I've been reading the Wall Street Journal for years, and I've never seen better letters published on the issue of income taxes. From July 25, 2008 newspaper:
By Sim Pace, from Arlington, VA--the spirit of Jefferson shines bright:
"[T]he top 50% of taxpayers paid 97.1% of income taxes in 2006...Isn't that the well-known definition of democracy, the poorest 51% of the population tyrannizing the richest 49%? I suspect Sen. Obama would like to see the pendulum swing even further and have the top third of taxpayers pay all the income taxes, then the other well-known definition of democracy will have been validated: two wolves and a lamb voting on what to have for dinner.
By Bruce Kebbekus from Hotchkiss, CO:
It should be mentioned that letting about half the citizens escape and pay no income taxes will lead, and probably has already led, to voter disinterest and bad government. Too many have no stake in the game.
By Harold Arkoff from Calabasas, CA:
California...receives back from Washington a smaller percentage of income taxes than it pays. A greater burden is placed on the local population to pay for state services which must be paid for by other sources of revenue..."Their fair share" can have more than one meaning. Is California getting a fair share?
What do D.C. and Delaware produce? They are usually in the highest brackets in terms of per capita GDP by state. See
http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm
Delaware has attracted almost all the major banks to its state by having a pro-business platform. Also, most of us didn't elect the Delaware Chancery Court to decide economic legal issues, but its opinions make waves nationally in business matters. This small state and D.C. have made themselves epicenters of influence despite their unimpressive physical statures (D.C. is a swamp after all).I t's commendable to see a small state and a district attract so much business and influence. At the same time, one wonders why California and Texas citizens don't project themselves as well as these smaller entities. Is this a case of Lennie and George, as Mr. Arkoff implies in his letter?
Friday, July 25, 2008
Money Tips
Here is a fun article with money tips from famous people, including Steven Levitt and Derek Jeter:
http://finance.yahoo.com/banking-budgeting/article/105452/The-Smartest-Advice-I-Ever-Got
I need to think about Mr. Levitt's advice more. Does the advice also apply to small businesses with inconsistent income streams?
http://finance.yahoo.com/banking-budgeting/article/105452/The-Smartest-Advice-I-Ever-Got
I need to think about Mr. Levitt's advice more. Does the advice also apply to small businesses with inconsistent income streams?
Across the Pond: American vs. British Women
I have a soft spot in my heart for the United Kingdom. I attended primary school for a short while in Edinburgh and still have family in London. I was a passenger in my first Ferrari ride (a GTO) in London, and the chocolates and sweets are incredibly richer and better than in the States. Of course, I think British women are wonderful as well. But an article disputes that point, and it is so hilarious and so different from the politically-correct publications we have in the U.S., I had to share:
Initial salvo (Tad Safran):
http://women.timesonline.co.uk/tol/life_and_style/women/beauty/article3029451.ece [Apologies--link has expired.]
A perfect example of this was presented to me last week. I was set up with Sophie (I have changed the name) by married friends. Sophie was a truly beautiful girl I used to be friends with, but hadn’t seen in 15 years. I was surprised to hear that she was still single and was excited to meet her again. At dinner, I found myself sitting opposite something that surely would have been happier hunting for truffles in the forests of France or grazing on the grassy marshlands of Canada...
It’s not entirely Sophie’s fault, I suppose. My friend’s wife didn’t manage my expectations. Maybe it would have been better if she had said: “Tad, you enjoyed The Lord of the Rings. Would you like to meet an orc?”
Counterpoint:
http://www.dailymail.co.uk/femail/article-504812/The-man-called-British-women-ugly-goes-date--Liz-Jones.html
Follow-Up (with extra shovel):
http://women.timesonline.co.uk/tol/life_and_style/women/beauty/article3056296.ece [Apologies--link has expired.]
Follow-Up from the Gentler(?) Sex:
http://www.thesun.co.uk/sol/homepage/woman/article571411.ece
I miss the U.K. sometimes. "Femur-sized Toblerones"...you just can't find that kind of acerbic writing anymore. If it weren't for the NY Times, the LA Times, and the Washington Post, Americans would be in danger of having no daily newspapers designed for an audience above a tenth-grade reading level. Sigh.
As for Tad Safran, he is writing at least partially tongue-in-cheek. He's smart enough to know if a woman can't figure out he's joking or laugh at herself a bit, he's probably better off without her.
Initial salvo (Tad Safran):
http://women.timesonline.co.uk/tol/life_and_style/women/beauty/article3029451.ece [Apologies--link has expired.]
[T]he girl giving the [beauty] advice actually did think her
friend looked adorable and it was simply like one cannibal asking another if
it’s wrong to eat human flesh. Ultimately, English women are like men doing
DIY. No matter how lost they are, they refuse to call in professional help.
It’s not entirely Sophie’s fault, I suppose. My friend’s wife didn’t manage my expectations. Maybe it would have been better if she had said: “Tad, you enjoyed The Lord of the Rings. Would you like to meet an orc?”
Counterpoint:
http://www.dailymail.co.uk/femail/article-504812/The-man-called-British-women-ugly-goes-date--Liz-Jones.html
Follow-Up (with extra shovel):
http://women.timesonline.co.uk/tol/life_and_style/women/beauty/article3056296.ece [Apologies--link has expired.]
Women of Britain: Bridget Jones’s Diary is not a
documentary. It’s a work of fiction, a fairytale. The fact is that control-top
granny pants are simply not a substitute for regular exercise, thoughtful
grooming and a healthy diet.
Follow-Up from the Gentler(?) Sex:
http://www.thesun.co.uk/sol/homepage/woman/article571411.ece
I miss the U.K. sometimes. "Femur-sized Toblerones"...you just can't find that kind of acerbic writing anymore. If it weren't for the NY Times, the LA Times, and the Washington Post, Americans would be in danger of having no daily newspapers designed for an audience above a tenth-grade reading level. Sigh.
As for Tad Safran, he is writing at least partially tongue-in-cheek. He's smart enough to know if a woman can't figure out he's joking or laugh at herself a bit, he's probably better off without her.
Thursday, July 24, 2008
We Don't Need No Stinking Capitulation
The economy looks bad, but when experts demand a 5% or more down day before buying stocks, we may have to wait a long time for a real recovery. Market experts, including Barry Ritholtz (http://bigpicture.typepad.com/), want capitulation, or one day of panic; however, the markets have placed rules to prevent large down days. The new rules against naked short selling are another brick in the wall against a Depression-era one-day dip. In addition, Grasso instituted trading curbs ("circuit breakers") to prevent exactly what the experts want. Meanwhile, Congress continues to consider regulations against ICE and other trading exchanges to prevent instability. If the experts and mutual fund managers want something the exchanges and government are actively preventing, even good economic data may get cast aside as we create a self-fulfilling sideways market.
The facts are that oil has come down from its high, and the American dollar is slowly recuperating. The dollar has already decreased so much the Mexican and Canadian currencies are the ones that look overvalued. The European Central Bank (ECB) has to maintain or increase interest rates to keep its superior edge on the dollar, and at some point, EU citizens will be screaming bloody murder when growth slows or stops. We forget that Europe has many powerful and influential companies that want to sell their own products abroad and are becoming angry at the U.S. dollar's weakness.
As for oil, barring an Israeli attack on Iran or vice-versa, oil will decrease in price. Commodities experts have been denying a supply issue for months. In the absence of a supply issue, oil prices will decrease as Americans use less oil--unless the law of supply and demand suddenly vanishes.
I am no Pollyanna, but with money markets offering 2%, and CDs not much better, if investors don't take some action, inflation (running around 5%) will destroy their purchasing power. Having said that, why is the market discounting technology companies, many of which have plenty of cash and were not involved directly in subprime, finance, or housing? If I'm Intel (INTC), Google (GOOG), ST Microelectronics (STM), Microsft (MSFT), Brocade Communications (BRCD), Taiwan Semiconductor (TSM), or MEMC (WFR), I'm beginning to wonder if the American stock market is an inefficient way of valuing my company. After Sarbanes-Oxley, why would a rational company want to have an IPO in this irrational market?
Disclosure: I own shares or plan on buying shares in the above companies.
The facts are that oil has come down from its high, and the American dollar is slowly recuperating. The dollar has already decreased so much the Mexican and Canadian currencies are the ones that look overvalued. The European Central Bank (ECB) has to maintain or increase interest rates to keep its superior edge on the dollar, and at some point, EU citizens will be screaming bloody murder when growth slows or stops. We forget that Europe has many powerful and influential companies that want to sell their own products abroad and are becoming angry at the U.S. dollar's weakness.
As for oil, barring an Israeli attack on Iran or vice-versa, oil will decrease in price. Commodities experts have been denying a supply issue for months. In the absence of a supply issue, oil prices will decrease as Americans use less oil--unless the law of supply and demand suddenly vanishes.
I am no Pollyanna, but with money markets offering 2%, and CDs not much better, if investors don't take some action, inflation (running around 5%) will destroy their purchasing power. Having said that, why is the market discounting technology companies, many of which have plenty of cash and were not involved directly in subprime, finance, or housing? If I'm Intel (INTC), Google (GOOG), ST Microelectronics (STM), Microsft (MSFT), Brocade Communications (BRCD), Taiwan Semiconductor (TSM), or MEMC (WFR), I'm beginning to wonder if the American stock market is an inefficient way of valuing my company. After Sarbanes-Oxley, why would a rational company want to have an IPO in this irrational market?
Disclosure: I own shares or plan on buying shares in the above companies.
Stocks Update, July 24, 2008
Numbers below are based on prices at the close of market on July 24, 2008.
Open Positions
EWM = -6.57
IF = -8.45
VNQ = -1.02
[Average of "Open Positions": losing/negative average 5.34%]
Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
WYE = +2.4%
[Overall Record: Lost an average of 3.97%]
Held less than 7 days:
GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)
[Overall Record: Gained an average of 3.31% (avg has changed because of GOOG trade)]
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)
[Overall Record: Gained an average of 1.76%]
Compare to S&P 500: losing/negative 9.6%
[from May 30, 2008 (1385.67) to mid-day July 17, 2008 (1252.54)]
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Open Positions
EWM = -6.57
IF = -8.45
VNQ = -1.02
[Average of "Open Positions": losing/negative average 5.34%]
Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
WYE = +2.4%
[Overall Record: Lost an average of 3.97%]
Held less than 7 days:
GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)
[Overall Record: Gained an average of 3.31% (avg has changed because of GOOG trade)]
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)
[Overall Record: Gained an average of 1.76%]
Compare to S&P 500: losing/negative 9.6%
[from May 30, 2008 (1385.67) to mid-day July 17, 2008 (1252.54)]
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Random Thought: Good Writing
Once in a while, I see some beautiful writing and want to share. This one's from Virgil's Georgics, about rural/farming life:
By winter fire-light, shaping with keen blade
The torches to a point; his wife the while,
Her tedious labour soothing with a song,
Speeds the shrill comb along the warp, or else
With Vulcan's aid boils the sweet must-juice down,
And skims with leaves the quivering cauldron's wave.
By winter fire-light, shaping with keen blade
The torches to a point; his wife the while,
Her tedious labour soothing with a song,
Speeds the shrill comb along the warp, or else
With Vulcan's aid boils the sweet must-juice down,
And skims with leaves the quivering cauldron's wave.
Wednesday, July 23, 2008
Bush Gets It Right
President George Bush explained the banking problems rippling through the economy as a drunken binge that has resulted in a hangover:
http://news.bbc.co.uk/1/hi/world/americas/7522335.stm
Apparently, this is news to some people and/or has offended some people. President Bush actually explained this one perfectly. I don't understand the controversy. If you're going to attack him for something, try his earlier linking of 9/11 to Iraq. Don't attack him for something when he makes sense.
Update on July 24, 2008: David Ellison in today's WSJ, C1, uses the same terminology as Bush: "Half of an alcoholic's problem, Mr. Ellison said, 'is admitting he's an alcoholic.'"
http://news.bbc.co.uk/1/hi/world/americas/7522335.stm
Apparently, this is news to some people and/or has offended some people. President Bush actually explained this one perfectly. I don't understand the controversy. If you're going to attack him for something, try his earlier linking of 9/11 to Iraq. Don't attack him for something when he makes sense.
Update on July 24, 2008: David Ellison in today's WSJ, C1, uses the same terminology as Bush: "Half of an alcoholic's problem, Mr. Ellison said, 'is admitting he's an alcoholic.'"
Susan Decker = Best Corporate Officer Ever?
CNBC had an interview today with Susan Decker, who is now Yahoo's president. She is currently my favorite corporate officer. She has an aura that exudes competence and intelligence, as well as femininity. Women who want to rise up in the corporate ranks ought to study Ms. Decker.
http://www.cnbc.com/id/25815607
She is married with three children.
http://www.cnbc.com/id/25815607
She is married with three children.
Most Overpaid Jobs
Chris Plummer has a great article on overpaid jobs:
http://www.marketwatch.com/news/story/10-most-overpaid-jobs-us/story.aspx?guid={954AA053-F953-43F3-BBC8-63D351A3BF2A}&dist=TNMostRead
CEOs and mutual fund managers go towards the top of the list.
http://www.marketwatch.com/news/story/10-most-overpaid-jobs-us/story.aspx?guid={954AA053-F953-43F3-BBC8-63D351A3BF2A}&dist=TNMostRead
CEOs and mutual fund managers go towards the top of the list.
Tuesday, July 22, 2008
Apple v. Bank of America: Whisper Numbers Come Home to Roost
Some of you who have been following earnings releases will be forgiven for not understanding why the market punished Apple (AAPL) after it released better-than-expected earnings (19%+ EPS surprise), while Bank of America (BAC) increased from $20/share to $32/share after showing its net income decreased by 41%. AAPL's stock was down at one point by 10%. Its growth prospects are still quite good, especially because market penetration in China is incomplete (Steve Jobs indicated that iPhones were being used in China without providing revenue back to Apple due to hacking and IP issues). BAC, on the other hand, will have major problems with its acquisition of Countrywide as more and more notices of defaults (NODs) occur. In fact, in recession-resistant Santa Clara County, NODs recently spiked.
The market makes no sense sometimes, except when it does. Earnings guidance is a game played between companies and analysts. When Apple (AAPL) tells Wall Street it expects 10% increase in sales, it does so with a wink. Apple gives the Street lower numbers so it can beat those numbers come earnings time. The Street, of course, is a formidable player. It accepts Apple's lowered expectations with a wan smile and then dumps it if the numbers aren't dramatically higher. The real numbers required to maintain or increase share price are sometimes referred to as "whisper numbers." Wall Street accepts the lower numbers on paper but demands that the company meet its whisper number later on. It's a strange song and dance that serves no one well.
AAPL went down while BAC went up because shares prices are based on how much money a company expects to earn in the future, not what it made last quarter. So the Street doesn't care about the actual numbers released--it knows it's all a game. The Street pays more attention to how well the company says it will do in the future, especially whether the company will maintain or increase full year guidance (i.e., whether the quarterly numbers released every three months will add up to the full year's "earnings per share" expectations).
What is an average investor to make of all this? Only that share prices are based more on future expectations of value than on past statistics. As they say in business, past performance is no guarantee of future results.
The market makes no sense sometimes, except when it does. Earnings guidance is a game played between companies and analysts. When Apple (AAPL) tells Wall Street it expects 10% increase in sales, it does so with a wink. Apple gives the Street lower numbers so it can beat those numbers come earnings time. The Street, of course, is a formidable player. It accepts Apple's lowered expectations with a wan smile and then dumps it if the numbers aren't dramatically higher. The real numbers required to maintain or increase share price are sometimes referred to as "whisper numbers." Wall Street accepts the lower numbers on paper but demands that the company meet its whisper number later on. It's a strange song and dance that serves no one well.
AAPL went down while BAC went up because shares prices are based on how much money a company expects to earn in the future, not what it made last quarter. So the Street doesn't care about the actual numbers released--it knows it's all a game. The Street pays more attention to how well the company says it will do in the future, especially whether the company will maintain or increase full year guidance (i.e., whether the quarterly numbers released every three months will add up to the full year's "earnings per share" expectations).
What is an average investor to make of all this? Only that share prices are based more on future expectations of value than on past statistics. As they say in business, past performance is no guarantee of future results.
Monday, July 21, 2008
Pfizer (PFE)
Like many before me, Pfizer (PFE) has caused me heartbreak. I sold all but 100 shares of it today, and will consider it a closed position at a percentage loss of 5.5%. I also picked up more IF and EWM and opened a new position, VNQ.
It appears I correctly called a bottom in the banking sector. Today, Bank of America reported better than expected earnings (which means they weren't completely abysmal), and CNB keeps chugging up. As one of the few people in the entire country who called at least a short-term banking bottom correctly, I am waiting for my first CNBC appearance...but won't hold my breath.
I've been keeping track of all my retirement accounts, which is where I do most of my trading. From June 3, 2007 to July 21, 2008, my portfolio increased 3.0%. It's not great performance, but the S&P 500 decreased 18% during that same time period, so I'll take it [from June 1, 2007 (1536.34) to July 21, 2008 (1260)].
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
It appears I correctly called a bottom in the banking sector. Today, Bank of America reported better than expected earnings (which means they weren't completely abysmal), and CNB keeps chugging up. As one of the few people in the entire country who called at least a short-term banking bottom correctly, I am waiting for my first CNBC appearance...but won't hold my breath.
I've been keeping track of all my retirement accounts, which is where I do most of my trading. From June 3, 2007 to July 21, 2008, my portfolio increased 3.0%. It's not great performance, but the S&P 500 decreased 18% during that same time period, so I'll take it [from June 1, 2007 (1536.34) to July 21, 2008 (1260)].
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Sunday, July 20, 2008
New York Times v. Sullivan: Should the NYT Go Private?
The New York Times reports earnings on July 23, 2008. Its stock price has declined as younger readers eschew newspapers for the internet. The NYT's reporting itself is still stellar--its recent reports on the economy have been fantastic, and its charts and easy-to-read graphs showing various economic statistics are unparalleled. Many outlets use the NYT's links or re-publish their articles and statistics, so demand isn't the NYT's problem. The real issue is monetization: "How does the NYT maintain its dual roles as a pillar of news reporting, which requires wide distribution, and as a public corporation, which requires more cash flow to please shareholders?" Both aims are not necessarily synonymous, because free content is more widely distributed, while paid content reaches a smaller audience. These conflicting aims render the NYT heavily dependent on advertising dollars, which are being shifted more to Google and other internet outlets. If Google's recent earnings results are any indication, the NYT may have a difficult future. Still, cash flow is not everything, and the NYT's reputation is still gold in terms of goodwill.
It is vitally important to remember that the NYT is directly responsible for one of the defining legal principles of our country--free speech. Every American should read Justice Brennan's opinion in New York Times Co. v. Sullivan, 376 U.S. 254 (1964):
The First Amendment, said Judge Learned Hand, "presupposes that right conclusions are more likely to be gathered out of a multitude of tongues, than through any kind of authoritative selection. To many this is, and always will be, folly; but we have staked upon it our all." United States v. Associated Press, 52 F. Supp. 362, 372 (D.C. S. D. N. Y. 1943). Mr. Justice Brandeis, in his concurring opinion in Whitney v. California, 274 U.S. 357, 375 -376, gave the principle its classic formulation:
To summarize the decision, American libel law after the NYT case made it very difficult for a public figure to sue someone for criticism. Europeans and Singaporeans, in contrast, sacrifice free speech for more civility. This remarkable difference would not exist had the New York Times not chosen to fight a libel judgment all the way to the Supreme Court. Today, one wonders if the NYT would have authorized such legal fees for the sake of principle. Would shareholders today agree to receive fewer dividends if it meant spending money to establish a long-term legal principle? The more I think about it, the more I believe the New York Times and newspapers should go back to being privately held so they can focus on long-term trends rather than short-term shareholder whims. Perhaps the earnings release on July 23, 2008 will force that result if it is bad enough. If earnings are good, we win because NYT's stock goes up; and if earnings are poor, we win, because we might get a newspaper more focused on reporting, not pleasing shareholders.
Indeed, America's Founders--as much as they hated their newspapers (just ask Alexander Hamilton, whose affair was exposed by the media, making him the original Bill Clinton)--intended media outlets to be the "fourth pillar" of government, keeping it in check. But as media have consolidated operations and focused on profit, it is hard to see any real criticism of government policies. Having hundreds of channels and outlets competing for our attention has fractured the public and its ability to engage in deliberative democracy. Keith Olbermann and Jon Stewart aside, where are our modern-day Edward R. Murrows? It is a sad and telling commentary on today's media that the most critical pundits of government policies are a former sports newscaster (Olbermann) and a comedian (Stewart). As good as they are, we deserve better.
Here are some excerpts from the Supreme Court's decision:
Justice Black:
[S]tate libel laws threaten the very existence of an American press virile enough to publish unpopular views on public affairs and bold enough to criticize the conduct of public officials...We would, I think, more faithfully interpret the First Amendment by holding that at the very least it leaves the people and the press free to criticize officials and discuss public affairs with impunity...I doubt that a country can live in freedom where its people can be made to suffer physically or financially for criticizing their government, its actions, or its officials...An unconditional right to say what one pleases about public affairs is what I consider to be the minimum guarantee of the First Amendment.
Justice Goldberg is even better:
In my view, the First and Fourteenth Amendments to the Constitution afford to the citizen and to the press an absolute, unconditional privilege to criticize official conduct despite the harm which may flow from excesses and abuses...The theory of our Constitution is that every citizen may speak his mind and every newspaper express its view on matters of public concern and may not be barred from speaking or publishing because those in control of government think that what is said or written is unwise, unfair, false, or malicious. In a democratic society, one who assumes to act for the citizens in an executive, legislative, or judicial capacity must expect that his official acts will be commented upon and criticized...Our national experience teaches that repressions breed hate and "that hate menaces stable government."
Justice Brandeis from WHITNEY v. PEOPLE OF STATE OF CALIFORNIA, 274 U.S. 357 (1927) (a Bay Area/Alameda County trial case):
Those who won our independence believed that the final end of the state was to make men free to develop their faculties, and that in its government the deliberative forces should prevail over the arbitrary. They valued liberty both as an end and as a means. They believed liberty to the secret of happiness and courage to be the secret of liberty. They believed that freedom to think as you will and to speak as you think are means indispensable to the discovery and spread of political truth; that without free speech and assembly discussion would be futile; that with them, discussion affords ordinarily adequate protection against the dissemination of noxious doctrine; that the greatest menace to freedom is an inert people; that public discussion is a political duty; and that this should be a fundamental principle of the American government.
It is vitally important to remember that the NYT is directly responsible for one of the defining legal principles of our country--free speech. Every American should read Justice Brennan's opinion in New York Times Co. v. Sullivan, 376 U.S. 254 (1964):
The First Amendment, said Judge Learned Hand, "presupposes that right conclusions are more likely to be gathered out of a multitude of tongues, than through any kind of authoritative selection. To many this is, and always will be, folly; but we have staked upon it our all." United States v. Associated Press, 52 F. Supp. 362, 372 (D.C. S. D. N. Y. 1943). Mr. Justice Brandeis, in his concurring opinion in Whitney v. California, 274 U.S. 357, 375 -376, gave the principle its classic formulation:
- "Those who won our independence believed . . . that public discussion is a political duty; and that this should be a fundamental principle of the American government. They recognized the risks to which all human institutions are subject. But they knew that order cannot be secured merely through fear of punishment for its infraction; that it is hazardous to discourage thought, hope and imagination; that fear breeds repression; that repression breeds hate; that hate menaces stable government; that the path of safety lies in the opportunity to discuss freely supposed grievances and proposed remedies; and that the fitting remedy for evil counsels is good ones. Believing in the power of reason as applied through public discussion, they eschewed silence coerced by law - the argument of force in its worst form. Recognizing the occasional tyrannies of governing majorities, they amended the Constitution so that free speech and assembly should be guaranteed."
To summarize the decision, American libel law after the NYT case made it very difficult for a public figure to sue someone for criticism. Europeans and Singaporeans, in contrast, sacrifice free speech for more civility. This remarkable difference would not exist had the New York Times not chosen to fight a libel judgment all the way to the Supreme Court. Today, one wonders if the NYT would have authorized such legal fees for the sake of principle. Would shareholders today agree to receive fewer dividends if it meant spending money to establish a long-term legal principle? The more I think about it, the more I believe the New York Times and newspapers should go back to being privately held so they can focus on long-term trends rather than short-term shareholder whims. Perhaps the earnings release on July 23, 2008 will force that result if it is bad enough. If earnings are good, we win because NYT's stock goes up; and if earnings are poor, we win, because we might get a newspaper more focused on reporting, not pleasing shareholders.
Indeed, America's Founders--as much as they hated their newspapers (just ask Alexander Hamilton, whose affair was exposed by the media, making him the original Bill Clinton)--intended media outlets to be the "fourth pillar" of government, keeping it in check. But as media have consolidated operations and focused on profit, it is hard to see any real criticism of government policies. Having hundreds of channels and outlets competing for our attention has fractured the public and its ability to engage in deliberative democracy. Keith Olbermann and Jon Stewart aside, where are our modern-day Edward R. Murrows? It is a sad and telling commentary on today's media that the most critical pundits of government policies are a former sports newscaster (Olbermann) and a comedian (Stewart). As good as they are, we deserve better.
Here are some excerpts from the Supreme Court's decision:
Justice Black:
[S]tate libel laws threaten the very existence of an American press virile enough to publish unpopular views on public affairs and bold enough to criticize the conduct of public officials...We would, I think, more faithfully interpret the First Amendment by holding that at the very least it leaves the people and the press free to criticize officials and discuss public affairs with impunity...I doubt that a country can live in freedom where its people can be made to suffer physically or financially for criticizing their government, its actions, or its officials...An unconditional right to say what one pleases about public affairs is what I consider to be the minimum guarantee of the First Amendment.
Justice Goldberg is even better:
In my view, the First and Fourteenth Amendments to the Constitution afford to the citizen and to the press an absolute, unconditional privilege to criticize official conduct despite the harm which may flow from excesses and abuses...The theory of our Constitution is that every citizen may speak his mind and every newspaper express its view on matters of public concern and may not be barred from speaking or publishing because those in control of government think that what is said or written is unwise, unfair, false, or malicious. In a democratic society, one who assumes to act for the citizens in an executive, legislative, or judicial capacity must expect that his official acts will be commented upon and criticized...Our national experience teaches that repressions breed hate and "that hate menaces stable government."
Justice Brandeis from WHITNEY v. PEOPLE OF STATE OF CALIFORNIA, 274 U.S. 357 (1927) (a Bay Area/Alameda County trial case):
Those who won our independence believed that the final end of the state was to make men free to develop their faculties, and that in its government the deliberative forces should prevail over the arbitrary. They valued liberty both as an end and as a means. They believed liberty to the secret of happiness and courage to be the secret of liberty. They believed that freedom to think as you will and to speak as you think are means indispensable to the discovery and spread of political truth; that without free speech and assembly discussion would be futile; that with them, discussion affords ordinarily adequate protection against the dissemination of noxious doctrine; that the greatest menace to freedom is an inert people; that public discussion is a political duty; and that this should be a fundamental principle of the American government.
WSJ Article: Rage against the Machine
The Wall Street Journal published a James Grant (of Interest Rate Observer fame: http://www.grantspub.com/) article today titled, "Why No Outrage?"
http://online.wsj.com/article/SB121642367125066615.html?mod=todays_us_nonsub_weekendjournal
In the old days, you'd expect a William Jennings Bryan preaching to the masses, and Howard Beale being mad as hell at Wall Street's alleged fleecing of the poor. But the William Bryan analogy isn't quite on point, and the populist movement was declared dead as early as June 1990. Take a look at this Kirk Scharfenberg Atlantic Monthly article, "Populism in the Age of Celebrity"--if it was published today, we wouldn't know the difference, even though almost two decades have passed:
http://www.theatlantic.com/issues/96feb/buchanan/scharf.htm
Mr. Scharfenberg's point is we have elevated celebrity and materialism over quieter, more intellectual pursuits, and in doing so, have extinguished "deliberative democracy." To wit: "As a nation, we have lost the capacity to ponder events, reflect on their meaning, and act." Another point Mr. Scharfenberg makes is materialistic pursuits (e.g., studying the stock market) render us more separate from each other, while community-based pursuits (e.g., Little League) bring us together, allowing for active democracy and an exchange of ideas. Put another way, we reap what we sow; however, if we've sown and accepted materialism for the last eighteen years, then who's to blame for our current financial mess?
Overall, the constant strain of greed is probably just one factor in our current malaise. Capitalism seems made for constant boom-and-bust cycles, so when times are good, no one complains, and when times are bad, no one also complains because they expect the next bubble to be around the corner. To borrow from Churchill, perhaps consistently steady growth for everyone isn't as desirable as the inconsistent opportunity for unequal wealth. Thus, the recurring hangover America experiences every ten years seems vaguely familiar but not bad enough to want to actually do something about it.
Personally, I am conflicted about whether outrage is justified. There is no doubt we have become a more craven society, more harried, more avaricious, less God-fearing, and less civil. But we have also become more affluent, more connected through electronic advancements, less hungry, and less stagnant. In France, the youth riot because they cannot find jobs due to the socialist structure, which always favors older persons. In America, even most of the unemployed have televisions, food in the fridge, a car, a cell phone, and internet access. America is also more diverse than ever, and most of the economically vibrant cities have less than a 50% white, native-born population (Chicago, Miami, New York, San Francisco, San Jose, etc.). Even the South is revitalizing itself, as manufacturing moves back to cities like Louisville, KY and Huntsville, AL. It's quite a turnaround from the days of Bull Connor attacking his own city's residents and Sandra Day O'Connor being unable to find a job as an attorney after graduating at the top of her law school class.
So a question has to be asked: is it possible for civilizations to reach a saturation point in terms of progress? Is it possible that while America still has eons of progress remaining in terms of spreading wealth, increasing media diversity, reducing its prison population, and re-discovering a more peace-minded foreign policy, most of the work relating to the spread of basic comforts has already been done? Perhaps we do not riot like the days of Watts because we know we are better off than our ancestors and most of the current world population. As one satirist (P.J. O'Rourke?) has remarked, "When my young daughter tells me, 'Life is unfair,' I tell her, 'Honey, you live in the greatest country in the world. You're not starving. You will not experience government-sanctioned sex discrimination. You have economic prospects. You are relatively safe. You'd better hope life keeps being unfair to you.'"
As for William Jennings Bryan, some readers will remember him as a fiery populist ("You shall not crucify mankind upon a cross of gold"). Yet, almost no one knows the context of the famous gold gobbet. Bryan was attacking the banks for not lending farmers more money. Banks, as we all know, loan more money than they actually have. They can do that because the money isn't linked to any hard asset. A bank doesn't need one bar of gold to loan 100 dollars. It can have no gold in its vault and lend as much money as it wants. In the old days, however, the gold standard meant the U.S. could only loan money based on how much gold it had in its vaults, because it had to be able to redeem the paper money for gold at any time. So if the U.S. didn't buy more gold, it couldn't loan more money to the banks, and the banks couldn't loan more money to the people. The gold standard, by linking paper currency to a fixed quantity of gold, prevented banks from taking in two dollars and loaning the same two dollars to others four or more times through multiple loans. If we had a gold standard today, the subprime mess would not have occurred, because banks would not have been able to fund all the loans without unrealistic quantities of gold.
So when Bryan railed against the gold standard, he wanted more inflation and more loans, because his farmers were already in debt, and their customers didn't have money to buy their products/produce. This double-bind meant the farmers were not getting paid, and their debt was increasing. By advocating more inflation, the value of the farmers' debt would be reduced and more people would have money to buy their products, breaking the debt cycle. Thus, Bryan wanted exactly what we had from 2002 to 2007--easy money.
Lost in all the reporting on the financial crisis is the unprecedented access to money the poor had, leading to a small window of opportunity to escape a lifetime of low hourly wages. As Bryan discovered, easy money helps the poor when compared to having no money. Easy money allows the poor to buy homes. Easy money allows the poor to open a small business. Easy money helps the poor, who get greater access to new jobs created by the influx of new money to spend. Easy money hurts the rich, who see their savings reduced by inflation. In a stunning reversal that would have made Marx proud, shareholders--thought of as rich--took the hit along with the poor. The problem, then, wasn't easy money--it was financial mismanagement and greed on all sides. Such factors make it harder to get outraged. For example, my immigrant, middle-class parents were able to refinance their house at a low interest rate, freeing up more money to spend and giving them more security. At the end of the day, we've reaped what we've sown.
Having said all that, I'm going to let Howard Beale have the last words:
I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it.
We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!
We all know things are bad -- worse than bad -- they're crazy.
It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."
Well, I'm not going to leave you alone.
I want you to get mad!
I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.
All I know is that first, you've got to get mad.
You've gotta say, "I'm a human being, goddammit! My life has value!"
So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell, "I'm as mad as hell,
and I'm not going to take this anymore!"
http://online.wsj.com/article/SB121642367125066615.html?mod=todays_us_nonsub_weekendjournal
In the old days, you'd expect a William Jennings Bryan preaching to the masses, and Howard Beale being mad as hell at Wall Street's alleged fleecing of the poor. But the William Bryan analogy isn't quite on point, and the populist movement was declared dead as early as June 1990. Take a look at this Kirk Scharfenberg Atlantic Monthly article, "Populism in the Age of Celebrity"--if it was published today, we wouldn't know the difference, even though almost two decades have passed:
http://www.theatlantic.com/issues/96feb/buchanan/scharf.htm
Mr. Scharfenberg's point is we have elevated celebrity and materialism over quieter, more intellectual pursuits, and in doing so, have extinguished "deliberative democracy." To wit: "As a nation, we have lost the capacity to ponder events, reflect on their meaning, and act." Another point Mr. Scharfenberg makes is materialistic pursuits (e.g., studying the stock market) render us more separate from each other, while community-based pursuits (e.g., Little League) bring us together, allowing for active democracy and an exchange of ideas. Put another way, we reap what we sow; however, if we've sown and accepted materialism for the last eighteen years, then who's to blame for our current financial mess?
Overall, the constant strain of greed is probably just one factor in our current malaise. Capitalism seems made for constant boom-and-bust cycles, so when times are good, no one complains, and when times are bad, no one also complains because they expect the next bubble to be around the corner. To borrow from Churchill, perhaps consistently steady growth for everyone isn't as desirable as the inconsistent opportunity for unequal wealth. Thus, the recurring hangover America experiences every ten years seems vaguely familiar but not bad enough to want to actually do something about it.
Personally, I am conflicted about whether outrage is justified. There is no doubt we have become a more craven society, more harried, more avaricious, less God-fearing, and less civil. But we have also become more affluent, more connected through electronic advancements, less hungry, and less stagnant. In France, the youth riot because they cannot find jobs due to the socialist structure, which always favors older persons. In America, even most of the unemployed have televisions, food in the fridge, a car, a cell phone, and internet access. America is also more diverse than ever, and most of the economically vibrant cities have less than a 50% white, native-born population (Chicago, Miami, New York, San Francisco, San Jose, etc.). Even the South is revitalizing itself, as manufacturing moves back to cities like Louisville, KY and Huntsville, AL. It's quite a turnaround from the days of Bull Connor attacking his own city's residents and Sandra Day O'Connor being unable to find a job as an attorney after graduating at the top of her law school class.
So a question has to be asked: is it possible for civilizations to reach a saturation point in terms of progress? Is it possible that while America still has eons of progress remaining in terms of spreading wealth, increasing media diversity, reducing its prison population, and re-discovering a more peace-minded foreign policy, most of the work relating to the spread of basic comforts has already been done? Perhaps we do not riot like the days of Watts because we know we are better off than our ancestors and most of the current world population. As one satirist (P.J. O'Rourke?) has remarked, "When my young daughter tells me, 'Life is unfair,' I tell her, 'Honey, you live in the greatest country in the world. You're not starving. You will not experience government-sanctioned sex discrimination. You have economic prospects. You are relatively safe. You'd better hope life keeps being unfair to you.'"
As for William Jennings Bryan, some readers will remember him as a fiery populist ("You shall not crucify mankind upon a cross of gold"). Yet, almost no one knows the context of the famous gold gobbet. Bryan was attacking the banks for not lending farmers more money. Banks, as we all know, loan more money than they actually have. They can do that because the money isn't linked to any hard asset. A bank doesn't need one bar of gold to loan 100 dollars. It can have no gold in its vault and lend as much money as it wants. In the old days, however, the gold standard meant the U.S. could only loan money based on how much gold it had in its vaults, because it had to be able to redeem the paper money for gold at any time. So if the U.S. didn't buy more gold, it couldn't loan more money to the banks, and the banks couldn't loan more money to the people. The gold standard, by linking paper currency to a fixed quantity of gold, prevented banks from taking in two dollars and loaning the same two dollars to others four or more times through multiple loans. If we had a gold standard today, the subprime mess would not have occurred, because banks would not have been able to fund all the loans without unrealistic quantities of gold.
So when Bryan railed against the gold standard, he wanted more inflation and more loans, because his farmers were already in debt, and their customers didn't have money to buy their products/produce. This double-bind meant the farmers were not getting paid, and their debt was increasing. By advocating more inflation, the value of the farmers' debt would be reduced and more people would have money to buy their products, breaking the debt cycle. Thus, Bryan wanted exactly what we had from 2002 to 2007--easy money.
Lost in all the reporting on the financial crisis is the unprecedented access to money the poor had, leading to a small window of opportunity to escape a lifetime of low hourly wages. As Bryan discovered, easy money helps the poor when compared to having no money. Easy money allows the poor to buy homes. Easy money allows the poor to open a small business. Easy money helps the poor, who get greater access to new jobs created by the influx of new money to spend. Easy money hurts the rich, who see their savings reduced by inflation. In a stunning reversal that would have made Marx proud, shareholders--thought of as rich--took the hit along with the poor. The problem, then, wasn't easy money--it was financial mismanagement and greed on all sides. Such factors make it harder to get outraged. For example, my immigrant, middle-class parents were able to refinance their house at a low interest rate, freeing up more money to spend and giving them more security. At the end of the day, we've reaped what we've sown.
Having said all that, I'm going to let Howard Beale have the last words:
I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it.
We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!
We all know things are bad -- worse than bad -- they're crazy.
It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."
Well, I'm not going to leave you alone.
I want you to get mad!
I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.
All I know is that first, you've got to get mad.
You've gotta say, "I'm a human being, goddammit! My life has value!"
So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell, "I'm as mad as hell,
and I'm not going to take this anymore!"
Saturday, July 19, 2008
William Greider and Bill Moyers
William Greider wrote one of my favorite economics-related books, Secrets of the Temple: How the Federal Reserve Runs the Country. I've never heard him speak before, so when I saw him on Bill Moyers' PBS show, I eagerly watched. Mr. Greider also has a blog:
http://www.thenation.com/blogs/notion/_by-greider
Here is his most salient post on our current economic mess:
http://www.thenation.com/blogs/notion/336722/wall_street_s_great_deflation
Mr. Greider isn't a charismatic speaker, so hearing him speak was a bit anti-climatic; however, I will look forward to more of his writing. Mr. Greider made it clear the problem cannot be blamed on any one party, and the absence of financial regulation has long been the province of both parties since 1980. He indicated that a Democratic Congress did away with usury laws, thereby paving the way for the current Wild West of Wall Street.
His most interesting point was this: usury laws have been around since the beginning of religion and were designed on the common sense notion that moneylenders have more power than the poor and must be regulated to avoid enslaving the poor through one-sided terms. He believes the current subprime mess is a modern-day form of usury.
Full transcript is below, courtesy of PBS:
http://www.pbs.org/moyers/journal/07182008/transcript2.html
Another blogger had an interesting take on usury from Adam Smith's perspective:
http://thinkingecon.blogspot.com/2008/04/adam-smith-and-counter-productive.html
http://www.thenation.com/blogs/notion/_by-greider
Here is his most salient post on our current economic mess:
http://www.thenation.com/blogs/notion/336722/wall_street_s_great_deflation
Mr. Greider isn't a charismatic speaker, so hearing him speak was a bit anti-climatic; however, I will look forward to more of his writing. Mr. Greider made it clear the problem cannot be blamed on any one party, and the absence of financial regulation has long been the province of both parties since 1980. He indicated that a Democratic Congress did away with usury laws, thereby paving the way for the current Wild West of Wall Street.
His most interesting point was this: usury laws have been around since the beginning of religion and were designed on the common sense notion that moneylenders have more power than the poor and must be regulated to avoid enslaving the poor through one-sided terms. He believes the current subprime mess is a modern-day form of usury.
Full transcript is below, courtesy of PBS:
http://www.pbs.org/moyers/journal/07182008/transcript2.html
Another blogger had an interesting take on usury from Adam Smith's perspective:
http://thinkingecon.blogspot.com/2008/04/adam-smith-and-counter-productive.html
Starbucks (SBUX) and the Economy
Starbucks (SBUX) published a list of stores it is closing across the United States. The WSJ published an interactive map of the store closings:
http://online.wsj.com/public/resources/documents/info-STARBUCKS_080718.html
PDF file of store closings here:
http://www.starbucks.com/aboutus/USStoreClosureInfo.pdf
I'm not a huge fan of Starbucks regular coffee (I prefer Peet's, especially the Guatemala blend), but it occurred to me that an economist or potential real estate buyer could use Starbuck's information to assess how well a local economy is doing. Starbucks would not be closing stores in a particular place if it believed growth was imminent.
http://online.wsj.com/public/resources/documents/info-STARBUCKS_080718.html
PDF file of store closings here:
http://www.starbucks.com/aboutus/USStoreClosureInfo.pdf
I'm not a huge fan of Starbucks regular coffee (I prefer Peet's, especially the Guatemala blend), but it occurred to me that an economist or potential real estate buyer could use Starbuck's information to assess how well a local economy is doing. Starbucks would not be closing stores in a particular place if it believed growth was imminent.
Government's Role
A friend sent me a postcard that reminded her of me--it was very kind of her, and absolutely up my alley:
It is not the function of government to keep the citizen from falling into error; it is the function of the citizen to keep the government from falling into error. -- Justice Robert Jackson (Nuremberg Trial Judge)
The key point here is good governance is a two-way street. Citizens should be wary of government attempts to solve problems, because in the absence of omnipotence, unintended consequences will arise from government intervention. One recent example occurred around 1992, when Bill Clinton promised to limit CEO pay by placing a cap on salary deductions. Although it sought to limit CEO pay, Congress's one million dollar cap on the tax deductibility of salaries ended up with corporate boards increasing CEO pay to just under a million dollars. The result was that the middle class got their taxes hiked while the executives got more stock options.
Also, rarely does Congress pass a law with a view towards long term consequences. Such consequences could include the creation of a new enforcement agency (e.g. Homeland Security), more taxes diverted or raised to support the agency, and a broadening of power. Given this natural predilection to increase rather than decrease jurisdiction and scope, most laws ought to have sunset provisions that subject them to more debate down the line about whether they are still necessary. The way Congress currently passes most laws and regulations, they stay on the books forever and spawn new enforcement measures, whether they are necessary or not.
It is not the function of government to keep the citizen from falling into error; it is the function of the citizen to keep the government from falling into error. -- Justice Robert Jackson (Nuremberg Trial Judge)
The key point here is good governance is a two-way street. Citizens should be wary of government attempts to solve problems, because in the absence of omnipotence, unintended consequences will arise from government intervention. One recent example occurred around 1992, when Bill Clinton promised to limit CEO pay by placing a cap on salary deductions. Although it sought to limit CEO pay, Congress's one million dollar cap on the tax deductibility of salaries ended up with corporate boards increasing CEO pay to just under a million dollars. The result was that the middle class got their taxes hiked while the executives got more stock options.
Also, rarely does Congress pass a law with a view towards long term consequences. Such consequences could include the creation of a new enforcement agency (e.g. Homeland Security), more taxes diverted or raised to support the agency, and a broadening of power. Given this natural predilection to increase rather than decrease jurisdiction and scope, most laws ought to have sunset provisions that subject them to more debate down the line about whether they are still necessary. The way Congress currently passes most laws and regulations, they stay on the books forever and spawn new enforcement measures, whether they are necessary or not.
Wall Street Finally Calls a Bottom on Banking...5 days after I did
As readers know, I correctly called a short-term bottom in banking and was one of the few people to do so in the country. See July 14, 2008 post: "I am calling a bottom in well-capitalized regional bank stocks."
http://willworkforjustice.blogspot.com/2008/07/colonial-bancgroup-cnb.html
And here:
http://seekingalpha.com/article/84988-well-capitalized-regional-banks-the-bottom-is-in
Now, after most bank stocks have jumped 20 to 50 percent, Wall Street deigns to tell the masses the bottom is in:
http://bigpicture.typepad.com/comments/2008/07/its-unanimous-b.html
It just goes to show you don't need specialized training to correctly pick stocks. Peter Lynch and Warren Buffett made billions picking stocks at the right time. The best skill as a stock picker isn't being able to discern a company's future cash flow prospects, but to know when to buy a stock. It took me over ten years to get some intuition on the market. Timing beats good research--as we've just seen.
http://willworkforjustice.blogspot.com/2008/07/colonial-bancgroup-cnb.html
And here:
http://seekingalpha.com/article/84988-well-capitalized-regional-banks-the-bottom-is-in
Now, after most bank stocks have jumped 20 to 50 percent, Wall Street deigns to tell the masses the bottom is in:
http://bigpicture.typepad.com/comments/2008/07/its-unanimous-b.html
It just goes to show you don't need specialized training to correctly pick stocks. Peter Lynch and Warren Buffett made billions picking stocks at the right time. The best skill as a stock picker isn't being able to discern a company's future cash flow prospects, but to know when to buy a stock. It took me over ten years to get some intuition on the market. Timing beats good research--as we've just seen.
Friday, July 18, 2008
Choose Life. Choose a job. Choose your future.
Paul Kedrosky (from http://paul.kedrosky.com/) cited Sterling Hayden's Wanderer in his blog recently:
Here's the direct link to Paul:
http://paul.kedrosky.com/archives/2008/07/16/words_to_live_b.html
It sounds a bit Communist in places ("brainwashed by our economic system"), but the overriding idea is true: when we remind ourselves what's really important in our lives, money won't be at the very top of our list.
In case you didn't recognize the title of this post, it's from Trainspotting, a film about the horrors of drug addiction (far better than any "Just Say No" government campaign). The addict in the film, Renton, has a less eloquent way of bashing an existence based on materialism. I've edited the curse words from his monologue after a reader complained. If you are interested in the full version, check out the video link below.
(Link above may not work after a while, but you can do a search using "Trainspotting Intro" to get a fresh link.)
Renton, as film-lovers know, chose heroin, making the materialistic existence he refers to above seem better to him. Ironically, his jaded view of "life" drew him to heroin, and had he been more materialistic, he might have been better off.
Little has been said or written about the ways a man may blast himself free. Why? I don't know, unless the answer lies in our diseased values. A man seldom hesitates to describe his work; he gladly divulges the privacies of alleged sexual conquests. But ask him how much he has in the bank and he recoils into a shocked and stubborn silence.
"I've always wanted to sail to the South Seas, but I can't afford it." What these men can't afford is not to go. They are enmeshed in the cancerous discipline of "security." And in the worship of security we fling our lives beneath the wheels of routine---and before we know it our lives are gone.
What does a man need---really need? A few pounds of food each day, heat and shelter, six feet to lie down in---and some form of working activity that will yield a sense of accomplishment. That's all---in the material sense. And we know it. But we are brainwashed by our economic system until we end up beneath a pyramid of time payments, mortgages, preposterous gadgetry, playthings that divert our attention from the sheer idiocy of the charade.
The years thunder by. The dreams of youth grow dim where they lie caked in dust on the shelves of patience. Before we know it, the tomb is sealed.
Where, then, lies the answer? In choice. Which shall it be: bankruptcy of purse or bankruptcy of life? Here's the direct link to Paul:
http://paul.kedrosky.com/archives/2008/07/16/words_to_live_b.html
It sounds a bit Communist in places ("brainwashed by our economic system"), but the overriding idea is true: when we remind ourselves what's really important in our lives, money won't be at the very top of our list.
In case you didn't recognize the title of this post, it's from Trainspotting, a film about the horrors of drug addiction (far better than any "Just Say No" government campaign). The addict in the film, Renton, has a less eloquent way of bashing an existence based on materialism. I've edited the curse words from his monologue after a reader complained. If you are interested in the full version, check out the video link below.
Choose Life. Choose a job. Choose a career. Choose a family. Choose a big television, choose washing machines, cars, compact disc players and electrical tin openers. Choose good health, low cholesterol, and dental insurance. Choose fixed interest mortgage repayments. Choose a starter home. Choose your friends. Choose leisurewear and matching luggage. Choose a three-piece suite on hire purchase in a range of f*cking fabrics. Choose DIY and wondering who you are on a Sunday morning. Choose sitting on that couch watching mind-numbing, spirit-crushing game shows, stuffing junk food into your mouth. Choose rotting away at the end of it all, pishing your last in a miserable home, nothing more than an embarrassment to the selfish brats you spawned to replace yourself.
Choose your future.
Choose life.
http://www.youtube.com/watch?v=T3g9nTOV9KMChoose your future.
Choose life.
(Link above may not work after a while, but you can do a search using "Trainspotting Intro" to get a fresh link.)
Renton, as film-lovers know, chose heroin, making the materialistic existence he refers to above seem better to him. Ironically, his jaded view of "life" drew him to heroin, and had he been more materialistic, he might have been better off.
Thursday, July 17, 2008
Icahn's Board has Mark Cuban!
Carl Icahn's proposed Directors slate includes none other than Mr. Cuban. I am excited! I previously wrote about how Mr. Cuban had his eye on the ball:
http://willworkforjustice.blogspot.com/2008/05/mark-cuban-on-ceo-pay.html
What will happen if Mr. Cuban gets elected? Will he subject Jerry Yang to public criticism on a daily basis? Will he make Susan Decker work in a Dairy Queen for a day? With no commissioner to rein him in, this could be the beginning of a fun period at Yahoo...
I just realized Cuban might be at this year's shareholder meeting. I might wear my old Mav's Michael Finley jersey. "Fin" seems like one of the league's classiest players. He also majored in business management at University of Wisconsin.
http://willworkforjustice.blogspot.com/2008/05/mark-cuban-on-ceo-pay.html
What will happen if Mr. Cuban gets elected? Will he subject Jerry Yang to public criticism on a daily basis? Will he make Susan Decker work in a Dairy Queen for a day? With no commissioner to rein him in, this could be the beginning of a fun period at Yahoo...
I just realized Cuban might be at this year's shareholder meeting. I might wear my old Mav's Michael Finley jersey. "Fin" seems like one of the league's classiest players. He also majored in business management at University of Wisconsin.
Joe Nocera Has a Blog
Barry Ritholtz pointed his readers to a new business blog that looks promising:
http://executivesuite.blogs.nytimes.com/
Joe Nocera is a business writer for the NY Times. Of course, his blog is not as good as Barry's, at least not yet:
http://bigpicture.typepad.com/
If you read one economics-related blog, read Barry's "The Big Picture."
http://executivesuite.blogs.nytimes.com/
Joe Nocera is a business writer for the NY Times. Of course, his blog is not as good as Barry's, at least not yet:
http://bigpicture.typepad.com/
If you read one economics-related blog, read Barry's "The Big Picture."
Stocks Update, July 17, 2008
It's been a wild week, so I thought it would be a good time for a stocks update. Colonial Bancgroup (CNB) skyrocketed around 50% within three days after I called a bottom in banking stocks, and I recovered my losses and ended up making 10%. JP Morgan upgraded CNB today, causing a 20% jump. It's fun knowing I beat J.P. Morgan to the punch. Too often, investment banks upgrade stocks after an already-large run-up in the price.
I also sold Embarq (EQ), not because I dislike the stock's fundamentals, but because of a potential political problem. Congress questioned EQ about customer privacy. Apparently, some Congressmen believe that EQ covertly tracked users' internet activity. While there have no proven allegations, and EQ deserves the benefit of the doubt, I'm not willing to take the risk of a political fallout, no matter how nice EQ's dividend is.
Pinnacle (PNK), my largest loss in terms of percentage in the "Closed Positions" category, jumped 20% today. I sold earlier because the actual dollar loss was small and the market was being irrational. I don't know if I'd jump back in just yet--the market seems to be indiscriminately devaluing casino and restaurant stocks.
My major positions now are in PFE and CCT, with much smaller amounts in BLV and DBV. Preferred shares took a bath this week. I still can't figure out why. I picked up more CCT as a result.
You'll notice that BLV, DBV and CCT are not listed below in "Open Positions." I bought these stocks prior to publicly disclosing my individual buys and sells, so old positions are "grandfathered" for purposes of this blog. Prior to the recent market lows, I reduced almost all my positions, including mutual funds. Now, I hold no individual position more than 6,000 dollars, not even mutual funds (although one international bond fund will probably exceed 6,000 dollars due to dividend reinvestment).
I also changed the format of the statistics below. I spoke with a friend of mine, who correctly told me the overall averages between categories made no sense, because they valued completely different items. In order to have a proper average, I would have to go through and add up each and every trade and then divide them by the total number of all trades. For now, I am listing averages in each category only. Clearly, my ability to predict the market in the short term is much better than my ability to discern where the market is going long-term.
Numbers below are based on mid-day prices on July 17, 2008.
Open Positions
EWM = -10.84
IF = -11.8
PFE = -4.38
[Average of "Open Positions": losing/negative average 9.0%]
Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PNK = -16.7%
PPS = -2.8
WYE = +2.4%
[Overall Record: Lost an average of 3.73%]
Held less than 7 days:
GE (1.0%); ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)
[Overall Record: Gained an average of 3.31%]
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)
[Overall Record: Gained an average of 1.76%]
Compare to S&P 500: losing/negative 9.5%
[from May 30, 2008 (1385.67) to mid-day July 17, 2008 (1254)]
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
I also sold Embarq (EQ), not because I dislike the stock's fundamentals, but because of a potential political problem. Congress questioned EQ about customer privacy. Apparently, some Congressmen believe that EQ covertly tracked users' internet activity. While there have no proven allegations, and EQ deserves the benefit of the doubt, I'm not willing to take the risk of a political fallout, no matter how nice EQ's dividend is.
Pinnacle (PNK), my largest loss in terms of percentage in the "Closed Positions" category, jumped 20% today. I sold earlier because the actual dollar loss was small and the market was being irrational. I don't know if I'd jump back in just yet--the market seems to be indiscriminately devaluing casino and restaurant stocks.
My major positions now are in PFE and CCT, with much smaller amounts in BLV and DBV. Preferred shares took a bath this week. I still can't figure out why. I picked up more CCT as a result.
You'll notice that BLV, DBV and CCT are not listed below in "Open Positions." I bought these stocks prior to publicly disclosing my individual buys and sells, so old positions are "grandfathered" for purposes of this blog. Prior to the recent market lows, I reduced almost all my positions, including mutual funds. Now, I hold no individual position more than 6,000 dollars, not even mutual funds (although one international bond fund will probably exceed 6,000 dollars due to dividend reinvestment).
I also changed the format of the statistics below. I spoke with a friend of mine, who correctly told me the overall averages between categories made no sense, because they valued completely different items. In order to have a proper average, I would have to go through and add up each and every trade and then divide them by the total number of all trades. For now, I am listing averages in each category only. Clearly, my ability to predict the market in the short term is much better than my ability to discern where the market is going long-term.
Numbers below are based on mid-day prices on July 17, 2008.
Open Positions
EWM = -10.84
IF = -11.8
PFE = -4.38
[Average of "Open Positions": losing/negative average 9.0%]
Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PNK = -16.7%
PPS = -2.8
WYE = +2.4%
[Overall Record: Lost an average of 3.73%]
Held less than 7 days:
GE (1.0%); ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%)
[Overall Record: Gained an average of 3.31%]
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)
[Overall Record: Gained an average of 1.76%]
Compare to S&P 500: losing/negative 9.5%
[from May 30, 2008 (1385.67) to mid-day July 17, 2008 (1254)]
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
Karachi Exchange
In America, when stocks plunge, we look for a bailout. In Pakistan, they let the market work out the kinks: "Investors have to learn to bear losses as they do gains," says a Pakistani money manager. See
http://www.bloomberg.com/apps/news?pid=20670001&refer=home&sid=a_.8H0oQOemI
One downside of free markets is someone bears the brunt of inequality. Here, the bourse had to call the police to protect it from unhappy investors: "investors broke windows, threw plant holders in the parking lot of the building and at least one protester was injured."
Pakistan's stock market has declined around 30% this year.
http://www.bloomberg.com/apps/news?pid=20670001&refer=home&sid=a_.8H0oQOemI
One downside of free markets is someone bears the brunt of inequality. Here, the bourse had to call the police to protect it from unhappy investors: "investors broke windows, threw plant holders in the parking lot of the building and at least one protester was injured."
Pakistan's stock market has declined around 30% this year.
Wednesday, July 16, 2008
Colonial Bancgroup (CNB), July 16, 2008 Earnings
These last few days, I knew exactly how Gordon Gekko felt as he was getting screwed by Bud Fox on the Bluestar deal. Colonial Bancgroup (CNB) kept dropping for no reason, unfounded bankruptcy rumors swirling around it. But now, after a 40% (now around 30%) jump in CNB's price in just two days, having sold most of my position, I hopped in Bud Fox's shoes when he switched sides and worked with Sir Lawrence Wildman. In fact, I am so pumped, if someone gave me Daryl Hannah's phone number right now, I'd make that call, and I'd close the deal.
But wait--people forget Bud Fox didn't exactly have a happy ending. He got greedy and overconfident. That's why, after seeing CNB jump 40%, I sold most of my shares. The earnings release was not terrible--although CNB lost money (five cents a share), the bank still appears to be well-capitalized. The main information I wanted to see was the following: "Foreclosed assets rose by $94 million, bringing bad loans to 2.62 percent of loans and other real estate." A bad loan ratio of 2.62% is still far from the informal 5% threshold that indicates a bank won't be able to pay out a dividend or will need to take active measures to shore up capital.
I will wait until after the ex-dividend date, and then decide whether to hold the remaining shares. For now, however, it's good to be king, having correctly called a short-term bottom in well-capitalized bank stocks.
But wait--people forget Bud Fox didn't exactly have a happy ending. He got greedy and overconfident. That's why, after seeing CNB jump 40%, I sold most of my shares. The earnings release was not terrible--although CNB lost money (five cents a share), the bank still appears to be well-capitalized. The main information I wanted to see was the following: "Foreclosed assets rose by $94 million, bringing bad loans to 2.62 percent of loans and other real estate." A bad loan ratio of 2.62% is still far from the informal 5% threshold that indicates a bank won't be able to pay out a dividend or will need to take active measures to shore up capital.
I will wait until after the ex-dividend date, and then decide whether to hold the remaining shares. For now, however, it's good to be king, having correctly called a short-term bottom in well-capitalized bank stocks.
Colonial Bancgroup (CNB) Update on July 16, 2008
Two days after I called a bottom in CNB (and most other bank stocks), CNB went up over 40%. I sold some of my position, and I am waiting for CNB to release earnings in about 30 minutes. These are exciting, volatile times. I do like being right, and it looks like I was one of the few nationwide to correctly call at least a short term bottom in financial stocks.
For fun, check out Barry Ritholtz's post today titled "Idiots Fiddle While Rome Burns." I'm not saying it's as entertaining (true) as Cramer's famous meltdown on CNBC, but it comes damn close:
http://bigpicture.typepad.com/comments/2008/07/idiots-fiddle-w.html
Even Robert Reich is getting into the act:
http://robertreich.blogspot.com/2008/07/modest-proposal-for-ending-socialized.html
For fun, check out Barry Ritholtz's post today titled "Idiots Fiddle While Rome Burns." I'm not saying it's as entertaining (true) as Cramer's famous meltdown on CNBC, but it comes damn close:
http://bigpicture.typepad.com/comments/2008/07/idiots-fiddle-w.html
Even Robert Reich is getting into the act:
http://robertreich.blogspot.com/2008/07/modest-proposal-for-ending-socialized.html
Tuesday, July 15, 2008
Colonial Bancgroup (CNB) and How to Value a Bank
A reader made a comment to the post below, indicating that CNB might be worse off than its total debt and total cash numbers indicate. He is correct--almost all banks are difficult to value today, because it is almost impossible to determine what percent of the debtors will be able to pay back their loans. The reader pointed me to the following link:
http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=5754137-104895-280327&type=sect&dcn=0001193125-08-037476
He believes that CNB is a risky investment because much of its debt is mortgage-related. Banks hold many different classes of assets--student loans, mortgage loans, small business loans, life insurance policies, home equity lines, and so forth. His analysis relies on an assumption that today, any bank holding significant mortgage-related or property-related loans in markets such as Florida, Nevada, and California will be distressed. I don't dispute that analysis; however, I also do not believe CNB deserves to be trading at 3 dollars a share, even with its risks. CNB will probably not collapse and as a result, five years from now, when property values recover, CNB will be lauded for being in high-growth areas.
In any case, CNB accelerated its earnings release to July 16, 2008. We will have a better idea of where the bank stands tomorrow. I can't imagine CNB would have accelerated its earnings release if there was worse-than-expected news involved, but common sense doesn't always apply in this panicked market.
http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=5754137-104895-280327&type=sect&dcn=0001193125-08-037476
He believes that CNB is a risky investment because much of its debt is mortgage-related. Banks hold many different classes of assets--student loans, mortgage loans, small business loans, life insurance policies, home equity lines, and so forth. His analysis relies on an assumption that today, any bank holding significant mortgage-related or property-related loans in markets such as Florida, Nevada, and California will be distressed. I don't dispute that analysis; however, I also do not believe CNB deserves to be trading at 3 dollars a share, even with its risks. CNB will probably not collapse and as a result, five years from now, when property values recover, CNB will be lauded for being in high-growth areas.
In any case, CNB accelerated its earnings release to July 16, 2008. We will have a better idea of where the bank stands tomorrow. I can't imagine CNB would have accelerated its earnings release if there was worse-than-expected news involved, but common sense doesn't always apply in this panicked market.
Colonial Bancgroup (CNB) Recap
One day after calling a bottom in well-capitalized banking stocks, Colonial Bancgroup (CNB) and First Horizon (FHN) increased 16% and 30%, respectively (at least as of 10AM PST on July 15, 2008).
I was able to make a short term trade on XLF as well--I put a limit order to buy last night, and when I woke up, it increased 4.3%, so I sold. I can't do a full stock update just yet, as the market isn't yet closed, and I will wait at least three weeks so I can get a better picture of how my stock picks are doing. In three weeks, most of the major companies will have released earnings.
For now, my main holdings are as follows, in descending order of worth: PFE, INTC, CNB, and DBV.
The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.
I was able to make a short term trade on XLF as well--I put a limit order to buy last night, and when I woke up, it increased 4.3%, so I sold. I can't do a full stock update just yet, as the market isn't yet closed, and I will wait at least three weeks so I can get a better picture of how my stock picks are doing. In three weeks, most of the major companies will have released earnings.
For now, my main holdings are as follows, in descending order of worth: PFE, INTC, CNB, and DBV.
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.
Monday, July 14, 2008
Colonial Bancgroup (CNB)
Correction Note (on July 15, 2008): an astute reader from Seeking Alpha pointed I was misusing accounting terminology in my posting, namely how debt is characterized on a balance sheet. When a bank makes a loan, it becomes the creditor. As a result, its balance sheet lists the loan/debt as an asset.
In my article, I used Yahoo Finance's "total debt" and "total cash" figures, which do not appear to include loans as "assets." The "total debt" and "total cash" statistics provide some holistic insight into how much a bank might be over-leveraged. At the end of the day, the ability of debtors to pay their debts is paramount, not "total debt" or "total cash," and everyone is currently dealing with bankers' black boxes of credit quality. But I was able to call at least a short-term bottom--both FHN and CNB, jumped by around 30% and 16% (see full day's chart for July 15, 2008), respectively, one day after I called a bottom in well-capitalized banking stocks. My full article, published yesterday, is below:
I am calling a bottom in well-capitalized regional bank stocks. When the New York Times publishes an article titled, "Analysts Say More Banks Will Fail," (by Louise Story) we have a good contrarian indicator. But here's what makes me angry: the reporter cites Richard Bove in her article as support for her thesis that despite being better capitalized in general, more banks will collapse. Take a look at this Nightly Business Report link to an interview with Mr. Bove:
http://www.pbs.org/nbr/site/onair/transcripts/080714c/
He expressly says he believes regional banks are in good condition:
"I think that the regional banks are actually in relatively good condition...I think if you look a year from now, the prices of bank stocks will be considerably higher than they are today."
Of course, he also says it is risky to bet on bank stocks now, in a time of panic, but overall, the clear sentiment is that the overwhelming majority of banks are healthy. The article itself states that 150 out of 7,500 banks might fail--or just 2%.
I have been very disappointed in my own stock picking ability because I bet on Colonial Bancgroup (CNB). While I bought almost all of my shares at under 5 dollars, the market has decided that CNB is worth only 3 dollars a share. I continue to believe I am correct, and the market is being irrational. The question is whether I can stay solvent until the market becomes rational again.
Bank stock financial data are abstruse because they defy normal value analysis. Usually, value investors like myself look at a company's total cash and total debt. My own personal yardstick is to deem a company undervalued if its net cash exceeds 10% of its market capitalization. For example, Intel has a market cap of 108 billion. Therefore, I want its net cash to be at least 10.8 billion before I view it as undervalued. Intel has about 11 billion in net cash, passing my test (I own shares in Intel).
Banks, on the other hand, cannot be analyzed in this way, because they make money through loans. As a result, Shakespeare's advice, "Neither a borrower nor a lender be," doesn't apply. In addition, a bank having more debt does not necessarily denote irresponsible spending. Indeed, as an investor, you want your bank to have more debt, because banks make money by loaning to others, not by keeping their cash. The problem lies in evaluating whether a bank's debt (or, in accounting terms, its assets, because they are technically the creditor) is likely to be repaid by its debtors. As debtors default on loans, they cause an immediate downward spiral: the bank that loaned them money has to stop lending others as much money; perhaps raise the rate on its CDs to attract more money; and take other steps that decrease its ability to take advantage of normal business conditions. What we forget is in a non-panicked world, banks have the easiest job: they get money from the Fed Reserve or their depositors at 2.25%, and then loan out the money at 5.5% or more. They make an automatic 3.25% just for being a middleman. (You can see why online banks are even better--they eliminate the fixed costs of a bank, like its numerous tellers/employees, ATM machines, and physical structures, and just get paid for being a middleman, minus the normal overhead. That's why an online bank like ING can offer higher CD rates.)
Having established that a bank's financial data cannot be analyzed in the same way as a non-bank's, how do we ascertain whether a bank might go under? One informal measure might be to measure the amount of total cash vs. total debt. It's a similar analysis as above, except that in these precarious times, if a bank has too much debt relative to its cash deposits, it is more likely to collapse. All figures are from Yahoo Finance's "Key Statistics" pages as of July 14, 2008:
IndyMac, which has collapsed, had about 2 billion in total cash and 11 billion in debt. That's a 9 billion dollar difference.
Washington Mutual has 15 billion in total cash and 97 billion dollars in total debt. That's an 82 billion dollar difference.
Regions Financial has 5.5 billion in total cash and 29.5 billion in total debt, a 24 billion dollar difference.
M&T Bank, considered to be a healthy, well-capitalized bank, has 2 billion in total cash, and 16.8 billion in total debt, a difference of almost 15 billion.
US Bancorp has 7.3 billion in total cash and 72.6 billion in total debt, a 65.3 billion dollar difference.
Wells Fargo, considered to be a conservative lender, has 25 billion dollars in total cash, and 157 billion dollars in total debt, or a difference of 132 billion. This high level of debt is very surprising. Warren Buffett extolled the virtues of Wells Fargo in a recent annual shareholder letter, and Mr. Buffett is the classic value investor. Wells Fargo might have a high debt load because it didn't sell off its loans to Wall Street and held them on its own books instead, but I am just speculating. As a direct holder of the debt, Wells Fargo can hold it till kingdom come, and would have no external pressure to dump loans at a discount. In some ways, its refusal to spread its risk creates an advantage. (I own some shares in Wells Fargo.)
Now we come to Colonial Bancgroup, or CNB. CNB has 2.5 billion in total cash and 5.3 billion in total debt, a 2.8 billion dollar difference. It has the lowest total debt of any other bank above, and plenty of cash relative to its debt.
Whatever you may think of banks collapsing, CNB probably won't be among them--its debt load just isn't high enough to make a collapse imminent. At 3.36 dollars a share, if you have an iron will, you may want to consider buying 1000 shares and leaving it alone for a while. A prudent investor would probably wait until after July 21, 2008 to buy, because CNB reports earnings on July 21, 2008. I will hold onto my 1100 shares of CNB and be patient--like Wells Fargo, I can wait a long time, but I hope next week brings good tidings and immediate vindication.
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.
In my article, I used Yahoo Finance's "total debt" and "total cash" figures, which do not appear to include loans as "assets." The "total debt" and "total cash" statistics provide some holistic insight into how much a bank might be over-leveraged. At the end of the day, the ability of debtors to pay their debts is paramount, not "total debt" or "total cash," and everyone is currently dealing with bankers' black boxes of credit quality. But I was able to call at least a short-term bottom--both FHN and CNB, jumped by around 30% and 16% (see full day's chart for July 15, 2008), respectively, one day after I called a bottom in well-capitalized banking stocks. My full article, published yesterday, is below:
I am calling a bottom in well-capitalized regional bank stocks. When the New York Times publishes an article titled, "Analysts Say More Banks Will Fail," (by Louise Story) we have a good contrarian indicator. But here's what makes me angry: the reporter cites Richard Bove in her article as support for her thesis that despite being better capitalized in general, more banks will collapse. Take a look at this Nightly Business Report link to an interview with Mr. Bove:
http://www.pbs.org/nbr/site/onair/transcripts/080714c/
He expressly says he believes regional banks are in good condition:
"I think that the regional banks are actually in relatively good condition...I think if you look a year from now, the prices of bank stocks will be considerably higher than they are today."
Of course, he also says it is risky to bet on bank stocks now, in a time of panic, but overall, the clear sentiment is that the overwhelming majority of banks are healthy. The article itself states that 150 out of 7,500 banks might fail--or just 2%.
I have been very disappointed in my own stock picking ability because I bet on Colonial Bancgroup (CNB). While I bought almost all of my shares at under 5 dollars, the market has decided that CNB is worth only 3 dollars a share. I continue to believe I am correct, and the market is being irrational. The question is whether I can stay solvent until the market becomes rational again.
Bank stock financial data are abstruse because they defy normal value analysis. Usually, value investors like myself look at a company's total cash and total debt. My own personal yardstick is to deem a company undervalued if its net cash exceeds 10% of its market capitalization. For example, Intel has a market cap of 108 billion. Therefore, I want its net cash to be at least 10.8 billion before I view it as undervalued. Intel has about 11 billion in net cash, passing my test (I own shares in Intel).
Banks, on the other hand, cannot be analyzed in this way, because they make money through loans. As a result, Shakespeare's advice, "Neither a borrower nor a lender be," doesn't apply. In addition, a bank having more debt does not necessarily denote irresponsible spending. Indeed, as an investor, you want your bank to have more debt, because banks make money by loaning to others, not by keeping their cash. The problem lies in evaluating whether a bank's debt (or, in accounting terms, its assets, because they are technically the creditor) is likely to be repaid by its debtors. As debtors default on loans, they cause an immediate downward spiral: the bank that loaned them money has to stop lending others as much money; perhaps raise the rate on its CDs to attract more money; and take other steps that decrease its ability to take advantage of normal business conditions. What we forget is in a non-panicked world, banks have the easiest job: they get money from the Fed Reserve or their depositors at 2.25%, and then loan out the money at 5.5% or more. They make an automatic 3.25% just for being a middleman. (You can see why online banks are even better--they eliminate the fixed costs of a bank, like its numerous tellers/employees, ATM machines, and physical structures, and just get paid for being a middleman, minus the normal overhead. That's why an online bank like ING can offer higher CD rates.)
Having established that a bank's financial data cannot be analyzed in the same way as a non-bank's, how do we ascertain whether a bank might go under? One informal measure might be to measure the amount of total cash vs. total debt. It's a similar analysis as above, except that in these precarious times, if a bank has too much debt relative to its cash deposits, it is more likely to collapse. All figures are from Yahoo Finance's "Key Statistics" pages as of July 14, 2008:
IndyMac, which has collapsed, had about 2 billion in total cash and 11 billion in debt. That's a 9 billion dollar difference.
Washington Mutual has 15 billion in total cash and 97 billion dollars in total debt. That's an 82 billion dollar difference.
Regions Financial has 5.5 billion in total cash and 29.5 billion in total debt, a 24 billion dollar difference.
M&T Bank, considered to be a healthy, well-capitalized bank, has 2 billion in total cash, and 16.8 billion in total debt, a difference of almost 15 billion.
US Bancorp has 7.3 billion in total cash and 72.6 billion in total debt, a 65.3 billion dollar difference.
Wells Fargo, considered to be a conservative lender, has 25 billion dollars in total cash, and 157 billion dollars in total debt, or a difference of 132 billion. This high level of debt is very surprising. Warren Buffett extolled the virtues of Wells Fargo in a recent annual shareholder letter, and Mr. Buffett is the classic value investor. Wells Fargo might have a high debt load because it didn't sell off its loans to Wall Street and held them on its own books instead, but I am just speculating. As a direct holder of the debt, Wells Fargo can hold it till kingdom come, and would have no external pressure to dump loans at a discount. In some ways, its refusal to spread its risk creates an advantage. (I own some shares in Wells Fargo.)
Now we come to Colonial Bancgroup, or CNB. CNB has 2.5 billion in total cash and 5.3 billion in total debt, a 2.8 billion dollar difference. It has the lowest total debt of any other bank above, and plenty of cash relative to its debt.
Whatever you may think of banks collapsing, CNB probably won't be among them--its debt load just isn't high enough to make a collapse imminent. At 3.36 dollars a share, if you have an iron will, you may want to consider buying 1000 shares and leaving it alone for a while. A prudent investor would probably wait until after July 21, 2008 to buy, because CNB reports earnings on July 21, 2008. I will hold onto my 1100 shares of CNB and be patient--like Wells Fargo, I can wait a long time, but I hope next week brings good tidings and immediate vindication.
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.
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