Thursday, September 4, 2014

How does internet advertising compare to other industries?

Quick trivia question:  Which of these has the most annual revenues?  NFL football, the video game industry, the movie industry, Exxon Mobil, or all internet advertising?  I started looking into this because I was trying to get a sense for the internet advertising business, since so many relatively new, very large market cap companies rely almost entirely on internet advertising for their profitability (e.g., Facebook, Google, and Twitter).  I was also just generally curious about different media and which is more significant.  So the answer is, Exxon Mobil, by a long way.  Internet advertising is approximately $43 billion a year.  Exxon Mobil did $397 billion in revenues alone.  Number 2 on the list is actually the video game industry, clocking in at $93 billion a year.  Movie sales are a paltry $11 billion a year, and NFL football is $9 billion a year.  

I thought the video game industry was pretty big, but I did not expect it to be 10x larger than the movie industry or the NFL.  Also interesting, Exxon Mobil makes about 9 times more in revenue than the entire internet advertising industry, yet the market capitalization of Google is about the same as Exxon Mobil.  Of course more goes into valuing a stock than its revenues in a given year, but it is still food for thought.

Wednesday, June 25, 2014

Quote of the Week

If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion. - Hayek

Tuesday, June 24, 2014

The great William Safire on Hilary Clinton

As Hilary Clinton is making the rounds and professing to have been "dead broke" and "not truly well off", I was reminded of William Safire's article on Mrs. Clinton in 1996 in which he wonderfully referred to her as a "congenital liar".  The article is below.

Thursday, April 3, 2014

Making Sense of the “Markets are Rigged” Nonsense

Michael Lewis has a new book that is gaining a lot of attention this week, especially since 60 Minutes ran a promotion of it, and when asked on that program what the punch line is from the book, Lewis responded with, “Markets are rigged”.  The subject of this book and Lewis’ ire are high frequency traders, who use market buy and sell information to make lightning fast trades to make pennies on transactions.  But I think some perspective is in order. 

First, Lewis claims that these firms have made “tens of billions of dollars”.  Let’s accept that claim (even though it is likely he is excluding the firms who have also lost significant sums with these types of trades).  The U.S. stock market has increased approximately $12 trillion in value since the lows of the economic crisis.  If we add back in the amount that Lewis claims high frequency traders have made at other investors’ expense, the value increase would have been $12.05 trillion (taking the midpoint of $50 billion for Lewis’ approximation) without high frequency traders.  $12.05 trillion vs. $12.00 trillion.  I am not exactly outraged.  And if you take his comments to mean you should get out of the market, consider how much wealth creation investors would have missed if they concluded markets were too rigged against them.

Also, Lewis talks about the “front running” that these traders do, although front running is illegal, and the high frequency traders are not accused of doing anything illegal.  But the basic argument is that they know you are going to buy a stock, and so they buy it in front of you and sell it back to you for a higher price.  An analogy on the program is given using buying tickets for a show, whereby you want to buy 4 tickets to a show all at $20, but after you buy 2 tickets, the price of the other 2 goes up to $25 before you can complete the purchase (since someone saw your demand for the first 2 tickets).  The problem with this example is that the difference in prices for stocks is a penny or two, not $5.  Lewis says as much in the 60 Minutes advertisement.  So, if you bought a stock 7 years ago at $50 and sell it today for $100, your profit could have been maybe $50.03 instead of $50 without high frequency traders.  You are not exactly getting ripped off.  Funny enough the investors who get hurt the most are hedge funds who might trade more frequently or other slower high frequency traders.  Are Lewis and 60 Minutes really trying to make people feel bad for hedge funds?

And finally, all of this ignores any potential value that these traders provide in terms of added liquidity to markets.  While the amount of that value may be debatable, assuming it is zero is clearly misleading.

So does this mean it is not a problem at all?  Maybe, maybe not.  Obviously if something is being done illegally, that should be stopped.  But this is not a significant concern given the size of financial markets, even if you want to argue they add no value.  If you really want to get outraged, consider perhaps the 1% or more in fees an actively managed fund charges EVERY YEAR for providing returns that are no better than if you bought an index fund.  This is a far bigger drain on the average investor.  But if you are a buy and hold investor in stock index funds, you have nothing to worry about.

Thursday, February 6, 2014

Are robots responsible for high unemployment today?

What if I told you there was an industry that currently makes up 30% of the workforce, but in 20 years it will make up only 20% of the workforce, and in 50 years it will make up only 2% of the workforce.  This will happen because machines are being developed that are much more efficient at producing the output from this industry.  Many people who work in this industry will not immediately have the skills that other jobs require.   And then what if I told you that there was a job right now that employed close to 1% of the workforce, but that would drop to 0.1% in 40 years due to new technology again.  This would have to lead to more unemployment, right?   What is this industry?  Agriculture, circa 1935.    What is the job?  A telephone operator, circa 1960.

Many people like to blame robots replacing jobs as the reason for continued high unemployment.  These are usually politicians on the left or those predisposed to leftist ideas (e.g., academics) who don’t wish to face other realities.  The fact is, we have experienced several waves of changes in technology in this country, and each time we have survived and maintained low levels of unemployment.  In the case of the change in our country away from agriculture and telephone operators, those jobs were replaced with jobs in other growing industries (e.g., leisure, health care, technology) and professions (e.g., entrepreneur, teacher, nurse, cook, and accountant).   After those changes occurred, unemployment in the United States was around 4-5%.  The economy had no problem adjusting.  If robots are currently replacing jobs, this time will be no different.  Other industries will grow that will use the excess labor.  What is different this time then, that explains higher levels of unemployment?  The main thing that is different in the last several years  compared to those other times in history is that we have unprecedented levels of regulations, from Obamacare, Dodd-Frank, and the EPA, which stifle new business development and job creation.  We had low unemployment in this country for a solid 20 years leading up to last few years.  Innovation is not to blame for today’s problems.