February 2006

You are currently browsing the monthly archive for February 2006.

Irrational Exuberance Explains Google Jitters

February 16, 2006 in Economics | Permalink

Shares of Google fell 7% on February 1st this year after the firm reported that its fourth quarter earnings rose by 82% or $1.22 per share rather than the expected rate of $1.50 per share. [BBC]

Google’s stock has been priced for perfection so any minor perceived downturns extract a large price on the stock. But Google is not the only stock that is “priced for perfection” and hence suffers from catastrophic declines as a result of bare failure to meet sky-high expectations. It seems the whole stock market is besieged by nervous anxiety – ready to pounce upon companies showing any sign of weakness. The phenomenon has a name – “Irrational exuberance”, first coined by ex-Federal Reserve Chairman Alan Greenspan to describe the dot-com bubble of the late 1990s.

Robert Shiller co-opted this term, Irrational Exuberance, for the title of his book that explicates further about the phenomenon. Schiller, through his research on stock price data and earning ratios, puts forth convincing evidence that many of the stocks are absurdly over-valued and hence investors are very sensitive to any signs of weakness in a company. Schiller has also incorporated statistics on the housing prices in his book.

Markets have often been often hailed as being a great barometer to accurately judge the profit potential of a company. Schiller shows that markets are prone to error. He discusses factors like culture and high-profile coverage of Internet in media as reasons that led to the creation of a bubble. On the question of how so many people got it wrong, he uses factors like Asch conformity (named after an experiment done by Solomon Asch to show influence of peer pressure on people) to explain “how people can listen to others against their own best judgment.”

“Irrational exuberance” and resulting inflated stock prices have created a very nervous market heavily dependent on the nervous cues of analysts and the quarterly results of the companies. The reliance on those factors has made many CEOs reluctant to making any substantial changes that will affect quarterly results until of course the company’s situation is critical and the knowledge of that public. Carly Fiorina, ex-CEO of HP, has publicly lamented that the increased focus on Quarterly results prevented her from initially doing the restructuring that she had envisioned. The other major consequence of the continued stock market and housing bubble is that shareholders have become more active in ensuring the welfare of ‘their’ companies.

Of course the most important possible consequence of “irrational exuberance” is the possibility that it will lead to depression or worse. John Campbell and Robert Shiller in their paper, “Valuation Ratios and the Long-Run Market Outlook: An Update,” posted on Yale University, calculated that share prices divided by a moving average of 10 years worth of earnings reached 28 just prior to the crash of 1929 as compared to 45 on March 2000. [Wall Street, October 1929 ] A major correction to the sustained bull run on the wall-street can have major consequences.

FDA defines ‘whole grain’

February 16, 2006 in Health | Permalink

Market shelves today are full of products claiming to be ‘whole grain’. Nearly 700 whole grain products were introduced in 2005, according to ACNielsen, a market research firm. The 700 plus whole grain products were released in 2005 for a reason – the demand is booming. In the past year, sales of foods with whole grain claims on the label have shot up nearly 8 percent, according to ACNielsen.

The heightened interest in whole grains is partly due to USDA’s new dietary guidelines released in 2005 that recommended consuming “3 or more ounce-equivalents of whole-grain products per day”. [USDA dietary guidelines]

But the guidelines over what constitutes a whole grain product were largely non-existent. “Until now, there has been no official definition of whole grains and no easy way for consumers to know that cracked wheat, stone-ground wheat, ordinary wheat flour and many other seemingly whole-grain ingredients are not the real thing.” Washington Post

Companies trying to cash in on the health food craze but with little inclination to institute large scale manufacturing changes instituted their own misleading branding for whole grain – “a good source of whole grains” etc. “For example, Cheerios and other General Mills cereals have their ‘own’ ‘whole grain’ emblem. Companies from Bruegger’s Bagels to Snyder’s of Hanover pretzels use black-and-gold labels shaped like a postage stamp saying a product is a “good source,” an “excellent source” or a “100 percent source” of whole grains.” MSNBC The companies

FDA on February 16th issued guidelines as to what constitutes whole grain. Under the new guidelines, “Cereal grains that consist of the intact, ground, cracked or flaked caryopsis, whose principal anatomical components – the starchy endosperm, germ and bran – are present in the same relative proportions as they exist in the intact caryopsis – should be considered a whole grain food.” FDA release

“The draft guidance states that although rolled and “quick oats” can be called “whole grains” because they contain all of their bran, germ and endosperm, other widely used food products may not meet the “whole grain” definition. For example, FDA does not consider products derived from legumes (soybeans), oilseeds (sunflower seeds) and roots (arrowroot) as “whole grains.” The draft guidance specifically recommends that pizza only be labeled as “whole grain” or “whole wheat” when its crust is made entirely from whole grain flours or whole wheat flour, respectively.” Food Consumer

While the FDA guidelines are a good first step towards leashing the ambiguous marketing of “whole grain” products, they don’t go far enough. The phrase “whole grain” is inextricably linked in public mind with healthy food and lifestyle and hence whole grain products with large amounts of sugar or fat can still be seen as healthy choices. There is a critical need to develop a more substantive labeling for food products that take into account the sugar and fat content. The other critical thing that is ignored is information about people with allergies to grains or people with celiac disease. Nurta Ingredients

But overall the FDA guidelines fill an important gap in standardizing labeling for an important aspect of a healthy diet.