Analyzing the usage patterns on how users consume news content, the report concludes that less and less users are actually going to destination sites of publishers and instead are consuming content on so called aggregator sites (e.g. Google News etc.).

The report states “Though Google is driving some traffic to newspapers, it’s also taking a significant share away. A full 44 percent of visitors to Google News scan headlines without accessing newspapers’ individual sites.”

The report states that users are more likely to turn to an aggregator (31 percent) than a newspaper site (8 percent) or other site (18 percent).

The problem with aggregators such as Google News is however, that the publishers, thought providing their content to aggregators, are not participating in the revenues generated.

We at kikin believe that it is crucial to bring the content to the user rather than thinking the user would come to the destination site – which this study shows users do less and less often. We call this the ‘User Centric Web’ – let relevant content come to me rather than force me into silo’ed web experiences.

BUT: Publishers should be in control of how their content is displayed when it is served ‘offshore’ (i.e. outside of the publishers site) and publishers should be in control of how they monetize their content in such cases.

kikin is offering exactly that to publishers.

This post is about the Stock Market. Thoughts about inflation and commodities to follow later, even though all of these are connected, which makes my head spin. Let’s start with the stock market nevertheless.

The stock market is down 50% since its high. Or you could say, 50% of the gains of the bull market that started in ’82 have been eliminated. I see a lot of comparisons of this market decline to other bear markets, including the bear market during the Great Depression. Compared to the Great Depression we would have to go another 78% down from current levels to reach the low. It seems to be in the human nature to look for patterns and compare in order to understand. But are these comparisons valid or interesting? I do not think you can make a decision on the direction based on those past bear market charts.

I think more a long these lines:

1. Negative Feedback Loop

Is the economy getting worse than already expected or not? I think we will see more negative surprises. And those will come from outside the US. January exports in Japan fell by 45% (!) creating a trade deficit. That is pretty shocking. Similar numbers across Asia and Europe. It shows how hard consumers are clamping down on spending. And this hits those export orientated economies (China, Japan, Germany) that were a bit removed from the financial turmoils. This will lead to a further hit on domestic consumption in these markets as people will get laid off leading to shrinking consumption there as well. All markets are connected – no decoupling anywhere in sight. I think we have a negative feedback cycle right here. And no local stimulus package can address that easily. So without going into more details, I think that this has not been factored into corporate earnings.

2. D-Process

Here is a link to Ray Dalio from Bridgewater. I fully agree with him. While most recessions are triggered by either supply shocks or monetary policy to fight inflation, we are today in a process where we have to restructure nearly all economic sectors, because they are over-leveraged (and some are just bankrupt): Banks, Corporations, Consumers, Governments. This de-leveraging process takes some time and will bring us to lower stock market prices.

Conclusion

These two effects will bring us to lower stock market levels – slowly and steadily. I am short with an unlevered (!) ETF ($SH)for long-term holding (Never hold an leveraged ETF for more than 48h if you do not want to get bitten by compound performance effect). However, there are as well factors that will lead to higher stock market (at least nominal) such as inflation. The whole inflation topic is related to the policies implemented in regards to the D-Process but I feel this post has been too long already. Eventually the stock market will recover, when the negative feedback loop has been reversed, earnings expectations have been adapted and the D-Process has worked its course (but before it is finished).

By the way: Follow the stock market, and my inverse ETF $SH with Alerts4All – Real-time alerts. Real Simple.

Instead let’s look at the automobile industry, the initiative to curb Co2 emissions and the price of fuel. The problem with the fuel price is that it pays for the cost of extracting the oil, processing it into fuel and shipping it right next door to you ready to be filled into your car. However the cost of burning the fuel which has an adverse impact on the environment is not included in that price. The cost of that is burdened on society instead. This is called an External Effect. It leads to a wrong market equilibrium as the price of the good (here fuel) it too cheap, as the external cost of burning the fuel is not included in the price. Therefore this cost is not included in the decision making process on how much to consume, i.e. how to drive (MPG of your car, distance driven etc.).

Economists can agree that a way to improve the market allocation and thereby total welfare is to increase the price of fuel to reflect this external effect – basically tax it. That would lead people to demand less by either buying more fuel efficient cars or driving less.

But instead of using the price of fuel and thereby market mechanism to improve the market equilibrium and in our example reduce CO2 emissions and reliance on oil imports, the US government for years has used Miles-per-Gallon standards that the car industry had to meet by its average fleet. So instead of using price and market mechanisms, the government tries to ‘tell’ the car makers what cars to build and consumers what cars to buy. That does not make any sense. It is not an efficient way to influence behavior, it has huge time lags to be enforced and most importantly it is easy to circumvent – as is the case with all large, cumbersome government regulations. This is why Detroit has lobbied for these kind of regulations – they have in the end little or no effect.

We see a similar notion in todays debate around the banks bailout plan. Lawmakers want to ‘tell’ the banks to start lending. Banks do lend to make a profit, if they can make a profit. In the current market environment they cannot open the siphons and start excessive lending again – there are enough toxic, i.e. non performing loans for a while (wasn’t that the whole problem anyway?). Instead of forcing banks to do something that is not in their profit making interest, the government needs to set the right framework that will allow banks to do business which will inevitable leed to lending (one should not forget that banks still lend – but they are much more careful and have only limited liquidity).

But there are three reasons why government seems to prefer to try to directly influence the behavior of market actors (companies) instead of setting incentives and using market forces:

- It seems easy. Instead of understanding the complex framework of incentives that influences corporations and their customers, just draw up a bill that requires people to do stuff – no matter if it makes economic sense. Often it does not, otherwise you would not have to write a law.

- It is a quick fix. We live in fast times. Who remembers last years legislation. Who cares about next generation if re-election is around the corner. Roger Ehrenberg wrote a good post on short-termism that sums it up.

- It can be influenced by the industry that is to be regulated. We saw that during the last 20 years with the introduction of MPG standards. Detroit did a good job in making sure they were not adversely effected. Unfortunately they missed the whole point that at some point fuel might become scarce.

To me this kind of behavior legislation is not too far off what could be seen in former socialists countries and you would expect to see in many parts of Europe but not in the US. Influencing behavior by setting the right incentives seems to me far superior than guiding somebodies hand.

An interesting article by Joe Nocera in the NY Times Magazine this weekend about the VAR (value at risk) risk models used on Wall Street made a point. The article is primarily about the VAR model and the problem of applying a statistical model that covers 99% of probable outcomes and leaves out the 1% outliers – good reading about the misuse that results from the yearning for simplification (only if you can stand reading more of Nassim Nicholas Taleb’s comments on ‘imbeciles’).

Without going into the article in too much detail, I noted one aspect:

Traders were not only incentivised by trading performance but as well to fool the VAR model – meaning to minimize the effect that the trade would have on the VAR model. This made them structure trades that would be of low risk in 99% of all cases, but that yielded at the same time devastatingly punishing risks outside the scope of the model, in the remaining 1% – the outlier event.

The point is: Professionals on Wall Street are not stupid – probably quite the opposite: They are smart, utility maximizing agents that play by the rules/incentives that were set. Only that these incentives have been wrong since the first investment bank, Salomon Brothers, transformed from a partnership into a public company in 1981. That shifted the balance: Upside lies with the executives, downside with the shareholders. Who can blame them. After all nobody was forced to buy shares of investment banks.

The incentives for Wall Street professionals were structured to take on maximum risk (VAR optimizing, overleveraging) to generate short term results (Yearly bonus). Everybody inside the industry knew, but ‘as long as the music is playing, you’ve got to get up and dance’ as Charles Prince famously put it. At some point the party would end – that was obvious – only when was the question. Until then you carry on.

The financial crisis is a result of smart inviduals playing by the rules (forget Madoff for a while) – but the rules created the wrong incentives. That is not a new discovery. People have been writing about that for the last couple of years (see for example here). Setting the right incentives will be key to repair this industry.

At the end of 2008 our company is not quite there were we wanted it to be. We are not off course – we are just slower than anticipated. The trouble in the financial markets were not unanticipated in the beginning of last year, but they had a bigger impact on us than I would have thought. In fact this recession is the first recession that has a direct personal influence on me. So what is the biggest thing  I learned in 2008?

Being open about your intentions, goals and ambitions opens up the people around you. That holds true for my personal and professional life. Though I was never shy about what I think, by now I am truly convinced that sharing my thoughts and starting a conversation yields a high return. Last year I learned tons of things that way.

Besides that I learned a lot about a new industry (financial markets), the NY startup environment and most important I learned a lot through new friendships that I entered in 2008.

While beginning of last year I had a rough idea on what the year would yield, today I have no clue what will happen in the next 12 months. I am anxious as there are big challenges ahead of me but at the same time there are great things happening this year (starting with the expansion of our family in April – fingers crossed). Very exciting indeed – I am looking forward to face all of that together with friends and family. In that spirit I whish everyone a succesful, satisfying and most important happy year 2009.

Most investors that have these products on their books try to unload them at any price through any available venue with most markets being illiquid. But it looks like there is a small crowd that is cherry picking in this market, which is after all not completley dried up (I would guess in 2009 north of $100B in existing paper will be traded).  As in any illiquid market, there are high transaction costs imposed by the existing market players (all over the counter). So some players are able to extract significant rents right now – and some investors might see a bright upside at the end of their trade.

Here is the full article: http://howardlindzon.com/?p=3984

Chart by Doug Short

1. Horrible Retail Numbers, Auto Execs pilloried and Dooming Job Numbers – Nobody cares anymore

This week we saw retail numbers that were quite impressive. Auto sales in November down 41%  year of year . All kinds of consumer good categories down between 25% and 35%. Numbers not seen for 40 years. Given that the US economy is driven 73% by consumption one can roughly extrapolate the contraction that we will see in Q4. Then, this week a bail-out of the Detroit-Trio became unlikely – all these miles driven for nothing, maybe they should have car-pooled? And we saw job numbers exceeding even the worst estimates. Each of those three ‘surprises’ would have created a major stock sell off normally. But this week nobody seemed to care – in fact the S&P500 left the week slightly higher. When even historic bad news do not bring the market down anymore, the market does not want to go down.

2. Warren Buffet is always right (sort of)

This week Warren Buffet called the bottom (again – first time in October) – and he has never been wrong in the past, at least in the long-term. He is not a market timer (he admits he does not know how much longer this bear market will last) but a market ‘pricer’. Meaning that investments in  stocks (the right ones – please no financials or gas guzzlers) at current levels should get long-term above average returns. When I am wrong with calling the bottom, than at least I have prominent company. Clusterstock has a nice write-up and links to all the Warren Buffet articles where he is calling the bottom.

3. Shoeshine boy buys triple leveraged short ETFs

Joseph P. Kennedy (1888-1969) knew that it was time to get out of the market in 1929 when his shoeshine boy began giving him stock tips. When people like me start to play with double and tripple leveraged short ETFs (hello SKF, FXP, SDS etc.) then the party must be over. Retail investors get to these parties always too late – by then the cool crowd has moved on already. That means from here on it will go sideways or up, but not further (significantly) down.

We started ClickandBuy in March 2000 before the bubble burst and launched right into the decline of Web 1.0 in the summer that same year. In this negative environment we were able to survive because we believed in our product and the value that our company would bring to the market place. But of course there were times of doubt. In fact it was easy to dismiss what we were trying to do, because of the market sentiment, the competition of incumbents (banks & telcos) and because of the complexity of the industry we were in (we probably were not fully aware of that last point). But we believed in us and made each other believe in the company, creating an interesting dynamic of identification between the founding team and the company. This identification was nurtured over nearly 8 years.

So after transitioning out of ClickandBuy, it took me longer than I thought to leave my role behind. Maybe because I did not take a break but jumped right into this new idea. Finally by now the new idea fits like a glove and going back is unthinkable to me right now.

It was even harder to explain to friends from abroad why I chose to live in this country. Back then it seemed that the United States had lost all those reasons that attracted people around the world to come to the US. It seemed like this country had lost its path.

Yesterday has shown that these United States the world used to admire were not lost during those last 8 years. In fact what happened yesterday could not have happened it most countries on this planet. This is the strongest message that the United States sent out yesterday. Instead of using my own words, I just quote:

“If there is anyone out there who still doubts that America is a place where all things are possible; who still wonders if the dream of our founders is alive in our time; who still questions the power of our democracy, tonight is your answer.”

and

“And to all those watching tonight from beyond our shores, from parliaments and palaces to those who are huddled around radios in the forgotten corners of our world — our stories are singular, but our destiny is shared, and a new dawn of American leadership is at hand. To those who would tear this world down: We will defeat you. To those who seek peace and security: We support you. And to all those who have wondered if America’s beacon still burns as bright: Tonight, we proved once more that the true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity and unyielding hope.”

Or, better see for yourself here.

As a legal resident alien, I was not allowed to vote – in fact only few of the guests at our house yesterday night were allowed to vote in this country. Nevertheless this election was important and personal to all of us.