Tuesday, September 30, 2008

Bailout = Monetarism in Action

I wanted to make another note about the bailout package, and why Wall Street wants it so badly. The overriding principle behind the proposed bailout reflects Wall Street's blind belief in the economic theory of "monetarism." This theory calls for pumping money into the economy to make it better during bad times. There is a joke that explains monetarism. It refers to Ben Bernanke in a helicopter dropping bags of money to random people. Unfortunately, this joke falls into the "funny because it's true" category.

Richard Duncan, in Chapter 3 of his book, The Dollar Crisis: Causes, Consequences, Cures , Revised and Updated, says that monetarism is like pouring water over a drowning child. He states,

The failure of those [liquidity calibration] attempts will be the death of monetarism, which claims that any economic difficulty can be overcome simply by adjusting the money supply up or down depending on the circumstances. It will be death through drowning.

To continue the analogy, pouring money into a shallow pool to attract more people doesn't mean people will suddenly learn how to swim--some people will drown as the pool becomes more dangerous.

I am surprised more news stories haven't mentioned the term, "monetarism." The absence of the term in new stories shows either the mainstream media don't know much about economics, or they think their audience can't understand economic theory.

Update: In The Predator State, James Galbraith has a prescient line about America's "unlimited privilege of issuing never-to-be-paid chits" coming to an end. The book also contains a scathing rebuke of monetarism (surprisingly, all the book reviews I've read never once mention "monetarism"). Galbraith also writes that managing interest rates, not the money supply (M1, M2, etc.), stimulates the economy. In other words, even if the government hands down a billion dollars, it doesn't ensure that the money is spent; in contrast, if the government lowers interest rates, it makes it easier for money to be lent and spent and used optimally within the economy.

Google Short Term Roundtrip Completed

In case you are following my trades, today, on 09/30/2008, I sold 100 GOOG at 412 dollars. I made 5.4% on the short-term trade. GOOG may go higher, but every wise investor's primary rule is, "Don't be greedy." Or, as Cramer says, "Bulls make money, bears make money, pigs get slaughtered."

Now I have to go figure out what is going on with Cypress Semiconductor (CY) shares. I know they spun off Sunpower, but Yahoo Finance is showing that CY shot up over 60% post-spinoff. I had some CY shares and bought more AMAT yesterday because it appears Obama will win the election; if so, solar power companies will benefit from his tax credit/subsidy plan. Even so, CY, the stand-alone semiconductor company, increasing 60+% (according to Yahoo finance) seems strange and incorrect.

More on the CY spinoff here: http://www.thestreet.com/story/10440059/1/a-wacky-debut-for-cypress-semi-stock.html

Update: I am now the proud owner of 17 shares of SPWRB. Spinoffs are always nice, especially when they are in tax-deferred accounts. Calculating a basis for spinoffs come tax-time deserves its own level of hell in Dante's Inferno.

Update: GOOG According to Yahoo finance, Google stock closed today at $320.50/share, but something fishy is going on. In after-hours, GOOG is trading at $413/share. Meanwhile, Google's finance page shows a closing price of $342/share. Thus, we have three different prices for the same stock. I always think some major player (Gordon Gekko reborn?) is manipulating shares somehow when this kind of discrepancy occurs.

Inefficiency happens more frequently than people would like to admit. For example, when I placed my trade to buy 100 shares of GOOG at a market price, I bought shares at $391--even though immediately before the trade, and immediately and at least a minute after the trade, GOOG shares traded around $388. Someone pocketed (stole?) the three dollars. Multiply that by thousands and millions of shares traded daily, and you can see that someone is making massive amounts of money.

Monday, September 29, 2008

Google a Short Term Trade?

On September 29, 2008, I bought 100 shares of Google (GOOG) at around $391 per share and may buy more tomorrow. I am optimistic that once the bailout package is re-worked, it will be passed on Thursday, and the overall stock market and Google stock will increase.

Google has several short-term catalysts:

1. The Google phone (the T-Mobile HTC G1) is set for a timely launch; the iPhone craze has subsided, allowing consumers to notice a competing product; and for now, the G1 lacks any problems, such as the launch problems Garmin (GRMN) is having with its nuvifone.

See U.K. article below for more information on the G1:


2. The U.S. Antitrust Department should not interfere with the Google-Yahoo deal. Jeff Jarvis has an excellent article on this issue:

[T]he problem with going after Google is that - unlike typical monopolies - it didn't steal its booty like a pirate in the night. It didn't win by being closed and proprietary. Google won by being open and distributed - which is not the image of the monopolist.

(from http://www.guardian.co.uk/media/2008/sep/15/digitalmedia.google)

3. As stated above, the House will pass a revised bailout bill soon, and the market should jump at least 200 points on that day. Short-term volatility will favor companies unfairly beaten down by the financial sector, such as State Street Corp. (STT), which didn't directly invest in subprime, and cash-rich companies, like Google (GOOG).

On a side note, when I bought the Google shares, I placed a market order rather than a limit order, causing the trade to execute at 391 rather than the lowest available price (at the time) of 388. Remember: when trading in volatile markets, place a limit order.

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.

"Blame it on the River"

The blog, "The Pendulum Swings," has one of the best macro-views of the current financial crisis:


Today, Congress failed to pass the bailout bill (the Emergency Economic Stabilization Act of 2008), causing the Dow to drop 700+ points. The Nasdaq took an even harder hit, falling over 9%.

I took the opportunity to add to some positions. Some positions I had partially sold two months ago returned above the 2,000 dollar threshold, so I am re-including them on the Stocks Update. Below are percentages as of 12:25PM on September 29, 2008. It's not a pretty sight, but the open positions are in retirement accounts, so ten years from now, I hope to have the last laugh.

Open Positions
CCT = -13.86
EMC = -13.88
EZU = -15.73
GXC = -13.92

IF = -29.79
SWZ = -12.34
VPL = -11.24
YHOO = -12.86

[Average of "Open Positions": losing/negative average 15.44%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
EWM =-11.61 [sold 9/22/08]
EWS = -12.98 [sold 9/22/08]
GE = -6.4
GLD = +8.61 [sold 9/22/08]
INTC = 0.0 (excluded from average; insignificant movement)
KOL = -10.36
PFE = -5.5
PNK = -16.7
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4

[Overall Record for 7 days+ trades: lost an average of 3.92%]
-50.90 / 13 trades]

Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; [GOOG (5.4) [9/29 - 9/30]]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), KOL (13.2%) [9/17/08 to 9/19/08]; NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08]

[Overall Record for ultra short-term 2 to 7 days trades: gained an avg of 3.49%
[41.9 / 12 trades; doesn't include GOOG trade on 9/30]

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 for daytrades: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 18.82%
[from May 30, 2008 (1385.67) to mid-day September 22, 2008 (1124.84

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, September 28, 2008

Pan's Labyrinth

Because this blog is dedicated to economics and the law, I don't usually share movie recommendations. However, Director Guillermo del Toro's film, Pan's Labyrinth, is too good for me to keep private.

Mr. del Toro, like other great directors, leaves a unique, identifiable mark on his films. His films are characterized by an authoritarian presence; an idealistic character who rebels against authority and overprotective adults; a reminder of the horrors of armed conflict; and an otherworldly presence whose loyalty is unknown until the end of the film.

Roger Ebert called Pan's Labyrinth a fairy tale for adults. I'd describe it as a grown-up version of The Lion, the Witch, and the Wardrobe. Mr. del Toro reminds us to question authority and to listen to the wisdom of children. In this day and age, as we become more and more affluent, it is too easy to forget about the sacrifices our ancestors made to create a more civilized society. Without being heavyhanded, Mr. del Toro shows us the sacrifices we have made--and those we should never make.

Mr. del Toro directed another film, The Devil's Backbone, a darker and less polished film. The Devil's Backbone has similar elements as Pan's Labyrinth and effectively functioned as a warm-up for Pan's Labyrinth. If you want to see three great international films, watch Juan Antonio Bayona's The Orphanage, The Devil's Backbone, and Pan's Labyrinth, in that order.

Saturday, September 27, 2008

Andrew Jackson on Government

Former President Andrew Jackson on government:

There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and low, the rich and the poor, it would be an unqualified blessing.

President Jackson makes sense, until you realize government necessarily favors some groups over others in making laws and deciding what laws to enforce. Equal enforcement and equal protection are seldom-practiced, idealistic theories. President Jackson himself should have seen this--the rains he mentions affect some parts of the country, not all, and are dispersed unequally.

Friday, September 26, 2008

Katha Pollitt's Take on Sarah Palin

The Nation's Katha Pollitt has an immensely entertaining piece on Sarah Palin:


"If she wasn't a big reactionary, she'd make a fantastic community organizer."

"But let's be real: There is just no way Palin is equipped to be vice president, much less president. She doesn't know enough; she lacks the necessary grasp of, and curiosity about, our complex world; her political philosophy could fit on a bumper sticker: Us versus Them."

Yes, it's a lefty view, but it's great writing, so I had to share. I had no idea McCain's campaign demanded and received special debate rules for the Biden-Palin debate. Shame on McCain for making such a demand.

Katha Pollitt has a blog: http://kathapollitt.blogspot.com/

I can't believe I haven't read more by Ms. Pollitt. She is joie de vivre personified.

[Note: this post has been modified since its original publication.]

Tom Toles on Debt Addiction

Tom Toles delivers another scathing, hilarious cartoon. This one's from February 28, 2008 (Washington Post). I love the comment at the lower right hand side.

WaMu: No Safeguards Lead to Collapse

I have accounts with WaMu and am happy that JP Morgan has taken them over. JPM's James Dimon has the respect of many investors and Wall Street, and thankfully, my deposits are safe at WaMu. I just read this article in a legal magazine about WaMu, and it's no wonder the bank collapsed. Take a look at this story, where WaMu gave 43 loans (25 million dollars) to one couple, revealing a complete lack of safeguards or risk controls:


If the Fed is correct--that it is buying undervalued securities that will eventually increase in value when the real estate market stabilizes--then JPM would be a good buy. In effect, JPM has partnered with the Fed in its new debt issuance and stands to gain or lose like the Fed. I had considered buying JPM stock, but the stock increased 11% today. It looks like I missed the boat.

Thursday, September 25, 2008

Malaysian Blog re: Racialism

The former Prime Minister of Malaysia, Dr. Mahathir Mohamad, has a blog (www.chedet.com). He recently wrote a post imploring his people to set aside racial issues and work together. It reminded me of Obama's plea to Americans to come together. Malaysia has three major ethnic groups--Malay, Chinese, and Indian--and apparently, segregation is more common than not, and quotas favoring the indigenous Malays have hurt racial relations. See the post here:


America is similar to Malaysia in the sense that we also have three major ethnic groups--Caucasians, Latinos, and African-Americans--and to some extent, de facto segregation, even in diverse cities. Americans should keep an eye on Malaysians to see how they deal with their diverse population. We may be able to avoid making their mistakes and learn from their successful policies.

Wednesday, September 24, 2008

Fantasy Sports

At Yahoo's (YHOO) shareholder meeting, I mentioned the curious lack of attention given to Yahoo's wonderful fantasy sports franchise. Today, I noticed an article listing Yahoo as the top online destination for fantasy sports. It looks like Yahoo has only recently begun focusing on increasing revenue from its fantasy sports platform. Better late than never:


Also, ESPN's Bill Simmons wrote an article about how fantasy sports have finally moved into the mainstream, to the point where if you're not involved, you're considered unusual:


Financial Illiteracy

Teaching our children financial literacy is essential not only for their well-being, but for ours. A nation of inept spenders does not bode well for any of us. On August 11, 2008, the Wall Street Journal published my one-sentence letter on the topic, which related to an article about teachers unable to handle their own investing. I wrote, "We are entrusting our children to people who can't handle basic investing and, somehow, we wonder why we end up with financially illiterate adults."

Braun Mincher wrote an article advocating for more financial education, and I am pleased to see more attention being given to this topic:


Sadly, research shows that financial illiteracy has reached epidemic levels with no end in sight.

I couldn't agree more. No child should graduate high school without understanding, at the very minimum, the impact of interest rates, the role of the Federal Reserve, and the wonders of compound interest.

Update on January 17, 2009: here is a link to my August 11, 2008 letter. I'm not sure if it's a permalink, but it's working for now.

Tuesday, September 23, 2008

Do American Bailouts Mean We've Become French?

An amusing article on how America has become like France:


Le Royale with cheese, anyone?

America's Account Deficit

An oldie but a goodie, from C. Fred Bergsten, Peterson Institute, February 1, 2007:


Our external deficit has risen by an average of $100 billion annually over the past four years. It has climbed by an annual average of $80 billion for the past nine years. The trajectory, as well as the level of the imbalances, is clearly unsustainable.

In the background, you can almost hear Jack Nicholson bellowing, "You can't handle the truth!"

Monday, September 22, 2008

OCM: Other Countries' Money

Despite the failure of several financial institutions, the decline in worldwide stock markets, and unprecedented foreclosure activity, the average American still has no idea how much trouble we're in. America has become beholden to the international community’s willingness to lend us money. I haven’t seen anyone coin “OCM” as a phrase, but whenever you see someone using their credit card, mention OCM—Other Countries’ Money. OCM means realizing our money isn’t ours because of the massive deficits our government has incurred through its spending. Having a deficit means we are borrowing other countries’ money through the form of Treasury and bond sales. By running deficits and spending more than we make/collect, each cent we make no longer belongs to us—it belongs to our international creditors. As a result, we have lost financial control of our own country. If we had a surplus, for example, national healthcare would be a no-brainer. But after Iraq and the bailouts, we are now a nation of beggars. As the old saying goes, “beggars can’t be choosers.”

How did we get to this point? Less than a decade ago, we had a surplus. In 2001, President Bush inherited a 128 billion dollar surplus. Now, we have almost a half a trillion dollar deficit—and that’s just for the year 2009.


It gets worse. Overall, people agree we have a debt of at least 9 trillion dollars, although some entities, like the Peter G. Peterson Foundation, peg our national debt at an even higher number, 52.7 trillion dollars--see http://www.pgpf.org. The numbers have gotten so large, they seem almost imaginary, like Monopoly money, and that’s the danger—at a certain debt and spending level, the American dollar will lack credibility against the Euro, yen, and Swiss franc, not to mention gold. If the American dollar loses credibility, the entire worldwide financial system will be at risk. If that sounds too “Mad Max” for you, you just need to understand this key concept: we are debtors, and debtors don’t get to make the rules. When I hear people say they want to tie restrictions and regulations on AIG, Merrill Lynch, Fannie Mae, and Freddie Mac in exchange for taxpayer money, I cringe. It’s not “taxpayer” money, any more than the money given to you by your credit card company is “your” money. The money belongs mostly to the Japanese and Chinese, who have lent us trillions of dollars by buying up U.S. debt, bonds, and preferred shares. If we want them to continue financing our lifestyle—which they will do, because few other places contain citizens so willing to spend—they set the terms of the bailouts, not us. Thus, I have no interest whatsoever in what regulations and rules Americans believe should be passed prior to doling out the money to AIG et al. It’s not our money we’re giving to AIG et al—it’s the creditors’ money, and creditors make the rules because they hold the purse.

I am far more interested in what the Japanese and Chinese think about the bailouts. The fact that they are not demanding major restrictions is a pleasant surprise. Singapore and other sovereign wealth funds have lost billions of dollars loaning money to MGM Grand and other American companies. It’s a miracle they are not demanding more concessions or protection for loaning us money. The equivalent of what just happened—especially with Japan's Mitsubishi recently willing to buy up to 20 percent of Morgan Stanley—is like you and me going on a shopping spree, running up 1000 dollars in debt while unemployed, and coming close to declaring bankruptcy—only to have our credit card company reward us with a higher credit line and no punishment.

In large part, international investors are willing to forgive our transgressions because of the bailouts. The bailouts wiped out stockholders (held mainly by Americans and non-Asian investors) and preserved Fannie Mae’s and Freddie Mac’s bonds (held mainly by Asian and international investors). Thus, the bailouts were designed to convince our creditors America was a safe place to invest.

From March 2019
Only as a secondary effect might the government intervention, using taxpayer money, help American homeowners by increasing liquidity (“liquidity” being dependent on Japan and China continuing to put us in more debt by giving us more of their money). Government intervention worked—Asian markets recently swung back from double-digit declines, and liquidity is being restored to the worldwide economy. Some Americans have used this increased stability post-government-intervention to believe that deregulation itself was a bust or the cause of our financial collapse. Nothing could be further from the truth.

No rule or law could have saved us from ourselves and our greed. Remember that Warren Buffett himself called financial derivatives “weapons of financial mass destruction” in early 2003—over five years ago. See


If someone with Mr. Buffett’s profile pointed out financial problems using language signifying the severity of a nuclear bomb and was unable to get anyone to take him seriously, what hope would a law have against this kind of indifference?

We had and have numerous laws to prevent financial and mortgage fraud. Laws against fraud exist in every state, and even if no express state statute exists, common law fraud can be pled in any county courthouse. Also, if you live in a company-friendly town, you can bypass your local state court judge and go to federal court under a 1968 federal law, the Truth in Lending Act (TILA). Thus, state and federal laws already exist to prevent financial fraud against consumers and homebuyers. Yet, no law could have prevented a bank from having lax standards for granting loans. Even if such a law existed, it may have forced a working class family to become permanent renters by requiring excessive upfront capital. In other words, laws don’t fix problems—they just arbitrarily create winners and losers. Furthermore, no law could have changed the common practice of mortgage brokers and real estate agents falsifying loan applications. Even if every D.A. in every county had dropped homicide cases in favor of prosecuting mortgage fraud, there would have been plenty of fraud to go around.

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.

Overall, deregulation has helped the American consumer. Just twenty five years ago, the idea of an average college student being able to fly to Iceland and back was laughable. But the government deregulated airlines, and consumers have received low prices—just check out Southwest Airline’s deals. And that cell phone you have, with the cheap 1000 minutes a month? If the government hadn’t broken up Ma Bell in order to deregulate the telephone industry, you’d be paying twenty cents a minute because of regulations designed to help AT&T maintain a monopoly. The list goes on.

Deregulation is devastating only when unethical people are involved. For example, energy deregulation in California was working initially, until Enron decided to actively steal from Californians and intentionally increase the price of electricity through various shenanigans. The common factor in any bubble’s existence and inevitable collapse isn’t deregulation, but a lack of ethics. Stories from yesteryear indicate that local bankers knew more about their debtors than the local church. Whether apocryphal or not, the very idea that a banker today knows all of his debtors’ financial situations intimately is amusing—and that kind of ignorance should scare all of us.

It wasn’t just leverage that caused this financial collapse—it was the attenuated way in which various people could make money. For example, a mortgage broker could loan hundreds of thousands of dollars over the phone to an applicant or after meeting him for half an hour and filling out some forms. After this initial contact, the broker had no interest whatsoever in the applicant/debtor. The broker received a fee from the bank for giving it the loan, and the bank sold the loan it generated to other investors as part of a larger package. The story is old now, but deserves to be told, because too many people miss its crucial point: attenuation leads to irresponsibility.

The financial debacle had nothing to do with regulations, or lack thereof. It had to do with our society itself, and how year after year, cities get larger, neighbors rarely see each other, and no one can reasonably promulgate a set of core principles each and every American believes in. We have become so reliant on laws rather than personal trust that we've had to pass laws to protect people when they help others. Many states have passed laws protecting Good Samaritans from being sued for helping others if their assistance unintentionally results in further injury. In other words, in some states, if you help a woman on the street replace a tire, and her tire happens to blow up in the middle of the street through no fault of your own, you can be sued for negligence and lose your life’s savings as a result. When a law has to be passed to counteract other laws that discourage others from lending a helping hand, something is deeply wrong, and the absence of laws is clearly not the problem.

I wish I knew the solution to our modern economic problems. I am too pessimistic to decree an amorphous form of morality as the solution—morality is so vague and subjective, it can masquerade as homophobia, Jim Crow, anti-Mormonism, or anti-whatever-the-minority-is. But capitalism, we too often forget, relies on mutual trust. I trust that when I make a loan, it will be paid back. I trust that when I give you a dollar, the paper will be honored by the next establishment when I want to buy something. I trust that a mechanic won’t rip me off if I go to get my car fixed—and if I don’t trust any mechanics, that means I have to do it myself and not spend any money, which restricts the economy. As another writer once pointed out, currency has value because it flows, like a current. Value is created when money moves from person to person and is worth nothing standing still.

If I had to venture a guess about to increase trust and ethics, I’d try to fix two problems: one, a non-stop treadmill of working hours that takes people away from their loved ones and their friends, creating higher living expenses and less time for parents to teach their children anything; and two, a lack of corporate responsibility to long-term shareholders and customers. As more people change residences and products more often, corporations become disinclined to foster long-term relationships and instead chase the bottom line, knowing they might never see a particular customer or resident again.

How do we fix these problems in an era of increasing competition? That’s the trillion dollar question. Unfortunately, we won’t get an answer if we wrongly frame the debate in terms of what laws to pass and how to increase regulation. The debate should be about OCM and realizing we are debtors who have made our children beggars because of our fiscal irresponsibility. It’s a painful truth to admit, but admit it we must—the first step to overcoming addiction to OCM is admitting we have a problem.

© Matthew Mehdi Rafat

Update on 2/28/2009: more on local bankers, from Warren Brussee's The Great Depression of Debt:

In the past, local banks gave mortgages to area home buyers, and the banks kept those mortgages. That was a big source of the bank's income, so they were careful about who got those mortgages. Banks verified income, employment, and past payment history. And they did their best to make sure that people did not get over their heads on the amount of their mortgages because they realized the high costs of foreclosures even if homes could be sold at their current market prices. There even seemed to be a morality involved, and bankers were looked up to in their communities as conservative protectors of wealth. [page 40]

Update on 8/13/2010, from Niall Ferguson's The Ascent of Money, page 262, Penguin, 2008-9:

"Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart [in It's a Wonderful Life] knew both the depositors and the debtors. By contrast, in a securitized market (just like in space) no one can hear you scream--because the interest you pay on your mortgage is ultimately going to someone who has no idea you exist."

Update: if you want to make the above issues very simple, focus on leverage. Leverage continues to be the major catalyst of financial collapse, along with a lack of diversification. In 2004, the SEC exempted investment firms with a market capitalization of over $5 billion from the net capital rule. Thus, Goldman Sachs, Lehman, Bear Stearns, and Morgan Stanley were no longer governed by the 12 to 1 leverage limit. These investment firms promptly increased leverage dramatically, sometimes up to a 40 to 1 ratio. The stock market soon became a casino instead of an efficient place to start up or evaluate companies. Not surprisingly, several firms collapsed or had to change their corporate structure. The exact same thing happened before, in 1998, with the most famous hedge fund at the time, LTCM:

"At the end of August 1997 [prior to the its collapse in August 1998] the [LTCM] fund's capital was $6.7 billion, but the debt-financed assets on its balance sheet amounted to $126.4 billion, a ratio of assets to capital of 19 to 1...On Friday 21 August 1998, it lost 550 million--15 per cent of its entire capital, driving its leverage up to 42:1." (Niall Ferguson's The Ascent of Money, pages 324, 327, Penguin, 2008-9)

Bonus: "In 2007, the United States needed to borrow around $800 billion from the rest of the world; more than $4 billion every working day. China, by contrast, ran a current account surplus of $262 billion, equivalent to more than a quarter of the U.S. deficit." (Niall Ferguson's The Ascent of Money, page 355,
Penguin, 2008-9)

Update and counterargument on 5/25/12, from The Atlantic Monthly (June 2012), by William Cohan ("How We Got the Crash Wrong"): 

"[T]he truth is that in recent decades, Wall Street firms have almost always been highly leveraged. For instance, according to a 1992 study by the U.S. General Accounting Office (now the Government Accountability Office), the average leverage ratio for the top 13 investment banks was 27-to-1 midway through 1991 (up from 18-to-1 in 1990). A subsequent GAO report, in 2009, noted that the big Wall Street investment banks had higher leverage in 1998 than in 2006. According to SEC filings, in 1998, the year before it went public, Goldman Sachs was leveraged at nearly 32-to-1, while in 2006 it was leveraged at 22-to-1. In 1998, Bear Stearns’s leverage was 35-to-1; in 2006, its leverage was 28-to-1. Similar patterns applied at Merrill Lynch and Lehman Brothers. To be sure, leverage has fluctuated over time: In the early 1970s, for instance, it was generally below 8-to-1. But in the 1950s, it sometimes exceeded 35-to-1. Of course, even a dollar of debt is too much if you are clueless about how to manage risk..." 

"The problem on Wall Street has never been about the absolute amount of leverage, but rather about whether financiers have the right incentives to properly manage the risks they are taking. During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation--and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses.  People are pretty simple: they do what they are rewarded for doing." More here

From Nader A, on 5/26/12: "Leverage is not new--applying it to complex derivatives is over the last 15 years is. The LTCM group used to arbitrage penny differences on equity and fixed income markets, but with leverage, they could profit in the millions, until everything turned (mostly because short term liquidity changed). Someone once said of LTCM, "You guys are picking up nickels in front of steamrollers," meaning they were scooping up small differences but with large amounts of leverage.The real changes in Wall Street are "Off the balance sheet obligations." Balance sheets, income statements and cash flows do a poor job showing what a company potentially owes, which could change drastically over time.  For example, Enron used Special Purposes Vehicles to stash debt from their balance sheets, but did not show their financial obligations when the SPVs soured. Lehman used repos to transfer debts before quarter ends. CDSes sold by banks started to increase in balance sheet obligations as debts widened. The problem in Wall Street today is that the current financial reporting does not reflect future obligations when "things change"; instead, it reflects current, optimistic, and biased asset values, which is okay until you have a "black swan" event.  The other thing about [complex] derivatives is that it obfuscates the problem. The recent JP Morgan trade that went bad was a derivative based on a derivative based on a derivative. Once you apply leverage to complex, multi-level derivatives, then the problems become systemic. So with respect to the sovereign debt problems in Europe, it's not as much the problem of Greece defaulting, as it is the banks holding the debt falling into insolvency and triggering a cascade of derivative swaps." 

Update on 6/3/12: from Sebastian Mallaby's 2010 book, More Money than God: "Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on.  When banks can pocket the upside while spreading the cost of their failures, failure is almost certain." (pp 13, hardcover, Penguin Press)

Re: the difficulties regulating leverage: "In the wake of LTCM's failure, Greenspan and his fellow regulators could see that the real challenge was the leverage in the financial system writ large.  Ironically, this was what Soros had tried to explain to Congress in his testimony four years earlier. Sure enough, the culprits in the crisis of 2007– 2009 were leveraged off-balance-sheet vehicles owned by banks (known as conduits or structured investment vehicles, SIVs), leveraged broker-dealers, and a leveraged insurer. Hedge funds were not the villains.

If hedge funds were only part of the challenge, why didn't regulators clamp down on the wider universe of leveraged investors? Again, the answer echoes 1994: The regulators believed they lacked a good way of doing so. They could not simply announce a cap on leverage: The ratio of borrowing to capital was an almost meaningless number, since it failed to capture whether a portfolio was hedged and whether it was exposed to risks via derivatives positions. Regulators could not simply cap hedge funds’ value at risk, either: LTCM’s collapse had shown that this measure could be misleading. The frustrating truth was that the risks in a portfolio depended on constantly changing conditions: whether other players were mimicking its trades, how liquid markets were, whether banks and brokerages were suffering from compromised immune systems. The Fed’s Peter Fisher, who was at the center of the regulatory brainstorming following LTCM, could see the theoretical case for government controls on hedge funds and other leveraged players. But it seemed so unlikely that the government would get the details right that he never pushed for action." (pp. 245-246)

Update on 6/24/13: Michael Lewis warned about collateralized mortgage obligations back in November 1989: "The CMO stands for collateralized mortgage obligations, but bond salesmen call it 'toxic waste.'"  (originally published in November 1989 in Manhattan, Inc.; re-published in Michael Lewis' The Money Culture, paperback, W.W. Norton and Company, pp. 105 (1991))

Update on 11/0/14:"Although they are established to protect both the security of ownership and that of transactions, it is obvious that Western systems emphasize the latter.  Security is principally focused on producing trust in transactions so that people can more easily make their assets lead a parallel life as capital." -- Hernando de Soto, The Mystery of Capital (2000), paperback, pp. 62. 

Update on July 2017: "As a man who did business with other people's money, the banker had to be intensely respectable... 'The function of bankers is to be trusted, not to be liked.' 'Adventure is the life of commerce,' wrote Walter Bagehot, first editor of The Economist, 'but caution, I had almost said timidity, is the life of banking.'" -- from The Bankers: the Next Generation (1997), by Martin Mayer, hardcover, pp. 5.

"[A]s Charles Rice of Florida's Barnett Banks puts it, 'The Harvard Business School never graduated an MBA that can't be hornswoggled by the businessmen of the Florida panhandle.'" -- Id. at pp. 10. 

James Surowiecki on Financial Public Perception

Another great article on financial excess by James Surowiecki:


Mr. Surowiecki has a knack for telling the straight story, no matter how complex the facts.

Symantec Corporation (SYMC) Shareholder Meeting

Symantec Corporation (SYMC) held its annual shareholder meeting today at its Cupertino, CA headquarters. Available food included a small spread of Starbucks coffee and untoasted bagels, with some juice drinks on ice. Shareholders received a free copy of Norton 360 Version 2.0 and a zip-up notebook with a pen and calculator inside.

There appeared to be about 25 employees attending, plus around 4 to 10 non-employee shareholders. Helyn Corcos, VP Investor Relations, was in charge of the logistics of the meeting. Ms. Corcos seems very detail-oriented and asked me to rewrite my full name on the sign-in sheet (my handwriting is usually illegible), and then noticed I held my shares in street name, i.e., through a broker. She referred me to another person, Mr. Wilcox, who indicated I could not vote at the meeting, because I had not requested a legal proxy. Later, Mr. Wilcox accepted my legal proxy and politely explained the process of converting the street proxy into a legal proxy. (A shareholder should mark on the ballot that s/he will be voting in person, and then mail his/her voting ballot back to the brokerage, after which it will send a legal proxy. I knew all this, but sometimes the ballot comes in the mail too late to mail it back and receive a legal proxy in time.)

Symantec's CEO and Chairman, John Thompson, led the entire presentation, starting with the formal part and then moving to the informal presentation. A link to Mr. Thompson's background is below:


Mr. Thompson's informal presentation started with some company background. After explaining that Symantec helps consumers and corporations manage digital content, he pointed to four focus areas: control (handling your digital environment); security (adding that "keeping good things in is as important as keeping bad things out"); compliance (legal requirements); and availability (accessibility of your information). He mentioned Walt Mossberg's glowing review of Symantec's latest Norton Internet Security program:


Mr. Thompson said "the number one issue is managing complexity," and Symantec's overall strategy was to "secure and manage" digital content. More specifically, Mr. Thompson identified five strategic areas:

1. Growing core franchises (security, etc.)
2. Scaling high growth businesses (data loss prevention, etc)
3. Seeding longer term growth (e.g., virtualization)
4. Going international
5. M&A

Symantec is in a good business. Data loss prevention is experiencing a 93% growth rate as more people buy computers and are willing to pay for online security. Symantec is ranked first in multiple categories in terms of market position and has a 58% market share in the fast-growing data loss prevention business.

Mr. Thompson said the company would use 1/2 of CFFO (cash flow from operations) for share buybacks, a very good sign.

The Q&A session started. I asked how Symantec differed from McAfee. I asked this same question from McAfee's CEO, who initially gave a confusing answer. Mr. Thompson's answer was clear and concise. He said McAfee focuses primarily on security, whereas Symantec has a dual focus of giving customers security as well as recovery tools. Mr. Thompson implied McAfee doesn't focus on helping its customers beyond avoiding disastrous online attacks.

Another shareholder asked about the Veritas acquisition. (Symantec bought Veritas and its large enterprise storage business in late 2005.) While seemingly a natural fit--Symantec does data protection for large enterprises, and Veritas handles storage for large enterprises--the acquisition ran into problems that have weighed down Symantec's share price. Symantec's shares were trading around $30 prior to the acquisition and now trade around $19, up from a 52-week low of $14.54.

This is where Mr. Thompson shined. Some CEOs will attempt to duck and dodge bad news, like MGM's CEO, who made overly optimistic comments at his most recent shareholder meeting. Other CEOs get upset at bad news or hard questions, like Enron's former CEO. But Mr. Thompson immediately took responsibility and didn't try to blow any smoke. He said that the execution of the Veritas acquisition has not been stellar, but has improved over the last twelve months. His answer was just the right length and with the perfect tone. I left thinking he knew exactly what the problem was and was on top of it.

Another shareholder asked about Mr. Thompson's thoughts on the recent financial turmoil (e.g., Lehman Bros and Merrill Lynch). Mr. Thompson said the underlying dynamics of his business have not changed--only the identity of the buyers/customers might change. He also indicated that financial companies cannot avoid online security compliance. He then turned the question over to the CFO, James Beer, who confirmed that 98% of Symantec's $2 billion were in banks (cash) or money market funds, not risky or illiquid instruments [such as auction rate securities].

I asked whether Symantec was working with VMware (WMV). Mr. Thompson said that Symantec was working with VMware and had demonstrated the "best backup capability" and very strong endpoint virtualization. He said Symantec might compete directly with VMware in the endpoint market rather than partner with it, because the nature of the software business fostered competition. (This can't be good news for VMware.)

Another shareholder asked a general question about phishing, and COO Enrique Salem said Symantec was working on numerous anti-phishing defenses, including "trustmarks." The meeting ended shortly thereafter.

After the meeting, I got a chance to hear Mr. Thompson speak informally with several people. Mr. Thompson has a gift when it comes to storytelling. He talked about a recent salmon fishing trip, which took place in an exclusive area. From a small story about fishing, he expanded into bears, even detailing an age range in which young male bears are the most dangerous. He expressed more interesting tidbits, like how you shouldn't get between a mother sow (pig) and her young offspring. He talked about silver salmon (after returning to their spawning stream, their coloring changes from pink to pale grey) and why you wanted to catch them right before or after they hit freshwater (they are used to saltwater, so when they hit freshwater, their skin "degenerates"--goes from pink to silver). When I was done listening, I came away thinking this is a man who notices the details and is a natural-born leader. I realized right then and there that Mr. Thompson is one of the most charismatic CEOs in Silicon Valley.

So much of enterprise security sales is about sales ability--the underlying software products aren't yet so different that technology is the primary differentiator. Having a CEO like Mr. Thompson provides Symantec with a clear advantage over competitors, because he is someone you want to listen to and have a drink with. Contrast this with McAfee's CEO, who, while certainly a nice man, doesn't inspire confidence and seems to throw out terms he doesn't fully understand to impress an audience. His offhand, irrelevant mention of the Basel II Accord still rings painfully in my head. I don't claim to understand it 100% either, but even the Dallas Federal Reserve Bank president declined to answer a question about Basel II publicly in a recent Commonwealth Club speech, saying it was too complex for a short answer and the questioner should speak with him privately.

It's worth noting that Symantec's meeting was very well-run--everyone knew what they had to do and adapted when necessary. When there was some static at Mr. Thompson's microphone, several people jumped and tried to fix it without interfering with the presentation. In contrast, during McAfee's shareholder meeting, I got the feeling that no one had spent substantial time planning the meeting in advance. In fact, one of McAfee's employees seemed upset non-employee shareholders had come to the meeting. Here, Mr. Thompson recognized a shareholder from last year and said hello.

If you're ever in a room with Mr. Thompson, go hear him speak. He's charismatic, dignified, and prepared. Mr. Thompson didn't just talk about salmon fishing after the meeting. He also briefly discussed politics. Not surprisingly for a man who has a preternatural ability to put people at ease, he said he supported Barack Obama because he was dismayed at how the country was becoming divided. He said we needed to work together, and he favored "statesmanship rather than brinksmanship." Regardless of your political beliefs, Mr. Thompson's natural leadership ability is exactly what shareholders should value in a CEO whose business involves sales. Between McAfee and Symantec, there is no question that Symantec appears to have a more professional management team. However, both McAfee and Symantec lack true diversity--there are no Asians/Indians on their Boards or in top management positions, which is an unforgivable oversight when some of the fastest growing markets are India, China, and possibly Vietnam. In time, I hope this oversight will change, but when the main problems with your company are diversifying upper management and finalizing an acquisition--neither of which directly impacts your underlying business--that's a good sign.

Disclosure: as of September 22, 2008, I own less than 20 shares of SYMC.

Stocks Update, 9/22/08

After the big run-up last week, I sold some of my positions. Malaysia's political turmoil bothered me enough to sell EWM. If the news stories are to be believed, the majority Malay population appears to be having some conflicts with the generally more affluent Chinese and Indian citizens. Also, while politics can get bad in the U.S., you don't see a ruling party trying to jail their opposition through a criminal lawsuit involving allegations of sodomy. I feel sorry for the Malaysians, who have to see a wonderful country's image get sullied by these political troubles. Yahoo's (YHOO) decline is also bothering me. First, a hacker gets access into Gov. Palin's Yahoo email account; then today, Microsoft (MSFT) announces it is spending 40 billion dollars to buy back its stock, taking available funds away from a potential acquisition. I will sit tight with Yahoo, but this kind of continued mismanagement is troublesome. Prices below are mid-day numbers on September 22, 2008. My open positions track the S&P 500 exactly at a negative 11.21%. The list of trades below includes only positions involving at least 2,000 dollars.

Open Positions
EZU = -8.34
GXC = -7.97

IF = -22.1
SWZ = -12.68
YHOO = -4.98

[Average of "Open Positions": losing/negative average 11.21%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
EWM =-11.61 [sold 9/22/08]
EWS = -12.98 [sold 9/22/08]
GE = -6.4
GLD = +8.61 [sold 9/22/08]
INTC = 0.0 (excluded from average; insignificant movement)
KOL = -10.36
PFE = -5.5
PNK = -16.7
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4

[Overall Record for 7 days+ trades: lost an average of 3.92%]
-50.90 / 13 trades]

Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), KOL (13.2%) [9/17/08 to 9/19/08]; NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08]

[Overall Record for ultra short-term 2 to 7 days trades: gained an avg of 3.49%
[41.9 / 12 trades]

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 for daytrades: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 11.21%
[from May 30, 2008 (1385.67) to mid-day September 22, 2008 (1230.30

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, September 20, 2008

Barry Goldwater: Political Campaign Buttons

I ordered my first campaign buttons from Legacy Americana (www.legacyamericana.com). I finally understand why people collect the buttons--some of them are a beaut. I really like the gold-colored button above, despite its obvious symbolism (Gold = Goldwater).

Friday, September 19, 2008

Frederic Mishkin Defends Core Inflation

Frederic Mishkin, a former Federal Reserve Board member, wrote a WSJ opinion piece defending the core inflation measure. I've called core inflation a useless, misleading number:


I was eager to see how Mr. Mishkin would defend a statistic seemingly designed to insulate the government from macroeconomic criticism. Mr. Mishkin's article is below:


To his credit, Mr. Mishkin intelligently argues that the Fed must maintain a "nominal anchor," and food and gas prices (what he refers to as "headline inflation") fluctuate too much to maintain a steady beacon.

As any statistician knows, however, there are ways to mitigate the extremes in any number sample. The Dallas Fed Reserve does just that by publishing "trimmed mean" figures, which are basically inflation numbers sans the extremes on either the high or low side. Mr. Mishkin provides a good defense of core inflation in principle, but I am still not convinced. A "nominal anchor" isn't going to provide any predictability if everyone knows the real numbers are much different than reality. Numbers need to have credibility first. That starts by acknowledging inflation numbers should include items most Americans use daily, such as food and gas prices.

Thursday, September 18, 2008

Transmeta (TMTA) Shareholder Meeting

I attended Transmeta Corporation's (TMTA) shareholder meeting this morning. The meeting took place at the Santa Clara Hilton at 8:00AM and was attended by approximately twenty people, with around three to six non-employees attending. The food spread included typical hotel seminar fare, such as Starbucks coffee, some fruit, and some pastries.

I arrived about eight minutes late, and TMTA had started its meeting with the informal part and was in the middle of a basic slideshow. The formal part of the meeting lasted a few minutes, and then we moved to the Q&A session. Prior to the Q&A session, TMTA honored one of its retiring Board members, William Tai. More on Mr. Tai after the jump:


Transmeta (TMTA) has around 35 employees and generates much of its revenue from licensing "LongRun and LongRun2 technologies" for controlling leakage and increasing power efficiency in semiconductor devices. The company focuses on power management and transistor leakage control.

One shareholder had several questions and asked questions given to him by other shareholders who could not attend. I will summarize his questions and CEO Lester Crudele's responses as best as I can. The shareholder asked several questions that required forecasting, a legal no-no, causing Mr. Crudele to answer, "We have no comment," to numerous questions.

Q: Given some of the promises of shareholder value, why do you think we're still trading below cash value?
A: I don't understand the motions of the stock market. We have valuable technology.

Q: Do you have any comments on program trading and short sellers?
A: No comment.

Q: When do you believe you will have a market cap of over a billion dollars?
A: No comment. We are still selling licenses, so the company has value.

Q: It feels like their are other infringers, in addition to just Intel [Note: TMTA settled with Intel (INTC) for an initial payment of $150 million with annual payments of $20 million from January 31, 2009 to January 31, 2014.]
A: We will vigorously defend ourselves and plan on defending our patents.

Q: Are you planning to approach more foundries?
A: Yes.

Q: Do you expect a license from AMD?
A: We have a long history with AMD. They invested in us last year.

Q: Do you expect your patents to hold up in continuing litigation?
A: One(?) out of eleven of our patents involved in the Intel litigation are being re-examined.

Note: an astute Seeking Alpha reader pointed out that all the patents are being re-examined:


Q: Why don't you communicate more with shareholders?
A: The licensing business is very lumpy, it takes time [to get an agreement], and it's difficult to know when the agreements close, as they are usually under NDA.

Q: You don't have much analyst coverage.
A: We are a small size [company], and our current revenue situation [does not bring much coverage].

Q: Your business model seems to be a one time cash payment for the license. What about sustaining revenue over a long term period?
A: We usually get an initial licensing fee and then royalties for continuing use of the license.

Q: Will you be buying back shares? What about a dividend?
A: No comment.

It wasn't a tense exchange, but the CEO did look exasperated with the questions that required him to project revenue or financials into the future. The shareholder appeared to be out for blood, but the CEO answered most of his questions politely.

It was my turn to ask a question. As a layperson, I don't always understand a company's technology, and I always ask the CEO to explain what the company does and what their products offer. CEO Lester Crudele looked pleased to get a question he wasn't legally barred from answering. I am going to do my best to summarize his response. Mr. Crudele said that when electrical currents run through circuits, the currents don't always move consistently and often lose some of its power [which can cause heat and overheating within the IC chip]. He said this current leakage benefited from an on/off switch that regulated the flow of the electrical current.

I asked him whether his product was hardware or software. Mr. Crudele initially said hardware, but when I asked him to be more specific, he said his product was the "technology," and assigning products to hardware/software categories was a limited view of technology. I wondered: if a CEO cannot definitively say his product either has software that goes on the chip, or some tangible hardware, like the chip itself, what exactly was he selling? (TMTA no longer makes any chips: its website states, "Transmeta no longer manufactures, offers for sale, or provides engineering support for any of its microprocessor products.") The CEO, realizing I was confused, told me to come talk to him after the meeting. The meeting ended shortly after my questions.

Before I was able to get to the CEO, two other employees seemed eager to fill the gap in my knowledge. I decided to speak with one of them, Daniel Hillman, VP of Engineering, to see if I could get more information. Mr. Hillman did a very good job explaining TMTA's product. He indicated the product isn't hardware per se, but affects the hardware. It can be used on any kind of chip, and works on all chips, including integrated circuit chips. He used an analogy to explain further. He talked about having a fireplace in a house, but without the ability to control how hot it was. If you just throw logs on an open fire, the fire doesn't move predictably and has energy going in different directions at different speeds. You can't control the heat and the spread of the temperature in an unregulated fire, and it's the same way with transistors. With TMTA's product, you have a thermostat dial and can regulate the heat (i.e., the current) in a particular range.

Mr. Hillman's analogy made perfect sense, but I was still confused about the actual product. Mr. Hillman patiently explained the "product is inside the chip." TMTA's technology works on the entire chip--it's a "fundamental thing." It's not a component like a USB or memory--we go "down to the transistor physics level." Returning to the analogy of a fireplace in a house, TMTA doesn't build the house, but can regulate the temperature in the house. Thus, TMTA allows you to "dial back" the heating to prevent overheating or uneven temperatures, while leaving alone the cold parts of the house. TMTA's products are as follows:

1. Sensors. TMTA sells sensors that can tell you how much heat is in the chip, how much consumption is used by the chip, and how fast the heat is spread in the chip.

2. Controller. Mr. Hillman repeated the the on/off switch analogy used by the CEO Lester Crudele. The controller can shut off a chip's heat if necessary. A "controller" has many meanings. In general, anything that can control an electronic function is called a controller. You can control electronic current, voltage, temperature and other activities.

3. Voltage source on a chip. Mr. Hillman did not elaborate, and he may have meant to combine this product in the controller category above. Voltage source is needed by a transistor or any electronic circuit to work. It is like a switch that can turn on or turn off a transistor.

Mr. Hillman indicated that TMTA's products are "one way of addressing power." TMTA deals with the "fundamental activity" of a chip and changes the behavior of transistors. In a great line, he said TMTA makes chips orderly--it takes the "rabblerousers and makes them well-behaved."

I asked whether TMTA basically sold the blueprint for chips. Mr. Hillman did not say my analogy was incorrect. Thus, it appears that TMTA has some patents that certain chip companies use or must use in their chip production process. Through litigation, TMTA can exact licensing fees from various chip companies or companies using its technology.

The CEO's statement that hardware/software was a limited view of technology now made more sense. Rather than reinvent the wheel, some chip companies choose to pay TMTA a licensing fee so they can run their business, and that's where TMTA appears to make its money. TMTA's value lies in sustaining the viability of its patents, having an experienced litigation team, and being able to successfully negotiate with chip companies. TMTA is not a growth story. It's own 10K states, "Our customer base is high concentrated. For example, revenue from two customers in the aggregate accounted for 89% of total revenue during fiscal 2007."

As new technology enters the market, other companies may not need to license TMTA's patents. New technology may allow chip companies to regulate heat and power management in ways different enough to justify spending the money on litigation to fight TMTA in patent litigation. For now, and perhaps over the next few years, TMTA will continue receiving revenue from its prior work. If Intel settled with TMTA, and Nvidia (NVDA) bought a license, TMTA's patents are viable. But in technology, Darwin's Law is harsh and comes with great speed. 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.

More analysis from a Ph.D. in electrical engineering: "It is not clear from your email exactly what kind of technology they [TMTA] are referring to; however, it appears that the technology is a combination of voltage source sensing and fabrication process control. This means that when we make transistors to build an electronic circuit, they can add another layer in the chemical process that can control electric current and hence the temperature of the transistors. Transistors, which are basic components of any electronic circuit, are made of staggered chemical layers on a piece of silicon. Now they can alter this fabrication process to control the current/temperature of the chip."

Disclaimer: I own fewer than 25 shares of TMTA.

Wednesday, September 17, 2008

America's Bailouts Approaching a Trillion Dollars

Courtesy of Reuters, here's a nice pie chart of the recent bailouts.

Stocks Update, 9/17/2008

Sigh. My open positions are tracking the market's decline. The market has humbled us all.

Open Positions
EWM =-19.88%
EWS = -21.60
EZU = -15.38
GLD = +4.83
GXC = -23.81

IF = -31.02
KOL = -23.87
SWZ = -16.29
YHOO = -5.58

[Average of "Open Positions": losing/negative average 16.96%]

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 average; insignificant movement)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4%

[Overall Record for 7 day+ trades: Lost an average of 2.82%]

Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), KOL (13.2%) [9/17/08 to 9/19/08]; NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]; TTWO (2.2%) [9/9/08 to 9/12/08] [Overall Record excludes recent KOL sale]

[Overall Record for ultra short-term 2 to 7 days trades: Gained an avg of 2.36%

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 for daytrades: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 16.5%
[from May 30, 2008 (1385.67) to mid-day September 9, 2008 (1156.39

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.

Capitulation is here...again (Good times to follow)

For anyone who has monies in a 401k, a Roth IRA, or some other retirement account and is under 35 years old, now may be a good to enter the market and use up some of that financial gunpowder.

From Barry Ritholtz: "The criminal enterprise, formerly known as Russia, has decided to halt trading. With its stock market down 57%, Putin & Co. are being even more risk averse than Paulson, Bernanke, et.al. & Co."

You know times are bad when Russia halts trading. But people with a long-term horizon of at least ten to fifteen years may want to add to existing positions. The economy and the stock market go through boom-bust cycles, and you can't enjoy the boom unless you get in on the bust. I've personally seen my retirement funds decline in value by over 10,000 dollars in the last two to three months. I've continued adding to positions, especially in the Asian markets. Barring some cosmic wrath directed at me, I don't need the retirement money now, tomorrow, or even ten years from now.

From Warren Buffett: "We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful."

If this isn't fear in the air I smell, maybe it's eu de depression. Come November, we will have a change, with either candidate bringing fresh ideas to the White House (McCain with less tolerance for pork and corruption, and Obama with, well, Obama). Good times will be here again, because a) we can (or should try harder to) learn from Japan's mistakes bailing out their banks; and b) financial services are still not that vital to an economy, once liquidity is restored.

We had a great economy back when Citigroup, BofA, and WaMa were just small or midsize banks. I still remember Citigroup being "just" 19 dollars during the heyday. Banks were never meant to be growth stocks. When they go back to paying a stable dividend, maintaining good credit profiles, and selling some insurance, the world will be a better place. And if I never have to hear about credit default swaps, I will be a happy man.

Tuesday, September 16, 2008

Interview with Ultizen's CEO Lan Haiwen

With the EA/Take-Two deal falling through, I had the opportunity to interview Lan Haiwen, CEO of the Chinese game development company, Ultizen:


He gives his opinion on what will happen with Take Two and provides a dire assessment of the gaming industry's X-Mas sales targets. While many investors like to say gaming is recession-proof, this X-Mas season may prove them wrong. My interview with Mr. Lan is below.

1. Where is your company headquartered? Please list how many employees you have in each specific country to give readers a better idea of your size and global reach.

Headquartered in Shanghai China. Ultizen has, totally, over 350 employees, 300 in Shanghai China, 50 in Beijing China, and 2 in LA US.

2. Please explain the background behind “Ultizen” as your company’s name.

Ultizen means: Ultimate Zen

3. Does your company have a focus in terms of what kinds of games it makes (i.e.,sports, role playing, action)? If so, why did your company decide to focus on that particular area? What is the name of the new XBOX game your company is making for Microsoft, what kind of game is it, and when is its expected release date?

We focus on casual game development mainly on PC and Mobile phone. We also do game outsourcing work for oversea studios/publishers. We believe the needs of game outsourcing would be huge as the next gen games cost so much money and time on development. We also believe casual game would grow fast as it targets to mass market. The name of our new XBLA title is called Crazy Mouse, it is a family fun game, and will be released in second half of October 08. This is our own IP title, and Microsoft will publish globally.

[My note: see http://games.teamxbox.com/xbox-360/2100/Crazy-Mouse/]

[My note: given what I've heard at Adobe and Yahoo shareholder meetings, Mr. Lan is correct--mobile gaming is projected to be a huge market.]

4. How many total games has Microsoft asked you to make, and how did you manage to get its business?

As I said, it is not [that] Microsoft asked [for a] game, but our own IP title. We do get lots support from Microsoft during the development, as we developed this title at Microsoft incubation center in Chengdu, China. We won the game design contest held by Microsoft, and got the chance to develop at the incubation center. This is the first China developed XBLA title that be published globally.

5. What are your competitive advantages over more established, well-known game companies?

Our competitive advantage is creativity, development process, quality control and low cost.

6. What is your opinion on EA's decision to walk away from Take-Two? Do you believe another company will make an offer for Take-Two? If so, who do you believe is the next most likely suitor?

I think it is a good deal, and Take-Two shall take it. I believe there are other companies will offer to buy Take-Two, [and] I guess those potential buyers would be from big media groups rather than game companies.

7. What developments do you expect to see in the gaming industry over the next six months? Do you believe game makers will reach their X-Mas sales targets? What are the reasons for your belief?
Yes, over the next 6 months, X-Mas would be huge sales season. [But] I believe only 10% will reach their targets, as the economy environment is really bad and people may reduce their shopping budget.

8. In 100 words or less, please tell me anything else you would like to share about your company.

I would like to use much less words: the best game studio in China.

Mr. Lan clearly has enthusiasm for his work. I thank him for the opportunity to interview him over email.

Monday, September 15, 2008

Scott Burns and the Medicare Problem

Scott Burns, formerly with the Dallas Morning News, has an insightful take on an "old" problem. He shows how Medicare will negatively impact not just young children, but 30 year old adults:


Scott Burns, Peter Peterson, David Walker, and Richard Fisher have warned us about the Medicare ticking time-bomb. With apologies to Aldai Stevenson, we need more than just the thinking men to agree that change is necessary. Seniors tend to vote in higher numbers, and it will take a strong, bipartisan effort to fix the broken entitlement system. Someone needs to figure out how to counteract advertisements of grandma not being able to afford her medication, or stories about seniors skipping lunch so they can afford medicine. Such tactics are bound to be used to support the status quo, which is hurting America's younger generations. What can we do when so many Americans spend their working life not saving enough and then end up relying on the government to survive?

This isn't an old-vs.-young issue. The negative savings rate destroys the feasibility of universal healthcare for all Americans, young, middle-aged, and old. Universal healthcare requires more taxation, a surplus, or a weakening of the American dollar, and since we don't have a surplus, I'll give you two guesses as to what the other options are in the absence of a higher savings rate. Meanwhile, here's what the Federal Reserve of San Francisco says about China's savings rate (http://www.frbsf.org/publications/economics/letter/2008/el2008-03.html#5):

China's overall saving rate is now nearly 50%, by far the highest in the world. China's domestic investment rate has also been high, but not as high as saving, resulting in net current account surpluses which rose from 4% of GDP in 2004 to 7% in 2007.

Sadly, America's economy is based on other countries lending us money to spend while America prints more money to sell to the creditor countries, whose citizens save their money. But without Americans spending money, fewer people get to move up the economic ladder, because a nation of savers is terrible for growth and jobs. So the key is for central banks to work together to create timely incentives to spend and to save. Forget about presidents working together--I'd rather see central banks getting chummy first.


Headline: "Dow Plunges 500 Points on Lehman Bankruptcy, Merrill Sale, AIG Woes"

If I had to venture a guess, I'd say today was the capitulation we've been waiting for. Perennial pessimist Nouriel Roubini said he expected another 20% drop, but to me, his prediction is a good contrarian indicator.

[Note: I also called capitulation on 9/17/08. The next two days, the market went up around 10%.]

Sunday, September 14, 2008

Libertarians and Responsibilities

From the WQ (Summer 2008, page 28):

When government takes over the responsibility from citizens, the citizens can't develop their own values anymore. So when you want people to develop their own values in how to cope with social interactions between people, you have to give them freedom.
-- Hans Monderman, Netherlands traffic engineer

This concept is so simple, even a European government worker can understand it. At least the Europeans offer benefits to all citizens, not just government workers, which creates less resistance to increased taxation. These generous benefits, however, create opposition to immigration, because more people entering a country sap the benefits from existing persons, assuming a stable and finite tax base. America, thus far, has been more open to immigrants, which is responsible for much of its success.

Housing's Real Issue: Bigger Ain't Always Better

The Wilson Quarterly (WQ, Summer 2008, Vol. 32, No. 3) published an article by Witold Rybczynski about affordable homes.

What's driving the high cost of houses today is not increased construction costs or higher profits...but the cost of serviced land.

The author refers to "serviced land" in two ways: one, the passing of costs from the government to developers for infrastructure; and two, NIMBY (Not In My BackYard).

Prior to Prop 13, the government would increase taxes on local communities for services that followed increased population growth, such as new roads, new parks, sewers, and general maintenance. Now, many local governments cannot increase property taxes to make up for the increased need for services, so they force developers to pay these costs if they want to build. The developers take the financial infrastructure hit up front and pass those costs onto the homebuyer at the end in the form of higher home prices.

NIMBY is easy to understand in this case. There is "widespread resistance to growth," so locals pass zoning laws and restrict building permits to prevent more houses from being built. These legally mandated slow growth policies lead to pent-up demand and not enough supply of houses, causing artificially inflated values. Anyone who's lived in Northern California and New York knows there isn't a problem with overpopulation and population density in California to justify California's slow growth policies--at least not yet. Rybczynski says,

According to the research of economists Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, since 1970 the difficulty of getting regulatory approval to build new homes is the chief cause of increases in new house prices. In other words, while demand for houses has been growing, the number of new houses that can actually be built has been shrinking.

One tactic cities use to stall new homes is zoning for large lots, like one acre. This forces larger houses and higher prices. In the past, many individual homes would be only 1/6 of an acre. Rybczynski states,

Smaller houses on smaller lots are the logical solution to the problem of affordability, yet density--and less affluent neighbors--are precisely what most communities fear most.

I would love to see a return to smaller houses. One advantage of not having a lot of space is people will consume less if they know there isn't so much space to hold their new purchases.

Follow-up from Mankiw's blog: Assar Lindbeck once called rent control "the best way to destroy a city, other than bombing." Rent control is another regulation that discourages new real estate development by providing an incentive for renters not to move. At the same time, it discourages new developers from investing in new buildings because the owners will be unable to charge higher market prices. I am conflicted about rent control, because there must be some cap on rent increases that will satisfy both renters and developers. Leaving renters to the pure whims of landlords doesn't seem ideal. Of course, in trying to establish an ideal cap on rent increases, we could end up with the problem of the cap actually inflating rents. For instance, if we enact a 5% annual cap, all landlords will probably raise the rent 5% a year when they might have kept the rent unchanged without the law.