Are stocks undervalued?

Historically, the difference between the earnings/price ratio for stocks and the 10-year bond yield has been 1.75% (see figure above taken from our textbook). In our book we show how this can be used to determine whether stocks are under-valued relative to bonds.

Historical relationship: US 10 yr Note Yield - SPX EP Ratio = 1.75%

Current relationship: 3.77% - 4.23% = -0.46%

The model implies that equities are historically undervalued relative to bonds.
DISCLAIMER: If I really knew how to make money, I wouldn't tell you.

Can price discrimination survive competition?

Nice article by two economists from the Boston Fed shows that when Midway Air (green dots) and later Southwest Air (chartreuse dots) entered the Philly<-->Chicago route, United Airlines price dispersion collapsed. This is consistent with the theory that price discrimination cannot survive in a competitive market. Curiously, ATA entry (blue dots) had a much smaller effect on United prices.

We cannot tax ourselves out of this mess

Federal tax revenue looks remarkably independent of tax rates. If we raise tax rates, tax revenue doesn't seem to change.

Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity ... .

Gen Y entrepreneurship

...is on the rise:

• Half of all new college graduates now believe that self-employment is more secure than a full-time job.
• 60% of Gen Y business owners consider themselves to be serial entrepreneurs
• 18 to 24-year-olds are starting companies at a faster rate than 35 to 44-year-olds.
• 70% of today's high schoolers intend to start their own companies,

Politicians respond to incentives

13 of 25 Democratic Legislators voted to extend the Florida voucher experiment:

What's encouraging is that these parents have managed to convey their pro-choice sentiments to their representatives, who are responding even though voucher programs infuriate powerful ... special interest groups like the teachers unions.

ONN: historic video rentailing museum

Video satire from the Onion News Network, who likely would have mocked the FTC for its antitrust concerns about mergers in video rentailing (see Blockbuster-Hollywood Video: Where are they now?).

Government Outsourcing Not Always the Answer

It hardly seems controversial to claim that the government isn't always the most efficient provider of services. And, you've probably heard plenty of calls for the government to outsource more of its work (perhaps even a few on this blog). But, outsourcing doesn't always work out so great.

A recent article in The Washington Post describes how the IRS has outsourced the collection of unpaid tax accounts to three private agencies. The program has been far from successful with the private companies collecting amounts rougly half of what it has cost to implement the program.

Competition between States is good

Tort reform has induced 7000 MD's to move to Texas, many from Tennessee:

In 2003 and in 2005, Texas enacted a series of reforms to the state's civil justice system. They are stunning in their success. Texas Medical Liability Trust, one of the largest malpractice insurance companies in the state, has slashed its premiums by 35%, saving doctors some $217 million over four years. There is also a competitive malpractice insurance industry in Texas, with over 30 companies competing for business. This is driving rates down.

Is there a commodities price bubble?

What economists know about price bubbles is precious little:

1. Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.
2. Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.
3. Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.

Most importantly, they can't tell me when its going to pop.

Still wrong after all these years...

The father of "finite resource" or "fixed pie" economics:

Malthus got his demographic as well as his economic predictions wrong. His assumption that populations would carry on growing in times of plenty turned out to be false. Starting in Europe, one country after another underwent a “demographic transformation” as economic development brought greater prosperity. Both birth and death rates dropped and population growth eventually started to slow. ... If the world's population growth was a false concern four decades ago, when it peaked at 2% a year, it is even less so now that it has slowed to 1.2%.

Canyoneering

Guided by Rick Green, Excusions of Escalante.

Dell-Alienware: Where are they now?

In 2006, Dell acquired the leading manufacturer of gaming computers, Alienware. The idea was to use Dell's supply chain to manufacture and sell the Alienware computers, keeping the marketing and product design of the high end gaming computers in a separate division under the Alienware brandname. Recently some conflicting product announcements came out saying that Dell would pare its own gaming line to reduce cannibalization.

Dell Inc. is taking a surprising step to reinvigorate its business in specialty gaming personal computers: abandoning several of its most popular models to focus on what it sees as its premium line.

The new strategy is part of Dell's broader turnaround effort. Last year, it slipped behind bigger rival Hewlett-Packard Co. in overall PC sales and is struggling to achieve profits in consumer PCs. Gaming PCs -- high-priced machines made specifically for playing games -- are a niche market, but tend to shape PC design trends and influence mainstream buyers.

Blockbuster-Hollywood Video: where are they now?

In past blog entries we have tried to follow up on abandoned and consummated mergers to find out what happened. (See What happened after the FTC blocked the Heinz-Beechnut merger?).

In 2005, Blockbuster abandoned its proposed acquisition of Hollywood Video during an FTC antitrust investigation. The target, Hollywood Video, resisted the acquisition, and was acquired by Movie Gallery which entered bankruptcy in late 2007. Now, BBI is looking to acquire Circuit City:

Rationale for deal: Synergy w/real estate, buying power, "cross-merchandising" opporutunities. Preloading devices with movies, subscriptions, etc.

BBI just reported Q1 2008 results:

...We are particularly pleased that domestic same-store revenues showed an improvement for the first time in five years primarily as a result of several initiatives we have put in place, including an increased availability of top new movies, improved store merchandising and more effective pricing.

Some commentators think that the FTC should have quickly approved the merger.

anti-trust regulators often miss important shifts in rapidly changing markets such as video and entertainment.

DISCLAIMER: I was Chief economist at the FTC during the investigation.

Butch Cassidy's hideout

Robbers Roost Ranch was one of Butch Cassidy's hideouts. Guide Rick Green (Excusions of Escalante) just found these carvings in the San Rafael Swell. Canyoneering with Rick is a blast.

Insurers won't pay for medical errors

"Imagine remodeling your kitchen and paying the contractor extra to fix your garage door because he backed his truck into it." This article on perverse incentives from the father of managed care, Alain Enthoven:

WellPoint, Cigna, and a number of other major health insurance companies announced last month that they will no longer bear the extra costs of caring for patients harmed by any of nearly a dozen types of preventable medical errors. In other words, the doctors and hospitals that harm these patients will have to foot the bill themselves.