Commentary From the Mile High City

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Joshua Sharf

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May 22, 2009

Now It's Municipal Bonds

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

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


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

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

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

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

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

April 19, 2009

The Least Important Leading Indicator

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.


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.

April 2, 2009

Like They Can Just Print the Money

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"

March 31, 2009

Lawlessness Under Cover of Law - II

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.

March 29, 2009

Freddie and Fannie, Together Again

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.

March 12, 2009

Bank Sale Rashomon

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.

It's Great Time To Raise Taxes

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.

What Does Lois Court Have Against Small Business?

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.

February 26, 2009

Creating Another Patronage Class

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.

January 31, 2009

"Worker Retention" - II

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 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?

January 29, 2009

"Worker Retention"

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.

January 15, 2009

Borrow In Haste, Repay At Leisure

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.

January 1, 2009

How Not To Invest In Real Estate

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.

Rationalizing Costs & Revenue

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.

December 12, 2008

Bad Markets Mask Problems, Too

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.

December 11, 2008

More Bailout Follies

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.

December 10, 2008

Bailout Exit Strategy

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.

Rebuilding the House of Cards

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.

December 8, 2008

The Problem With Experts

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.

November 28, 2008

Newspaper Finance - II

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.

November 25, 2008

What Was That About the Oil Industry

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.

November 21, 2008

Culture Clash

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?"


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

November 17, 2008

Worst Bailout Excuse Yet

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.

November 12, 2008

PERA-lous Territory

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.

November 10, 2008

Blessed Are the Cheesemakers

And now for something completely different.

October 25, 2008

Right to Work

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.

October 10, 2008

Special BTR Today

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.

July 31, 2008

How a Campaign is (and isn't) Like a Startup

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" »

December 6, 2007

CFA'd Out

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.

October 19, 2007

Business and Baseball

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.

October 11, 2007

Leading With Your Chin

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.

August 27, 2007

Receivables Securitization

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.

August 24, 2007

The Modern Lyceum Movement

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.

August 20, 2007

The Weekend

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?


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.

August 13, 2007

Customer Service

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.

July 30, 2007

CFA Blog

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...

April 28, 2007

Fooled by Randomness

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."

April 27, 2007

I, Voice Mail

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.


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.

Conference Call Etiquette

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.

March 26, 2007


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.

March 6, 2007

Economics By Doctors

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.

March 1, 2007

Media Alert

Channel 4 caught me in DIA.

Good thing the flight had been delayed.

February 27, 2007


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.

February 20, 2007

*Sigh* Even AdWeek

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.

January 4, 2007

Back to Blogging

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.

December 1, 2006

Writing For Business

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.

November 29, 2006

Wednesday Morning

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?

November 28, 2006

LPR Cheat Sheet

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 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.

November 22, 2006

Series 87

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.

November 13, 2006

What's Three Months Between Friends?

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.

October 30, 2006

Property Rights

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?"

October 26, 2006

Cultural Reversal

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?

Conference Train Scrip

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...


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.

October 11, 2006

More Partisan Shopping

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...


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).

September 27, 2006

Tradesports Arbitrage

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.

September 15, 2006

Beware Oil

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.

September 12, 2006

The Carnival of the Capitalists

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.

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.

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.

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 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.

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.

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?"

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).

September 11, 2006

CotC on the Way

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

August 30, 2006

Note to Management

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.

July 28, 2006

The Great Amalgamator


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.

July 20, 2006

Setback for Socialism

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?

July 18, 2006

Series 86

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."

July 17, 2006

Carnival of the Capitalists

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....

July 12, 2006

10-K Activism

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.

The Island of Venezuela

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.

June 27, 2006

The Denver Post and the Death Tax

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)

June 23, 2006

Whither the ISM?

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.

June 21, 2006

And They'll Pass...

...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.

June 20, 2006

The Morningstar Empire Strikes Back...

...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.

June 19, 2006

A "New Direction" For Wages?

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.

Carnival of the Capitalists

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.


Carnival of the Capitalists

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.


June 11, 2006

Reading Assignment

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.

June 5, 2006

Feldstein Proposes Gas Rationing - Roundup

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.

May 31, 2006

Ron Ziegler Lives! In Private Industry!

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.

May 30, 2006

Carnival of the Capitalists

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

May 29, 2006

Revenue Bonds Follies

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.

May 26, 2006

If Atlas Shrugged Were About Oil... 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.

May 25, 2006

Amazing What a Little Profit Motive Can Do

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.

May 24, 2006

Local Economy Booming: Women, Minorities Hardest Hit

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.

May 23, 2006

Salazar Gets One Right

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:, now comforably Blogrolled.)

Carnival of the Capitalists

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.

May 17, 2006

Carnival of the Capitalists

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.)

May 16, 2006

The President And Immigration II

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.

May 15, 2006

The Tricorder Is In Prototype

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?

May 12, 2006

Qwest For a Defense

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

May 11, 2006

Series 7

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 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.

May 10, 2006

Small Companies and Sarbox

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.

May 8, 2006

Cell-Phone Replay

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.

May 4, 2006

The USPS - Timely As Ever

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.

May 1, 2006

Growth Is Good

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.

Carnival of the Capitalists

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

April 30, 2006

In Other Economic News

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.

MSM Still Passing Gas

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?

MSBNC "First Read" Issues Correction

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.

April 27, 2006

Why Finance is Like Baseball - II

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.

April 25, 2006

What Is It With NBC's First Read and Polls?

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.

A Little Trent's A Lott

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.

April 18, 2006

Career Change


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.

April 12, 2006

NBC's Political Director Fabricates Own Poll Results

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.

April 7, 2006

New Book Review - The Myth of Market Share

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" »

March 24, 2006

The WaPo Wanders Off The Reservation

Apparently, certain readers aren't taking too well to'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.

The Language of Business

Mais Non!

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

March 20, 2006

Carnival of the Capitalists

The Carnival is up!

March 17, 2006

RFID Hacks

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...

March 15, 2006

More Gas Prices

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.

March 13, 2006

Wal Mart's Pharma-Power?

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.

Carnival of the Capitalists

ProHipHop has this week's edition, and seems to have made it though without reference to this year's Best Original Song. Thank goodness.

March 9, 2006

Expensing Options Makes No Sense

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.

March 8, 2006

Google Pays

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.

March 6, 2006

Carnival Time!

Yes, I know Fat Tuesday was last week, but for Capitalism, the Carnival never ends! Free Money Finance is hosting the week's festivities.

March 3, 2006

Addicted to Natural Gas

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.

Booming Border Business

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.

Marginal Morningstar

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.

February 28, 2006

Even More Economic Illiteracy

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 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.

February 20, 2006

More Economic Illiteracy

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?

February 14, 2006

Book Review - Analyzing Business Data With Excel

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" »

February 13, 2006

Capitalism for Credit

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.

Ask Not For Whom the Road Tolls...

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.

February 12, 2006

Oil Reserves & Politics

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.

February 7, 2006

RFID-Customized Pricing

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.


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.

February 3, 2006

Mangled Cat Goes to the Movies

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.

January 30, 2006

Carnival of the Capitalists

The best intellectual property on the web.

Goooooodbye Google

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.

January 27, 2006

Lies, Damn Lies, and Statistics

Beware those numbers you see in the newspapers. (Look closely for a familiar name, too.)

January 26, 2006

Yup. A Deal From Hell

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.

January 25, 2006

Electronic Subversive Follow-Up

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 mentioned below, is actively working to get around the Great Firewall of China:

But it's difficult to question the honorable nature -- some might even say "nobility" -- of the work Anonymizer is doing with the U.S. government. Cottrell said that immediately after 9/11, for example, the company put a front end on the FBI's tips page on the Web. The idea was to make it possible to assure tipsters of their anonymity, and the effort yielded 25,000 tips within three months.

Yet the effort that's probably most worthy of that badge is Anonymizer's work in collaboration with Voice of America to enable people in China and Iran to access information on the Internet that their respective governments don't want them to see. Anonymizer sends e-mail blasts into both countries, and those messages include specially generated URLs that people can click on to anonymously get to sites that can't be accessed through in-country ISPs.

"We're punching holes in the Chinese firewall," Unrue said. China's government, Cottrell claimed, is trying to launch denial-of-service attacks against in retaliation.

January 24, 2006

The Compleat Electronic Subversive

This is a repeat of a post from last August. Because trackbacks and comments didn't survive the port to MT 3.2, I've been asked by the company to re-post it as an FYI for their user community.

As any Neal Stephenson fan knows, it's an arms race between the encryptors and the decryptors. Still, this looks like the kind of thing that any aspiring terrorist operative - or Chinese protest organizer - would want to have.

Stealthsurfer II is a little USB device that looks like one of those Jumpdrives, but acts as a shunt for all your Internet traffic. Even browsers with very small caches still write to disk, and those files are more or less permanent. Arthur Anderson should also have taken hammer to all of their Enron hard drives. The Stealthsurfer intercepts email, web browsing, and FTP traffic, and encrypts it using ES3. It's apparently versatile and easy to use.

Why would this be useful? Well, think of the number of intelligence coups we've had when we caught al-Qaeda guys parading around with their laptops. Using the Stealthsurfer, much of this content would never have hit the hard drive. Captured, they could either impersonate drug mule or just toss the little capsule away. Someone could use the Net for operational traffic, and if they weren't under surveillance, searching their laptop wouldn't do intelligence agents or federal prosecutors any good.

Another feature lets you spoof your IP address, making it seem as though your traffic is originating from a computer thousands of miles away. Handy little tool for the terrorist on the go.

It appears that the service reroutes your traffic through their servers, 128-bit encrypted, so the host website your accessing thinks that Anonymizer is the client. Anonymizer claims to cooperate with law enforcement, but if the transmitted information is already encrypted or hidden, they might never know their service was being used this way. And since they also claim they don't keep any of the traffic, the trail might well stop at their servers.

Now the tool does have limitations. Chinese dissidents or protest organizers wouldn't exactly be able to parade into an Internet cafe and cover their tracks. There's a login screen, a popup window, and some other give-aways. Also, the ChiComs are in the nasty little habit of blocking internet sites and monitoring traffic, so this kind of thing is likely to attract the attention of that little white van parked across the street.

So, take an electronic one-time pad that tell me where to look for my next instructions, a host site that has nothing but an innocuous-looking JPEG with the instructions embedded in it, a hand-held GPS for setting up remote drops and meetings. Add plausible deniability to my laptop and even my physical location, and I'd say we've got a little problem here, 99.

January 19, 2006

I'm Not Making This Up

So I'm working late, trying to get some coding done before the customer changes his mind altogether, and I figure that the perfect thing to help me concentrate would be Dave Barry's appearance on Talk of the Nation. Since Barry gave up his column a few years ago, we've had to get along on scraps and the odd book, and since he doesn't do those very often, it made me feel better just knowing he was still around. (Now, though, Barry has a blog, including some startling insights on 24.)

What did I learn? First, I learned from host Neil Conan, that if you're going to have a world-renowned humorist on your show, don't try to keep up. He's paid to be funny. You're paid to be the pseudo-intellectual voice of our tax dollars at work. You were born to be a straight man, this is your moment to shine.

Second, I learned this about money:

The problem was that gold is too heavy to be constantly lugged around. So, to make it easier for everybody, governments began to issue pieces of paper to represent gold. The deal was, whenever you wanted, you could redeem the paper for gold. The government was just holding your gold for you. But it was YOUR gold! You could get it anytime! That was the sacred promise that the government made to the people. That's why the people trusted paper money. And that's why, to this very day, if you–an ordinary citizen–go to Fort Knox and ask to exchange your U.S. dollars for gold, you will be used as a human chew toy by large federal dogs.

Because the government changed the deal. We don't have the gold standard anymore. Nobody does. Over the years, all the governments in the world, having discovered that gold is, like, rare, decided that it would be more convenient to back their money with something that is easier to come by, namely: nothing. So even though the U.S. government still allegedly holds tons of gold in "reserve," you can no longer exchange your dollars for it. You can't even see it, because visitors are not allowed. For all you know, Fort Knox is filled with Cheez Whiz.

Which brings us back to the original question: If our money really is just pieces of paper, backed by nothing, why is it valuable? The answer is: Because we all believe it's valuable.

Really, that's pretty much it. Remember the part in Peter Pan where we clap to prove that we believe in fairies, and we save Tinker Bell? That's our monetary system! It's the Tinker Bell System! We see everybody else running around after these pieces of paper, and we figure, Hey, these pieces of paper must be valuable. That's why if you exchanged your house for, say, a pile of acorns, everybody would think you're insane; whereas if you exchange your house for a pile of dollars, everybody thinks you're rational, because you get... pieces of paper! The special kind, with the big hovering eyeball!

January 17, 2006

Deals From Hell Just Keep Coming

Am I the only one who sees a replay of the Qwest-Verizon-MCI struggle in the current Boston Scientific-J&J-Guidant bidding war? J&J can always win this thing if it wants to - it just may not want to. And BSX is now offering substantially more than its own value, on its way to wrecking the combined balance sheet of the two companies.

Then there's this:

Some of Guidant's largest shareholders have protested what they believe is an unfair preference for J&J at the Guidant board level, despite what they regard as J&J's inferior offers. This suggests that a hostile bid might find backers among these groups.

That should also sound familiar.

Likewise, some are arguing that J&J needs Guidant because it has few other growth opportunities. I'm not certain that a profitable and growing company worth $180 billion needs any company worth about $25B.

There are some differences. For instance, Qwest had no outside help. In this case, Abbott Labs seems willing to fund BSX's escalating offers - at least to some extent - by agreeing to pay more for certain overlapping bits of Guidant that can't keep. But there are some limits, here, too. Abbott is only valued at about $65B, and certainly won't be looking to blow its entire roll of cash just block J&J. This isn't the Persian Empire bankrolling the Spartans.

I suppose there's that argument that something is worth what you can get for it, but people value companies for a reason, and J&J had excellent reasons for pushing down Guidant's price. Using the pre-deal list from Deals From Hell, I'd be a little worried about winning if I were a BSX shareholder. It's a bidding war for a public company, one that BSX has valued above itself, and which the board is clearly hoping will save the company. There are complex regulatory issues to be negotiated. And there will almost certainly be expensive buyouts and severance for senior- and middle-management. Speaking of management, with one exception there's very little management investment in BSX.

If J&J wins, they may be overpaying.

If BSX wins, they may soon be up for sale.

December 25, 2005


I just saw an ad for some NBA video game or gaming system, that tries to show how realistic it is by focusing on the sweat on Shaq's neck at the free-throw line.

Then they go and throw it all away by having him make the free throw.

December 21, 2005

Radio Daze

Councilman Elbra Wedgeworth has way too much time on her hands. And apparently, the leaders of the Denver Black and Hispanic Chambers of Commerce are seeing a slow holiday season, too. They also seem to have confused CBS with NPR.

All three met with CBS radio in Denver to protest a format change:

Wedgeworth; Wil Alston, vice president of the Colorado Black Chamber of Commerce; and Jeffrey Campos, president and CEO of the Denver Hispanic Chamber of Commerce, met with Don Howe, senior vice president for CBS Radio in Denver. They emphasized to Howe the station's importance in the Latino and African-American communities.

Central to the meeting was the sudden demise Thursday of the area's only rhythm-and-blues outlet, axed after six years on air.


Independently, Urban Spectrum, a newspaper published in the Five Points neighborhood, launched a campaign Tuesday to let station management "know there is a voice out there they have turned their back on. They have a mandate to serve the public, and no one asked the public before switching."

Actually, they asked the public every day, and the public yawned. This was the only station in town with this format, they had no competition for this niche, and they still couldn't drum up enough listeners to pay the freight.

A few years ago, when KVOD, a commercial station and the only classical station in Denver, folded, CPR took over the call letters (although not the frequency), and began a 24-hour classical station. Maybe the aggrieved parties need to ask CPR to start sharing time on their classical network, but they need to stop playing program director with someone else's revenue stream.

UPDATE: I wrote this late last night, and clearly wasn't thinking. The Hispanic & Black Chambers of Commerce? Have they no advertisers?

Open-Source Capitalism

One of the more amazing things about business in this country is how open it is. Most, but not all, traded companies will willingly talk to you about their annual reports, explain their footnotes, discuss strategy. Listen in to a few conference calls of Fortune 500 companies, and you'll see what I mean. When I needed an explanation of some inventory number from a large company for a school project, I simply called the investor relations number on the website, and one of the accountants spent about 15 minutes with me on it.

Now, most companies won't reveal trade secrets. And some companies' management don't like to talk the press, but frequently that's just because they don't see a need to play a public relations game. But those are rare and can only get away with it as long as they make money and stay out of jail.

It makes the dereliction of analysts who clearly couldn't comprehend Enron's business model all the more unforgivable.

December 18, 2005

Carnival of the Capitalists

Coyote Blog has it this week, with a new sponsor.

Hell Of a Way to Run an Airport

Apparently, government isn't any better at running an airport than it is at running a railroad. Commercial or passenger. If you remember, Conrail was formed as a government-run railroad after it kept so many failing lines on life-support that the whole northeast corridor part of the industry collapsed.

It seems that the Denver City Council decided to just skip the whole "regulating-into-bankruptcy" phase of the process, and go straight to owning and running Denver International Airport itself. Now, while it's considering relaxing purchasing and hiring rules, there's only a hint of a whisper of a suggestion that they might think about beginning to study actually creating a private airport authority. Don't hold your breath.

The most offensive aspect of the city's management is probably its minority set-asides for airport concessions. Which is why Wilma Webb, wife of former mayor Wellington Webb, who clearly needs the help, has an interest in a shop there.

The most damaging aspect though, is probably its continued favoritism to United Airlines. If there were a way of assessing it, United could count the city's goodwill on its balance sheet. And hometown airline Frontier would have to write it up as a liability.

The latest example comes in the form of a deal to let United transfer $184 million in debt to DIA in return for - well, it's hard to say what, exactly. Here's what the Rocky lists as the benefits to DIA:

• Connections: The carrier commits to increasing the level of passengers connecting through DIA to 7.5 million in 2006, 7.6 million in 2007 and 7.7 million in 2008 through 2025. That would lead to an estimated $9 million in additional annual concession and passenger fee revenues for DIA.

• Concourse A: United will fly a minimum of four flights a day through 2025 from each of its six gates in Concourse A, which the carrier uses for its Ted service. United said it currently is exceeding that threshold.

• Concourse B: The airline will shelve plans for a new regional jet facility on Concourse B, saving DIA $2 million annually in construction and other costs.

So United is promising more connecting flights to DIA, with a whopping 2.7% in the first 2 years, and no growth promised thereafter. It's also promising to meet a minimum it says it's already meeting. The only potentially attractive feature here is that the airline is letting the airport off the hook for a regional jet facility, for United, that the airport had agreed to pay for. Yes, those sharp businessmen over at City Hall had agreed to pay for more gates for an airline that was already in bankruptcy.

The cancellation has got to come as a disappointment to Phelps Program Management, but as a relief to just about everyone else. Phelps had the thankless job of rescuing the baggage system from ignominy, and may have reduced costs, but otherwise, the system still isn't working properly. The company's web page for the project shows baggage ramps and carts, but no baggage, so at least they can't be accused of false advertising.

Contrast this with the way DIA is planning to expand for Frontier:

One possible solution: revive Frontier's planned expansion of Concourse A. The carrier delayed the project - initially estimated at nearly $80 million - last year because of industry turmoil and the uncertain future of its bankrupt rival United. In that scenario, Frontier and other carriers would repay DIA for the expansion through rent and other fees.

Frontier's not in dire straits, but they're being artificially constrained from expanding, and it may very well keep them from making their most efficient use of their new debt issue. More ironically, the regional jet facility was supposed to be part of a plan to free up a few gates here, a few gates there, for Frontier, but apparently, that's fallen through now, as well.

I know this is just howling into the wind, but guys, how about a private airport authority, and a gate auction.

Just a thought.

UPDATE: It occurs to me that the one weak point in the Southwest conference call to announce their new Denver service was the CEO's confidence that something could be worked out regarding expansion plans. They must be just thrilled with this announcement.

An announcement that United considers so critical to their plans, that creates such important future obligations on their part, that they didn't even issue a press release on it.

December 16, 2005

The Governor Boots Immigration, Too

Governor Owens, trying to get back into the graces of the free-market conservatives whom he abandoned in his rush to raise taxes last year, has now endorsed the idea of a privately-run guest-worker program for the US. The image that comes to mind is that of a plane, having lost hydraulics, trying to steer using engine power, and wildly overcorrecting back and forth.

I'm as free-market a conservative as they come, but even I can see that this is, to be blunt, a horrible idea.

To be fair, this isn't the fox guarding the henhouse. This is the fox being given the keys to the henhouse while the owner goes out recruiting more foxes. Business doesn't want the laws we have now enforced. Their entire incentive is to keep the borders as open as possible. I have no doubt that business could devise a plan that was easy-to-implement. Also easy-to-outlive, outrun, evade, avoid, duplicate, deceive, and corrupt.

Once it became clear that some guy with a box of green paper and a Xerox machine was handing out tickets in Tijuana, the government would have to step in, anyway, and not merely to create its own system, but to ferociously prosecute anyone who had come within a hundred miles of the border, er, system, set up privately.

About the only benefit I can see is that it's given Joan Fitz-Gerald a chance to prove what a fool she is:

Senate President Joan Fitz- Gerald, D-Jefferson County, said the plan appears to favor big business and wealthier undocumented immigrants who can afford to return to their country and go through the process.

This is a woman who clearly has all the skills necessary to serve in a legislature. Her class-warfare instincts are so well-honed that they even extend to dividing up one of her party's core constituencies into haves and have-nots. Or in this case, haves and don't-needs.

She even manages to accept the frankly bizarre notion that anyone already here illegally from Guatemala or Ramadi is going to cheerfully stroll back across the border and literally, not figuratively, stand in line. Suppose he's denied re-entry, especially now that physical border control is supposed to be more effective? Why take the risk dealing honestly with a system that's proven itself with decades of ineptitude?

Admittedly, the Democrats are worse. They're happy to sandbag business with the responsibility of proving that an applicant is here legally, above and beyond checking Social Security numbers, which apparently the government can't certify the integrity of any more. But they only want to shut off the private carrot. Schools, hospitals, public services of all kinds would remain available, across an effective open border. The net result is a system where illegals can freely come across in search of government benefits without even the promise of work. This doesn't merely bankrupt us financially, it imports all the worst aspects of the world the migrants are trying to esacpe.

Whatever border control is, it's primarily a sovereignty issue. We can choose to have an open policy, as we did for many decades, or a closed policy, as we did for many decades after that. But we can't credibly have any policy unless we can control, document, and potentially deport the people coming across. Fobbing off administrative responsibility onto a group whose interests lie entirely in the other direction makes no sense at all.

December 15, 2005

Is That Taxis or Taxes?

Exhibit A of what happens when the government gets too involved in "regulation" should be the taxi system in just about any major city. For some reason, taxis are considered a "utility." This leads to spectacles like the Public Utilities Commission keeping fares too low when gas prices are high, and then raising fares after gas has fallen again. While Denver has avoided the sort of corruption that has led to drivers using medallions to stop bullets in places like New York, we still don't actually get the benefits of competition.

I completely understand the need for a city to maintain certain minimum standards in catering to its guests. There's probably no quicker way to lose convention business that for word to get around that the driver didn't even charge the rats for sharing the ride. But there's a perfectly good way to achieve safety and cleanliness while still allowing prices and supply to find their natural levels.

License fees, rather than securing a spot in an artificially-limited supply chain, could pay for inspections. In theory, there's no limit as to how many cabs could operate, but of course, there's a point where drivers couldn't find enough fares to stay in business. Virginia has just such an inspection system for private, non-commercial cars.

Price-signalling would be a little more difficult, but there's no reason why a taxi couldn't have its fares printed on the side of the cab, or on little cards inside the airport. Even now, cabbies are pretty good at estimating fares given a destination. A company that maintained higher standard or had extra perks, like in-car wifi, could charge more, while a company that didn't charge enough to cover its maintenance costs would quickly be put out of business by inspections.

There is a risk of sort of a Gresham's Law of cabs here, where the line could get clogged by too-expensive cabs that couldn't find fares. if a cop can wander up and down the line telling me that I can't wait to pick someone up, they can make cabs circle the same way. They won't like burning the extra gas, and that's the point.

There's no question that fares for normal, run-of-the-mill rides would tend towards the same price, with very little variation. But that price would better-reflect market realities rather than trailing them, and it would also allow for some innovation in services without having to hire a limo.

December 12, 2005

Some People (like the RIAA) Never Learn

The Recording Industry Association of America has made a long career out of opposing new ways to market its product. It didn't like tape, or 8-track tape (no loss there), or DAT, or taping off the radio; it really didn't like CDs, and we've seen their recent reaction to Napster. Reproducibility is their enemy; digital their nemesis-until-death. Not only has this been foolish, it's usually been a losing battle. Bringing criminal charges against the occasional downloader is just liable to make people more eager to avoid paying the companies in the first place.

Now, they're at it again, this time with satellite radio (subscription required). I don't subscribe to XM or Sirius, but apparently, they're now offering the equivalent of subscribe-pods, which let users record and store songs, delete ones they don't like, and then even replay them in "shuffle" mode. Two caveats: users can't transfer the songs to other media, and they have to keep subscribing to the service to keep listening to their downloaded music.

The RIAA is all in a tizzy, claiming that this is recording of songs, and that since their royalty rates are lower for broadcast or streaming than for purchase, they're getting cheated. My guess is that they're not fully valuing that ongoing revenue stream. Remember, I have to keep paying that monthly fee to listen to what I've downloaded.

I don't think XM and Sirius are even arguing on principle here (although they're certainly arguing about higher royalty fees):

XM's new device, the Nexus, won't be out until early next year, but analysts expect strong sales. The Nexus has many similar functions to the Sirius receiver, and also allows users to purchase better-quality recordings of the songs they like through a partnership with Napster Inc. If the listener purchases a song individually, it can be transferred to other devices such as computers.

There. The satellite companies are treating purchase differently from download. If they're in a partnership with Napster, then the record labels will certainly see the purchase royalties from those sales.

The RIAA's traditional obstreperousness is becomes even more evident when you look at their further objections:

Though portable, the new receivers must be placed in a docking station to receive satellite-radio signals -- one more reason that record labels tag them as recording devices. They also can store music from sources other than satellite-radio broadcasts; for example, users can move playlists from their computers to the new players, though they can't transfer music captured from the radio to other devices.

The new receivers need to be plugged in to receive signal, so that makes them even more of a recorder. Only under the RIAA's twisted logic would a black hole that can receive but not broadcast, and which needs to be at a docking station to work, be more of a threat than a simple digital recorder.

Eurosclerosis Made Easy

Political Calculations, without doubt one of the coolest number-crunching blogs around, updates that study comparing US and EU living standards, treating each EU country as though it were a state. In summary: T.R. Reid must be very disappointed.

December 4, 2005

"Scoop" Lieberman

Sen. Henry "Scoop" Jackson was every Cold War Republican's favorite Democrat. Jackson managed to get the One Great Issue of the day - the struggle against the Soviets - right, while being a prominent member of the party that got it catastrophically wrong. It's primarily for this reason that Sen. Joseph Lieberman has been compared to him. Even as the names have changed (well, most of the names, anyway), and his party gets this war wrong, too, Sen. Lieberman, almost alone has been reliable on the war.

The problem is, Jackson't legacy was decidedly two-sided. His common sense seemed to stop at the water's edge, especially where oil was concerned. Jackson spent most of the 1970s helping to ensure gas lines, odd-even license plate days, and the election of Ronald Reagan. Jackson introduced the price-control legislation in 1973, and then in 1975, when President Ford tried to get it repealed, his response, according to David Frum in The 70s:

By proposing decontrol, Jackson said, Ford was "working hand in hand with the major oil companies to push the price of oil up and up and up."

And the New York Times reported that in April 1979, Scoop was there to oppose Jimmy Carter's(!) Nixon-in-China moment, when he finally phased out controls.

Turns out Joe Lieberman shares this - trait - with Jackson. Lieberman has co-sponsored no fewers than four windfall profits bills (SR 1631, S Amdt 451, S Amdt 2587, and S Amdt 2626), and one price control bill (S Amdt 2612, proposed by Washington Senator Maria Cantwell, who ran on her business experience). (Hat Tip: George Will)

Lieberman has his eye closely on oil, and realizes that China and the US are liable to end up at war over it unless something is done. (What he doesn't seem to realize is that that's probably ok with China. They think they're playing the role of the US to our Japan circa 1940.) But he seems to think that the way to handle it is to let China sign what amount to very long-term futures deals, while removing exploration incentive for our own companies.

Lieberman's right on one Big Thing, but he's following his party's tradition a little too closely on another.

November 30, 2005

Qwest For Hell

Having gone through Deals From Hell, I thought it might be fun to start applying its lessons. And where better to start than with two delightful examples from right here in Denver: the Qwest-US West merger, and Qwest's proposed purchase of MCI.

First, here are the main criteria for failure:

  1. Destruction of Market Value
  2. Financial Instability
  3. Impaired Strategic Position
  4. Organizational Weakness
  5. Damaged Reputation
  6. Violation of Ethical Norms and Laws

For Qwest-US West, we have, let's see, check, check, check, check, check, and, uh, yeah, check. Qwest was very quickly worth less than the two companies had been separately, with large, unmanageable debt, an inability to compete, seen as an undesirable business partner, with fleeing executives, some of them fleeing the law.

Now, let's look at the causes of failure:

  1. Excessive complexity
  2. Limited flexibility
  3. Poor management choices
  4. Cognitive bias leading to overoptimism
  5. Business not as usual
  6. Breakdown in the management team

Once again, they hit for the cycle. Having bought a company at a time of great - ferment - (5), Qwest found itself with limited ability to respond. They completely underestimated the difficulty in reworking US West's famously bad customer service (4), had no idea what was involved in running a local phone network, which is substantially different from a long-distance network (1). They clearly overpaid for US West - take a look at the goodwill writeoff they had to take, leaving them with too few resources on this forced march to integration (2). The company changed direction any number of times (3), and finally, the two cultures never really meshed. Qwest had a reputation as a high-flying, fast-moving risk-taker living on the edge. What do you think a Baby Bell management team looked like? (6)

This deal was a train wreck from Day 1, and the company has never really recovered, even years later.

Now, by applying the list of warning signs, it should be obvious why the Qwest-MCI deal was a bad idea to start with, and be relieved that it didn't come to pass.

First, what they did right. MCI was certainly in a complementary business to Qwest. It wasn't as though they were trying to enter a completely new market or business. They did have a strategic reason for wanting MCI.

Now, what they did wrong. First, the buyer was looking for the seller to transform their own business. Second, they weren't very creative in structuring the deal. And third, the got into a bidding war in a hot market. No, the overall market wasn't hot, but telecom was seeing a whole lot o' mergin' going on, and lots of weaker companies were getting bought.

The three points flow from one to another. Qwest was not a strong company, and was looking to improve itself rather than the seller. Since it didn't have any cash, its offer was entirely in stock, with no earnout, to a set of owners who were clearly looking to exit the business. (Bruner flags all three of these as warning signs.) As it got into a bidding war with Verizon, and its stock price fell, it had nothing to offer but progressively larger slices of itself. That slowly rising precentage eventually approached majority control, which would have governance as well as tax consequences.

Next step: evaluating deals when they're announced, which is only one teeny-weeny baby step away from making predictions.

Book Review

Another book review is up, this one of Deals From Hell, wherein Robert Bruner turns his gimlet eye to the world of M&A.

November 29, 2005

Awash in Cash

The Wall Street Journal has run a couple of articles in recent days about how much cash corporate America is sitting on, and what they're doing with it. The most recent article though, while trying to cover all the bases, I think ends up shedding more heat than light. Still, they raise a number of interesting points.

First, this may mark a return to a normalcy, where dividends are more important than capital, which should prevent a return to a speculative market. In part, this is a result of the tax changes, but since we can't get Congress to make those permanent, watch out for post-2008, when those changes expire. While the Republicans are displaying political illiteracy, the economic illiteracy here is on the side of the Democrats, who can't figure out the difference between static revenue and incentives.

Now, when I was growing up, there was something called the "business cycle," and one indicator of the top of the "business cycle" was when companies had lots of extra cash. This may or may not have corresponded to "a vote of no-confidence in U.S. economic prospects," but that's a long way from eating your seed corn:

Some economists call the payouts this year an ominous development that may be stealing from future economic growth, since they suggest companies are having trouble spotting new products, projects or services they think will boost their growth. "These payments keep the economy growing more slowly because that money isn't flowing into capital spending," says Milton Ezrati, chief economist at Lord Abbett Funds in Jersey City, N.J. "If businesses are giving up on innovation, we have problems."

"Giving up on innovation?" That's a stretch. And remember, we're also talking about S&P 500 companies here, the larger ones, the ones that have a harder time innovating in the first place.

My worry is that the buybacks and dividends will leave these companies less able to weather the long-predicted recession. While the profits are at least partly a result of operational efficiency, the other half of survival is deep pockets, and those companies that don't have cash on hand may find 1) they've pushed up their stock prices above their real value, and 2) there's little room for more immediate efficiency gains.

This may be great for hedge funds and other short-term investors, who seem to be behind some of the payouts. But it's not such good news for long-term investors, now is it? It's a fine example of how shareholder interests are rarely aligned with each other, and why Stephen Bainbridge, who's been skeptical of both the existence and desireability of sharehold activism, has a point.

I'd be a lot happier with a company that declared a new (or larger) quarterly dividend, rather than a one-time payout, since it indicates some confidence in their operations. It also indicates an understanding that growth in economic value is more important than growth in any one revenue metric.

There's another, possibly darker side to this tucked away in the article, as well:

The outpouring of cash from corporate coffers in the U.S. is just one aspect of a world-wide phenomenon. With interest rates low, unprecedented amounts of capital are sloshing around the globe, in search of better returns. Pension funds, mutual funds and insurance-company accounts, for example, have some $46 trillion in assets, up almost a third from five years ago.

This is exactly the kind of dynamic that led to 1929. While we haven't seen (and aren't likely to see) anything like the speculative boom-and-bust from 1928-29, too much money in search of too few goods is a good sign that interest rates need to come up. Since right now, the US is the only place raising rates, we're in better shape than the rest of the world if credit does start to dry up - we have more room to lower rates. Still, that much extra money supply floating around has never been a good thing.

Indeed, the Journal itself noted this possibility several weeks ago:

If the world's central banks boost short-term interest rates more sharply than expected to ward off inflation, investors might start selling some of their riskier assets in favor of newly attractive short-term instruments. The Fed has recently stepped up its anti-inflation rhetoric, and the European and Japanese central banks have indicated they may raise interest rates in the coming year.

At the same time, corporations might revive expansion plans and become big borrowers again, pushing up long-term interest rates. Rising risk premiums, and thus falling asset prices, could then become self-reinforcing as leveraged investors unwind their positions to limit losses, driving asset prices down further and triggering still more selling.

...although the article went on to claim that a soft landing was a greater likelihood.

Still, we've been down this road before - many times - and historically, it hasn't ended well.

November 28, 2005

Carnival of the Capitlists

This week, hosted by Gill Blog, with an emphasis on the business and economics of Katrina.

November 20, 2005

Carnival of the Capitalists

Brian Gongol has this week's Carnival up a little early. Lots of blogging for bucks worth reading this week.

November 17, 2005

More Efficiency, Less Margin for Error

One of the great success stories of American business over the last 20 years is inventory management. Take a look at the inventory-to-sales ratio over the last 20 years:

Overall, businesses have to carry less than 3/4 as much inventory as they did 14 years ago to fulfill the same number of orders. For manufacturers, that number is 5/8. Multiply that by the overall growth in the GDP, and the savings are staggering. In fact, manufacturing efficiency is really driving this improvement. The correlation between the overall number and manufacturing is an astonishing 0.98. So while resellers are getting better at inventory mangement, most of the improvement comes from innovations like Just In Time manufacturing.

This is both a cause and a result of technology, as better processes free up money for capital investment, which further increases efficiency. To the extent that American manufacturers haven't been run off the playing field altogether, this is why. To be fair, other factors such as proximity to markets help. More clothes are being produced in smaller quantities locally, as a futher aid to flexibility. And some of the biggest adopters of just-in-time are the welfare states known as the auto companies, so all they've done is stave off the inevitable. But auto producers aren't nearly as big a part of the economy as they used to be, so these efficiency gains are quite real.

This doesn't come without a price, however. In this case, it's a loss of flexibility. If that truck with the spare parts isn't there on time, you're less likely to have a box of them lying around on the shop floor. Take a look at the PMI survey component called Supplier Deliveries. Over 50 means that supplier deliveries are getting slower:

Whoa. Better processes mean more stability - a lot more stability -, but since 1992, only rarely have purchasing managers seen actual improvemet in the month-to-month situation, and that improvement tends to be correlated with economic slowdowns. (No, 1996 wasn't an actual recession, but there was a good deal of grumbling that Greenspan had tapped the brakes hard enough for most of us passengers to spill our coffee.) Now maybe some of this is just purchasing managers always worrying about where their next bucket of bolts is coming from, but there must be more to it than that, otherwise why ask the question?

None of this should be too surprising. Robert Bruner, in his M&A How-Not-To book, Deals From Hell, notes that tight coupling, or loss of flexibility, lets trouble propagate through a business much more easily. And what's true for individual companies is true in the aggregate.

Now, it would be interesting to see how many of these slow deliveries are raw materials, and how many are manufactured goods. Given China's recent propensity for trying to lock up raw materials and resources, a lot could be riding on that answer.

November 15, 2005

1925 This Ain't

As his contribution to this week's Carnival of the Capitalists, the Prudent Investor takes the Fed to task for deciding to stop publishing M3 data. This Austrian blogger believes that 1) the M3 has been expanding at rates that should indicate a strong market in wheelbarrow futures, 2) the Fed is engaged in the beginnings of a coverup that will hide this fact, destroying all US economic forecasting, and 3) the US government bombed the Pentagon on 9/11 to justify a Nazi-like takeover of the country.


You know how we used to talk about the "Vietnam Syndrome," how every war was another Vietnam? Apparently, for some Mittel-Europeans, every large-scale terrorist assault followed by the response of a healthjy society, combined with normal governmental activity, is another Anschluss. No doubt the incipient hyper-inflation is merely another step in Hermann von Rumsfeld's plan for a New American Century fund.

It would help if more than about 1% of his analysis were grounded in fact. Bernanke wants to expand transparency of the Fed's decision-making process, the money supply isn't expanding like a Guth-universe, and Barbara Olsen actually died when her plane hit the Pentagon. Then again, any government capable of turning the Pentagon into the set of Capricorn One could probably fake these numbers more easily then just not publishing them.

What's that point #2 again? The money supply isn't running out of control? Well, not entirely.

Here are the year-over-year graphs for M1 and M2:

And here's the year-over-year for M3:

Sure, it's higher than growth, but by historic levels, it's not particularly high, and through the low-inflation 90s, its margin compared to GDP growth was much higher than it is now.

Where's the extra growth coming from? Here's the Fed's definition of the M3:

M3: M2 plus large-denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S. banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $50,000 or more).

And here are the M3-specific components:

Which one of these things is not like the others? Why, it's large-denomiation (read: institutional) time-deposits! That's where the M3 growth is coming from. Companies with too much cash, looking for places to invest. There are some signs that inflation could become a problem, including high metals prices, some evidence from the price indices, and lots of purchasing- and supply-manager survey data. But the money supply itself doesn't look like it's flying off into space.

November 14, 2005

The Carnival of the Capitalists

...goes back to school, with a whole lot of assigned reading.

After dinner, let's head down to the Corner for a few games of 8-ball, though, huh? The library'll still be there when we get back.

November 11, 2005

LPR Friday

Blogging today will be light to non-existent, as I will be attending an LPR meeting today, at a remote location where wifi is either a distant dream or a lurking nightmare, depending on your point of view.

In the meantime, Charles Krauthammer shows that, no matter how brilliant a psychiatrist he is, and no matter how incisive he is about the Middle East, he and his keyboard shouldn't be allowed anywhere near economic issues.

In promoting his idea for a (basically unenforceable) $3 floor for the pump price of gasoline, he claims

It makes infinitely more sense to reduce consumption, drive the world price down and let the premium we force ourselves to pay at the pump (which begins the conservation cycle) go to the U.S. Treasury. If the price drops to $2, plow that $1 tax right back into the American economy by immediately reducing, say, Social Security or income taxes.

The beauty of a tax that keeps gasoline at $3 is that it obviates the waste and folly of an army of bureaucrats telling auto companies what cars in which fleets need to meet what arbitrary standards of fuel efficiency. Abolish all the regulations and let the market decide. Consumers are not stupid. Within weeks of Hurricane Katrina, SUV sales were already in decline and hybrids were flying off the lots.

As though this Congress, or any Congress, would use extra revenue to reduce other taxes. As though the price of gas doesn't seep into every other item we buy. As though the very last sentence, the part about consumers not being stupid. doesn't proves that you could get rid of the CAFE-bureaucracy right now, without any new tax.

And then, there's the irony (already noted), in pushing for a mandated price in order to "let the market decide."

Have a nice weekend. Go for a drive someplace. See you Sunday.

November 9, 2005

VC Gets Conservative?

Again, with the WSJ. They report this morning that VCs are starting to invest later in the business lifecycle, maybe the cocoon stage rather than the caterpillar stage. While seed- and early-stage investment has stayed about constant for the last 5 years, later-stage investment has tripled since 2000. Some of this is just investing leftover dot-com-boom cash that had been mouldering under the mattress, before the funds expire and close up shop (VC funds usually have a limited lifespan). They'd need to be able to get out sooner rather than later, and later-stage companies give them that chance.

Still, the traditional VC model has been kind of like Dave Kingman - no average, but lots of power. Maybe only one in ten, one in fifteen really pays off, but when it does, it's a 10- or 20-bagger. If this does represent a more conservative mentality, it may not bode well for those entrepreneurs. On the other hand, VC's are probably in that game because they like it. So this may be more of a cyclical phenomenon, and when new funds open up, they'll be there looking for the Main Chance again.

I'm not in VC myself, but so far, none of the more / high-profile / VC / bloggers has commented. Maybe they're out looking for the Next Big Thing.

UPDATE: Friday, I spoke with a VC friend of mine, who seemed to think is was both monetarily and psychologically psyclical. He had noticed the same thing in his own business, but also seemed to think that the change wasn't permanent - that new money would be pushed into startup and seed-stage companies, and that it would take a couple of big winners there to get the rest of the industry to follow suit.

So all isn't lost, but depending on where the business cycle is when that new money starts coming in, it may take a little while for the engine to get revved up again.

Ownership Society

The Wall Street Journal carries a story this morning about the benefits of homeownership - for poverty-stricken Latin Americans. Turns out that owning their own homes actually gives them a stake in the society and the motivation to take advantage of the liberalized economies:

The Argentine study followed 1,800 squatter families who in 1981 occupied a one-square-mile piece of what they assumed was public land. It had once served as a garbage dump. Through a quirk of the legal system, roughly half of the settlers in the heart of the neighborhood gained title to their properties, while the other half didn't. The researchers found that over the course of two decades, the title holders surpassed those without them in a host of key social indicators, ranging from quality of house construction to educational performance to rates of teenage pregnancy.


The investigators concluded that titles improved access to credit only slightly. Banks appeared to have a deeply ingrained reluctance to lend to the poor, in part because of the cost and difficulty of foreclosing in Argentina's legal system. But even without bank loans, they said, landowning families improved their homes substantially by squirreling away cash and doing the work themselves. Architects affiliated with the study concluded that homes on titled lots had sturdier walls and sounder roofs, were more spacious and had better sidewalks.

An accompanying study, co-authored by Mr. Di Tella, detected a difference in the attitude of landowners. They were more materialistic and individualistic, and more inclined to say that money was important to happiness, and that individual initiative leads to success.

The researchers found that landownership status seemed to make no difference in employment or income. But it did seem to affect the way residents spent their money, and their aspirations and expectations. The researchers figure that the children of the landowners could eventually earn significantly more than the children of the untitled.

The results aren't exactly counterintuitive, but every once in a while, it helps to be reminded that the system you believe in actually works.

November 2, 2005

Referendum C - What Went Wrong, Where Do We Go?

With Referendum C passing by about 52-48 yesterday, TABOR limits are essentially repealed for the next five years. Regardless of what proponents say (and don't those proponents just say the darndest things?), the money can be used for anything, anywhere, anytime they like. However, the baseline income tax rate will be reduced in five years, and barring any new referenda, TABOR limits will also return then. Naturally, the fear here is that a psychological boundary has been crossed, one that will make it easier to pass new taxing and spending measures in the future.

What Went Wrong? Basically, this loss was a comprehensive, although not massive, failure of Republican and fiscally conservative leadership in the state. Once the Governor gave the game away by not coming up with effective counterproposals, we couldn't count on a unified Republican response. Despite this, the measure still only passed by 4 points statewide, which means that the argument was not only winnable, it was almost won.

The remaining state leadership - the House Republicans, John Andrews, the Independence Institute, and the Club for Growth, failed to work together effectively. Each group maintained its own websites, its own financing, its own commercials, and its own message. One example: I had no idea where to get lawnsigns or bumper stickers. I live on Monaco effing Parkway for crying out loud. You don't think that getting a few thousand cars a day to see a yardsign on private property would have made some difference? When your entire morning commute consists of Red-Yellow-and-Blue-plastered medians, a certain sense of inevitability begins to set in. Even a few black-and-gold signs along the way would have reminded people that it wasn't a thought crime to oppose a tax hike.

Secondly, while political and academic debates about why an idea is bad are terrific for party and ideological health, they're death-on-a-stick for a political campaign, especially one about a ballot measure. A simple irrefutable message, endlessly repeated, is far more effective. That would have required an umbrella organization like the Pro-C forces had, one that could have coordinated immediate responses to Pro-C tactics, and would have reminded those non-profits (and their donors) that they're better off building grass-roots support for their projects than spending money on lobbyists.

And finally, an umbrella organization would have required political leadership to take the helm here. Look, Jon Caldera's a bright guy, but didn't it occur to anyone (other than maybe Caldera) that having the libertarian leader of a think tank be the main spokesman for a Republican cause wasn't the best job fit, as they say? Think tanks are for ideas; they provide intellectual capital, they shouldn't be spending it in advocacy. Can anyone imagine the head of the Heritage Foundation, or the Claremont Institute, or the Manhattan Institute, or the Hudson Institute, or the Hoover Institute, leading a political campaign? The point here isn't to "influence the debate," it's to win the vote. Too many people saw a chance to make headlines, and as a result, we lost the campaign.

So how do we keep a TABOR defeat from turning into the catastrophe we're all afraid of? Long-term planning. If we're afraid of long-term programs building in a structural need for higher taxes, we need to point it out loud and long when it happens. This requires a combination of a legislative, executive, and political program, and it requires years of coordinated effort. It requires a legislative leadership willing to push for changes in how accounting it done, and it requires a governor willing to keep his promises on how the money is spent. And it requires groups like Claremont, the Independence Institute, and the Club for Growth to agree on how to measure this spending.

First, money is fungible. Part of C requires a report on how the extra money is being spent. In the real world, that's called a "budget," but in the new political culture of the state capitol, it will be an excuse to take all sorts of new programs, put them under the budget, and take all sorts of old education-roads-research spending and count it under "new money."

The Republican legislative leadership needs to begin drafting legislation, now, today, to make sure that doesn't happen. If they can't they need to issue their own annual reports conforming to those standards. And the governor need to show a little spine and veto spending bills that don't meet the standard, either. So he loses the override? Too bad. If Owens wants to keep next year's Republican nominee from running against his legacy, he needs to show that the party still stands for fiscal restraint.

Secondly, long-term Fiscal Notes. Right now, any piece of legislation requires a 2-year Fiscal Note, an estimate of its spending and revenue effect on the state. Stretch that to 5 years, to put it into the context of a re-TABORed budget. Then the storyline always becomes the effect on the budget after the new rate comes into effect. You think this isn't powerful? Wait until every new budget item is accompanied by a paragraph about how much more money they'll need to keep it going.

When the Democrats complain that 5 years is too long to estimate budgetary effects, remind the public that 1) they were the ones who sold a 5-year plan in the first place, and 2) businesses do it all the time, when valuing companies or evaluating new projects.

Third, compile 5-year budget estimates. This shows the overall iceberg before we hit it, and is the mirror of the Govnernor's Favorite Chart, showing exactly those projects in order to sell Ref C.

Finally, Porkbusters, Colorado-style. If Porkbusters can scrutinize the federal budget for bridges to nowhere, surely we can do the same here.

Fine, we lost the vote, now we have to deal with the consequences. The question is, are we willing to build for the long-term, in order to avoid the fiscal mess Ref C makes possible?

November 1, 2005

Why Refs C&D Are Like Passover

Passover is a expensive holiday that demands extensive preparation. So a lot of people (usually with a lot of money) decide to go away to a Pesach program, at a hotel, and Leave the Kashering to Them. Some friends of ours run such a program, and were kind enough to have us as guests a few years ago.

The logistics of preparing a tour like this are complex. Not only is there the catering, but also the kashering of the kitchen, the programming, setting up a synagogue in the hotel, programming, children's programming, arranging local tours, and so on. Families want special rates. They need special room arrangements for wheelchairs. Some people arrive in the middle, some people leave in the middle, and some families partially arrive in the middle, and want rooms near each other. D-Day took less preparation.

Now, these programs are pretty expensive, especially for a family. A family of four can easily spend $30,000 on such a trip, and some families do it every year. Which means that when things go wrong - and they always do - people complain. As my friend Avi put it, "when you're paying $30,000 for a vacation, every meal is a $30,000 meal, because that's the number they remember."

And that's where C&D come in. When we were interviewing Bob Beauprez, he recalled a conversation with the police department in Delta, and how desperate they were for their piece of that $3.7 billion. "How much of that do you really think you're going to get?" he asked them, in a conversation since repeated a few hundred times. "I think they thought they were getting the whole $3.7 billon."

In fact, since nobody really knows how much they're going to get, $3.7 billion is the number they remember. So every slice, every nonprofit, ever fair-to-middle Montessouri school in the middle of Montrose turns into Mr. Berger, Esq, from Manhattan, and his family of five. Just as every seder turns into a $30,000 meal, and every broken TV remote turns into a $30,000 call to the hotel staff, every non-existent allocation turns into $3.7 billion.

Remember, there is abosolutely nothing statutory about where this money gets spent, how it gets spent, or who gets to see it. Legislatures can't bind their successors that way. The C&D proponents simply dangled this $3.7 billion number in front of these guys, and they all figured they're get a generous helping. They foolishly looked at the long list of advocates, and thought this must be a good thing. In fact, tonight, if C passes, every name on that list makes each piece that much smaller.

When those guys who put their names on the line for $3.7 billion get a check for $5,000, they're going to be more than a little disappointed. And no, don't expect them to have second thoughts about the process. Expect them to ask for even more money.

Which just goes to show that generous non-profits can be just as short-sighted and selfish as anyone with retained earnings.

October 31, 2005

Carnival of the Capitalists

It may be Halloween, but there's nothing spooky or mysterious about business.

October 28, 2005

Southwest Effect II

Well, that sure didn't take long. Next year's fares from DIA to Chicago, Vegas, and Phoenix drop to match Southwest's. So far, not all the carriers who had been low-fare have moved to match, and for some reason United it still $40 higher on the Las Vegas route. It'll be interesting to see which airlines try to maintain higher fares, and for how long.

October 27, 2005

The Southwest Effect?

Southwest Airlines finally announced its initial routes and fares from Denver, and as promised, it's a small start. With 13 daily departures, they'll have more than jetBlue and Airtran, but fewer than such titans as United (309), Frontier (153), and Great Lakes (66). (Hey, don't laugh. Great Lakes can get you from Denver to Kingman, AZ in just five easy hops.)

They'll fly to Chicago ($79 one-way), Las Vegas, and Phonenix ($59 one-way, each), starting on January 3, with a 21-day advance purchase. Just for fun, I looked up the current low airfares from Denver to each of those cities, roundtrip, January 5, returning January 8. They are, Chicago: $252, Las Vegas, $206, and Phoenix, $178. (Source: Orbitz)

Now, of course, I'll have to track those numbers daily until service starts, to see if there really is going to be a Southwest effect.

Why Baseball is Like Finance

My first year in college, I was introduced to Bill James. He practically invented modern baseball statistical analysis, making up new statistics like Runs Created and Win Shares to measure performance. He created the baseball Pythagorean Theorem relating runs scored/allowed and wins. He quantified mean reversion for teams that showed unusual improvement, and showed how stolen bases are overrated, and explained park effects.

He did this by doing what any good analyst does - asking the right questions, collecting as much data as possible, and then putting it together in inventive and original ways.

Which is also what any good financial analyst should do. Any competent analyst can look up the numbers, harmonize financial statements across competing companies, and compare the existing ratios. Anyone with a decent background can create fairly good spreadsheet models. (This isn't to say it's easy; nothing's easy; only to say that it's part of an analyst's basic skill set.)

But a really good analyst, a creative guy who's trying to push back the frontiers a little, will invent his own stats, invent his own ratios, his own ways of looking at the numbers. Maybe there are ways of describing how a company manages its debt, or what it's raising it's debt to do, that are different from simple debt ratios or capital structures. Maybe there are ways of including other long-term liabilities (read: pensions) into the model. Cash flow statements are still relatively new, but the main ratios to come from them use the overall cash flow number, and Quality of Earnings (how much income is from operating cash flow). There must be other ways of using all those line items.

The great revelation for me, as a programmer who had never really thought much about the nuts and bolts of the system that I earned my living in, was that the line items on the financial statements represented ideas and concepts, not just bookkeeping entries. I'm just starting out, so for me, it's largely a matter of mastering the existing tools. But the fun part, and the part that more analysts ought to be focusing on, is putting those numbers together in new ways, to tease out new information, and to describe businesses - and even whole industries - in new ways.

Otherwise, we're just a batting-average outfit in a OPS world.

Nice Little Business You Got There...'d be a shame if we had to start telling you how much to pay people:

Corporate directors must rein in soaring U.S. executive pay or face the prospect of government regulation, said the judge who presided over a landmark pay case involving entertainment group Disney Co. on Tuesday.

Delaware Chancery Court Judge William Chandler -- who let Disney directors off the hook in August for Michael Ovitz's huge $140 million 1996 payoff after a brief failed term as Disney president -- warned in a speech to a directors' group that regulation would be a "blunt instrument."

"If neither the courts nor the markets are able to restrain executive compensation, and if you the decision-makers fail ... the result will be imposition of regulatory controls," said Chandler, whose court handles many important business cases.

I don't disagree that executive pay is out of whack. Given the quality of management at a whole host of large corporations, there's no question that a whole lot of guys sitting in AAA could step up to the big leagues without much loss of quality. That is, the talent pool is probably a whole lot deeper than we think it is, and the actual bottom-line worth of any individual executive, with a few exceptions, is much lower than they're paying.

But it's up to them to figure it out.

First of all, salaries, as salary have already been regulated, and companies just find other ways (deferred compensation, options, etc.) to pay executives. Money will find a way, whether it's around McCain-Feingold, or around judges and regulators who fancy themselves better managers than HR and corporate boards.

But also notice the little bait-and-switch in the judge's last paragraph. "If neither the courts nor the markets...the result will be...regulatory controls." What does he think court-mandated controls are, if not regulation by another name? I don't care what party this guy is, or who appointed or promoted him. This is a perfect example of someone assuming that by definition, the courts are free to roam where they will, even into company salary negotiations.

October 23, 2005

Carnival of the Capitalists

This week, with an extra, added course of law-blogging thrown in, just to remind us all of who the ruling class really is.

October 20, 2005

Southwest Plants in Denver - But Can It Grow?

Southwest Airlines has announced plans to come to Denver, after a twenty-year absence. Since fares historically begin dropping on the announcement that Southwest plans to enter a market, I can't begin to tell you how happy this makes me.

In the conference call, CEO Gary Kelly noted a number things contributing to LUV's decision: 1) Denver's a large a growing market, with the 9th-largest origin-destination traffic in the country, 2) the airport's per-passenger costs have declined dramatically, from over $20 to around $9, where Southwest wants to be, 3) weather. OK, he didn't actually say, "weather;" what he said was that the taxi and turnaround times were more reliable, blah blah blah. But Stapleton, like the Fairfax County School System, was about 20 miles closer to the mountains and used to close on the prediction of snow. (One of the concourse shops was actually called, "Bread, Milk, and Toilet Paper," and only opened on snow days.) Since the airline's Statement of Values says "Thou Shalt Not Idle Your Engines," that alone probably contributed mightily to their 1986 on-time departure from Denver.

One might argue Southwest will have a hard time dealing with a competitor who doesn't have to pay its bills on time. However, United is under pressure to emerge from bankruptcy, which requires a business model that's actually profitable. That just got less likely, so for the moment, Platte River communities downriver from Denver are going to have to keep filtiering red ink out of their drinking water.

Naturally, the company wants to grow, and here's where there could be some trouble. Note that Frontier has been trying to pry United's hands off its under-used gates for years, but neither the city's half-hearted efforts nor the company's threatening to find a new hub has been able to loosen United's death-grip on Concourse B. Those gates represent vitrually all of United's competitive advantage, and it's worth noting that it's a completely contrived advantage, the result of poor negotiating by the city.

Kelly was asked several times about growth, and while he continued to repeat that those were the plans, comparing Denver's size to that of Boston and LaGuardia. But when USA Today asked about a rapid buildup, a la Philadelphia, he sounded very unsure: "I believe we will have the facilities we will need, although that's not definitive. (emphasis added - ed.)"

I sincerely hope that Southwest has more than a wing and a prayer when it comes to those gates. It's not clear where they're going to come from, and if I were Frontier, I'd be hopping mad about seeing a long-term rival expand, so there may be legal action coming from that quarter. On the other hand, there's no question that United's near-monopoly status has enabled their Baby Doe Tabor impersonation ("Hold on to will pay millions again"). So maybe Frontier will welcome the entrant.

A couple of side-points. First, Southwest apparently had been planning to enter the Denver market in late 2006, but pushed up the date when lots of planes became available from New Orleans. Since their model relies on being the low-cost provider, they don't want those planes sitting idle, and moved up their Denver entry,possibly before they actually had those long-term facilities nailed down. (Kelly was extremely careful to make all the right noises about the expansion not coming at New Orleans's expense, about rebuilding their New Orleans service, but "according to needs," so my guess is that a lot of those planes are permanently available now.)

Secondly, when asked about other major markets the airline didn't serve (the reporter in question was probably looking for Limits to Growth), the first city he mentioned was Minneapolis-St. Paul. Ahem.

October 19, 2005

Recycling Doesn't Pay

In the process of making this year's sukkah, I finally got around to clearing Sukkah 2.0 out of the back yard. While the current V 3.0 is made of PVC, Tinker-Toy-like, the older version was a homey, but very heavy and unweildy wooden version. I spent hours pounding a 2x4 frame onto 4x8 sheets of plywood, joining the corners with hinges, creating a swinging door, adding fold-down shelves and the like. While it was great fun to sit in, it took a crew of 3 several days to assemble, and required constant protection from the rain. Eventually, it was more trouble than it was worth.

So I pried it apart, and cut the 4x8s into 4x4s or smaller. When it turned out that the men paid to take away the garbage didn't consider this garbagy enough, but more like building materials, I stacked the against the house and started looking for Plan B.

Plan B was to have them recycled. I take them to a recycler, they pulverize the wood, turn it into new plywood, and re-sell the results. Now since I'm providing their raw material, they should pay me, right? Or maybe just take the wood for free? No, I would have had to pay them something like $6 a linear yard to take the wood. In the case of the plywood, that's coming close to what I paid for the wood in the first place.

If a wood recycling business is only economically feasible when they have to make money on both ends, maybe that says something about the economic value of recycling wood. In the end, especially given gas prices this year, I would have been better off burning the stuff to keep the house warm. Assuming, that is, I could find enough Blue Days to burn all of it. (Eventually, I found a friend who's having his house rebuilt - er, remodeled - with enough room in his dumpster.)

But that's an interesting question. Given the price of gas, I suspect a lot of homes will be keeping their wood for their fireplaces rather than paying extortion rates to subsidize someone else's business. Will that end up having an effect on how much those recyclers charge?

Carnival of the Capitalists

The second half of the Two-Year Anniversary Special is up.

October 16, 2005

Energy Independence Mythology

The Wall Street Journal has a terrific review article tomorrow about natural gas, and how the industry (with some encouragement from regulators) has gotten caught short. There's a lot of good stuff in there, about utility hedging, exploration, and supply chain management. This, though, caught my eye:

Natural gas has swung to scarcity from abundance in recent years as energy companies run out of easy-to-tap wells. Unlike oil, it's hard to ship natural gas across the ocean, so more than 97% of U.S. supply comes from North America.


On the supply side, there likely will be more LNG terminals, perhaps outside the hurricane-prone Gulf region. (LNG is Liquified Natural Gas, the only cost-efficient way to ship gas in tankers - ed.)

So, we're basically completely energy-independent when it comes to natural gas. And yet, the price has risen in response to the supply-and-demand equation. (Gas is harder to extract now, partly from regulation, and partly from depletion of the low-hanging fruit. This makes the more expensive extraction techniques cost-effective. This will bring tremendous new fields into play; this country has plenty of natural gas.)

But part of the proposed solution is to tie the country more closely into the world market for gas.

In any event, the morons who prattle on about energy independence are living in a fantasy world. The last time we may have had actual energy independence was when we were clear-cutting our forests and Quaker State Oil was in the can, not just on the label.

October 10, 2005

Economic Illiteracy Spreads to Salazar

Which Salazar? Take your pick. But in this case, it's Ken's brother John, the first-termer from Colorado's Third District. Evidently, he and Diana DeGette have been attending the same economics classes. The Congressman is in high dudgeon over Rep. Joe Barton's bill to promote new refining capacity. Aside from the usual blather about how increased supply won't affect prices, the Pueblo Chieftain carried this remarkable statement:

Salazar said the measure also requires the government to make $3 billion in oil available to oil companies from the Strategic Petroleum Reserve, but does not set any limits on what oil companies can charge customers for that fuel at the gas pump.

Aside from the fact that oil companies don't (usually) charge consumers for gas at the pump, this statement reveals a mind-boggling (if such a thing is still possible) ignorance of how inventory works. Look at any income statement, and you'll see a line like "Cost of Goods Sold." This is, roughly, the base cost of the inventory that was sold. It doesn't include operating costs, so it's a good measure of the company's efficiency in turning inventory into sales.

Companies use one of three methods for valuing their inventory. FIFO, or First-In-First-Out; LIFO, or Last-In-First-Out, and Weighted Average Cost of Goods. The classic classroom example for FIFO is milk. It's got a short shelf-life, so most of the milk that comes in early gets sold early. The classic LIFO example is televisions, or hardware. Since these don't decay, you just put new widgets at the front of the shelf. The older widgets stay there, unless there's a run on widgets.

The classic classroom example for Weighted Average Cost of Goods is - heh - gasoline in a storage tank. The gas truck pulls up, pumps in 1500 gallons to top off your 3000-gallon inventory, and all the gas mixes together. When the time comes to report your COGS, you just divide the gallons sold by the price you paid for it. It lets you smooth out your pricing, simplifies your accounting, and accurately reflects your business processes. The same is true for refineries, which have multiple lines feeding multiple barrels of oil into the maw at the front end, with the back end releasing gasoline, nicely blended from all of them, into multiple trucks. If I even wanted to try to keep track of what oil ended up in which consumers' cars, I couldn't do it.

Let's go back to the simpler case of the gas station alone. In fact, LIFO (which is what Salazar is really proposing here) simply can't be calculated. Since I never fully empty out that underground tank, every gallon I pump out is a mixture of every delivery ever emptied into it. Sure, I could pretend that it works on a LIFO basis, but to what end? To provide a fictional paper-trail for some publicity-hungry Champion-of-the-People DA or AG who's got nothing better to do than to calculate my gross profit margin on a daily basis?

Carnival of the Capitalists

The Carnival enters the Terrible Twos.

October 6, 2005

Refining and Environmental Regulations

Stephen Karlson over at Cold Springs Shops makes the following statement about refining and environmental regulation:

Note that I haven't mentioned two popular explanations. Some people have blamed environmental regulations that impede the construction of new refineries. That argument is special pleading. U.S. refinery capacity and production have both been increasing steadily since 1982, shortly after the end of the crude oil price controls in place during the Nixon, Ford, and Carter administrations as well as the severe recession early in the Reagan administration. There is a chart available from the BP Statistical Review of World Energy from June 2005 and some commentary by James D. Hamilton, an economist at the University of California, San Diego, at his web journal. Another economist, Steve Verdon, in his web journal, notes some evidence of oil companies using the environmental regulations to thwart their competitors' construction of refineries, which the Foundation for Taxpayer and Consumer Rights has been following closely. Such behavior doesn't surprise me. It reminds me of the way trucking companies would use the Interstate Commerce Commission to impede competition. “The existing service is adequate. If additional service is required, the existing carriers are ready to provide it. The applicant is incompetent to provide the service.”

I'm not sure how the evidence supports the claim of "special pleading." The chart actually shows that while production has been increasing since 1982, capacity has only been increasing since about 1992. This has largely been a process of squeezing out more efficiency - a noble process to be sure, but one that also carries with it risks, such as greater vulnerability and, quite likely, deferred maintenance. Also, Hamilton's post argues that regulation has been hampering efforts to bring new capacity online, which is driving up prices now. As for the fact that oil companies have been playing the regulatory game to protect their position, that only points out that the problems with regulation run in many directions; it doesn't negate those effects.

UPDATE: I would also add two things: 1) Karlson implies the solution in his post: deregulate refining the way that we deregulated trucking. 2) My sympathies are not with the existing or big oil companies, they are quite selfishly with me, the consumer. What I want is increased capacity, whether it comes from StartupOil, or ExxonMobilChevronShell.

The Cost of Lawsuits

The Wall Street Journal this morning discusses our unpreparedness for an avian flu pandemic:

The U.S. once boasted a large vaccine industry. But in recent decades drug makers have exited the business, for reasons including low profit margins, exposure to lawsuits and manufacturing difficulties. As a result, the U.S. has lost much of its capacity to produce vaccines for seasonal flu, leaving it largely dependent on a plant in Pennsylvania, which is owned by Paris-based Sanofi-Aventis Group

Let's leave the question of whether or not Senator Salazar still thinks medical lawsuits are cheap, or whether he'll think so after the poultry-farming population of his state heads for the cities.

Tellingly, the Washington Post covers the story as a governmental issue:

"The good news is, we do have a vaccine," Leavitt added. But he also said there isn't an ability to produce it quickly enough or in sufficient quantity in the event of an emergency.


As for treatment, HHS last month began spending $100 million for the first large-scale production of a bird flu vaccine. But the department has been criticized for only stockpiling enough of the anti-flu drug Tamiflu for several million people. The Senate last week passed legislation that would increase those purchases by $3 billion.

Even the business section focuses on the local company, rather than the national problem:

The government recently awarded a $100 million contract to Sanofi-Aventis SA for an undisclosed number of vaccines that target the current strain circulating, called H5N1. But there are about 16 strains of bird flu, and the government wants Gaithersburg-based MedImmune to create vaccines for each.

And Washingtonians think provincials are, well, provincial. There's no discussion, none at all, of the wider reasons why our vaccine-production capacity is so limited in the first place, and no discussion of what's being proposed to fix the problem.

None of this is to suggest that invididually, businessmen are better decision-makers than bureaucrats. The Journal continues:

Though infectious diseases are huge killers, with about 35,000 to 40,000 Americans dying each year from seasonal flu, big drug companies are largely ignoring investing in vaccines. Instead, they are placing their bets on chronic diseases or on lifestyle drugs with big profit potential, resulting in a growing public-health problem.

But collectively, dispersed decision-making is better than central control, because the ideas will likely be there come crunch time. And don't let the sheer number of biotechs fool you. Much of the funding for the small, startups comes from the large drug companies, who will still set the research priorities.

As in other cases, Washington has over-regulated an industry (in this case, through lawsuits), taxing away its ability to place multiple bets and invest in excess capacity, and is now wishing to snap its fingers and will the product out of thin air. It's not surprising that a business newspaper would understand this, while a Washington paper would focus on the government's disaster-response planning. But enlightened regulatory policy can make governance easier down the line. This is a textbook case of bias-by-omission, where questions don't get asked, ideas don't get considered, conclusions don't get drawn, because they don't fit the underlying assumptions.

October 5, 2005

History Lessons

I've been reading John Steele Gordon's An Empire of Wealth: The Epic History of American Economic Power, over the last few days, and it contains a number of interesting nuggets.

The one that stands out, given the questions about Chief Justice Roberts and prospective Justice Miers, concerns the difference between political and judicial philosophy. Salmon Chase, as Lincoln's Secretary of the Treasury, helped push through the first income tax to help finance the War of Northern Aggression. Later, as Chief Justice, he ruled it unconstitutional, although by then the war was over.

There is a difference between political and legal opinion.

Oh, yes. The book is very interesting, and hopefully I'll be posting a review shortly.

October 2, 2005

Regulation Begets Regulation

There ought to be a required reading list for members of Congress. High up on that list should be Thomas Sowell's Basic Economics. Any freshman Congressman who fails a test on the contents should not be allowed to take his seat. All sitting Congressmen and Senators would be required to pass before beginning the next session.

I'd be happy to run in the special election to succeed Diana DeGette.

UPDATE: More on this subject here.

Continue reading "Regulation Begets Regulation" »

September 28, 2005

Not a Leading Indicator

As the major (and not-so-major) media continue to hyperventilate about consumer confidence, nobody seems to be asking if this really is a leading indicator. Turns out, it's not much of one at all. That doesn't mean it's meaningless, it's not just much of a predictor of consumer spending.

The St. Louis Fed makes public economic data that would make your head spin, just before it nodded off to sleep. While they don't have the Conference Board's numbers, they do have the University of Michigan index of consumer sentiment, a reasonable proxy. They also have an inflation-indexed history of personal spending. I compared the two over the history of the Consumer Sentiment index, from January of 1978. That period covers just about every conceivable economic condition except a depression, including a major runup in gas prices during 1978-80.

Since the Index is constrained between 0 and about 100, rather than compare actual spending, which rises almost continuously, I compared the Sentiment Index to the change in personal spending, both monthly and annual. I compared them contemporaneously, and both leading and lagging the Index by 1, 3, 6, and 12 months.

The best correlation was a contemporaneous comparison between the Sentiment Index and the year-over-year change in spending. Here's a chart, with the Sentiment Index on the left, and the spending rescaled to overlay:

This is about a .70 correlation, meaning that just about half of the annual change in spending can be explained by consumer sentiment. And we still haven't established a cause-and-effect here, either. (The correlations to monthly changes were awful, under .20.)

But at the risk of burying the lead, compare the correlations when I lead the Sentiment Index (i.e., when I use it as a leading indicator) with when Iag it:

Consumer sentiment is a terrible leading indicator, but a tolerably good follower. What that says to me is that people's perceptions of the economy, and even of their own finances, are more a reflection of what they've been reading than of what they've been saving.

Applying this to our current situation, we shouldn't be surprised if personal spending doesn't rise much this month compared to last year, but we certainly shouldn't be projecting Christmas sales on the basis of this number.

September 26, 2005

A Word of Advice

If at all possible, don't ever go into a Comcast office to try to transact business while you're reading Atlas Shrugged.

It just makes it all seem so...real.


Power, Faith, and Fantasy

Six Days of War

An Army of Davids

Learning to Read Midrash

Size Matters

Deals From Hell

A War Like No Other


A Civil War

Supreme Command

The (Mis)Behavior of Markets

The Wisdom of Crowds

Inventing Money

When Genius Failed

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

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

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud