WSJ Weekend Business in Brief

Behind the Boutique Kristina Nissen Wall Street Journal

If I had a dollar for every time I couldn’t get to my morning paper, my retirement fund would be the least of my concerns. Sometimes I just look at the paper folded on my kitchen counter and remember a time I actually got to it almost every day. Those days are gone.

Alas, I got to the business section this morning and now I’m bringing it to you in summary form because you probably don’t have time for that shiz!! Enjoy and hopefully you’ll learn something random about a company you use every day 🙂

Why airlines overbook your flights:

Overbooking flights is not an accidental oversight. It’s a strategy; and it’s pretty common among most airlines. There’s a calculation of the probabilistic chances of vacant seats on your plane, and there’s a strategy to offset those chances with overbooking. Somebody somewhere is making the calculated decision that the benefit of this strategy outweighs the potential downside. Physical altercations and widespread negative publicity most likely aren’t in their risk models, but alas, it still occurs. Southwest has pledged to stop doing this, JetBlue allegedly never did, and United is still on a cigarette break.

Apple in a boxing match:

Apple makes phones, but not all of the components to those phones. Specifically, they get chips from Qualcomm; who Apple says (in a far more diplomatic fashion) was screwing them with pricing. In retaliation from a previous agreement, Apple has refused to reimburse their manufacturers (who license the chips from Qualcomm), and Qualcomm had to revise their earnings estimates downwards as a result. Shares were down about 2%. Fun!

GM is saved by Merica’!

Merica’ comes in to save the day for GM (again?!)!! We like our trucks and we like them big… so much that we’re offsetting declining sales in China, shrinking car demand, and financial loses in Europe. You’re welcome, GM.

“Smart Beta” should be smarter, dammit!

I’m speaking for him, but Rob Arnott is annoyed that investors are screwing up his beautiful factor tilting strategies because they’re trying to be clever timing the market rather than investing on sound factor principles (which leads to overpricing and then subsequent mean reversion that is unrelated to the underlying factor). Let me give you a simpler analog: Some people buy shares of Amazon today because they think it’s good timing. They didn’t necessarily do research to determine if the stock was over or undervalued, they just bought it because “Dammit, we use Amazon Prime and look how well the stock has performed!!”. Then there’s investors who took the time to do research. They know it’s valued correctly, so they buy. If too many of the former buy the stock, then the price of Amazon rises beyond what it’s “fundamentally worth”. That excess pricing is a problem if there’s no real reason for it; specifically because it will eventually fall in an efficient market. You don’t need to know the complexities of what Rob is doing, but in my example, he’s analogous to the CEO of Amazon being like: Our stock price is falling because those crazy people bid it up too high, not because I didn’t know what I was doing.

Consumers are credit happy and some card issuers aren’t happy about it:

They’re not happy about the unpaid balances I mean. Synchrony Financial, the nuts and bolts financial company behind other business’s credit and loyalty programs, reported lower earnings than expected because they had to set aside more money to cover losses. What does that mean? It can mean that lending standards got too loose (“have a higher credit limit for no reason!”) and/or consumers are taking on more debt than they can actually pay back. Capital One and Discover were also hit. Visa and Mastercard avoid the battle for now because they’re not lenders… their revenues come from transaction fees from merchants. Well played.

Investors are drunk and overestimating returns:

Survey says wealthy individual investors expect their investment portfolios to earn 8.5% a year after inflation. Holy smokes! Do you own bonds in this magical portfolio or are you allocated exclusively to Bobby Axelrod? Haha, I kid (please laugh with me). From 1950 to 2009-ish, stocks have returned an average of 7% a year. I’ll save you the suspense, these guys aren’t all in stocks. They have some money in bonds (average return of 2.5% a year) and a portion goes to alternative investments like real estate or hedge funds… but 8.5% a year becomes difficult to calculate unless you’re allocating more to riskier assets.

Time magazine:

The magazine with awkwardly invasive close-ups of peoples’ faces is in trouble but they want to try to fix it themselves. TIME magazine announced they are no longer going to try and sell itself, rather fix their troubles themselves. Evidently investors have less confidence about the idea because the stock plummeted 17% on the news. Declining circulation of print is at the root of their troubles. Buy 100 subscriptions to TIME if you’d like to help 😉

There were a few others but I’m spent.

Did you learn anything random?! Have a great day!!!




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