More Banking Confusion: Liquidity Versus Solvency (@EconTalker, #banking, #liquidity)

Here is a choice quote from the recent EconTalk podcast with Anat Admati of Stanford University:

Well, they have fancy ways to talk about banks, and we try to unpack those. They talk about maturity transformation, liquidity transformation. What that means is really that the depositor, the people who lend to the banks, often time want their money quickly, especially demand deposits. But when they invest it, they kind of invest it longer term and in less liquid things. So there is a sort of imbalance between the money that they use to fund and their investment in the sense of the length of time until something has to happen and also the speed with which they have to pay versus get paid. And so that mismatch creates fragility by itself, which also means for example if all of us run to the bank at the same time then the bank may not be able to cover all of that. Even if it technically would be solvent, it has everything, that’s kind of an inefficient run that you could have, in principle. So basically the banks tend to run a little bit more than other people into liquidity problems. You could say that, just, I have the money but I didn’t go to the ATM kind of thing–I can pay you back but we’re going to have to find a liquidity solution, sort of a rolling back my debt. Their funding is kind of fragile almost by definition because of the way it comes and the way people can come back for their money on short notice or any time they want. So that’s part of the funding. And the investments are not as liquid or longer term than that. (emphasis added)

This is an utter confusion. This is not a “liquidity problem”, it’s a solvency problem.

Money-in-an-ATM is not the same economic good as money-in-my-hand. That is, money-five-minutes-from-now is not the same as money-right-now.

They are separate economic goods due to the time value of money. What Admati has done is create an arbitrary distinction between a future money good and a present money good, by projecting her preference/judgment onto an exchange involving two other parties of which she is not one.

If party A demanding “liquidity” from the bank B truly saw no difference between money-right-now and money-a-few-days-from-now, for example, then a bank run would never happen and these items would trade at the same price, which they do not.

This is a fundamental error of economic reasoning. I expect a professor of finance and economics to understand something like this and as a result I find myself disappointed to see that she does not.

Economists and politicians only let banks get away with this. If anyone else were to be so arbitrary and haughty toward contracts they’d be thrown in prison, but for banks insolvency never comes so long as you can contort logic to the point that you convince yourself that all that’s missing is a bit of liquidity.

This is more free lunch thinking.

Observations On Expectations (#publicschool, #expectations, #psychology)

A story of expectations met and unmet, in two parts.

Part the first. I spoke in front of a group of students at a local continuation high school this morning. The original topic was my career (what do I do? what do I like/dislike about it? etc.) and my career path (what’s my background? education? how’d I get to where I am?) but I never quite got there. I mostly ended up talking about economics as I was speaking to an economics class, nominally, and the program coordinator kept prompting me on that subject.

I introduced two economic concepts to the assembled: TNSTAAFL/opportunity cost, and subjective value theory. I tried to apply them to “real life” to make them tangible and interesting to the audience. I talked about how everyone got suckered into the Housing Bubble, which cost a lot of people their homes, their personal finances, their jobs and sometimes more. I suggested that a person who understood that TNSTAAFL wouldn’t have gotten suckered in because he would’ve recognized the bubble for what it was and played it safe as he could. Subjective value theory I used to explain why we have an economy and why people work jobs, to serve each other’s subjective needs. I encouraged the class to think about their own values and to pursue them, and recognize that when people tell them what to do they’re simply telling them they should follow subjective values other than their own. I tried to highlight the role opportunity cost plays in pursuing subjective values, for example, people often get into traps such as pursuing money to provide for their families in such a way that they don’t get to spend time with their families. This opportunity cost is forgotten or ignored.

I also covered time value of money and the function of credit during a brief tangent, prompted by the program coordinator emphasizing the importance of personal finance principles.

The instructor goaded the students into applauding me before I had even spoke, as some kind of polite welcome for someone who had taken the time to stand before them and pontificate on a subject they cared little about. I said, “We’ll see if you still feel like applauding me at the end” and then began my talk. At the end of it, as the students rose to leave at the sound of the Pavlovian bell, one of the young men closest to me in the front of the room turned to his classmate and said in a quite intentionally audible way, “Thank GOD that is over!”

The morning’s events completely met my expectations and as a result, I was satisfied with myself when I myself left. I had entered a prison, whose inmates were being held against their will, by force of law, who had been assembled before me because they had no other choice save punishment and who had little to no interest in the subjects I had been invited to speak about before them. You certainly can’t blame a person in such circumstances for being disengaged, melodramatic and at times downright hostile.

If you put me in a cage I’d be uncomfortable and not in a friendly mood, either.

I didn’t expect to touch anyone, change a life or spark a fire or interest in anyone for the subjects I spoke about (economics, careers, my career, me) and if I happened to do that despite my intentions, that’s fine. I expected to go in there, treat the poor beasts with respect and maybe a bit of sympathy, having once been caged in a similar manner myself, and deliver my thoughts as articulately and coherently as I could. I expected to get practice speaking before an audience and trying, not necessarily succeeding, at making a foreign subject engaging or relatable for them.

In this, I met my expectations and so I believe I succeeded and thus I felt satisfied.

Part the second. For some time now I have watched in despair as a previously favorite blog of mine has gone into seemingly terminal decline. What was once a source of original thinking, unique coverage and respectable ideological consistency has in time become a haven for hacks and simpletons, its content hollowed-out and refocused on a few topics I just don’t have much interest in. The purveyor of the site has taken numerous opportunities, on his blog and his new webcast radio show, to demonstrate qualities of his personality I’ve found surprising, disappointing and at times reprehensible.

My distress with this reached a fever pitch early this week when a long-awaited debate on the subject of “intellectual property” was joined by the purveyor and another popular blogger on the subject. While the purveyor’s behavior leading up to the discussion gave me no reason to believe it’d be an intelligent, objective attempt at sussing out the truth by the two parties, but rather much evidence that it would be a battle of wills and ego characterized by willful blindness of reason and savage emotional assaults on each respective victim, the final product was so shockingly extreme in terms of all the undesirable qualities I suspected it would contain that I almost couldn’t believe these two adults had allowed themselves to be recorded, their outrage to be shared in front of a public audience of strangers.

I found myself so disappointed with the whole thing. It was anti-intellectual and truly uncivilized, the kind of stuff blood feuds at made of (gusto about sacred honor and the like that can never be satiated by way of reasonable argument). I knew both men were capable of a bit of underhandedness, but at least in the past the underhandedness seemed to have some kind of productive point. This time, after I finished sitting through two and a half hours of two middle-aged men calling each other names and screaming at one another, waiting for a point, I realized too late that there was none beyond sharing pure hate and distrust.

Who was to blame for my dissatisfaction in this instance? Initially, I found myself disgusted with these two people for subjecting me to this idiocy. “How dare they!” Then I thought about it some more. They are who they are. Their current skills and capabilities with regards to interpersonal communication and intellectual reasoning are aspects of their identity that exist as they do, whether I find them appealing or satisfying or not. I expected them to work hard to please me in their debating efforts (despite, I should add, much evidence that they were capable of no such thing) and when they didn’t live up to my expectations, I was disappointed.

Not by them, but by myself. For expecting people to live to serve my intellectual and emotional needs.

In the first part, I participated in something that could easily be seen as a disastrous waste of everybody’s time. Yet, I walked away from it in a positive state of mind. In the second part, I witnessed a true social tragedy and felt depressed and upset. Both circumstances were undesirable, but my reaction was different each time because my expectations were different.

Expectations can glorify our existence or cast the light of our lives down a dark abyss. I hope to remind myself of this fact more often.

Videos – Toby Carlisle, Q&A Notes at UC Davis Talk on Quantitative Value (@greenbackd, #QuantitativeValue)

Click here to watch the video (wear earphones and bring a magnifying glass)

UC Davis/Farnam Street Investments presents Toby Carlisle, founder and managing partner of Eyquem Investment Management and author of Quantitative Value, with Wes Gray

Normally I’d embed a video but I can’t seem to do that with the UC Davis feed. Also, these are PARAPHRASED notes to the Q&A portion of Toby’s talk only. I ignored the “lecture” portion which preceeded because I already think I get the gist of it from the book. I was mostly interested in covering his responses to the Q&A section.

The video is extremely poor quality, which is a shame because this is a great talk on a not-so-widely publicized idea. I wish there was a copy on YouTube with better audio and zoom, but no one put such a thing up, if it exists. I hope Toby does more interviews and talks in the future… hell, I’d help him put something together if it resulted in a better recording!

I had trouble hearing it and only thought to plug in some earbuds near the end. Prior to that I was contending with airplanes going overhead, refrigerator suddenly cycling into a loud cooling mode as well as my laptop’s maxed out tinny speakers contending with the cooling fans which randomly decided to cycle on and off at often the most critical moments. I often didn’t catch the question being asked, even when it wasn’t muffled, and chose to just focus on Toby’s response, assuming that the question would be obvious from that. That being said, I often conjoined questions and responses when there was overlap or similarity, or when it was easier for me to edit. This is NOT a verbatim transcript.

Finally, Toby recently created a beta forum for his book/website, at the Greenbackd Forum and I realize now in reviewing this talk that a lot of the questions I asked there, were covered here in my notes. I think he’s probably already given up on it, likely due to blockheads like me showing up and spamming him with simpleton questions he’s answered a million times for the Rubed Masses.

Major take-aways from the interview:

Q: Could we be in a “New Era” where the current market level is the “New Mean” and therefore there is nothing to revert to?

A: Well that’s really like saying stocks will revert down, not up. But how could you know? You could only look at historical data and go off of that, we have no way to predict ahead of time whether this “New Mean” is the case. I think this is why value investing continues to work, because at every juncture, people choose to believe that the old rules don’t apply. But the better bet has been that the world changes but the old rules continue to apply.

Q: So because the world is unknowable, do you compensate by fishing in the deep value ponds?

A: I like investing in really cheap stocks because when you get surprises, they’re good surprises. I find Buffett stocks terrifying because they have a big growth component in the valuation and any misstep and they get cut to pieces; whereas these cheap stocks are moribund for the most part so if you buy them and something good happens, they go up a lot.

Q: (muffled)

A: If you look at large cap stocks, the value effect is not as prevalent and the value premia is smaller. That’s because they’re a lot more efficient. There’s still only about 5% of AUM invested in value. But the big value guys portfolios look very similar; the value you have as a small investor is you don’t have to hold those stocks. So you can buy the smaller stuff where the value premia is larger. The institutional imperative is also very real. The idea of I’d like to buy 20 stocks, but I have to hold 45. That pushes you away from the optimal holdings for outperformance.

Q: (muffled)

A: The easiest way to stand out is to not run a lot of money. But no one wants to do that, everyone wants to run a lot of money.

Q: (muffled)

A: The model I follow is a bit more complicated than the Magic Formula. But there are two broad differences. I only buy value stocks, I only buy the cheapest decile and I don’t go outside of it, and then I buy quality within that decile. ROIC will work as a quality metric but only within the cheapest decile. ROIC is something Buffett talks about from a marketing perspective but I think in terms of raw performance it doesn’t make much sense. There’s definitely some persistence in ROIC, companies that have generated high returns on invested capital over long periods of time, tend to continue to do that.  If you have Warren Buffett’s genius and can avoid stepping on landmines, that can work. But if you don’t, you need to come up with another strategy.

Q: (muffled)

A: Intuition is important and it’s important when you’re deciding which strategy to use, but it’s not important when you’re selecting individual stocks. We can be overconfident in our assessment of a stock. I wonder whether all the information investors gather adds to their accuracy or to their confidence about their accuracy.

Q: (muffled)

A: All strategies have those periods when they don’t work. If you imagined you ran 4 different strategies in your portfolio, one is MF, one is cheap stocks, one of them is Buffett growth and one is special situations, and you just put a fixed amount of capital into each one [fixed proportion?] so that when one is performing well, you take the [excess?] capital out of it and put it into the one that is performing poorly, then you always have this natural rebalancing and it works the same way as equal-weighted stocks. And I think it’d lead to outperformance. It makes sense to have different strategies in the fund.

Q: (muffled)

A: QV says you are better off following an indexing strategy, but which market you index to is important. The S&P500 is one index you can follow, and there are simple steps you can follow to randomize the errors and outperform. But if you’re going to take those simple steps why not follow them to their logical conclusion and use value investing, which will allow you to outperform over a long period of time.

Q: (muffled)

A: Not everyone can beat the market. Mutual funds/big investors ARE the market, so their returns will be the market minus their fees. Value guys are 5% of AUM, can 5% outperform? Probably, by employing unusual strategies. Wes Gray has this thought experiment where he says if we return 20% a year, how long before we own the entire market? And it’s not that long. So there are constraints and all the big value investors find that once they get out there they all have the same portfolios so their outperformance isn’t so great. There’s a natural cap on value and it probably gets exceeded right before a bust. After a bust is then fertile ground for investment and that’s why you see all the good returns come right after the bust and then it trickles up for a period of time before there’s another collapse.

Q: (muffled)

A: I think the market is not going to generate great returns in the US, and I am not sure how value will do within that. That’s why my strategy is global. There are cheaper markets in other parts of the world. The US is actually one of the most expensive markets. The cheapest market in the developed world is Greece.

Q: Did you guys ever try to add a timing component to the formula? That might help you decide how to weight cash?

A: Yes, it doesn’t work. Well, we couldn’t get it to work. However, if you look at the yield, the yield of the strategy is always really fat, especially compared to the other instruments you could invest the cash in, so logically, you’d want to capture that yield and be fully invested. I think you should be close to fully invested.

Q: What about position sizing?

A: I equal weight. An argument can be made for sizing your cheaper positions bigger. I run 50 positions in the portfolio. In the backtest I found that was the best risk-adjusted risk-reward. That’s using Sortino and Sharpe ratios, which I don’t really believe in, but what else are you going to use? If you sized to 10 positions, you get better performance but it’s not better risk-adjusted performance. If you sized to 20 positions, you get slightly worse performance but better risk-adjusted performance. So you could make an argument for making a portfolio where your 5 best ideas were slightly bigger than your next 10 best, and so on, but I think it’s a nightmare for rebalancing. The stocks I look at act a little bit like options. They’re dead money until something happens and then they pop; so I want as much exposure to those as I can. I invest globally so the accounting regimes locally are a nightmare. IFRS, GAAP to me is foreign. You have to adjust the inputs to your screen for each country as a result of different accounting standards.

Q: digression

A: Japan is an interesting market. Everyone looks at Japan and sees the slump and says it’s terrifying investing in Japan but if you look at value in Japan, value has been performing really well for a really long time. So, if the US is in this position where it’s got a lot of govt debt and it’s going to follow a similar trajectory, you could look at Japan as a proxy and feel pretty good about value.

Q: (muffled)

A: I’ll take hot money, I am not in a position to turn down anyone right now. It’s a hard strategy [QV] to sell.

Q: (muffled)

A: Special situation investing is often a situation where you can’t find it in a screen, something is being spun out, you have to read a 10-K or 10-Q and understand what’s going to happen and then take a position that you wouldn’t be able to figure out from following a simple price ratio. It’s a good place to start out because it’s something you can understand and you can get an advantage by doing more work than everyone else. It’s not really correlated to the market. I don’t know whether it outperforms over a full cycle, but people don’t care because it performs well in a bad market like this.

Q: What kind of data do you use for your backtests?

A: Compustat, CRISP (Center for Research Into Securities Prices), Excel spreadsheets. You need expensive databases that have adjusted for when earnings announcements are made, that include adjustments that are made, that include companies that went bankrupt. Those kinds are expensive. They’re all filled with errors, that’s the toughest thing.

Four Views On Gold And Gold Miners (#gold, #investing, @atyantcapital, @valresproj)

1.) Atyant Capital, “What is gold saying?”:

Gold stocks lead gold and gold leads currencies and currency moves correlate with stocks and bonds. Gold stocks have been declining for two or so years now. This is in part due to unavailability of capital and credit for gold mining projects, but in our assessment, not the whole story. We believe gold stocks are also correctly forecasting lower gold prices.

Long term readers know my gold pricing model puts fair value at $1100 per ounce (Alpha Magazine Aug 24, 2011). So at $1700-$1800, gold was about 60% overvalued, floating on a sea of credit. Gold declining now tells me the sea of credit is receding here and now. This should translate to a higher US Dollar and pressure on asset prices globally.

2.) Value Restoration Project, “Gold miners – Back in the Abyss – An Update“:

Gold mining stocks remain cheap by almost any objective measure.

One way to look at mining stocks is to compare them to the price of gold itself.

Comparing miners to the price of gold itself, show miners are cheaper today than they have been in decades.

[...]

Today, gold appears undervalued relative to the growth in the monetary base that has occurred up to now, and in light of the monetary expansion the Fed and other central banks are currently undertaking, gold appears more undervalued. The Fed’s current quantitative easing program probably won’t be curtailed until households stop deleveraging and the government can handle the rising interest expense on its expanding debt.

Yet, in the face of all this, many gold mining stocks are now selling at valuations that suggest the market has priced in a decline in the price of gold back to 2007 levels, before the Fed began expanding its balance sheet during the financial crisis. Many gold mining stocks are now selling near or below their book value, which is the market’s way of saying that these businesses won’t be able to add shareholder value in the coming years by mining gold and silver. If the price of gold were to decline below $700 or so, it would certainly be the case that most mining companies wouldn’t be able to profitably sell gold. Yet such a decline in gold is the main implied assumption being priced in by the market today, and this has sent valuations of gold mining stocks to their lowest levels since the current bull market began.

3.) Robert Blumen, “What is the key for the price formation of gold?“:

The gold price is set by investor preferences, which cannot be measured directly. But I think that we understand the main factors in the world that influence investor preferences in relation to gold. These factors are the growth rate of money supply, the volume and quality of debt, political uncertainty, confiscation risk, and the attractiveness (or lack thereof) of other possible assets. As individuals filter these events through their own thoughts they form their preferences. But that’s not something that’s measurable.

I suspect that the reason for the emphasis on quantities is that they that can be measured. Measurement is the basis of all science. And if we want our analysis to be rigorous and objective, so the thinking goes, we had better start with numbers and do a very fine job at measuring those numbers accurately. If you are an analyst you have to write a report for your clients, after all they have paid for it, so they have to come up with things that can be measured and the quantity is the only thing that can be measured so they write about quantities.

And in the end this is the problem for gold price analysts, you’re talking about a market in which it’s difficult to really quantify what’s going on. I think that looking at some broad statistical relationships over a period of history, like gold price to money supply, to debt, things like that, might give some idea about where the price is going. Or maybe not, maybe you run into the problem I mentioned about synchronous correlations that are not predictive.

Part of the problem is that statistics work better the more data you have. But we really don’t have a lot of data about how the gold price behaves in relation to other things. The unbacked global floating exchange rate system has never been tried before our time. How many complete bull and bear cycles has the gold/fiat market gone through? My guess is that when we look back we will see that we are now still within the first cycle. Our sample size is one.

[...]

I do think we will have a bubble in gold, although it may take the form of a collapse of the monetary and a return to some form of gold as money in which case, the bubble will not end, it would simply transition over to the new system in which gold would go from being a non-money asset to money.

I have been following this market since the late 90s. I remember reading that gold was in a bubble at every price above 320 dollars. I very much like the writings of William Fleckenstein, an American investment writer. He has pointed out how often you read in the financial media that gold is already in a bubble, a point he quite rightly disputes. Fleckenstein has pointed out that the people who say this did not identify the equity bubble, did not believe that we had a housing bubble, nor have they identified the current genuine bubble, which in the bond market. But now these same people are so good at spotting bubbles that they can tell you that gold is in one.

Most of them did not identify gold as something which was worth buying at the bottom, have never owned a single ounce of gold, have missed the entire move up over the last dozen years, and now that they’re completely out of the market, they smugly tell us for our own good that gold is in a bubble and we should sell.

So, I don’t know that we need to listen to those people and take them very seriously.

4.) valueprax:

I don’t know what the intrinsic value of gold is. I don’t think gold mines are good businesses (on the whole) because they combine rapidly depleting assets with high capital intensitivity and they are constantly acquiring other businesses (mines) sold by liars and dreamers and schemers. And I don’t think this will end well, whatever the case may be. So, I am happy to own a little gold and wait and see what happens.

I wonder what the short interest is on gold miners?

 

Inside The Minds Of Wall St Analysts & Earnings Reports: Spotlight Nintendo ($NTDOY)

This post is about Nintendo, specifically, and about the logic of the earnings season and Wall St analysts, generally. Let’s start in reverse order.

The following is from Michael Pachter, a securities analyst with Wedbush Securities (WallStCheatSheet.com):

We expect a Q2 miss. Nintendo is likely to report Q2 results below our estimates for revenue of ¥100 billion and EPS of ¥(127), compared to consensus of ¥108 billion and ¥(84) and implied guidance of ¥145 billion and ¥(22).

I don’t really care what the forecast or expectations are, here. What Nintendo does or does not report tomorrow is immaterial to the point I want to make. Look at who is responsible here.

According to Wall St logic, a company is responsible for missing Wall St’s targets. It is not Wall St that is responsible for accurately modeling and anticipating a company’s results. In this sense, there is something holy and sacred and inviolable about such forecasts– they represent a hurdle for a company like Nintendo to cross over, if it’s good enough. If it’s not good enough, the company will “disappoint” everyone in the financial community by not overcoming these (somewhat arbitrarily chosen) performance targets.

It seems entirely backwards. The company is going to perform as it’s going to perform, regardless of Wall St expectations. If anyone creates disappointment, it should be the Wall St analysts who are held responsible. What should be disappointing is that with their salaries, schooling and deep focus on these companies, they still can’t manage to accurately forecast their earnings from quarter to quarter.

If you think about it, it’s ridiculous for a company to ever “miss” its Wall St earnings forecast because these can be adjusted on the fly, all the time. In fact, this entire exercise of writing a report like this saying you “expect a miss” is an absurdity. If you expect a miss, then recalibrate your forecast to what you think is actually going to happen. It’s preposterous to act surprised with a “miss” tomorrow, when you said ahead of time that you were expecting it.

This seems to be part of the Wall St priesthood tradition. Analysts can’t accurately forecast earnings just like investors can’t– the future is uncertain. This is one of the tenets of value investing. But somehow, despite Wall St analysts trying and failing to do the impossible, the ill result is not their fault.

The last bit of commentary is specific to Nintendo:

We think that Wii U’s price points are appropriate given likely demand from Nintendo’s core fan base, but believe that pricing will be too high to sustain long-term demand. Demand for the Wii U will likely wane once Nintendo’s core fan base has purchased the first 6-7 million units, especially given the number of cheaper, comparable alternatives. For example, the prices of the Xbox 360 Kinect bundles have been reduced by $50 at Amazon, GameStop, and Wal-Mart.

DS and 3DS unit guidance is likely unrealistic. Nintendo guided to growth for combined DS/3DS hardware and software units for FY:13. In our view, handheld hardware sales will continue to decline due to migration of casual gamers to mobile devices. We do not expect handheld hardware to see a rebound in sales without price cuts. Similarly, we think that overall handheld software growth is unlikely.

Maintaining our NEUTRAL rating and our 12-month price target of ¥10,000, a slight premium to Nintendo’s ¥9,000/share in cash, giving it credit for brand equity. We cannot assign a P/E, given the company’s low potential to generate significant profits in light of declining product demand and unfavorable F/X.

I don’t know how to put this… this is just stupid. And it demonstrates zero creativity and zero ability to think beyond the end of one’s nose.

First, the analyst is confusing things. Perhaps casual gamers were partly responsible for the booming success of the Nintendo Wii, but few have ever made the argument that “casual gamers” are a big market demographic for the company’s handheld systems, like the Nintendo DS. Surely, wouldn’t someone who is so in love with gaming that they must have a portable system to carry with them everywhere they go be the opposite of a “casual gamer”?

Second, the analyst is being pseudo-precise. The Nintendo Wii sold almost 100M units worldwide since release. But the analyst calculates that the “core audience” is only 6-7M customers? So approximately 90M, or about 90%, of all sales were to casual, non-core gamers? How precise can an estimate like this be?

Third, the analyst confuses apples and oranges. The emphasis on price cuts to make Nintendo’s products competitive from here on out implies that the experience Nintendo sells is identical to the one offered for free or cheaply on mobile phones and other devices which are now deemed to be “competitors” to Nintendo’s product. By this logic, Nintendo is vastly overcharging for its wares. It’s hard to spell this out in simple terms but, is there an analog experience to that of an epic puzzle adventure game such as the Legend of Zelda series on smartphone app games? How would one play something as complex as Pikmin with the ability only to tap on the screen to control the gameplay experience? Or even something as simple as Mario Kart? These are not comparable experiences so the argument that Nintendo must cut prices to be competitive doesn’t hold water– it’s like arguing that Mercedes-Benz needs to cut the price of the S-Class or else they’ll lose all their customers to the Nissan Sentra.

Fourth, the analyst is being inconsistent. To give the company brand equity credit, and any non-zero valuation at all when one argues that Nintendo must cut their prices when they can’t and won’t do this is idiotic. Because Nintendo won’t do this, by the previous logic they’re doomed to fail, but if they’re doomed to fail the brand has no equity and it certainly shouldn’t get a premium to the cash value of shares. If anything, it should get a discount to the cash value as it’ll probably burn through more.

Fifth, the analyst is being disproportional and lacks perspective. Negative charges due to forex translation have been more than de minimis but are still a small, small fraction of revenues and total earnings. To cite ongoing forex issues as an earnings problem for the company shows a lack of respect for the true magnitude of this issue.

Sixth, and finally, this is another demonstration of Wall St’s short-term focus and inability to think of the big, long-term picture. The analyst doesn’t see ANY WAY that Nintendo can generate meaningful earnings in the next 12 months, even though it’s rolling out a brand new system without any competition from Sony or Microsoft doing the same, and even though it’s gaining sales momentum with the new 3DS system. The analyst sees NO optionality in any initiatives or efforts by this company, whatsoever. And, even though the stock market is supposed to be discounting all future cash flows of a company, therefore qualifying it as a “forward-looking” market, this analyst only cares about the next year.

Will Nintendo even be around 13 months from now? This analyst doesn’t know and doesn’t care, and seems to think that either way, the company represents such a frightening risk with 90% of his share price target in cash and no debt, that he is only willing to assign it a small premium value over that cash.

If Nintendo just scrapes by, the market should lift off once it realizes it’s not dead in the water like this analyst believes it is. And if Nintendo has another hit on its hands, with the Wii U or otherwise, it’s really going to catch everyone with their pants down.

Which is quite an embarrassing position to be in.

Oh, and one other thing– the smartphone gaming ecosystem seems to be in the process of cannibalizing itself. I don’t think they’ll present much of a threat for ol’ Nintendo.