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May 27, 2009

That 10-Year Spot

A couple of things. First, we've been in a declining long-term interest rate environment for a long time. This is a huge plus for the economy is a number of ways, large and small. Second, that time is probably over. It doesn't necessarily mean we're headed for a period like the mid-50s to the mid-70s, but there just isn't much room for rate to decline, even if they wanted to.

Third, rates are still at historic lows, and we've seen quick increases even during the last 20 years when the trend was down, so there's not necessarily reason to panic just yet.

Fourth, the middle part of that graph should remind us all just how quickly things can get out of control.

CFA and Hedge Funds

The CFA unfortunately doesn't have much helpful to say about evaluating hedge fund performance.  You'd like to see if there's any alpha there, but the best they can offer is a series of variations on the CAPM theme, where alpha's what's left over after you've subtracted out the Betas for whatever you want to qualify as a risk factor.

If I believed in CAPM this would be alarming for its arbitrariness.

About Those Interest Rates

The Chinese, the major purchasers of our debt, have been getting increasingly antsy about the possibility that we might monetize our debt, or start playing Weimar Germany to their France & England.  Those nerves have been blamed for the recently rising spot yield for 30-year Treasuries, and the increasing doubt attending to recent Treasury auctions.

There may be another possibility.  The Chinese have been funding this debt in part because they hope that a stimulated and recovering American economy will help drag their export-driven economy out of its own slump.  However, their own Keynesian stimulus has been subject to the same sort of inefficiencies and failures that have been predicted for ours here:

The report "has some substantial findings," said Xianfang Ren, an analyst with IHS Global Insight. She said the issues it raised -- funding delays and not enough stimulus for small- and medium-size enterprises -- are big problems that have long been suspected. The report also raised the matter of speculative bill financing, which occurs when borrowers use loans not for working capital but to buy stocks or speculate in other assets.
China has begun issuing rules to try to prevent this, but Fitch has begun sounding warnings about Chinese banks' balance sheets:

In a report on China's banks published Thursday, Fitch said it is seeing warning signals from the Chinese banking system. Chinese lenders have been downgrading more "special mention" loans, those that are considered about to default, to nonperforming status, marking them as bad debt, said Charlene Chu, a senior director at Fitch Ratings China and an author of the report.

Chinese banks also have been increasing provisions for losses on unimpaired loans, indicating that "the banks themselves see greater losses down the line in loans that are currently performing," Ms. Chu said.

The report added to earlier warnings from the credit rater that lending quality in China is weakening.

This, even as HSBC and Citigroup scale back their lending in China.

Could it be that China is now worried that it might need to shore up its own banks' balance sheets, and is holding back money for that purpose?

May 26, 2009

Dispelling Myths

Douglas Ross over at Red Alert took a first pass through the political contributions of the Chrysler dealers who are losing their franchises, and noticed that virtually none of them contributed to Obama; that those who did contribute heavily favored Republicans, and that the ones who contributed to Dems at the Presidential level like Hillary.  So he asked if this might constitute some political juice in deciding whom to shut down.

A number of commenters pointed out that he hadn't looked at the contributions of those dealers who'd still be in business, so he posted both lists and asked readers to have at it.

Colorado is a swing state if ever there was one, which should make it especially vulnerable to this sort of political game-playing, if indeed it's going on.

It turns out that in Colorado, to the extent that there's any difference at all, those losing their dealerships are perhaps slightly more likely to have contributed to Democrats than to Republicans.

Of the 27 dealers keeping their businesses, 14 had made contributions at all, with only a little money going to Joan Fitz-Gerald, and the rest going to the NADA PAC, Republican candidates, and Republican PACs and committees.    Of the 11 losing their dealerships, 9 had made contributions, and while these are also heavily Republican donors, about $3500 went to Democratic candidates, the balance going to NADA and Republicans.

Ross found something interesting, asked a question, and made the raw data available, which is what good bloggers should do.  I'm just afraid that the fact that there doesn't seem to be any there there, at least not in Colorado, won't keep some folks from repeating this claim as fact.

Sotomayor Roundup

A roundup of some early reaction to the nomination of Sonia Sotomayor to the US Supreme Court:

  • Powerline has the pro-Sotomayor talking points, and the Lawyers' eval from the Almanac of the Federal Judiciary
  • Scotusblog has responses to some of the predicted criticisms.
  • The Volokh Conspiracy wonders how this will play out among Hispanics.
  • Ann Althouse has a bunch of stuff
  • There's some back-and-forth between Althouse and Jeffrey Rosen, although to be fair, Althouse isn't really engaging in an all-out debate here
  • Stuart Taylor on Sotomayor's embrace of Democratic-Left identity politics
  • At Volokh, Jonathan Adler's take on Sotomayor's problematic comments
  • And via Orin Kerr at Volokh, the relevant portions of her speech, and a link to the whole thing
  • The Anchoress has her own comments, and a series of links, as well
  • Ed Whelan's earlier research, Part 1 and Part 2

May 25, 2009

Channels of Information

Markets are only efficient when there's a free flow of information.  One of the channels of that information are the sell-side analysts.  I was one for a little over a year, and I can tell you that small-to-medium sized companies, even ones with significant coverage, were almost always happy to hear from us. 

We were their means of getting their stories out to the market at large.  While we were always honest, and always discussed the company's warts, we also wouldn't have been covering them if we didn't think they were a good investment.

Now, with the financial industry in flux, adn Wall Street hurting, there are fewer analysts around to cover stocks, and information flow may be suffering:

Lost coverage can be meaningful not just to smaller companies but to their investors. Analysts link corporate management with both institutional and, to a lesser degree, retail investors. Though they are faulted at times for being too cozy with companies and too bullish on their stocks, analysts build a mosaic of information and analysis that can help drive interest in a particular company. The good ones do an even better job of understanding when corporate operations are struggling and thus warn investors away.


Scholastic Inc., a publisher of children's books including the U.S. editions of the Harry Potter series, has lost coverage from Goldman Sachs, J.P. Morgan and Citigroup, among others, leaving only three analysts still tracking the company. One result: company executives now spend more time on the road, meeting with potential institutional investors, since Scholastic has fewer Wall Street analysts to pitch their story.

"It has changed how we communicate with investors," says Jeffrey Mathews, Scholastic's vice president of corporate strategy and investor relations. "We spend much more time with institutional investors than we did five years ago." Goldman said the Scholastic analyst left the firm and coverage was dropped. Citigroup declined to say why it stopped following the company and J.P. Morgan declined to comment.

Directly targeting institutional investors would tend to reduce the information available to smaller investors, and narrow the decision-making base.  Information flow is slower, and fewer people are making informed decisions; both these effects tend to degrade market efficiency.

This effect may be reversible, but another will be harder to undo.  In the past, analysts could content themselves with analyzing market forces, the actions of thousands or millions of actors.  The government is taking a much more direct role not only in regulation, but in credit decisions and the actual running of banks, credit companies, auto companies, and soon, the insurance industry.  More and more, the fate of companies will ride not only on management's ability to respond to its consumers' needs, but also on decisions made in Washington. 

Not only will the analyst have to read tea leaves to guess the direction those decisions will take, but he will also have to judge management's ability to do so.  This is going to make political analysis as important as economic and financial analysis, and it's going to make guessing the moods of a couple of dozen lawmakers as important as understanding a company's supply chain.

And you thought it was only the technical analysts who practiced black magic.

May 22, 2009

Now It's Municipal Bonds

The financial wizards who brought us the mortgage debacle now want to do the same for municipal bonds:

One piece of legislation would provide the Federal Reserve with the authority to fund new liquidity facilities for some municipal securities. Another would provide federal re-insurance for municipal bonds, which seeks to make it easier to for municipalities to issue municipal debt to raise money.


House Financial Services Committee Chairman Barney Frank, D-Mass., defended legislation to create a federal re-insurer, arguing that the marketplace imposes unfairly high interest rates on municipal bonds, which typically have a lower rate of default than corporate bonds

"We need to have the safety of municipal bonds reflected in the interest payments on those bonds," Frank said. "The market plays a very important role but market failure is also a factor."
Well, he'd know about market failures, having helped create the last one.

What he wouldn't know, wouldn't have any idea about, is what the proper interest rate premiums are for municipal debt.  If Mr. Frank thinks that municipal debt is a bargain, he's always free to buy some.  Why doesn't he just suggest securitizing such debt and chartering companies to buy the securities?

There are already companies that insure municipal debt, so there are two, mutually-reinforcing markets already at work here.  If he really thinks that these companies are under-capitalized, there are plenty of regulatory remedies already available.

In fact, there's excellent reason to think that what's really going on here is an attempt to bail out California without having to tell people that's what you're doing.  Because they might not like that.

May 21, 2009

The EPA and Your Health

I'm pretty sure I don't want the EPA making decisions about what medical equipment ought to be permitted.

This goes back a long way, but they moved pretty quickly once these lousy alternatives became available.

She has high praise for socialist Sweden's ban on paying for anything but non-CFC dry-powder inhalers, which cause discomfort in some patients. Sweden, she says, shows "it can be done. It is political will along with an alternative that for the majority of patients works.... Sweden managed it." Asked if Sweden's socialist plan would work in the United States, she replied, "No, we still think we have choice."

Conflicts of Interest

The government, having already funnelled $5,000,000,000 to last fall, is now suspending lending rules to benefit its new wards, GM and Chrysler:

The exemptions come as part of a multi-pronged aid package for GMAC that will be laid out early this evening. The Treasury Department is also planning to announce a second bailout for GMAC of $7.5 billion, which is in addition to a $5 billion infusion made in December. More money could be coming soon, the sources said.
Oh, goody.  Now, full disclosure: I own a couple of thousand in 5% GMAC bonds, maturing in September, currently trading at $90 ($100 is par value), for an annualized yield in the 50% range.  This is considered junk, but people are willing to be roughly 1-9 odds that the company won't default.  That said, I would rather take that chance than to see GMAC bailed out time after time.

Chrysler Financial, which has historically provided loans to Chrysler's car buyers and dealerships, is expected to be wound down over time, the sources said. GMAC may need as much as $4 billion more to provide loans to its new base of customers, industry sources said.
Let's see if Chrysler Financial pays any retention bonuses to the workers who stick around to work themselves out of a job.

The FDIC is preparing to announce today that it has given GMAC access to the Temporary Liquidity Guarantee Program that allows companies to borrow money at lower interest rates, the sources said....

GMAC applied to participate in the program shortly after it became a bank holding company. But until now the FDIC had been reluctant to allow GMAC access to the program, given its shaky financial position.

The use of FDIC resources to rescue an auto lender like GMAC would be without precedent. If GMAC is unable to repay the loans guaranteed by the FDIC, the agency could be forced to raise the money through a special assessment on banks

For the Fed to make an exception to its rule separating banks and commercial enterprises would not be unprecedented. The Fed took such a step in its original decision to bring GMAC under the agency's umbrella and it made similar moves involving other financial companies.

So the FDIC will use federal money (i.e. our money, or maybe Beijing's money) to let consumers borrow at a lower interest rate to buy cars made by government car companies. 

If those subsidized loans at lower interest rate fail to perform (now how could that happen?), the government may have to take money from banks - who are now in no position to refuse the favor - in order to cover its losses.  The only precendent it can cite for waiving these rules is for GMAC itself.

Proponents of the auto bailout assured us that the government would never rewrite the rules to benefit itself.  Others of us didn't see how it could be avoided.  And now, GMAC is being used as the IV drip for GM and Chrysler.  Just as the "public option" for medical insurance will favor the government favorites, and drive out private insurance.

So, Scott Sperling, you still think this is capitalism at its best?

Has Anyone Seen Sandy Berger Around?

For some reason, the National Archives has a hard time keeping its hands on information related to the Clinton Administration:

The National Archives lost a computer hard drive containing massive amounts of sensitive data from the Clinton administration, including Social Security numbers, addresses, and Secret Service and White House operating procedures, congressional officials said Tuesday.

One of former Vice President Al Gore's three daughters is among those whose Social Security numbers were on the drive, but it was not clear which one. Other information includes logs of events, social gatherings and political records.

Um, political records?  The Clinton Administration had a hard time keeping its White House operations, it politics, and its FBI files separate, and now it turns out that much information of this type is missing.

The aide, who was not authorized to be quoted by name, said the hard drive was left on a shelf and unused for an uncertain period of time. When the employee tried to resume work, the hard drive was missing.
Sure, and Sandy Berger was just looking for a place to make change when he stuffed those meeting notes and memos under a trailer for a dead drop brief time.

The first inclination is to suggest that someone wanted the information disappeared.  Washington is so thick with intrigue and interested parties that it doesn't take much of an imagination to come up with a couple of dozen suspects.  The fact that the Archives simultaneously claims that 1) it's trying to find out what was stolen, and 2) it's certain that there's a copy of it somewhere around here (shuffles papers on desk), opens the door to blackmail as well as protection.  And remember who's our current Secretary of State.

The Post doesn't appear to have bothered to put this in its print edition, but it'll be interesting to see if there's any follow-up.

Correction: The article did appear on page A20 of Wednesday's paper.

May 20, 2009

You Call This Capitalism?

If there's one thing that Ayn Rand and Albert Jay Nock both understood, it's that businessmen will cut deals with the government when they think it's to their advantage.  Economics may be the sea that business swims in, but if you need to buy off Ahab with a couple of the slower-moving whales well, hey, who asked them to be your calves?

The problem comes when business develops a sort of Stockholm Syndrome about the process, convincing itself - or trying to convince itself - that the presence of the whalers is actually a good thing, even as the herd gets thinner and thinner, the calves somehow never call and never write, and the cow down at the other end of the sand bar needs more and more plankton to get her in the mood.

That's the attitude on display by private equity fund mogul Scott Sperling's apologia in yesterday's Wall Street Journal ("Obama's Auto Plan Is Capitalism at Work").  Wrong on both strategy and tactics, is Mr. Sperling.

The Chrysler creditors are not bad or unpatriotic people. They are appropriately acting as good fiduciaries to their investors. But luckily for American citizens, the Obama administration is also acting appropriately by insisting it will only invest taxpayer dollars if the investment has a chance of succeeding. While the government was willing to pay a significant premium to the debtholders to avoid the "friction" costs that occur in a bankruptcy, the administration was not about to do anything stupid with our money.
There's almost nothing right with this paragraph.  In fact, the President did call the bondholders bad and unpatriotic.  Maybe some bondholders did bid up the price hoping for a government bailout of their own.  A nasty lesson in the dangers of arbitrary power may be valuable, but it's hardly, "capitalism."  And what of those who didn't, who merely priced in their place in line, free of public hectoring by the President?

There's nothing "capitalist" about the federal government going into partnership with the ruling party's major constituency.  Barring such partnership, there's no reason for it to care about bankruptcy's "friction" costs.  Sperling has no idea - none - whether the bondholders got a premium or not.   And while the government's new-found fiduciary conscience it touching, it would be more credible if it had shown up sometime before Obama Partners, ULC. contracted to double the national debt in four years.

Means matter.  If they didn't, we wouldn't have a Constitution that theoretically forbids this kind of neo-feudal behavior by Washington.  Even if, every time, the government managed to magically reproduce or improve on what the market or bankruptcy courts would have done, having a deus Obamica show up and bruit things about this way is extremely dangerous.

This is one reason I'm a Burkean conservative.  The bankruptcy laws have evolved over decades both to give order to the system, but also to embody a reasonably good way of sorting out competing interests.  No politician, or set of politicians is going, time after time, to do better than the accumulated wisdom of hundreds of thousands.

The self-deception that believes the lie
I wish I were in love again
Lorenz Hart, "I Wish I Were in Love Again," Babes in Arms
Mr. Sperling is a heavy, heavy Democratic contributor.  He's is in the business of brokering deals.  Why do I suspect the Mr. Sperling (and his partner, Thomas H. Lee) sleep well at night knowing - or at least, hoping - that it's unlikely that government's going to step in and rewrite their terms of their arrangements.  Beware, Mr. Sperling, many others have been rudely disabused of similar notions.

In the past, he and his company have refused to accept modified terms that didn't suit them.  We'd hear a different story if the government were a major investor in his latest fund, and started throwing its weight around to pick and choose his investments.

After all, we know how Tom Lauria reacted.

May 15, 2009

A Day Late, A Billion Dollars Short - Maybe

After forcibly nationalizing the banks in all but name, redistributing ownership of GM and Chrysler, and making noises about the necessity of absorbing GMAC, speculation was that the insurance companies are next.

And sure enough, today, the government announced that it was freeing up $22,000,000,000 for insurers who had applied for TARP funds back when they were supposed to be used for buying up toxic assets.

Now, having seen what happens to cities that make deals with the Empire companies that make deals with this administration, at least two of the insurance companies are putting the money down and backing away from the table, while two more are likely to do so. Prudential and Ameriprise are expected to say, thanks but no thanks, and Allstate and Principle are also looking at the money like a side-dish they hadn't ordered, although, of course, they had. Only Hartford and Lincoln(!) seem willing to take the cash.

It's hard to blame the reluctant four, as they have seen banks refused the opportunity to repay their, "loans," contracts broken, officers fired, budgets rewritten, and now talk of salaries being determined in DC. We now know that banks and their officers were threatened with audits, and pension funds and other bondholders with public "shaming," a la the AIG employees who stayed on to wind down the derivatives division. (No such fate seems to attach to any employee of Fannie or Freddie, but that's a subject for another day.)

That two companies are giving into temptation is might disappointing, but hardly surprising, as companies almost never keep a united front against government plans, whatever they may be. And I suspect that we haven't heard the last of this yet. The Obama Administration will almost certainly try to threaten and browbeat the reluctant insurers into taking the cash, or of finding ways to preference their competitors who do. Hopefully the holdouts will continue to do so.

If so, I know who I'll be using to insure my new Ford, when I need a new car.

May 10, 2009

The Illusion of Voting Integrity

In the Cowboy trick, an individual from the crowd is given a video camera; Penn says he's going to make a tiny plastic cow disappear from his hand, and he asks the audience member to film the vanish as the feed is projected onto a large screen for the rest of the room. While the mark focuses on Penn's flamboyant hand gestures--and the impertinently nonvanishing cow--Teller rearranges the entire stage in plain view. The audience cracks up; even when the poor sap looks up from the viewfinder, he fails to notice that anything is different.

"The idea for this trick came straight from science," Teller says. "We thought it would be fun to show people how bad they are at noticing stuff." Called change blindness, the phenomenon is illustrated in a video (on YouTube) that inspired the duo. Shot in 2007 by British psychologist Richard Wiseman, it ostensibly documents a simple card trick--the backs of the cards in a deck are magically transformed from blue to red. But during the course of the video, Wiseman's shirt, his assistant's shirt, the tablecloth, and the backdrop all change color, too. Most viewers watch the card trick unspool and miss the other alterations. Attention, it turns out, is like a spotlight. When it's focused on something, we become oblivious to even obvious changes outside its narrow beam. What magicians do, essentially, is misdirect--pivot that spotlight toward the wrong place at the right time.

-- Wired Magazine

Penn and Teller are latecomers to this game.  In the case of preserving the integrity of the voting system, the Democrats got there long before them.  While they keep you focused on all-paper voting, the butterfly ballot, or whether or not this or that Diebold! Diebold! Diebold! system has a paper receipt, they're busily changing the rest of the set.

Merely in terms of basic voting integrity, the Democrats in this legislative session killed bills that would have assured that voters were Colorado residents, that they were citizens, and that they actually were who they claimed to be. 

In the meantime, there was also a bill introduced that would have doled out driver's licenses to non-citizens.

The two big parts to voter security are making sure that 1) the voter has the right to vote in that jurisdiction, and 2) the voter is who he says he is.  The Democrats continue to make it virtually impossible to validate either parts of that equation.

When Secretary of State (Democrat) Bernie Buescher threatened to take people whose latest voting precinct was the cemetery off the rolls, the ACLU, Common Cause, and every other lefty group screamed loud enough to wake those voters.  And there's now a move at the federal to prevent independent organizations from comparing voting records to other public records for validation - the very records that are supposedly good enough for an individual to use as identification at the polls.

Democrats will respond that there's never been a large-scale prosecution of voter fraud.  Well, if you treated accounting the way they treat voter records, there'd never be any prosecutions for money-laundering, either.

The next step is to allow voters to register online.  Of course, every other week we read about Chinese hackers breaking into the electrical grid or stealing the plans for our new fighter jets before they've been finished.  And then, there's the fact that government files are the single biggest source for identity fraud.

So see?  While you're focused on whether or not the ATM you trust your savings with is good enough to count your votes, they're re-doing the entire set.  You don't want to know what it's going to look like when they're done.

May 7, 2009

Conservatism's Not a Dirty Word

At least according to the Denver Women's Republican Club. This Saturday, at the University of Denver's Sturm Hall, they're holding a free forum on the future of conservatism and the Republican party - the two aren't identical - with a free continental breakfast.

It features some terrific speakers: Karen Kataline, Ben DeGrow, Ryan Frazier, Mark Hillman, and others.

See the whole flyer, with directions, the full program, contact information, and further reassurance about the free food.

They've worked very hard to put this together, and it should be well worth the time.

May 5, 2009

California Spreads the Wealth Around

In Sunday's column, George Will analyzed the fiscal grease fire that is the Republic of California.  Early on, he makes this point:

Under Arnold Schwarzenegger, the best governor the states contiguous to California have ever had, people and businesses have been relocating to those states. For four consecutive years, more Americans have moved out of California than have moved in. California's business costs are more than 20 percent higher than the average state's. In the past decade, net out-migration of Americans has been 1.4 million. California is exporting talent while importing Mexico's poverty. The latter is not California's fault; the former is.
"Those states" include, notably, Nevada and Arizona, which have used their windfall to subsidize ever-expanding government of their own.  Now, City Journal's Nicole Gelinas writes that their time is running out, too:

But during the boom times, elected officials in Arizona, Florida, and Nevada took a page out of the old states' playbook, driving up spending at an unsustainable pace. Now that the growth of the low-tax states has hit a wall, shattering revenues, they face a tough choice: they can raise taxes to fund permanently higher costs, or they can aggressively cut spending. So far, it's proving surprisingly easy for them to choose Option One, taking a small step toward transforming themselves into the high-tax states that so many of their own residents have fled.
"Those states" also include Colorado, which had a net domestic in-migration of about 162,000 from 1995-2000, and again from 2000-2008 (all these numbers are from the US Census), about a third of that total coming from California.

We can't assume that in-migration will continue to float us forever.  In fact, during the 2003-2004 period, our net migration turned negative by a couple of thousand.  We can also expect our in-migration to drop substantially for 2009, as people generally move less during economic downturns, and this one has the amplifying factor of making it more difficult for people to sell or rent out their homes in order to move.

There's little doubt that TABOR saved us from a similar fate as Nevada and Arizona, over-spending and over-taxing being bipartisan pathologies, but it's also clear which party now wants to remove those safeguards.

May 4, 2009

Iran, Playing Us For Suckers

The Wall Street Journal today carried two important pieces about our approach to Iran. 
One was a report that Secretary of Defense Robert Gates is in the region trying to console, reassure our Arab clients allies, that we won't suck up to reach out to Iran at their expense.

Given Iran's desiderata, it's a zero-sum game, possibly a negative-sum game.  Helping Iran take a role in regional affairs necessarily entails limiting our own role, allowing the mullahs to help shape events to their liking.  These regimes are not to their liking, but can probably be bypassed for the moment at Iran targets Lebanon, Egypt, and other potential and current US allies of actual significance.
Gates also said that the emirs had nothing to worry about since, in all likelihood, the administration's overtures would be met by a "closed fist." 
It's not the closed fist I'm worried about, it's the joy buzzer.  Iran is easily savvy enough ato use negotiations and the appearance of openness to jolly us along until, one morning, look at that, a bomb!  Wow, what a coincidence; we were just talking about that.  Where did that come from?  And where did all those Europeans allies go to?  In fact, Amir Taheri makes an excellent case that this is exactly what they have been doing.
More transparently, it puts the initiative in Iran's hands, or fists, relying on them not to be smart enough to make their best play when indeed they already are. 
When your best response is, "don't worry, they won't be smart enough to discern our good intentions," you can bet that 1) they already have, and 2) it's not particularly reassuring to your allies.

It ought to be even less reassuring to us.

May 2, 2009

Israel Appoints Michael Oren Ambassador to the US

The new Israeli government has appointed Michael Oren as its new ambassador to the United States.  It's a home run appointment.  (Soccer Dad is also approving.) One assumes his ability to talk to our government, but it is his ability to communicate directly to the American public that will prove his greatest asset.  It's the sort of fluency and articulateness that Israeli PR has been lacking since, well, since Bibi was here.

Oren is a fellow at the Shalem Center, and has a deep knowledge of both contemporary Middle East history and the long US involvement in the region, dating from our inception in the 18th Century, having written serious books on both - Six Days of War; and Power, Faith, and Fantasy.  His writing for Azure reveals a thinker, informed by historical documents more than ideology.

Merely having such knowledge probably wouldn't be of much help with an administration that seems both ignorant and apathetic about history.  But he's also demonstrated an understanding of current politics and policies.  Oren knows what mischief Jimmy Carter is up to, and has written with caution about the prospects of talking to Iran.  Oren also fought in the recent Gaza incursion; to the extent that this administration is willing to listen, he can speak from experience they wouldn't have seen on CNN or Al Jazeera.  (Listen to his contemporaneous interview with Hugh Hewitt here.)

May 1, 2009

Business Still Doesn't Get It

One stock that I followed at the brokerage, and which I own a couple of hundred shares of, is called Tetra Tech (TTEK).  When I get a chance, I like to listen to conference calls of companies I've done research on.  Even if I'm not actively modeling the companies right now, I'll learn something about their business, and usually about how they see the economy.

Now, TTEK is heavily dependent on government contracts, getting just under 50% of their net revenue from federal contracts, and another 15% or so from state and local governments.  Their main line of business is water projects, and they're also heavily involved in wind power, nuclear, and other alternative energy projects.  In fact, they make a good case that their work corresponds with the government's current priorities:

And one thing that is very clear to us here is, the clear priority of this administration and the majority party here in the United States are to support programs for clean water and water infrastructure, cleaning the environment and energy efficient buildings and energy independence while reducing CO2 emissions. And these are the markets that Tetra Tech is primarily focused on. So when their funding goes up, we are exactly in the right spot.

While they haven't built stimulus money into their projections, they consider themselves to have a natural advantage when that immedately-necessary, time-critical, urgently-needed cash starts to hit the market sometime in the next century:

...And from our perspective, the firms that will be the most successful are the ones that have contracts in place today.

I have said this before in our previous call but with two and half months gone by, since the signing of the Recover Act, it is increasingly important to get this into the economy fast. And the only way we see to do that is to go first to those as whole contracts.

Fair enough.  Except for two things.  First, one would thing that with two and a half months gone by, and the money still sitting in Beijing and Shanghai, they would have figured out that maybe getting the money to market isn't the most important thing on the government's mind.

Second, if the Chrysler and GM debacles have shown us anything, it's that where this money gets spent, and who gets to see it, is going to be determined by narrow political motives.  Period.

What's at work here is that too many in the business community don't understand that the game has changed.  Used to making deals enforceable by steady rules, they are ill-equipped for an environment where there are no rules and the deals only last as long as the President likes them to.

The TARP-entangled banks are learning this to their detriment, as are the GM and Chrysler bond-holders.  Soon, Ford will be find it out, when it finds itself forced to compete with union-owned car competitors for lending at government-held banks.

Those who say that the commercial credit markets will dry up aren't counting on the federal government forcing the banks to lend, quality of the borrower-be-damned.  And I'm afraid that the management of Tetra Tech is using entirely the wrong yardstick to measure how the government dole is going to work in the future.


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The Day the Universe Changed


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The Case for Democracy

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

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