Making Money From the Internet

Ruh roh.  After yesterday's euphoria around the new year wiping the
economic slate clean, investors woke up and realized that, well, a new
year does not wipe the economic slate clean and unemployment remains
unhealthily high (and as unhealthily high as if it had shared a needle
with Gia Carangi), housing prices have either already started their double dip or are getting ready to double dip (and for the record, Money McBags hates double dippers), and JWOWW still wants her nude pics back. So some things are still rotten in the state of Ben's market.

 

A sobering day caused large cap stocks to mildly sell off while small cap stocks went down like someone named Ms. Candy Deepthroat
at an NBA all-star weekend (and Money McBags promises he couldn't make
up anything as bizarre as that).  So has the market topped or do we pray
to the great Bernanke Put in the sky and buy the fucking dip?  Money
McBags' cognitive dissonance hasn't been this high since Paul Krugman
won a Nobel Prize in Economics or since he learned of something called adult chocolate milk
(because really, why would one need to mix malt liquor with anything? 
It is perfectly delicious on its own), so he is going to remain
cautiously hedged right now even though the market still feels like it
wants to go up more than a priapism sufferer after shotgunng a case of
viagra.

 

As for macro news, the Fed released their minutes
from last month's meeting and to save you from inelegant prose, Money
McBags can sum up the minutes in four words "Same shit, different day." 
If you read the minutes, and Money McBags recommends that if you do,
you not be operating heavy machinery (so sorry Lexington Steele, you'll
just have to read the Cliffs' Notes) and you say goodbye to your loved
ones ahead of time (because reading the minutes could put you in a
deeper sleep than Terri Schiavo), you'll see that the Fed governors found
some things were getting a nut hair better and other things (like
unemployment, housing, and shit that matters) remained worse than a Mary
Meeker internet call or whatever it is they show on the Style Network.

 

The key point is that the Fed is determined to stick with the pace of
the $600B Treasury bond-buying program because in their estimation (and
remember these are highly paid witch doctors), the economy is still
struggling, or to use a more technical term, "eating a fat dick."  Some
investors thought the Fed may not employ the full extent of the $600B
but "members emphasized that the pace and overall size of the
purchase program would be contingent on economic and financial
developments; however, some indicated that they had a fairly high
threshold for making changes to the program." So this means that
QE2 is here to stay because to give you a hint how high the Fed's
threshold is, Janet Yellen doesn't even have a safe word to mumble out
of her ball gag when playing "bubble my asset" in the Fed's
headquarters.

 

In other macro news, according to the Commerce Department factory orders were up .7%
which beat analyst guesses of a .1% decline and is consistent with
yesterday's rise in the ISM (and leave the first J off for savings). 
This marks the first time since the depression began that two disparate
yet similar statistics have kind of matched when delivering relatively
positive news which has left Money McBags more confused than he is over
whatever this angry birds
thing is to which people are so fucking addicted.  But he guesses even a
broken clock is right twice a day (unless it is digital and out of
batteries, but whatever).  Orders have now risen in four of the last
five months and excluding transportation, orders were up a cockriffic
2.4% which was the highest since March and likely driven by demand for
the production of more naval movies.

 

Internationally, inflation is coming to Europe
and Money McBags only hopes it remembered to bring its deodorant with
it because it sure as heck won't be able to find any when it hits the
continent.  Annual inflation rose 2.2% in December from 1.9% in
November according to an initial estimate from Eurostat, which is the
EU's version of the B(L)S only even douchier.  It is the first time
inflation has been above the ECB's 2% target since 2008 but luckily core
inflation was only ~1% (you know, the prices of shit people don't
actually buy) so the ECB can continue to make up different metrics to
show inflation has been tamed.

 

In the market, auto sales were up
~7% for the month thanks to people losing their jobs and having to
downsize to cars from apartments.  Ford, GM, and Chrysler sales were all
up over 7% while Toyota was down .4% as a result of a spate of recalls
and people preferring shittier made cars.  In addition to strong auto
sales, retail sales were up 3.6% last week compared to a year ago despite a ridonkulous snowstorm on the East Coast and people not having any fucking money.

 

As for stocks, Motorolla split in to two companies
today which will allow shareholders to lose in two different ways now
instead of just one.  The company split its consumer business,
which makes cell phones people no longer use and cable set-top boxes
which will soon be outdated, from the professional business, which sells
police radios to state governments who can no longer afford them and
barcode scanners to stores going out of business.  So in short, the
business plan may be a bit more lacking than that of sex.com's
(and two important notes here on that sex.com article.  1.  The url
sold for $13MM which is only $3MM more than the asking price for the
award winning When Genius Prevailed and WGP certainly has the better
content so just remember that potential buyers.  2.  To the guy who
bought the url and has no idea what to do with it, um, you have heard of
titties,
right?  Shit, you don't need to go all Porter's five forces to figure
out what to do with sex.com, fuck, it's an easier business plan write
than the one for BAC (Step one: Get too big.  Step 2: Fail.  Step 3:
Profit) so Money McBags will be happy to put his MBA, his CFA, and his
love of T&A, to work on a consulting basis to help out).

 

Elsewhere grocery stores sold off after Morgan Stanley cut its rating on Supervalu
to "Nofuckingvalu" and told clients to underweight the stock due to
margin compression.  And finally Atheros Communications was up 18% on a rumored buyout from Qualcomm as Qualcomm seeks a way to get in to the tablet market to lose to Apple in yet another vertical.

 

Money McBags has plenty more today as he gets his small cap on (and he doesn't just mean his jimmy cap) at the award winning When Genius Prevailed.  So click over and take a look, or just browse through the archives as you might find some very useful material and analysis.

I have never been a gambler.

I pay attention to horse racing twice most years, and three times at most. I find out the winner of the Kentucky Derby (though usually not by watching the actual race) and then, when the Preakness rolls around, I check to see if the same horse has won both races.

If so, I pay just enough attention to learn if that horse also wins the Belmont Stakes, taking racing’s prestigious Triple Crown. The last time a horse actually won all three races was in 1978, so since then my excitement over the Belmont Stakes has been pretty limited.

In spite of all that, I thought I knew at least one thing about the gambling world: The house always wins. But it turns out that’s not the case when New York City or New York State takes the bets.

In early December, after about 40 years in business, New York City’s Off-Track Betting Corporation (OTB) closed its doors when it failed to receive a hoped-for legislative reprieve. In its last full fiscal year, ending March 31, the state-controlled corporation operated at a loss of $37.2 million after handing over the money it was required to give to the state, local governments, and race tracks. At the time of its closing, OTB had also racked up a pension bill that, together with health benefits promised to retirees, could be greater than $600 million.

This is a pretty astonishing feat considering that OTB’s business consisted of taking money from people and then giving some of it back to them. This is a business which was previously handled by neighborhood bookies, who never seemed to have a problem making money at it. To be fair, the bookies probably had a less generous pension plan.

Yet both New York City and New York State managed to fail to make money in the business of taking money for nothing. The city finally gave up in 2008, when it handed its mess over to the state.

Officials have tried to blame OTB’s collapse on decreased interest in horse racing. Speaking with The New York Times, John D. Sabini, chairman of the State Racing and Wagering Board, referred to off-track betting as “an industry that’s having a tough time…in a tough economy.” But while decreased demand is a fine excuse for not making much money, a gambling outfit should still be able to avoid losing money. All you have to do is reduce expenses to match revenues.

OTB could have easily closed down many or all of its betting parlors and relied on a small staff to manage Internet and phone traffic. For some businesses, atmosphere is everything, but OTB considered it a major upgrade in “customer amenities” when it installed restrooms and seating in 1993. It seems safe to say then that, while some may have enjoyed a sense of camaraderie in the storefront parlors, most people didn’t turn to off-track betting for the luxurious environment. With the cost savings from closing physical locations, OTB could have done some advertising to try to boost demand. That is what any rational manager would have done.

Unfortunately, instead of having rational managers, OTB had New York City and then New York State.

OTB was designed to function as a public benefit corporation, an entity that operates like a private business but turns over its profits to the state. However, everyone knew that OTB, being affiliated with New York City, was almost certain to become a bastion of patronage, if not corruption, and probably would never admit to having any profits to give back to the government. So lawmakers decided to have the corporation pay the city, and later also the state, a portion of its gross revenue, rather than its net profits. As Assemblyman J. Gary Pretlow of Mount Vernon succinctly explained: “If they’re allowed to pay on the net there would be nothing left over.”

This structure meant that the state was sure of getting some money, but it also meant the government had little reason to encourage OTB to cut costs. Meanwhile OTB had no assurance that it would have enough money after paying the state and the city to actually cover its operating costs, let alone reinvest in its business. The result was inevitable. Now that inevitability has come to pass.

It may take some skill to lose money collecting bets, but it’s the kind of skill New York has in spades. When it comes to the sport of mismanagement, there’s no doubt about it: The people who run the Empire State are thoroughbreds.

For more articles on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.

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