View From a Height

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.

Posted by Joshua Sharf at 6:17 PM | Permalink | Comments (0) | TrackBacks (0)

1) Consumer sentiment is useless is predicting the single most important engine of economic growth

2) Since it's somewhat correlated with media coverage of the economy, attempts to jawbone up the economy are doomed to fail, or at least be irrelevant.

3) Consumer sentiment during non-recessionary periods of Republican and Democrat administrations over the last 28 years clearly shows patterns that indicate more favorable coverage during the Clinton years.

This:

U.S. consumer confidence rebounded this month to the highest levels since the demise of Wall Street, according to a highly regarded study.

The University of Michigan's Consumer Sentiment Report, released today, is based on a scale of one to 100, and preliminary April figures show confidence rose to a level of 61.9, up from 57.3 in March. This is the highest index reached since September, when the survey recorded a 70.3.

In the study, people said they're feeling better about spending money because they think the recession is going to bottom out this year, not because their personal economic situation has improved.

And why would they think that? Well, why do you think?

Most consumers really only know about their own situation at the moment.  They're going to form their opinions about the broader economy based on 1) what they're hearing in the press and 2) what they're hearing from their friends, co-workers, and businesses.  And as much as we don't like to admit it, voices of authority such as the President and the Fed Chairman still carry weight, especially when reduced to optimistic sound bites.

Worse, this statistic has just about no predictive value.  I correlated the St. Louis Fed's record of Consumer Sentiment with the change in personal spending, month-over-month, for the last 30 years.  I lagged them from 0-12 months.  The best correlation was lagged by one month, meaning that consumer sentiment best predicted next month's increase in spending.  It correlated at 0.22, which is pretty meaningless, and has an r-squared of 5%, meaning that the best, the best that this does is to predict 5% of next month's increase in personal spending.

OK, I hear you say, but both numbers are sort of bounded.  After a while, you can be making more than you're spending, top out your spending, still be feeling really good about the economy, but not feeling better, and not spending more.  Aha!  The month-to-month change in sentiment predicts less than 1% of the change in personal spending for any month in the coming year.

This means that 1) consumer sentiment is useless is predicting the single most important engine of economic growth, and 2) since it's somewhat correlated with media coverage of the economy, attempts to jawbone up the economy are doomed to fail, or at least be irrelevant.

But when you look at the graph of consumer sentiment, and compare it with GDP growth, something else emerges:

Sentiment recovers during the first years of the Reagan Administration and then stays high, but flat until the recession of 1990-91.  It then recovers as the economy begins to, only to dip again just in time for the election.  At which time it goes on an 8-year, unbroken upward trend, cresting and then declining with the election of George W. Bush.  The attacks of 9/11 no doubt helped push it down, but in fact, we were headed into a recession at that point, anyway.  Then, despite the recovering a prosperous economy until 2007, sentiment bounces around, but trends flat for the decade.

There's never any one, single cause for anything outside of physics, but there's pretty strong evidence here that unremittingly positive coverage during the 90s pushed up sentiment, while unremittingly skeptical coverage during the Bush years helped keep it in check.

The good news is that this probably didn't actually affect the real economy.  The bad news is that it almost certainly affected out politics.

Posted by Joshua Sharf at 7:32 AM | Permalink | Comments (0) | TrackBacks (0)

I'm beginning to think that having put the State Capitol near the Mint was a mistake. I think the Democrats are beginning to think that they can just print their way out of whatever burdens they put on the state.

We found out last month that the Colorado Unemployment Insurance Fund was safe, despite climbing unemployment numbers:

Reforms instituted a generation ago appear poised to keep the system solvent even as other states see their unemployment programs go broke. And work is under way to improve the department's Web site this spring, which should make it more user-friendly and ease the strain on the phone system.

...

In the 1980s, state lawmakers set out to protect the state's Unemployment Insurance Trust Fund -- it is used to pay benefits to people who lose their jobs -- after watching it go broke in a recession.

The result was an additional tax, dubbed a "solvency surcharge," that was designed to kick in whenever the trust fund's balance fell below 0.9 percent of the wages paid in the state. The calculation is made each year on June 30, and in 2004, after three years of recession, the tax kicked in.

The result: Colorado's unemployment trust fund grew to $672 million last fall, just as the latest recession was taking hold. That allayed fears that Colorado could again find its unemployment fund out of money.

...

"It would take a deep recession that went on for several years before we would go insolvent," [Mike Cullen, Colorado's director of unemployment insurance] said.

His assertion is backed up by various scenarios that have been considered, including a moderate or even severe recession, said Alex Hall, the department's chief economist.

"Certainly with all the information we have available at this time, and what we feel are reasonable scenarios, including scenarios that take us into a pretty deep recession, we feel that the surcharge is providing that stability and revenue for the unemployment insurance trust fund, and that solvency will not be an issue for us," Hall said.

Well, not so fast there, cowboy.

In a state budget outlook delivered week, the Colorado Legislative Council Staff predicted the fund balance "will fall precariously close to insolvency" to just $44 million by June 30, 2010, down from nearly $700 million on June 30 last year.

The Colorado Department of Labor and Employment expects a healthier fund at $187 million on June 30, 2010, but still has concerns, said Mike Rose, chief of statistical programs for the department.

"We also consider it possible that the fund might be marginally solvent at periods in 2010 and 2011," he said Wednesday.

Unemployment insurance payouts are expected to total $834.1 million in the current fiscal year that ends June 30 and stay at that level for another year, according to the council forecast.

In the midst of this, the legislature seems poised to pass HB 1170, which would entitle employees who are locked out - that is, they have jobs but are involved in a labor dispute - to receive unemployment benefits.

Here's a chart showing the monthly balance of the Colorado Unemployment Insurance Fund, along with a 12-month moving average of employer contributions and benefits paid out:

The reason I've smoothed out these payments and contributions is that employer contributions are extremely seasonal. They generally see a large jump in May, when the surcharge is assessed. They also tend to have almost no contribution during the last month of each quarter, while the first month of each quarter is the highest.

So, the payouts are still rising, and have just passed the contributions. For the first time since the recovery from the last recession, we've seen an actual drop in the fund's balance. Even if all those conveniently-times stories about how we're hitting bottom are correct, unemployment is a trailing indicator. Since contributions are based on the current aggregate salaries paid, that means that contributions will fall even as unemployment rises. This dynamic refills the coffers during the latter part of recoveries and prosperity, but drains them towards the middle and end of recessions.

Then, there's this:

A state Senate committee took up a bill Wednesday that would make Colorado eligible for $127 million in federal stimulus money for the fund by expanding the definition of who can qualify for jobless benefits. It would cost the state an estimated $14.6 million in the fiscal year that begins July 1 to make the changes, largely to pay benefits for newly eligible residents.

So we'll pick up a net $100 million this year, at the cost of no future returns and nobody-bothers-to-ask how much more in perpetual commitments down the line.

The only way out is to float debt. If we end up having to do this during an inflationary period, it'll mean higher rates and even more trouble down the line.

Unemployment insurance is well-established by now. But I can't help wondering if it wouldn't be better to give it to the employees up front rather than paying to the government for what passes for their traditional definition of, "safekeeping"

Posted by Joshua Sharf at 4:30 PM | Permalink | Comments (0) | TrackBacks (0)

Turns out if you work at a company that's taken federal money, the government's going to save you having to wait until your company derives your new pay scale from what they can pay the CIO this month.

But now, in a little-noticed move, the House Financial Services Committee, led by chairman Barney Frank, has approved a measure that would, in some key ways, go beyond the most draconian features of the original AIG bill. The new legislation, the "Pay for Performance Act of 2009," would impose government controls on the pay of all employees -- not just top executives -- of companies that have received a capital investment from the U.S. government. It would, like the tax measure, be retroactive, changing the terms of compensation agreements already in place. And it would give Treasury Secretary Timothy Geithner extraordinary power to determine the pay of thousands of employees of American companies.

...That includes regular pay, bonuses -- everything -- paid to employees of companies in whom the government has a capital stake, including those that have received funds through the Troubled Assets Relief Program, or TARP, as well as Fannie Mae and Freddie Mac.

The measure is not limited just to those firms that received the largest sums of money, or just to the top 25 or 50 executives of those companies. It applies to all employees of all companies involved, for as long as the government is invested. And it would not only apply going forward, but also retroactively to existing contracts and pay arrangements of institutions that have already received funds. (emphasis added -ed.)

On Backbone Radio a couple of weeks ago, my colleague Matt Dunn and I disagreed on whether or not the government should try to claw back the AIG bonuses.  I didn't think so, but could see there was an argument in using AIG as a cautionary tale to keep others from taking the bait in the first place.  Matt was wondering why the Republicans weren't making a bigger issue of this.

Turns out we were both operating under the delusion that there were still rules.

Readings of the Commerce Clause have been increasingly detached from reality for the last 70 years, beginning with a decision that selling corn within the borders of Indiana somehow constituted interstate commerce, because corn is fungible.  This was followed by a decision that a company was engaged in interstate commerce because its suppliers' suppliers moved products across state lines.

Since the government hasn't provided any exit strategies for these, ah, "investments," this amounts to a perpetual pay schedule.  And you thought that post-graduate degree was going to open the door to someone more than a GS-8.

In fact, Treasury is considering dispensing with the requirement that you have received Federal money, requiring only that you be publicly traded.  Given the open-ended nature of this commitment, it's only a matter of time before the employees of these companies demand that their competitors be held to the same standard.

After all, it's only fair.

Posted by Joshua Sharf at 1:54 PM | Permalink | Comments (0) | TrackBacks (0)

The Wall Street Journal is reporting that the Obama Administration now wants to use Fannie and Freddie as a source of warehouse capital for small mortgage banks.

The regulator has asked representatives of mortgage banks, including the Mortgage Bankers Association, to come up with a detailed plan for Fannie and Freddie to help mortgage banks get credit. John Courson, chief executive officer of the association, said in an interview that the plan should be ready to be presented to the regulator within about a week. One possibility is that Fannie and Freddie will guarantee debt issued by warehouse lenders, making it easier for them to provide financing to mortgage banks.

...

Mortgage banks typically are small, family-owned companies. Unlike commercial banks or thrifts, they aren't licensed to take deposits and so don't have that source of money for their loans. Instead, they borrow money from warehouse lenders, which often are units of larger banking companies. The mortgage banks use the short-term credit to provide loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to investors such as Fannie or Freddie.  (emphasis added -ed.)

In short, the mortgage banks were one of the prime sources of securitization.  Properly done, securitization is a good thing, and if the buyers, rather than the sellers, assess the risks, then there's some chance it could work again.  But it's far from clear that the mechanisms are in place for banks to assess these risks.  The lack of warehouse capital itself should be a sign that those funders don't believe there are buyers yet for mortgage-backed securities.

So, rather than let that market re-develop on a sounder basis, the Obama Administration plans to lend the mortgage banks the money to originate the loans which it then plans to buy itself.

The Administration apparently has tired of even trying to conceal the financial shell games it's playing.

Posted by Joshua Sharf at 7:50 PM | Permalink | Comments (0) | TrackBacks (0)

New Mexico based First States Bank is selling is Colorado banks, known as First Community, to South Dakota-based Great Western Bank, which itself is owned by National Australia Bank. Papers in all three states reported on the sale, but in very different ways. And each tells an important story larger than this sale.

The Las Cruces paper leads with the fact that First States is changing its mind about that TARP money, after all:

Albuquerque-based First State Bancorporation says the sale of its Colorado bank branches will improve its balance sheet enough to eliminate any need to accept federal bailout money.

First State, which does business as First Community Bank, will focus its attention on the New Mexico market, the Albuquerque Journal reported in a copyright story Thursday.

...

Stanford said availability and terms of the federal Troubled Asset Relief Program funding is too uncertain and that First State has withdrawn the application it submitted last October.

The bankers don't like the fact that, increasingly when doing business with the Federal government, a deal really isn't a deal, after all. So rather than get caught in that particular tarp, er, trap, they decided to raise their capitalizatino to 12% from 10% by selling off some of the bad loans.

Both of the Colorado reports, from the DenPo and the Denver Business Journal, mention that it was Bob Beauprez who sold the under-performing banks to First State in the first place. Bad news for an election run this cycle, I'd think.

But neither mentions why Great Western would want to take on this burden. Leave that to the Argus-Leader:

The acquisition involves the purchase of 20 branches and will allow Great Western to expand its small business and agriculture lending, said Jeff Erickson, president and chief executive at Great Western.

"The addition of these Colorado branches is consistent with our strategic growth plans and gives us the opportunity to expand particularly in the areas of small business and agricultural banking," Erickson said.

So it would appear that rather than beg for federal money with Lilliputian-quantity strings attached, a bad sold off an underperforming ball and chain to another bank who saw opportunity there instead.

I can't believe either presidential administration meant for it to work this way, but the raging uncertainly surrounding TARP may be forcing smaller banks to actually let the market operate.

Posted by Joshua Sharf at 11:01 PM | Permalink | Comments (0) | TrackBacks (0)

So say a majority of the Metro Mayors Caucus, who want to double the portion of the local RTD sales tax to make sure that the Great White Elephant of a light rail gets built on time and massively over budget.

We can't actually tell which mayors thought that raising taxes in the worst economy since the invention of money was a good idea, and which ones thought they should wait until next year, when all the people who had money to spend were out of work, because neither of the Post's two articles, nor the Caucus's page itself tell you. It's a good thing there are professional journalists around to keep us informed.

They estimate that this glorified Disney monorail is going to suck another $2.2 billion out of the regional economy over the next 8 years. In fact, as has repeatedly been shown, both the cost and revenue forecasts are little better than ouija boards. Denver had no idea well into the 4th quarter of last year how far south its sales tax revenues were headed, and budgeters missed both the commodity price decline of the T-Rex years and the jump in construction prices over the last couple of years.

There's no guarantee that even this amount will be enough, and if mirabile dictu, the thing somehow manages to come in under the excess projected, they'll find some other way to spend the money.

Here's a better idea. Make choices. Like the rest of us.

Posted by Joshua Sharf at 10:26 PM | Permalink | Comments (0) | TrackBacks (0)

Lois Court (D - Economic Cluenessness) joined all four Boulder Democrats in the State House yesterday in voting against Declaring March 9 - 13 Small Business Week. (By the way, Randy, Rep. Fischer from up there in Larimer County also dissed the bill. Raise an extra glass to the Maya Cove's owners next week, will ya?)

This is the sort of pro-forma measure that usually sail through by a combined 100-0, and if anyone pauses to comment, it's usually to sing the praises of whatever group is being honored.

Admittedly, there was a dig in there about the estate tax, but people die in Boulder and east Denver just like everywhere else. Stating that an estate tax can be a powerful disincentive is just stating an economic fact. It's like voting against a resolution honoring the astronauts because there's a clause in there stating that solid rocket fuel is dangerous and should be handled with care.

Maybe they didn't like the line about small business having a harder time getting credit, because it reminds people of all the money we're borrowing.

Maybe this is like voting against a Children's Day, because every day is Children's Day, and under the Dems, they want every business to be a small one.

I really have no idea. There are 59 Democrats up on Capitol Hill, and 48 of 'em were able to make their peace with this non-binding sense-of-the-legislature that wealth comes from entrepreneurial brains, rather than legislative luncheons.

Posted by Joshua Sharf at 12:35 PM | Permalink | Comments (0) | TrackBacks (0)

Or, "Taming the Wild Entrepreneur."

From the WSJ's description of the President's tax plan:

As expected, Mr. Obama proposed raising taxes on private-equity fund managers and venture capitalists, by taxing their profits as ordinary income instead of capital gains. That change would raise $23.9 billion over 10 years, according to White House budget office estimates.

I seem to recall the President making some comment in his speech to Congress about helping entrepreneurs. (Maybe I remember it because it was one of the few times where Nancy "Jumping Bean" Pelosi took a brief break from her calisthenics.) Where does the President think entrepreneurs get their capital? Removing this tax break may raise a few billion in the short term, but it removes a key incentive for capital to flow to entrepreneurs in the first place, which means that, like all tax increases, it will ultimately raise far less than projected.

This is self-defeating. Unless, of course, the President wants the government to pick the inventors who'll get the money instead. Almost certainly, he'll claim that he's supporting entrepreneurship by redirecting money into green energy startups. That, combined with his ongoing attack on the oil and coal industries, designed to make green power more competitive by making oil and coal more expensive, will allow him to claim that government investment in just as efficient and effective as private investment.

Of course, it does expand another patronage class, directing creativity where the government wants it to go, with the added satisfaction of making the inventor beg to the government for support.

As for the private-equity funds, those are the funds that have the most flexibility and creativity. Obviously, we'd want to punish them, as well. Stock appreciation is no less a capital gain when one of those funds sees the benefit, than when yours or my 401(k) or IRA sees it, but the President wants to treat them differently, because most private equity investors are successful and prosperous.

One last note. On Tuesday night, the President said that, "if you earn less than $250,000, your taxes won't go up one dime." Turns out he wasn't talking to individuals, but to married couples. If you live in the northeast, it's pretty common for each spouse to bring home $125,000 apiece, and it doesn't go all that far.

We really have elected a cross between FDR and Wesley Mouch.

Posted by Joshua Sharf at 5:02 PM | Permalink | Comments (1) | TrackBacks (0)

President Obama has paid his first installment to the unions, instituting a "Worker Retention" policy for federal contractors, of the kind Denver is considering at the local level. You can read the text here, via shopfloor.org. Mickey Kaus (HT: Powerline) gets at least one of the problems with it.

I wrote about this disaster of a public policy proposal the other day, but more has occurred to me since them. This, of course, is aside from the bizarre act of giving the employee an overt property right in a contract he had no hand in winning, and in fact, may have in fact helped cost his current employer.

As part of that patronage extension, there's the virtual elimination of any incentive to actually perform the work involved.

If the Denver City Council is so convinced that this policy would save the city money, they must be equally convinced that, had it been in place, it would have saved the city money over the last decade or so. So why don't they go back, dig up all the contract rebids over that period, see which ones changed hands, and see how much of the savings was attributable to labor costs.

Better yet, how about some enterprising reporter who actual job it is to cover these things goes over the last year's worth of contract re-competes and makes that calculation?

Posted by Joshua Sharf at 11:15 PM | Permalink | Comments (0) | TrackBacks (0)

That's the term for a recession-induced, recession-prolonging piece of extended patronage being considered by the power-conscious but economically illiterate Denver City Council.

According to the Denver Post, the City Council is considering enacting so-called "worker retention" laws for city contracts:

Now Nevitt and eight other members of the 13-member City Council say they want to extend "worker retention" for all service contracts for the city and airport.

Firing workers just because a new contractor comes on the scene is "both inefficient from an operational perspective, expensive from a budget perspective and cruel from a personnel perspective," Nevitt said.

Oh-for-three. There's no particular reason to think it's inefficient operationally: if the duties performed are routine, the new, winning bid may in fact derive from operational efficiencies. It's less expensive by definition, as the winning bid by a new company must be, by definition, lower than the incumbent's bid. As while nobody wants to see anyone else lose his job, where's the kindness in leaving the winner's employees on unemployment?

It's perfect reasonable for people to seek security in this economy. You think I'm not worried about my job, too? But pressure to keep wages high was one of the chief factors in the New Deal's prolonging of the Depression, and this bill would do nothing if not keep wages artificially high.

Finally, this basically extends permanent job security from direct city employees to city contractors, in effect creating an entirely new patronage class dependent on the largess of city budgets.

Posted by Joshua Sharf at 10:39 PM | Permalink | Comments (0) | TrackBacks (0)

Colorado Republicans have proposed mortgaging government property to pay for transportation projects, up to $500 million.

The Democrats, naturally, want to raise your taxes permanently instead, and would net only half the amount the first year.

Right now, Colorado general revenue bonds, which are basically secured only by the moral obligation of the state to pay its debts, are paying about 1.5% yield to maturity. Paid back over 15 years, that's about $35 million a year in payments, or about $6 a person per year, for $500 million.

The Democrats want to secure a permanent funding stream out of your pockets, at about 4 times that rate, in the middle of what they've consistently called the worst economy since the Great Depression.

The Republicans want to borrow at a ridiculously low interest rate, heading into what will likely be an inflationary environment sometime in the next two years. That inflation will only increase borrowing costs.

The Democrats want to build in more structural spending, and then, when inflation eats away at the value of the taxes they're collecting, complain about shortfalls and raise rates again.

And this is without ditching TABOR.

Posted by Joshua Sharf at 12:09 AM | Permalink | Comments (0) | TrackBacks (0)

Colorado will receive $34 million to buy up distressed properties. Of that, Denver will get about $6 million.

This isn't right, This isn't even wrong.

Look at the path the money follows to get here:

The state of Colorado will allocate the HUD funds, and community development groups, with the help of elected officials, will use the money. NSP money can be combined with HUD's Community Development Block Grant (CDBG) Program funds as well as other funding resources.

This doesn't even include all the administrative costs; some of the $6 million will go to those, as well. The fingers in the pie include: the IRS, HUD, the state of Colorado, community development groups, local elected officials, who will rely on local bureaucrats, all of whom have incentives to maximize their respective cuts, none of whom have incentives to actually improve neighborhoods. I'd love to see the cost accounting at the federal, state, and local levels for this cash, but none will be forthcoming, I'm sure.

Worse still, $6 million isn't even worth the effort. According to the City Assessor's Office, we can roughly value all the residential real estate, both real property and condos, at about $40 billion. Six million isn't enough to arrest a trend of declining home prices; it is, however, enough to pick favorites and reward allies.

If there are distressed properties for improvement at a profit, there are plenty of investors willing to risk their own money, without having to make the round trip through three different bureaucracies.

Maybe they could even hire some of those paper-pushers to do the framing.

Posted by Joshua Sharf at 4:03 PM | Permalink | Comments (0) | TrackBacks (0)

The Governor of Oregon has come under fire for wanting to replace the gas tax with a mileage tax. He wants to use GPS to track residents' mileage, and then assess the tax at the pump.

At first glance, this might seem like the right way to assess the tax. Wear and tear on roads is more closely related to miles driven than to gallons of gas consumed. In practice, it's a terrible mis-assessment of taxes, raising questions of jurisdiction, cost-to-revenue matching, government-sponsored behavior modification, and CAFE standards. And that's without the intrusiveness of the government watching where you drive your car.

If gas tax revenues are down, it results from some combination of better mileage and less driving. Better mileage undermines the argument for higher CAFE standards, as it happened without them.

Less driving - supposedly the behavior we all want - shows the dangers of using the government as a massive behavior-modification program. Governments do a terrible job of matching revenue structure to cost structure; if successful, the programs that were dependent on sinful excess suffer.

I've written about Denver Water's experience (and now neighboring Aurora's experience) a couple of times. Almost all of their costs are fixed, so higher charges result in lower usage, and less revenue, but does little to lower costs. They raise rates even further, enraging consumers who are already watching their yards turn brown in years of plentiful snowpack.

We've seen this with smoking. Smoking in the US is down, and yields on tobacco-backed revenue bonds are up. Long-term bonds paying 5% coupon are routinely priced at 9% yield-to-maturity. This in a declining interest-rate environment, with a tax-free coupon. Often, these bonds are now rated at just over junk level.

Ideally, fees would allocate taxes to the roads being driven and their maintenance costs, from the drivers using them. But it isn't necessary to tax each driver preicsely; it's only necessary to make sure that aggregate collections match aggregate costs.

A mileage tax would tax only Oregonians. But they drive in neighboring states, and Washingtonians and Californians use Oregon's roads. All things being equal, I'm most likely to fill up in a jurisdiction where I do most of my driving. And under such conditions, a point-of-sale system would ensure that every jurisdiction would collect its fair share of road use taxes over time.

All things being equal. Of course, they're not. I no longer drive out of my way to get better gas prices. But I will try to nurse a tank to get to the cheapest gas near my regular route. Bureaucrats argue that this leads to competition. As though there were something wrong with that.

Posted by Joshua Sharf at 1:07 PM | Permalink | Comments (0) | TrackBacks (0)

Hank Paulson, and now the British, are complaining that the bailout money available to the banks isn't being lent.  So why not?

Well, it's not because banks are happy to sit on fat piles of cash while you and I look for work.  And it's not, contrary to some conspiratorial emails I've gotten, because the bank want to own everything from the GM to your house.

Banks make money by lending.  They don't make money by being in the real estate business, or the car business, or any other business other than lending.  They want to be able to judge good managers of those businesses, but they neither have nor want the skills to run those businesses themselves.

So why aren't they lending?  It's because they can't find anyone they want to lend to.  They won't lend to other banks because they can't tell which banks are sound and which aren't.  But most of their business comes from lending to businesses, and right now, it's almost impossible to tell which businesses have good stories and which don't.

I spoke which a friend of mine who invests money for a living.  He's a value investor, and a good one, and his complaint was that every company had one of two stories: it wouldn't make it, or it had a great model for when the economy turned around.  The valuation measures he uses - that most value investors use - aren't distinguishing between merely good companies and companies actually worth investing in.

It means that almost every company's story is now the macro story, the story of the larger economy, not its own.  And it means that the market, the individual decisions that individual investors make about individual companies, is being driven by the uncertainty in that macro picture.

The sooner we let the market find a bottom, the sooner we let the economy adjust, the sooner those valuation measures will begin to make sense again, and the sooner we can start turning this thing around.

Or, Obama can take all that FDR talk seriously, and we can be having the same discussion 7 years from now.

Posted by Joshua Sharf at 2:20 PM | Permalink | Comments (0) | TrackBacks (0)

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is im-possible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Adam Smith, The Wealth of Nations

Even though the bailout package now seems to be debt-based rather than equity-based, the basic dynamic hasn't changed - the government is going into business with the Big Three.  It isn't merely requiring such meetings, it's participating in them.

What's even weirder is Elisabeth Moss Kanter's discussion of the lack of green planning by the Big Three, as a condition for receiving public funds:

All three of the plans talk about how they're getting better at building cars to [meet] market demand. Pause for a moment and think about that. These are the biggest advertisers probably in the world. And that makes it sound like they're passive recipients of consumer preferences, as opposed to shaping consumer preferences. So I would ask [the car companies] what are you going to do in your advertising and marketing this time to guarantee that the public actually wants green cars?

Implicit in the patronizing notion that people can be bludgeoned by advertising into wanting something they don't want, is the notion that they should be.  By government fiat.  Leave aside the fact that the so-called "green" cars will create an increased demand for electricity that regulators are doing everything to not meet.

People aren't buying green cars because the payback periods (including increased and naturally-rising maintenance costs) extend well past the second century of the Cubs' rebuilding program.  If you pay more that you have to for the same item - in this case, getting from home to your job - you'll have less left over for everything else, including reitrement.  That's called a lower standard of living.

You might try to offset this by buying into one of the rent-seeking green companies, and that'll work until everyone buys in and reduces returns to market rates.  Inefficient investment is no more better for an economy than inefficient purchasing.

So what Prof. Kanter is proposing is that we use our own money to persuade ourselves to live more poorly.  As the Powerline guys put it, lower living standards aren't the solution, they're the problem.

Posted by Joshua Sharf at 10:15 AM | Permalink | Comments (0) | TrackBacks (0)

Under what conditions would the government liquidate its proposed stake in the car companies?  In short, what's the exit strategy.

Should the companies become profitable again, there may be considerable pressure for the government to stay in the game and collect dividends.  And even if the car companies wanted to buy out the government, it might never be to their financial advantage to do so.  If the shares are over-valued, it's to GM's advantage to let them drop before buying.  If undervalued, GM's move to buy would be interpreted as such, and the government might well choose to them the shares appreciate.

But the real threat here is regulatory.  The Big Three would find themselves with a friend in government, more able than ever - and with a profit motive to boot - to muck around with the rules to the benefit of rent-seeking auto companies, and with a proven disinclination to defer to market discipline.

Our own Diana DeGette, Congressman for Denver, is Chief Deputy Whip, thus a part of leadership.  She's also the outgoing Vice Chairman of the House Energy and Commerce Committee, so will exercise considerable oversight of this monstrosity.

I just placed a call to her office for clarification (1:15 PM Denver time), and am awaiting a reply.

Posted by Joshua Sharf at 1:11 PM | Permalink | Comments (1) | TrackBacks (0)

With its Treasury assets low, the Fed is considering issuing its own debt, something it's never done before, and may be prohibited by law from doing.  The central bank has seen its balance sheet more than double, to over $2 trillion, and is trying to come up with added flexibility.

This is a spectacularly bad idea, so I'd expect to see enabling legislation on the President's desk by next week.

Anyone who buys Fed debt would be basically buying all those risky assets - plus whatever new risky assets the Fed decides to backstop tomorrow.  The market doesn't think much of those securities, which is why the Fed had to step in and buy them in the first place.  On the open market, they'd have insanely high yields and minimal value.  What the Fed is proposing to do is to remarket those securities, in effect as CDOs without the tranches, rebuilding the house of cards that got us into this problem in the first place.

Any difference between the yield those securities would be required to pay on the open market and the interest rate the Fed would have to pay would be - totally and completely - based on the public's confidence in the US Government's ability to cover those costs.  In other words, you and me. 

There are also almost certainly conflicts of interest (so to speak) between the Fed's role as a stabilizer of the debt markets and its role as a participant in them.  It's one reason the Fed has been independent, with the ability to tighten money and drive up borrowing costs largely without interference from the Treasury.  The Fed as debtor may be much less willing to fight inflation.

Posted by Joshua Sharf at 12:13 PM | Permalink | Comments (0) | TrackBacks (0)

The problem with experts is that they're awful at predicting the things they're supposed to predict.  Nassim Taleb makes this point in both Fooled by Randomness and The Black Swan.  The problem with reporters is that they don't bother to check how well the experts have done in the past.

The CU Boulder's Leeds Business School released its Business Economic Forecast for 2009.  Both the Post and the Rocky reported on it, doing little more than repeating the predictions.  Now, the whole thing's available for download here.

Looking back over the 2005-2007 predictions, they've done all right, but nothing spectacular.  And this year's prediction spent time on the housing market, but completely missed the financial crisis and the mortgage industry's spillover into the rest of the economy.  The 2008 forecast doesn't even mention the word "mortgage" outside of the housing industry survey.

In terms of percentage change in total employment, they were off by 8% in 2005, 1% in 2006, and 17% in 2007.  That's not bad, but their sector-by-sector results aren't so good.  They've consistently underestimated the Mining sector's growth, as well as government growth.  They're almost never under 10% relative error on these estimates.  When the change is near 0, that's going to happen, but of the 33 sector predictions over the last 3 years, only 6 have been under +/-1000.

I saw the same thing when I was valuing a construction company at the brokerage.  The American Institute of Architects tries to predict construction activity, but their sector predictions are almost never with 10% of the actual number. 

We use these numbers because we don't think we have anything better.  That doesn't mean they're actually good.

Posted by Joshua Sharf at 10:09 PM | Permalink | Comments (0) | TrackBacks (0)

The Balance Sheet

Put simply, American newspaper companies have too much debt, and have been fooling themsevles about how much equity they have. When they went through that period of consolidation a few years back, the surviving (so far) companies vastly overpaid for the properties they bought, thinking that either they could turn them around or that the names would translate into sales. Then they borrowed agains these "assets," and have thus robbed themselves of whatever flexibility they had.

Here are the assets of the seven companies we've been looking at so far:

The bars represent the total assets. The blue represents something called, "Goodwill," the red, everything else. Goodwill is, roughly speaking, the vigorish that you pay for a company. Essentially, according to accounting rules, you're not allowed to pay more for something than it's worth. What you pay for it is what it's worth. So if you pay $4 million for a company whose net assets are valued at $3 million, after the buyout you put down the extra $1 million as an asset called, "Goodwill." It can generously be interpreted as extra cash you think the property should generate over time.

But it's a guess, an estimation, and can also serve as a slush line item to hide the fact that you just overpaid by 50% for a name that isn't generating any ad revenue any more, but that People Trust. It used to be that Goodwill was amortized over a period of time. Now, it has to be re-examined as often as necessary, and written down as appropriate.

Let's take a look at what's going to happen, as accountants realize that if the New York Times can't sell ad space, neither will the Podunk Press they sunk $2.5 extra large into five years ago, and that all the Goodwill in the world isn't going to change the fact that Iowans are getting their news from here and their local advertising from here.

The other rule here, so basic it's been known since the Italian Renaissance as the Accounting Rule is that Assets = Liabilities + Equity. If I write down an asset, I also need to subtract a like amount from either liabilities or equity. Since Goodwill isn't exactly a loan, likely it'll come out of equity. Here are the Owners' Equity lines from these companies, before and after Goodwill is subtracted:

That's right, boys and girls. Four of these Titans of Type go from having positive equity to negative equity, meaning they owe more than their companies are worth. And this is a completely defensible assessment. Given the current market, and the likelihood of how these will develop, you can't sell that Goodwill on the open market, because people apparently have resorted to paying what things are worth.

Now all of these companies have some long-term debt, although the Washington Post company seems to have made an effort to pay its down to minimal levels. Typically, I don't want debt-to-equity to be more than about 1. I know, there was a time not so very long ago when investors liked leverage. Because after all, we'd always be able to refinance that, wouldn't we? But I was never comfortable with huge debt-equity ratios.

Naturally, the D-E are calculating including Goodwill. Here's what happens when you subtract the Goodwill from the equity, and recalculate:

Not much fun. Of course, four of them go from positive to negative, including USA Today, which looked safe. The Journal newspapers only edge up to 1.30, and the NY Times - whoa, there, Pinch! - run up from a safe-looking 0.75 to almost 3.2. Only the Washington Post manages to stay sober.

These companies have been fooling themselves about the state of their balance sheets, believing that they had better balance than they did, because they were counting on revenues that will never materialize.

Now, I know what you're thinking. Debt's ok if you can pay it. Well, as we'll see next time, that's a problem, too.

Posted by Joshua Sharf at 2:34 PM | Permalink | Comments (0) | TrackBacks (0)

Governor Ritter and too many legislators have been counting on the oil and gas industry to protect us against a recession. Note that these are the same people who argue against shale oil on the basis of Black Sunday a few decades ago.

Here comes the bad news your mother warned you about:

Energy companies are slashing operating budgets as Colorado's once-booming oil and gas industry struggles with plummeting commodity prices, a tight credit market and an uncertain regulatory environment.

Hiring freezes have been implemented in an industry that just six months ago struggled to fill open positions. The effects of the cutbacks are trickling to other companies, such as law firms that provide service to oil and gas operators.

News flash: it ain't just the law firms. It's trucking companies, hotels, housing, construction, pipeline companies, metalworking, logging, and everything else upstream from the hole in the ground. It's not just severance taxes, guys.

They'll base the budget on a cyclical industry, but won't allow it to grow to take advantage of the upturns.

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Politicians don't understand businessmen. And businessmen don't understand politicians. Each certainly fails to understand the game that the other is playing, and why they're playing it. It results in consistently unequal negotiations, where one side ends up getting scalped by the other.

Businessmen are in it to make money, but the entrepreneurs are also in it to build, to create, to do cool things. Politicians are in it to help people, but they're also in it to control, to exercise power, to dispense favors. For most of history, politicians had the upper hand, because wealth was tied up with the crown and with aristocracy, which was tied up with the government. Only in very rare instances - fleetinglly in industrializing England and France, and more durably in 19th and early 20th century America - was business able to run its own show.

It depends on whose turf they're playing on. Earlier this year, the academics and bureaucrats over at the Fed got snookered into heavily subsidizing JP Morgan's buyout of Bear Stearns. Morgan had to put up $1 billion, in return for which the Fed bought $26 billion or so of bad debt. The pressure was on, a deal had to be reached, we were told, and the government gave in.

Similarly here in Denver, aviation moguls have repeatedly played the Denver and Colorado governments over DIA. United Airlines got preferential treatment concerning gates, which prevented the expansion of Frontier and kept UA on life support, all the while shutting out new competition like Southwest and keeping fares high and choice low for Denver flyers. Later, Boeing led the governor and the mayor on a merry chase, playing them off against Chicago and Dallas for the right to host their new headquarters. And let's not even get started about Coors Field and Mile High II.

But it works the other way, too, and historically, it's been far more common. We got to build DIA, but the concession stands had minority and women set-asides. For some reason - can't for the life of me figure out how - Wilma Webb ended up with one of those set-asides.

And now, the Big 2.5 were on Capitol Hill rattling their tin cups, asking for our money to stay afloat. The price of this was to be a government oversight board of some kind. They they can't run a railroad, they seem to have problems running a bank, they sure as hell can't run a school system, they gave up trying to run the airlines, but they want an oversight board for auto manufacturers.

Then there are the health insurers who seem willing to sign the death warrant for their own industry:

Wall Street Journal: On Wednesday, the insurance industry's Washington trade group issued a statement saying it could accept new rules requiring companies to cover sick people, as well as healthy ones, as long as all Americans were required to have insurance, with subsidies for those who need them. The declaration by America's Health Insurance Plans is a switch from the industry's long-time opposition to rules that bar the common practice of weeding out customers who are likely to rack up too many bills.

...

National Review: Still, [Daschle] is unlikely to abandon the contention that decisions regarding what should or should not be available as a universal benefit to all Americans should be decided by an independent body of experts and wise men, not the marketplace or the political process. A powerful, unaccountable über-regulator of health care would be exactly what proponents of market-based health care dread.

Having demonized insurers for making money on their product, the government would simply rig the rules so that its "non-profit" share of the health insurance market steadily grew.

There's a chilling line from Atlas Shrugged, where the increasingly meddlesome bureaucrats tell the Midshipmen of Industry, "You wouldn't want us to tell you how to run your businesses now, would you?"

Indeed.

Progressively more intrusive. Progressively more expensive. Progressively more restrictive.

Posted by Joshua Sharf at 9:53 AM | Permalink | Comments (0) | TrackBacks (0)

On Friday, driving to Aspen for the weekend, I happened to hear Lou from Littleton (a host, not a caller, on KOA, who's actually from Detroit), argue for the automakers' bailout. His case? That attendance at the Lions games was so bad that the NFL was considering lifting its blackout policy there.

So instead of spending $25 billion to keep the UAW afloat for a few more years, how about the Lions just lower the ticket prices? Oh, right. Probably because then they wouldn't be able to put that quality product on the field that the people of Detroit have come to expect over the last 50 years.

Posted by Joshua Sharf at 8:00 AM | Permalink | Comments (0) | TrackBacks (0)

Moral Hazards, everywhere you look. Arnold Kling has been all over that terrible idea, the proposed auto bailout.

A big reason that the auto industry is in trouble financially is that many of its current and past workers have retirement benefits (including medical care) that are defined benefits. That is, the benefits are promised regardless of whether enough money was contributed to provide for them.

And why is this a problem?

This refers to companies with defined-benefit pension plans, which are plans that promise to pay specific benefits, even if the funds in the plans lose money. The companies think that it is onerous that they should be expected to actually have to take steps to keep their promises. Instead, they want to go on as if everything is fine, and leave somebody else to pick up the tab if it isn't.

And who are the tab-picker-uppers? Naturally, the taxpayers, under the Pension Benefit Guarantee system.

Everyone who promises defined benefits thinks that somebody else needs to help them keep their promises. That somebody else is you and me.

First GM, and then PERA, which is less arguable, because those pushing this little piece of socialism will then claim that you and I made the promises to the government employees.

In fact, it's almost as though they're pushing to help GM in order to clear the way for a PERA bailout.

Posted by Joshua Sharf at 1:03 PM | Permalink | Comments (0) | TrackBacks (0)

And now for something completely different.

Posted by Joshua Sharf at 2:57 PM | Permalink | Comments (0) | TrackBacks (0)

Readers of the blog, and those following the campaign, know that I'm a fan of Right to Work, and therefore a proponent of Amendment 47.

I just saw an anti-Amendment 47 ad, claiming that Right to Work would both lower wages and cost jobs. I suppose these are truly bipartisan ads, in that neither Hoover nor Roosevelt seemed to think that employment had anything to do with the cost of labor.

Posted by Joshua Sharf at 7:48 PM | Permalink | Comments (0) | TrackBacks (0)

I'll be doing a special noon-time BTR show today about the financial crisis with King Banaian of SCSU Scholars, and William Polley of, ah, William Polley.

Hopefully, we'll all learn something.

Posted by Joshua Sharf at 11:18 AM | Permalink | Comments (0) | TrackBacks (0)

As a result of the campaign, I've been invited to chat with the local IDEA Cafe, basically a support group for aspiring and recovering entrepreneurs. Since it's a decidedly non-political group, I'll be talking about process, rather than policy. Basically, a campaign is a startup, and the campaign and entrepreneurs probably have a lot to learn from each other.

How so?

Well, for one thing, you had better have done your research before you start running. Your product is a combination of positions and proposals. (To some extent, your product is also your positioning relative to other candidates, but more about that later.) If you think you're going to have time to do research and refine the product once the campaign is underway, good luck with that, as they say. Part of a campaign is working on and refining message, but the basic product, and the principles underlying it, had better be settled before you start to run.

Probably the piece of the campaign that people are most familiar with is the marketing aspect - segmenting the market, and then trying to position yourself into (and your opponent out of) favor with those juicy segments. Here's where your brand - i.e. party - can either help or hurt. Trying to get yourself in front of as many voters as possible also matters, and there are free forums and so-called earned media that are less available to entrepreneurs, by virtue of the process.

And then, there's funding. Like any good enterprise, a campaign needs to show the prospect of a return on an investor's money in order to raise funds. And like any good pie of investors, the target group can be divided into more and less risk-averse. The great risk-takers will help fund the petition drive. But many folks won't contribute until you're past the primary.

Here again, the value in funding a candidate can vary from race to race. An investor in a candidate in a safe district might be seen as looking for access once the person's elected. A contributor in a close race is looking to boost that party's prospects for control. A candidate in a more difficult district can still raise money by broadening the theater: after all, votes in his district count towards state totals on things like ballot initiatives and Senate and Presidential races. And every candidate can sell the longer-term, multi-cycle business of fighting the battle of ideas in the trenches.

And then there's the Exit Strategy. Campaigns usually have a series of well-defined exit strategies; they're called, "elections." Although, if you think of the operation in terms of a political career, and not just one campaign cycle, then it more closely resembles and ongoing operation. The problem is that way, way too many candidates and politicians do exactly that...

Continue reading "How a Campaign is (and isn't) Like a Startup" »

Posted by Joshua Sharf at 11:02 AM | Permalink | Comments (0) | TrackBacks (0)

Which is just as well, because the exam was Sunday.

The exam pass score is a 70, which is tougher than it seems, especially when you realize that only 40% of the examinees pass the thing. For some reason, the CFA Institute hasn't deigned to sign a contract with a computer testing center. I was able to get my brokerage licenses more or less at will, since I could take them on the computer and have them scored immediately. The Level I, despite being multiple choice (or multiple cherce, if you're from Brooklyn), uses those little pencil-bubble sheets that tolerate neither stray marks nor incomplete fills. The Level II is essay question, and to keep the monks in shape for that, they have them grade the Level I by hand and I should know in about 5 weeks whether or not I passed. So the monks can have time off for Lent, and also watch the World Series, they give the Level I twice a year, then pick the best, most reliable monks, and have them grade the Level II and the Level III in June only.

Now I know that I either passed or failed on my own merits. No pulling a Baltimore Ravens and blaming the refs if I failed. But there are a couple of points to make. First, about the econ section. The MBA program I attended neither required nor taught econ. And the econ study book (provided by the CFA Institute itself) was noticeably lacking in sample questions on the subject. This is a real problem, since a great deal of words in economics jargon mean more or less the exact opposite of their common, everyday dictionary definitions.

Now the CFA does provide sample exams. At $50 a pop. Naturally, I bought all five, so I could trade 'em with my CFA pals. They're on line, they grade them right there for you (apparently the monks are too busy at Matins), and tell you what sections you need work on. But then, they disable the browser's Print and Select-All functions, even though they only let you take each exam once. For $50, you would think they'd understand that you want to take them home, so you can take them again and again. Of course, you can still do a View-Source and paste them into a text file, then edit them to allow printing, and print them from the browser.

Not that anyone would actually do that. Oh no. Of course not. Cough.

The sample exams are actually helpful. They advertise them as having real questions from past exams, and then it turns out that they have real questions from the exam you're about to take, too. There's no question that going back over the tests a few times drilled into my head the right answers for somewhere between 10 and 20 questions.

In any case, the worst thing you can do is to go back and start figuring out the answers to the questions you remember. That way lies madness. So here I sit, checking out job listings with more attentiveness, hoping that I'll be signing up for the Level II in June, rather than the Level I again.

Posted by Joshua Sharf at 3:51 PM | Permalink | Comments (0) | TrackBacks (0)

So Manny Ramirez doesn't think it's the end of the world if the Bosox don't win the pennant this year. As usual, Manny's a little, what, isolated? out-of-step? oblivious? to the desires of the Red Sox nation. So yesterday, Mike Greenberg explained that fans want their players to care as much as they do, especially if they're making more in a year than most will make in a lifetime. And Mike Golic explained that it just doesn't work that way, that it's a job, and that getting paid more doesn't make you care more. We've heard it all before.

Then Greenberg said something like the following, and I'm paraphrasing:

Fans forget that for people inside sports, it really is all about the money. Sports is the only industry where what the customers want has nothing to do with what the owners want. Owners and players want to make money, while the fans want to win. Take our company, Disney. Do moviegoers care if they make a movie that wins the Oscar? No, not really.

Greenberg makes a mistake than many sports commentators make, when commenting about sports-as-business, and in doing so he lands himself completely on the wrong side of the discussion.

Let's point out first that successful teams make more money. With the exception of the Los Angeles Clippers, few teams can lose and continue to make money year after year. Getting taxpayers to build you a new stadium is a one-time boost, but eventually people get tired of watching a lousy product, and there are plenty of free places to see the mountains from. There's a reason the Braves left for Milwaukee, and the Expos are now the Nationals, replacing two previous DC baseball teams.

One reason the Yankees, Red Sox, Redskins, and Celtics are worth what they're worth is decades worth of building fan loyalty through winning. Championships. (Don't quibble with me about the Red Sox. They went to the World Series at least once a decade since the Babe was a bat-boy.) The A's obviously have better attendance and make more money since figuring out how to manage a budget and value-invest in players.

Bill James points out in his brilliant 1988 essay, "Revolution," that the competing business entities here aren't really teams, they're leagues. Except for a narrow swatch of Connecticut, the Yankees and Red Sox don't really compete for fans the way they do for wins. But MLB competes with the NFL for attention (also known as brosdcast revenue), and the Rockies compete with the Avs and Broncos and Nuggets for local attention. The reason the NHL #6 and sinking fast is that its games are on something called the "Vs." network, not because they Avs win or don't win.

While the Yankees may hate the Red Sox and the Cowboys may hate the Redskins, from a business perspective they need each other, like the black-white/white-black guys on that Star Trek episode. Because otherwise it's just the Black Sox throwing around a ball on a cornfield in Iowa.

James makes the insight that Greeny misses entirely: I buy a can of tomato soup because I want tomato soup. Just because Campbell's sees it as a business doesn't mean I have to. They may have better soup, or more flavors, or they may have better packaging, or more convenient sizes, or placement deals with Safeway. For them, that's business. Me, I just want a can of soup.

Baseball is selling competition. The minor leagues withered away into mid-inning diversions because of TV, yes, but also because their competition isn't real. The players care about stats because they want to get to the next level. Just like the managers. For them, success isn't winning an International League championship, it's getting called up to the majors and watching their old mates win that title.

When major league players don't care, or are perceived as not caring, it damages the honesty of the competition every bit as much as Giambi on the Juice. If enough players don't care, then the fans won't, either. They'll look for a league or a sport where players do care. And those players and owners will make the money.

Posted by Joshua Sharf at 12:03 PM | Permalink | Comments (0) | TrackBacks (0)

So I'm sitting here, listening to KNUS, when on comes an ad for CITGO gasoline.

"We bring you a steady stream of Venezuelan oil..."

It's not often you hear an advertiser openly and honestly give you the best reason for avoiding their product like the plague, hoping they'll shrivel and die.

And on KNUS, Salem Radio, which isn't exactly a target market filled with warm fuzzies for Herr Hugp.

Posted by Joshua Sharf at 4:36 PM | Permalink | Comments (3) | TrackBacks (0)

Over at the Three-Letter Monte, the CFA Blog, I have a posting discussing securitization of accounts receivables, and its location within the Statement of Cash Flows. I'm not sure this is a particularly widespread problem, but it may well be a more serious one for certain companies.

Here's the issue. Some companies have gotten into the habit of packaging their receivables and selling them off at some discount to a buyer. You know those ads where Orson Bean asks you why you should have to wait for a settlement or a lottery annuity? Well these companies apparently feel the same way. So they collect the money now from a third party, buy their hambuger, and then pay the third party back next Tuesday when their customers pay them.

Typically, companies will publish a schedule of their receivables, if not how long they're outstanding, then how long they expect them to be. This gives the purchaser some idea of the historical collections record, how long they can expect to take to collect what's outstanding, and how much they might expect to have to write off.

The buyer could take an annuity, some percentage of the receivables over time, or some percentage at the beginning. Any of these arrangements can be considered borrowing at some interest rate. As a result, they should be listed on the statement of cash flows under financing cash flows. But because the revenue is secured by receivables, which are part of operating cash flows, many companies categorize them there.

Now, the notional interest rates some of these companies pay will rise, if they can find buyers at all. Their operating cash flows will shrink, and valuations based on those cash flows will fall substantially. In fact, there's reason to suspect that those companies that place this financing under operations are the ones that are most likely to need the cash.

Next step: find a list of such companies.

Posted by Joshua Sharf at 6:48 PM | Permalink | Comments (0) | TrackBacks (0)

The Wall Street Journal carries a fawning review of one of my favorite companies, The Teaching Company, the modern incarnation of the Lyceum Movement. The length of the lectures and the level of engagement required is pitch-perfect. I've had particular luck with the music courses and the history courses, but the only reason the literature courses haven't worked as well is that I rarely have had time to read the books.

The bus ride has been devoted to CFA studying, in fact it has become a primary reason for taking the bus when I can. Although come to think of it, that course on Byzantium is probably the ideal accompaniment to floor tiling.

Posted by Joshua Sharf at 1:13 PM | Permalink | Comments (0) | TrackBacks (0)

Sunday was Chore Day. All day. For the first time since the sod went it, I cut it. Naturally, it was so high that the lawnmower kept cutting out. So I'd cut a few inches, back up, cut a few more inches, back up, etc. It was like cutting grass with a battering ram. Sometimes, I would restart the mower, and it would cut off just as I set it down. After 90 minutes out there in the sun, I can't begin to describe what a patience-building exercise that was. As for the grass, it's in good shape, but I can see where I'll want to fertilize as soon as I can.

After that, it was Back To The Tile. I've laid all the center tile, the tile I don't have to cut. Now, it was time to cut the edge tile. Break out the wet saw! Woohoo!

It was more tedious than hard. Since I was off just slightly from square to the walls, and since the walls themselves are off slightly from square, I had to measure each tile to cut separately. Down to measure, grab a tile, set the saw, and push it through. I will say that I've gotten pretty good at guiding a tile through by hand, without the guide, cutting along the pencil line. You have no idea how useful that is when you need to shave the tile down by 1/16", or just the width of the blade. And so, after four hours of turning all that tile back into clay (think ceramic dust + water), the edge tile is done, except for the pantry area. Not laid down permanenetly, but placed to measure. Pictures to follow soon.

Sunday evening was wall-to-wall wall-themed bumper music, in honor of our imported disingenuous lefty blogger, as opposed to the homegrown kind. My personal favorite was "Cry Me a River" by singer Kathy Wall, but there's plenty to choose from.

So what about Friday afternoon?

Well.

What happens when you naively believe that Sprint will simply do what they say, and exchange the phone at a store? Exactly what I should have expected from a company who only promised to exchange the phone in the first place to make up for lousy customer service. What should have been a 20 minute exercise turned into an hour ordeal.

I walked into the store, waited a few minutes for my turn, and then explained to the salesman that customer service had promised to exchange my phone. No dice, I was told. I needed to go to one of their newly consolidated Customer Service stores for that. And here's a handy map to help you find them!

I extended the salesman the courtesy of arguing with him briefly, then put the map back on the pile with all those other maps, and asked for his manager.

< Rod Serling Voice >Mr. Cole, sales manager of Store #506 at Cherry Creek North. Mr. Cole is a quiet, unassuming young man, just starting to make his way in the world. He earns a large portion of his compensation by making sure that no exchanges take place in his store. Little does he suspect that he is about to place a call to...the Twilight Zone.< /Rod Serling Voice >

In short order, I am told by Mr. Cole that, 1) he can't exchange the phone because he's not a service center, 2) he can't call customer service because 3) he won't have access to my account records, 4) there will be a $55 service charge at the service center for exchanging the phone, and that customer service won't be able to waive the charge.

That's four whoppers in only a few minutes. I informed Mr. Cole that I had no intention of arguing with him longer than it would take for me to drive to the Park Meadows service center, and that I had no intention of driving to the Park Meadows service center. No luck. As I was ready to walk out of the store, I went back, got his card, and called customer service from my phone.

Long story short - he called customer service himself (2), brought up my records on his computer (3), exchanged the phone (1), and had them reverse the service charge on my account (4). Short on time, I refrained from asking Mr. Cole what he had accomplished by stonewalling, since he did everything, anyway.

This is clearly the result of some insane incentive system that Sprint has set up. I'm sure I've mentioned this before, but Omni magazine had a story about 25 years ago, maybe a little longer, about a game where government bureaucrats compete to see who can most frustrate and enrage the citizenry foolish enough to show up at their offices. Sprint must offer very large prizes to the winners.

Posted by Joshua Sharf at 5:13 PM | Permalink | Comments (0) | TrackBacks (0)

The weather's still muggy, but now the monsoons are a little less reliable. So now, it's the triple threat: heat and humidity, and you still have to run the sprinklers.

Apparently, the Sprint-Nextel merger isn't going so well. I went to the Sprint website to pay the bill, and found that while Sprint may have known who I was, Sprint-Nextel had apparently come down with corporate Alzheimer's and I had to re-register. All of which went fine. Except they have you enter your password, and your Social Security Numberin the clear. Apparently, it hasn't occurred to the people who run the company that someone might try to use their wireless internet card to pay their bill, you know, in a public place.

Then, the dreaded, "Double Secret Probation Security Question." You get to choose your question, so I picked, "First Elementary School." Answer: Mosby Woods. Evidently, whatever software, and I use that term advisedly, they're using to run this website, thinks that a space is a special character, which rules out something like half the schools in the country. "Street where you grew up" isn't much better, but since the name of that street was "Northwood-that's-one-word-northwood," I took it.

You get a confirmation text message, enter the secret code telling you to drink Ovaltine, and you're resgisered! Here's the text of the message I got:

Subject: --- Put the subject of the mail here --- ---Put the body here and put a 'VqBvGKmk' where the validation code goes----

How these people survived Y2K without routing all of our calls through Russia is a deep, deep mystery.

So, I decided to call customer service, figuring that of all companies whose bills I could pay by phone, the phone company would be one. Guess again.

Remember that sketch where Mike Nichols tries to get a phone number from Elaine May? This was about the same. *4, Account Information, wanted a PIN, and cut me off when I couldn't remember it. *2, Customer Service did the same, but referred me to *3, Bill Pay.

Which also required the PIN Which Cannot Be Named. And this time, finally, I got to talk to a real person. Who asked for the phone number. And my name.

And the PIN.

It took rounds with two other customer service people before I found someone who could override the damn computer and take the payment for my bill. Yes, remember? They were sufficiently determined not to take my money that they turned what should have been a five minute job into a half-hour adventure.

People, if anyone reading this is in charge of customer service, don't do this.

Posted by Joshua Sharf at 9:51 AM | Permalink | Comments (0) | TrackBacks (0)

I mean it this time. After a couple of fits and starts, I'm going to take the Level I exam in December, and I'm going to be blogging about the studying.

A few starter posts to get things going...

Posted by Joshua Sharf at 10:45 PM | Permalink | Comments (0) | TrackBacks (0)

I've recognized myself in Nassim Taleb's superb Fooled by Randomness. Taleb has disdain for reporters, whose job it is to fit facts, post-hoc, into a coherent story. And he's right.

I cover a company called Brush Engineered Materials, BW. Take a look at that chart, especially the last day.

Several weeks ago, I had gotten a call from a reporter at the Cleveland Plain Dealer who was working on a story about the company. Thursday was the Company's earnings call, and while they met their own guidance, many analysts (although not I) had expected them to beat them. The stock dropped 10 points. The story was scheduled to run Friday, and I got a post-close from the reporter, his editor explaining that they couldn't run something about the company and ignore a 17% drop in the price.

I said,

"Investors just got a little over-enthusiastic," said Joshua Sharf, a stock analyst with Wm. Smith & Co. in Denver. Thursday's stock close "is where Brush was a couple of weeks ago, probably about where it should be. People are disappointed," he joked, "that earnings didn't exceed their expectations."

In retrospect, this is exactly the kind of post-hoc explanation that does nobody any good. In the morning meetings, I never speculate on where a stock's going thast day, week, or month. I have a price target. If I like the stock, I like the stock. If I don't, I don't. But I - along with Taleb - have exacty no idea where the market or an individual stock is going that day, and it's silly to try to explain it after the fact.

In the future, when asked by a reporter why a stock is dropping, I'll probably say something like, "Who the hell knows? More sellers than buyers, I guess."

Posted by Joshua Sharf at 9:59 PM | Permalink | Comments (0) | TrackBacks (0)

I have just finished arguing with a voice mail system.

I was calling UPS. I have two books on order, scheduled to arrive at the office today. But the last scan is from last night, and it's the check-in scan to the warehouse in Commerce City. So I wanted to call, to see if it were on the truck, and if it weren't to do as I had done before and drop by the warehouse and pick the thing up for myself.

Ha.

First, the voicemail asks me what it can do for me. (Heh.) It lists 4 items, beginning with "Track a Package."

Me: Customer Service
It (Slightly peeved at having been interrupted, and been asked for an item not on the menu): That's ok, and I can connect you with a customer service agent, but first, select one of the four options, "Track a..."
Me: Track a package
It (Breathing a slight sigh of relief): Please say your tracking number
Me (Breathing a slight sigh of annoyance): 1Z 189 093 04 505 38 HS
It: (Tells me what I already see on the web tracking screen)
It: Now, what else can I do for you? Track a package, ...
Me: Customer Service
It (Clearly annoyed at being asked to interrupt someone's coffee break): I can connect you with a customer service agent, but that is the most recent information available on your package. Would you still like me to connect you with a cusomer service agent? If so, say, "yes."
Me: Yes.
It: If so, say, "please."

No, I made that last part up, but you see where this sort of thing could lead you. I remember a science fiction story in Omni many years ago, about a game played by bureaucracies. The purpose of the game was to get the public very, very upset. Points were awarded on the basis of how ticked off individuals got, and how out of control they behaved. The real purpose of the game was to discourage public interaction by discouraging the public from showing up at all. I believe the beta version of the game is being tested now at various DMVs around the country.

Posted by Joshua Sharf at 2:41 PM | Permalink | Comments (0) | TrackBacks (0)

Earnings conference calls usually go on too long as it is.

Here's a suggestion.

When a conference call caller - like, say, an analyst - begins his call with, "Well guys, I really don't know what to say," the call moderator should disconnect him and tell him to get back in the queue when he figures it out.

Posted by Joshua Sharf at 2:38 PM | Permalink | Comments (0) | TrackBacks (0)

Another month, another business trip, this time to Dallas.

Now I know what you're thinking, and I was surprised, too, but it actually looks like a pretty decent place, at least the bits I've seen so far.

They've got me in the Marriott Fairfield on what might be considered the wrong side of the highway, but it's actually close to one of those mixed-use, industrial-artsy areas where you can get tile and countertops for the new kitchen, and then walk a block and get the art to hang in the new living room. The walk down Dragon street took me by both places, including the now-defunct "House of Kirk." How odd. "House of Picard" I could understand, but "House of Kirk?"

Another closed-on-Sunday art gallery is called, "Art of India, Inc.," which sounds more like a print shop for Peanuts originals. (There was one strip where Schroder tells Lucy that here eyes look like little round dots of India ink.)

Since my objective was the kosher Indian restaurant, I decided to walk the three miles to the train station. "Why?" you might ask? Tradition! Actually, I like these walks. I get to see something of the city, In this case, I also got to walk through the Historic West End, sort of like LoDo, and also the location of Dealy Plaza. And by the Dallas World Aquarium. Because when you think, "Dallas," you think, "fish!"

Then there's the light rail. Almost every city has "invested" in one of these white elephants. Although as a visitor, it's more comfortable to ride than a bus, very few visitors are going to have the same local travel profile that I will: stay downtown for meetings, ride out to the 'burbs for dinner. And while the downtown seems to have some retained some of its local character, once out of the city, the thing runs along the interstate, which looks like any other Interstate, only moreso, as Rick would say.

Although there are always the distractions onboard the train, like the electronic advertising sign for Dallas County Community College: "Love is a canvas pattern furnished by nature and embroidered by imagination." Their motto should be, "DCCC: Sucking the Manhood Out Of Texas One Associate's Degree At A Time."

I suppose it's better than the woman sitting in front of me, who was at least 45, and reading the train behavior admonitions aloud in both English and Spanish, in a voice that indicates that she moonlights on the bingo circuit. I demurred from complimenting her on her command of phonetic alphabets.

Walking from the train station to the restaurant - about 3 miles, I'd guess - I was stopped by a woman in a car who asked if I needed a ride someplace. She said this in a voice that suggested I should check the back seat for chain saws. I need the exercise, in any event.

The restaurant itself is quite good, full of Indians in fact, which is the surest test of any ethnic food joint. I ended up ordering the Thali, which I gather is Hindi for "Poo Poo Platter." Ah ha! There were plenty of leftovers, none of which would have made it past security at DFW, especially since this state of the art airport the size of Manhattan doesn't have any services ground-side. I ended up eating lunch sitting at baggage claim area B29.

DFW was full of soldiers, looking decidedly un-victim-like, except for their having to submit to the same bizarre security requirements as the rest of us. Barring a coordinated effort by an entire military unit to turn Turk, requiring soldiers, in the presence of dozens of other soldiers, to take boots off, borders on the insane. I am beyond confident that if any one soldier were to decide to try something, the several platoons around me could spontaneously organize well enough to deal with him faster than anything TSA could muster.

DFW, as one of the two main airports that soldiers move through to and from Iraq (the other is Atlanta), has a program where civic groups can show up at the airport to welcome troops home. Now Ken "Colorado Surrender Caucus" Gordon claims he "supports the troops," whatever that means. It occurs to me the nobody's ever asked him whether he's given to Soldier's Angels, the USO, or any of the couple of dozen programs that spring up from time to time to get care packages to the troops or their families.

Going through security at Denver, the gal (ethnomusicologists take note) behind me in line asked if I remembered when air travel was fun. I honestly replied, "No." It's been that long.

Posted by Joshua Sharf at 12:50 PM | Permalink | Comments (1) | TrackBacks (0)

Last week, the local propagator of economic illiteracy, the Denver Post, ran an op-ed by a professor over at the University of Colorado Health Sciences center, who specializes in bioethics and the humanitites. It included the usual bromides about obscene profit margins and too much marketing vs. too little R&D. It concluded with a call for the citizenry to demand more R&D spending by drug companies. Or presumably, we'll be taking away those profits to make sure there's no more R&D. (Ironically, a week earlier I had had this debate with a friend of mine who's a doctor there, so maybe it's something in the water. Or a virus.)

In the meantime, Russ Roberts has an extensive podcast with Mr. Law-and-Economics himself, RIchard Epstein, an actual economist, of the Hoover Institution and the University of Chicago. Epstein makes the following points.

• That studies show that drug companies keep somewhere between 15% and 25% of the economic profit from their discoveries. Which means that you and I get to keep about 80% of the benefit from someone else's work.
  
• That the excessively long FDA approval time robs the compnies from many of the benefits of the patent system
  
• That taxing away the profits is only going to force the drug companies to focus on the higher-margin projects, which will then lead the same whiners to complain about the even more obscene profit margins
  
• That there will always be competition, since it's the molecule not the health benefit that gets patented; this means that your slightly different drug with a slightly different mechanism can compete even while the original is under patent protection
  

I'd add one other point. Mark Yarborough complains about the ratio of marketing budgets to R&D budgets. But this is always true. I just finished visiting a company, Brush Engineered Materials, which refuses to get pantents on much of its research out of the belief that they'd rather not have their competition reverse engineer their processes. Their competitive advantage and their real asset is their institutional know-how and craftsmanship in the art of making metal alloys. This is a company that knows it needs to be ahead of the curve, always developing new alloys and new uses for those alloys.

They spend less than 1% of gross revenues on R&D.

I never would have know about Epstein's book if not for a series of blog links.

Thus do institutional biases restrict the debate. At least on their pages.

Posted by Joshua Sharf at 9:01 PM | Permalink | Comments (0) | TrackBacks (0)

Channel 4 caught me in DIA.

Good thing the flight had been delayed.

Posted by Joshua Sharf at 5:37 AM | Permalink | Comments (3) | TrackBacks (0)

One of the companies I cover is Brush Engineered Materials, based in Cleveland. I inherited the coverage when another analyst left, so Company management invited me out here to meet them and get to know the Company's story first-hand.

Now, one of their plants is in Elmore, where they do a vapor deposition process. Wednesday's meetings are all Conversations With Management, but on Thursday, I get a chance to go see the operation in operation. As part of that, I have to wear a moon suit with a respirator. OSHA requires that a doctor approve this, so I don't turn blue and pass out in the middle of the tour. So what's the first question OSHA asks on its web questionnaire? "Can you read?" That's the question. Consider, for a moment, the implications of answering, "No."

Typically, the airport experience in Denver resembled army logistics: hurry up and wait. After the shuttle bus's tour of the parking lot, I made it to the automated United check-in with two, count them, two minutes to spare before I would have had to make some unpleasasnt choices about what luggage to leave behind.

So naturally, the flight took off an hour late. They announced that with a full flight, they really didn't want to take any chances with the lavatory, and some wit started whistling Humoresque.

In any case, the pilot landed us safely in Cleveland, guiding us in by the light of the river. Just kidding! Of course, the river was obscured by the smoke.

The cabbie was Eritrean, and seemed genuinely happy when I told him he could put his music back on. He had changed it to some muzak station so as not to offend, but it didn't sound like they were singing, "Jihad Jihad Jihad," so since it was his cab, it only seemed fair to let him listen to his music.

And now, here at the hotel, there is only one thing to do.

Go directly to bed.

Posted by Joshua Sharf at 11:18 PM | Permalink | Comments (0) | TrackBacks (0)

Barbara Lippert at AdWeek had some harsh criticism of the pulled Volkswagen "Jumper" ad. The column included these two winners:

At least "Jumper" has things people can relate to. When the dude on the rooftop begins reciting his list of misery to the crowd below, it includes, "There's no affordable housing." I particularly liked his line, "You think I wanted global warming ... or reality TV?"

Go view the ad, and see what complaint she left out. Right. I'm sure the phrase, "high taxes" would have busted right through her column's word count.

Maybe it's the times. For whatever reason, VW is hardly alone in joking about suicide. Once "Jumper" hit the airwaves, it was the third spot in three weeks to go the self-offing route after the GM robot and a Washington Mutual spot featuring a bunch of non-WaMu bankers headed off a rooftop, just like in the Depression.

Is all this talk of suicide an unconscious metaphor for the state of the automotive industry? Or, given WaMu's inclusion, is it more of an unconscious representation of a sense of doom pervading the ad industry? Or, as The New York Times noted post-Super Bowl, could the violence of suicide be a metaphor for our unresolved war? At least we've got ourselves three fine options to consider. Meanwhile, let's get back to the VW debacle.

Ah, the Gratuitous War Reference appears even in industry trade magazines. Yes, maybe it is the Times, rather than the times. A quick Google search turned up two | ads and a reference to a third from over a year ago.

Maybe all the talk of suicide in print publications says something about that industry.

Posted by Joshua Sharf at 8:02 AM | Permalink | Comments (0) | TrackBacks (0)

Happy New Year! I suppose I could catch up on all the missed holidays, but at some point, you just write off lost time and get back to the cycle.

Back from an extended blogging vacation, relaxed, refreshed, and having missed tremendous amounts of major news, such as Iran's adoption of the Nazi salute and the goose-step. It's not as though you actually run out of things to say, but it's easy to see why blogging and talk radio are such a natural fit. Both of them consume tremendous amounts of material, and you'd better not repeat yourself too often, else you may as well just post links back to prior posts.

One of the interrupting events of mid-December was a long, quick drive back east to Long Island - driving a 26-foot truck. Now I like driving, especially long distances. Here to NY - ok. From the house to Wal-Mart - not so much. But I basically had two days to get the truck to Long Island, so I-80 it was. I'll say this for the Interstates, they have speed, which is just as well, since the things are routed away from anything you might want to stop and see, anyway.

In this case, it was also a chance to kluge together some interesting technology. DC-AC converters have come down dramatically in price, and I traded in my Comcast cable modem for a Sprint wireless card (although I still have my old wifi card for when I'm in a town lacking a digital signal but possessed of a wifi-enhanced coffee shop). Iowa may have wifi-enabled all of their rest stops, but that was just a redundant system as far as I was concerned. (That may be a red flag for all those governments putting money into muni-wifi. Or it may be an excuse to turn it into another stagnant public utility.)

So after having driven from Peru, IL to the exit for Wilkes-Barre/Scranton, I am reminded that half the so-called highways on Long Island don't take truck because they were built when the largest thing on the road was a drafthorse. I know Robert Moses tried his best, but there's not enough air in any tire to get a 12' truck under a 10' 6" clearance. This was at 1:00 in the morning, having driven 800 miles already, needing to have the truck at the door by 9:00 the next morning, and low on gas, and having drunk enough diet Coke that my back teeth were floating. Having crossed The Broncks, heading for the gloriously named Throgs Neck Bridge, no neighborhood was safe to empty and refuel in, and the refreshing early-morning traffic jam made changing lanes an adventure in itself.

Ah, the magic of technology. With only the guidance of a warning sign somewhere in one of the 45 highway-to-higway interchanges in the Bronx, saying, "Trucks - Expressways Yes! Parkways No! It's The Law!," I pulled up Mapquest on the laptop in the seat next to me, and had a full-screen GPS helping me find the Yellow Brick Expressway. This would have been completely impossible even three years ago.

Soon, it'll be an option.

Posted by Joshua Sharf at 8:03 AM | Permalink | TrackBacks (0)

There's a reason Jim Cramer and Robert Krulwich are popular. Jim Cramer may be a maniac, a Wizard of Ahhs with nothing behind the curtain, but he's entertaining. Robert Krulwich was merely the Stan Freberg of business radio journalism. I remember him doing a bit on just-in-time manufacturing back in the early 80s which incorporated both the song and what NPR producers pride themselves on - "environmental sound" - into a brilliant 5-minute exposition. Any b-school prof I had would have killed for the kind of attention you paid to that piece. (The environmental sound was fake. At one point, an assembly-line worker interrupts the song to shout, "Hey, Frank! The radios are here!")

So why do we write coverage reports and updates as though the people reading them are robots? Are we afraid that they won't take us seriously otherwise? Ironic that the current euphemism for "explanation" is "color," and then we proceed to drain every last bit of it out of our writing.

My guess is that these guys read the bullet points, maybe skim through the numbers, and then go on to the next report that reads like shoe leather left over from last year's tourist season at Moab. Spice it up a little, get them to expect that they might get a smile out of it, and they're more likely to stick around long enough to appreciate your insights.

Naturally, you have to make it clear enough that the humor-impaired fellas don't miss the point you're trying to make. The second-to-last thing you want is someone scratching his head mumbling to himself, "no, I don't see why newspapers any anything like clay tablets..."

The last thing you want is a page 1 WSJ article about how your entire research staff needs to be packed off to Khe Sanh for sensitivity re-education. So avoid the racial, ethnic, sexist, political, and religious jokes, since pretty much everyone's a member of the investor class nowadays - that stuff isn't just in poor taste, it's bad for business.

Still, this leaves lots of room for personality, and lots of room to get your subscribers to grin rather than groan when they see your updates in their inboxes.

Posted by Joshua Sharf at 9:49 AM | Permalink | TrackBacks (0)

Snow. Cold. When they gang up on you, the roads turn into skating rinks. For the first time, I had to use the 4WD just tooling around town. Of course, the Jeep is rear-wheel drive normally, not front-wheel as I'm used to, but even 4WD doesn't help your braking all that much. It just means that you slide straight. The snow's still coming down even now, but tomorrow's supposed to be sunny, so perhaps there will be photo-ops anew.

So having finished the NASD licensing steeplechase, and not yet having renewed the Quest for the CFA, I've got a little time on my hands in the evenings, and I've decided that at least one of the adult ed classes at the shul must be for me. Last night I tried out the beginning Talmud class - the nth beginning Talmud class I've tried - and it went pretty well.

Business-halachah-legal geekery follows immediately.

We're learning Tractate Makkot, and it deals in part with the penalties for perjury in civil cases. The basic rule is that if you lie under oath as a witness, and if that lie would have cost someone money, you owe that person damages equal to what you tried to cost them. So if you falsely claim that someone stole $1000, and that lie is uncovered and the claim denied, you owe the accused $1000, since that's what you tried to do him out of.

Apply this to a loan. You claim that Bob borrowed $1000 for 30 days and now needs to pay it back. Bob claims the loan was for 10 years. What would your lie have cost him? Not $1000, since everyone agrees that he needs to pay that back anyway.

In fact, you'd owe Bob what he would have been willing to pay to have the money for 10 years, minus what he'd be willing to pay to have it for 30 days. I'm not sure how they would have calculated this back in 200 CE, but nowadays, you'd just apply the short-term and long-term interest rates to determine the value of having the money on hand. (There are halachic issues with charging interest, but set those aside for the moment.) In short, the raabis understood, at least at some level, the notion of opportunity cost and the time value of money.

Pretty neat, huh?

Less neat is this week-old piece from the Denver Post about minority enrollment at CU. Since this is a report about a report (a Boorstinian pseudo-event of the first order), objections to the diagnosis and prescriptions are anticipated and dismissed:

The study accused flagship universities of blaming their low diversity on inadequate state funding and the K-12 system.

Instead, they should direct more financial aid to low-income students, recruit minority students more aggressively and focus on helping minority students succeed in college, the report said.

Unasked by the reporter or by the CU administration: of the Colorado high school graduates who qualify as "minorities" under their definition, how many can actually read at 12-grade levels, and why is it CU's job to remediate this problem?

Posted by Joshua Sharf at 7:01 AM | Permalink | TrackBacks (0)

Milton Friedman's Free To Choose is required reading for the LPR program. Now, IdeaChannel is streaming both the original 1980 version and the 1990 update for free.

I'd also suggest the audible.com version of Atlas Shrugged, but I'm not sure that even long-haul truckers have that kind of commuting time.

UPDATE: Some people just can't leave well enough alone.

Posted by Joshua Sharf at 8:20 AM | Permalink | Comments (1) | TrackBacks (0)

Oy. Finally.

The Series 87 is the last of the NASD licensing exams required to be a research analyst. It deals with the regulator best practices for sell-side research analysts, including the Chinese Wall between investment banking and research (what do they call that in China?), vaarious personal and institutional disclosures of potential
conflicts of interest, restrictions on trading and publishing, and so forth.

For some reason, I could pass all the sample tests, knew the material cold, and that just didn't translate into answering the questions right. But now, with a passing score, I'll finally be able to publish research reports under my own name.

And to move on to the next challenge. I'm not quite ready to revive the CFA blog yet, but I am ready to start studying for it again.

Posted by Joshua Sharf at 7:19 PM | Permalink | TrackBacks (0)

Just when you want to try to give business the benefit of the doubt, you run into earnings season. Two of the companies I cover had fine income statements, and less-than-stellar statements of cash flows for the quarter. But of course, their cash flows were fine for the first three quarters combined. So guess which time period they reported their cash flows on?

I know they'll say something about seasonality and how you can't judge a company by its quarter, but if you're bound by law to report quarterly cash flows, report quarterly cash flows. Do they really think they're fooling anyone by making them back out the cash flows for the quarter, rather than just giving them out?

It's probably the same reason that 95% of companies use the indirect method of cash flows, which nobody understands, rather than the direct method, which everyone understands.

Posted by Joshua Sharf at 2:31 PM | Permalink | TrackBacks (0)

The Taylor Ranch controversy is one of those nasty points of intersection between economics, politics, and the judiciary. In 2002, the Colorado Supreme Court ruled that a series of landowners who border the Taylor Ranch had the right to continue doing what they had been doing for about 150 years, namely, freeloading off the Taylor Ranch resources. We had the chance to interview Dick Johnston, author of The Taylor Ranch War, which follows the 40-year (!) series of lawsuits required to resolve this issue.

In essence, the court ruled that the communal rules of the original Mexican land grant from the 1830s and 1840s overrode the American notion of exclusive use.

It hadn't occurred to me before, but is it possible that communal property right could be an answer to the question, "Why is Mexico so poor?"

Posted by Joshua Sharf at 7:45 AM | Permalink | TrackBacks (0)

So suppose that Chinese brokerages have the same conflict-of-interest rules that we do.

What do they call the separation between the research & investment banking departments?

Posted by Joshua Sharf at 8:20 PM | Permalink | TrackBacks (0)

We subscribe to a nifty little service called Street Events, which makes available earning releases, and almost instant transcripts of corporate earnings conference calls. I needed to go down to the Courthouse to file some paperwork, and knowing the line would be staffed by a single underpayed civil "servant," I took along a preliminary transcript of a call that I need to write up.

"Preliminary" is generous. The thing looks as though it was created either by someone barely conversant in the English language, or by Version 0.2 of dictation software, programmed by someone who was barely conversant in English. Either or both are completely possible, but it renders picking through the transcript an Adventure in Homophones. (Thurber had a similar problem at one point.) Consider the following:

I'm reinforce way made in the prees also those related to sale growth and the affect that copper and pressure metal have had on sale and I'll review our acquisitionings have had on the quarter and the accounting treatments affects the year over year comparisons. Then aisle review the outlook...

Or:

Good afternoon. The first Gordon before he took off he was pushing all the mu products which finally hit in 06 are there products you are stock marketed to accentuate 07 growth.

Of course that's the mole of the company.

I think the mole of the company was busy preparing this transcript.

I don't want to make too much of this. A better transcript will be available soon, and when it is, I'll let you know what the hell these people were saying to each other, because I certainly can't figure it out.

Posted by Joshua Sharf at 5:40 PM | Permalink | TrackBacks (0)

Upon further reflection and observation, there's something else extremely worrying about the whole notion of partisan shopping - the extension of ownership past, well, ownership.

When I buy a bottle of seltzer at Wal Mart, I give Wal Mart my money, and they give me their seltzer. I take the receipt, walk out the door, and while I might have the right to return the unopened seltzer, my ownership of that money is gone. It's now Wal Mart's money. The company is free to do whatever it wants with it. Likewise me and the selzter. I can drink it, use it to take out a stain, shake it up and leave it as a practical joke, or pour it on the ground in their parking lot, if I feel like it. My seltzer.

Their money. Just as Wal Mart doesn't have the right to follow me around and police my seltzer-usage, I don't have the right to tell Wal Mart what to do with its retained earnings. It can spend it to clean or open stores, pay employees, put it in the bank, or even buy its executives minor-league baseball teams for their own enjoyment. The shareholders may disapprove of the last, but I can't.

This may seem pretty simple, and it is. It's called, "ownership," and it's something that the most recent Nobel Prize winner in Economics built his life's work understanding.

And again, once we establish the principle, what's to keep a government from establishing a commission - purely advisory, no doubt, no doubt - to, ah, guide corporate political and social giving? Or to establish, you know, purely voluntary guidelines for companies wishing to establish branches within city limits? I mean, after all, it'd be much more efficient than actually having to declare and collect taxes...

Posted by Joshua Sharf at 9:52 AM | Permalink | TrackBacks (0)

Daniel Pipes takes on a proposal to have Muslim cab drivers put a special light on their taxis, so that passengers carrying alcohol know to look elsewhere. Maybe the cabbies should look elsewhere for work. Taxis are a highly-regulated industry, artificially limited in supply in order to subsidize fares. As long as they're operating as a public utility, they need to operate by the same rules as everyone else.

In any case, if a Muslim cabbie has a problem with carrying my bottle of wine, that's his problem, and he should bear the burden of it. I don't expect my employer to have kosher food at functions, and I don't expect MLB to take Saturdays off so I can pursue my dream of being a big-league radio announcer. The fact that some of them are trying to leverage their 75% position as drivers into forcing Sharia on the rest of us should be highly worrying.

Now, maybe they shouldn't have to operate as a public utility. Then we could have as many cabs as the demand required, and if Metro Taxi decided to not carry alcohol, someone else who would, could be free to enter the market. Fares would fall, cabbies who were offended by carrying a bottle of scotch would have to lower their rates further, perhaps past the point where they could make money. I'm sure that some would cry, "Racism!" when Sharia Cabs tanked, but hey, the marketplace is pitiless.

Hat Tip: (Powerlilne).

Posted by Joshua Sharf at 9:26 AM | Permalink | TrackBacks (0)

Has Tradesports internally mispriced the chance of the Democrats retaking the Senate? That is, do the chances of the Dems winning the individual races they need "add up" to the same number as the chances of them winning back the chamber as a whole? Mind you, this is an entirely difference question from whether or not Tradesports has accurately priced the contracts. I'm only looking at whether or not Tradesports is internally consistent with itself.

(I'm not the first one to think about this. A Google search turned up this somewhat amateurish attempt, along with these more sophisticated ones.)

Tradesports is a futures market based on real-world events. If you buy a contract, you pay, say $0.56 for a contract stating that the Republicans will hold the House. If they do, the contract expires with a value of $1.00, and you make $0.19. If Speaker Bela Pelosi is sworn in on Jan. 1, then the contract, like promises to control spending and defend the country, expire worthless, and you lose your $0.81. Ideally, the sum of the prices on a given event should equal 1. And the prices of equivalent events should equal each other. If they don't then an arbitrage opportunity exists, which means free money, which means drinks for everyone.

For instance, if the contract giving control to the Republicans is selling for $0.49, and the contract giving control to the Democrats is selling for $0.49, then you only have to pay $0.98 to buy one of each, kind of like what business is doing.

As for the notion of equivalent events, here's a simple example made complex. Suppose I can bet on two flips of a coin. I can bet on each flip by itself, and I can bet on the end result of both flips. In the real world, there's a 50% chance of getting heads, a 50% chance of getting tails, and a 25% chance of getting tails both times. So the prices of the contracts for tails on the first flip = 0.50, tails on the second flip = 0.50, and tails both times, 0.25. Betting the two tails separately is the same event as betting the two tails together.

Now suppose the market thinks that tails is a 60% likelihood, or a 2-3 bet. The chance of two tails should be priced at $0.36. (0.6 x 0.6 = 0.36) If it's not, if it's still priced at $0.25, then there's an arbitrage opportunity based on the idea that the market will discover & correct this discrepancy. Either the 0.25 is right, and tails is overpriced, or the 0.6 is right, and the combination is under-priced, or they're both wrong. But the two numbers are inconsistent with each other.*

So. When I did the math earlier, the contract for the Senate remaining Republican was selling at $0.816. If you take all the possible Senate race outcomes, and multiply them together, and add up the probabilities of those combinations that give the Democrats the Senate, do you get $0.816? If not, there's an arbitrage opportunity, because the market's not pricing the equivalent events the same.

Excel's a wonderful thing.

There are 33 Senate races contested this year. Currently, the Dems hold 18 of the seats, the Republicans 15. To take the Senate, the Dems need to pick up 6 seats. That means after Nov. 7, they need to have 24 of these seats to the Republicans' 9. I found the contract prices for the Democrat and the Republican in each of these races (counting Lieberman as a Democrat). Now, with 33 races, there are 2^33, or 8,589,934,592 possible combinations. In order to simplify things, I took as given any races where one party or another was judged to have a 95% or greater. Of those races, 13 go to Dems (also giving them the Socialist Bernie Sanders), and 6 to Reps. This means that Dems need to win 11 of the remaining 14 races to get to 24.

The contested races (and the Democrat's contract prices) are: Arizona (.09), Maryland (.65), Michigan (.90), Minnesota (.90), Missouri (.48), Montana(.80), Nevada (.09), New Jersey (.43), Ohio (.76), Pennsylvania (.84), Rhode Island (.80), Tennessee (.35), Virginia (.40), and Washington (.88). With 14 races, the number of possible outcomes is only 2^14, or 16384, which Excel can handle. If you write down all the possible outcomes, calculate the probability of each - as determined by Tradesports traders - and add up the likelihoods of those outcomes where the Dems win 11 seats, you get... 7.27%

This means that collectively, Tradesports prices the chances of the Dems taking the Senate at 18.4%, but taken race-by-race, they only get a 7.27% chance. Now, it's clear that the individual elections are not independent events, even though Tradesports lets you bet on them that way. A single event of national significance could swing voters all over the country, affecting every race that's in play, and given the Dems' percentages in the races in play, it would take a bigger event to swing the electorate Republican than to tip, say, Tennessee and Virginia to the Democrats.

If I move the cutoff to 0.80 from 0.95, that tips Arizona & Nevada to the Republicans, and Michigan, Minnesota, Montana, Pennsylvania, Rhode Island, and Washington to the Dems. Even then, the percentage only moves to 10.88%.

But overall, Tradeports seems to be saying either that 1) it can't find the races to put the Dems over the top, or 2) some individual Republicans are getting a benefit of the doubt they don't deserve.

Sooner or later, the market's got to figure this out. Doesn't it? If it does, the beer's on me.

*If the coin actually is fair, and the contracts are consistent, that doesn't mean you hedge perfectly by buying one and selling the other. That's because you're adding the results of the two individual tosses to determine one payout, and multiplying the results to determine the other payout. If anyone's interested, I email me and I'll send you the math.

Posted by Joshua Sharf at 11:32 AM | Permalink | TrackBacks (0)

It's a truism that prosperity breeds bad management, and that extended prosperity breeds exceedingly bad management. Example A: Bethlehem Steel (Ticker: PAWS.UP). The legendary CEO of the company used to send people ahead each morning to make sure he wouldn't have to share an elevator. Eventually, the elevators stopped running altogether. Finally, when USX faced bankruptcy, a bunch of mini-mills in the South figured it out and started delivering high-quality, low-cost steel again. A couple of years ago, the leader of the rebellion, Nucor, itself ran into some management problems, opening the door for dozens of others.

It's hard to imagine a set of American companies more victimized by their own success than oil. The automakers learned this less in the late 70s and early 80s, and today's problems are more failures of imaginarion than anything else. But the oil companies, small and large, have a history of making terrible mistakes and then getting rescued by some international crisis or large expanding economy.

Historically, the worst of those mistakes has been over-investing at the peak of the cycle. Anyone from Colorado or Wyoming can tell you about boom-and-bust, and it's a mentality that oil and gas has never seemed to get under control. Right now, they seem to be making the same mistake yet again. I'm not talking about the strike in the Gulf. That kind of exploration has a life cycle of decades. I'm talking about the smaller companies that are now running cash flow deficits because they're looking at the forest and seeing

It's not exploration, which would make sense. It's actual free cash deficits in the face of rising returns, which happen because a company is spending more on its capital investment than its getting from ongoing operations. It's the sign of an expanding supply to meet demand, but it's also risky to plow this money in at the top of the curve time after time. Many of these wells are only profitable at high prices, and when oil prices drop - as they seem to be doing now - a lot of these smaller companies are going to be left with expensive, unprofitable, and idle equipment.

Posted by Joshua Sharf at 8:22 AM | Permalink | Comments (0) | TrackBacks (0)

Hello, and welcome to this week's belated Carnival of the Capitlists. My apologies for the delay, but I'm sure you'll find the posts well worth it. And even though it's now September 12th, September 11th can still be remembered.

9/11
Mike Buckley at Mine Your Own Business reminds us why business-somewhat-as-usual is a victory in itself.

Jack Yoest shares his Memories of 9/11

At Debt Free, Steve Faber discusses the terrorist attacks' effects on the stock market

UPDATE: Hank Stern has posted a moving tribute at InsureBlog to someone he didn't even know. It's part of a tremendous blogospheric memorialization of those who died 5 years ago. If I may indugle: may you be moved to tears, moved to anger, and moved to action.

In a somewhat more disgusted note, Ali Eteraz argues that day-strippers in Haditha may not be the most high-minded way to be winning hearts and minds.

Economics
Wenchypoo, who dispenses Frugal Wisdom from Wenchypoo's Warehouse, explains Why the upcoming business contraction is part of a long-term demographics-driven retrenchment.

Adam at Creative Destruction debunks the Kevin Drum article about Median Income.

Boring Made Dull wonders why everyone asks about the exploding price of college education, but nobody does anything about the costs.

James Hamilton of Econbrowser cautions that some of the enthusiasm about the recent oil discovery in the Gulf of Mexico may have been overdone.

Leon Gettler of Sox First notices that someone's sure making money out of the war on terror and soaring oil prices!

Trent of Stock Market Beat examines evidence that employment is slowing.

Marketing
At Scatterbox, Steven Silvers discusses how irritated editors and insiders now routinely spotlight inane attempts to generate positive publicity -- but instead make the companies being promoted look like idiots. Or worse.

Tam Hanna at Tam's Palm claims that lots of pre-defined choices can be economized more easily, while keeping (almost) everyone happy.

On the other hand, Barry Welford at StayGoLinks argues for websites with fewer choices, and draws some interesting conclusions.

Deborah Brown of BizInformer has a new take on Craig's List for customer generation.

Over at Whisper, Steve Cranford reminds us that there's more to branding than just a pretty logo.

Kevin Stirtz of Winning With Service claims that just because a given customer service practice is repeatable doesn't mean it's good.

Jim Logan writes at Bootstrapping Business about 10 Tips To Managing A Customer Crisis.

Kicking Over My Traces points out that if your customers can't understand (or read) your ad, they probably won't remember your product. Illiteracy can reduce even the most clever ads to background noise.

Management & HR
David Maister at Passion, People and Principles suggests that since character is as important as skills, screen for that, too.

Yvonne DiVita of Lip-sticking has doubts about CBS's hiring process for their evening news, and a few other candidates for the job.

David St Lawrence of Making Ripples notes that avoiding failure through parental intervention or by refusing to make decisions is a scenario for eventual disaster. There is no attention on making better decisions, only attention on avoiding responsibility for bad decisions.

Elisa Camahort of The Worker Bees Blog shows how social networking can provide diversity of experience and opinion.

Free the Drones has a post on how to answer a common job interview question: why do you want to work for us?

Carmine Coyote of Slow Leadership discusses how shareholders can help keep management's mind on the long-term.

Peter Kua at Radical Hop lists three personalities you need to hire to go from idea to sales. Not for nothing is "Tipping Point" the recommended book.

Pawel Brodzinski at Software Project Management explains why habit is the enemy of creativity.

More and more employers are beginning improve their employee benefits packages. Henry Stern at InsureBlog has the numbers, and the rationale behind this move.

Michael Wade at Execupundit.com shows how to get upper management’s backing when you want to fire someone.

Innovation & Entrepreneurship
Dave Free at Seeds of Growth gets you to look at things differently.

Andrew Trinh of Trizoko Biz Journal shows how innovation along isn't enough for David to beat Goliath...

...while A Samuel at New Build Blog uses Rightmove as an example,

Rob May at BusinessPundit examines entrepreneurs making the pitch. Be prepared, be concise, be focused.

Wayne Hurlbert of Blog Business World reminds us not to rest on our laurels.

Andrew MacGill of Diary of a Startup explores scarce resources & economics at their most elemental and tradeoffs in IT decisions for a startup company.

Finance
Tom Hanna at Financial Options gives us his weekly roundup of upcoming financial and economic indicators. And a suggestion that this might be the week to make that patriotic return to the stock market for those who've been waiting.

Moneywise at The Real Returns looks at real returns in large non-American mutual funds.

Policy
Starling Hunter at The Business of America is Business questions the ethics of public pensions divesting from Wal-Mart over alleged human rights abuses.

Nina Smith at Queercents wants Netflix to pay a living wage.

Joe Kristan at Roth & Company Tax Update

Vihar Sheth of Green Rising offers some cheerful optimism on the future of the planet.

Dan Melson of Searchlight Crusade explains why even seemingly simple real estate transactions are complex, and why that's not a bad thing.

The eponymous Alan K. Henderson of Alan K. Henderson's Weblog sees mischief in unions pushing to abolish the secret ballot for organizing votes. After all, you wouldn't want to be on the losing side of one of those, would you?

Brandon Peele at GT urges us to Grow! Give up politics! Become a Democrat! Really!, in Politics is Philosophy for the Intellectually Lazy.

Personal Finance
Scott on Scott on Money advocates bad debt avoidance.

David A. Porter at Pacesetter Mortgage Blog calls "state income" mortgages "Liar's Loans," and explores their contribution to the housing bubble.

Free Money Finance explains why being nice is just as good a buying strategy as a sales strategy.

The Prince of Thrift at Becoming and Staying Debt Free argues for leading a cash only lifestyle rather than taking out credit. Hint: it costs less, to start with.

Michael Dawson at The Time & Money Group contemplates how to apply to business concepts, like investing in assets now, to buy your financial freedom over time.

Andrew Leahey at Personal High Finance asks, "Is a reverse mortgage for me?"

Miscellaneous
It's no sin to be miscellaneous, it's just...different.

Ask Uncle Bill about starting an MBA program.

Mike Simonsen at Altos Research Real Estate Insights claims that a local business group got a bunch of headlines this week with a wrong-headed study about Silicon Valley competitiveness.

That's all for this week. Look for next week's carnival at OK, Dork.

Carnival of the Vanities #208 also went up tonight, a special edition completing four years as the original carnival, which inspired the creation CotC (which itself will be three in a few weeks).

Posted by Joshua Sharf at 10:48 PM | Permalink | Comments (2) | TrackBacks (1)

Today's Carnival of the Capitalists will be up soon. Stay tuned.

Posted by Joshua Sharf at 8:00 AM | Permalink | Comments (0) | TrackBacks (0)

When you're reviewing a report for factual inaccuracies, don't try to deny the presence of risks inherent in the business that you're in. There's a reason people write Risk sections in reports, and when you try to pretend that, say, the price of oil won't affect your margins, and you happen to be an airline, you just make yourself suspect.

I know it's your job to try to present your company in the most favorable light. But it's my job to make sure that investors get a balanced picture of the company. And if the high rollers ask you tough questions in a meeting because of a note in the Risk section, and force you to address these risks on a daily basis in running the company, well, good.

Posted by Joshua Sharf at 5:02 PM | Permalink | Comments (0) | TrackBacks (0)

Business.

The Left likes to peddle stereotypes. CEOs are large, overstuffed, pre-Splenda sugar barons smoking cigars as the white horses carry their carriage to the ball. Immigrants are, by definition, pooranddowntrodden products of failure-oriented cultures. Southerners this. New Yorkers that. Never can one be the other - at least as more than a token - and the Mason-Dixon line apparently still separates smart from backwater.

So explain to me how the senior management of an S&P 1500 company is named Gregorian, Melendrez, Ghaderi, and Le. Another company whose conference call I listened in on had a CFO who sounded like he grew up a couple of miles from the Duke Law School he attended (he did) and a CEO who sounded as though he had the same speech coach as Robert Loggia (he probably didn't).

I suspect all of this was accomplished without busing, although some forms of long-range transport were involved somewhere in the process. Contrary to liberal obsessions, most people just don't think about race on a moment-to-moment basis. Give 'em a decent education, an internal combustion engine, and some pavement, a reason to use them, and people are bound to mix.

Posted by Joshua Sharf at 8:21 AM | Permalink | Comments (0) | TrackBacks (0)

In a story inexplicably buried on page B2, the Wall Street Journal reports that a federal judge in Maryland has ruled that the state legislature there may not run Wal-Mart's budgeting process:

The Maryland law sought to require employers with more than 10,000 workers in the state to pay a penalty to the state's health-insurance program if they fell short of spending a specific amount on health-care coverage for their employees. That threshold was an amount equal to 8% of the employer's payroll in the state.

Only eight nongovernment entities in Maryland employ more than 10,000 workers. Of those, only Wal-Mart fell short of the 8% threshold for for-profit businesses.

In February, the Retail Industry Leaders Association, a group of 400 large retailers, sued Maryland's secretary of labor, licensing and regulation in U.S. District Court, arguing that the Maryland law encroaches on the purview of the federal Employee Retirement Income Security Act of 1974. Yesterday, U.S. District Judge J. Frederick Motz agreed with the trade group and granted its request for summary judgment.

In his ruling, Judge Motz found that the law sought not to generate revenue for the state but to force employers to provide a specific level of health-care coverage for their workers, an area governed by Erisa. "The act violates Erisa's fundamental purpose of permitting multistate employers to maintain nationwide health and welfare plans, providing uniform nationwide benefits and permitting uniform national administration," the judge wrote in his opinion.

The unions are pushing similar bills in 23 other states, and this ruling is going to make it tough sledding for those should they become law.

On the other hand, the fact that the judge ruled that spending other peoples' money this way is the exclusive province of the Federal government is less than comforting.

Once again: how do they know 8% is "right?" And if it isn't, why are they so sure it's not too low?

Posted by Joshua Sharf at 8:32 PM | Permalink | Comments (0) | TrackBacks (0)

Two down, one to go.

The 86, while it only has 150 questions (as opposed to the Series 7's 250 questions), actually took longer than the 7 to finish. That's because you actually have to calculate numbers and think about the questions, unlike the 7, which is essentially a 1930s vocabulary test. A friend of mine suggested that the number of the exam is actually the last year in which the subject matter was relevant.

I was actually a little worried about this one, since I was scoring in the low 70s on the practice exams, with my own calculator and all the coffee I could want. Turns out the practice exams are harder than the real thing.

Next up - Series 87, "Best Practices," or, "How to Make Sure People Should Believe What You're Telling Them."

Posted by Joshua Sharf at 2:02 PM | Permalink | Comments (0) | TrackBacks (0)

This week's Carnival is up.

Some of the highlights:

• The Skeptical Optimist points out that the national debt really is necessary for decent growth. Hmm, seems to me I've heard that argument made somewhere before.
  
• Econbrowser suggests that while the economy is more oil-resilient in the past, it's not infinitely so.
  
• Sophistipundit praises one of my favorite books.
  
• Frugal Wisdom has a post on consumer inflation-fighting that reads as though it's from the 1970s
  
• The Sharpener discusses SOXian extra-territoriality. With capital fleeing the US in part because of SOX, this can't be good news for Britain.
  
• And because it's always good to read the opposition, Lip-Sticking tries to make the case that a school system where boys score lower, test lower, graduate at lower rates, attend & graduate from college at lower rates, is actually not bad for boys. Now, if all that were reversed....
  

Posted by Joshua Sharf at 7:35 AM | Permalink | Comments (2) | TrackBacks (0)

In running through the 10-Ks for some companies, I came across this paragraph in the Risks section of Alloy, Inc.'s 10-K:

We also face risks due to a failure to enforce or legislate, particularly in the area of network neutrality, where governments might fail to protect the Internet’s basic neutrality as to the services and sites that users can access through the network. Such a failure could limit our ability to innovate and deliver new features and services, which could harm our business. The U.S. Congress is currently considering changes to the existing regulatory regime, including bills to prohibit broadband network discrimination. This proposed legislation would prevent broadband network operators from interfering with the ability of consumers to access the Internet, as well as from charging businesses for the distribution and carriage of online content and services over their networks. No assurances can be given that this or any other legislation prohibiting or otherwise limiting broadband network discrimination will be adopted.

Whatever one thinks of Net Neutrality (I happen to lean against it, at least in terms of Federal legislation), this paragraph is clearly argumentative, essentially an editorial in favor of Net Neutrality. There's nothing wrong with this, but it is an interesting development. Usually, the Risks section highlights issues without taking a position on them. "The United States may adopt the Kyoto protocols which would hamper our ability to develop new energy resources by reducing the demand for our product." Not, "The US may commit economic suicide by adopting Kyoto restrictions designed to force everyone onto bicycles."

Alloy may or may not engage in direct lobbying activities, although it almost certainly does so through trade associations. As a content provider, it has almost certainly let Congress know of its support for Net Neutrality. Despite that, Alloy believes that it's important that 1) the market know of the legislative effects on its business, and 2) the market know of its position on the issue. Whether Alloy intends it or not, its shareholders may be encouraged to pick up the phone and call their Congressmen.

Google's discussion of Net Neutrality, while briefer, uses some of the same language:

We also face risks due to failure to enforce or legislate, particularly in the area of network neutrality, where governments might fail to protect the Internet’s basic neutrality as to the services and sites that users can access through the network. Such a failure could limit Google’s ability to innovate and deliver new features and services, which could harm our business.

In Google's case, the matter is much more troubling. Google is calling for regulatory protection from the predations of private network operators, having folded like a cheap suit in the face of Chinese threats.

The use of 10-Ks to discuss political or legislative issues in more than bland terms bears watching.

Posted by Joshua Sharf at 2:19 PM | Permalink | Comments (1) | TrackBacks (0)

Apparently in imitation of his hero, Hugo Chavez is slowly turning Venezuela into an island, or at least an economic one. Morgan Stanley is seeking consultation of the investment community as to the removal of Venezuela from its Emerging Market Index. Morgan Stanley gives three interrelated reasons for this proposal:

1. The continued presence of investability restrictions linked to the foreign exchange regime put in place in the country in February 2003,
   
2. The lack of liquidity of most of its constituents,
   
3. The continued weight decrease of the MSCI Venezuela Index in the MSCI Emerging Markets Index over the last several years.
   

Point 2, for the Oakland Raiders fans, means that you can't sell if you want to get out, and you can't buy if you want to get in. The Point 3 means that Venezuela's market has collapsed relative to those of other Emerging Markets. It should be obvious, even to Diana DeGette, that (2) is a direct consequence of investment controls, and (3) is an indirect consequence.

How illiquid is Venezuela? Morgan-Stanley uses a measure called the "Annualized Traded Volume Ratio," which means, roughly, the average monthly dollar volume in a stock divided by its market cap at the end of that month. The Venezuelan securities in the index traded at an average of 1.5% ATVR as of February. That means that in a month, a stock only traded about 1.5% of its market cap. By comparison, Latin America traded at 37% ATVR, Argentina at 26%, and Columbia (heh) at 40%.

How poorly has Venezuela performed? Right now, Venezuela accounts for 0.085% (yes, you read that right) of the entire MSCI Emerging Market Index. Two-thirds of that is the national telephone company, the only Venezuelan company able to repatriate its dividends outside the country. It has been worse. At the end of 2005, the number was 0.07%. But don't get too excited.

At the end of 2001, Venezuela accounted for 0.28% of the Index. That's not terrific - it was 6th-worst - but it's better on both absolute and relative terms. Right now, the next-least-important country on the index is Morocco, at 0.22%. Venezuela's current relative value is about half of the last important country in 12/01, Columbia at 0.14%.

The potential removal is more than a sign that the Venezuela should join the Receding Market Index. It's also going to make it harder to attract capital by completely submerging the country's international investment profile.

Bolivia, take note.

Posted by Joshua Sharf at 11:44 AM | Permalink | Comments (0) | TrackBacks (0)

Warren Buffett, in addition to his admirable philanthropic endeavors, has also been trying to make sure that the Federal Government continues to be the recipient of your largess from beyond the grave:

The world's second-richest man, Warren Buffett, has asked Sen. Ken Salazar to vote against repealing the estate tax.

Buffett sent a letter to Salazar, D-Colo., the senator's spokesman, Drew Nannis, said. The multibillionaire Monday called on Congress not to repeal the tax.

...

Repealing the entire estate tax now would cost the government an estimated $550 billion to $700 billion through 2010. (emphasis added - ed.)

The Post gives no citation for this number, nor does it consider the additional wealth that will be created by businesses that can, well, stay in business after their owners die. If the estate tax comes back, it will be on estates over $1 million. Most estates over that number aren't just cash sitting around under mattresses. They're in businesses that employ people.

Larger businesses tend to be separate corporations, but the smaller businesses hit here are often partnerships or sole proprietorships that tend to struggle for cash. They would have to sell all or some of their assets just to pay the IRS. In all likelihood, they'll sell to larger companies. Even assuming that everyone stays employed - a bold assumption at best - these transfers concentrate wealth, they don't diffuse it.

The Post also fails to notice that Mr. Buffett hasn't been such a big fan of paying unnecessary taxes himself:

Mr. Buffett’s decision to give away to charity Berkshire Hathaway stock valued at about $37 billion, much of it to the Bill and Melinda Gates Foundation, is the sort of bold move that has made so many Americans admirers of Mr.Buffett. As an avowed supporter of the estate tax, Mr. Buffett could have let the government take its share of his estate after he dies. But just as Mr. Buffett has accumulated his vast wealth without paying much personal income tax, he has found a way to avoid the tax man in this maneuver as well, even writing in his letter to Bill and Melinda Gates that a condition of the gift is that the foundation “must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes.”

(Hat tip: Best of the Web)

Posted by Joshua Sharf at 9:06 AM | Permalink | Comments (0) | TrackBacks (0)

The Denver Post and Rocky Mountain News continue to ignore the good economic news in the ISM's Regional Reports on Business. The Institute for Supply Management's monthly national survey is one of the most respected and widely-followed economy surveys, covering as it does the expected purchasing and hiring trends, as well as the trailing indicators of price and supplier performance.

In addition to the national survey, the ISM also publishes monthly regional surveys, one of which is based in Denver.

For the last two months, the manufacturing survey has been extremely strong. This month, the more violatile non-manufacturing index moved from slightly negative (49.4) to solidly positive at 53.2.

The Rocky gave plenty of space to the unreliable Index of Leading Economic Indicators and the one-week increase in the volatile Jobless Claims, ignoring the decline in the more reliable 4-week moving average.

Personally, I believe we're cresting the economic cycle, but economic news is always mixed. Eliminating the positive while accentuating the negative doesn't help anyone make informed decisions.

Posted by Joshua Sharf at 11:29 AM | Permalink | Comments (1) | TrackBacks (0)

...and be forgotten with the rest.

Passed! With an 85, or 213 questions correct, which means I wasted 38 correct questions' worth of study time.

During the break, I went outside, opened up the sample exams, and started missing questions. This wasn't doing my confidence any good, I skipped answering them and just started looking at the answers. One or two of them showed up on the exam, so I don't suppose it hurt.

Now, it's on to the Series 86, for Research Analysts.

UPDATE: It occurs to me that an 85 is probably the 2nd-worst score you can get. If you're going to fail, fail big. The worst score you can get isn't a 0, it's a 69. It's like running down the escalator in time to hear the door-closing bell on the last train of the day. You paid the money, spent the time, and if you hadn't stopped off for the package of breath mints at the newsstand you'd be home by now.

If you're going to pass, on the other hand, either get a maximally-efficient 70, or a maximally-imposing 100. There's decreasing value to each correct answer, until somewhere in the middle the thing turns around and people start to be impressed, probably at 90. Eighty-five is like rushing to make the train, only having to wait 10 minutes on the platform, amongst the winos, breathing stale air. Yeah, you made the train, but you also had time for that snack so you're not hungry all the way home.

Posted by Joshua Sharf at 12:08 PM | Permalink | Comments (0) | TrackBacks (0)

...but not very well.

Apprently, the work I helped out on last year has, ah, struck a nerve over at Morningstar, where John Rekenthaler, VP of research, has sallied out to meet the attackers ("In Defense of Style Boxes") in this month's Investment Advisor. He takes the litigator's approach: "my dog doesn't bite, and anyway, that's not my dog." In this case. it translates roughtly as, "style boxes work, because people don't use them the way you say they do; and even if they did use them that way, they'd still work."

While conceding the main research points, Rekenthaler has to distort our assertions in order to deflect them.

Nothing so drastic as investing 100% in a single style grid is required for maintaining "style purity." Even if a portfolio manager were morbidly concerned about adhering to Morningstar’s style definitions, the manager would have much more flexibility than is implied by this study. That is because the Morningstar style designations are averages of a portfolio’s positions, with no minimum requirement that stocks be in any particular grid. Strictly speaking, it is possible, although quite unlikely, that a fund could occupy a style grid without having a single stock of that style type.

...

Finally, every manager with whom we have ever spoken has considered overall portfolio issues when implementing a strategy. So, regarding a strategy’s top-ranked selections as the true portfolio that would exist if the managers disregarded the style policy is not realistic.

And yet, every manager we spoke to, the ones who actually have to manage inside this grid, and to face investors and advisors on a quarterly basis, expressed frustration with the limits that the boxes put on them. Every one spoke of investments foregone becuase it would place them too far outside the box.

Morningstar's use of the average to characterize the fund is also misleading. They speak derisively of Lipper's "Multi-cap" designation, calling it the "junk drawer." where Lipper can store everything that doesn't fit. And yet, the multi-cap funds have outperformed the single-cap funds for a while now.

Lipper also provides a service telling a fund manager when his fund is getting close to changing Lipper boxes, helping them game the system. Whence the demand for such a service?

Finally, these boxes are beginning to take on the air of a regulatory authority. Funds need the approval of their investors to change their stated investment objective. Should a fund drift outside its box, and stay outside its box, there's the risk either of regulatory disapproval or shareholder litigation.

All in all, the world of characteristic-defined funds behaves much more like we say than like he says. The fact that Morningstar shouts, Bart Simpson-like, from the rooftops that, "I didn't do it," hasn't kept them from profiting mightily from that misuse.

The authors’ second claim is that style boxes are not asset classes. According to them, asset classes should be obviously and readily definable entities with widely agreed-upon definitions. However, they point out, style-box grids are defined differently by different organizations. The authors also argue that asset classes should have low correlations with each other. Finally, the authors state that asset classes should have a stable membership; that is, securities should not periodically change their asset classes.

The first and third points, those of the ease of definition and stable membership, reflect the authors’ preferences, no more.

Points One and Three are, at least partially, a way of getting to point Two. I would argue that any of the major indexers - S&P, Morgan-Stanlet, Wilshire, Russel, would agree that they each have useful definitions of "Large" and "Small." But if a word is to be widely used, the various participants should at least be able to agree on what it means. We didn't uncover small differences of opinion, we encountered wholesale overlaps:

Only half of the Morningstar mid-cap stocks were categorized that way by S&P, and a little less than 75% of Morningstar’s small-cap stocks were called small cap by S&P. Over all, there was slightly more than 30% disagreement between the two information services on how individual stocks should be categorized in these supposed "asset classes."

... S&P does not have a "core" category. Among the stocks not in the Morningstar core category, S&P and Morningstar disagree on 20% of the remaining value or growth stocks. That is a remarkably large area of disagreement for supposed "asset classes."

... Fully 50% of the Morningstar "mid-cap" stocks are smaller than the largest "small-cap" stocks in the S&P classification, and a little over 23% of the "large-cap" stocks are smaller than the largest "mid-cap" stocks in S&P.

On point Three, we have no problem with funds and indexers periodically deciding that Amazon or Google no longer qualify as small-cap. But when almost 10% of the stocks indexed drift back and forth over the value-growth line on a regular basis, one doubts whether the classifications are capturing behavior.

The problem is, as Rekenthaler suggests, one of behavior. If the definitions are so fluid that one stock can be put all over the map, depending on which service is doing the rating, and if these various classifications accurately capture the stock's behavior, then perhaps (cough) we really are dealing with a single asset class called, "US stocks."

Rekenthaler argues:

The problem is, asset-class behaviors change over time, enough to confound simple correlation rules. For example, in the first half of the 1990s, the Lehman Brothers Aggregate Bond Index had a 0.60 correlation with the S&P 500. In contrast, in the first half of the current decade, the Morningstar Large Value index had but a 0.39 correlation with the Small Growth index. So, what’s that about bonds and stocks are asset classes, but style grids are not?

Yes, and if you compare the mileage of my grandfather's Studebaker to that of the 18-wheeler Rekenthaler is looking at in his rear-view mirror, you'll conclude that cars today just aren't any more fuel efficient than they were 50 years ago. Comparing bonds vs. stocks during a period of stable growth to stocks vs. stocks during a period of international chaos is like asking to be published in the Journal of Irreproducible Results. We know that small and large, value and growth have some differences in performance. That those differences would be magnified during a decade with several multi-sigma events is hardly surprising. For the record, when we compared the Morgan-Stanley Large Value to its Small Growth from 1992-2003, we got a correlation of 0.672.

Rekenthaler's comparison of Morningstar's Four Corners from the years 1999-2001 is similarly loaded:

Uh-oh. In the most dramatic marketplace in your clients’ memories, the single most critical element in their investment returns was how much money they had in Large Growth style stocks, as opposed to Small Value. And you didn’t clue them in.

No kidding. A sector comparison between techs and industrials, or say, tulip and onion bulbs, would probably show the same thing.

Rekenthaler doesn't tell you whether or not he loaded the deck. Morningstar reworked their classification methodology in 2002, and used 1999-2001 as part of the input to the optimization. Any sane methodology would show similar. But these things matter - the correlations among boxes using the current methodology are much higher going forward from 2002. (Again for the record, Rekenthaler returned my email from his vacation in Japan, but a firm response on this point will have to wait until he's back stateside. Frankly, it was nice of him to reply at all from vacation.)

Look, Rekenthaler's no idiot, and he wouldn't last 10 minutes in this business if he were dishonest. But he's got a vested interest in perpetuating Morningstar's methodology, at least until they can wean themselves from it.

Posted by Joshua Sharf at 11:32 AM | Permalink | Comments (0) | TrackBacks (1)

Let's continue to pretend that the border doesn't exist, while raising the minimum wage!

This is like making the hole at the bottom of the tub larger, while pouring in more water and adding suction at the same time. You're increasing the hiring incentive for US employers, simultaneously reducing their incentive to hire US workers.

Electorally, you get to add numbers both to an oppressed underclass and the idle government dependants. Economically, you get to increase government spending at both ends.

If the Democrats weren't so clearly incompetent, this might actually constitute a plan.

Posted by Joshua Sharf at 2:31 PM | Permalink | Comments (0) | TrackBacks (0)

This week's version is up, over at Blog Business World.

This week's best rides:

Why I should learn something useful and stop trying to get on Millionaire.

Why "microwave popcorn and a heavy coat" is just a version of free-riding that drives up ticket prices in the end.

How one team is skipping firing the manager and going straight to letting the fans call the plays.

The Red-Green Alliance: It's Not Just for Christmas (or the CBC) Any More.

"The Customer Is Always Right: The International Relations Version." Didn't we hear a lot about this just before World War I?

Economic roadmaps by economic illiterates.

Remember, there are two parts to a fraction. Why PEG ratios can become an exercise in tautology.

Repeat after me: Lower Tax Rates, Higher Tax Revenues

The Laffer Curve of innovation & creativity. I know that's true in my case.

Enjoy!

Posted by Joshua Sharf at 8:11 AM | Permalink | Comments (0) | TrackBacks (0)

This week's version is up, over at Blog Business World.

This week's best rides:

Why I should learn something useful and stop trying to get on Millionaire.

Why "microwave popcorn and a heavy coat" is just a version of free-riding that drives up ticket prices in the end.

How one team is skipping firing the manager and going straight to letting the fans call the plays.

The Red-Green Alliance: It's Not Just for Christmas (or the CBC) Any More.

"The Customer Is Always Right: The International Relations Version." Didn't we hear a lot about this just before World War I?

Economic roadmaps by economic illiterates.

Remember, there are two parts to a fraction. Why PEG ratios can become an exercise in tautology.

Repeat after me: Lower Tax Rates, Higher Tax Revenues

The Laffer Curve of innovation & creativity. I know that's true in my case.

Enjoy!

Posted by Joshua Sharf at 8:11 AM | Permalink | Comments (0) | TrackBacks (0)

On Backbone Radio earlier this evening, I mentioned some further reading for those interested. Here they are:

I, Pencil, which explains why all of us are smarter than any of us.

Thomas Sowell's Basic Economics, written for the layman by one of the best. I promise: no equations, no graphs, no complex tables.

And the Carnival of the Capitalists. The best of each week's economics and business blogging; find some blogs that appeal to you, on topics you like, and keep going back.

Posted by Joshua Sharf at 9:18 PM | Permalink | Comments (0) | TrackBacks (0)

Jaw-droppingly, that's what Martin Feldstein proposes in today's Wall Street Journal.

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations that now read credit cards and debit cards would be modified to read these new TGR debit cards as well. Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.

The government could distribute TGRs to reflect geographic differences in driving patterns. Additional TGRs would be distributed to each debit account at the end of each month to avoid problems of expiring rights. Businesses that use trucks would also get TGRs.

This was a column that just didn't get printed in time for the April 1st edition, right? Or maybe Feldstein was cleaning out his liquor cabinet and found this draft next to the Purim leftovers.

This is WWII rationing, pure and simple.

More likely, Feldstein has spent so long analyzing government policy on Social Security, Health Care, taxes, fiscal and monetary stimulus, that he's forgotten that we have a perfectly good system for encouraging conservation - it's called, "prices."

One wonders why Feldstein stops with gasoline. Surely a government capable of calculating how much gasoline each neighborhood needs to consume is capable of much, much more.

UPDATE: Feldstein's proposal is generating a fair amount of blogospheric comment: I still think the fundamental question is why on earth anyone thinks any government system of allocating credits ahead of time is going to be a more efficient aggregator of need than the market. Given the national balkanization of fuel mixtures and the refining process, this can only lead to more shortages.

Greg Mankiw: I have said many times that I like the idea of higher gasoline taxes, but Marty's scheme leaves me cold. Do we need to create a new administrative bureaucracy because politicians are afraid to use the word tax? I hope not.

lynne Kriesling: But it is so potentially prone to political manipulation, and over such a large number of possible stakeholder organizations, that I think it would distort decision-making enough to generate bad outcomes and entrench special interests.

John Caddell: And Feldstein has a pretty good argument as to why fuel economy standards, while well-intentioned, won't make enough difference to reduce our overall consumption quickly.

Mark Thoma: In addition, while this proposal does provide the correct incentive at the margin, I can envision an endless political fight over the allocation of credits.

Glittering Eye: I have a more basic question. Perhaps I’m being dense but how is this approach better than any other fiat system (it is a fiat system: the government is setting a quota)? Why not just let prices rise? Are they convinced that the demand for oil is infinitely inelastic?

Brad DeLong: I think Marty's right. I think it's a clever idea--and much better than tightening CAFE. Tom Kalil was talking about higher gasoline taxes with the revenue dedicated to paying the first X thousand of individuals' Social Security taxes. But I think Marty's scheme is more transparent, which gives it powerful political-economy advantages.

Arnold Kling: One gets the feeling that his main concern is to fend off fuel economy regulations, which are indeed exercises in moral vanity--they do little to reduce gasoline consumption but they do help to brand auto companies as villains.

Posted by Joshua Sharf at 8:57 AM | Permalink | Comments (1) | TrackBacks (0)

I'm beginning to reconsider the idea that business and government are all that different, at least when it comes to PR. Given the way some of these quarterly earnings conference calls go, the next President should think about hiring some CEO or CFO as his press secretary.

Two examples. One company saw sales dip for one segment in Q1, but net income for that segment fell to almost 0; well out of proportion to previous quarters. The CEO and CFO were asked three times in three different ways what happened, and each time said the problem was a capacity shortage. Not only doesn't this answer the question, but when someone asked where the sales went - were they lost or pushed off into the future? - the CFO replied, "neither."

On another call, the company basically refused to offer earnings guidance for the next quarter, aside from an EBITDA projection. Worse yet, this was a company that had undergone a massive restructuring, and was filing its first public quarterlies in more than a year. They repeatedly refused to talk about what other hidden restructuring costs might be lurking during the next year, before they finally put the whole thing behind them.

Investors showed their confidence in management by driving the stock off a cliff during the call. I can't imagine it does much for management's anti-perspirant to see the stock plunging through new low after new low every time they open their mouths to avoid a question.

Conference calls aren't a waste of time. But imagine how much time of their own these guys waste trying to anticipate and block all approaches to key piece of information.

Posted by Joshua Sharf at 7:24 AM | Permalink | Comments (0) | TrackBacks (0)

Working Solo hosts this week's Carnival of the Capitalists from Australia. In the original English!

Posted by Joshua Sharf at 7:57 AM | Permalink | Comments (0) | TrackBacks (0)

Apparently, companies charged with estimate traffic flows on toll roads - the rates of return that price the roads' funding bonds in the market - have been cooking the books the make their government clients happy. The governments, apparently not understanding how the municipal bond markets work, figured the underwriters would adjust the numbers downward. But that's the underwriters' job. Their job is to price the bonds (frequently on competitive bid), based on the information they're given by the state and its contractors. Bad information in this case leads to low interest rates, defaults, and general taxpayer and bondholder unhappiness.

If this happened in private business, there's be perp-walks, frog-marches, howls of indignation, calls for the banning of bonds as unsafe investments, tsk-tsking about the inherent corruption of multinational corporations, and legislation making CEOs and CFOs personally responsible for the accuracy of the assessment.

Which is all you need to know about how governments treat themselves, as opposed to how they treat business.

In fact, though, there is a perfectly good free-market solution to the problem, one that will kick in soon enough. Most revenue bonds carry bond insurance. The insurers take on the responsibility to pay both interest and debt, should the bonds default. If estimators keep cooking the books to make bonds look better than they are, then the value of having insurance (to the investors) will rise; municipalities that don't have insurance will have to pay higher interest rates; and those that do have insurance will find their insurance premiums rising. In short, because nobody trusts what they're investing in or insuring, municipalities will have to bear an uncertainty premium along with the real rates of return their projects justify.

Another alternative would be to have the underwriting syndicates pay for their own studies, although since they also have an incentive to sell the bonds at the best price, it's hard to see where this helps the investor.

Then, there will be an incentive for the projecting companies to be right, not just popular. A company that finds itself right more often than its competitors will be giving the bond underwriters, investors, and insurance companies something to hang their hats on. Even if the company tends to make conservative estimates, the knowledge that they know what they're doing will reduce or eliminate the uncertainty premium described above.

Sure beats another federal agency.

Posted by Joshua Sharf at 7:44 AM | Permalink | TrackBacks (0)

...it would look like this.

Clear Peak Colorado, a committee that backs Democratic candidates for the state legislature, plans to launch a series of automated phone calls to voters this weekend.

"As you pay record prices for gas this holiday weekend, remember that some of your hard-earned money is paying for partisan politics," the caller says.

The calls claim that Republicans are using oil-and-gas industry money to pay for attacks on Democrats.

"The Republicans have let big oil off the hook for cleaner air and tougher drilling standards. The high gas prices go from your pocket to the Republicans and back to the pump again," the call says.

Talk about the grease calling the oil black. Someone needs to make calls to parents describing how Democrats are using state funds to attack Republicans over schools. Of course, that would take a Republican leadership with the onions to take on the teachers' unions and the lefty non-profits bellying up to the Ref C trough.

Never mind that it's excessive and poorly-designed clean-air regulation, along with bizarre drilling standards that are at least partly responsible for $2.64 gas to begin with. Federal clean-air regulation mandates that several dozen mixes of fuel be sold, balkanizing the refining and transportation process, preventing plants from substituting for each other when they go offline, and creating semi-annual switchover price spikes. Combine that with decades-old offshore drilling restrictions, and you're doing a masterful job of vertically integrating your supply-chain strangulation.

Not that the Post isn't sympathetic:

Already this year, Owens vetoed House Bill 1309, which would have let the state adopt tougher clean-air standards.

"Already!" The legislature has adjourned, and won't be back until there's a new governor, but the Post wants you to think that Owens is ready to run a drilling rig through the middle of the state capitol, and put a refinery in City Park, providing employment displacing the homeless there.

Thereafter follows a list of Trailhead donors who exhale dangerous carbon dioxide greenhouse gases. Including Pete Coors who has had run-ins in the past with state officials over air pollution. Coors, the Post may not remember, actually ran for Senate as a Republican two years ago, at the, ah, suggestion of Owens and Benson. So naturally he's contributing to a Republican party-building 527 because of air pollution.

Bad politics. Bad journalism. Bad economics. The triple threat.

Posted by Joshua Sharf at 8:55 AM | Permalink | Comments (0) | TrackBacks (0)

The rebuilt Seven World Trade Center opened for business on Tuesday. City Journal's Nicole Gelinas celebrates:

Seven World Trade Center officially opens its doors May 23 after an efficient two years of design and construction. Seven is a stunning piece of work. Just as important, it’s the first tangible evidence that lower Manhattan will triumph over 9/11, both architecturally and economically. Who built Seven? Not Governor Pataki or Mayor Bloomberg, but private-sector developer Larry Silverstein, who completed the 52-story tower while the pols dithered over 16 still-scarred acres across the street.

Silverstein could build Seven so quickly—replacing the office building of the same name he owned before 9/11—because it’s adjacent to the World Trade Center site, not part of it. Thus, Silverstein’s lease with the Port Authority of New York and New Jersey, the bistate entity that owns Ground Zero, doesn’t govern the site. Free from the government “direction” that has overseen Ground Zero redevelopment, Silverstein did what he does best: he built.

The city hasn't even started on the WTC replacement, and several ofther nearby buildings that it's responsible for continue to literally sit and mold.

Naturally, the politicians, bureaucrats, and self-styled guardians of the "public interest" don't like being made to look like the petty, squabbling, egotistical busybodies that they are:

By finishing Seven, Silverstein has replaced with hope the dread that infused lower Manhattan after 9/11. Yet pols and the press condemn him—because he’s in the private, not the public, sector.

When negotiations over a revised lease at Ground Zero broke down temporarily in March, Port Authority chief Charles Gargano called Silverstein “greedy.” Pataki said Silverstein had “betrayed the public trust.” The New York Times published an editorial called “Greed vs. Good at Ground Zero,” castigating Silverstein for failing to “think beyond the . . . bottom line here.”

Silverstein quickly built Seven World Trade Center on private land even as politicians argued for years over what to build at the adjacent World Trade Center Site, which is owned by the Port Authority.

Gargano and Pataki should be ashamed of their slander of Silverstein, who has been nothing but patient as they and Mayor Bloomberg have turned Ground Zero into a political swamp. As for the Times: of course Silverstein must think of the bottom line. If he doesn’t earn money, he can’t build more buildings like Seven. That’s how the private sector works. The Times fails to explain why it is bad for New York that Silverstein actually wants what goes up at Ground Zero to succeed.

Seems to me that the Times wasn't beyond a little real estate greed of its own when it wanted a new headquarters at Times Square a few years ago. Then again, the way their income statement looks, maybe they really don't understand the profit motive.

Posted by Joshua Sharf at 9:00 AM | Permalink | Comments (0) | TrackBacks (0)

In addition to its monthly national survey, the Institute for Supply Management publishes a series of local and regional reports as well. Denver's manufacturing sector is lucky enough to be included in the list, and April's report explains why state tax revenues are going through the roof, and would have solved the budget problem on their own, without a need for Ref C. (It's a terrible thing when a governor loses faith in his own state.)

Now, it's worth remembering that the local reports often cover either only manufacturing or services, which narrows the base even further. As a result, these reports tend to be more volatile than the national survey. And yet.

Looks, it's not all three-martini lunches and Tyco Analyst Days parties. The cycle is starting to hit some self-limiting factors, such as price increases in a time when nobody seems to have pricing power, a labor shortage, increasing lead times, and suppliers who can't seem to get copper or components onto the trains fast enough. But those are good problems to have. They're somewhat manageable, and are problems of prosperity.

In fact, even the Raw Materials story isn't all glooomy. Raw Materials inventories are rising, even as prices and lead times rise, and supplier performance deteriorates. if managers are complaining they can't find tungsten, maybe it's because they're hoarding the stuff.

The time to worry is when these guys are blowing dust off their inventory and their LIFO reserve starts to rival their equity.

These surveys were only published today. Let's see if the local papers bother to pick this up. After all, you'd think that business sections that have space for the Annual Tucler Hart Adams We're All Going to be in Hoovervilles This Time Next Year While The Bank Directors Use Our Those Vacant Unsold Homes For Their Dogs, might be available to cover a survey with national juice.

Posted by Joshua Sharf at 8:52 PM | Permalink | Comments (0) | TrackBacks (0)

No, the other Salazar. John Salazar of the 3rd Congressional district. He voted to lift the decades-old ban on offshore drilling in all but a few places. (Naturally DeGette got it wrong, preferring instead to take my money to pay for someone else's heating.)

Gee, now there's a novel idea. Responding to supply-and-demand issues by increasing supply. Maybe it has something to do with the energy poll results from his Congressional website.

Of course, there's this, from the Democratic Congressional Campaign Committee:

Congressman Salazar remains committed to protecting the environment which is why he opposed the “energy bill” devised by the Bush Administration and oil companies that put profits first and threatens natural preserves and Alaskan wildlife. Rather than promoting oil drilling into our precious lands, Congressman Salazar is a leading proponent for renewable energy sources.

So if Salazar is for drilling elsewhere, but opposes it close to home, what does that say about him? Moreover, if that's what the DCCC chooses to emphasize, what does that say about their energy "policy?"

(Hat Tip: ShopFloor.org, now comforably Blogrolled.)

Posted by Joshua Sharf at 8:13 AM | Permalink | Comments (0) | TrackBacks (0)

Integrative Stream is hosting this week's festivities. Go there. Learn about business and economics. Then go call your Congressman and ask him what he did this week to make the economy freer.

Posted by Joshua Sharf at 8:05 AM | Permalink | Comments (0) | TrackBacks (0)

A little late, but this week's CotC is up, over at The Virtual Handshake. (Hugh would probably say that for anyone you really wanted to meet, you'd give a real handshake.)

Posted by Joshua Sharf at 9:54 AM | Permalink | Comments (0) | TrackBacks (0)

Another quick hit here.

This represents a massive failure of leadership on the President's part. He could have faced down both Vincente Fox - who has no vote - and Tom Tancredo, who does. Instead, he's left the door open for the Democrats to paint the issue as one of living standards, make businesses the bad guys, and then to combine the issue with protectionism.

At this point, the Democratic party stands for economic populism of the most destructive kind - raise taxes, control gas prices, slap tariffs on China, prevent existing energy alternatives, and increase entitlements. The President is at risk of giving them the room to sell border security on protectionist lines, opening up debates that should have been settled in the 1970s.

Posted by Joshua Sharf at 8:49 AM | Permalink | Comments (0) | TrackBacks (0)

Found, while researching a company (not this one) for a report:

Ahura's FirstDefender is the only light-weight, rugged handheld instrument for the immediate identification of unknown solids, liquids and mixtures even through the walls of their containers.

Another thought: how long before Jack Bauer has one of these in his Little Bag of Tricks?

Posted by Joshua Sharf at 10:51 AM | Permalink | Comments (0) | TrackBacks (0)

The Denver Post reports that among Joe Nacchio's other problems, he was the first Qwest CEO to refuse to help the NSA analyze phone records in the pursuit & deconstruction of terrorist networks. Even as,

"This is a case where (Qwest) showed some independence and courage," said Phil Weiser, a University of Colorado law professor who specializes in telecommunications issues.

...

In 2002 he chaired the National Security Telecommunications Advisory Committee, a group of industry executives who advised President Bush. He also chaired the Network Reliability and Interoperability Council, an advisory panel on emergency communications networks and homeland security to the Federal Communications Commission.

Powerline has already noted that Qwest's independence and courage ended where its business relationships began:

As a general rule, Qwest does not release customer account information to unaffiliated third parties without your permission unless we have a business relationship with those companies where the disclosure is appropriate."

The Post quotes the Qwest Privacy Policy on the matter of aiding law enforcement, ignoring the question of sharing the information with other businesses.

At the same time, the Post, assuming incorrectly that the rest of the country is as outraged as its newsroom is at these shocking, five-month-old revelations, claims that:

The news report casts Nacchio in a more positive light than he has received since departing the company amid an accounting scandal and falling stock price in mid-2002.

...

His fight with the NSA could improve Nacchio's image in Denver, where his own lawyers concede he is "reviled." They are seeking a change of venue for his trial.

Note the assumption that this relevation is "positive." Also note that apparent the DenPo didn't get a chance to read the WaPo before going to press:

The new survey found that 63 percent of Americans said they found the NSA program to be an acceptable way to investigate terrorism, including 44 percent who strongly endorsed the effort. Another 35 percent said the program was unacceptable, which included 24 percent who strongly objected to it.

A slightly larger majority--66 percent--said they would not be bothered if NSA collected records of personal calls they had made, the poll found.

Also, I can't find this disclaimer at the bottom of any other overnight polls the WaPo has done:

The practical difficulties of doing a survey in a single night represents another potential source of error.

Qwest: We Put The "W" in Qwality

Posted by Joshua Sharf at 7:55 AM | Permalink | Comments (0) | TrackBacks (0)

In addition to getting up at 5:00, working at a brokerage requires a Series 7 license. So, after the regular workday, I'm back in school, taking the equivalent of 4 credit hours stuffed into two weeks of evenings. Makes for a very long day. I actually wrote this during the options class. Options, I know. Options, I already trade.

The course is taught by one Reed Nakazono, who seems to be something of a legend in Denver financial circles. Reed teaches the best Series 7 cram course in the area, and he does it by teaching to the test. No, I mean to the test. High school teachers with CSAP evaluations coming up should be so lucky. Reed's been doing this for a living for almost a quarter of a century. He used to actually sit for the exam until NASD, recognizing industrial espionage when they saw it, revoked his license. [The NASD is a jealous god, carefully monitoring the proper use of their licenses.] Now, he debriefs as many students as he can, often as they walk out of the test.

Reed's been doing this long enough that it's clear he's slightly bored by the whole thing, but he's still got a good sense of humor. He can stand in front of an options grid he created, oh, 20 years ago, and point to the chart over his shoulder without even looking at it. If the NASD ever finally gets fed up and raids the place, he'll have another career as a TV weatherman.

Every city probably has a Reed Nakazono. New York, Chicago, LA probably have a dozen, teaching to and defeating the test. Seen one way, if undermines an exam intended to protect the public. Seen another way, it undermines the Guild Hall.

As for the test itself, it seems to be oddly weighted in both space and time. Stocks get all the press, but the test favors the process of underwriting and trading municipal bonds. They also have questions about "bearer bonds," which haven't been issued for years, but apparently used to operate like letters of transit signed by General Weygand, only without the piano. I'm sure there must be films noir where the husband and the femme fatale can only raise the money to get to Brazil by getting the bearer bonds out of the unsuspecting wife's safe deposit box, or war pictures where the feds have to foil a German plot to hijack a train carrying bearer bonds. They get the bonds, only to see that all the coupons have already been clipped.

The exam also resembles nothing so much as a vocabulary test. Even without street slang, or Street Slang, there are still four different ways to describe a zero-coupon bond. And of course, the inevitable trick questions about options that expire on a day they can't be traded.

Evidently, the test has also drastically reduced the amount of calculation over the years. Now, why do you suppose that is?

UPDATE: The Great One himself has commented on the post, with two corrections to it. In the first case, I simply misunderstood; apparently they won't let him sit for the exam any more, but have not revoked his license. In the other case, I was unclear. When I wrote that Reed debriefed students...as they walk out of the exam, I had in mind that they called him with whatever questions they could recall, not that he stood outside like an exit pollster. Clearly what I wrote lends itself more to his interpretation than to mine.

Posted by Joshua Sharf at 10:10 PM | Permalink | Comments (3) | TrackBacks (0)

The GAO has, at the request of Sen. Olympia Snowe and Rep. Michael Enzi, produced a report analyzing the disproportionate effects of Sarbanes-Oxley on small businesses. Unfortunately, both the report (and the WaPo article summarizing it) downplay the effects of SarbOx on small companies trying to go, or stay, public.

They acknowledgeboth that the companies themselves cite increased costs as a reason for going private, and that administrative costs tend to hit small IPOs disproportionately hard. And yet, the report searches for alternate explanations, such as the consolidation of the accounting industry and the acceptability of only the Big Four as auditors for IPOs.

As a result, issues unrelated to the Sarbanes-Oxley Act, such as market and liquidity issues and the benefits of being private, are also major reasons for companies going private. From 1999 to 2004, more companies cited market and liquidity issues than the indirect costs associated with maintaining their public company status.

But look at the numbers:

The "benefits of being private" are cited less and less frequently, while the number of small companies that just can't afford multiply-redundant accounting costs is shooting through the roof. And if you're looking for the effects of a law passed in 02, using the average from 1999-2004 is a complete non-sequitur.

As for not going public in the first place, it's clear that the 404 reporting requirements are a significant barrier to entry, something the report admits:

While the act does not impose new requirements on privately held companies, companies choosing to go public realistically must spend additional time and funds in order to demonstrate their ability to comply with the act, section 404 in particular, to attract investors....

Companies with smaller reported revenues now make up a smaller share of the IPO market. The number of IPOs by companies with revenues of $25 million or less decreased substantially, from 70 percent of all IPOs in 1999 to about 48 percent in 2004 and 31 percent during the first two quarters of 2005. Venture capitalists told us that, on average, a private company had to demonstrate at least 6 quarters of profitability before it could go public and hire an auditor to carry it through the IPO process. According to the venture capitalists, an increasing number of small and mid-sized private companies have been pursuing mergers and acquisitions as a means of growing without going through the IPO process, which now typically costs more than a merger or acquisition.

M&A is perfectly legitimate activity, of course. Indeed, this is exactly the sort of M&A activity that is more likely to succeed, since it typically involves cash, management continuity, earnouts, less publicity, and therefore more honest valuations and less winner's curse risk from competitive bidding.

But the market there is much less liquid, and all of us are still richer than any of us, even if any of us is Exxon or Microsoft. Those deals typically net less than an IPO, and don't subject the firm to the large-scale, Wisdom-of-Crowds scrutiny that the open market does. They typically leave the company less free to pursue its own course, and create all sorts of potential corporate culture issues that an IPO doesn't. They limit growth.

In fact, one issue the report doesn't address is the extent to which smaller public companies' cash flows and valuations are depressed as a result of accounting costs, leaving them more likely to be takeover targets than long-term competitors to older, larger firms.

Fortunately, Sen. Jim DeMint and Rep. Tom Feeney are proposing to exempt small companies from the 404 reporting requirement. Presumably, the market will give us some indication of just how much it values those extra layers of accounting.

Posted by Joshua Sharf at 3:11 PM | Permalink | Comments (1) | TrackBacks (0)

If Carter-appointee Judge Harry T. Edwards has his way, soon terrorists will have another surveillance-free avenue of communication:

A federal appeals court on Friday challenged the Federal Communications Commission's rules making it easier for law-enforcement authorities to wiretap Internet phone calls. One judge called the government's arguments "gobbledygook."

...

Judge Edwards appeared skeptical over the FCC's decision to require that providers of Internet phone service and broadband services ensure their equipment can accommodate police wiretaps under the 1994 Communications Assistance for Law Enforcement Act. The rules go into effect in May 2007.

Critics said the FCC rules are too broad and inconsistent with Congress's intent in passing the 1994 surveillance law, which excluded categories of companies described as information services.

At issue is VOIP, which, given Vonage's "Don't Try This At Home" ad campaign, is particularly appropriate. The FCC has probably over-reached in trying to subject all broadband traffic to the 1994 law, but case law frequently develops by analogy. Senate Democrats (and a couple of Republicans, as well) seem bound and determined to grandstand over terrorist's rights to disposable cell-phones. Now, unless Judges Sentelle and Brown are willing to stand up to Edwards, whole new vistas of ineffective, out-of-date warranting procedures will open up to people trying to kill us.

Posted by Joshua Sharf at 8:07 AM | Permalink | Comments (0) | TrackBacks (0)

When large-scale email first got started, and fax machines had been around for a while, and FedEx and UPS were making large-scale nuisances of themselves from the Postal Service's point of view, some forgotten wag on NPR had a brilliant idea.

Make the postage stamp last forever.

You'd buy a stamp, and it would guarantee you delivery of a letter forever, like a little callable zero-coupon bond that you would redeem for whatever it was selling for that week. The Postal Service would have gotten a huge revenue injection that it could have used for modernization and technology, and they wouldn't have to keep reprinting "A" and 2-cent stamps every time they needed to raise the price.

Too bad they waited until today to actually float the idea. In the meantime, everything has conspired to reduce the idea from a serious business plan to a cute, labor-saving device.

For one thing, revenue from unsorted first-class mail has dropped faster than a Nolan Ryan sinker. According to official USPS financial reports, in 2000, Single-Piece flat letters and cards, and nonautomated presort First-Class, the kind you use one stamp for, accounted for 37% of Post Office revenue, or just under $24 billion out of about $64.5 billion.

Today, first class letters (postcards aren't deemed worthy of inclusion) account for $20 billion out of just under $70 billion, or 28% of revenue. Worse, such items used to accout for 29% of volume, and now are only 21%. The actual number of First Class letters handled has dropped by 20% in absolute terms.

Remember, this doesn't include metered mail from businesses, which probably comprise something like 50% of first class mail, and which wouldn't be eligible for the Forever Postage.

Worse, while the P.O. still has a reputation for outrunning its postage revenues, in fact, over the last 10 years or so, first class, first-ounce postage has been pretty consistently running behind the CPI. See below. The first chart is first class postage and the CPI normalized to the CPI's birth on 1/1/1947. Postage rates start out running away from, say, eggs, but over the last few years, percentage-wise, the CPI has started to catch up:

Here's the same data presented differently. It's the annualized percentage difference in increase between the CPI and postage rates. The magenta line is for the time period between rate increases, while the blue line is the cumulative difference since 1958, when rates first went to 4 cents. When the magenta line is below 0, postal rates lag the CPI; that corresponds to the blue line declining:

(The annualized difference is calculated this way. Say it's been 5 years since the last rate increase. In that time, the CPI has gone up 5% total, while the proposed rate increase is from 20 cents to 22 cents, or 10%. We start with 1.10 / 1.05, and then figure out what rate, compounded annually for 5 years, would get you there.)

This means that in 1994, with memories of the drastic hikes of the 70s and early 80s still fresh in people's minds, you could have made a case that you'd save money in the long run by buying a stamp and letting it moulder in your desk drawer for 20 years, through moves, floods, fires, rain, hail, sleet, snow, and dark of night. Now, with the cost of postage not even matching the CPI, much less a decent rate of return on any sane investment, you're better off buying that roll of stamps at Costco every year or so.

Or, you could just send an email.

UPDATE: It also occurs to me that there's no announced plan for what to do with whatever revenue boost does come from this idea. Either they haven't thought about that, or they're just not thinking in those terms.

Posted by Joshua Sharf at 6:34 PM | Permalink | Comments (0) | TrackBacks (0)

The Institute for Supply Management's monthly survey holds little but good news this month. The overall index is up to 57.3; anything over 50 indicates expansion, and the index has been over 50 for almost three years now.

Even the bad news isn't really bad. Inventories are growing for the first time in a while, but only barely, and the index has been sitting within a point or two of neutral for months. Customer inventories are also shrinking. At first, one might think that customers will have to adjust, creating inflationary pressure. Except that this trend has persisted for five years without producing inflation. Any price pressure will almost certainly be cyclical.

We'll see how much attention the MSM pays to all this.

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What better way to celebrate May Day than to read about business?

Posted by Joshua Sharf at 5:10 AM | Permalink

UPDATE: Welcome Instapundit Readers, and feel free to take a look around the site.

Among the news items that the MSM ignored last week in favor of $2.82 gas (source: Barron's):

• Retail store sales were up 4.1% year-over-year
  
• Same-store sales were up 5.1% year-over-year
  
• Consumer Confidence rose to 109.6, well above the consensus estimate range
  
• The housing bust continues to track the elusive Afghan Winter, as existing home sales rose slightly, when they were expected to decline
  
• This was offset somewhat by a decline in mortgage applications
  
• Durable goods orders were up 6.1%
  
• New home sales soared 13.8% in March, even as prices moderated and supply dropped
  
• Jobless claims sat pretty much where they have been for the last 2 years
  
• Employment cost index was up 2.8% y/y, but we'll need to evaluate that in terms of the productivity index, due out this week
  
• The GDP boomed, conusmer sentiment (a different survey from consumer confidence) held, and the Purchasing Managers' index showed continued strong growth.
  

Despite the strong housing market, MSNBC still found time to quote USA Today as saying that the "strong housing market is slipping."

UPDATE: It also occurs to me that long-term interest rates have been inching up lately. This is both good news and bad news, but it's always spun as bad news. When the yield curve briefly and narrowly inverted, there was a great deal of talk about recession. Now that long-term yields have edged back up over short-term rates, the talk is of the effect on mortgages, even as the recession indicator has receded.

Posted by Joshua Sharf at 10:25 AM | Permalink | Comments (3) | TrackBacks (0)

MSNBC's First Read continued its obsession with gas prices to the exclusion of, well, all other economic news this past week. A rough word-count of economic reporting on First Read's blog shows that of 3500 words devoted to economics, 3250 were about gas prices. This does not include a Monday posting ostensibly about the Dahab bombing that spent the second paragraph talking about oil prices.

Ironically, First Read is aware of the problem, even if they don't know that they know. On Friday:

Asked in the April 21-24 NBC/Wall Street Journal poll who is most responsible for high gas prices, 37% of those polled say the oil companies are most responsible. Oil-producing nations rank second at 22%, while only 15% lay the most blame at President Bush's feet and 4% say Congress bears the most responsibility.

While on both Tuesday and Wesnesday:

...unstable relations with Iran and political instability in Nigeria seem to be the primary drivers of the price of oil.

Gee. I wonder where people are getting this idea that ExxonMobil is wearing the oil-soaked black hat here?

Posted by Joshua Sharf at 9:54 AM | Permalink | Comments (0) | TrackBacks (0)

Last week, we noted how MSNBC's First Read blog had reprinted the New York Daily News's misquote of a CNN poll about how oil prices were affecting families. In the poll, 23% said that gas prices were having a "severe effect," 46% said they were having a "moderate effect." The Daily News and First Read both reported 69% under the "severe effect" label.

On Friday, in response to my email, First Read issued the following correction:

On Tuesday, we quoted a New York Daily News article, which cited a CNN poll showing that 69% indicate gas prices are causing them severe hardship. However, the actual poll finds that 69% say these prices are causing them "hardship", not "severe hardship."

To their credit, the correction was given about the same prominence as the original report - at the end of their long, daily commiseration about gas prices.

It's not a perfect correction; they probably should have noted the difference between "severe" and "moderate," for instance. But Ms. Wilner replied promptly and without attempting to make excuses.

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I read Michael Lewis's Moneyball the other week, and one of the first things that came to mind was a comparison to investing. Moneyball explores the Oakland A's search for better cheap talent through market inefficiencies. They discover these inefficiencies by sifting through massive amounts of data, and by, in effect, playing a different game from everyone else. The look for correlations between statistics and runs - in their case, on-base percentage and slugging.

They also do something really funky. They calculate the value of everything a player does - ever batted ball, every fielding play, every pitch - in terms of how much that play made his team more or less likely to score in that game, and then add them up. Nothing matters but outs and runs. Get enough runs, forstall outs long enough, and wins will follow. That's playing a different game from everyone else.

They are the quant funds of baseball.

Compare them to the Atlanta Braves. Boys not born the last time someone else won the Braves' division were complaining about getting fountain pens last year. They rely on traditional scouting, trying to project what a player can become, looking for them one gem at a time.

The Atlanta Braves are the value investors of baseball.

Compare them both to the Red Sox & the Yankees. These guys have money to burn, they frequently try to buy whatever proven talent is out there, often overpay for it, and often don't keep it very long. They'll break teams apart, change management with glee, raid weaker & poorer teams for their best players.

The Red Sox & Yankees are Carl Icahn and T. Boone Pickens.

The interesting thing is that you can win both ways, and you can make money both ways. And what's more, you can find lots of different types of value, and you can and you can find lots of different quantitative inefficiencies. As part of my research last year, I interviewed three different quant fund managers, and know of a couple others. They each do something different, and they each consistently beat the market. Finally, you can also make a lot of money turning around failing enterprises and buying up juicy bits of your competitors. But it's a lot of work running the business.

Posted by Joshua Sharf at 9:51 PM | Permalink | Comments (1) | TrackBacks (0)

For a few days, it looked as though maybe MSNBC's First Read - written in part by NBC's political director Elizabeth Wilner - was being more careful with their poll numbers. Then, from today:

The New York Daily News says the same CNN poll showing Bush's approval at 32% also notes that 69% "said gas prices were causing them severe financial hardship."

Well, they quoted the Daily News accurately enough:

Sixty-nine percent of Americans in the CNN poll said gas prices were causing them severe financial hardship.

Take a look, though, at the actual poll. Forty-Six percent say gas prices have caused "moderate hardship," while only 23% say "severe hardship."

In effect, both the Daily News and Ms. Wilner triple the number of people reporting "severe hardship". At least it wasn't their own poll they got wrong this time.

Meanwhile, First Read, now posting throughout the day, fails to mention today's buoyant consumer confidence numbers, which would tend to contradict the claim the gas prices are forcing people to take second jobs.

So why the discrepancy? Probably because gas prices are the one price that everyone knows, because it's posted on every street corner in America. As you drive by the sign, you're literally coming closer to having to pay that price. Gas prices are a lower percentage of total household expense than ever, but gas consumption is something that usually takes some major change to affect. So any change in price gouges into that always-thin margin between the red and the black.

I realize that First Read is primarily political, not economics, but they're clearly letting their political biases get in the way of their economic fact-checking.

Posted by Joshua Sharf at 5:22 PM | Permalink | Comments (0) | TrackBacks (0)

Trent Lott was just on Sean Hannity explaining why every time he opens his mouth he gets further away from succeeding Bill Frist and closer and closer to being the ranking minority member on whatever committee assignment he gets.

Look, I know gas prices are high. I pay for gas, too. But to try to argue that there's collusion at the highest levels because when you drive down the street, the prices are all near each other must be to come from a state that can see oil wealth but didn't have enough sense to lure it across state lines. Oil and gasoline are commodities, meaning that they compete on price, that there's no basic difference between the competitors.

Once again, it needs to be said that the oil companies don't set gas prices.

Lott also played the robber-oil-baron class-warfare card. Has he actually bothered to do the arithmetic? Does he really think that if every oil company CEO worked for $1 a year it would save me more than that dollar over the whole year?

Here are two suggestions that Senator Lott might want to try out. First: let the oil companies actually make a profit so they have something to reinvest in exploration and drilling and all those alternative energy sources they'll need to stay in business when the well runs dry. (Corollary: let them actually invest it in those things.)

Second: you, too, can share in the wealth by buying oil company stock. These stocks pay dividends. The Dow Jones US Oil & Gas Index is up something like 35% over the last year. Over the last 3 years, it's up about 100%. If you want to shield yourself against the high price of gas, maybe think about buying oil stocks, and sharing in the wealth.

No, I didn't do that, I'm afraid. But then, I'm not whining about greedy profiteering, colluding oil CEOs, either.

Posted by Joshua Sharf at 4:20 PM | Permalink | Comments (0) | TrackBacks (0)

Finally.

You go to b-school, you get not one, but two degrees, and then you spend a year doing the same damn thing waiting for a position to come along.

Well, what better way to celebrate May Day than to begin work at a brokerage? That's right. On May 1, I make the long-awaited leap from programming into finance, joining Wm Smith & Co. as a research analyst. Naturally, I've got about 400 clients to wind up by 4/30, and I still have one contract to deliver on over the summer, plus I'll still be available to set up the occasional blog for people. But basically, I'm switching careers.

Let me tell, you, at 39, even in your first year of being 39, it's not easy to switch careers. Entirely too many HR people have already decided that your corners have been forever chipped away from 20 years of being repeatedly pounded into that round hole. Too many others simply assume that work experience, if it's not industry-specific, doesn't count. They might be willing to give you a chance, on the assumption that you should be willing to work for a 21-year-old's wages.

It's exciting to find a place that doesn't think that way, where the company's always looking for new ways to apply new ideas, and where I'll get a chance not just to write reports, but also to contribute to the business, as a business.

I've been trying to get away from programming practically since I started. The problem is that for 10 years, I spent time with a variety of government contractors. Now the government analysts weren't making a whole lot of money, so the only real compensation they had was the fun of doing the analysis. They contracted out the programming, much as the Army contracts out the washing & cooking. The last 10 years of web programming was largely a surrender to circumstance, the price being that I managed to get paid better for it.

Full disclosure: the initial connection was made through Marc Holtzman, candidate for governor, lest anyone accuse me of harboring secret sympathies or having made some sort of deal. In any case, Anyone who's actually had to find work, which immediately disqualifies most government workers and political activists, already knows that nobody "gets" you a job.

Hopefully, this will also mark a shift in blogging from mostly politics to mostly business and finance. I won't be abandoning any topics, just changing the mix to more vodka and less orange juice.

Posted by Joshua Sharf at 5:02 PM | Permalink | Comments (2) | TrackBacks (0)

This morning's NBC "First Read," ostensibly an analysis by NBC News's Political Director Elizabeth Wilner (and others), lies about the contents of an NBC/WSJ Poll:

The NBC/Wall Street Journal poll and other surveys continue to show that Americans have little appetite for extending the tax cuts in the face of more pressing domestic concerns -- including energy prices.

The poll contains exactly two questions about taxes. By a 49-29 margin, respondents said they were more likely to vote for a candidate favoring "making the tax cuts of the past few years permanent." And by a 56-39 margin, respondents support the tax cuts (Question 18). Gas prices do not show up on the list of questions. The only support for Wilner's comment is that by a 49-19 margin, people asked are more likely to vote for someone who "emphasizes domestic issues over military and foreign policy issues," leaving those issues completely unspecified.

By the way, "favors tighter controls on illegal immigration" wins 71-11, the largest more-likely/less-likely result of any split. Somehow, that little nugget didn't make it into their analysis of the political dyanmics of the immigration debate.

Posted by Joshua Sharf at 9:11 AM | Permalink | Comments (0) | TrackBacks (0)

This is a somewhat older book, from a few years ago, by Richard Miniter. He argues persuasively that you can't win by buying customers. Those customers aren't worth it. It's a good book, with some historical perspective, and a lot of good recent examples.

Continue reading "New Book Review - The Myth of Market Share" »

Posted by Joshua Sharf at 5:17 PM | Permalink | Comments (0) | TrackBacks (0)

Apparently, certain readers aren't taking too well to Redstate.org's Ben Domenech's hiring by the Washington Post. Howard Kurtz's column has a slightly whiny tone to it: "Liberal bloggers, some of whom have been criticizing The Post since its editorial page backed the war in Iraq, have expressed varying degrees of outrage over Domenech's hiring." And while calling Ted Rall a "steaming bag of pus" may make Ted Rall upset, calling Dan Froomikin an "embarassment" could just as well be a professional assessment.

Still, the complaints smack of perceived betrayal of the faithful. Conservatives are upset over the monolithically liberal WaPo blogroll, while leftists are upset over the presence of a single righty. The fact that the leftys are screaming like a woman scorned suggests the degree to which they count on the Post's megaphone, and the risk that the Post has been running of ghettoizing itself.

On the other hand, maybe it's jealousy. If the lefty bloggers were as important as they think they are, they wouldn't need the Post anyway.

And finally, what business is this of Pete Stark's? When the White House folded like a cheap suit and attacked Bill Bennett for some offhand comments about the crime rate, conservatives were wondering why the White House felt compelled to comment. Don't expect liberals to be asking when Pete Stark got into the newspaper business.

Posted by Joshua Sharf at 8:56 AM | Permalink | Comments (1) | TrackBacks (0)

Mais Non!

If the French government cared about business, the fact that their businessmen get it might matter.

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The Carnival is up!

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I had a chance to review two books on RFID recently - The Spychips Threat and RFID Essentials. Each took on the issue of RFID security differently.

Now, it turns out that the greater threat (at least immediately) isn't to the individual, but to the business, because that's where the money is.

Best hack:

Lacking their own power source, the chips are also susceptible to so-called power-consumption hacks. Adi Shamir, a professor of computer science at the Weizmann Institute of Science, announced in February that he and a student researcher were able to hack into an RFID tag and extract its kill password, which is a code that effectively makes the tag self-destruct.

The researchers deduced the password by monitoring the tag's power consumption. (It turns out, the tag's power consumption rises when it receives incorrect data from the reader). The researchers uncovered the tag's kill code in three hours. While that tag was dated, more recent iterations, which came on the market in the second half of 2005, could react in similar ways, the researcher says. And a tag can be hacked with a tool as simple as a cell phone.

Let's see. Port security. Ubiquitous RFID tags on cargo containers. Viruses. I think I see the outlines of next year's 24 story arc starting to take shape...

Posted by Joshua Sharf at 2:33 PM | Permalink | Comments (0) | TrackBacks (0)

I was on the other side of town for a meeting today, and noticed something that should put to rest the idea that big oil companies set gas prices. (Senator Schumer, please pay close attention.)

There were two gas stations, both selling Conoco, right next to each other on a major north-south street. One was on the northwest corner, and the other on the southwest corner of the intersection. There was no obvious commuting advantage to one over the other: the side street wasn't terribly busy, and they were both on the same side of the major street.

One was selling gas for 10 cents cheaper than the other. That's a huge difference, especially for the same brand.

There was no obvious difference between the two - both had pay-at-the-pump, both had carwashes - except that the cheaper one also had a small mini-mart, too. Is it possible that the mini-mart made up enough margin that the first one could undercut the second on price to that extent, and so bring in the extra gas business? (Remember, if there isn't some imbalance, either station could always match the other's price.)

In any case, Conoco obviously wasn't setting the prices here.

Posted by Joshua Sharf at 8:41 PM | Permalink | Comments (2) | TrackBacks (0)

The Denver Post yesterday lauded Wal Mart for abandoning its principles in the face of regulation and legislation, calling it a step in the company's evolution towards "good corporate citizen." The paper was particularly concerned with Wal Mart's decision to start carrying the Plan B emergency contraception pill, subject to the local pharmacist's discretion:

With its 3,700 pharmacies, Wal-Mart's decision not to stock Plan B was a huge setback for women's health. Wal-Mart was the only major chain that had refused to sell the drug, known as the morning-after pill. If taken within 72 hours of intercourse, the pill can prevent pregnancies.

Wal-Mart opened the door but it hasn't fully committed itself. The company is still allowing pharmacists who object to Plan B to refer customers to another pharmacist - or another pharmacy. It's a short-sighted and troubling policy, and Wal-Mart needs to think about the women who may not have other pharmacies nearby. In many small rural communities, Wal-Mart has edged out the smaller mom-and-pop stores and pharmacies.

Emphasis added. It seems to me that in their editorial zeal to appropriate someone else's cash flow, shelf space, inventory, morals, and ethics, the Post has made the mistake of including a falsifiable (or verifiable) claim; that the claim that Wal-Mart's policy is a "huge setback" relies almost entirely on the fact (or non) that Wal-Mart's pharmacy is the only choice for many women for miles around.

So I decided to test the thesis. There are two rural areas in Colorado: the plains and the mountains. First, I looked for all Wal-Marts with pharmacies within 100 miles (the maximum allowable distance on the Wal-Mart website) of Hugo, a city centrally located on Colorado's plains. The only stores not located on I-25 in a major city are:

La Junta, CO 81050
Fort Morgan, CO 80701
Lamar, CO 81052

I extended the search to the rest of the plains, and found an addition store in Sterling, and two more in Trinidad. Since Trinidad is the sex-change capital of North America, my guess is that Wal-Mart isn't the only pharmacy in town.

None of these towns is tiny, although all are small. Still, just to be fair, I searched DexOnline for Pharmacies in or near (within 25 miles) of each of these four towns. I chose 25 miles because it's a trip that could be made during lunch hour or after work without too much inconvenience. The score:

Lajunta - 9
Fort Morgan - 5
Lamar - 3
Sterling - 2

In none of these places, did Wal-Mart have a 24-hour pharmacy. One of the two in Sterling was. Also, there were other pharmacies in more remote rural towns, where Wal Mart had no presence, so it's not like people in those places had to drive to Sterling, only to discover it monopolized by Wal Mart and bereft of Plan B.

On the Western Slope, I found the following Wal-Marts not in major cities or major destinations (again, if you're in Avon, you're serving Vail, and again, my guess is that the number of broken legs justifies more than one Wal-Mart Pharmacy in town):

Alamosa, CO 81101
Canon City, CO 81212
Cortez, CO 81321
Delta, CO 81416
Durango, CO 81303
Frisco, CO 80443
Glenwood Springs, CO 81601
Gunnison, CO 81230
Montrose, CO 81401
Rifle, CO 81650
Salida, CO 81201
Steamboat Springs, CO 80477

And the Pharmascore:

Alamosa - 8
Canon City - 4
Cortez - 2
Delta - 4 (many in small towns nearby)
Durango - 5
Frisco - 8
Glenwood Springs - 4
Gunnison - 1
Montrose - 3
Rifle - 2
Salida - 5
Steamboat Springs - 2

In this case, there is one town without another advertised pharmacy - Cortez - but without further research, it's impossible to tell if Wal-Mart displaced, replaced, or had nothing to do with whatever pharmacy may have been there before.

It is true that in a couple of small towns, the only other competing pharmacies are supermarket chains, but what this has to do with the Post's argument is beyond understanding. If anything, the larger chains are more likely to carry this sort of thing as policy, whereas a small-town druggist might shy away from it, which is precisely the Post's complaint about Wal-Mart's policy.

Conclusion - at least in Colorado, the Post, having declared Wal-Mart guilty, is itself guilty of assuming facts not in evidence.

UPDATE: A Google search on "Pharmacy" and "Cortez" revealed that both City Market and Safeway had pharmacies in town, and that, as of December 15 of last year, Walgreen's had gotten approval to build a store there. The numbers have been updated to reflect these facts. As a result, Wal-Mart's monopoly in rural Colorado disappears entirely.

Posted by Joshua Sharf at 9:53 PM | Permalink | Comments (0) | TrackBacks (1)

ProHipHop has this week's edition, and seems to have made it though without reference to this year's Best Original Song. Thank goodness.

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At least according to the Rocky Mountain News this morning. In an article about stock and stock-option compensation for United executives who skillfully guided their company through a period where they didn't have to pay their bill, and successfully off-loaded their welfare state pension plan onto the taxpayers, the paper notes this:

The stock could be worth an estimated $193 million, although it's impossible to predict the value because the shares become usable at different times during the next four years.

The estimate for restricted stock incorporates the market value of the shares on the date it was given. The value of the stock options assumes that United's stock appreciates 10 percent annually over the life of the options. They would be worth less, or more, if United's return is lower or higher.

"The value obviously is theoretical at this point," said Jean Medina, a spokeswoman at United, which is the largest carrier in Denver and employs more than 5,000 here.

Given that the entire justification for expensing options is opportunity cost, and given that the Rocky has just pointed out that such a cost is impossible for calculate, I trust we won't be seeing any future editorials about the need to debase the currency of fact-based accounting.

Posted by Joshua Sharf at 10:49 AM | Permalink | Comments (0) | TrackBacks (0)

Google has agreed to pay $90M to settle an advertising click fraud case; evidently on grounds that it didn't catch the fraud. Google's defense had been that it does reimburse for fraudulent clicks, and the WSJ claims that the settlement apparently leaves that defense intact.

$90M is a lot even for me, but for Google, frankly, it's pocket change. Their latest quarterlies have them at almost $4B in cash & equivalents. That's down from $5.5B the prior quarter, but the difference has gone to short-term investment, not burn rate.

Google uses some strange proprietary formula based on the number of clicks, number of ads, priority, phase of the moon, and position of the owners' yachts in the latest test race. It was opaque to both the advertiser and to me, and the added layer of uncertaintly almost certainly makes for a less efficient market.

Personally, I think BlogAds has the better model. I never really understood the click rates except as a proxy for eyeballs, and nobody pays for any other kind of advertising that way. You don't see people charging for urban billboards by how many people changes busses just to hit the Macy's sales.

I've only had a couple of BlogAds, but it's easier for me, since I set a fixed rate up front for a set period time. You know, like a normal product, or normal advertising. In some sense, it's based on how many people see the ad, but in another sense, it's also based on the sales the advertiser sees rather than the visits. Market signals are much more direct this way.

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Yes, I know Fat Tuesday was last week, but for Capitalism, the Carnival never ends! Free Money Finance is hosting the week's festivities.

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It turns out that China, by capping gas prices in an attempt to shift from coal & oil, has driven consumption up to the point where they're pricing themselves out of the natural gas market.

Despite a significant improvement in Tongchuan's air quality, local leaders are planning a new plant and it is going to be powered by coal. They blame sharply rising gas prices. "We have plenty of coal, why don't we use it?" says Zhao Guanlong, the deputy director of the city's development and planning commission.

China has backed out of at least one multibillion-dollar deal to buy gas from overseas oil companies and other deals are in jeopardy. Plans to build more than a dozen terminals to receive gas shipments in liquid form are on hold. Chinese officials are discouraging new gas-related investments because they fear the terminals won't be fully utilized.

This indicates the folly of "energy policy."

Of course, it's going to make LNG more appealing to us, and put more pressure on oil prices, which is why this is good news:

As the Bureau of Land Management faces increasing pressure to speed up gas-drilling permits on federal land across the West, it has begun extending deadlines in Colorado because companies can't start drilling fast enough.

BLM officials in Colorado recently changed their rules to stop the clock for drilling companies that can't find rigs to drill gas fields they've leased from the government. Previously, companies that couldn't start drilling before their lease expired lost their lease. M/blockquote>

Since it's smaller companies that are having a hard time finding drilling equipment, this serves as a help to smaller business; and it also suggests that it's time to look into companies that make (not necessarily operate) NG drilling equipment. Note that a large part of the cost of LNG is transportation, so this undercuts that cost.

One other point. The WSJ notes that China has the world's second-largest energy use. But it only just became the world's fourth-largest economy. So it's apparently incredibly inefficient when it comes to energy use, and incredibly dirty when it comes to pollution. Its exclusion from Kyoto is another reason to ignore that treaty.

Posted by Joshua Sharf at 5:18 PM | Permalink | Comments (0) | TrackBacks (0)

The Journal today reports on the bomming retail business on the US side of the Mexican border. This is, of course, what NAFTA promised. It also highlights the problems with people who want an iron wall across the southern border. Along with employees, US businesses are now getting lots of customers from Mexico, and some of them may be illegal.

American stores that don't have Mexican outlets, such as Abercrombie & Fitch, Gap Inc., American Eagle Outfitters Inc. and Victoria's Secret, are the most popular with Mexican shoppers, who buy large quantities of clothes to bring back to friends and family. The average Mexican shopper spends twice as much per trip as an American shopper, according to Simon Property Group.

Carmen Soto, mall manager at Valle Vista Mall in nearby Harlingen, says Mexicans sometimes buy clothes without even trying them on. "They think, 'It's American! It's authentic! So what if it doesn't fit?' " Ms. Soto says.

Of course, the clientele implies a Mexican staff, as well, raising the question as to how much of the sales staff is here illegally as well.

Still, in addition to a guest worker program, maybe we also need a guest-shopper program.

Posted by Joshua Sharf at 5:05 PM | Permalink | Comments (0) | TrackBacks (0)

Morningstar announced today that 1) they'll start ranking ETFs and 2) they're adding several new categories.

Besides the new ETF rankings, Morningstar today also is launching five new mutual-fund categories, including "long-short" funds, which make money by betting that some stocks will rise in price while simultaneously betting that others will fall, and "target-date" funds, which automatically adjust the fund's asset allocation in order to meet investors' specific retirement date.

The bad news for Morningstar is that they're still going to use the Size-Value-Growth grid for ETFs, when there's no reason to think that they'll work any better for ETfs than for regular mutual funds.

The problem with Size-Value-Growth is that it unnecessarily constricts managers' decision-making. When a "value" or "growth" manager sees a stock, it rarely matters what size it is. Likewise, rating companies can't agree on what "value" and "growth" actually mean. A stock that a growth manager finds attactive might remain beyond his reach, because S&P considers it a value stock. Given their druthers, virtually no managers would actually make decisions this way. Moreover, the Nine Boxes don't define asset classes, so diversifying across them doesn't significantly help a portfolio.

The interesting news here is that the new categories are based on actual style, i.e., criteria that managers use when deciding where to put their money. It's perhaps evidence that Morningstar is trying to diversify its own portfolio of rankings. The question is whether or not managers, advisors, consultants, and investors are so invested in the current SVG "style" grid that Morningstar can wean itself from the giant Stay-Puft Marshmallow Turkey it's created.

Posted by Joshua Sharf at 3:19 PM | Permalink | Comments (0) | TrackBacks (0)

This is going to have to become a category on its own.

The WSJ is reporting that a number of state legislatures are mulling over the notion that the answer to low supply is...to further depress supply:

With consumers in many parts of the country facing sharp increases in their electricity bills, officials in some states are considering rate caps or other measures that would beat back deregulation.

...

Some state officials are stepping forward to propose rate caps and other measures meant to hold down increases in electricity bills. But the proposed fixes could put utilities in a cost squeeze. Similar proposals backfired five years ago during California's electricity crisis, bankrupting the state's biggest utility. Critics also say the measures do nothing to fix the underlying problem of surging wholesale power costs.

We want more efficient plants. The public would almost certainly settle for more nuclear plants. Heaven forbid the energy companies be able to charge enough to cover the cost of new investment. No, no, much better to let the system crumble, and then, twenty years from now, ask what happened.

Posted by Joshua Sharf at 4:38 PM | Permalink | Comments (0) | TrackBacks (0)

When will we learn that there really is no free lunch? Some Colorado legislators, eager to throw yet more money at the teachers' unions, want to raise taxes on the booming oil and gas industry in the state. And for some reason, they don't think it will actually cost anything:

The proposal would increase by 1 percent the taxes oil and gas producers pay and would divert some federal mineral lease funding largely for school-building and renovations.

"It is our intention in this measure to make sure that we address the immediate health and safety needs in the poorest districts first," said Mary Wickersham, a leading supporter of the proposal and who works for the Donald Kay Foundation.

Because oil and gas prices are set by national and international markets, Wickersham said, the severance tax hike would not increase what Colorado consumers pay for gasoline or natural gas.

Well, if you spread the added cost over the entire worldwide oil & natural gas markets, I suppose that's true as far as it goes. But of course, it's only true as far as any cost doesn't really show up in the price, since prices are set by markets, not by sellers. It also makes Colorado marginally less competitive, since the competition isn't only straight drilling now, but also tar sands and shale oil. Which eventually will mean an equivalent number of jobs lost. Oh, we won't notice it now, only when we need the work.

Then again, what do you expect from someone who thinks that calling a wild pitch a ball means that the umpire is skewing the game?

Posted by Joshua Sharf at 12:22 PM | Permalink | Comments (3) | TrackBacks (0)

One more book review. This one, not so good. As always, you can read it below, or read it here.

Continue reading "Book Review - Analyzing Business Data With Excel" »

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Having been more or less driven off campus by the radicals, you won't really find too many college courses defending capitalism any more. Well, the Independence Institute has somehow managed to sneak a 2-credit course past the censors and into the CU system. While it's open to anyone for $75, college students are particularly encouraged to attend.

The reading list and syllabus look very solid for 15 hours of attendance, and you can register either through UCCS or the II itself.

Looks a little bit like a handy, bite-sized version of the LPR, and maybe it'll leave graduates wanting more.

Posted by Joshua Sharf at 7:30 PM | Permalink | Comments (0) | TrackBacks (0)

Also last night, we talked about tolls on new roads and lanes as a possible answers to congestion and future needs. As my favorite local VC says, "I remain skeptical."

Tolls roads seem to suffer from the same inverted cash flow structure as, say, water. Almost all of their costs are fixed, while almost all of their revenue is variable. This puts the toll road operator in a bind where there are other alternatives, either existing routes or a boost in telecommuting. The operator presumably has set his rates at something close to the optimum level to begin with. Lowering rates will cause the very congestion his customers are paying to avoid, and raising them will either drive off traffic, or create resentment among increasingly captive commuters.

Just privatizing operations doesn't change the basic economics. And it's no good saying that the bonds are market-tested. Markets funded the dot-com boom as well. They may be the best system around, and in the long run, a pretty good one, but markets are still subject to fads, herding, and other mistakes. And don't underestimate the pressure that a financially-strapped government can bring to bear on the underwriting banks.

I remain not hostile, but skeptical.

Posted by Joshua Sharf at 7:15 AM | Permalink | Comments (0) | TrackBacks (0)

Last night, one of the guests on John Andrews's show was Jay Lehr of the Heartland Institute, talking about our national "oil addiction." He made the perfectly good point that as the price-per-barrel rises, recoverable reserves rise as well. While the days of $20 per barrel are long-gone, at $50 per barrel, nobody's running out of anything for a while, and the US and Canada suddenly have the largest reserves in the world. So in a war or some other world crisis, we should be able to get our hands on enough oil to run the military without foreign help. (In the absence of a war, the US is still hooked into the international system, where transportation of oil is relatively cheap, and prices are set at world, rather than local, markets.)

That said, it's worth remembering that recoverable reserves are also subject to political as well as economic restraints. Much of the world's exploration and recovery is now being done by government firms, which tend to be less flexible, more protective of prerogatives, and less efficient. This can't help but decrease the recoverable reserves, if only by slowing exploitation, especially of the harder-to-reach reserves, which require more infrastructure.

In fact, it's also worth pointing out that even the surface oil takes a little while to get to, while rigs are built. Large-scale shale and tar sand recovery will take a while to get up and running, and until then, we will remain vulnerable to international oil shocks.

Posted by Joshua Sharf at 11:04 PM | Permalink | Comments (0) | TrackBacks (0)

In their book Spychips, Liz McIntyre and Katherine Albrecht raise the spectre of personalized pricing, done so that you would never know. As they paint it, the RFID-enabled store would read your store membership card, and if you were a bargain-hunter, would raise the price you were charged for the item. If you were a high-margin customer, say, one who didn't wait for the $2.50-per-twelve-pack for Diet Coke, they might give you a break. The advertised price is for the non-members, or someone without enough of a track record to screw with analyze.

This strikes me as a singularly bad idea, albeit one unlikely to cost me much money.

Unlikely to cost me money, because even if King Sooper (that's "Kroger's" to you) decides that it doesn't want to sell me Diet Coke for $2.50, there are large companies (read: Wal-Mart, Save-On, Sav-a-lot, Target) whose entire business model is predicated on going after people like me. And if King Sooper stops selling me Diet Coke for $2.50, even though that's the sale price, they're going to lose my Empire Chicken business, too.

But it's also a bad idea for the economy. One of the great advances in western economies came with the advent of fixed prices. There was a time when, if Mr. Clean were on sale, we would have had to bargain with the merchant as though we were buying a new Jeep. Fixed prices are much more efficient, because the time wasted haggling over a few pennies is much better spent doing something else, like productive work.

Now, in addition to right-pricing the item, computer programs would have to be developed to right-price for any number of different sorts of customers. With both customer behavior and market conditions changing on a daily basis, it's hard to believe that the effort put into such software could actually be worth it. Worse, as a consumer - business or individual -, it becomes virtually impossible for me to know the price before I go to the store. If that doesn't reintroduce inefficiencies into the system, I don't know what does.

The book compares the chaos that would result to the pricing of airline tickets, except that that's not quite right. As Thomas Sowell has pointed out, you're not just paying for the ticket - you're also paying for flexibility. If you buy your ticket late, you're paying for the right to wait till the last minute, possibly in response to factors you can't control.

A better comparison is preferred-customer programs on steroids. Usually, you can see what points you've accumulated, and choose how you want to spend them. Even when the program results in an immediate price difference, it's usually infrequent, and presented as a reward or a bonus. It rarely factors into overall purchasing decisions.

I'm not big on intangibles and feelings when it comes to the market. But the reason the system works is that it's a system of contracts above (although exclusive to) personal relationships. If a store is going to routinely change prices just for me according to some algorithm I can't understand, the whole system starts to look as though it's reversing that precedence. And remember, every business is someone else's customer.

Which is why I don't think it'll catch on.

Posted by Joshua Sharf at 4:15 PM | Permalink | Comments (0) | TrackBacks (0)

Well, sort of. Tom Howard and Craig Callahan have published an article in Investment Advisor ("Boxes Are Not Classes") based on research that I did for them last summer. The prose is mostly theirs, but the data and analysis come from yours truly.

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So Jonathan's parent company is going to be promoting films (can prizefights be far behind?):

I want to stop here for a moment and make it really clear that we are not investing in a movie and we are not getting into the movie business in a traditional way. What we are doing is leveraging our vast retail store footprint and the cultural relevancy of the Starbucks brand to bring film to the public in a new way during the time when the film industry has been challenged.

Starbucks will participate in all aspects of the marketing and distribution of this year film, and we will be an equity participant in the film's success, not only at the box office but through the sale of the sound track and the DVD in all retail outlooks including our stores. The soundtrack will be available in early April and we will carry the DVD along with other traditional retails, when it becomes available later in the year.

Through this venture, we are creating an economic partnership with the film industry that mirrors the structure we created in music with the successful later trail CD. Through the power of the Starbucks brand, we will create awareness and drive new Movie Goers to the film, something movie producers could not do on their own. We will introduce the film through a truly innovative and interactive in store marketing campaigns, which will provide customers the opportunity to experience the fun and inspirational feeling of the movie. Many of our store
partners will have a chance to view the film prior to its release and they along with strategic marketing materials with in the store will create enthusiasm in entries among our customers around the Akeelah and the Bee.

Even before I read the entire article, this made perfect sense to me. Starbucks has a history of this sort of opportunism. The CDs that they sell came from customer requests for the home-made mixes they were playing in their restaurants. The roll-your-own-CD machine that they have in Austin and Seattle is typical.

Starbucks isn't make the Sony mistake of getting into movie-making. It's just pursuing a logical extension of their current business model.

Posted by Joshua Sharf at 4:59 PM | Permalink | Comments (0) | TrackBacks (0)

The best intellectual property on the web.

Posted by Joshua Sharf at 10:11 PM | Permalink | Comments (0) | TrackBacks (0)

No more Google Ads. Since this wasn't precisely my main source of income, neither I nor Google are going to notice much of a hit to our respective bottom lines.

Still, seems like the right thing to do, and it's not likely even to cost me entry to the Lucrative China Market.

Posted by Joshua Sharf at 8:45 AM | Permalink | Comments (1) | TrackBacks (0)

Beware those numbers you see in the newspapers. (Look closely for a familiar name, too.)

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The Journal post-mortems Boston Scientific's successful bid for Guidant. Nothing in these has me rethinking my belief that the combined company will be either up for sale or reorganizing within 2 years:

Boston Scientific will borrow an estimated $9.6 billion to finance the deal -- and sustain four years or more of damaged earnings -- on its hunch that Guidant is the answer to its own deteriorating product line. While paying down all that debt, the company will have to integrate the largest merger in its 27-year history, revive Guidant's flagging market share, develop new products, and wrestle with any product-liability costs from Guidant's legal problems.

Investors nonetheless have shown their confidence, keeping Boston Scientific's shares relatively stable during a tumultuous merger showdown. The combined company, with revenues of about $9 billion...

Debt. Target as Savior. Complex operations. Key target personnel leaving. Uncertain regulatory environment.

BTW - the shares that have been stable this year are already down 30% from the start of '04.

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At a time when Microsoft, Cisco, and Google seem to have electronically-jammed moral compasses, it's good to be able to report that Anonymizer, of the companies