Thursday, July 31, 2008

Small Business Bankruptcies Increased

Barry Ritholtz writes about small businesses getting the shaft:

Small businesses in California and elsewhere are being overlooked as Congress and state legislators rely more on corporate donations. We need strong legislators who can help small businesses and who also have the skills to balance the interests of employers and employees. Without predictable regulations and more assistance to small businesses, the path to the American Dream will become limited to the slow hierarchy structure of your nearest mega-corporation. Clark Gable's character famously justified his profession as a freelance horse wrangler by saying, "Better than wages"--but at least he had a choice.

Wednesday, July 30, 2008

Mark Cuban as Small Business Savior

Sometimes, I imagine I am Mark Cuban's twin, and we were separated at birth. I attract controversy, I'm iconoclastic in my views, and always believe I'm right--and like Mr. Cuban, I usually am. I just need a few billion dollars and an NBA team, and I'd be *right there*. Here is Mr. Cuban's blog post on small businesses, which mirrors my views:

"No taxes of any kind on small businesses with 25 or fewer employees. No employer payroll tax. No state or local taxes. No taxes on earnings. Nada. The business owners will pay income taxes on their personal income they pay themselves, but not corporate earnings."

I blogged on a related tangent myself in April:

I advocated for the "elimination of all civil laws except for wage and contract laws relating to businesses with fewer than six non-family employees and/or gross revenue of less than 575,000 dollars per year (thereby encouraging entrepreneurs and small businesses)." Mr. Cuban doesn't include the cost of complying with unpredictable laws and judges, which is a form of taxation for a small business. Other than farmers, I have not heard of a single state legislator talk about protecting small businesses in California for years. It's disgraceful.

Mr. Cuban, you and I had to be twins in another life. Just let me know when I can shoot hoops with Dirk, and I'll be there. I predict I'll score at least 4 points in a game up to 15, by ones.

Stocks Update, July 30, 2008

I opened new positions in SO, VNQ, GRMN, and EZU. My next buy will either be WFR or NVDA. My largest positions are now SO, CCT (not included because most shares bought before publicly tracking positions), and VNQ. I am concerned about GRMN going down further in the short-term, but plan on holding onto it for at least a year.

My short-term trades continue to be uniformly positive by small margins. W
ith these short-term trades, I regularly invest large dollar amounts and get out quickly, usually making 1% each round-trip. If I do that 10 times a year with all my money, that's a 10% gain, but I've got too many scattered positions right now to commit to a full-time short-term strategy.

The major outstanding question is whether we have experienced capitulation. There is no uniformly accepted definition of "capitulation"--it's the same as Justice Potter Stewart's definition of pornography: "I know it when I see it." The WSJ wrote today the VIX (volatility index) hasn't reached the levels some experts demand before calling a capitulation, but the market hasn't been acting predictably anyway, so perhaps it's all noise. Experts and fund managers probably want to see panic before they commit major amounts in the stock market, and whatever signal they're looking for, they're not seeing it. As a result, most experts say it's not time yet to jump back into the pool. Me, I am slowly getting back in, but I am aiming for September 2008 as a time to consider adding to my existing positions in a serious way. Other than SO, none of my individual positions currently exceeds 5,000 dollars.

Numbers below are based on prices at the close of market on July 30, 2008.

Open Positions

EWM = -3.49
EZU = +1.24
GRMN = -2.41
IF = -4.56
SO = -0.61 [insignificant movement, so not included in average]
VNQ = +3.39

[Average of "Open Positions": losing/negative average 1.17%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PFE = -5.5
PNK = -16.7%
PPS = -2.8

WYE = +2.4%

[Overall Record: Lost an average of 3.97%]

Held less than 7 days:
GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)

[Overall Record: Gained an average of 2.96%

PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)

[Overall Record: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 7.32%
[from May 30, 2008 (1385.67) to mid-day July 30, 2008 (1284.26

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.

New Positions: SO and GRMN

I opened two new positions: Southern Co. (SO) and Garmin (GRMN).

SO is an electric utility company with an annual dividend of around 4.8%. In turbulent times, electric utilities appear to be the last legitimate widows-and-orphans stocks. Pharma has lost that designation, especially after Wyeth's (WYE) plummet today and Pfizer's (PFE) poor historical performance. The problem with having new drugs in the pipeline is if something goes wrong with them at any stage, gains in the stock price suddenly evaporate. That unpredictability makes electric utilities the safer bet, unless regulation becomes unreasonable.

I bought Southern Co. on July 30, 2008, the last day to collect the quarterly dividend, and after earnings had been released. Here's the skinny on the second-quarter earnings: they declined three percent because of a $67 million charge relating to Southern Co.'s development of international energy projects in the 1990s, more specifically, leveraged leases. Still, Southern Co.'s net quarterly income was $416 million, and most of its customers are located in the faster-growing Southeast region of the United States.

I am concerned about more surprises in the leveraged lease area because like CDOs, it's very hard to ascertain how much money a company is losing on a lease when others are involved to limit risk and when the underlying asset is difficult to value. Here is the best definition of a leveraged leased I found, from's glossaries:

A lease that involves a lender in addition to the lessor and lessee. The lender, usually a bank or insurance company, puts up a percentage of the cash required to purchase the asset, usually more than half. The balance is put up by the lessor, who is both the equity participant and the borrower. With the cash the lessor acquires the asset, giving the lender (1) a mortgage on the asset and (2) an assignment of the lease and lease payments. The lessee then makes periodic payments to the lessor, who in turn pays the lender. As owner of the asset, the lessor is entitled to tax deductions for depreciation on the asset and interest on the loan.

A more detailed review of these leases is necessary to see whether Southern Co. has fully disclosed its potential liabilities and risks on various projects.

GRMN hit a new 52-week low after indicating its much anticipated new product, Nuvifone, would be delayed. GRMN has aviation, marine, and automobile divisions, and all are affected by the increased price of oil. In addition, GRMN has formidable competition from TomTom and Magellan. According to Yahoo Finance, about 18% of GRMN's float is being sold short, so there are plenty of people who dislike this stock. At these prices, however, I consider GRMN to be a long-term value play. I bought shares at 36.06 dollars and may average down if shares continue to go lower.

Eric Savitz's Tech Trader blog has the best earnings summary:

If you believe oil prices are preternaturally high, and the U.S. dollar will firm back up, GRMN might have some unexpected upside.

On an unrelated note, I just realized something about McAfee's (MFE) shareholder meeting yesterday--every single employee at the shareholder meeting and on the Board appeared to be a white male, except for two white females. A tech company in Silicon Valley without any Asians, Indians, or Persians in the top ranks? That homogeneity makes a company appear very insular and behind the times, especially with Symantec (SYMC) having more diverse key executives.

Educational Attainment and Economic Advantage

David Brooks recently wrote a great article about education's impact on the economy:

Starting intensive education earlier (Scotland starts its first grade at 4 years old, at least when I was there) and investing in all-day (9AM to 6PM) elementary schools may be a wise choice. When I tutored at UC Davis, I was stunned at how poorly some UC students wrote, especially after the supposedly higher educational requirements for admission. God only knows what teachers and tutors have to deal with in the California State University (CSU) system.

One personal anecdote: the ESL students, usually foreign residents earning math, science, or engineering degrees, worked the hardest on their writing. Some students even hired me for private work. I remember being ecstatic about making 15 dollars an hour when a South Korean student hired me as a private tutor. Back then, 15 dollars was major bling-bling and meant dinner at the local Thai restaurant (Sophie's Kitchen, apparently under different ownership now, so I can't personally vouch for it) rather than the 99 cent chicken sandwich at Jack-in-the-Box. I discovered sushi for the first time in Davis also. Yup, those were the days.

Top 25% of Earners Paid 85% of All Taxes in 2006

The numbers the IRS released regarding tax burdens in 2006 is stunning. Basically, the top 10% pay 68% of all income taxes. That means if you're making less than $108,904, your contribution to the pool is fairly small in comparison, and if you're making more, well, thank you.

Income Category
2006 AGI
Percent of All Income
Percent of Income Taxes Paid
Top 1%
Over $388,806
Top 5%
Over $153,542
Top 10%
Over $108,904
Top 25%
Over $64,702
Top 50%
Over $31,987
Bottom 50%
Under $31,988

The above chart is from Kiplinger's:

This reminds me of a joke I read on Greg Mankiw's ( blog. He told a story about a group of four friends who went out drinking. At first, they divided the bill equally, each paying 10 dollars for a pitcher of beer. Then, the four friends realized that one only made $10/hr, while another made $90/hr. They agreed the higher-earning friend should pay 20 dollars as a "fair" share. The friend agreed, everyone else paid about 7 dollars each, and everyone was happy. Everything was going well, until the other three friends demanded that the higher earner pay 30 dollars as his "fair" share. The friend got ticked off and moved out of the city. The next time the three friends went out for beers, they all paid about 14 dollars each, more than if they had been nicer to the higher wage earner.

The lesson? People will move or take other measures to avoid taxes if they are too high or unreasonable, leaving everyone else with a higher bill.

Update on April 13, 2009: more on income taxes here and here.

Update on August 10, 2012: more on overall tax burdens here:  (David Wessel, August 6, 2012, The Numbers Inside a Hot-Button Issue)

"In the 1980s, the top 5% averaged 22.6% of income and paid 28.5% of taxes.

In the 1990s, the top 5% averaged 25.3% of income and paid 34.3% of taxes.

In the 2000s, the top 5% averaged 28.4% of the income and paid 40.3% of the taxes."

"Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger--except for those whose income mainly comes from capital gains and dividends."

"The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income." 

Tuesday, July 29, 2008

WSJ Review, 7/29/08

Just when I'm ready to throw in the towel on the WSJ's steadily "dumbing down" of content and language and subscribe to the LA Times or NYT, it comes out with a fantastic issue. Here are the highlights:

1. One, a great quote from John Adams I'd never seen before, reminding Americans they are a republic, not a true democracy (Letters to the Editor section):

"Democracy never lasts long. It soon wastes, exhausts and murders itself. There was never a democracy that did not commit suicide."
-- John Adams, Letter, April 15, 1814

2. A reference to Frederic Mishkin's final speech as a Federal Reserve Board (FRB) employee:

All FRB speeches in 2008 can be found here:

Mishkin advocates for more FRB transparency and a publicly stated inflation target:

"By establishing a transparent and credible commitment to a specific numerical inflation objective, monetary policy can provide a firm anchor for long-run inflation expectations, thereby directly contributing to the objective of low and stable inflation."

Common sense stated simply and persuasively. Sigh. Why can't the FRB hold onto to someone like this? If the Dallas FRB's Fisher leaves, we won't have any inflation hawks left.

3. An article on Turkey's current turmoil caught my eye. Basically, Turkey has mandated secularism. At one point, it outlawed head scarves. This strict separation of religion and citizenry has caused internal turmoil, as more Turkish citizens demand free exercise of religion reminiscent of the original Americans. Turkey seems to have gone too far, because by outlawing certain religious aspects, it has intruded into its citizens' personal lives. Still, it bears noting and repeating: Muslims in the U.S. have greater religious freedom than in many Muslim countries. On the other hand, Malaysia and Indonesia, as prosperous Muslim countries, are good examples of how to run a religiously-inclined state.

4. Speaking of Indonesia, few people know Indonesia is an OPEC member. However, like Iran, Indonesia is experiencing difficulty with very low domestic oil prices, and needs to import more and more of it. As a result, Indonesia's power grid relies somewhat on coal. The problem is Indonesia's privately owned coal companies can get more money exporting coal (33% more, apparently) than selling it domestically. As a result of the difference in pricing, Indonesia's power grid is becoming inconsistent, like Enron's refusal to power California, causing state-wide problems. Hence, the question: should Indonesia pay more to the private coal companies, or does a state have an interest in demanding lower prices because power is a necessary item for its citizens? The coal companies may not pay much in taxes and do benefit from being in Indonesia, with its low labor costs, rich resources, and wonderful people.

 I tend to believe in regulation of essential items, such as food and energy, but of course, the question is always, "How much regulation?" One cannot make the usual argument that regulation should be extended up to a point before the coal companies leave and do business elsewhere. Resource-rich countries have more leverage because of the finite nature and necessity of many natural resources; in other words, services may be regulated differently than natural resources because services, unlike natural resources, are usually more fungible. In any case, an interesting discussion can surely be had about this topic.

Immigrants and Entrepreneurship

An Oklahoma newspaper has an interesting article on immigrants and entrepreneurship:

"The Ewing Marion Kauffman Foundation [], a Kansas City, Mo.-based entrepreneurial think tank, says 0.35 percent of immigrants are entrepreneurs compared with 0.28 percent for the native born."

"We are a nation built on immigrants. But there was always a path to the middle class. And that's not so much the case anymore. That's why more immigrants are turning to entrepreneurship. A lot of immigrants see it as the best, if not only, ticket to the American dream."

Monday, July 28, 2008

McAfee Shareholder Meeting, July 28, 2008

McAfee's (MFE) shareholder meeting was a low key event. It appeared less than five non-employees attended. The food consisted of some cookies, what looked like a brownie, and sparking juice (berry flavor).

David Dewalt, McAfee's CEO, did the non-formal part of the presentation. No video presentation was involved--just Mr. DeWalt speaking at the podium for about six or seven minutes. See link for more on Mr. DeWalt.

McAfee is a security technology company that secures systems and networks. They are famous for their anti-virus software. The highlights of Mr. DeWalt's speech are as follows:

1. McAfee has 125 million downloads/sales.
2. McAfee has 4,500+ employees worldwide.
3. They have 1.2 billion in cash and no debt.

After these points, much of Mr. DeWalt's speech was difficult to understand because it was very general. I have been to many technology shareholder meetings, and it seemed as if this speech/presentation was designed to motivate employees and the Board rather than explain anything in detail. Mr. DeWalt talked about inter-locking security, securing the premises and new frontiers, and other terms relevant to McAfee's security focus.

I did catch one point about a partnership with VMWare, Inc (VMW). Mr. DeWalt mentioned McAfee being more involved in virtual machines, not just physical machines. (For more information, you can search Wikipedia for "virtual machine.") And just like that, the presentation was done.

Another shareholder, an Apple user, asked how Apple's continued popularity will affect McAfee. Apple users are known for boasting about their OS's superior safety; however, some engineers have said there is no salient difference in security. Their opinion is Apple enjoys an advantage against hacking because of its popularity (I have never met a programmer who likes Microsoft) and lower user adoption of the Tiger OS. In other words, Microsoft dominates the field, so it has more hackers gunning for it, and if Apple ever became too large, its security system would also be exposed after hackers focused on Apple rather than Microsoft. Mr. DeWalt said the company was researching Apple's Tiger system and would be prepared to handle any security needs. McAfee's "Avert Labs" is their research arm. Here is their blog:

I asked a few questions. I first asked how McAfee is different from Symantec (SYMC) and whether there was a "wide moat" (a barrier to being overtaken by competitors). Both McAfee and SYMC are known for their anti-virus software, but I've never been able to tell the difference between the two companies. Mr. DeWalt tried to answer my question, but was very general. I asked for more details, and he talked about McAfee's superior work in several areas, such as its Software-to-Services model ("SAS," pronounced "sass"). He said that McAfee had taken market share from SYMC over the past two years. He implied McAfee's encryption was better than SYMC's. He also referred to the involvement with virtual applications, not just physical applications. He ended by saying McAfee was also better in risk and compliance issues, such as understanding regulations and how to comply with new and existing laws. His speech had earlier cited HIPAA, SOX (Sarbanes-Oxley), and even Basel II.

Hence, my second question. I asked how McAfee was involved in the Basel II Accord. I asked this question because it made no sense for an online security company to refer to a system designed to improve and harmonize international financial dealings. Basel II is a very complex idea. Put simply, it is designed to create some consistency and trust in international banking regulations so one country does not create worldwide problems by poorly regulating their banks. The advanced, first world countries most likely envisioned Basel II as a way to decrease risk when dealing with less-regulated or emerging markets. Hilariously, America's Fannie Mae and Freddie Mac, while not banks per se, just proved the need for a stronger Basel II Accord, or perhaps an entirely new Basel III.

Mr. DeWalt said that he was working with the U.K. and each country had different regulatory bodies. He focused on data security and the data loss. Presumably, Basel II has some requirements for how to store customer data so a James-Bond-type can't download someone's bank account in Switzerland through a laptop.

Mr. DeWalt is an amiable man, but my overall feeling is that he wants to be a visionary and uses grand ideas to establish a vision a la John Kennedy's style. That's great if you want to be president of a nation--but for running a tech company, especially one based on credibility, one must be careful to use words in context and to have specific examples if necessary as support for the grand ideas. Mr. DeWalt didn't really explain who he was working with in Europe to implement Basel II. The EU is implementing Basel II now, but most countries will be implementing Basel II by 2015. Mr. DeWalt's glib response might have been due to a lack of time or his general style, which is geared more towards enthusiasm than specifics. I came away thinking McAfee has grand visions but needs to work on being more specific in its business and expansion plans.

My last question had to do with a line in the "Risk Factors" section of the 10-K. California is auditing McAfee's 2004-2005 income tax returns. No specifics were listed in the 10-K. I asked about the audit, and the CFO indicated the audit involved apportioning income between states. Most states are experiencing budget shortfalls and are going after any source of untapped revenue . A company like McAfee that sells a lot of their products online to an anonymous end user may have a difficult time determining in which state it or its customers should pay taxes, thereby allowing an argument that it is underpaying certain taxes. For example, if someone downloads a program in Kentucky but uses it in California, which state should get the tax? It's also possible McAfee wasn't collecting any taxes at all during 2004-2005, but I am speculating. The CFO indicated there had been no claim and no settlement discussions with the State of California.

The CEO came up to me after the meeting and shook my hand. I handed him my business card, which lists me as a lawyer. His face sort of froze a bit. No one in business likes lawyers. I need to get a new card for shareholder meetings. Still, Mr. DeWalt, while amiable, needs to be more specific about future plans and how exactly he will take McAfee into the future. Having 1.2 billion dollars and no debt is impressive. Perhaps the numbers already speak for themselves or will speak for themselves. McAfee releases earnings on July 31, 2008.

After the meeting, I thought about McAfee's wide moat. I didn't really see one at first. McAfee has competition from not only SYMC, but AVG, which offers a free security application. I use a paid security service for my work computer, but AVG for a home computer. And that's when it hit me. McAfee did have some protection against becoming obsolete because no business will entrust their enterprise or business software protection to a company that gives away its product. Consumers are one small part of the pie when it comes to online security, and McAfee and SYMC probably duke it out for the corporate accounts the way Pepsi and Coke fight for market share. But unlike Coke and Pepsi, when times are tough, people won't cut back on online security. It's the last place any business will skimp on--after all, a business will lose days, maybe even weeks, if hackers access its intranet or files. The new essential product is online security, and a recession won't necessarily affect companies like SCUR, MFE, and SYMC. But the proof is in the pudding, and we will see on July 31, 2008, whether McAfee's numbers satisfy Wall Street.

New Position: EZU

I will not jump back into the market until sometime in September 2008. However, I will be buying small lots so as not to miss an unexpected (and unlikely) rally before then.

I bought 30 shares of EZU today and will look to add more in September 2008. I am placing these stocks on my watch list:


At some point, if this market's volatility increases, the names above may become too cheap to ignore. (I recently bought GOOG, BRCD, and NVDA--very small lots.)

I just bought 25 GOOG @ 478.4794 as a short-term (under 7 days) trade.

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.

Saturday, July 26, 2008

New Word: filigree

I just learned a new word: "filigree."

It's a rare and pleasurable occurrence when I learn a new word, and I thought I'd share. Filigree refers to jewel work of a delicate kind made with twisted threads usually of gold and silver or stitching of the same curvy motif. As an adjective, it refers to anything very delicate or fanciful.

The NY Times published an article by Meghan O’Rourke I am still agog about:

Here's the sentence that caught my eye: "Bootie too young to accept that he lives in a world of filigreed self-absorption rather than pragmatic transcendentalism." Sigh. I wish I could write like Ms. O'Rourke.

Juror is Dismissed in Mattel Trial

Mattel alleges MGA, a competitor, stole the idea of Bratz dolls. MGA's CEO, Isaac Larian, is an Iranian Jewish immigrant. A juror may have influenced the Mattel/MGA case when she told other jurors about her husband's assessment of Iranians: "stubborn, rude, stingy, are thieves and have stolen...ideas."

This comment is rather surprising, given that the founder of eBay is a French-born Iranian (Pierre M. Omidyar); the first female space tourist, Anousheh Ansari, is Iranian; the founder of bebe, a clothing retailer, is Iranian; and one of Google's business founders is Omid Kordestani, an Iranian.

On the bright side, at least the comments weren't considered anti-Semitic or directed at Mr. Larian's Jewish background, so there's some progress there. My take on the issue of Mattel's gripe against MGA? It takes a lot more than an idea and some sketches to bring to market a viable product. Even if the original sketches were designed by someone who happened to be working for Mattel at the time, Mr. Larian obviously took the idea and made it into a viable product. Damages should take into consideration Mr. Larian's performance in terms of advertising his product effectively, investing in international factories to make the dolls, setting up an efficient shipping/export process, hiring the employees, etc.

Unfortunately, any employee who leaves a company who had an inkling of an idea during company time that ends up being successful will be sued. This is like Xerox suing Apple for "stealing" the idea of a computer--it's laughable. A company should not be able to cherrypick ideas through the legal system when it first rejected the idea and did not invest in developing it. If Mattel is smart, it will focus on saving future legal fees (I am not sure if an attorneys' fees provision was available or pled), not fight the inevitable appeal, and settle with Bratz for a small slice of the profits.

Warren Buffett and Bill Gates Talk Economics

Warren Buffett and Bill Gates had an interesting conversation on economics--here's one excerpt:

[I]t just occurred to me that if you don’t trust the government to do a lot of things very well—and business will never trust them to do that; rich people will never trust them to do that—and if, on the other hand, the honor system doesn’t work particularly well in terms of how many people behave (and this idea just occurred to me ten seconds ago so it will take a lot of refining): what if you had three percent or something like that of the corporate income tax totally devoted to a fund that would be administered by some representatives of corporate America to be used in intelligent ways for the long-term benefit of society, This group—who think they can run things way better than government—could tackle education, health, etc. or other activities in which government has a large role. And it would have this forced funding of three percent of corporate profits or some sum like that.

As readers know, I am a huge fan of Warren Buffett. Enjoy the link:

(Conversation took place on May 15, 2008)

Friday, July 25, 2008

Funny: Don't Buy Stuff You Cannot Afford

Steve Martin and the best SNL financial skit of all time--If You Can't Afford It, Don't Buy It!

Simple and brilliant financial advice. Just goes to confirm that the new millennium is the age of the comic.

General Electric (GE)

General Electric (GE) is known as a perennial blue chip. But it is also a finance company--see Bloomberg:

GE holds about $5.3 billion in residential mortgage-backed securities as of June 30, down from $5.8 billion at the end of the first quarter.

GE also reduced its commercial mortgage-backed securities to $2.7 billion, down from $2.8 billion held as of March 31. The company also said it reduced its exposure to subprime credit in its residential mortgage-backed securities to $1.7 billion from $1.8 billion in the first quarter.

It's impossible to gauge the true value of underlying assets because almost all major companies dabbled in complex financial instruments--this is one reason markets are so volatile.

One tip: if you're driving to Mexico from California with a rental car, consider buying GE insurance. Your California insurance does not typically cover liability in Mexico:

As you can see, even with the bad loans, GE has plenty of great products.

July 25, 2008: WSJ Letters to the Editor

I've been reading the Wall Street Journal for years, and I've never seen better letters published on the issue of income taxes. From July 25, 2008 newspaper:

By Sim Pace, from Arlington, VA--the spirit of Jefferson shines bright:

"[T]he top 50% of taxpayers paid 97.1% of income taxes in 2006...Isn't that the well-known definition of democracy, the poorest 51% of the population tyrannizing the richest 49%? I suspect Sen. Obama would like to see the pendulum swing even further and have the top third of taxpayers pay all the income taxes, then the other well-known definition of democracy will have been validated: two wolves and a lamb voting on what to have for dinner.

By Bruce Kebbekus from Hotchkiss, CO:

It should be mentioned that letting about half the citizens escape and pay no income taxes will lead, and probably has already led, to voter disinterest and bad government. Too many have no stake in the game.

By Harold Arkoff from Calabasas, CA:

California...receives back from Washington a smaller percentage of income taxes than it pays. A greater burden is placed on the local population to pay for state services which must be paid for by other sources of revenue..."Their fair share" can have more than one meaning. Is California getting a fair share?

What do D.C. and Delaware produce? They are usually in the highest brackets in terms of per capita GDP by state. See

Delaware has attracted almost all the major banks to its state by having a pro-business platform. Also, most of us didn't elect the Delaware Chancery Court to decide economic legal issues, but its opinions make waves nationally in business matters. This small state and D.C. have made themselves epicenters of influence despite their unimpressive physical statures (D.C. is a swamp after all).I t's commendable to see a small state and a district attract so much business and influence. At the same time, one wonders why California and Texas citizens don't project themselves as well as these smaller entities. Is this a case of Lennie and George, as Mr. Arkoff implies in his letter?

Money Tips

Here is a fun article with money tips from famous people, including Steven Levitt and Derek Jeter:

I need to think about Mr. Levitt's advice more. Does the advice also apply to small businesses with inconsistent income streams?

Across the Pond: American vs. British Women

I have a soft spot in my heart for the United Kingdom. I attended primary school for a short while in Edinburgh and still have family in London. I was a passenger in my first Ferrari ride (a GTO) in London, and the chocolates and sweets are incredibly richer and better than in the States. Of course, I think British women are wonderful as well. But an article disputes that point, and it is so hilarious and so different from the politically-correct publications we have in the U.S., I had to share:

Initial salvo (Tad Safran): [Apologies--link has expired.]

[T]he girl giving the [beauty] advice actually did think her friend looked adorable and it was simply like one cannibal asking another if it’s wrong to eat human flesh. Ultimately, English women are like men doing DIY. No matter how lost they are, they refuse to call in professional help.

A perfect example of this was presented to me last week. I was set up with Sophie (I have changed the name) by married friends. Sophie was a truly beautiful girl I used to be friends with, but hadn’t seen in 15 years. I was surprised to hear that she was still single and was excited to meet her again. At dinner, I found myself sitting opposite something that surely would have been happier hunting for truffles in the forests of France or grazing on the grassy marshlands of Canada... 

It’s not entirely Sophie’s fault, I suppose. My friend’s wife didn’t manage my expectations. Maybe it would have been better if she had said: “Tad, you enjoyed The Lord of the Rings. Would you like to meet an orc?”


Follow-Up (with extra shovel): [Apologies--link has expired.]

Women of Britain: Bridget Jones’s Diary is not a documentary. It’s a work of fiction, a fairytale. The fact is that control-top granny pants are simply not a substitute for regular exercise, thoughtful grooming and a healthy diet.

Follow-Up from the Gentler(?) Sex:

I miss the U.K. sometimes. "Femur-sized Toblerones" just can't find that kind of acerbic writing anymore. If it weren't for the NY Times, the LA Times, and the Washington Post, Americans would be in danger of having no daily newspapers designed for an audience above a tenth-grade reading level. Sigh.

As for Tad Safran, he is writing at least partially tongue-in-cheek. He's smart enough to know if a woman can't figure out he's joking or laugh at herself a bit, he's probably better off without her.

Thursday, July 24, 2008

We Don't Need No Stinking Capitulation

The economy looks bad, but when experts demand a 5% or more down day before buying stocks, we may have to wait a long time for a real recovery. Market experts, including Barry Ritholtz (, want capitulation, or one day of panic; however, the markets have placed rules to prevent large down days. The new rules against naked short selling are another brick in the wall against a Depression-era one-day dip. In addition, Grasso instituted trading curbs ("circuit breakers") to prevent exactly what the experts want. Meanwhile, Congress continues to consider regulations against ICE and other trading exchanges to prevent instability. If the experts and mutual fund managers want something the exchanges and government are actively preventing, even good economic data may get cast aside as we create a self-fulfilling sideways market.

The facts are that oil has come down from its high, and the American dollar is slowly recuperating. The dollar has already decreased so much the Mexican and Canadian currencies are the ones that look overvalued. The European Central Bank (ECB) has to maintain or increase interest rates to keep its superior edge on the dollar, and at some point, EU citizens will be screaming bloody murder when growth slows or stops. We forget that Europe has many powerful and influential companies that want to sell their own products abroad and are becoming angry at the U.S. dollar's weakness.

As for oil, barring an Israeli attack on Iran or vice-versa, oil will decrease in price. Commodities experts have been denying a supply issue for months. In the absence of a supply issue, oil prices will decrease as Americans use less oil--unless the law of supply and demand suddenly vanishes.

I am no Pollyanna, but with money markets offering 2%, and CDs not much better, if investors don't take some action, inflation (running around 5%) will destroy their purchasing power. Having said that, why is the market discounting technology companies, many of which have plenty of cash and were not involved directly in subprime, finance, or housing? If I'm Intel (INTC), Google (GOOG), ST Microelectronics (STM), Microsft (MSFT), Brocade Communications (BRCD), Taiwan Semiconductor (TSM), or MEMC (WFR), I'm beginning to wonder if the American stock market is an inefficient way of valuing my company. After Sarbanes-Oxley, why would a rational company want to have an IPO in this irrational market?

Disclosure: I own shares or plan on buying shares in the above companies.

Stocks Update, July 24, 2008

Numbers below are based on prices at the close of market on July 24, 2008.

Open Positions

EWM = -6.57
IF = -8.45
VNQ = -1.02

[Average of "Open Positions": losing/negative average 5.34%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PFE = -5.5
PNK = -16.7%
PPS = -2.8

WYE = +2.4%

[Overall Record: Lost an average of 3.97%]

Held less than 7 days:
GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)

[Overall Record: Gained an average of 3.31%
(avg has changed because of GOOG trade)]

PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)

[Overall Record: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 9.6%
[from May 30, 2008 (1385.67) to mid-day July 17, 2008 (1252.54

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.

Random Thought: Good Writing

Once in a while, I see some beautiful writing and want to share. This one's from Virgil's Georgics, about rural/farming life:

By winter fire-light, shaping with keen blade

The torches to a point; his wife the while,

Her tedious labour soothing with a song,

Speeds the shrill comb along the warp, or else

With Vulcan's aid boils the sweet must-juice down,

And skims with leaves the quivering cauldron's wave.

Wednesday, July 23, 2008

Bush Gets It Right

President George Bush explained the banking problems rippling through the economy as a drunken binge that has resulted in a hangover:

Apparently, this is news to some people and/or has offended some people. President Bush actually explained this one perfectly. I don't understand the controversy. If you're going to attack him for something, try his earlier linking of 9/11 to Iraq. Don't attack him for something when he makes sense.

Update on July 24, 2008: David Ellison in today's WSJ, C1, uses the same terminology as Bush: "Half of an alcoholic's problem, Mr. Ellison said, 'is admitting he's an alcoholic.'"

Susan Decker = Best Corporate Officer Ever?

CNBC had an interview today with Susan Decker, who is now Yahoo's president. She is currently my favorite corporate officer. She has an aura that exudes competence and intelligence, as well as femininity. Women who want to rise up in the corporate ranks ought to study Ms. Decker.

She is married with three children.

Most Overpaid Jobs

Chris Plummer has a great article on overpaid jobs:{954AA053-F953-43F3-BBC8-63D351A3BF2A}&dist=TNMostRead

CEOs and mutual fund managers go towards the top of the list.

Tuesday, July 22, 2008

Apple v. Bank of America: Whisper Numbers Come Home to Roost

Some of you who have been following earnings releases will be forgiven for not understanding why the market punished Apple (AAPL) after it released better-than-expected earnings (19%+ EPS surprise), while Bank of America (BAC) increased from $20/share to $32/share after showing its net income decreased by 41%. AAPL's stock was down at one point by 10%. Its growth prospects are still quite good, especially because market penetration in China is incomplete (Steve Jobs indicated that iPhones were being used in China without providing revenue back to Apple due to hacking and IP issues). BAC, on the other hand, will have major problems with its acquisition of Countrywide as more and more notices of defaults (NODs) occur. In fact, in recession-resistant Santa Clara County, NODs recently spiked.

The market makes no sense sometimes, except when it does. Earnings guidance is a game played between companies and analysts. When Apple (AAPL) tells Wall Street it expects 10% increase in sales, it does so with a wink. Apple gives the Street lower numbers so it can beat those numbers come earnings time. The Street, of course, is a formidable player. It accepts Apple's lowered expectations with a wan smile and then dumps it if the numbers aren't dramatically higher. The real numbers required to maintain or increase share price are sometimes referred to as "whisper numbers." Wall Street accepts the lower numbers on paper but demands that the company meet its whisper number later on. It's a strange song and dance that serves no one well.

AAPL went down while BAC went up because shares prices are based on how much money a company expects to earn in the future, not what it made last quarter. So the Street doesn't care about the actual numbers released--it knows it's all a game. The Street pays more attention to how well the company says it will do in the future, especially whether the company will maintain or increase full year guidance (i.e., whether the quarterly numbers released every three months will add up to the full year's "earnings per share" expectations).

What is an average investor to make of all this? Only that share prices are based more on future expectations of value than on past statistics. As they say in business, past performance is no guarantee of future results.

Monday, July 21, 2008

Pfizer (PFE)

Like many before me, Pfizer (PFE) has caused me heartbreak. I sold all but 100 shares of it today, and will consider it a closed position at a percentage loss of 5.5%. I also picked up more IF and EWM and opened a new position, VNQ.

It appears I correctly called a bottom in the banking sector. Today, Bank of America reported better than expected earnings (which means they weren't completely abysmal), and CNB keeps chugging up. As one of the few people in the entire country who called at least a short-term banking bottom correctly, I am waiting for my first CNBC appearance...but won't hold my breath.

I've been keeping track of all my retirement accounts, which is where I do most of my trading. From June 3, 2007 to July 21, 2008, my portfolio increased 3.0%. It's not great performance, but the S&P 500 decreased 18% during that same time period, so I'll take it [from June 1, 2007 (1536.34) to July 21, 2008 (1260)].

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.

Sunday, July 20, 2008

New York Times v. Sullivan: Should the NYT Go Private?

The New York Times reports earnings on July 23, 2008. Its stock price has declined as younger readers eschew newspapers for the internet. The NYT's reporting itself is still stellar--its recent reports on the economy have been fantastic, and its charts and easy-to-read graphs showing various economic statistics are unparalleled. Many outlets use the NYT's links or re-publish their articles and statistics, so demand isn't the NYT's problem. The real issue is monetization: "How does the NYT maintain its dual roles as a pillar of news reporting, which requires wide distribution, and as a public corporation, which requires more cash flow to please shareholders?" Both aims are not necessarily synonymous, because free content is more widely distributed, while paid content reaches a smaller audience. These conflicting aims render the NYT heavily dependent on advertising dollars, which are being shifted more to Google and other internet outlets. If Google's recent earnings results are any indication, the NYT may have a difficult future. Still, cash flow is not everything, and the NYT's reputation is still gold in terms of goodwill.

It is vitally important to remember that the NYT is directly responsible for one of the defining legal principles of our country--free speech. Every American should read Justice Brennan's opinion in New York Times Co. v. Sullivan, 376 U.S. 254 (1964):

The First Amendment, said Judge Learned Hand, "presupposes that right conclusions are more likely to be gathered out of a multitude of tongues, than through any kind of authoritative selection. To many this is, and always will be, folly; but we have staked upon it our all." United States v. Associated Press, 52 F. Supp. 362, 372 (D.C. S. D. N. Y. 1943). Mr. Justice Brandeis, in his concurring opinion in Whitney v. California, 274 U.S. 357, 375 -376, gave the principle its classic formulation:

    "Those who won our independence believed . . . that public discussion is a political duty; and that this should be a fundamental principle of the American government. They recognized the risks to which all human institutions are subject. But they knew that order cannot be secured merely through fear of punishment for its infraction; that it is hazardous to discourage thought, hope and imagination; that fear breeds repression; that repression breeds hate; that hate menaces stable government; that the path of safety lies in the opportunity to discuss freely supposed grievances and proposed remedies; and that the fitting remedy for evil counsels is good ones. Believing in the power of reason as applied through public discussion, they eschewed silence coerced by law - the argument of force in its worst form. Recognizing the occasional tyrannies of governing majorities, they amended the Constitution so that free speech and assembly should be guaranteed."

Thus we consider this case against the background of a profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open, and that it may well include vehement, caustic, and sometimes unpleasantly sharp attacks on government and public officials.

To summarize the decision, American libel law after the NYT case made it very difficult for a public figure to sue someone for criticism. Europeans and Singaporeans, in contrast, sacrifice free speech for more civility. This remarkable difference would not exist had the New York Times not chosen to fight a libel judgment all the way to the Supreme Court. Today, one wonders if the NYT would have authorized such legal fees for the sake of principle. Would shareholders today agree to receive fewer dividends if it meant spending money to establish a long-term legal principle? The more I think about it, the more I believe the New York Times and newspapers should go back to being privately held so they can focus on long-term trends rather than short-term shareholder whims. Perhaps the earnings release on July 23, 2008 will force that result if it is bad enough. If earnings are good, we win because NYT's stock goes up; and if earnings are poor, we win, because we might get a newspaper more focused on reporting, not pleasing shareholders.

Indeed, America's Founders--as much as they hated their newspapers (just ask Alexander Hamilton, whose affair was exposed by the media, making him the original Bill Clinton)--intended media outlets to be the "fourth pillar" of government, keeping it in check. But as media have consolidated operations and focused on profit, it is hard to see any real criticism of government policies. Having hundreds of channels and outlets competing for our attention has fractured the public and its ability to engage in deliberative democracy. Keith Olbermann and Jon Stewart aside, where are our modern-day Edward R. Murrows? It is a sad and telling commentary on today's media that the most critical pundits of government policies are a former sports newscaster (Olbermann) and a comedian (Stewart). As good as they are, we deserve better.

Here are some excerpts from the Supreme Court's decision:

Justice Black:

[S]tate libel laws threaten the very existence of an American press virile enough to publish unpopular views on public affairs and bold enough to criticize the conduct of public officials...We would, I think, more faithfully interpret the First Amendment by holding that at the very least it leaves the people and the press free to criticize officials and discuss public affairs with impunity...I doubt that a country can live in freedom where its people can be made to suffer physically or financially for criticizing their government, its actions, or its officials...An unconditional right to say what one pleases about public affairs is what I consider to be the minimum guarantee of the First Amendment.

Justice Goldberg is even better:

In my view, the First and Fourteenth Amendments to the Constitution afford to the citizen and to the press an absolute, unconditional privilege to criticize official conduct despite the harm which may flow from excesses and abuses...The theory of our Constitution is that every citizen may speak his mind and every newspaper express its view on matters of public concern and may not be barred from speaking or publishing because those in control of government think that what is said or written is unwise, unfair, false, or malicious. In a democratic society, one who assumes to act for the citizens in an executive, legislative, or judicial capacity must expect that his official acts will be commented upon and criticized...Our national experience teaches that repressions breed hate and "that hate menaces stable government."

Justice Brandeis from WHITNEY v. PEOPLE OF STATE OF CALIFORNIA, 274 U.S. 357 (1927) (a Bay Area/Alameda County trial case):

Those who won our independence believed that the final end of the state was to make men free to develop their faculties, and that in its government the deliberative forces should prevail over the arbitrary. They valued liberty both as an end and as a means. They believed liberty to the secret of happiness and courage to be the secret of liberty. They believed that freedom to think as you will and to speak as you think are means indispensable to the discovery and spread of political truth; that without free speech and assembly discussion would be futile; that with them, discussion affords ordinarily adequate protection against the dissemination of noxious doctrine; that the greatest menace to freedom is an inert people; that public discussion is a political duty; and that this should be a fundamental principle of the American government.

WSJ Article: Rage against the Machine

The Wall Street Journal published a James Grant (of Interest Rate Observer fame: article today titled, "Why No Outrage?"

In the old days, you'd expect a William Jennings Bryan preaching to the masses, and Howard Beale being mad as hell at Wall Street's alleged fleecing of the poor. But the William Bryan analogy isn't quite on point, and the populist movement was declared dead as early as June 1990. Take a look at this Kirk Scharfenberg Atlantic Monthly article, "Populism in the Age of Celebrity"--if it was published today, we wouldn't know the difference, even though almost two decades have passed:

Mr. Scharfenberg's point is we have elevated celebrity and materialism over quieter, more intellectual pursuits, and in doing so, have extinguished "deliberative democracy." To wit: "As a nation, we have lost the capacity to ponder events, reflect on their meaning, and act." Another point Mr. Scharfenberg makes is materialistic pursuits (e.g., studying the stock market) render us more separate from each other, while community-based pursuits (e.g., Little League) bring us together, allowing for active democracy and an exchange of ideas. Put another way, we reap what we sow; however, if we've sown and accepted materialism for the last eighteen years, then who's to blame for our current financial mess?

Overall, the constant strain of greed is probably just one factor in our current malaise. Capitalism seems made for constant boom-and-bust cycles, so when times are good, no one complains, and when times are bad, no one also complains because they expect the next bubble to be around the corner. To borrow from Churchill, perhaps consistently steady growth for everyone isn't as desirable as the inconsistent opportunity for unequal wealth. Thus, the recurring hangover America experiences every ten years seems vaguely familiar but not bad enough to want to actually do something about it.

Personally, I am conflicted about whether outrage is justified. There is no doubt we have become a more craven society, more harried, more avaricious, less God-fearing, and less civil. But we have also become more affluent, more connected through electronic advancements, less hungry, and less stagnant. In France, the youth riot because they cannot find jobs due to the socialist structure, which always favors older persons. In America, even most of the unemployed have televisions, food in the fridge, a car, a cell phone, and internet access. America is also more diverse than ever, and most of the economically vibrant cities have less than a 50% white, native-born population (Chicago, Miami, New York, San Francisco, San Jose, etc.). Even the South is revitalizing itself, as manufacturing moves back to cities like Louisville, KY and Huntsville, AL. It's quite a turnaround from the days of Bull Connor attacking his own city's residents and Sandra Day O'Connor being unable to find a job as an attorney after graduating at the top of her law school class.

So a question has to be asked: is it possible for civilizations to reach a saturation point in terms of progress? Is it possible that while America still has eons of progress remaining in terms of spreading wealth, increasing media diversity, reducing its prison population, and re-discovering a more peace-minded foreign policy, most of the work relating to the spread of basic comforts has already been done? Perhaps we do not riot like the days of Watts because we know we are better off than our ancestors and most of the current world population. As one satirist (P.J. O'Rourke?) has remarked, "When my young daughter tells me, 'Life is unfair,' I tell her, 'Honey, you live in the greatest country in the world. You're not starving. You will not experience government-sanctioned sex discrimination. You have economic prospects. You are relatively safe. You'd better hope life keeps being unfair to you.'"

As for William Jennings Bryan, some readers will remember him as a fiery populist ("You shall not crucify mankind upon a cross of gold"). Yet, almost no one knows the context of the famous gold gobbet. Bryan was attacking the banks for not lending farmers more money. Banks, as we all know, loan more money than they actually have. They can do that because the money isn't linked to any hard asset. A bank doesn't need one bar of gold to loan 100 dollars. It can have no gold in its vault and lend as much money as it wants. In the old days, however, the gold standard meant the U.S. could only loan money based on how much gold it had in its vaults, because it had to be able to redeem the paper money for gold at any time. So if the U.S. didn't buy more gold, it couldn't loan more money to the banks, and the banks couldn't loan more money to the people. The gold standard, by linking paper currency to a fixed quantity of gold, prevented banks from taking in two dollars and loaning the same two dollars to others four or more times through multiple loans. If we had a gold standard today, the subprime mess would not have occurred, because banks would not have been able to fund all the loans without unrealistic quantities of gold.

So when Bryan railed against the gold standard, he wanted more inflation and more loans, because his farmers were already in debt, and their customers didn't have money to buy their products/produce. This double-bind meant the farmers were not getting paid, and their debt was increasing. By advocating more inflation, the value of the farmers' debt would be reduced and more people would have money to buy their products, breaking the debt cycle. Thus, Bryan wanted exactly what we had from 2002 to 2007--easy money.

Lost in all the reporting on the financial crisis is the unprecedented access to money the poor had, leading to a small window of opportunity to escape a lifetime of low hourly wages. As Bryan discovered, easy money helps the poor when compared to having no money. Easy money allows the poor to buy homes. Easy money allows the poor to open a small business. Easy money helps the poor, who get greater access to new jobs created by the influx of new money to spend. Easy money hurts the rich, who see their savings reduced by inflation. In a stunning reversal that would have made Marx proud, shareholders--thought of as rich--took the hit along with the poor. The problem, then, wasn't easy money--it was financial mismanagement and greed on all sides. Such factors make it harder to get outraged. For example, my immigrant, middle-class parents were able to refinance their house at a low interest rate, freeing up more money to spend and giving them more security. At the end of the day, we've reaped what we've sown.

Having said all that, I'm going to let Howard Beale have the last words:

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!

We all know things are bad -- worse than bad -- they're crazy.

It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."

Well, I'm not going to leave you alone.

I want you to get mad!

I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you've got to get mad.

You've gotta say, "I'm a human being, goddammit! My life has value!"

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell, "I'm as mad as hell,
and I'm not going to take this anymore!"

Saturday, July 19, 2008

William Greider and Bill Moyers

William Greider wrote one of my favorite economics-related books, Secrets of the Temple: How the Federal Reserve Runs the Country. I've never heard him speak before, so when I saw him on Bill Moyers' PBS show, I eagerly watched. Mr. Greider also has a blog:

Here is his most salient post on our current economic mess:

Mr. Greider isn't a charismatic speaker, so hearing him speak was a bit anti-climatic; however, I will look forward to more of his writing. Mr. Greider made it clear the problem cannot be blamed on any one party, and the absence of financial regulation has long been the province of both parties since 1980. He indicated that a Democratic Congress did away with usury laws, thereby paving the way for the current Wild West of Wall Street.

His most interesting point was this: usury laws have been around since the beginning of religion and were designed on the common sense notion that moneylenders have more power than the poor and must be regulated to avoid enslaving the poor through one-sided terms. He believes the current subprime mess is a modern-day form of usury.

Full transcript is below, courtesy of PBS:

Another blogger had an interesting take on usury from Adam Smith's perspective:

Starbucks (SBUX) and the Economy

Starbucks (SBUX) published a list of stores it is closing across the United States. The WSJ published an interactive map of the store closings:

PDF file of store closings here:

I'm not a huge fan of Starbucks regular coffee (I prefer Peet's, especially the Guatemala blend), but it occurred to me that an economist or potential real estate buyer could use Starbuck's information to assess how well a local economy is doing. Starbucks would not be closing stores in a particular place if it believed growth was imminent.

Government's Role

A friend sent me a postcard that reminded her of me--it was very kind of her, and absolutely up my alley:

It is not the function of government to keep the citizen from falling into error; it is the function of the citizen to keep the government from falling into error. -- Justice Robert Jackson (Nuremberg Trial Judge)

The key point here is good governance is a two-way street. Citizens should be wary of government attempts to solve problems, because in the absence of omnipotence, unintended consequences will arise from government intervention. One recent example occurred around 1992, when Bill Clinton promised to limit CEO pay by placing a cap on salary deductions. Although it sought to limit CEO pay, Congress's one million dollar cap on the tax deductibility of salaries ended up with corporate boards increasing CEO pay to just under a million dollars. The result was that the middle class got their taxes hiked while the executives got more stock options.

Also, rarely does Congress pass a law with a view towards long term consequences. Such consequences could include the creation of a new enforcement agency (e.g. Homeland Security), more taxes diverted or raised to support the agency, and a broadening of power. Given this natural predilection to increase rather than decrease jurisdiction and scope, most laws ought to have sunset provisions that subject them to more debate down the line about whether they are still necessary. The way Congress currently passes most laws and regulations, they stay on the books forever and spawn new enforcement measures, whether they are necessary or not.

Wall Street Finally Calls a Bottom on Banking...5 days after I did

As readers know, I correctly called a short-term bottom in banking and was one of the few people to do so in the country. See July 14, 2008 post: "I am calling a bottom in well-capitalized regional bank stocks."

And here:

Now, after most bank stocks have jumped 20 to 50 percent, Wall Street deigns to tell the masses the bottom is in:

It just goes to show you don't need specialized training to correctly pick stocks. Peter Lynch and Warren Buffett made billions picking stocks at the right time. The best skill as a stock picker isn't being able to discern a company's future cash flow prospects, but to know when to buy a stock. It took me over ten years to get some intuition on the market. Timing beats good research--as we've just seen.

Friday, July 18, 2008

Choose Life. Choose a job. Choose your future.

Paul Kedrosky (from cited Sterling Hayden's Wanderer in his blog recently:

Little has been said or written about the ways a man may blast himself free. Why? I don't know, unless the answer lies in our diseased values. A man seldom hesitates to describe his work; he gladly divulges the privacies of alleged sexual conquests. But ask him how much he has in the bank and he recoils into a shocked and stubborn silence.

"I've always wanted to sail to the South Seas, but I can't afford it." What these men can't afford is not to go. They are enmeshed in the cancerous discipline of "security." And in the worship of security we fling our lives beneath the wheels of routine---and before we know it our lives are gone.

What does a man need---really need? A few pounds of food each day, heat and shelter, six feet to lie down in---and some form of working activity that will yield a sense of accomplishment. That's all---in the material sense. And we know it. But we are brainwashed by our economic system until we end up beneath a pyramid of time payments, mortgages, preposterous gadgetry, playthings that divert our attention from the sheer idiocy of the charade.

The years thunder by. The dreams of youth grow dim where they lie caked in dust on the shelves of patience. Before we know it, the tomb is sealed.

Where, then, lies the answer? In choice. Which shall it be: bankruptcy of purse or bankruptcy of life?

Here's the direct link to Paul:

It sounds a bit Communist in places ("brainwashed by our economic system"), but the overriding idea is true: when we remind ourselves what's really important in our lives, money won't be at the very top of our list.

In case you didn't recognize the title of this post, it's from Trainspotting, a film about the horrors of drug addiction (far better than any "Just Say No" government campaign). The addict in the film, Renton, has a less eloquent way of bashing an existence based on materialism. I've edited the curse words from his monologue after a reader complained. If you are interested in the full version, check out the video link below.

Choose Life. Choose a job. Choose a career. Choose a family. Choose a big television, choose washing machines, cars, compact disc players and electrical tin openers. Choose good health, low cholesterol, and dental insurance. Choose fixed interest mortgage repayments. Choose a starter home. Choose your friends. Choose leisurewear and matching luggage. Choose a three-piece suite on hire purchase in a range of f*cking fabrics. Choose DIY and wondering who you are on a Sunday morning. Choose sitting on that couch watching mind-numbing, spirit-crushing game shows, stuffing junk food into your mouth. Choose rotting away at the end of it all, pishing your last in a miserable home, nothing more than an embarrassment to the selfish brats you spawned to replace yourself.

Choose your future.

Choose life.

(Link above may not work after a while, but you can do a search using "Trainspotting Intro" to get a fresh link.)

Renton, as film-lovers know, chose heroin, making the materialistic existence he refers to above seem better to him. Ironically, his jaded view of "life" drew him to heroin, and had he been more materialistic, he might have been better off.

Thursday, July 17, 2008

Icahn's Board has Mark Cuban!

Carl Icahn's proposed Directors slate includes none other than Mr. Cuban. I am excited! I previously wrote about how Mr. Cuban had his eye on the ball:

What will happen if Mr. Cuban gets elected? Will he subject Jerry Yang to public criticism on a daily basis? Will he make Susan Decker work in a Dairy Queen for a day? With no commissioner to rein him in, this could be the beginning of a fun period at Yahoo...

I just realized Cuban might be at this year's shareholder meeting. I might wear my old Mav's Michael Finley jersey. "Fin" seems like one of the league's classiest players. He also majored in business management at University of Wisconsin.

Joe Nocera Has a Blog

Barry Ritholtz pointed his readers to a new business blog that looks promising:

Joe Nocera is a business writer for the NY Times. Of course, his blog is not as good as Barry's, at least not yet:

If you read one economics-related blog, read Barry's "The Big Picture."

Stocks Update, July 17, 2008

It's been a wild week, so I thought it would be a good time for a stocks update. Colonial Bancgroup (CNB) skyrocketed around 50% within three days after I called a bottom in banking stocks, and I recovered my losses and ended up making 10%. JP Morgan upgraded CNB today, causing a 20% jump. It's fun knowing I beat J.P. Morgan to the punch. Too often, investment banks upgrade stocks after an already-large run-up in the price.

I also sold Embarq (EQ), not because I dislike the stock's fundamentals, but because of a potential political problem. Congress questioned EQ about customer privacy. Apparently, some Congressmen believe that EQ covertly tracked users' internet activity. While there have no proven allegations, and EQ deserves the benefit of the doubt, I'm not willing to take the risk of a political fallout, no matter how nice EQ's dividend is.

Pinnacle (PNK), my largest loss in terms of percentage in the "Closed Positions" category, jumped 20% today. I sold earlier because the actual dollar loss was small and the market was being irrational. I don't know if I'd jump back in just yet--the market seems to be indiscriminately devaluing casino and restaurant stocks.

My major positions now are in PFE and CCT, with much smaller amounts in BLV and DBV. Preferred shares took a bath this week. I still can't figure out why. I picked up more CCT as a result.

You'll notice that BLV, DBV and CCT are not listed below in "Open Positions." I bought these stocks prior to publicly disclosing my individual buys and sells, so old positions are "grandfathered" for purposes of this blog. Prior to the recent market lows, I reduced almost all my positions, including mutual funds. Now, I hold no individual position more than 6,000 dollars, not even mutual funds (although one international bond fund will probably exceed 6,000 dollars due to dividend reinvestment).

I also changed the format of the statistics below. I spoke with a friend of mine, who correctly told me the overall averages between categories made no sense, because they valued completely different items. In order to have a proper average, I would have to go through and add up each and every trade and then divide them by the total number of all trades. For now, I am listing averages in each category only. Clearly, my ability to predict the market in the short term is much better than my ability to discern where the market is going long-term.

Numbers below are based on mid-day prices on July 17, 2008.

Open Positions

EWM = -10.84
IF = -11.8
PFE = -4.38

[Average of "Open Positions": losing/negative average 9.0%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PNK = -16.7%
PPS = -2.8

WYE = +2.4%

[Overall Record: Lost an average of 3.73%]

Held less than 7 days:
GE (1.0%); ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)

[Overall Record: Gained an average of 3.31%

PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)

[Overall Record: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 9.5%
[from May 30, 2008 (1385.67) to mid-day July 17, 2008 (1254

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.

Karachi Exchange

In America, when stocks plunge, we look for a bailout. In Pakistan, they let the market work out the kinks: "Investors have to learn to bear losses as they do gains," says a Pakistani money manager. See

One downside of free markets is someone bears the brunt of inequality. Here, the bourse had to call the police to protect it from unhappy investors: "investors broke windows, threw plant holders in the parking lot of the building and at least one protester was injured."

Pakistan's stock market has declined around 30% this year.

Wednesday, July 16, 2008

Colonial Bancgroup (CNB), July 16, 2008 Earnings

These last few days, I knew exactly how Gordon Gekko felt as he was getting screwed by Bud Fox on the Bluestar deal. Colonial Bancgroup (CNB) kept dropping for no reason, unfounded bankruptcy rumors swirling around it. But now, after a 40% (now around 30%) jump in CNB's price in just two days, having sold most of my position, I hopped in Bud Fox's shoes when he switched sides and worked with Sir Lawrence Wildman. In fact, I am so pumped, if someone gave me Daryl Hannah's phone number right now, I'd make that call, and I'd close the deal.

But wait--people forget Bud Fox didn't exactly have a happy ending. He got greedy and overconfident. That's why, after seeing CNB jump 40%, I sold most of my shares. The earnings release was not terrible--although CNB lost money (five cents a share), the bank still appears to be well-capitalized. The main information I wanted to see was the following: "Foreclosed assets rose by $94 million, bringing bad loans to 2.62 percent of loans and other real estate." A bad loan ratio of 2.62% is still far from the informal 5% threshold that indicates a bank won't be able to pay out a dividend or will need to take active measures to shore up capital.

I will wait until after the ex-dividend date, and then decide whether to hold the remaining shares. For now, however, it's good to be king, having correctly called a short-term bottom in well-capitalized bank stocks.

Colonial Bancgroup (CNB) Update on July 16, 2008

Two days after I called a bottom in CNB (and most other bank stocks), CNB went up over 40%. I sold some of my position, and I am waiting for CNB to release earnings in about 30 minutes. These are exciting, volatile times. I do like being right, and it looks like I was one of the few nationwide to correctly call at least a short term bottom in financial stocks.

For fun, check out Barry Ritholtz's post today titled "Idiots Fiddle While Rome Burns." I'm not saying it's as entertaining (true) as Cramer's famous meltdown on CNBC, but it comes damn close:

Even Robert Reich is getting into the act:

Tuesday, July 15, 2008

Colonial Bancgroup (CNB) and How to Value a Bank

A reader made a comment to the post below, indicating that CNB might be worse off than its total debt and total cash numbers indicate. He is correct--almost all banks are difficult to value today, because it is almost impossible to determine what percent of the debtors will be able to pay back their loans. The reader pointed me to the following link:

He believes that CNB is a risky investment because much of its debt is mortgage-related. Banks hold many different classes of assets--student loans, mortgage loans, small business loans, life insurance policies, home equity lines, and so forth. His analysis relies on an assumption that today, any bank holding significant mortgage-related or property-related loans in markets such as Florida, Nevada, and California will be distressed. I don't dispute that analysis; however, I also do not believe CNB deserves to be trading at 3 dollars a share, even with its risks. CNB will probably not collapse and as a result, five years from now, when property values recover, CNB will be lauded for being in high-growth areas.

In any case, CNB accelerated its earnings release to July 16, 2008. We will have a better idea of where the bank stands tomorrow. I can't imagine CNB would have accelerated its earnings release if there was worse-than-expected news involved, but common sense doesn't always apply in this panicked market.