town was like being a fish out of water. I had no way to get my fix, and it drove me crazy. Then I got used to it for a few days. Still, I was glad to get home in time to watch the returns roll in.

I wonder how much employee productivity time is lost to election watching?

The Vegas Strip

Having never been to the Vegas Strip before, I always figured it was something like the downtown of a city. It's not.

The Vegas Strip is several miles long. That's quite a bit of real estate. Most of the casinos are huge parcels of the Strip. Not only do they have a quarter mile (obviously, this is towards the high end of the range) of land on facing the strip, but the property usually goes back quite a ways too.

Even on the most developed sections of the strip, there are still properties facing the strip that aren't very developed.

The point is: while longtime Vegas residents probably feel like the Strip is incredibly long, I predict that the Strip will continue to get longer and longer for the next few decades.

Out of town

Been out of town recently. Posting should resume imminently.

The new business - FSBOAustinTX.com

I haven't written nearly as much about the launching of the new business as I had planned. I just didn't feel like it was very interesting to talk about the details of getting started. However, FSBO Austin TX has now launched. FSBO = For Sale By Owner.

The internet has allowed people to take control over their real estate purchases. Previously, a seller had to contract with a realtor to sell their home and pay them thousands of dollars (generally 3% of the selling price). But the internet offers the opportunity for exposure without paying a real estate agent to get an MLS listing. For $200 (although we are giving away free listings right now), a FSBO seller can list for 6 months and have the exposure necessary to sell their house.

There are several national FSBO chains that generally don't appear to have been very successful. That's no surprise -- you don't want to list with a national website when you want visitors targeted to your area. Several local, targeted sites like FSBOMadison.com in Wisconsin have been a huge success.

Cutting out the real estate agent middleman also lets buyers and sellers increase their control over the process. In the biz blog world, Michele Miller has written about how frustrating it can be to search for real estate:

With the mantra, "Good things come to those who wait," my husband and I spent three years searching for a new house in Arizona. We put thousands of miles on the car and went through realtors like numbers at a New York deli counter. Armed with the real estate section of the local paper, each and every weekend was spent on the hunt for the "Open House" signs that matched the ads we'd circled in red ink.

That's what I love about this. Because of technology, people don't have to depend on an agent anymore, they can do it themselves and save money. FSBO isn't for everyone; some people don't have the time. But for sellers and buyers who want to save money and not surrender control, we're a good alternative.

We've got a fancy FSBO Austin TX yard sign too.

'Stros!

The Astros have won 3 in a row to lead the Cards 3-2 in the NLCS. Last night the game was scoreless until the bottom of the 9th, when Jeff Kent hit a walkoff 3 run homer.

There was talk about Clemens taking the mound for Game 6, but manager Phil Garner decided to give the nod to Pete Munro.

A wise move. Pitchers throw much much better on an extra day of rest. Clemens is over 40 years old, so the extra day of rest will be good for him. If the Astros win game 6, then Clemens can start Game 1 of the Series. And if they lose game 6, is there anyone you'd rather have on the mound for game 7?

Heinz CEO

The New York Times has an interesting interview with Heinz CEO William Johnson.

Among other things, he claims:

1. The Atkins fad never hurt sales.
2. The Kerry -- Heinz connection hasn't hurt at all. He hasn't tried W ketchup.

Interesting. I don't know if I buy it.

(link via Bainbridge)

Are people born lucky? Are some people luckier than others?

From Robert Rubin's memoir In an Uncertain World:

Anyone who is honest about having done well will acknowledge the enormous role played by chance.

I agree. I think some people are born lucky. Some people are luckier than others.

I don't actually believe that people are inherently luckier than others, but by virtue of a small sample size some people end up luckier than others.

How many decisions in life really matter? Sure every decision you make steers you towards some decisions and away from others, but only a few are really life changing.

For example, take standardized tests like the LSAT, which selective law schools prefer that you only take once. Once you get to a certain level, three or four questions can make the difference between acceptance to Harvard Law and getting rejected from Penn Law. Anyone who has taken a few LSATs will tell you that your score can easily fluctuate five questions on any given day.

Or to take a more egregious example, some people get rich due to winning the lottery. Over the long run, playing the lottery is a ridiculously negative expected value at almost any level -- especially once taxes are figured in (of course, even in the lottery there are often ways to give yourself a small edge). But some people get lucky.

This isn't to say that I think successful people got there due to luck. I think most successful (measured in financial terms) people are successful because of hard work. Even most rich kids don't have as much of an edge as one might intuit, as the rich kids' parents I know aren't willing to give them money. They'll pay for nice schooling, but after that they're on their own.

There are alot of factors in financial success of course. For example, career choice. Anyone who is smart enough and willing to work hard enough can go to law school and make a few million being an ambulance chaser.

This was very disjointed. Maybe someday I'll take these thoughts and organize them into an essay.

How Meriweather created loyalty

Meriwether obviously did a fantastic job of creating loyalty among his team. They were furious when Salomon sacked him, so they eventually jumped at the chance to join him at LTCM.

1. Brought in his own people. By being the first person to hire academics, Meriwether not only brought in the best in the business, but they were his people. Until Meriwether, they were academics who studied the issue. Then Meriwether gave them the opportunity to put their ideas into action and make a few million bucks.

2. Chose his traders over the firm. Salomon did a china service lunch for its partners, but Meriwether chose to eat with his traders. So every day a waiter would bring Meriwether a bologna sandwich, a TAB soda, and two apples under a silver dome. Every day Meriwether would give one of the apples to one of his traders as an "attaboy." The traders were soon competing hard for the apple.

3. Didn't make people work when they didn't need to. One of the great things about Salomon's group is that they didn't need to make every trade, just find a few very good trades. So they would take the time to leisurely discuss the merits of a certain position. Or they would gamble.

4. Encouraged gambling. As bestselling Moneyball author Michael Lewis wrote in Liar's Poker, the group played liar's poker constantly, both at work and not at work. When the group went out to dinner, they'd play liar's poker to see who picked up the check.

Of course, this was a good way to keep his trader's instincts sharp. What do you do in gambling? Assemble information, analyze it, figure out the odds, and pull the trigger. Same thing as in trading.

5. Group outings to compete. His group would frequently go -- and were expected to attend -- compete against each other. They'd go to the horse track together and place wagers. They'd go to Antigua with their families for yearly vacations. Day trips to Atlantic City. Betting on elections, sports. They bought a resort in Ireland to play golf. In Ireland, they devised elaborate betting pools on their scores.

How Meriwether started his team

As I explained about Meriwether in a previous post, the founder of Long Term Capital Management started most of his team at Salomon Brothers.

Meriwether had become a partner at Salomon by being a savvy trader, particularly in one instance. A different firm had taken a position that was nearly certain to pay off in the long run, but was declining and thus threatening the firm's leverage. Meriwether saw that the trade had to pay off in the long run and convinced the Salomon bosses to make the trade, for tens of millions at a time when total firm capital was only $200 million.

As Keynes said, "in the long run, we're all dead." And in fact, the trade continued to lose money for the next few weeks. The Salomon partners watched the downward progress of the trade. Meriwether insisted that they would eventually make money. The managing partner replied, "We better, or you'll be fired."

The trade eventually won money, and Meriwether became partner the next year.

Meriwether understood -- or so Lowenstein imputes to him -- that the heart of trading is gambling. It's simply finding bets where you have a positive expectation, and then rolling the dice. Successful gamblers look for bets where they have an edge, and then they exploit them as much as possible.

Meriwether's genius is that his edge was hiring the best. At a time when he was at the top of his field, he decided to recruit people even better than him. He hired academics who studied the subjects, but who no firm had ever thought to hire. He assembled a team that were the best. Two of his team -- Merton and Scholes -- eventually won a Nobel Prize for economics for the Black-Scholes theorem (which they had invented pre-Meriwether's recruitment of academics).

Meriwether liked to say that he never hired anyone who wasn't smarter than he was. Per Lowenstein:

One time, a trader named Andy who was losing money on a mortgage trade asked for permission to double up, and [Meriwether] gave it rather offhandedly. "Don't you want to know more about this trade?" Andy asked. Meriwether's trusting reply deeply affected the trader. J.M. said, "My trade was when I hired you."

Meriwether saw that trading at the time was dominated by intuition. As most gamblers -- and casinos! -- will tell you, intution can sometimes be very costly. Meriwether helped end the days of the intuitive bond traders. His vision helped turn trading into a model-based, rigorous analytical field.

Samuel Adams a Ukrainian?

Director Mitch writes of a story that claims Samuel Adams was Ukrainian.

I know the claim is all in good fun -- I think so, anyway -- so I don't know why I have to be the spoilsport. But what can I say, I am a spoilsport.

Research does not suggest that Samuel Adams was a Ukrainian:

ADAMS, Samuel, born in Boston, Massachusetts, 27 September 1722; died there, 2 October 1803. Among the grandsons of Henry Adams, the emigrant from Devonshire, were Joseph Adams, of Braintree, and John Adams, of Boston, a sea captain. The former was grandfather of President John Adams; the latter was grandfather of Samuel Adams, the statesman. The second son of Captain John Adams, born 6 May 1689, was named Samuel, and in 1713 married Mary Fifield. Of their twelve children, only two, besides the illustrious Samuel, survived their father. The elder Samuel Adams was a man of wealth and influence, tie owned a large estate on Purchase Street, with a noble mansion fronting on the harbor, and here the younger Samuel Adams was born.

I could be wrong, but I don't think there is a Devonshire in the Ukraine.

US makes it to finals of World Cup qualifying

The US beat Panama to assure themselves a place in the final qualifiers for the next World Cup, Germany '06.

Landon Donovan showed why he is a world-class player, with 2 opening goals.

Then Eddie Johnson came on as a sub, and scored 3 goals! The first US hat trick in qualifying since 1968. And as a sub in only his second appearance with the National Team!

The US will be a force to be reckoned with very soon in the world soccer scene.

Keynes

Robert Rubin reports that Keynes once reportedly said: markets can remain irrational longer than you can remain solvent.

LTCM forgot that.

Two other books I picked up

Two other books I pick up that are tangential to LTCM are Robert Rubin's recently published memoir and Michael Lewis' Moneyball.

I didn't realize all three were related when I picked them up. Lewis dealt with Meriweather -- head of LTCM -- in his first book Liar's Poker, while Rubin was part of Clinton's team that seemingly bailed out anyone and everyone, including LTCM.

Long Term Capital Management

Last night I read Roger Lowenstein's book on the rise and fall of Long Term Capital Management. I didn't intend to, but I started it and I couldn't put it down.

Long Term Capital Management was a hedge fund started by former Salomon Arbitrage Group head John Meriweather. Meriweather was one of the stars of Michael Lewis' Liars Poker, a book about the author's years at Salomon.

Frankly, the book -- especially the beginning -- made me want to go work for a hedge fund. I've emailed some friends with some questions, so we'll see where this takes me. I've dabbled in the market before, but I'm a bit of a dilettante.

Anyway, Meriweather was a bond trader at Salomon who became a partner by buying out someone else's big risk and then having that risk pan out well. He eventually recruited academics to Salomon, who brought financial models with them and relied heavily on the models. The academics were a big success, and Meriweather ran a loose ship at Salomon. He gave his former academics free reign, and eventually a rogue trader caused him trouble with the SEC.

After a 3 month suspension of his license, Meriweather started his own hedge fund, Long Term Capital Management. He brought along his most of his old Salomon group. These guys were very loyal to him, and all very big names. They were able to raise $1.25 billion, and started with a leverage to assets ratio of 30. Their goal: exploit market inefficiences wherever they found them.

They did very well, running that $1.25 billion way up, to the point where they had to give money back to their original investors. Eventually though, they took some foolish risks and went broke. The fall of LTCM is much less interesting than the rise -- they had to get the Fed Reserve to push 25 Wall Street banks to bail them out.

Meriweather and group are now in a new hedge fund. If at first you don't succeed...well, in this case start a new hedge fund and raise $250 million.

Fascinating story. I imagine this will inspire some other posts.

Clutch City! Bring on the Cards!

The Houston Astros win their first series!

Yeah, the franchise is 43 years old, but it's still sweet. It was the deciding game, the Braves had narrowed the game to a 1 run lead...and then the Astros scored 9 consecutive runs.

The Killer B's -- Beltran, Bagwell, Biggio and Berkman -- were all clutch. Beltran had 5 RBIs and homered on two consecutive at bats.

I'm not much of a baseball fan, but it's exciting to see the Astros play the Cards. The Astros are really a feel good story right now -- written off for dead, they ended the season 36-10 to squeak into the playoffs.

And the Yankees are playing the RedSox. That's an intense rivalry. Having been to Boston around the beginning of the season, it was amazing to me how intensely Bostonians loved their RedSox.