Wednesday, December 31, 2008

Beautiful Piano Music

I'd like to share Michael Nyman's "The Sacrifice" with my readers. The song can be heard on this youtube clip, which has been viewed over a million times. It's one of the most beautiful pieces I've ever heard. I discovered it on the Miramax Greatest Hits soundtrack.

Happy new year to all.

Tuesday, December 30, 2008

Addison Wiggin's The Demise of the Dollar

Addison Wiggin co-authored two good books, I.O.U.S.A. and Empire of Debt. As a result, I was looking forward to reading The Demise of the Dollar (and why it's even better for your investments). I should not have been so eager. Unless you are a gold bug, skip this book, or get I.O.U.S.A. instead.

First, the title, "The Demise of the Dollar, and why it's even better for your investments," is misleading. Readers don't get any tips or insight on why the dollar's fall would be good for investments until page 157. (My paperback edition has only 181 pages). If you do buy this book, and you agree the U.S. dollar will collapse, you may want to save yourself time and skip to the end if you're looking for investment ideas.

Predictably, the author likes gold and commodities and dislikes the Federal Reserve: "As the value of the dollar begins to fall, a corresponding and offsetting rise in the value of commodities, raw materials, and tangible goods will rise." [p. 157] Gold is mentioned several times as an "ultimate dollar hedge." [p. 175] Wiggin says that America's "decision to go off the gold standard was devastating," [p. 8] and "[n]o fiat money system has ever succeeded." [p. 71] As for the Fed, Wiggin calls it a "banking cartel" and "not part of Congress," making it unconstitutional. [p. 22]

The entire gist of Wiggin's book can be found on page 152:

The consequences [of a declining dollar] will be huge declines in the stock market, savings becoming worthless, and the bond market completely falling apart. As the value of the dollar falls, that dollar will no longer be worth a dollar; it will be worth only pennies on the dollar. It will be a rude awakening for everyone who has become complacent about America's invulnerability.

When Wiggin isn't repeating the same anti-dollar ideas, he makes some good points. For example, he laments the loss of domestic manufacturing: "We've given up making things to sell elsewhere, closed the store, and gone shopping. But we're not spending money we have; we're borrowing money to spend it." [p. 10] Those are good lines, but The Wire said it better:

You know what the trouble is? We used to make sh*t in this country, build sh*t. Now we just put our hand in the next guy's pocket.

A much better way to get the information in Wiggin's books is to watch his movie, I.O.U.S.A. More information, including an excellent 30 minute film, after the jump:

I.O.U.S.A. the Movie

While I recommend the I.O.U.S.A. movie and book, I cannot recommend Demise of the Dollar. It reads like the author finished it in one day and then handed it to students to add the citations. Demise contains nothing that hasn't been said before, by someone else, with more eloquence. That's one reason I.O.U.S.A. is so much better than Demise--it contains interviews with Warren Buffett and other investors who explain the economic times much better than Wiggin, and without the hysterics. (Read my take on the situation here and here.) Readers should skip Demise of the Dollar and watch/read I.O.U.S.A. instead if they're into economic horror stories.

As for me, I agree the U.S. dollar is in for a bumpy ride. That's why I've already bought a commodities ETF (DBC) and some Swiss francs (FXF).

Some stats from Demise:

At the end of 2006, foreign holdings of U.S. dollars had a market value of $16.295 trillion. [p. 43]

U.S. borrowing has expanded to the point that foreign central banks own major portions of the U.S. debt. The Bank of Japan held $668 billion of Treasury securities in 2004, compared to the Federal Reserve holdings of $675 billion. In other words, the Bank of Japan nearly matched the Fed in ownership of U.S. debt...If you just add in China, South Korea, and India, central banks own a lot more debt than the Fed does. [p. 153]

[O]ur actual inflation rates are understated by around two percentage points per year. [p. 30] For more on this phenomenon, click here.

Monday, December 29, 2008

Banks Did It, in the Dining Room, with the Rope

The Jan 2009 issue of The Commonwealth has a fascinating speech by Dick Kovacevich, Chairman of Wells Fargo (WFC). Most interesting is how quickly the banking sector grew.

Wells Fargo started as a business in 1852, and Norwest, where I worked before merging with Wells Fargo, started in 1873. By 1950, our combined assets were less than $3 billion...By 1985, both companies together were still only about $50 billion. Today, they are $610 billion. When our merger with Wachovia is completed, we will be nearly $1.5 trillion. So what happened...that caused this unprecedented growth? ... deregulation, new technologies, non-bank competition, and industry consolidation.

The banking sector is a rarity--despite multiple mergers, competition continues to be fierce. The internet banks, especially ING Direct, keep threatening the big players. Consumers owe (in the abstract) more to ING and other internet bankers than we realize.

The 1980s was a very difficult time for our economy. We had 16 percent inflation, 20 percent interest rates, double-digit unemployment and a severe recession.

Mr. Kovacevich differentiates between an economic crisis and a financial crisis. He says the 1980s was worse than today's crisis, because it was a full-blown economic crisis. Today, however, we have more of a financial crisis than an economic crisis:

We're probably in a recession; we'll be in one until early next year, but we've still got 6.1 percent unemployment, not 14 percent. We have 2 or 3 percent inflation, not 20 percent. We have interest rates at record lows, not at 20 percent...[So] It is a more serious financial crisis...We [the financial sector] really caused this crisis.

His willingness to accept blame should earns points. It's nice to see a Chairman of a major banking company speaking so frankly. He ends with a positive note:

I wouldn't want to bet against all the regulators and all the governments of the world -- this is a coordinated effort. If you want to bet against them, go right ahead, but I wouldn't. They'll get this thing fixed.

Very reassuring words from Wells Fargo's chairman.

Disclosure: I own shares of Wells Fargo (WFC). Warren Buffett's Berkshire Hathaway also holds WFC shares.

Bonus: In the same issue of The Commonwealth, Meg Whitman, former CEO of eBay, talks about California's budget:

Revenues have got to be greater than costs. This is one of the real laws of business. Otherwise, we go bankrupt. We need to change the structural way our budget is being done.

Although I live in California and consider myself a fairly comprehensive reader, I have no idea what's really going on with my state's budget. Last I heard, the Democrats were trying to call taxes "costs" to push through a budget over Republican objections. Come state election time, I may just vote against all the incumbents.

2008 in Review

At the end of each year, I like to re-visit my hits and misses. Let's start with the misses.

My biggest mistake was thinking we didn't need any capitulation (July 25, 2008). The market hit the skids shortly thereafter. At the time I made the call, the S&P 500 was 1,257--now it's 869. That's a loss of around 30%. (Not as bad as Hilary Kramer, but too close for comfort.)

Of course, the market did capitulate later on, and on September 18, 2008, I said it was a good time to slowly re-enter the market. Unfortunately, the S&P 500 was 1206 on September 18, 2008--now it's 869. That's a loss of around 28%.

I also had a near-miss. On July 30, 2008, I praised Garmin when it was selling around $36/share. Fortunately, less than a week later, on August 5, 2008, I sold my shares, writing, "I sold Garmin (GRMN), taking a [small] loss. I violated the rule of never catching a falling knife." Garmin is now around $19/share.

My top hits in 2008?

1. Not only did I predict Longs Drugs would be bought out, I also identified the eventual buyer:

Longs is going to be a good company and attractive takeover target...CVS is going to be knocking one of these days.

I made the call on May 29, 2008. On August 12, 2008, CVS announced it was buying Longs Drugs.

2. On September 19, 2008, I correctly said that Transmeta (TMTA) was trying to conserve cash to become more attractive as a buy-out candidate.

TMTA looks like a company trying to conserve cash to survive. If you're looking for a growth story, this isn't it; however, as long as its patent portfolio remains viable, TMTA may be a potential takeover target or value play at the right price.

On November 17, 2008, Novafora bought Transmeta.

3. I correctly called a short-term bottom in banking stocks and Colonial Bancgroup (CNB) shares. My joyful reaction at making the correct call is here.

4. I called MGM overpriced and told the CEO at MGM's shareholder meeting he was propagating unrealistic expectations:

[Despite your rosy outlook] you're basically telegraphing that you're going to lose money because you're expanding and spending money while entering a recession...

In the same post, I wrote,

Overall, I believe MGM will not be able to replicate its record in 2007 and will make less money in the short term.

At the time, MGM was selling for around $52/share. Now it's at $12.74/share.

If you read the full post, you will see that I disliked the CEO at the time, Terrence Lanni. Mr. Lanni recently resigned after the WSJ reported that he had falsified his resume.

(By the way, the only other CEO who rubbed me the wrong way was Trimble Navigation's (TRMB) Steven W. Berglund. Let's see what happens with him and his company in 2009 and beyond.)

5. Recently, I called the drop in the Canadian dollar overdone. So far, it appears I accurately called the bottom.

6. I called GE a good buy when it was around $14.66 a share. It closed today at $15.66. GE's current dividend yield of 7+% shows it is willing to pay investors to wait until better times.

My favorite "hit," however, had nothing to do with a prediction. At the Yahoo shareholder meeting, I told Chairman Bostock to stop talking about Microsoft, comparing his repeated and unnecessary public proclamations to words from a jilted ex-girlfriend. I also politely suggested Mr. Yang go on a sabbatical. We haven't heard a peep out of Bostock for months now, and Mr. Yang has gracefully exited. Meanwhile, Yahoo stock has quietly made a comeback from around $9/share to around $12/share.

Aside from hits and misses, what was my biggest lament? That this article wasn't more popular among my regular readers. I don't think we're going to see the end of "OCM," so perhaps the article will gain more popularity with time.

As for my thoughts on 2009, I am looking forward to it. I think the S&P 500 will hit 1012 in 2009, but whether it stays there is anyone's guess. Here's the annual Barron's challenge if you're into forecasting.

My riskiest 2009 stock is Maxim (MXIM). I am hoping it will go to $14.90/share by early 2010. I started buying Maxim shares at around $12/share and have been averaging down. Maxim closed today at $10.98/share. If I'm right, my Maxim shares will appreciate 30+% in around one year.

The market's gyrations notwithstanding, it's important to remember that most Americans enjoy one of the highest standards of living in the world. If you disagree, may the new year bring you knowledge and a much-needed passport.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Indian Newspaper

For those of you looking for non-mainstream news, here's an excellent Indian periodical:

The North American August 8, 2008 edition had an informative insert called, "61 years of India."

Sunday, December 28, 2008

More on Madoff

A consistent 15% return over 25+ years, without any losses, is impossible without some illegal advantage, such as inside information. Thus, Madoff's investors could not have reasonably believed they were receiving 10 to 15% every year without some insider information. In fact, Madoff's position as Nasdaq chairman probably convinced investors they had access to information no one else did. Click on the link for more.

Madoff's investors should have diversified or at least done more due diligence. Their failure to follow the well-known and cardinal rules of investing--diversify and buy only what you understand--is the sine qua non of their current situation.

Also, most of Madoff's investors were not unsophisticated investors--most were educated, English-speaking, and affluent. This is why Madoff slept soundly at night--in his mind, even if someone invested a million dollars with him, s/he most likely had plenty of money left over. Madoff may have even believed himself to be a modern-day Robin Hood--stealing from the rich to give to the poor and the charities.

At the end of the day, the blame belongs on Madoff and the fiduciaries of charities and other entities who failed to diversify donor and investor money. Rather than excuse negligence, Madoff's investors should serve as an example to those who fail to diversify or who do not question impossible returns. Bailing them out would result in the following:

1. It would tell the world America will print money and devalue the dollar when its citizens--especially the rich and well-connected--make avoidable mistakes. If the Japanese, Chinese, Swiss, and British begin to question the U.S. dollar's integrity, it will be the beginning of the end for our entire country. We have major deficits and are currently dependent on foreign investors to finance our expenditures. When we have a surplus, we can afford to be generous. Right now, we can afford to be sympathetic only with our hearts, not with our wallets.

2. It would weaken faith in our country's sense of fairness. Any time a government gives money away arbitrarily, others not part of the largess rightly cry foul. What about all the other victims of investment fraud, like the Baptist Foundation of Arizona or Sunrise Equities Inc.? What about the mortgage brokers who ripped off ordinary Americans by submitting mortgage applications with false income information? (By the way, where's the perp walk for those people?)

To those of you who say I have no sense of compassion or morality, let me say this: if anyone ought to receive taxpayer money, it should be the families of Americans who were slain in Iraq. They are also victims of government inaction and negligence and have lost more than just money. The list of more deserving victims is endless, but if we go down that path, we will transform America into a land of sympathy-seekers, not strength. For a country that has been the symbol of hope for so many people worldwide, such an image shift is unacceptable.

Although I opposed the auto and bank bailouts, they will help hundreds of thousands of ordinary Americans who had little power to avoid their current situation. Auto workers themselves did not cause their current financial mess--the banks, their unions and the Big Three did. In contrast, Madoff's investors failed to do due diligence, failed to diversify, and/or must have believed Madoff had inside information. As a result, they do not have clean hands.

Regulations resulting from the Madoff scandal, if any, should focus on requiring nonprofits and other charities to publicly disclose (preferably on a website) more than just basic financial information. Even in the absence of a law, donors should ask charities and nonprofits to disclose not only their P&L statements and budgets, but also where they are holding donations, and what specific investments they have bought. As long as taxpayer money is not involved, some good may come of this yet.

More on Madoff here:

1. "Capitalism without Failure is like Religion without Sin"

2. The one that started it all: Madoff the SIPC.

3. NY Times mentions Madoff (1/4/09).

Saturday, December 27, 2008

Clark Winter's The Either/Or Investor

I originally avoided Clark Winter's The Either/Or Investor because the title is uninspiring and brought back visions of Søren Kierkegaard. I am happy I reconsidered. Clark Winter isn't your ordinary Wall Street denizen. He dedicates his book to his "wife and family," which tells you right away he knows his priorities. You can almost imagine him zipping across the landscape in a Pontiac G8. He seems to admire GM and the car business--which is part of the problem, because he wrote his book before March 2008 and the auto industry's current woes. If you can ignore his sanguine predictions about car companies and auto usage (see page xxxiii, where he praises GM over Ford, and says, "Even rising fuel prices will probably not make much a difference, as American habits are extraordinarily ingrained." [p. 147]), the rest of his book is a joy to read. His comments on immigration are particularly timely, given America's increasing protectionist sentiments:

Despite the belief that immigrants don't contribute much to society besides low-level work, they are in fact instrumental in starting businesses that serve other immigrants. In the United States, individuals start more than 550,000 new businesses a month, according to the Ewing Marion Kauffman Foundation. Latin American immigrants start more business[es] than any other group, following by immigrants in general. [p. 33]

On the whole, immigration is good for investors. It brings new customers, new incentives to innovate, new markets, new competitors, and new capital into the market. The savings rates of immigrants are higher than those of the native born, which adds to capital formation. What immigrants, legal or otherwise, take out of the system in terms of municipal services, they probably make in sales taxes on the goods they purchase. Immigrants start new businesses--and therefore are a greater source of new employment--than their native-born counterparts. Additionally, these new companies add to the capital stock of the community in another way. They bring their talents, hopes, dreams, and skills to countries that are increasingly postindustrial and therefore less inclined to do the jobs that those at the bottom rungs of the economic ladder are willing to take on. All in all, there are few reasons to oppose immigration from an investment perspective, much less a cultural one. [p. 35]

Most investing books have insightful or funny anecdotes and facts, and Mr. Winter's book is no exception. He talks about teaching his son economics while driving to grandma's house [p. 54]; Singapore's rise [p. 66]; the economic concepts of alpha and beta [p. 106]; sentiment's role in the markets [p. 70]; and the role of "expensive beef" in Argentina's rise and fall [p. 73]:

Poverty doubled from 27 percent to 54 percent, and millions of Argentines had their life savings wiped out...During all that time, the diet never changed. If it had, Argentines would have brought down their government. [p. 70]

Mr. Winter's main point is that ordinary investors can invest better simply by paying attention. He calls this "thematic investing," or concentrating on a subject whose outcome might be reasonably predictable [p. 72]. Although he doesn't explicitly say it, he favors momentum trading, because buy-and-hold investors are subject to the vagaries of geopolitical events and other events beyond their control:

You could always be a buy-and-hold investor, but that isn't likely to work, either, as you could lose a lot of money in the process. Markets can and do go to sleep for years, as they wait for geopolitical events to sort themselves out. [p. 72]

Going back to Argentina, if an investor understood or learned how important beef was in Argentina's traditional diet, s/he may have been able to profit. For instance, Mr. Winter's "reality-based" investor could have done well by trading beef/cattle futures, or perhaps by stockpiling beef before the Argentine peso collapsed. However, Mr. Winter supplies his own counterargument when he describes Macao as a good investment opportunity:

If Macao is a good enough investment for Steve Wynn or Sheldon Adelson, two of the most successful investors in Las Vegas real estate, it may be a safe bet for individual investors as well. [p. 77]

Unfortunately, Steve Wynn's Wynn Resorts (WYNN) and Sheldon Adelson's Las Vegas Sands (LVS) have been two of the worst-performing stocks this year. Both invested heavily in Macao. What's the lesson? Even if you know which direction the wind is blowing, it doesn't necessarily mean a beneficial storm will occur at the spot you predict. (Somewhere, John Bogle, an ardent buy-and-hold advocate, is smiling.)

Despite these "oops" moments, I learned a lot from Either/Or. Mr. Winter can explain complex ideas without sounding as if he's speaking down to his readers. On page 94, he explains why companies go public, despite the higher scrutiny (they want liquidity and access to more sources of funding). On pages 95-96, he discusses derivatives (you can almost hear the foreboding music in the background as you read):

[T]he variety of futures contracts available has increased dramatically and the number of contracts has increased exponentially. There are now many more futures contracts in oil traded than actual barrels of oil to be delivered...While futures are supposed to create more orderly markets, sometimes they can add disorder in the marketplace.

I also learned some more interesting facts. For example, Brazil is an oligarchy: "In Brazil, for example, twenty thousand families control 80% of the wealth." [p. 123] Also, the bottom of an oil barrel contains the most valuable liquid:

[W]hen the oil is refined, the lightest components become gasoline and kerosene and jet fuel, which sell for a couple of dollars per gallon. The next heaviest component becomes heating oil, which also sells for a dollar or two a gallon. What is left at the bottom of the barrel is the heavy, tarlike residue that is turned into thousands of different organic chemicals and pharmaceutical compounds...[these can] sell for anywhere from a few dollars a gallon to thousands of dollars a pound.

I'll leave you with Mr. Winter's investing rules:

1. Don't lose money
2. Don't invest where the big investors invest
3. Find a waterfall and put your bucket under it
4. Open your mind

Mr. Winter is obviously a man with both feet planted firmly on the ground. If you're skeptical of buy-and-hold investing, or if you just want to learn more about a different investment style, you may enjoy his book.

Friday, December 26, 2008

Education between the Genders

Greg Mortenson, in The Commonwealth (Jan 2009), tells us a beautiful proverb about education:

If we educate a boy, we educate an individual. But if we can educate a girl, we educate a community.

He is the co-founder of Central Asia Institute, and the co-author of Cups of Tea. In smaller communities, especially poorer ones, Mr. Mortenson is indeed correct.

Thursday, December 25, 2008

Ali Salem on Peace

In honor of X-Mas day, I give you some words from Ali Salem, an Egyptian playwright:

Peace will not come to you; you have to make it, you have to sculpt know, business deals lead to peace, not "enlightenment" from writers and intellectuals. [SF Chronicle, 12/19/08, A24]

I have a soft spot in my heart for writers, especially blacklisted ones. Mr. Salem has the right idea--words alone are not enough for peace. Individuals must work together. We forget that racism and lynchings in America were not resolved through American courts, which affirmed both Dred Scott and Plessy v. Ferguson. From everything I've read, when white Americans had to serve with African-Americans in the military, only then did America's racial consciousness change. After all, it's hard to be racist when you spend time with someone and do productive and/or courageous activities together. On this day, I give thanks to human beings everywhere who make it possible for us to connect to other human beings all over the world. Thank you, eBay. Thank you, Doctors Without Borders. Thank you, Google. Thank you, Kiva. And most of all, thank you to the "people who do their jobs, raise their families and sacrifice so that we can gather here in peace."

An X-Mas Gift

On X-Mas Eve, I received my new passport. I love the new design. I realize the new passports are a privacy lover's worst nightmare because of the embedded chips. I was still very happy to receive what felt like a timely gift from the feds. I especially like the quotes from famous Americans, including Abraham Lincoln and Martin Luther King, Jr., on each page. Here's one I had not seen before:

Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty. -- JFK

The passport also has blank sections where you can write in your address and other contact information. Use pencil when writing in the requested information. I made the mistake of writing my address and phone number in pen on the passport. That's my fault, of course--paragraph 5 told me to use pencil. The new passport also has two new pages titled, "Important Information." Most of the information is excellent and useful, but there is one interesting section--"Loss of U.S. Citizenship" (paragraph 13):

LOSS OF CITIZENSHIP. Under certain circumstances, you may lose your U.S. citizenship by performing any of the following acts: (1) being naturalized in a foreign state; (2) taking an oath or making a declaration to a foreign state; (3) serving in the armed forces of a foreign state; (4) accepting employment with a foreign government; or (5) formally renouncing U.S. citizenship before a U.S. consular officer overseas.

I admit I don't know which federal statute the above language comes from. (If someone does, please post a comment or email me the U.S.C. and/or CFRs directly.) Even so, most of the language seems overly vague and may therefore be unconstitutional.

For example, "Taking an oath or making a declaration to a foreign state?" That could encompass a lawyer writing a declaration in another country's court of law on a routine matter.

How about, "Serving in the armed forces of another state?" What about an Israeli citizen with dual citizenship? (Israel has mandatory military service.)

In short, Americans have allowed their government too much discretion if their new passports contain the direct language of a federal law. I am now having visions of Sir Thomas More appearing before Chancellor Cromwell, i.e., an innocent citizen before a government employee who twists the law to eliminate opposition. My country can do better in protecting all of its citizens from the vagaries of government discretion.

Wednesday, December 24, 2008

Why Does Hilary Kramer Still Have a Job?

I don't usually watch television, but I happened to catch tonight's NBR. Analyst Hilary Kramer scared me out of my wits when she said she expected the market to drop 25%:

I believe in the first six months, everyone should be very careful, all investors. We could see the Dow dip to 7500. S&P could have another 25 percent downside...But don't just rush in or if you have some concern in the market, sell, hold out, wait for the real bottom to come...I think that gold could reach $1400 during 2009.

I was absolutely frightened until I saw the following transcript, also from NBR:

Ms. Kramer says,

I believe we have seen the bottom and we are going to now see a bull come back into Wall Street. We have formed a bottom and the reason we know that is that we finally had real buyers come in today. But we know it even more so because of what I saw this morning and yesterday, which is real fear. Fear took over and it over powered greed. Greed for so long was fueling the market, including as it was going down people buying into it.

The date? January 23, 2008. The DJIA was 12,270--now it's 8,468. The S&P was 1338--now it's 865.  Some "bull," eh?

The lesson? Analysts don't know squat. Trust your own instincts. Or at least listen to people who've been right before, like Barry Ritholtz.

gold did not reach $1400 in 2009, but on March 6, 2009, the Dow dipped to 6626, proving Ms. Kramer partially correct.

Plumes, Tulips, and Mortgages

Sarah Stein's book, Plumes, was reviewed by Stephen Birmingham, in the WSJ on November 19, 2008. It shows the fallacy of human greed and is yet another reminder of our tendency to engage in overzealous optimism. To wit,

It is the tulip craze that is most often cited in discussions of speculative bubbles, like the frenzy of for Internet stocks a decade ago and the more recent madness in the mortgage and credit markets. But the rage for ostrich feathers a century ago is instructive, too. When ostrich feathers flounced into vogue among the fashionable set in Paris, London, and New York, traders assumed that the popularity of plumes would stay permanently aloft, as if floating on an endless zephyr.

An ostrich feather bubble? Just one hundred years ago? Oh, the human frailty.

Tuesday, December 23, 2008

"Capitalism without failure is like religion without sin."

On, my Madoff article has attracted the second most comments. I've added a comment of my own, which I share below:

I've read all of your comments with the hopes that our outrage will prevent another ill-advised bailout. Carnegie Mellon economist Allan Meltzer once said, "Capitalism without failure is like religion without sin." In other words, capitalism doesn't work unless we allow losers. Having losers creates two positive outcomes: one, it shows others what doesn't work (in this case, not diversifying or not doing due diligence when investing); and two, it creates shame--a powerful motivator--by warning others that bad actions lead to real consequences.

A Madoff bailout would be particularly harmful to capitalism as a whole, because it would pervert it into a tool for the rich and well-connected. I called the WSJ article propaganda because it focused not on the investors who made substantial returns over the 25+ years of investing with Madoff, but on charities and the elderly. Thus, it was deliberately designed to pull on our heart-strings for a class of people who are generally well-off.

The real victims are non-Madoff investors who will suffer diminished returns from their mutual funds. Their mutual funds hold companies like UBS and other entities that invested with Madoff. No one will be bailing out these Main Street investors, but they are the real victims. Yet, all the attention is being given to Madoff's investors, who are a highly exclusive group of hedge fund investors and investors who failed to diversify their investments.

In the end, a bailout is wrong because it would cause the transfer of wealth from people America should support rather than penalize. Basically, rather than reward people for making wise decisions or providing utility to others, a Madoff bailout ensures that Main Street will continue to suffer for bad decisions made by the rich and investors who failed to diversify.

If we wish to serve as a non-exploitative economic model for the rest of the world, we must allow some failure. We must not allow well-connected investors to make bad decisions and then escape the consequences because of their friends in Congress, on Wall Street, and in the Dow, Jones & Company publishing firm.

More important, if we want the U.S. dollar to continue being the world's reserve currency, then we must ensure the rich as well as the poor suffer the slings and arrows of bad decisions. The alternative is printing more money, which will lead to inflation, and reduced stature.

Mad about Madoff

My Madoff article became the most popular article on yesterday, as well as the third-most commented on article. People are angry. I hope their reaction pre-emptively stopped serious talk of another ill-advised bailout.

More comments and public reactions at the Daily Kos.

Politics: Eisenhower and Obama

I just got off the phone with one of my closest friends, who is an Orange County Republican. He is staunchly anti-Obama. Although I am a registered Democrat, I call myself a Barry Goldwater Republican, or (when I'm feeling giddy) an Eisenhower Republican. I miss the days when we had Republicans who refused to sacrifice American lives unless it was absolutely necessary.

August 11, 1954: Eisenhower: ‘I Don’t Believe There Is Such a Thing’ as Preventative War

Q: Mr. President, there seems to be increasing suggestions that we should embark on a preventive war with the Communist world, some of these suggestions by people in high places.

A: All of us have heard this term ‘preventive war’ since the earliest days of Hitler. I recall that is about the first time I heard it. In this day and time, if we believe for one second that nuclear fission and fusion, that type of weapon, would be used in such a war—what is a preventive war? I would say a preventive war, if the words mean anything, is to wage some sort of quick police action in order that you might avoid a terrific cataclysm of destruction later. A preventive war, to my mind, is an impossibility today. How could you have one if one of its features would be several cities lying in ruins, several cities where many, many thousands of people would be dead and injured and mangled, the transportation systems destroyed, sanitation implements and systems all gone? That isn’t preventive war; that is war. I don’t believe there is such a thing; and, frankly, I wouldn’t even listen to anyone seriously that came in and talked about such a thing.

To those Republicans who are anti-Obama, I ask them to wait until the President-Elect does something wrong. Right now, it appears Americans are pre-judging our Commander-in-Chief, even though he picked Cabinet appointees with moderate views.

Gold in National Geographic

National Geographic Magazine's January 2009 issue has an article about gold:

While investors flock to new gold-backed funds, jewelry still accounts for two-thirds of the demand, generating a record $53.5 billion in worldwide sales in 2007. For all of its allure, gold's human and environmental toll has never been so steep. Part of the challenge, as well as the fascination, is that there is so little of it. In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools. More than half of that has been extracted in the past 50 years. Now the world's richest deposits are fast being depleted, and new discoveries are rare.

I cannot understand why people and central banks are willing to pay so much for gold. It has less utility than platinum and silver. Most items that rely primarily on scarcity to attract consumers eventually lose demand and their high value. With gold, however, consumers can't seem to get enough. At least gold's value is not artificially inflated, as with diamonds (See DeBeers litigation). Still, I cannot think of another product whose attraction has such little correlation with its utility.

With platinum and gold selling at similar prices, I would probably go for the platinum. For now, my only precious metal is silver, which I own through a silver trust ETF (SLV).

Update: the print edition of the National Geographic has two charts on page 42 and 43 that are worth a look. One is called, "What it's worth," and the other is called "How it's used." If readers find a link to the charts, please let me know or please post a comment.

Bonus Round: Steve Forbes on gold.

Bonus Round 2: from the Italian Job, about gold:
it "is our only refuge."

Update on 12/23/08: here is a comment I posted on, in response to other comments:

I appreciate all of your comments, but the only one that makes sense to me is Albert Ling's. He says that expensive products are expensive precisely because of their lack of utility. Although he doesn't expand on his hypothesis, he makes sense. The low utility of certain products, including gold, reveals an important trait--namely, that their buyer can afford useless objects, confirming the buyer's high disposable income, and therefore status.

I don't disagree with the ultimate end of the gold bugs, which is to establish a hard currency. Once most central banks moved away from gold and into fiat currency, gold no longer qualified as an agreed-upon unit of currency. Only if we return to the days of hard currency will gold have value because of its utility in determining currency. Until that day, its value seems to be linked to consumer demand and perception rather than utility.

Other people argued that almost no other products have prices relating to their inherent value, citing beachfront property; Mona Lisa; and Apple stock. Those examples are somewhat inapt.

1. Beachfront property has value because it is something that is necessary--shelter. It can also be used every day. Gold is not necessary, while shelter is required for most people.

2. The Mona Lisa has value because it is a unique historical artifact. Unique historical items tend to be valuable, despite their lack of utility, because history has value to most human beings. Therefore, I have no logical hangup with a historical painting connected to Leonardo da Vinci and the Renaissance having value. The Mona Lisa's value is inherent in its existence, which links it to a specific time period that will be studied as long as human beings exist.

Other paintings, however, especially so-called modern art, may have no value in the future. I would never buy a MoMa painting.

3. Apple stock is a harder one to analyze. It has no utility at first glance, because it does not pay dividends. (Many value investors avoid non-dividend paying stocks, because they don't see any definite return.) Yet, Apple stock has utility because it is easily traded, like currency, for other things, which do have utility. Gold is not easily traded for cash all over the United States. Apple stock, on the other hand, once liquidated, will buy a farmer in a rural area as well as a NY banker in a big city immediate utility. Therefore, its utility lies in its quick, convenient conversion into a unit that confers utility.

Monday, December 22, 2008

Conquest of Happiness

I was going through some old books and found The Conquest of Happiness, by Bertrand Russell. Bantam Books priced it at 95 cents on my edition, but the wisdom inside is priceless. Here are some passages I highlighted when I first read the book:

The secret of happiness is this: let your interests be as wide as possible, and let your reactions to the things and persons that interest you be as far as possible friendly rather than hostile.

Where outward circumstances are not definitely unfortunate, a man should be able to achieve happiness, provided that his passions and interests are directed outward, not inward. It should be our endeavor, therefore, both in education and in attempts to adjust ourselves to the world, to aim at avoiding self-centered passions and at acquiring those affections and those interests which will prevent our thoughts from dwelling perpetually upon ourselves. It is not the nature of most men to be happy in a prison, and the passions which shut us up in ourselves constitute one of the worst kinds of prisons. Among such passions some of the commonest are fear, envy, the sense of sin, self-pity and self-admiration...the happy man is the man who lives objectively, who has free affections and wide interests, who secures his happiness through these interests and affections and through the fact that they, in turn, make him an object of interest and affection to many others. To be the recipient of affection is a potent cause of happiness, but the man who demands affection is not the man upon whom it is bestowed. The man who receives affection is, speaking broadly, the man who gives it.

The best part, however, is the very last page of the book. Here is a link to the book, so you can discover it for yourself.

Roy Haynes

Neal Templin, move over--there's a new cheapskate in town, and his name is Roy Haynes:

70 bucks for a wedding? I bow down to this financial wizard. Anyone who calls me cheap is going to hear about the great Roy Haynes.

Sunday, December 21, 2008

Madoff and SIPC

When you click on the SIPC website, you will see a pop-up screen for "Madoff claims." I've been reading stories about the hard-luck investors and charities that invested with Madoff everywhere. In fact, Saturday's WSJ could almost be called propaganda designed to convince readers to feel sympathy for Madoff investors (thank God for the James Grant article, which salvaged the issue). Don't fall for it. Most of these investors knew what they were getting themselves into when they invested with a hedge fund. As for the people who invested through a "feeder fund," they should blame their well-connected managers and leave Main Street taxpayers alone.

First, only sophisticated individual investors can invest with hedge funds. A hedge fund is a private investment fund open to a limited range of investors. Such a fund is less regulated and allowed to undertake a wider range of activities than other investment funds. Basically, the rich have created a separate avenue of investment designed to make them even more rich--or, in some cases, less rich. Hedge funds come with unique risks--and individual investors knew that going in. That's partly why few of Madoff's investors asked questions--a hedge fund is designed to be less regulated, so there's more allowances made for secrecy. Madoff operated as a hedge fund until 2006, when the SEC finally forced him to operate solely as a broker-dealer.

Second, you should always be wary when the government or the media says Wall Street should have more protection or attention than Main Street. Investors like you and me are limited to KKR Financial (KFN) or Blackstone (BX) if we want a piece of the hedge fund mystique. How are those stocks doing? Well, KFN is around 57 cents per share. BX is about $6/share, with a 52 week high of $23.87/share. In short, Main Street investors didn't do much better than Madoff's investors--and the SIPC isn't going to help us. Why should Madoff's investors--who already had access to a special fund--get special help or special sympathy? I don't see sob stories featuring Blackstone or KKR investors.

I am deeply concerned that taxpayer monies may be used to reimburse Bernie's rich investors more than the usual $500,000 SIPC coverage. Bernie's investors should receive half a million dollars each. I fear that Congress will increase or finance SIPC insurance, purportedly as a populist move (I can already hear the words, "For our protection")--and then make the increased limits retroactive. If that happens, taxpayers will be paying more bailout money, this time to sophisticated, rich investors.

Don't be scammed. Most Madoff investors were doing fine before Madoff, and they are still better off than 99% of the American population today. If they convince you otherwise, perhaps they really do deserve to be called sophisticated investors--after all, if Madoff's rich investors are smart enough to get reimbursed for 100% of their losses when they knowingly invested in a less regulated fund, the American taxpayer is indeed unsophisticated.

Update: Kathleen Pender of the SF Chronicle had a very comprehensive article about Madoff in the Chronicle's December 21, 2008 issue (page C1).

Update: Madoff's investors are already asking for a taxpayer bailout:

"There's no doubt that hearings will be held on this, and some government aid is a very logical request," said Robert Schachter, an attorney with New York-based Zwerling, Schachter & Zwerling, which is representing several Madoff victims. "If we're bailing out Wall Street and the auto industry, maybe these individuals should be bailed out too."

[Additional cite, Joe Bel Bruno, AP Business Writer]

More on Madoff here:

1. "Capitalism without Failure is like Religion without Sin"

2. Clark Winter on hedge funds, in The Either/Or Investor, page 88: (although the book was pre-Madoff scandal, it still has relevance to Madoff):

Hedge funds are basically nondirectional investments designed to take advantage of the indecision of markets. Once upon a time, you needed to be a millionaire in order to be qualified to invest in hedge funds--they are loosely regulated, and it is possible for investors to lose all of their money quickly if a manager's strategy goes only wealthy investors are allowed to use hedge funds as investment vehicles. But increasingly, institutional investors such as universities and mutual funds have placed a portion of their money with hedge fund managers, to their customers' benefit.

[on page 105] Wall Street's performance demands had gotten so out of line that some corporate chieftains could only make their numbers by faking them.

Update: It was only a matter of time--Madoff's investors have asked the 111th Congress for a bailout. The House of Representatives has obliged, and the House Committee on Financial Services is currently reviewing H.R. 2798. As of July 10, 2009, H.R. 2798 has not been submitted for a vote. You may write to the House Financial Committee using the following link:

Here is my letter, which you are welcome to copy:

Dear House members:

I am asking that you vote against H.R. 2798 or decline to submit the bill for a full House vote. The proposed bill seeks to bail out Madoff's investors under the guise of shoring up the SIPC. For example, SIPC members will only be expected to pay $1000 annually (up from $150 annually) into the SIPC fund. This amount is stunningly low, given that credit unions have had to pay millions of dollars to shore up their own version of SIPC, called the National Credit Union Share Insurance Fund (NCUSIF). Star One Credit Union, for example, will be assessed a $44.2 million charge to maintain adequate member protection. Thus, a revised annual SIPC fee of $1000 is laughable if consumer protection is the goal.

H.R. 2798 would be even more comedic if the money to expand SIPC protection wasn't coming from taxpayers. Unfortunately, because the SIPC has been woefully underfunded, if Congress passes H.R. 2798, the U.S. Treasury must issue loans to raise the SIPC fund's available credit from one billion dollars to $2.5 billion. As you know, the U.S. Treasury is basically the American taxpayer, so ordinary Americans and their children will be on the hook for this proposed bailout.

Most tragically, H.R. 2798's proposed penalties for white collar crime are too low at five years' jail time and a $250K fine. Such minimal deterrence will not protect the public against a future Madoff. Approving such low penalties post-Madoff may cause voters to wonder if white collar criminals have lobbyists. I would not want my name associated with H.R. 2798 in its current form.


Update: Click here for more on Madoff's investors.  It's titled, "To Madoff's Investors: Welcome to Main Street."

Dividends and Historic Stock Returns

John Bogle was recently on Nightly Business Report. He indicated that about half of the historic 10% return from the stock market was from dividend income:

So I think we can move toward more normal returns in the stock market now for some very fundamental reasons. First the dividend yield, an important part of long- term stock market returns. In fact, in the long-term the stock market return of 9.5 percent is a 4.5 percent dividend yield and 5 percent earnings growth.

How do tech stocks--most of which don't pay dividends--fit into this rate of historic return? I am not sure, but the year 2000 tech bubble and collapse has probably wrecked many stock market stat sheets, or at least made them more difficult to create. One thing's for sure, though--it's hard for large cap, established companies to argue against dividends. Companies like Oracle and Google are going to have a difficult time encouraging buy-and-hold investors if they refuse to pay shareholders a dividend.

Saturday, December 20, 2008

Generous Benefits Will Bankrupt California

From the WSJ, 12/18/08, A4:

Calpers, which stands for California Public Employees' Retirement System, is California's pension fund for government workers. It provides retirement and health benefits to more than 1.6 million state and local public employees. From June 2007 to June 2008, the fund declined from $239 billion to $182 billion. Basically, Calpers lost $57 billion of taxpayer monies. Even with this loss, Calpers has almost $113,000 for each California employee's retirement and health benefits. This amount sounds generous, and it's certainly better than what most Americans have, but the pension is still underfunded. As a result, taxpayers will be forced to pay higher taxes to make up the shortfall, or will suffer inflation and a weaker American dollar as the government prints money to give to itself. In this way, public pensions are ticking time bombs, ready to release dangerous inflation unless something is done.

Congress and state legislatures talk about regulation, but they don't pass laws forcing cities and states to fully fund their pensions and/or to prevent borrowing money from pension funds. I remember Al Gore talking about putting Social Security funds into a "lock box," i.e. a box that is untouchable. Too often, when cities, counties, and states need money to finance a project or to cover a revenue shortfall, they dip into the retirement funds of police officers, firefighters, and other government employees. Eventually, the monies will have to be paid because a) the government employees have paid into the system; and b) the political will to reduce or deny retirement funds is non-existent. Just witness the auto bailout--if we cannot avoid printing money to give to GM and Chrysler, which lost billions of dollars annually, we surely cannot avoid printing money to give to retirees).

In addition to creating a lock box, the government needs to pare down benefits. Every dollar paid to a government employee means another dollar coming out of non-government employee pockets. Here is a quote from the WSJ story:

Like many residents who work for private employers, Ms. Nolan-Stewart, an AT&T manager, says she is astounded at the generosity of public-employee pensions. "If I were to retire, my retirement would be one-quarter of what I make today for the rest of my life," she says. By contrast, city firefighters and police who retire at age 50 with 30 years of service may retire with 90% or more of their final salary.

The WSJ (12/17/08, A1) also reported that Calpers used leverage (borrowed money) to boost returns; however, using leverage also means that losses are magnified, which may explain the fund's recent poor performance.

So Calpers engaged in a risky investment strategy with taxpayer money, and few Californians seem to care. Americans seem to have been so distracted with Iraq, they forgot about domestic surveillance and protecting our finances from government ineptitude. That's too bad, because history shows that every major empire has collapsed from within, not from an outside threat.

Friday, December 19, 2008

Government Gets Bigger

Greg Mankiw reminds us all why he's a Harvard professor and we're not. When government expands, it almost never contracts again. As a result, most new government programs lead to current and future taxpayers contributing more of their money to the government's coffers every year--and it doesn't stop. Thus, taxpayers should be ever-vigilant when it comes to any government expansion, even those purportedly for our benefit.

Thursday, December 18, 2008

An X-Mas Shopping List

For those of you looking to tip-toe back into the market, looking at money flows is one way of seeing what others are buying. On December 18, 2008, it appeared investors were buying the following companies: Cisco (CSCO); Intel (INTC); Coca-Cola (KO); and Wells Fargo (WFC). Investors might also consider adding a Brazilian ETF (EWZ) and an undervalued technology company, Maxim Integrated Products (MXIM), to the above list.

The dollar's recent decline favors American companies that receive a substantial portion of their revenues abroad. Although one of my colleagues thinks Coca-Cola is sugar water and refuses to buy the stock, Coke has a decent dividend; good cash flow; and worldwide appeal. Even if a large percentage of the entire world becomes unemployed, they still have to drink something, and coffee--especially at 4 dollars a cup--is losing its status as the drink-du-jour. I also find it unlikely that people will cut back on soda, because soda is still cheaper than most other drinks.

Cisco is poised to rebound as an infrastructure play, especially if it gains ground in China and other Asian countries. Cisco has taken various actions--which include providing support after the Sichuan Province earthquake--to convince the Chinese government it wants to be a technology leader in China.

Wells Fargo represents a risky contrarian play. When the real estate market recovers--which it will, at some point--Wells Fargo will benefit. If it maintains its dividend, investors will receive around 4% while they wait, a better rate than most CDs. I considered replacing Wells Fargo with an REIT, but I used to own REITs primarily for their dividends. At this time, Wells Fargo's dividend is high enough for me to prefer its diversified business over a REIT. I also like the fact that Warren Buffett owns Wells Fargo shares.

EWZ is a Brazilian ETF. I've included it here primarily for diversification purposes, especially in the energy/commodities sector. Some investors may prefer to buy ConocoPhillips (COP), another Buffett pick, instead.

Intel (INTC) was downgraded by Jefferies and Co. today. (Interestingly, Jefferies (JEF) itself is being sold short by Barry Ritholtz, who accurately predicted the most recent market downturn.) With a 3.6% dividend yield, a dominant market position, and around $10 billion of net cash, it's hard to see Intel stock remaining at current levels. Although the U.S. market is saturated, Asian consumers will be buying more computers, and businesses worldwide will be buying more servers--products which generally require or use Intel CPUs, due to Intel's quasi-monopoly position in the processor market.

Intel's real problem is that lower-end laptops have become so cheap, they retail for about the same price as a Blackberry, iPhone, Google Android phone, and Sony Playstation. As a result, if consumers choose to delay upgrading their laptops and instead buy an iPhone or a video game console, Intel's revenue will suffer.

Maxim Integrated Products (MXIM) has no debt and finally appears to have its financial house in order, having resolved stock option backdating issues. Now that its external issues have been resolved, Maxim should do well as more consumers worldwide buy products using Maxim's analog chips. Maxim sports a 6% dividend yield.

A caveat: I don't work on Wall Street; I'm not in the business of making stock recommendations; and I don't have any financial licenses or formal financial training. Do your own due diligence before buying shares of any company. Although I currently own shares in all the companies mentioned above, I may sell all my shares in the future. Current conditions are volatile and favor short-term traders.

Disclosure: I own shares in all of the companies mentioned above. My relatives also have other financial interests, including shares, in Maxim Integrated Products (MXIM). You can read about Maxim's recent shareholder meeting here.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

I plan on revisiting these stocks a year and two years from now. Prices at the close of business on 12/18/2008:

CSCO = 16.66
EWZ = 35.95
INTC = 14.26
KO = 45.18
MXIM = 12.00
WFC = 29.65

S&P 500 = 885.28
DJIA = 8,604.99
Nasdaq = 1,552.37

Update on December 23, 2008: a JP Morgan analyst disagrees with my assessment of MXIM. We will see in December 2009 who was right about MXIM. Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a "sell" or "underweight" rating, that's when contrarians and value investors should take a closer look at a stock.

Immigrants Add Jobs

Ah, the perennial debate about whether immigrants take away jobs: The Guardian

For the last time, the answer is "No." But no matter how many numbers are publicized or gathered, the human being is a visual animal. That means if some different-looking fella is mowing your neighbor's lawn, he's going to be noticed much more than anyone else, even if three more natives are hired at the local hardware store down the street.

The more interesting question is whether immigrants drive down wages in certain industries. I think generally speaking, they would, only because of the simple fact that more people entering any industry create more competition, which leads to lower prices. In ordinary times, people like more competition, because it led to lower prices. Now, it's a problem because people see increasing unemployment and need to find a scapegoat. Of course, they don't blame out-of-control government spending, ill-advised international adventures, or underfunded entitlement programs. Nah, it's much easier to blame that different-looking fella who talks funny.

I'm not sure this visual bias will ever change, but perhaps schools should be more effective in teaching students how the Irish, Germans, Italians, and Chinese were treated when they first arrived in America, and how they were all blamed each time an economic crisis arose.

IQ Test

From across the pond, courtesy of John Pozadzides(?), a fun blog and an IQ test (scroll towards the end of the page):

I didn't score exceptionally high, but at least I scored over 100, and with 10 minutes left to spare. Some of those color combos left me dizzy.

Speaking of IQ tests, here's an FT story on investors and Madoff.

Wednesday, December 17, 2008

Financial Times Summary (12/17/08)

I just finished reading today's Financial Times. Here are the major points:

1. Saudi Arabia feels that a fair price for oil is $75 a barrel--almost a 100%+ increase from the current NYMEX price of $39.85.

2. Yale's endowment fund lost 25% in the last four months. It's nice to know I'm beating the Ivy League.

Ron Paul on Regulation

Ron Paul publishes reports every month on the following website:

From his November 2008 bulletin:

Nothing should take the place of your own common sense and due diligence...Regulation can actually benefit big business and corporate greed, while simultaneously killing small businesses that are the backbone of our now faltering economy. This is why I get so upset every time someone claims regulation can resolve the crisis that we are in. Rather, it will only exacerbate it.

I've echoed these sentiments before:

The problem wasn’t and isn’t a lack of regulation, but a lack of ethics and honesty. Unfortunately, there is no law that can curb the human appetite for greed when everyone is seemingly making money. Even a casual student of economics has heard of “tulip mania,” which took place in the year 1637. Back then, the price of a tulip contract sold for more than 20 times the annual income of a skilled craftsman; in other words, people were happy to exchange 41,600 hours of hard labor for a flower that you can now get for a buck at Home Depot. Financial bubbles happen, and then they pop. Unless a law can remove humanity’s attraction to getting rich, another bubble will occur, and more people who bought late in the game will be wiped out.


EPIC stands for the Electronic Privacy Information Center, a nifty non-profit organization. EPIC files lawsuits against the government, forcing them to provide more information about their privacy policies and domestic surveillance practices. You can learn more by going to

You can also donate to the organization here:

How much is your privacy worth?

To Aspiring Lawyers

Many lawyers who cannot find permanent work do temp work. Most of these temporary jobs are projects involving document review. It's not exciting work, but some projects pay well, and the work is a necessary part of litigation. There are so many temp attorneys, there is even a website dedicated to them at

With the number of lawyers increasing with every annual law school graduation and more work being outsourced to capable Indian attorneys, law is no longer a stable profession where most entrants earn a steady paycheck:

The Temp Attorney post links to a WSJ article that shows that a degree isn't what it used to be. On the bright side, the chart above shows that at some point--many years later--a college degree finally pays off. Still, I can't help but think that the American education system is broken.

First, the paper-pushing jobs--bankers, lawyers, etc.--make more than engineers and doctors, people who provide vital services or who spearhead innovation. As a result, many intelligent young people go into law--which produces no innovation--rather than nursing, engineering, or science. On some level, that's a wise decision--it's easy for companies to hire engineers in other countries for much less. At the same time, it seems strange that America's job market incentivizes students to go into non-innovative professions rather than innovative ones.

Second, many high schools do not teach their students useful subjects, or they encourage too many students to go to college. Not all students need to go to college, and some students are better off spending four years in an internship program or an apprenticeship program. Also, many subjects taught in high schools will have no future application for students. For example, I still know how to take the derivative of x-squared (it's 2x), but I have no idea what that signifies, and I've never used it in my law practice. Yet, I was able to sit through calculus because I knew it made me a more competitive college applicant. Despite calculus's uselessness to me, I had an incentive linked to a long term goal--a college and graduate degree--which made the class and high school tolerable.

I empathize with students who have no interest in math, second languages, science, or any other required core classes. These students have good cause to be disenchanted with school--they know they will most likely never use physics or even algebra. Their disenchantment or disinterest in their classes may actually be a sign of high intelligence. After all, which is a smarter choice: refusing to spend time on a subject that has no utility, or dedicating hours to it?

In addition, if the under-performing students' family lacks the money to send them to college, the students intuitively realize the system isn't designed with them in mind. Common sense tells them--and should tell us--that their first order of business should be getting useful skills that will lead to a non-minimum wage job. To accomplish that end, high schools ought to join forces with local businesses to teach students the skills they need to get a job immediately upon graduation. When a law degree--which takes four years of high school, four years of college, and three years of law school, plus an exam--doesn't lead to stable employment or useful skills, families should realize their property taxes and other taxes are being spent unwisely. There must be a better way to educate students than a system that encourages eight to eleven years of school and the prospect of paying off student loans by the age of 40.

Tuesday, December 16, 2008

Love in the Time of Wit

This post has nothing to do with economics or the stock market. It's just a well-written article on love--more specifically, how to tell if a woman loves you:

The Morning News

I can't believe I'd never heard of TMN or Pasha Malla till now.

Hat tip to J-Sares for the link.

Pericom Annual Shareholder Meeting

I attended Pericom's (PSEM) annual shareholder meeting on December 11, 2008. There was no presentation. Water and soda were available to attendees. It appeared I was the only non-employee who attended.

Pericom's main business is enabling high-speed serial connectivity. Pericom makes chips that connect high-speed components inside TVs, phones, computers, and servers. You can read more about the company here:

Because I was the only non-employee attendee, CEO and President Alex Hui sat down with me after the formal meeting to engage in a Q&A session. I asked him several questions, which he was kind enough to answer.

He said that Pericom had a history of spotting the trends in the market. As a result, they were early to market when it came to inventing technological solutions. Mr. Hui said his company's focus was on "total connectivity" and "timing solutions."

I asked him to identify the areas of growth within the technology market. He said that in 2008, notebooks and servers had led the way; in 2009, digital TV and GPS would be major drivers; and in 2010, he predicted that telecom and networking solutions would experience growth.

Mr. Hui also said that his chips were not "system on a chip," or SoC. He explained that Pericom's chips were analog-based.

I asked him to talk about Pericom's major products. It is difficult for a semiconductor company to explain their specific products to a layperson because their business involves enabling other products, like TVs. Semiconductor companies function like linebackers in a football game--you only notice them if they fail. Yet, if they fail, the entire product or team fails. Mr. Hui said his products related to timing; signal integrity; and switching/routing. He saw competition from Texas Instruments (TXN).

I asked Mr. Hui's thoughts on the recession and how it would affect his company. Like a true entrepreneur, Mr. Hui said he and his company "had to work better and harder." As for the credit crunch and possible solutions, he said the current environment was something "none of us had seen in our lifetimes." He praised the government for "reacting very quickly," but indicated there was "no overnight fix." He expects a turnaround in late 2009 or early 2010.

I asked him who his heroes were. This question surprised Mr. Hui, who appears to be a very humble person. (Few CEOs would have spent time with a small shareholder at the annual meeting.) Mr. Hui, after some thought, said he found inspiration in the Bible.

When asked whether his company would pursue other areas while the economy recovered, Mr. Hui remained steadfast--he said Pericom's "focus will not change," and his company would continue to "enable high-speed connectivity."

It's always fun to see a smaller company take on the competition and not only survive, but flourish. Most--88%--of Pericom's net revenues come from Asia (see page 22 of 10K). If you believe Asia will lead the way out of the current recession, then Pericom may be worth a look. Its stock price is very volatile, which is typical for smaller companies priced in the single digits. Sometimes, however, that volatility can work in your favor. Today, December 16, 2008, Pericom stock increased around 20%.

Disclosure: I own only a few shares in this company.

Greg Mankiw Supports Charles Wheelan

Greg Mankiw supports Charles Wheelan for Congress:

Here's an article from Charles Wheelan, summarizing his views:

You'll notice that he lists Mankiw as his favorite economics blogger.

I wrote about Wheelan before on this blog.

Wheelan has an excellent book, Naked Economics. Great title, isn't it? There's no nudity, but it's a fun read, especially if you liked Freakonomics.

Monday, December 15, 2008

Maxim Annual Shareholder Meeting (2008)

Maxim Integrated Products, Inc. (MXIM) had its annual shareholder meeting today in Sunnyvale, CA. A spread of donuts, pastries, water, coffee, tea, and bottled orange juice was offered. (The donuts were an interesting option--most shareholder meetings don't offer donuts.) The meeting started at around 10:05AM and lasted until around 11:00AM. Around 35 people attended.

CEO Tunc Doluca, who replaced Jack Gifford, started the meeting by introducing the Board of Directors. Once the formal part of the presentation was over, the rest of the meeting consisted primarily of questions from shareholders. There was no video presentation.

Before I move to the Q&A session, readers may appreciate some background on Maxim. Due to financial irregularities caused by previous officers, Maxim's shares were temporarily pink-listed; however, Maxim is currently off the pink sheets and back on the NASDAQ. In fact, Maxim was just incorporated into the NASDAQ 100 index. This turnaround--from the pink list to the Nasdaq 100--is stunning, because most companies that are pink-listed never return to stock prices above the single digits or soon declare bankruptcy. Thus, Maxim appears to have put most of their regulatory woes--SEC investigations, stock option backdating, and lawsuits--behind.

Maxim's 10K, starting on page 20, summarizes the status of Maxim's litigation. It appears that if the Delaware Court of Chancery--known for being company-friendly--approves a stipulated settlement agreement, the derivative state and federal lawsuits against Maxim will also be dismissed. In addition, Page 7 of the 10K shows that the federal government's involvement in Maxim's option practices is over:

The informal SEC investigation has subsequently been settled without any admission of wrongdoing on the part of the Company and without any assessment of penalties and the U.S. Attorney subsequently informed us that its office does not intend to pursue any further investigation or action against the Company concerning our stock option grant practices.

I went online to review some of the filings in Maxim's federal litigation. Here are the open case numbers:

06-cv-03344-JW Derivative Litigation (Maxim Integrated Products)

06-cv-03754-JW City of Pontiac Policemen's and Firemen's Retirement System v. Gifford et al, filed 06/14/06

06-cv-03755-JW Corey v. Gifford et al, filed 06/14/06

06-cv-03395-JW Horkay v. Beck et al

08-cv-00832-JW In re Maxim Integrated Products, Inc., Securities Litigation, filed 02/06/08

The latest event in the 2008-filed case is Maxim’s substitution of attorney from Quinn Emanuel to Weil, Gotshal and Manges. I didn't see any filings that appeared out of the ordinary, but one of the plaintiffs' briefs caught my eye. It included charts of when Maxim's former directors granted stock options. These charts appeared to show that certain options were granted at the lowest possible price during the relevant time period. In any case, these directors are no longer with the company.

All the above circumstances have caused Maxim's stock price to reach prices last seen in 1998--over ten years ago. Yet, from a value investor's standpoint, Maxim's balance sheet is pristine--it has no debt, and around a billion dollars in cash.

I asked the first few questions at the shareholder meeting. I inquired about the status of the current lawsuits. A person who appeared to be Maxim's in-house counsel provided a basic overview of the litigation, but after realizing I was looking for more substantive details, he provided more information and a short chronology of legal events. I was pleased with his responsiveness and ability to clearly explain the litigation.

I then asked about the company's experience being pink-listed (I erroneously said, "de-listed"--for the record, Maxim has never been de-listed). CEO Doluca said that being pink-listed did not reduce the company's workload at all, because the company still had to comply with various regulations and internal controls. In fact, he said being pink-listed was a hindrance mainly because Maxim couldn't tell the public how well the company was doing. (During the period of time when Maxim had to restate its financial results, it was barred from publicly reporting various numbers.) CEO Doluca said that it was "frustrating, frankly," not to be able to tell the public more details.

Another person asked about buybacks. The CEO said the company was "buying cautiously."

Another person said that the cost of the backdating of options had cost the company 30 cents a share in earnings, and asked what the company was doing to prevent this [stock option irregularity] from happening again. CEO Doluca said that none of the directors involved in the backdating of options were still with the company. He also said that the company had revamped its stock option plan to grant options only on the first Tuesday of the month after an employee is hired.

Another person asked why the company was buying back shares "cautiously" (instead of more aggressively). The CEO said that the company wanted to maintain its strong balance sheet and in hindsight, not buying shares had been a good decision because Maxim stock had declined (along with the overall market).

This same person asked about Maxim's inventory and what the company was doing to clear inventory (making way for new products and new sales). The CEO indicated that Maxim's customers had become very cautious in their own outlook and were keeping less inventory on hand, making it more difficult for Maxim to predict future sales with clarity. In addition, because of the X-Mas season, a lot of finished products were on the market, making it difficult to ascertain when inventories would be reduced and when customer demand would pick up.

I didn't hear the next question clearly. The CEO responded that Maxim had scored various design wins and was looking forward to growth in handsets (3G), medical products, and management products.

Someone asked about additional product lines. The CEO responded that the auto market represented a growth market for Maxim. He said that even though demand was down, "for us, it's a growth market." He also indicated that security video and storage/networking sectors would experience growth.

The CEO indicated that Maxim had acquired a security video company and that various acquisitions had already broken even or would be at the break-even point by next year.

Another person asked an interesting question. I am paraphrasing, but I believe he asked how Maxim was evaluating future demand when the credit markets were so volatile and currently inefficient. The CEO talked about using a cash burn rate and other metrics. (It's refreshing to hear a CEO who can convey both financial and technological concepts effectively. Not once during the presentation did the CEO deflect a question to the CFO.)

After the praising the CEO for being responsive during the meeting, I asked him to tell me whether Maxim had a "wide moat." Warren Buffett uses the term "wide moat" to see whether a stock is worth buying. Basically, a wide moat is how secure a company's product is from competition/attack. Imagine being in a castle and having no moat. You will be invaded and possibly vanquished. But with a wide moat, attackers need to spend more time, energy, and resources to attack you and might avoid your territory. Coke's brand name and the goodwill attached to it represent one form of a wide moat. Adobe's PDF DRM support, which allows only Adobe's software to be capable of reading and creating every PDF feature with 100% accuracy, represents another example of a wide moat. What, I wondered, was Maxim's wide moat?

CEO Doluca responded that Maxim's "wide moat" was its well-diversified product lines, the numerous features of its products, and its highly innovative staff. He said Maxim's products were part of a broad IP portfolio that was highly integrated and "very differentiated" from other companies' products. Also, because Maxim's chips were "feature-rich" and multi-functional, their high level of specialization eliminated most competitors and start-ups from Maxim's target markets.

CEO Doluca also talked about how, relatively speaking, Maxim enjoyed high margins. (In general, analog products have longer lives, which allows companies involved in analog-based products to enjoy higher margins. The downside is that the longer life of analog products comes with lower growth because products don't have to be replaced as often.)

So many CEOs have a hard time with the "wide moat" question, but CEO Doluca answered it very well. I would also add that many of Maxim's employees have specialized knowledge in analog design and products. Engineers who specialize in analog design are less available on the market and tend to have Ph.Ds, making them harder to find and hire. While Microsoft won't have a hard time finding software engineers, analog technology companies have to work harder to find competent employees who can handle the high level of specialization in their products. As a result, Maxim's engineers represent a unique strength. I believe this is what CEO Doluca was saying when he mentioned his innovative employees as part of Maxim's "wide moat."

The CEO agreed with another shareholder who said that Maxim had previously been in a position where it "couldn't tell our story very well."

I was very pleased with CEO Doluca's grasp of his company's products and his ability to answer questions. I view him as an honest, knowledgeable CEO who will give Maxim more credibility on Wall Street.

Most semiconductor companies have seen their shares decline in value, and Maxim is no exception. But the semiconductor industry is cyclical, and right now, most major semiconductor companies have strong balance sheets. When the economy improves, companies like Maxim, Texas Instruments, and Intel--all of which have solid balance sheets--will be well-positioned to benefit from the economic recovery. I see a bright future for Maxim.

Disclosure: I own over 200 shares of Maxim, most of which I bought after attending the shareholder meeting; members of my family own shares of Maxim and/or have access to shares; and a relative works at Maxim. I may buy more shares of Maxim in the future. I also own shares of Texas Instruments (TXN) and Intel (INTC).

Note: The law firm of Weil, Gotshal and Manges was mentioned in this article. I was in an intern in Weil, Gotshal and Manges' Singapore office for a brief period of time. At the time, non-Singaporean law firms had to set up joint ventures with Singaporean law firms to do business in Singapore, and the law firm I worked at happened to be connected with Weil, Gotshal and Manges. As far as I know, I do not currently have any financial interests with or in Weil, Gotshal and Manges.

Correction: Maxim was in fact de-listed from the NASDAQ exchange, but Maxim shares never stopped being publicly traded.

Cities and the Recession

ABC has a story on how the recession is affecting various cities:

Instituting hiring freezes and eliminating after-school programs doesn't sound like financial Armageddon to me. It appears the government is cutting non-essential services until tax revenues increase. This isn't news to most people who have to live on a budget. I try not to spend more than I make. Why shouldn't the government have to do the same thing, too?

Bernard Madoff

With respect to the Bernard Madoff scandal, we've seen this before, though on a smaller scale. Bernie, meet Samuel Israel III:

Basically, if you can't understand how your broker makes money, be afraid. Be very afraid.

Sunday, December 14, 2008

Thomas Jefferson Center

Thomas Jefferson is one of my favorite presidents because of his predilection for small government. An organization called the Thomas Jefferson Center caught my eye:

They advocate for free speech. President Jefferson would be proud.

Saturday, December 13, 2008

Charles Barkley on Politicians

I once said Ted Turner was the only famous person left who spoke his mind. I forgot about Charles Barkley:

I think politicians, they only have three jobs. Make sure we got a great public school system, make sure we have economic opportunity and make sure we're safe. That's all I want from any politician.

Makes sense to me. Full interview after the jump:

Ball Don't Lie

Friday, December 12, 2008

Stephen Fry on America

Stephen Fry on America:

If I were to run out of petrol in the middle of the night I would feel more confident about knocking on the door of an American home than one in any other country I know - including my own. The friendly welcome, the generosity, the helpfulness of Americans - especially, I ought to say, in the South and Midwest - is as good a reason to visit as the scenery. Yes, Americans are terrible drivers (endlessly weaving between lanes while on the phone, bullying their way through if they drive a big vehicle, no waves of thanks or acknowledgement, no letting other cars into traffic), yes they have no idea what cheese or bread can be and yes, strip malls, TV commercials and talk radio are gratingly dreadful. But weighing the good, the kind, the original, the enchanting, the breathtaking, the hilarious and the lovable against the bad, the cruel, the banal, the ugly, the crass, the silly and the monstrous, I see the scales coming down towards the good every time.

There is one phrase I probably heard more than any other on my travels: Only in America! If you were to hear a Briton say ‘Tch! only in Britain, eh?’ it would probably refer to something that was either predictable, miserable, oppressive, dull, bureaucratic, queuey, damp, spoil-sporty or incompetent - or a mixture of all of those. ‘Only in America!’ on the other hand, always refers to something shocking, amazing, eccentric, wild, weird or unpredictable. Americans are constantly being surprised by their own country. Britons are constantly having their worst fears confirmed about theirs. This seems to be one of the major differences between us.

I made a similar comment a while back about Americans being friendlier than most people, but it's all relative. I just had opposing counsel tell me this morning she moved from Long Island to California because New Yorkers were rough and rude (something Escape From Brooklyn mentions in her blog frequently as a reason to move to Minnesota). Personally, I liked most of the New Yorkers I met when I was in NYC.
In any case, Mr. Fry is correct--as an older white male with a British accent, most Americans will fall over themselves to help him (Americans are suckers for British accents--how else can you explain Hugh Grant's popularity here?).
I think a more accurate statement is that American culture is generally less guarded than other cultures. The question is whether Americans sacrifice modesty and humility for their greater optimism and tolerance. "Whatevah," an American might say. Seems an oddly appropriate response, no?

By the way, Mr. Fry has a delightful blog: