Primordial Scream, Economic-Style

It's times like these I just want to tear my hair out. I just bought some FHN (under 2,000 dollars' worth, so I am not including them in my Stocks Update), as well as another 100 shares of CNB. But CNB went down around 13% today, so now I have 1100 shares and a lot less confidence in my stock picking abilities. After the Fed Reserve came out and assured everyone that FNM and FRE would not go under, small bank stocks still went down based on the IndyMac collapse, a poor earnings report from M&T Bank, and National City's woes. All three banks were having issues, which reflected on FHN and CNB.

Still, FHN and CNB are priced as if they are going to fail. That is far from the case. The "Texas ratio" is a good financial rule of thumb that assists investors in determining whether a bank will fail. The ratio is calculated by dividing a bank's non-performing loans, including those 90 days delinquent, by the company's tangible equity capital plus money set aside for future loan losses. The Texas ratio shows to what extent a bank is overleveraged; how well its loans are doing; and whether it has the capital to continue suffering losses on loans without failing or needing to raise more capital. Any ratio 100 or over means the bank may fail and is in the zone of bankruptcy. IndyMac had a Texas ratio of 125 prior to its collapse. But FHN and CNB have Texas ratios of around 25%. CNB releases earnings on July 21; FHN releases earnings on July 17 [Update: FHN released earnings today after its stock price went down 25%; in afterhours trading it was up 5%].

USB releases earnings tomorrow. It is said to be a much more stable bank, and its earnings may provide better guidance about whether CNB and FHN will have good news this week and next week.

If any major bank is going to go under, I don't think it's going to be CNB or FHN. Unless their earnings/losses are especially horrendous--and their stock prices reflect normally horrendous losses--they should be okay. The word on the street is that Washington Mutual is teetering on the brink. I have an account there, and I am not concerned because FDIC insurance will protect my deposits and my clients' deposits.

These are truly crazy times for banks and American capitalism. I hope two years from now, my readers and I can read this posting and smile. Right now, however, I am just shocked at how irrational this market is. "Encephalic apoplexy" seems like an appropriate term to describe what I am feeling, because I am used to being right about the market.

[On the bright side, I did successfully day-trade some GE shares today.]

Stocks Update

I had sold some PFE at 18.33 but still hold many shares. I sold my GE prior to the earnings report, taking the 6% loss. I added to my CNB position, which swung from an unrealized 3% gain to an unrealized 11% loss. I also received dividends, which are not factored into the calculations below. If I pick stocks well, my picks should do well even without factoring in dividends.

Thus far, it appears I am doing slightly better than the overall market, but this is bittersweet, given that the S&P 500 has lost over 10% in less than two months. I had removed most of my money from the market two months ago, so I am not concerned--yet. "The market can stay irrational longer than you can stay solvent," the saying goes. Thankfully, all of my open positions are in retirement accounts, so I can wait for years until the market becomes rational again.

One benefit of keeping track of my trades is I can see which styles work for me. So far, it is clear I am better off with short term trades (100% positive record) than long term ones. I place very large bets when making short term trades, and smaller bets when establishing longer term positions. Therefore, it's as if I bet 5,000 dollars on red in roulette, win quickly, but then give some of my gains back when I overestimate my intelligence and go play poker for a few hours with a 1,000 dollar buy-in.

Open Positions
CNB = -11.5
EQ = -8.0
EWM = -8.54
IF = -11.8
PFE = -7.22

Average of "Open Positions": losing/negative average of 9.41%

Closed Positions:
Held more than seven days but less than one year:
GE = -6.4
PNK = -16.7%
PPS = -2.8
WYE = +2.4%

Held less than 7 days:
GE (1.0%); ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%) (Overall record in this category is a 3.31% average gain)

Daytrades:
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)

Average of "Closed Positions" sub-categories, except for Daytrades: losing/negative 4.59%

Combined Total Averages, excluding Daytrades: losing/negative 7.0%

Compare to S&P 500: losing/negative 10.5%
[from May 30, 2008 (1385.67) to July 13, 2008 (1239.49)]

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.

Stock Market Week Recap: Fannie Mae and Freddie Mac

Contrary to my belief that GE's earnings would be some kind of bellwether for the overall market, Fannie Mae and Freddie Mac stole the show. GE had set expectations so low, when it beat its own lowered expectations, the market barely noticed.

Meanwhile, Fannie (FNM) and Freddie's (FRE) stock prices got cut in half after liquidity concerns arose. What are Fannie and Freddie, and why are they so important? I realized I didn't really know much about these institutions, which hold between five to six trillion dollars in debt.

According to its own website, FNM "operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates." FRE's business sounds similar:

We connect Main Street – the residential mortgage market – to Wall Street – dealers and investors – through our mortgage purchase, credit guarantee and portfolio investment activities.

Our customers are predominately lenders in the primary mortgage market. Our activity in the secondary mortgage market supports a continuous flow of funds to the primary market, which leads to consumer benefits in the form of a steady flow of low-cost mortgage funding.

What is a secondary mortgage market? It's when a bank gives you a mortgage and then wants to spread its risk around. If it holds onto your loan, and you don't pay, then it is the only entity on the hook. But if it sells the right to future interest payments and/or principal in your loan to someone else, it reduces its reliance on one source of profit. Another way to reduce risk is to have more people involved in a deal, so if one person pulls out, there are plenty left to handle the remaining issues. So most banks re-package their mortgage loans and put them into one big "debt pie" (my own term) and then instead of holding onto the pie, they sell slices to other entities. The bank cuts the "debt pie" into several pieces, some better than others, and sells off its loans at different prices to investors who want to receive the monthly mortgage payments and/or interest.

FRE and FNM get a fee for repackaging various banks' mortgage loans and shouldering the risk that the borrower might not repay the principal or the interest. By allowing banks to place everyone and their mortgages into a large pie, the banks spread their lending risks and possibly get some immediate cash back to make more loans.

The problem is that the pie slices kept getting sold off to more and more buyers through even more complex financial instruments. When the music stopped, everyone forgot that someone had to pay the original mortgages or the game couldn't continue. Ironically, by trying to reduce the risks of lending, banks and FNM/FRE actually increased overall risk, because no one had an interest in making sure the original borrower paid up. The geniuses on Wall Street created no incentive to make sure the guy at the bottom had the papers or the income or the willingness to pay his/her mortgage, because everyone assumed that the original bank checked out the papers and did the due diligence. As we know, loan agents didn't always require tight documentation before submitting loan applications, but the banks that received the applications didn't care, because they knew they could put the loan into a large pie and sell it off and get paid. In violation of the philosopher Kant's ethical guidelines, the banks treated people as a means to an end, rather than an end, knowing they could dump the loans on someone else because FNM and FRE would guarantee them.

The U.S. government has decided that in order to encourage people to buy homes, it needs to support companies (FNM and FRE are both publicly traded and owned by shareholders, not the government) willing to buy up the "debt pies." It supports them by offering loans from the Federal Reserve's discount window, currently at 2.25%. Without this kind of support, the government believes banks would be less willing to make mortgage loans, thereby causing housing prices to decrease. Because most Americans have most of their net worth in their homes, if housing prices decrease, it would make them feel more poor and less willing to spend, causing a recession. As a result, the government has lent an implicit promise to FNM and FRE that they can make loans and will receive liquidity from the government to support American home ownership. This "promise" isn't written down anywhere, but the amount of debt pies held by FNM and FRE are staggering--again, it's around half the entire mortgage loan market, or around 5 to 6 trillion dollars. They are "too big to fail," as some might say.

Recently, the Federal Reserve, which holds taxpayer money (read: our money) refused to loan more money to FNM or FRE, causing their stock prices to decrease by around 50% [This just in: the Fed Reserve Bank of New York will lend money to FNM and FRE]. [Still,] In a worst case scenario, FNM and FRE have been guaranteeing mortgage loans that can't be repaid, in which case they have to reduce their mortgage guarantees, diminishing further demand in the housing market.

At the same time, this might be a welcome development, because by reducing the availability of mortgages, housing prices might decrease enough to allow more first time buyers to buy homes. A friend of mine reminded me not everyone should buy a home--some people are better off in apartments. This reality caused some cognitive dissonance because I am a firm believer in the American Dream including a home, but he is correct. Not everyone can afford to buy a home--some people's incomes are not steady or high enough to guarantee their ability to pay property taxes and repairs, much less the monthly payments on a home. In addition, FNM and FRE's business models work best if you assume housing prices will always increase, allowing homeowners to refinance to pay their mortgages in lean times or during a layoff. But there is no guarantee that housing prices will keep increasing, nor should the government "guarantee" infinitely increasing property prices. The problem, of course, is it looks like the government has done just that.

It appears that when the Fed lowered interest rates post-9/11, basically making money free to the public, it gave everyone a green light to buy a home. In retrospect, Mr. Greenspan didn't really have a choice--he had to open the money spigot to bring back American confidence. But neither Mr. Greenspan nor anyone else thought an Iraq war would last several years, or that oil would increase to 160 dollars a barrel. Therefore, people who blame Greenspan might want to look in the mirror first--the Iraq war, which the Democratic Congress continues to finance, has contributed to taking trillions out of the United States' economy and into non-productive areas, destroying the value of the American dollar. In time, when Iraq's oil fields are producing oil at full capacity, the war might make more sense. But for now, Congress needs to commit to a balanced budget and restore the world's faith in the American dollar. Fannie and Freddie are just symptoms of an overall refusal by our government to restrict spending.

On a personal note, I can't figure out the difference in FRE and FNM, but apparently, Congress approved FRE to counteract FNM's monopoly. If someone can explain the difference between Fannie and Freddie, please add to the comments section. In addition, I can't figure out if FNM and FRE just get paid a fee for buying the loans from the bank and then dumping them on someone else, or if they hold onto some percentage of the mortgage loans.

Also, do FNM and FRE line up a buyer for the loans in advance of buying them from the banks? If not, then they could be stuck with trillions of loans on their own books. If they do have loans on their books they can't dump on someone else, and they go bankrupt, what happens if the government doesn't bail them out? I think the banks would get screwed, but not the homeowner, as long as s/he's paying his mortgage. That means we could have major banking collapses, but that's a shareholder matter, unless the FDIC gets involved. It is also probably cheaper to pay FDIC guarantees than FNM/FRE loans. Of course, if the government doesn't support FNM/FRE, and lets the banks shoulder the risk, the entire banking system collapses, because Americans would take their money out of banks, causing an IndyMac situation (i.e., if bank deposit holders think their bank is going under, they will remove the capital the bank is using to fund other loans, causing the bank to collapse). Sigh. It really doesn't look good, folks. Any comments are appreciated.

Shareholder Meeting Tip

The Wall Street Journal published an unintentionally amusing blurb about Marks and Spencer's (M&S) shareholder meeting. Despite poor performance, M&S shareholders retained their CEO. The WSJ tried to explain the retention of the beleaguered CEO by saying, "Marks and Spencer may have helped lift the mood by offering the 1,636 investors free wine, cider, sandwiches and desserts beforehand." Compare that to Long's Drugs shareholder meeting, where they served just water and basic Milano cookies. A word to the wise in corporate departments: always have good refreshments or some kind of unique freebie at shareholder meetings--investors will give you free advertising and speak well of you, which provides a good return in the form of goodwill.

Real Inflation: Trimmed Mean PCE

It looks like the real inflation rate in May 2008 was 5%. See

http://dallasfed.org/data/pce/index.html

The United States still uses a grossly fallacious measure of inflation called, "core inflation," which excludes food and energy prices. This "core inflation" is reflected in a widely-used metric called the CPI, or Consumer Price Index. Using CPI numbers that exclude food and energy, if a tomato goes from 80 cents to 5 dollars each, but a Dell laptop gets cheaper by 100 bucks, the CPI would indicate that overall inflation was going down--which would be inaccurate. Thus, as a statistic, most "core" CPI numbers bring to mind the comment about "lies, damn lies, and statistics."

The Dallas Fed Reserve has bucked this misinformation trend by publishing a more accurate inflation statistic called "Trimmed Mean PCE," which includes energy and food prices. The Trimmed Mean PCE (personal consumption expenditures price index) more accurately reflects the real rate of inflation is because a) it usually includes food and energy prices; and b) it trims, or cuts, unusual numbers that are indicative of generalized noise rather than a long-term inflation signal. The United States' continued use of certain CPI numbers over a more inclusive indicator of inflation means that it is misleading the public, which still has not fully grasped how much money America has printed recently for extraneous expenditures.

For example, if annual inflation is at 4%, and your assets increased by 3%, you lost purchasing power. Money, after all, only has value because it is a means to buy things. If your ability to buy things decreases in the real world, even though the quantity of your money increases, you have fallen behind. America is currently experiencing about 5% inflation while the stock market has caused many portfolios to decrease by 10%, a double whammy. 5 dollars a gallon gas is just one obvious indicator of how massive federal expenditures have harmed the American Dream and Americans' ability to plan ahead financially. Still, if you look at most government figures for CPI, the government's numbers appear understated. The Fed Reserve is telling us that inflation is running at 4.2%, including food and energy, and 2.3% excluding food and energy. See CPI-U for 12 months ending May 2008 (link goes to PDF file):

http://www.bls.gov/cpi/cpid0805.pdf

But the Dallas Fed Reserve believes that inflation is running at 5%. Even the Fed Reserve member banks cannot get their story straight. Using several conflicting CPI numbers allows the federal government to keep printing more money, destroying its real value in the process, and then telling the public everything is okay and the government is properly evaluating inflation. Using a more focused, more accurate indicator of inflation would force the government to be more prudent in its expenditures. The public should be able to log onto the BLS website and get one or two numbers showing real inflation, instead of fifty different numbers. Other figures may still be listed on the government's website, but currently, there is no quick or obvious link to any PCE figure showing real inflation for the month of May 2008. Without such numbers, savers and workers cannot plan ahead to see how much they have to earn to maintain their standard of living.

Without accurate and easily accessible inflation information, a reckless government will print money to satiate the public in bad times, which allows the government to hide failed or short-sighted policies. The Medicare scheme is one such example of a failed government policy that is not being fixed partly because the government can mask the true cost of printing money in a barrage of irrelevant CPI statistics. As a result of public ignorance, the government can delay a real solution to Medicare's underfunded trillion dollar liabilities because it has the political go-ahead to print money to pay benefits if necessary. But, as one of my favorite quotes goes, "a few billion here and a few billion there, and pretty soon, you're taking about real money." That "real money" is the real value of money that savers have toiled to earn, and without more accurate inflation numbers, the United States makes it harder for its citizens to plan ahead and to justify delayed self-gratification.

There is one other interesting side note--the U.S. issues TIPs, or Treasury Inflation Protected Securities. These bonds are linked to inflation as measured by the "core" CPI numbers. These are very popular bonds, and the government may continue to issue billions of dollars' worth of them. As a result, the government has less incentive to shore up its CPI numbers, because doing so means it has to pay more money to the buyers of these bonds.

At the end of the day, a melange of irrelevant CPI figures favors spenders over savers because the more inflation statistics the government publishes that are irrelevant or not fully accurate, the easier it is to shield the public from the true consequences of government spending. The Federal Reserve should heavily advertise only a few inclusive inflation numbers and consider eliminating CPI, especially when PCE offers a more accurate inflation rate.

Update on July 11, 2008: according to my T Rowe Price newsletter, "inflation, as measured by the Consumer Price Index, was up to 4% for the one-year period ending March 31, 2008...U.S. inflation has historically averaged 3.1% for the 80-year period from 1926 through 2006."

Economics and "Common Sense" Quiz

There's a website that allows you to write your own quizzes--it's a little difficult to navigate, but it's quite good for a beta version. Here is my econ quiz--bonus points if you recognize the picture:

http://www.helloquizzy.com/tests/the-basic-common-sense-and-capitalism-test

Good luck!

Econ Calendar: Oh, Baby, Baby, It's a Wild World

GE releases earnings this Friday, and the day before, the unemployment numbers come out. So today, July 7, 2008, will either be the definitive bottom of the bear market, or we're in for a slow, somber decline if this week's numbers don't look good. Value investors might be salivating now, but as for me, well, I think Cat Stevens'/Yusuf Islam's lyrics are particularly apropos:

Now that I've lost everything to you
You say you wanna start something new...

Mr. Market has taken investors' money but now appears to be starting a new upward trend. And yes, I am being melodramatic--I called the recent market decline and got most of my money out, and if I hadn't jumped back in so soon with Pfizer (PFE), I'd be all smiles. As it stands, I still like PFE, GE, and CNB, because I can hold these stocks for the next five years or more. For long-term investors, perhaps today's V-shaped day can be the start of something new. Of course, "remember there's a lot of bad, and beware," and "a lot of nice things turn bad out there." To see Mr. Stevens in all his glory, check out the video after the jump:

http://www.youtube.com/watch?v=DHXpnZi9Hzs

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.

Pinnacle Entertainment (PNK)

Jake Fuller of Thomas Weisel Partners agrees with me on choosing Pinnacle Entertainment over the Vegas casinos. See CNBC's article titled, "Casino Stocks: Don't Bet On the Biggies." Of course, I made the same call weeks ago, only to see Pinnacle Entertainment become a victim of the overall market decline:

PNK is Pinnacle Entertainment Inc. Although their HQ is in Las Vegas, they don't own casinos there. The six casinos they own are in Louisiana, Indiana, Missouri and Reno, NV; in addition, they operate casinos in the Bahamas and Argentina. This is a fairly small company--its market cap is still under 1 billion. So why choose this stock over WYNN, LVS, or MGM?

I watched a PBS documentary on Vegas recently, and let me tell you, Steve Wynn and his vivacity are a hoot to watch. The documentary reminded me of how cool Vegas used to be, starting with the Mafia and the Rat Pack, moving to JFK/RFK and Howard Hughes coming in to clean up Vegas, and then ending with shareholders and Wall Street finishing the job. What struck me most during the documentary is that Vegas seems like it's all out of gimmicks. The old Sands, where the Rat Pack used to play, is gone. Steve Wynn's Mirage is no longer the epitome of cool. By focusing so much on the future and demolishing anything older than a decade, Vegas has neglected to preserve its history, which would have been a tourist draw (who wouldn't want to walk on the same stage that Sammy Davis Jr. danced on?).

To be fair, when I went to the new Wynn hotel in Vegas, I was impressed. I wasn't impressed in the sense that this hotel was something wild, something fun--but it was a darn nice hotel and casino, and the no-smoking sports book didn't hurt (of course, it's impossible to find a seat). Would I fly out from California to Vegas just to see the Wynn hotel? That's the million dollar question, isn't it? I wouldn't--and if I did, there's nothing in that particular hotel that I couldn't get by staying at another hotel nearby and, say, walking over to view the Wynn's Ferrari display. The problem with sinking so much money into these hotels is that it's based on the hope that the high rollers will come to you and make up for the initial costs. But other than Charles Barkley, it's unclear why an international client would fly to the Wynn rather than another more exclusive resort, say, in Macau.

The next stage for Vegas hotels is to do what the Hard Rock Hotel has done--make each room unique so that customers are paying for the inside of their room, not the outside. I genuinely look forward to staying at any Hard Rock Hotel (HRH), because you don't necessarily know ahead of time which rock star your room will be based on. The problem with the HRH is that they don't have good locations (the one in Vegas is off the strip), and it's harder for them to expand in an already saturated market. But Vegas as a whole doesn't seem too much different than it was ten years ago, and so far, other than making its hotels more lavish, there's no new major attraction. With a looming recession, people might go to Reno or a cheaper hotel instead.

PNK is building casinos in areas where casinos are a unique, new attraction. It's like a Walmart coming to a tiny town--even if it's not fancy, even if it's just downright ordinary, the lack of competing attractions will still promote a steady stream of business.

Also, labor costs are cheaper in Indiana, Missouri, Louisiana, etc. A major cost of any Vegas casino is their unionized workforce and sheer number of employees needed to run all the attractions (or did you think the lions at the MGM fed themselves all day?). Especially in a slower economy like Indiana, casinos won't have as hard of a time finding cheaper labor and good employees. That's good news for the Midwestern and Southern-based casinos and PNK.

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.

Dave Barry Has a Blog

Dave Barry has a blog:

http://blogs.herald.com/dave_barrys_blog/

My favorite Dave Barry column is at this link:

http://findarticles.com/p/articles/mi_qn4188/is_20030720/ai_n11403113

I used to enjoy reading him every Sunday, but either the San Jose Mercury News stopped running his syndicated column, or he stopped writing for the Miami Herald.

I heard him speak at UC Davis about ten years ago. He was entertaining, but not laugh-out-loud funny. One audience member asked him about his height (he is not very tall), and although he was not happy about that question, he was classy enough to brush it off in a laid-back style.

American Anti-Immigration Fervor as Old as Benjamin Franklin

Some people view America's immigration scenario with trepidation; others with resigned acceptance; and others with open arms and optimism. While it is easy to write off the Minutemen and others as ignorant rednecks, none other than Benjamin Franklin expressed unease at immigration into America. Mr. Franklin was concerned about Germans. My point in sharing his letter and concern is to show that every single wave of new immigration brings fear, even to educated people, but years later, such fear is always forgotten. America's ability to incorporate all manners of people has been absolutely stunning and most likely the key to our success. 

  "Inconveniences may one day arise among us. Those [immigrants] who come hither are generally of the most ignorant, stupid sort of their own Nation... [F]ew of the English understand the German language; and so cannot address them either from the Press or Pulpit... Few of their children in the country learn English...they will soon so outnumber us, that all the advantages we have, will not, in my opinion, be able to preserve our Language and even our Government will become precarious." 

Mr. Franklin shows some humanity at the end of his letter when he says, "I say I am not against the admission of Germans in general for they have their Virtues; their Industry, and Frugality is exemplary." Do those traits remind anyone of the current crop of immigrants? 

I still say Thomas Jefferson's Louisiana Purchase was the single greatest achievement in American history--for what good is the Constitution without a large canvas for its implementation? America's vast landscape has allowed and will continue to allow more immigration for many more decades. The major issue is not whether America needs more immigrants--it has always had them--but how we can incorporate new immigrants and minimize wage losses in the industries they impact.

© Matthew Rafat (July 2008)

Reading List: Pensions, Global Econ, and Spending

We're approaching the holiday July 4th weekend, so I thought I'd share some book tips on my list:

1. While America Aged, by Roger Lowenstein.

Mr. Lowenstein echoes exactly what I have been saying about the inherent corruption in government, more specifically, how government workers are slowly bankrupting the younger and unborn generations.

http://www.amazon.com/While-America-Aged-Bankrupted-Financial/dp/1594201676

2. When Markets Collide: Investment Strategies for the Age of Global Economic Change, by Mohamed El-Erian.

Mr. El-Erian ran Harvard's multi-billion dollar endowment fund and was lured away by Wall Street.

http://www.amazon.com/When-Markets-Collide-Investment-Strategies/dp/0071592814/ref=pd_sim_b_4

3. Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire, by Laurence J. Kotlikoff.

This is a recommendation from Laura Rowley, who has a blog on Yahoo Personal Finance.

http://www.amazon.com/Spend-Til-End-Revolutionary-Standard-Today/dp/1416548904/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1214860083&sr=8-1

Letter to SJ Mercury re: Taxation of Services

I had a letter published in the SJ Mercury News re: taxation of services. Here is the link, in case anyone is interested (scroll down):

http://www.mercurynews.com/letters/ci_9750543

In addition to disproportionately falling on minorities, the middle class, and the poor, a service tax would create other problems. If the government starts taxing services, many small businesses might be tempted to go "underground" or not report certain transactions. I am not sure who wins when governments set up taxation systems that are sure to create enforcement problems. Although technically, the tax is passed onto consumers, it causes compliance costs for small businesses. For example, I do my own taxes; however, if I had to collect a sales tax, I would probably have to hire a CPA or accountant to make sure I was following the law properly.

These same arguments--the disproportionate impact on those least able to afford the tax, and potential enforceability issues--have been used against replacing an income tax with an additional sales tax on goods. Perhaps replacing an income tax with a national consumption tax on goods may be choosing the lesser of two evils.

Stocks Update

The WSJ hurt all casino investors today. Pinnacle Entertainment (PNK), the casino operator I recommended earlier, fell over 6% today. The probable cause? The front page of the WSJ had an article about casinos being laden with debt and being poor investments in a recession. Smaller casinos like Boyd Gaming (BYD) as well as larger ones (MGM, LVS) plunged. While I only lost a few hundred dollars (about 300 dollars) on the PNK trade, my percentages decreased significantly. My major holdings are still in GE and PFE. I sold the 1000 shares of General Electric I bought last week and made a few hundred dollars on that trade.

Open Positions
CNB = +3.99
EQ = +0.22 (excluded; movement too limited to be relevant)
EWM = -6.82
GE = -6.64
IF = -8.83
PFE = -7.64

Average of "Open Positions": losing/negative average of 5.19%

Closed Positions:
Held more than seven days but less than one year:
PNK = -16.7%
PPS = -2.8
WYE = +2.4%

Held less than 7 days:
GE (1.0%); ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%) (Overall record in this category is a 3.31% average gain)

Daytrades:
PFE = +0.5%

Average of "Closed Positions" sub-categories, except for Daytrades: losing/negative 2.39%

Combined Total Averages, excluding Daytrades: losing/negative 3.79%

Compare to S&P 500: losing/negative 7.27%
[from May 30, 2008 (1385.67) to July 1, 2008 (1284.91)]

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.

NVIDIA Corporation Annual Shareholder Meeting (2015)

Jen-Hsun Huang reminds me of James Dean, if James Dean was a Silicon Valley tech founder and CEO.  As Nvidia’s President and CEO, Mr. Huang’s leather jacket, jeans, and cool demeanor are refreshing to see.  Whereas most CEOs and board members crumble when presented with a question requiring some thought, Mr. Huang not only relishes the questions, he enjoys displaying his prodigious intellect.  Perhaps that’s only natural when he’s led Nvidia for 20+ years and battled Intel (INTC) successfully. 

Nvidia’s 2015 annual meeting took place at the company's HQ in Santa Clara, CA.  About 50 people attended.  Unlike in past years, there was no “annual yearbook” or product displays, and sadly, the food options have dwindled to just a few pastries, a plate of fruit, and coffee and water.  If you come to the meeting, you’re coming to see Mr. Huang, who clearly takes deserved pride in the company he’s built.

He opened the meeting by talking up Nvidia and how it’s the “best in the world in our field.” He mentioned that Nvidia early on recognized video games would be tech-driven, a prediction which turned out to be “absolutely right.”  Looking forward, visual computing and game simulations will drive technological innovation for a few more decades as video games become even more complex. 

Despite being the leader in video game technology, Nvidia no longer wants to be known as a mere video game company.  It has branched out into virtual reality (the future of video gaming), self-driving cars, and deep learning (AI, image recognition, pattern recognition, etc.).  Nvidia’s sales to the auto industry are booming, with 85% growth from FY14 to FY15.  That’s more than cloud and HPC growth—53%—during the same time period.  Mr. Huang said that future cars are going to be “computers on wheels,” and “safer and easier to drive.”  Overall, “simulation work” is largely done on Nvidia technology, which allows people to “see the world around you in real time.” 

Nvidia has two women on its board, Dawn Hudson (CMO, NFL) and Persis Drell (Dean, School of Engineering, Stanford University).  I asked how Nvidia could become more diverse, as all the board members except for Mr. Huang appeared to be white, which is an unusual composition in the very diverse Silicon Valley, where about 40% of Santa Clara County residents are immigrants. 

Mr. Huang delivered a great response, unlike many other companies, which become defensive under the same line of questioning (I’m looking at you, San Jose Water Company (SJW), with your one female board member and not a single person of color in the front of the room at your 2015 shareholder meeting).  Mr. Huang responded that “through diversity, we get better answers,” and explained that it was difficult to attract board members when Nvidia was known only as a video game tech company.  Now, as Nvidia successfully branches out into several different areas, it is getting more and more attention and interest. 

I then asked what advice he had for a new entrepreneur starting out in Silicon Valley.  That’s when he delivered the line of the night—“Don’t go into video graphics,” which caused the entire room to laugh.  When the noise settled down, Mr. Huang said that success requires serendipity, and it’s never just one person—it’s the people you’re surrounded by.  As for how he’s managed to remain CEO for so long, Mr. Huang showed a bit of a Mark Cuban streak when he remarked that he and the company (have not been and) should not be complacent.  Today, in part because of his leadership and willingness to take calculated risks, Nvidia is succeeding on multiple platforms—PC, cloud, and mobile, while some other companies struggle with the shift to mobile, such as Intel (INTC). 

When the meeting ended, I wanted to talk to some board members.  I wasn’t impressed with board member Dawn Thomas—she seems standoffish and plastic—but I was honored to talk to Stanford’s Persis Drell.  I asked her how to increase diversity on the board and in Silicon Valley.  She said it would take time, but talking about the issue was the first step.  Also, diversity of experience matters, not just race or gender—she remarked that one of the best people she had on her team was a white gentleman who was ex-military, and because of his military experience, he was comfortable pushing to get things done when others might sometimes dither. 

As for why persons of color in America are underrepresented in the science and engineering fields, she said some of it has to do with resources.  Many kids have access to computers and other resources at an early age, but this access is not universal.  I couldn’t help but think of where Bill Gates might be had his parents not enrolled him in a school where a computer company provided computer time for the students.  In the 1970’s, having access to computers was not common, and Gates’ privileged access allowed him to become who he is today.  It was a pleasure speaking to Dr. Drell. 

Let’s start talking about diversity, complacency, and other difficult topics, folks.  The world ain’t gonna fix itself, but as long as there are people like Dr. Drell and Mr. Huang—intrepid pioneers who aren’t afraid to meet challenges head-on—I have a feeling things are going to be just fine.

(Originally published May 21, 2015, referring to NVIDIA's May 20, 2015 annual shareholder meeting.) 

NVIDIA Shareholder Meeting 2008

I attended NVIDIA's (NVDA) shareholder meeting on June 19, 2008. NVIDIA has an Asian CEO, Jen-Hsun Huang, who comes across as knowledgable and enthusiastic. In San Jose, where so many Southeast Asians, Middle Easterners and Asians drive innovation, most companies still have no diversity in upper management ranks. While NVIDIA appears to be diverse, it's not helping the company's share price, which is down significantly this year.

NVIDIA designs graphics chips and cards. NVIDIA has partner fabs that actually make the chips which are then sent to partner factories to be mounted on video cards for PCs. NVIDIA graphics cards that bear NVIDIA as the manufacturer are referred to as reference cards.

NVDA's most touted product is its GeForce, a video graphics chip (NVDA likes to brag that the "graphics chip was given a soul" by its company). GeForce revenue increased 28%, and overall revenue increased 34%. Revenue numbers looked great, so it is quite possible the stock price is undervalued.

NVDA specializes in the high growth area of gaming, which requires high-end video graphics. It has even partnered with Hollywood movie companies to make films--the higher the graphics requirements, the more NVDA's products will be in demand.

As for competition, I asked my engineering friends why Intel wouldn't muscle in on NVDA's territory if NVDA is basically a fabless semiconductor company. Here is what one engineer said:

Intel did try to make a top-of-line video card at one time to compete with NVIDIA and ATI (AMD) but they failed. Modern day top-of-line video cards that NVIDIA and ATI (AMD) produce are very complex devices that take years of R&D. Video card drivers are notoriously complex pieces of software that also take years to fine-tune. Video card drivers support many if not all of the features of OpenGL and DirectX.

This anti-Intel piece brought some indignation from an Intel engineer, who referred everyone to "Larrabee." The Larrabee will not be available until Q1 2009, so until then, NVDA will be king of the graphics processing unit (GPU).

The highlight of the shareholder meeting was the "annual yearbook" video. It showed several fun pictures of the company and its worldwide employees, including a great Fortune cover with the CEO. It became apparent that NVDA's decision to open up its architecture through CUDA (a set of development tools) is something that should be analyzed in more depth. Like Linux, opening up a technology company's architecture allows hardcore geeks to improve your products for free, but this "free" work comes at a cost, namely less control over the product. Last time I checked, Microsoft's operating system is still king, despite the programming community's swearing that Linux's OS is superior. In any case, several images of "CUDA Everywhere" flashed on the screen.

The employee tidbits in the video yearbook were the most amusing--the video alternated between employees who had been there a few weeks to some who had been there for fifteen years.

After the video yearbook, which was impressively done, the presentation mentioned Quadro (Creativity), Tesla (Discover), and other NVDA products. The CEO stated his goal of making the 2-D into 3-D. Mr. Huang talked about four areas of innovation: photorealism; parallell processing; dimensionalization; and imaging and sensing, all tools to make the 2-D into beautiful 3-D. Mr. Huang compared his company with Nike several times, meaning that he wanted NVDA to be partners with the best video gaming companies and the best gamers, similar to Nike and Jordan, for example.

One slide showed the insides of a GeForce chip, more specifically the GTX 200 chip. It has 1.4 billion transistors, 933 GigaFLOPS of processing power, 240 processing core, and more than 20,000 threads. I have no idea what that means, but it sounds damn impressive.

Mr. Huang mentioned that the world's leading physics simulator used his products, and then took us into a John Madden NFL video game, where a player named "Gibbs" (Washington Redskins fans in the house?), showed how NVDA technology is used in more everyday applications.

Mr. Huang clearly wanted to show that NVDA was more than just a gaming company--he showed that his products help speed up iPod movie downloads (from conversion to finish) through the BadaBoom application, and talked about a new project, Folding@home, a Stanford-NVDA project. Other NVDA chip/card uses involved film, and we saw a clip of Curse of the Golden Flower, which apparently used the NVDA Tegra chip to create its visual effects.

There were only two questions. One person asked about the criteria NVDA uses to give back to the community. Mr. Huang said that the NVIDIA Foundation was independent and involved in diverse areas with no set criteria. NVDA has assisted battered women, schools, and other causes.

I asked the second question, about some specific items in the 10K, focusing on a section on competition from Intel, and who NVDA's major customers were. Mr. Huang talked about "having the courage to take the risk" of innovating into novel areas, and "imagining 'there' five years before going there." He said that NVDA's top customers were Dell and HP.

All in all, a very interesting presentation, but one that could have been done in less time. Some shareholders were getting antsy after more than an hour. The food, by the way, was good--I had some juice and a breakfast burrito.

With respect to the overal market, last week's stock markets swooned, and the Dow fell more than 300 points on one day. Is this the bottom? For long term investors, it may make some sense to wade back into the market and pick up shares of financially sound companies, such as Intel, GE, and perhaps even Pfizer. But short term investors willing to take on some risk may benefit also. I bought 1000 shares of GE on Friday and plan on selling it before Thursday. I predict GE will hit 27.50 at some point next week. Some brave souls willing to wait may want to consider NVDA as well.

Update on June 30, 2008: I picked up another 100 shares of PNK.

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.

Clarence Thomas Gives UGA Commencement Speech

Justice Thomas coined an interesting phrase: "telescopic philanthropy," to refer to someone who cares more about people far away than issues at home. Here is the link to the speech:

http://www.uga.edu/news/artman/publish/printer_080529Thomas_commencement.shtml

I always like quoting Justice Thomas directly because of the criticism he receives from the media. When the media paints a man as polarizing, it's important to look at what he says, rather than what is said about him.

East and West: Singaporean-American Blogger Sued for Defamation

I lived in Singapore for a little while and loved it, so I took a special interest in today's San Jose Mercury News, which had a story about the Singaporean government suing a blogger for defamation. The blog can be found here:

http://singaporedissident.blogspot.com/

Most of the blog has a sensationalist style, but there are two well-written paragraphs where the blogger successfully articulates his position:

This whole matter boils down to one question. A right to free speech and expression. It appears to me as well as anyone watching this case that what the Singapore authorities are trying to say is this. Do not criticize the Singapore judiciary no matter what. Even if the Singapore judiciary were to say, two and two is ten, the Moon is made of cheese and Christmas Day does not fall on December 25th, we have to keep our mouths shut and go about our business as if nothing happened! What the Singapore authorities are trying to say, if I correctly understand it, is that human beings are disallowed from criticizing the judiciary, period! They are above criticism. They are beyond question. They are invincible. Infallible. They are the best, and need no criticism from mortal human beings! That they are Gods.

I, as a human being cannot understand this to be correct, surely. I was born a Singaporean. I lived my life here in Singapore. I am a former Singapore politician. The welfare of Singapore and Singaporeans should be more my concern than that of Central West Africa! Surely. Criticism is necessary for any organization to improve, to get better. Without criticism, there is stagnation. And with stagnation there is no hope. This has always been the case. What I had done and said was for the welfare of Singapore, a country that I care for and a country in which I have a stake, even if I am now an American.

Whenever someone criticizes Singapore, it is usually from a myopic Western perspective. Most people in Western societies equate democracy and free speech with success or, if they are more condescending, with civilization. But being democratic is no surefire avenue to express the majority's will, as we saw with Al Gore's contested election and as we see now with the current war in Iraq. Also, restricting free speech is not an uncommon tactic--Germany bans swastikas, and France just prosecuted Brigitte Bardot for inciting violence against Muslims. As such, the Western media seems to unfairly single out Singapore without providing appropriate context and its different path of Eastern values, which emphasizes cooperation over independence.

It may seem contradictory for a libertarian to defend Singapore when it sues its own citizens for criticizing the government, but Singapore is a unique country, and its actions must be taken in the context of its size and broad-based economic success. First, Singapore is small and has very few natural resources. Its area consists of about 300 square miles--to give you an idea of how small that is, Rhode Island, the smallest state in the U.S., is about 1500 sq miles. Second, Singapore is very diverse--when I was there, I saw Chinese Buddhists, Israeli Jews, Malaysian Muslims, white Christians, and Indian Hindus. As a result of being diverse, both religiously and ethnically, Singapore takes special care to regulate speech to make all groups feel welcome and to minimize chances of a racial riot (a risk it is particularly sensitive to after its 1964 riots). In short, Singapore needs to project an image of harmony to ensure its status as Southeast Asia's banking hub. In exchange for good behavior, Singapore offers its citizens subsidized housing (HDB flats), safety (no drugs are allowed in the country, and gun-related deaths are rare--for a general overview, see http://ije.oxfordjournals.org/cgi/reprint/27/2/214.pdf), and low unemployment (on 1/30/08, the reported unemployment rate was 1.6%).

In some ways, Singapore seems like the polar opposite of the United States. It does not have a 2nd Amendment, freedom of speech, large land mass, and an adversarial system of checks and balances. But it works. In smaller countries, a government can successfully micromanage its population to create stability. For example, the U.S. government and the Fed Reserve just pumped a lot of money into the American economy, but it is having little effect and will probably cause inflation. In a smaller population, a government can pump in a smaller amount of money into its economy and positively affect its entire population, while avoiding massive inflation due to lower population numbers. In simple terms, Singapore can use very little money to build a few good housing projects and solve homelessness, while America needs to do a lot more and spend a lot more to solve homelessness. In addition, with a smaller population, inflation stops more quickly after benefits or monies are given because the monies are expended in a faster and more predictable fashion, whereas in a larger population, granting extensive benefits may lead to prolonged periods of inflation as the money works its way more slowly and more unpredictably through the economy.

This opportunity to effectively micromanage means that smaller countries can be successfully socialist if most of its citizens cooperate and are willing to delegate. While that sounds hostile to anyone who has read Thomas Jefferson, Singapore's system continues to attract major outside investment while providing a high quality of life to almost all of its citizens. Homelessness, a high prison population, murders, poorly performing schools, and large pockets of unemployment are virtually non-existent in Singapore. Singapore's infrastructure is also better developed than most European countries and most American cities--its MRT system is as good as D.C.'s Metro or Germany's U-Bahn. By most tangible measures, Singapore is one of the most successful countries in the world, if not the most successful.

Thus, given the differences in scale, it is unfair to compare small, cooperative, and cohesive Singapore to large, adversarial, and idealistic America. At the end of the day, there ought to be room for a country that gives its citizens free/subsidized housing, safety, and cheap, delicious food, while minimizing unemployment. These are tangible, quantifiable items that Singapore works hard to bring to its people. To borrow from Walt Whitman, Singapore is not large, and it does not contain multitudes. It offers a simple, direct deal--be cooperative, and you will be safe, not homeless, and live in a stable, diverse and rich country. America's deal is different, and not necessarily a superior deal for all citizens. America is unique because it is vast and tries to live up to very high standards in an adversarial system that prizes independence. When it works, it's wonderful--we get to claim Google, we attract the best and brightest from all over the world, and we have freedom and creativity that lead to timeless films and books. But our system is unpredictable--when it doesn't work, we get Watts Riots, a costly war in Iraq, people imprisioned in Guantanamo Bay for six years without due process, many desperately poor people or people one paycheck away from being homeless, and shootings of innocent citizens, like Vahid Hosseini (San Jose, CA) and Alia Ansari (Fremont, CA). Singapore offers a different flavor for people who like to cooperate and don't mind making some intangible sacrifices.

On a personal note, when I was in Singapore, I felt safer there than here in the United States. Singapore has no history of physical violence or prolonged physical detention against its own citizens or residents. America's government locked up its own residents (Japanese and German internment camps); killed dissidents (the Black Panthers' Fred Hampton and Mark Clark, Kent State); blacklisted "subversives" (McCarthyism); and enslaved minorities. With the exception of suing its "subversives" in court--still an open process--Singapore has no history that requires it to change its cooperative structure. Given its stunning economic success, Singapore should be given the benefit of the doubt, at least for now.

Stocks Update

The WSJ mentioned Colonial BancGroup (CNB) in an article today titled, "Small Banks Get Tempting." Author Peter Eavis said that CNB was an "intriguing prospect," but it would probably take two to three quarters (9 months) before the stock would rebound. He mentioned that the bank's charter had changed from federal to state, "allowing it to replace the Office of the Comptroller." I don't think anyone quite understands that all banks are regulated by the Office of the Comptroller if their funds are FDIC-insured. Either I'm wrong, or financial journalists aren't doing their homework.

Pinnacle Entertainment (PNK) took quite a beating today and yesterday. I only have 100 shares, and won't add anymore just yet, but I am surprised the stock is down this much. As Mr. Eavis might say, PNK looks like an "intriguing prospect" at these prices.

Open Positions
CNB = -2.51
EQ = -2.15
EWM = -3.61
GE = -6.00
IF = -8.04
PFE = -7.84
PNK = -13.72

Average of "Open Positions": losing/negative average of 6.27%

Closed Positions:
Held more than seven days but less than one year:
PPS = -2.8
WYE = +2.4%

Held less than 7 days:
ICE (+2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%) (Overall record in this category is a 3.78% average gain)

Daytrades:
PFE = +0.5%

Average of "Closed Positions" sub-categories, except for Daytrades: up/positive 2.09%

Combined Total Averages, excluding Daytrades: losing/negative 4.18%

Compare to S&P 500: losing/negative 5.15%
[from May 30, 2008 (1385.67) to June 24, 2008 (1314.29)]

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.

Reno Automobile Museum, Part 2

The cars above are just beautiful. Chrysler and Mercedes seemed to have the best designs. The Ford Edsel didn't look that bad--certainly not bad enough to be associated with failure. One advertising campaign was especially interesting--to demonstrate the toughness of a car, a company drove it off a cliff, and even after it bounced several times on rocks, it was still drivable. The older cars all looked heavier and larger than modern cars.

What stuck out the most was the car companies' willingness to experiment with designs and engineering (I saw a V-16 engine). Today, I like to say, without pleasure, that Ford and GM are slowly going bankrupt. GM is probably worth nothing without GMAC, its car loan unit. In fact, GM is probably closer to a bank than a car company. Meanwhile, Toyota innovates with hybrids and other models and does a better job of managing production and employee costs. It's sad to see the state of American car companies today and compare them with how robust they were back in the day. Part of me thinks that Kirk Kerkorian isn't buying Ford shares because he thinks there's an imminent turnaround--he's buying a large minority stake out of pure nostalgia.

Reno: National Automobile Museum, Part 1

The original R.V. (above)

Reno, Nevada, has lots to see and do. You can walk along Truckee River, relax at the Siena Casino spa, grab a classic grilled cheese sandwich off the main drag at the Peppermill, or just hit the slots at the Silver Legacy. You can also see some very old cars, and gain an insight into why car companies today aren't doing very well. In the old days, cars looked better, and American car companies were not afraid to innovate. Here is the link to the Museum:

http://www.automuseum.org

More Random Thoughts: Is it Amoral to Pay Less?

My last posting on coffee, tips, and massages surprisingly garnered the most comments so far. A masseuse read my posting about the small business in downtown San Jose and said she was "appalled" at the post, and it was amoral to pay the masseuses so little because they could not afford a reasonable living making minimum wage + tips. To read the full exchange, go back one post and click on "comments." I put my response below. It is slightly unnerving to me to hear people say that offering cheaper products or services is somehow amoral.

___________

Rebecca,

Thanks for your post. I hope your school/business is going well.

Like you said, people always want bargains. They will complain about Walmart and "exploitation" in front of their friends, but still clip coupons and go after the best deal possible.

I am not sure that paying less for a product is "amoral." Most poor(er) people charge less for certain services, because they work out of their home, or just don't have the resources to offer a more professional-looking experience. At the end of the day, Walmart and other cost-conscious companies have lifted many people out of poverty abroad, and going for the cheaper option usually means some poor person, somewhere, gets to have a job.

You are correct that when a consumer chooses a cheaper product of service, someone down the chain makes less money. But this person needs to differentiate his or her business or go extinct, and that "creative destruction" is one major source of innovation and promotes superior customer service. In any scenario, someone gets hurt. Consumers who choose to pay more help support the upper-middle-class lifestyle but hurt the chance of lifting someone out of poverty, even if it's not in the U.S. Liberals oftentimes don't understand that by advocating more laws and more expensive products, they hurt the poor and help the rich.

Most important, a little shop in San Jose won't hurt your massage business. Your business appears to be more upscale, so you won't be after the same clients that the downtown San Jose shop attracts. Therefore, both stores can co-exist. In the Bay Area, there are several upscale spas in Saratoga and Los Gatos offering the same basic services as the cheaper shops in downtown San Jose. But some people won't be seen in the "lower-price" shop, because they equate low-cost with being "lower-class." For example, I have a good friend who spends $1000/wk on clothing. When I suggested she try a Vietnamese-immigrant-owned place for her pedicures so she could save 80 dollars on what looks to me to be the exact same service, she scoffed. She wouldn't be seen dead in that place and said it might not be clean. In any business, you have to decide who you want as your customers and then proceed based on that goal. There is nothing "amoral" about buying services from lower-income groups or immigrants who offer cheaper services with very little reduced quality.

Random Thoughts: Coffee and Tips

I had an interesting week. I stayed up late writing motions on a case where a public company is suing some ex-employees. The company is "pink-listed," or traded OTC (over the counter), at three cents a share. The company claims that my clients took their trade secrets. California case law requires "trade secrets" to have independent economic value, and this fabless semiconductor company's IC chips appear antiquated. (They have plenty of money to pay lawyers rather than R&D, apparently.) One line in my brief compared their product to the Gutenberg Press and how it couldn't be a "trade secret," even if a company makes its employees sign an agreement promising not to disclose the Gutenberg Press. The other side had no response to that line in their reply brief. As scintillating as all this might sound, the lawsuit is one example of how the big guys can crush or bankrupt small guys because it's usually more cost-effective for individuals to settle even frivolous cases than to pay for all the motions and depositions that come with any case (only 5 to 10% of civil cases actually get to trial, at least in Santa Clara County). In this case, my clients have decided to fight the good fight...and I guess I'll see how much debt I have to write off this year. Anyway, we'll get back to how my case is relevant to the economy.

First, I discovered this great foot massage place in San Jose, along Story Road (Little Vietnam/Saigon area). I talked with the owner, and we discussed how different cities deal with massage places. The vice squad of the local PD always vets these businesses--I represented some acupunture places before, so I am somewhat familiar with the licensing process. This San Jose owner has a great operation. He partnered with an educated Chinese immigrant who's been in California for many years. I am guessing she's the hard worker and connections, and he's the capital (he was perusing some bylaws as we spoke). They hire grads from massage schools in S.F. and L.A., probably pay them minimum wage, and the workers get to keep their tips. All of the workers are professional and appear to be Chinese immigrants. Customers are around each other in a relaxing, open area. Massages are only 20 dollars for an hour, an incredible bargain (massages are usually $40 to $60 an hour here, but those massages allow full body contact).

The massuers and massueses rely on tips in this business structure. After my massage, I gave my massuese a 4 dollar tip. I don't usually carry cash and use my credit cards to rack up points (paying off the balance each month). Realizing a 4 dollar tip was not enough, I asked my friend to provide me with two more dollars, thinking a 30% tip was sufficient. But in between receiving the additional dollars and giving it to my masseuese, I saw that she was clearly upset over receiving just a four dollars (20%) tip. When she received the 6 dollars, she appeared to be fine, or at least not insulted. Two thoughts came to mind:

1. There might be some relationship between how much it costs to buy one cup of coffee and tips. Coffee is ubiqitous and an everyday product. Everyone, rich, poor and even homeless, expects to be able to buy it. Pre-Starbucks, a cup of joe cost about a buck. In those days, a 2 dollar tip when the underlying service cost 20 dollars or less (e.g., bellhops, a few drinks) was sufficient. Now, even when the underlying cost for a service is 20 dollars or less, people expect more than just a few dollars as a tip. Psychologically, times have changed. A reasonable minimum tip might be calculated by how much it costs to buy two cups of coffee (in this case, around six dollars). Coffee prices might be a good indicator of inflation.

2. There's a greater lesson here than just how much to tip. A service economy relies on workers getting adequate tips, which shifts salary costs from businesses to customers. I did a service this week, too. I didn't get paid a tip, but I got paid $190/hr (a discounted rate, and I "no-charged" several hours also). The American economy has catapulted certain service professions from tip status into non-tip status. The non-tip jobs are usually the better ones, because the lack of tip means that the full price of the service is included, and the price is less elastic due to the greater bargaining power of the seller. I had to wonder, as I received my massage--who was contributing more to the economy and wellness? Me, with my motions and oppositions in a frivolous case filed by a three-cents-a-share company, or the masseuse?

I came to the conclusion that American society has arbitrarily vaulted my job into the non-tip column because theoretically, my job requires the use of other positions--paralegal, court clerk, judge, process server, and even a law school professor. The masseuse, while offering a more benign skill, gets paid less in the American economy because her job does not create other jobs. That appears to be the benchmark for getting paid in a capitalist system--make sure your job theoretically requires several other jobs, or is interlinked with a diverse set of jobs.

In reality, my job, at least this week, was less important or useful than the masseuse's. That's the problem with having a service-based economy--it arbitrarily makes certain positions better than others not based on output, but on expected total consumption. Other countries appear to be positioning their economies on output, i.e. paying persons who produce things more money. (Neither the masseuse nor I produce anything in the classical sense.) So in China, the jobs go to people who produce clothing, shoes, motorcycles, etc. People can make a living producing things. In India, the jobs go to people who produce generic drugs, steel, and computer products. Of course, all countries have a service and manufacturing sector, but until recently, most service-based jobs paid similarly, regardless of status. Doctors in Russia many years ago did not make much money. Lawyers certainly don't make as much money anywhere else in the world as they can in America. In Singapore, I interned in a firm's corporate legal division--almost all the lawyers in that division were women making about 45,000 U.S. annually. Looking at the American economy in this way, it appears to be based on pure air, just like our money post-Bretton Woods. Meanwhile, other countries are basing their service jobs on selling products to Americans. I don't have the time now or the mental energy to think these ideas through, but there is something dangerous lurking in the shadows (and no, I did not deliberately try to make that sound as ambiguous as possible).

I am off to Reno in eight hours for a short three day trip. I got a great deal on Southwest Airlines. The key to getting their cheaper internet fares seems to be buying a flight at least two weeks in advance. Speaking of Reno, there are two public companies in Reno that might be decent investments: 1) IGT, in which I own shares; and 2) SRP, or Sierra Pacific Resources.

SRP sells electricity and also natural gas. Once I get more funds available in my retirement accounts, I will look more closely at SRP and its dividend.

IGT sells gaming systems, better known as slot machines or electronic games, to casinos and Indian reservations. It's got a wide moat. No one is going to risk going with a newer, cheaper competitor in this area.

Due to my trip, I won't be posting anything new until at least June 24, 2008. I will update readers on the NVDIA shareholder meeting when I return. Good night, and wish me luck.

Stocks Update

This is a condensed version of the Stocks Update. I sold PPS today at a loss of 2.8%. My actual loss was only 50 dollars. Goldman Sachs came out with a "neutral" rating on PPS two days ago. At the time, the stock was selling for around 35 dollars a share. Goldman's report established a price target of 32 dollars a share. The stock dropped to 34 dollars a share. Now, if Goldman thought the price should be 32 dollars/share, then why didn't it issue a "sell" rating? This strange rating system makes no sense. Some conspiracy theorists allege that Goldman Sachs' research arm knows that its brokerage arm has shorted certain stocks and will issue reports depressing a particular sector, allowing Goldman to cover its shorts. Maybe Tim Donaghy knows something about this. The SEC and DOJ might want to work together. I'm just sayin'.

In some semblance of sanity today, PFE went up on a down day for the market, which is what defensive pharma plays should do.

I added to my GE position, and also added 200 shares of Intel (INTC). Right now, my major positions are only in PFE and GE. See you in five years or more, while I collect my dividends. If I see some share price increase, that's just ice cream on the pie slice, as far as I'm concerned (I hate gravy, so I won't perpetuate that colloquilism).

Closed Position
PPS (-2.8%)

Dick Armey's Axiom Number One

Dick Armey's Axiom Number One: "The market is rational. The government is dumb."

His entire speech, printed in Imprimis, can be found by searching here:

http://www.hillsdale.edu/news/imprimis.asp

Mr. Armey goes on to say, "George Washington might have become our king, but he chose not to. His governing idea was that government is our servant because we are inherently free. It is an idea too many in government today forget."

Dick Armey is perhaps most famous for a statement made during the Monica Lewinsky scandal in 1998. A reporter asked him what he would do if he were in President Bill Clinton's position. He replied "If I were in the President's place I would not have gotten a chance to resign. I would be lying in a pool of my own blood, hearing Mrs. Armey standing over me saying, 'How do I reload this damn thing?'"

Stocks Update

I don't usually like giving a Stocks Update right before the market closing, but I have some more closed positions I wanted to add (ICE and WYE). I couldn't handle ICE's volatility, and WYE went up 4% today. But as you can see, CNB has been a major disappointment today. I picked up another 250 shares, bringing my total to 750 shares. It's not a major investment, and most of the regional banks went down today (e.g., Regions Financial, etc.), but for the first time, I am starting to have doubts about CNB. It is quite possible it will need to raise more capital due to its mid-2007 acquisition of Citrus & Chemical Bancorporation, Inc. Where is Citrus Bank located, you might ask? (Cue ominous music...) Lakeland, Florida, one of the states affected most by the subprime mess. In any case, my only "major" position continues to be PFE.

Remember the days when banking and pharma companies were "widows and orphans" stocks? Grandma could buy some shares, not expecting any major upswing in price, but collect a consistent dividend check. The banks looked out for the savers back in the day, knowing how many shareholders were depending on their dividends. Now, this unusual economic environment has made savers into buffoons, and speculators into heroes. More important, how long will this unusual market continue? The theoretically risky stocks--like technology, where a company product can become worthless overnight due to failure to innovate--are safe havens, and the theoretically necessary stocks--like banking and medicine--are the most dangerous. There's only one explanation for this--the technology companies, like Intel, acted liked conservative banks, saved their profits and now have very healthy balance sheets. Meanwhile, the banks went loco and decided they were growth companies, Grandma's dividend check be damned. And so it goes.

Update: for what it's worth, here is CNB's response to an email I sent their Investor Relations:

We acquired Citrus and Chemical Bank in December of 2007. As part of the purchase accounting, at the date of acquisition, the assets and liabilities are marked to fair value. This mark would have happen in December of 2007 and therefore has been reflected in our capital ratios for two quarters now. Our board of directors meets in mid July at which time they will vote on the dividend. At this point, we have enough capital to maintain the dividend at its current level of $.095/quarter. We filed an 8k a couple of weeks ago which shows our excess capital and good liquidity position. This material can be accessed from our website at www.colonialbank.com.

Open Positions
CNB = -11.53
EQ = -3.19
EWM = -0.45 (excluded from totals due to insignificant gain or loss)
GE = -4.52
IF = -6.24
PFE = -7.74
PNK = +4.74
PPS = 0 (excluded from totals due to insignificant gain or loss)

Average: losing/negative average of 4.74%

Closed Positions:
Held more than seven days but less than one year:
WYE = +2.4%

Held less than 7 days:
ICE (+2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%) (Overall record in this category is a 3.78% average gain)

Daytrades:
PFE = +0.5%

Average of all sub-categories, except for Daytrades: up/positive 3.09%

Funny: Dilbert Has a Great Blog

This is one of the funniest things I've read in a long time, so I had to share:

http://dilbertblog.typepad.com/the_dilbert_blog/2007/03/worlds_most_ann.html

If the link doesn't work, do a search for "Dilbert" and "World’s Most Annoying Man." Here is one short excerpt:

Mr. Clean on crack was rocking out to his iPod and sniff-snorting so loudly every few seconds that the flight crew kept looking out the window to see if a pterodactyl was attacking the fuselage...

And yes, apparently, Scott Adams has a blog (http://dilbert.com/blog/), and he understands economics:

http://dilbertblog.typepad.com/the_dilbert_blog/2008/05/the-economics-p.html

Enjoy!

Colonial Bancgroup Inc. (CNB) Bolstering its Dividend?

[Note on November 13, 2008: this post was popular because it was published during an extremely volatile time in CNB's stock price. CNB stock has since declined along with the rest of the market, and I sold my shares at a profit. Readers who followed this blog and bought on the way down had a brief opportunity for out-sized gains. See this 07/16/08 entry (CNB Entry), just one month after the 6/15/08 entry below.

Note on August 28, 2009: what a long, strange ride it's been for CNB. The bank became insolvent, and the FDIC brokered a takeover by another bank, BB&T. CNB shares now trade only on the OTC market under the symbol CBCGQ.PK.]

I was immediately attracted to Alabama's Colonial Bancgroup Inc. (CNB), because its stock symbol reminds me of "CMB," or Cash Money Brothers, from the classic film New Jack City (where Chris Rock played a crack addict a little too well). Acronyms aside, CNB recently indicated it might switch from a national charter to a state charter. What does that mean? For reasons discussed below, I believe this is good news for people like me, who bought CNB stock for its dividend.

First, it is generally less onerous to operate as a state chartered bank than a federally chartered bank. For example, a state chartered bank can more easily pay dividends than a federally chartered bank. To understand why, we need to go back in American history. Many of the Founders of the United States viewed the notion of a federally-supervised banking system with skepticism. They had just come from a centralized, tyrannical British system and did not want to grant their federal government equivalently broad powers in the form of money-monopoly. But Alexander Hamilton pushed for a central banking system and in 1791, help set up the First Bank of the United States in Philadelphia, as well as the U.S. Mint (also in Philly). Perhaps because of the initial difficulty in setting up a centralized banking system, the federal government later passed laws that forced federally-chartered banks to operate under more strict arrangements, creating an Office of the Comptroller and other regulatory banking agencies.

The restrictions on a national (or federally chartered) bank’s ability to pay dividends arise from two statutes: 12 U.S.C. § 60(b) and 12 U.S.C. § 56.

12 U.S.C. 60(b) states:

Approval required under certain circumstances:

A national bank may not declare and pay dividends in any year in excess of an amount equal to the sum of the total of the net income of the bank for that year and the retained net income of the bank for the preceding 2 years, minus the sum of any transfers required by the Comptroller of the Currency and any transfers required to be made to a fund for the retirement of any preferred stock, unless the Comptroller of the Currency approves the declaration and payment of dividends in excess of such amount.

In short, a national bank has to get approval from the federal government if the total of all dividends it declares is more the total of its “net profits,” including net profits from the last two years, and excluding any required transfers to maintain liquidity and pay off higher priority creditors. The point is that there is a restriction on paying dividends that doesn’t necessarily exist under a state charter.

12 U.S.C. § 56 (titled, “Prohibition on withdrawal of capital; unearned dividends”) states:

No association, or any member thereof, shall, during the time it shall continue its banking operations, withdraw, or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital. If losses have at any time been sustained by any such association, equal to or exceeding its undivided profits then on hand, no dividend shall be made; and no dividend shall ever be made by any association, while it continues its banking operations, to an amount greater than its undivided profits, subject to other applicable provisions of law. But nothing in this section shall prevent the reduction of the capital stock of the association under section 59 of this title.

Basically, if a federally chartered bank ends up with bad loans, they cannot exclude those loan losses when determining their “net profits.” This accounting restriction affects its ability to pay dividends and attract shareholders, who typically buy bank stocks for their dividends. In contrast, if a non-federally-chartered bank is losing 100 million dollars because of bad loans but makes a profit of 99 million dollars elsewhere, they might not be forced to mark-to-market their bad loans, meaning they might be able to report a net profit of 99 million dollars (oh, pro forma, how Wall Street loved you). However, a federally chartered bank, under that simplified scenario, could not pay any dividends whatsoever. This § 56 accounting restriction means that in bad years, federally chartered banks would probably have to reduce or eliminate their dividends. In addition, because a federally chartered bank has to pay dividends from “net profits,” rather than some other capital account (“prohibition on withdrawal of capital”), a bank with two consecutive bad years might not be allowed to pay any dividends at all for a long time, even if it is financially healthy overall.

What does this mean now that CNB’s application to become converted into a state chartered bank has been approved? I interpret it to mean the relatively hefty dividends are going to keep coming. In the absence of financial irregularities--never a sure bet these days--the state conversion application should be good news for Cash Nabob Bulls, er, CNB shareholders (sorry, Mario van Peebles--I couldn't resist, especially not when you have an economics degree from Columbia University.)

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.