Dirty Planet

Looks like second graders are now dictating public policy in West Virginia. (Last three paragraphs)

http://www.nytimes.com/2008/12/08/business/08recycle.html?pagewanted=2&_r=1
Thanks to the pleas of the environmentally conscious and naive second graders, WV is now shipping trash across the state to Kentucky to "recycle" it and keep the planet from getting dirty. I wonder what they think the exhaust from the semi-trucks transporting the trash hundreds of miles is doing to our planet. We may need to tell them that Thomas the Train won't be haling this junk for free like he hauls their toy solders around the living room.

Even the NY Times has acknowledged that many recyclables are junk or rubbish. Finally, someone can acknowledge price really does matter. The best part or the article is where it talks about how hard the downturn has been on the "junk poachers." These people used to take the cardboard from recycle bins to sell and leave the rest. This should have been a sign to the rest of us that what was left behind really was garbage and should not have been recycled anyway. Since these second graders don't bear the cost of recycling like the rest of the taxpayers, I propose we let them pull their Radio Flyers around for an afternoon picking this crap up to see if they still think it's worth it.

Blight

On days the largest banks in the world aren't on the edge of failure, we often get to hear stories of blight as a result of the mortgage fallout. As a country, are we really that well off that we can afford to spruce up abandoned neighborhoods just so they don't look bad. Aren't there a few more relevant causes we could attend to with our unending riches. I guess we've taken care of all the problems that fall below bad looking neighborhoods so this is next most important.

Toxic assets

This week the treasury guaranteed what has been called $300 Billion of toxic assets. I really don't understand what comprises a toxic asset. Toxic by definition is something that is poisonous, so much so that it can cause death or serious debilitation. I'm not sure how a mortgage security or a CDO can cause death, at least to a human being.

The real issue is that these firms holding toxic assets have toxic levels of leverage that has led to their inability to make markets in the securities they hold. It's fine for firms to apply leverage to capitalize on their competitive advantage; however, many financial institutions appear to have misjudged their competitive advantage. They believed they were supreme experts at quantifying risk. It is this lapse in judgement that has been toxic to their shareholders and taxpayers alike.

Burning $

Interesting article in the WSJ on the auto industry bailout. http://online.wsj.com/article/SB122669746125629365.html

I would like to have my portion of whatever the auto industry bailout is burned. Take it, turn it into hard cash and burn it. It is likely that this would be a slower way to lose the money than the auto makers have found.

Corn Independence

The notion of energy independence seems very troubling, and hopefully not very probable. First off, why would we choose two or three commodities that we call "energy" which we really like, and tell the rest of the world we don't want any from them any more? It is possible that we perceive energy to be so important to our national security and future survival that we want to handle this one on our own. If these commodities truly are that important, why not consume all we can from the rest of the world now and save ours for later. Seems like there are many other products produced by the rest of the world we may not be able to live without that we don't mind buying. Should we become steel independent, we need steel to build war ships and tanks to defend our country? Seems like the more countries depend on each other, the less likely they would be to engage in aggressive behavior in the first place.

To be independent, we will either have to draw down our own resources or find technologies that don't use the resources we formerly associated with "energy". In fifteen years, will there be headlines about how we need to be corn independent or questions about what to do with all of our oil and gas now that no one uses it.

I'll have a Tucker

The Big 3's attempt to suppress innovation and advancement will hopefully be their downfall; however, this is no revelation. Dating back to their successful fight to stop the Tucker Torpedo in 1948, the Big 3 have never embraced innovation or been willing to accept the change that would allow them to compete on the global stage. It could date back even further to the Model T, every single one of which rolled off the assembly line in one bright color; black.

To the Nancy Pelosis and Harry Reids, please don't try to spend my money to change and update three companies that have spent the last hundred years fighting the change and innovation that could have prevented their demise. Please let these three turgid corporate citizens of malpractice reap the seeds they have sown.

Leverage Please

The past few weeks have not been kind to the leveraged companies and financial institutions in America. Their meteoric decline has yielded calls from those who were alive in the 50's and 60's when consumer credit was not widely available, to stop the over consumption. True, some people may have over consumed; however, this should not be confused with leverage.

Companies too apply leverage through borrowing, and often end up with debt levels which are many times their capital. The reason companies apply leverage in the first place is in attempt to raise their return on their own equity. The reason this leverage is productive and beneficial to the greater society is that these companies are really using leverage to capitalize on their competitive advantage. With leverage, a company can find what it does better than anyone else and exponentially multiply their returns. This is good, because this causes capital to be allocated in a more efficient manner, forcing companies to focus on their core competencies.

Politicians who are calling for the deleveraging of America should take a step back and think about what they are really saying. To me they are telling us that they want companies that have become experts in their industries to only produce at 20% capacity (reduction from 25 times leveraged to 5 times). If American companies are to compete globally, they better be able to bet the farm when the deck is stacked in their favor.

Why the Bail Out Won't Work

The final Bail Out bill passed by congress last week includes a key provision that should prevent any significant participation from the Banks who needed it. Section 113 of the plan requires that the Treasury receive non-voting warrants from participating financial institutions. A warrant is a contract to receive a company's shares at a set price some time in the future. If significant warrants are outstanding on an institution, investors will avoid allocating capital to these organizations for fear their ownership will be diluted once the warrants are exercised. Why would we want the government to own these banks anyway, haven't we spent the last 30 years trying to denationalize our economy?

Told you so

No one likes an "I told you so", and for the past two weeks we've got to hear it from the European bankers. We had to hear about how their superior regulation and central control led to their advantageous position going into the credit crisis. Today, it was revealed that they have leverage ratio's similar to the Wall Street investment banks, and in excess of the American commercial banks. If their central banks don't act with prompt and pervasive action, they'll be joining the ranks of Lehman and WaMu. You really have to hate it, but now is the time to grab the finger pointing "I told you so'ers" and turn their hand back around and jab them in the eye. Good luck to the heavy handed regulators and socialized governments in finding resilience in their institutions, they're going to need it.

Fourth Ghost of Christmas Past

In last night’s debate, Sarah Palin was demonizing Wall Street for their corruption and greed. Wall Street investment banks have no doubt had some involvement in the current financial situation we are in today, but probably stop short of corruption and what does greed have to do with anything anyway?

I’m not really sure what greed is, although many people give it the negative connotation associated with A Christmas Carol and Ebenezer Scrooge. In the play, Scrooge hordes all of his profits and resources, seemingly to the detriment of his workers and acquaintances. Unfortunately the fourth ghost of Christmas past never visited Scrooge to tell him what a good deed he was doing these people. By accumulating these resources and allocating them in a very efficient manner, he was likely able to provide opportunities to more people in his town that may not have been available otherwise.

What did Wall Street do that was so greedy? They came up with innovative ways to carve mortgage securities into different tranches with similar risk profiles and apply leverage so investors could efficiently and effectively allocate capital to this market. The result of their so called greed was that the mortgage backed securities market grew from nearly nothing in the late 1970’s to a $10 trillion dollar market today. As a result home ownership reached record levels.

Who was greedy? Politicians were greedy in that they continually applied pressure to Fannie & Freddie to continually expand this market which resulted in lending to unqualified buyers. These politicians were simply telling Scrooge to give away the farm in hopes it would be returned in pristine condition 30 years later. It’s not the markets failing that caused this; it’s the government’s intervention in the markets that has led us to where we are today.

Bailout People not Banks

Looks like someone thought the Bailout was a good idea (the whole damn market). The market lost over $1.4 trillion in market capitalization today after the failed bailout. I'm tired of hearing about the "constituents" that are contacting their representatives to hold up the bailout plan. This is not a time to ignore the doctor's orders and subscribe to some herbal remedy. We have elected these representatives not to control their every vote, but for their principles and ability to make the right decisions for our country's future. The loud obnoxious populist minority "constituents" need to pipe down and let our representatives listen to some truly credible advisers.

Crystal Ball

Looks like some people do have crystal balls. Check out this article from 1999.

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

Monetary Phenomenons

I recently attended an industry conference for equity funds where the relationship of rate of return to risk, and supply and demand was brought into question. Funds were primarily attributing their increased offered rate of return to the decline in investor demand for their product. Some Funds were however suggesting that a higher rate of return may imply higher overall risk.

Rate of return for investments typically correlates positively to the underlying risk of the investment. While this premise seems accurate, it should only be applied under constant circumstances. At any given time it would be fair to evaluate different investments’ risk based on their return as long as external monetary factors are held constant. Investors try to measure this risk by using a risk premium, the additional return they require over risk-free investments.

If outside monetary factors such as the supply of money are changing, risk premiums under one set of circumstances are not comparable to those of another monetary situation. When the supply of money is reduced as it has been during the current credit contraction, returns will be greater for that reason alone regardless of investment risk. This is a relationship that was developed by Milton Freedman in his book Capitalism and Freedom where he explains why inflation is purely a monetary phenomenon.

Unfair value accounting

Fair value accounting has been discussed widely recently and deserves comment from a free market advocate. First off, having confidence in free markets is not the same as thinking market values represent useful information. Useful and transparent information is the purpose of attempting to implement fair value accounting. Seems reasonable, however there are several inherent flaws.

Unfortunately markets are not efficient in the short term i.e. the measurement date used for financial reporting. These short term inefficiencies when interpreted as fair value can cause unnecessary volatility in firm’s balance sheets and reek havoc with the slightest amount of leverage. Warren Buffet uses the analogy that if you buy a farm, you don’t hire an appraiser to come out every day an tell you what it’s worth. Just because the market produces a price on a measurement date does not mean they are producing a reasonable value. By definition, a market is only capturing data from a few of the parties involved in a particular asset. The transaction is taking place between two parties who believe they are benefiting from a favorable price, that’s why they are making the transaction to begin with. What the market price does not consider is all of the parties that are not able to come to an agreement, because their perceptions of value are too far apart for the particular asset. Fair value accounting is in essence forcing these two holdout parties to accept the price set by the transactions and reflect that on their balance sheet.

What is the value of an asset that currently has a market price $70 and a 5% dividend? Under traditional valuation methods, this assets value would be some discounted factor of the future dividend income and a projected sale price. Using fair value accounting, the asset would be valued at the market price. The market has valued the following assets at $70 or more in the past year: Bear Sterns, Fannie Mae, Freddie Mac, Lehman Brothers, Ambac, AIG, etc… Fact is the market was dead wrong on every one of these firms and was extremely inefficient in the short term.

Bailout - Yeeeeaaaaaaaahhhh

Can't let $700 Billion go by with out a little critique. First off, I don't really think it's all that much; it's only about $2,300 per capita. Next if people way smarter than the average person are the ones proposing this maybe we should listen. Henry Paulson did manage to run the most successful investment bank for quite some time (one that is still around).

The politics of the plan are at best despicable. First the blame game, then they play savior of the Free World (Nancy Pilosi & Barney Frank should kiss off, they've had plenty of chances to regulate and both were around during the Clinton administration when many regulations were lifted). This is also not the time to implement every populist regulation legislators can think up either, put those in on their own merit later.

Who knows what the economics of the plan are, no government has ever spent $700 Billion in a week. Proponents claim financial disaster if we don't act and detractors claim skyrocketing inflation and an untamable deficit. It's unlikely either is completely correct in their views, although I would error on the side of some of the smartest bankers in the World. Finally, the gov't is not really spending $700 Billion, they are buying these "worthless" securities and are going resell them at a later date. Once a market returns for the securities whatever the price, they will be sold back possibly at a loss or potentially at a gain.

The bailout could be too small - If the $700 Billion is not enough to provide a sufficient market in these securities, competition in the auctions will be too much and they will still sell at a depressed value. Once these auctions begin they will also serve as a "market price" for similar securities that some banks may not want to sell or be able to sell due to the size of the bailout. Similar securities may then have to be marked down further due to these auctions.

Inside the Mind of an Investor (PIC)

This is why I don't play the market.

read more | digg story

Guess who got fired today-

http://www.bizjournals.com/charlotte/stories/2008/08/25/daily13.html?f=et56&ana=e_du

Wonder what the board said; sorry we were irresponsible and paid you too much, now you're fired. May be a little cliche, but isn't that the pot calling the kettle black.

Underpaid & Overworked

The executive director of the United Way Central Carolinas received over $1,000,000 in compensation in 2007, partially to catch up retirement contributions from prior years. Her compensation will level off at approximately $900,000 for the next few years. http://www.bizjournals.com/charlotte/stories/2008/08/25/daily7.html?f=et56&ana=e_du

Given that a United Way Director's primary mission is to raise donations, it may seem fair to compare their salary as a percentage of donations to others in their geographic area. Using this metric Mrs. King's salary actually falls below that of some of her colleagues. So what metric if one such exists is an appropriate compensation factor for those who do not work in the private sector?

Fortunately the metric has already been set by the market, as long as transparent information remains available to supporters. All supporters of the United Way have access to Mrs. Kings salary records and that of the executives of other charities. Donations will come to charities that appear to be good stewards of the charity and are able to keep their administrative burdens low regardless of a single executive's pay. How much you are worth is determined by what others are willing to pay.

Unfortunately the Central Carolina's United Way board has allowed Mrs. King to hijack the fundraising powers of the United Way to manipulate her perceived value to the organization. The business leaders on this board should take a minute to remember what made them successful in business, and employ those tactics when it comes to dealing with Mrs. King and stop paying her like a realtor.

Privatized Gains and Socialized Losses

Privatized Gains and Socialized Losses is catchy phrase fit for any local news reporter or opinionated columnist. It's easy for viewers and readers to take stock in a phrase like this when it allows them to be the victim, it's very similar similar to the underdog phenomenon. Populist rhetoric aside, the phrase does have some truth if the government provides bailouts to wayward capitalists. Recently this phrase has been applied to the Fannie/Freddie mess and the Bear Sterns bailout. The real issue is that the government provides a stop loss, thus effecting the future behavior of firms toward risk.

With Fannie and Freddie, the implied government guarantee has been in the cards since the inception of these firms. Now is not the time to claim socialization of losses, the government is simply following through on their initial guarantee. Imagine the fallout if investors came to believe the U.S. Government may or may not honor its previous commitments; I'm sure treasury yields might move just a little.

The Bear Sterns Debacle or so it was labeled has different characteristics, but falls short of "Socializing Losses". First you have to consider that shareholders did see their shares fall from $150 to $10 (-$140 - privatized). Second, you must consider what the actual loss for taxpayers would be. The "Bailout" involved the Fed guaranteeing around $30 Billion of mortgage backed bonds assumed by J.P. Morgan i.e. the cost is the portion of the $30 Billion that defaults. Gains while harder to measure are also a part of the Bailout. Gains result from the entire credit market not falling into free fall (research Bear Sterns counter party trades if your a doubter). Gains are also attained from the continuation of the securitized mortgage market that provides capital for millions of homeowners (who don't live in govt housing). Perhaps in the next decade we will decide the Bailout was a net loss, but if the gains are properly measured and monetized hopefully we will be reading about Socialized Gains.

Winston-Salem Runs Out of Recycling Bins

City runs out of recycling bins - must be a smashing success. More than likely citizens have actually recycled the bin itself, using it for something more useful than collecting trash. According to the article, there is a waiting list of 2,000 people who are needlessly filling landfills as I write. How are these tax paying wannabee recyclers going to get their green fix if they can't pile all their crap into a plastic box and send it off with the trash? To start with they could actually do something that really saves resources. Yeah resources are measured in $$$, that's why the city doesn't want to give out any more recycle bins.

If recycling actually saved resources, and the City was able to cruise around picking up little green boxes of net resource savings I would think they could come up with 2,000 more boxes, because they would be selling the net savings to other producers. If recycling truly saved resources, there would be a problem with people coming in the night and emptying your recycling box so they could steal your resources. Unfortunately we have to pay someone to take our valuable net resource savings (they must be making out like bandits.)


Winston-Salem Runs Out of Recycling Bins http://www.myfoxwghp.com/myfox/pages/News/Detail?contentId=7089900&version=2&locale=EN-US&layoutCode=VSTY&pageId=3.2.1

Working Not poor

I recently read an article siting a proposed tax cut for the "working poor" from the Obama campaign. First off, there is nothing wrong with cutting taxes for the rich, poor or big ugly corporations. However, who is the working poor? I guess this is focus group talk to differentiate from people who should be poor since no one wants these people getting any more handouts. I guess there are people out there that consider themselves in the working poor social class, seems like I'd rather be in the nonworking poor if I was going to be poor. If you're going to be poor why not just sit around. I'm OK with the tax cut for the working poor, but I think it should be presented with a tax hike for the nonworking poor. They could tax their medicaid and other social benefits, at least the value of these benefits would surface.