WSJ on Turkey's Islamic Capitalism

Singaporean 2006 Collectible Coin

Today's WSJ ("Muslim Land Joins Ranks of Tigers") profiles how Islam has benefited Turkey's economy. Despite the tug-of-war between the secularists and the Muslims, there is no question that the pro-Islam party has brought better economic prosperity to Turkey. This adds more evidence to my overriding theme that economics is destiny. A country could believe in Wicca, and as long as it was also successful, we'd all be analyzing how Wicca makes people rich. Any religious or political system that allows people to work hard, feel appreciated, feel safe, and gain material prosperity will be considered successful and progressive. 

Here are some interesting lines from the article, written by Andrew Higgins and Farnaz Fassihi: 

Islam itself has nothing against business. The Islamic prophet Muhammad [peace be upon him] started out as a merchant, and his first wife was a successful businesswoman. Asked to fix prices in the bazaar by followers who wanted to buy goods more cheaply, Muhammad [peace be upon him] is said to have refused: "Only Allah governs the market." 

Now there's one interpretation of the "invisible hand" in action. Of course, Dubai has been successful more consistently than Turkey. Turkey's bonds were paying in excess of 20% until recently (still around 13% from my last memory--these numbers have not been cite-checked). 10 year U.S. bonds now sell for around 4.05%. 

The lower the interest rate on a country's bonds, the more stable the country usually is, because the country has to increase rates to whatever point makes sense to investors after a risk-reward analysis. The higher an interest rate on government bonds, the more risky the country is perceived. Even with higher interest rates and potential inflation problems, Dubai and Turkey should be cited as economic and yes, Islamic, successes. 

Malaysia, at least today, has done the best job in terms of creating both an Islamic and an economically successful state. With its increasing diversity, Malaysia must now find ways to integrate its entire population or risk losing its most successful workers to neighboring countries. It's a problem all rich countries, including America, have and it can be an opportunity to re-affirm nationalism in a peaceful way. Singapore, for example, had a great idea in making an independence day coin displaying different races. See links below:

http://www.singaporemint.com/product_info.php?products_id=966

http://www.singaporemint.com/product_info.php?products_id=810 

Back to Turkey. I own Turkish bonds in my T. Rowe Price Emerging Markets Bond fund (PREMX) and am happy thus far. PREMX also has Iraqi bonds with a 5.8% interest rate. Apparently, the market thinks Iraqi bonds are only a moderately less safe bet than U.S. bonds. I wonder what the interest rates on proferred Iraqi bonds will be when American troops leave. It may not make much of a difference, as long as some troops remain to protect the oil pipelines, or if Iraqi security forces are strong enough to protect their own pipelines. Interesting note: the Iraqi bond held by PREMX matures, or ends, on December 28, 2025. Yup, the year 2025--over 17 years from now. 

Charles Wheelan and the Fed Budget Deficit

Charles Wheelan, a Yahoo Finance columnist, is the author of Naked Economics, one of my favorite and most accessible economics books. Here's what he had to say recently:

If you want to know how bad this [debt] problem is likely to get, check out this alarming graph [above] from the Heritage Foundation based on data from the Congressional Budget Office. (Warning to parents: The graph is inappropriate for children -- not because it's pornographic, but because they'll realize how much your generation is totally shafting them.)

See http://finance.yahoo.com/expert/article/economist/98587?count=30&start=6#dtk-cmtscnt for more.

Bottom line: we're borrowing from many future generations to pay for obvious mistakes now. The U.S. dollar and our world image are suffering as a result.

Why Does Gasoline Cost $4 or More?

Here is a graphic from the Washington Post re: oil prices. I got this from Barry over at http://bigpicture.typepad.com a while ago:

http://www.washingtonpost.com/wp-dyn/content/graphic/2008/07/26/GR2008072601566.html?sid=ST2008072601558&pos=list

I disagree with the Barry "The Big Kahuna" Ritholtz on market capitulation (he is waiting for it, I don't think it will happen), but love his blog.

Stocks Update: out of SO/GRMN, in WFR/TTWO

Numbers below are based on prices at market's close on August 5, 2008.

I sold Southern (SO) after seeing it listed as one of the highest sold-off stocks (largest outflow of money) this week. Someone seems to know something I don't, and that makes me uncomfortable. I lost about 30 bucks on the trade, including the dividend payout.

I sold Garmin (GRMN), taking a loss. I violated the rule of never catching a falling knife. However, I wasn't completely off my rocker, because I bought only 80 shares, intending to average down slowly. In the end, I only lost around 180 dollars.

Since posting trades publicly, SO and GRMN are the first times I have lost money on short-term trades (held less than 7 days). Most of my short term trades--the ones I intend to be short-term--are major trades of 500 shares or more. My losses on SO and GRMN were about two hundred (200) dollars total, and I did not intend for them to be short-term trades, so I'm not concerned.

My two main holdings now are WFR (bought more today--stock went down because a storm might affect production--unless this storm is called Katrina's Sister or the Second Coming of Katrina, wake me up when it's over) and TTWO. I sold 150 shares of my TTWO holdings today, and now own 250 shares. I also have CCT, most of which was bought many months ago, and I am slightly positive on CCT.

The Fed decided to stay pat on interest rates. This should be good news for my international bond funds.

Open Positions
DUK = [bought on 8/7/08]
EWM = -5.73
EZU = +1.55 [excluded from average, insignificant movement; will be excluded completely in the future b/c I realized I only own 30 shares, below the 2,500 dollars basis or current value threshold for inclusion]
IF = -7.13
TTWO = +4.89
WFR = 0 [excluded from average; new position]

[Average of "Open Positions": losing/negative average 0.72% [changes with addition of DUK and sale of VNQ on 8/7/08]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from average; insignificant movement)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WYE = +2.4%

[Overall Record: Lost an average of 3.97% [does not include 8/7 sale of VNQ]]

Held less than 7 days:
GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08 and 8/7/08]

[Overall Record: Gained an average of 1.72% [does not include 8/7 sale of TTWO]]

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 7.27%
[from May 30, 2008 (1385.67) to close on August 5, 2008 (1284.88)]

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.

Cypress Semiconductor Smacks California Gov

Cypress Semiconductor's CEO, T.J. Rodgers, continues to impress me months after the company's shareholder meeting. So many CEOs lack knowledge of their own company's product, come from a sales rather than technical background, or are just slimey (e.g. Yahoo's Terry Semel, who released information to China leading to the arrest of a blogger).

T.J. Rodgers is the opposite of all of these CEO stereotypes. He is a plainspoken, knowledgeable man that inspires confidence and whose very presence seems to repel fluff (I had another word in mind, but wanted to keep this family-friendly). Here is a two-part interview with him:

http://news.cnet.com/8301-13578_3-9887435-38.html

http://news.cnet.com/8301-13578_3-9887436-38.html

T.J. Rodgers just had a letter published in the Wall Street Journal that serves as a warning to all Californians. Mr. Rodgers writes, "Except for our sales force, our company was 100% California-based as late as the mid-1990's...[Now] 7,000 of our 8,000 employees reside outside of California. And we are moving jobs out of California as rapidly as we can. Few people know it, but so-called Silicon Valley is not really Silicon Valley anymore--almost all of the wafer fabrication plants have been shut down due to the hostile business climate."

When was the last time you heard of a CEO openly criticizing the state government of his company's HQ? If Sacramento doesn't wake up soon, California will increase two types of jobs, lawyers and low-level service workers, while higher paying jobs move elsewhere.

Here is a paragraph from Mr. Rodgers' famous letter against quotas:

We simply cannot allow arbitrary rules to be forced on us by organizations that lack business expertise. I would rather be labeled as a person who is unkind to religious groups than as a coward who harms his employees and investors by mindlessly following high-sounding, but false, standards of right and wrong...

Cypress stands for personal and economic freedom, for free minds and free markets, a position irrevocably in opposition to the immoral attempt by coercive utopians to mandate even more government control over America's economy.

Read Mr. Rodgers' full letter here:

http://www.enterstageright.com/archive/articles/0996rodgers.htm

A friend of mine emailed me saying I was contradicting myself by advocating more diversity at McAfee and EA but supporting Mr. Rodgers. I told my friend she should realize that being anti-quota is not anti-diversity. Indeed, Mr. Rodgers has beefed up diversity in his company--a quick look at current (2008) executive management shows these names:

Dinesh Ramanathan
Ahmad Chatila
Shahin Sharifzadeh
Hal Zarem
Babak Hedayati

There's at least one Indian and one Iranian now in upper management. Contrast that with EA's executive ranks, and you'll see it's like night and day.

Also, read Mr. Rodgers' 1996 letter more carefully--he specifically states that the picture will change in "10 years," which is now here:

Unfortunately, there are currently [in 1996] few minorities and almost no women who chose to be engineering graduate students 30 years ago. (That picture will be dramatically different in 10 years, due to the greater diversification of graduate students in the '80s.)

In twenty five years, when most upper management in technology companies will be Indian and Chinese (that's where the growth markets are), I bet the same people advocating quotas for non-Caucasians will not be protesting on behalf of Caucasians.

Here is another letter from Mr. Rodgers, against government spying and patriotism:

http://www.commondreams.org/views05/1229-35.htm

New Positions: WFR, TTWO

Update: I added WFR and TTWO to my portfolio. Next potential stops: PNY or ADI. I would love to add some CY, but the price is still too high for my value-minded tastes.

Based on the WSJ's recent Saturday article, Garmin (GRMN) might be a more volatile stock than I expected. I was particularly unhappy with my assumption Garmin owned its own satellite service. Apparently, Nokia, a competitor, provides satellite images to Garmin. I will sell earlier than I expected.

Funny: How to Raise Snobs

This is a funny post by Nathan DeGraaf. Warning, not safe for work (NSFW) and contains coarse language. Also, do not read if you have no sense of humor.

http://www.pointsincase.com/blogs/nathan-degraaf/if-i-had-kid-i-would-raise-judgmental-snob

I love this paragraph on raising his kids to be part of the power elite:

When they reach their teens, then we'll start talking about the best ways to bribe elected officials and cops. But until then, they'll just have to learn to lie, cheat and steal. And if you don't think those are valuable American traits, well then explain our government. Hell, they stole 300 billion of your dollars to bail out their banking buddies and you didn't even flinch. If that's the way the game is to be played, I want my children on the winning side, the stealing side.

By comparison, Bear Stearns' bailout (30 billion or so) looks cheap compared to Fannie and Freddie.

Jeff Yeager and the Ultimate Cheapskate

I dislike Suze Orman. I think Alexis Glick is an airhead. In fact, I believe most financial commentary is worthless in terms of assisting someone with the day-to-day saving of money. Once in a while, however, a great book comes out that can actually convince people to handle money wisely--Jeff Yeager's book, The Ultimate Cheapskate's Road Map to True Riches, is my pick of the lot. Jeff is funny, humble, and entertaining--a great combination, especially when it comes to a dry topic like saving. His website is below:

http://www.ultimatecheapskate.com/index.cgi

I strongly recommend his book. Here is one sample of Mr. Yeager's writing:

http://www.stretcher.com/stories/04/04aug23c.cfm

Jamba Juice, Revisited

I own some Jamba Juice (JMBA) shares and averaged down, recently at 97 cents. My cost basis isn't high enough to make me worried, but I wonder if JMBA at under a dollar a share is worth a look. The company releases earnings on August 21, 2008, and for the past month, has been pulling out all the stops in getting traffic into its stores. It simplified its menu design, introduced brand-new breakfast items like granola poppers, and introduced a lower-priced orange refresher with the entertaining repartee, "Where's the Fruit?"

Here's the case for Jamba:

First, Jamba's stock price is below its book value.

Second, traffic has increased as a result of the marketing blitz. I have personally noticed traffic increase in its stores, at least in the Bay Area.

Third, competition is sparse. Starbucks' new drinks taste terrible. BusinessWeek's David Kiley agrees with me--he said one drink had a "chemical taste."

http://www.businessweek.com/the_thread/brandnewday/archives/2008/07/starbucks_vivan.html

The better competition is from Jack-in-the-Box's smoothies, which actually taste good but probably have no nutritional value (too much sugar).

Fourth, the prices for oranges has decreased. Jamba spends a lot of money of strawberries and oranges. With the recent good weather, Jamba's costs should decrease.

Fifth, most of us in California have had a very hot summer. Hot weather helps Jamba's business for obvious reasons.

The case against Jamba:

1. Service is slow. No matter how many songs their workers sing in the stores, Starbucks makes a drink faster. I see lines all the time at Jamba. This means traffic has increased, but their service model needs to be changed to improve efficiency. There is no reason people should be waiting 6 minutes or more for a drink. Also, I never get a receipt at Jamba unless I ask for one. This means customers and employees have no record of what they ordered, making some fraud inevitable. I saw someone recently tell an employee he ordered a pretzel. No one had any records. She had to give it to him. That situation also slowed down service for other people.

2. Jamba continues to be lackluster in finding good locations. A frozen yogurt place just opened up in downtown San Jose next to a new Popeye's. Both places probably got money from the city's redevelopment department. Why didn't Jamba get one of those locations? I am willing to bet Jamba doesn't even know a Redevelopment Agency exists in San Jose. This is Jamba's main problem--in food services, location is everything because if consumers can't easily get to you, they will just go across the street to someone else.

3. Jamba may be losing money on its orange refresher. To compete with Starbucks, Jamba introduced a new drink costing $2.95. If someone only orders that drink, Jamba may not benefit from all the increased traffic. (From what I saw, however, people were ordering many different drinks.)

4. Management continues to be non-responsive. I sent a detailed letter to Jamba's management several months ago after their annual meeting. I did not receive even an acknowledgment they received it. I understand that Jamba cannot respond to every inquiry, but a postcard confirming receipt of detailed letters might be a good idea.

5. Jamba has not used the futures market to lock in fruit prices. With orange prices being relatively low right now, Jamba is foolish not to consider using orange futures.

6. As far as I know, Jamba's warrants haven't expired yet. Explore previous Jamba posts for more on this issue.

7. If Jamba's stock price stays below a dollar for a certain period of time, it may be pink-listed or taken off the NASDAQ. That would make its shares harder to trade.

What's my conclusion? Skip the Vegas trip and put your play money on Jamba--if earnings disappoint on August 21, 2008, only then will I give up on Jamba.

Note: the Wall Street Journal's Richard Gibson had an excellent article on Jamba (April 2008):

http://www.smsmallbiz.com/profiles/Jamba_Rebound_Faces_Hurdles.html

Electronic Arts Shareholder Meeting, July 31, 2008

Electronic Arts (ERTS) has a history of fun shareholder meetings. Its previous CEO, Larry Probst, seemed to enjoy being in the spotlight and demonstrating new games. In previous years, he had a member of the Board play a new skateboarding game in front of shareholders. ERTS also provides great sweets every year--no real food, but the non-Costco chocolate chip cookies, soda, mini-cheesecakes and Starbucks coffee are more than enough. The cafeteria is a few yards away from the auditorium where the meeting is usually held, and the panini I had was great. Wearing a buttoned shirt and slacks, I was obviously out of place among the jeans and t-shirt employee crowd. A group of employees was playing touch football on the lawn across from the cafeteria.

Mr. Probst was replaced by John Riccitiello in 2007. Mr. Riccitiello brings an East Coast bluntness to ERTS and is more intense than Mr. Probst. ERTS usually has a great video showing new and old games and its different franchises, such as Harry Potter, Spore, and other famous games. This year, the video seemed shorter. It was still a good video, but it's clear Mr. Riccitiello seemed to take the meeting as a more serious matter than a time to show off his company's numerous games. Some people in the audience privately complained no images of the new Batman game were shown. No live demonstration of any new games occurred.

The slides and presentation during the informal part of the meeting seemed to have two themes: cost-cutting through outsourcing, and the Pogo acquisition. ERTS has several top-selling titles, while competitors such as Take Two (TTWO) only have one (Grand Theft Auto). Riccitiello talked about cutting costs by using engineers overseas, and singled out Romania and India as desirable locations. ERTS also has workers in Shanghai and Montreal.

ERTS indicated the mobile segment was the new growth area and it was well-positioned to do well. (Yahoo made a similar point in its annual meeting.)

The Q&A session was brief. Only two people asked questions, including myself. One person asked about an online forum that criticized some ERTS games (I am not sure about the exact website, but the speaker basically asked about how the company responded to online criticism of its games). ERTS mentioned it had no control over the online forums but generally listens to consumer complaints.

I asked about diversity and whether ERTS was concerned about having a 100% Caucasian-looking management while its workers and employees were incredibly diverse. I received a stock answer about the company's commitment to increasing diversity. The officer pointed out there were now three women on the board, which was an improvement. Being in California and a tech company, it seems unusual to have no Asians or Indians on the Board or in upper management.

My second question was about the rumored Take Two (TTWO) acquisition. I asked how ERTS planned on incorporating a controversial game like Grand Theft Auto into its portfolio, which includes games geared to teenagers and children, like Harry Potter, Spore, pogo.com, Simpsons, and Madden football. Riccitiello first declined to answer my question because of ongoing discussions with Take Two. I then asked him to speculate and pretend as if the company might end up buying Take Two. Riccitiello said ERTS had several Mature-rated games (MA rated), and the Godfather games were similar to Grand Theft Auto. He smartly added that ERTS was looking to increase the diversity of its gaming portfolio, a jab back at my criticism of the company's homogeneous management look.

There are a couple of problems with his comments. One, Grand Theft Auto was actually rated "AO," or "Adults-Only," at one point, not Mature. Thailand just banned sales of the game after a Grand-Theft-Auto-related homicide. [Update on 7/6/08: apparently, the Thai government had nothing to do with the ban--a local distributor stopped selling the game.]

Two, no one mentioned risking the ire of conservative-minded consumers. Riccitiello did not seem to take seriously a potential backlash from marketing sex and violence to children. In 2006, the FTC reported, "In 2002 consumers purchased nearly 40 percent of M-rated video games for children younger than 17 years." Also, "69 percent of unaccompanied children aged 13 to 16 years participating in its mystery shopper survey successfully purchased M-rated video games." If ERTS is going to sell many games to children and teenagers, it needs to take its public image seriously. The juggling act of selling games to children and "AO" games to adults is even more difficult because Grand Theft Auto revels in its smashmouth, rebel-without-a-cause persona. If you're a one-trick pony like Take Two, having an in-your-face image is fine; however, when you're a larger company with ties to Hollywood and major media outlets, there are other considerations at stake.

After the meeting, I went to the ERTS company arcade and played some games. I always look forward to my annual John Madden playtime. A new game was there this year, a very realistic EA NASCAR racing game--I had a great time playing it. Some sports items were in the arcade also. I had not noticed these items before. Several autographed items were in clear locked boxes, including an autographed Karl Malone basketball shoe. My favorite was the picture of a young Michael Jordan in a Bulls jersey typing on a 286 desktop computer (with the old floppy drives and tiny green screens). That one was classic--if anyone at EA is reading this, one hit at next year's meeting would be having copies of that picture for shareholders.

As for my thoughts on shares, I bought Take Two shares after the meeting. If ERTS is successful in buying TTWO, then their stock price might take a small hit when the deal is announced. I continue to believe ERTS should have bought TTWO prior to both companies' earnings releases. Back then, TTWO's share price was in the mid-teens and represented a good value. TTWO has since released great earnings, while ERTS released not-so-great earnings. Any stock deal that occurs now will be more dilutive of EA's stock.

ERTS clearly has a strategy of acquisitions to feed its growth. To be fair, it's hard to create a lasting video game franchise, so acquisitions are a good way to grow in the video game business; however, timing is everything when it comes to buy-outs, and ERTS's timing is not ideal. ERTS might want to wait a year or two, when TTWO might miss their numbers, causing a correction in its stock price. When any company bets its future on one franchise, especially one like Grand Theft Auto, it takes a large risk. Meanwhile, ERTS is more diversified and can afford to wait.

I still don't blame EA for its impatience--if EA doesn't buy Take Two, it runs the risk that Microsoft might, especially after the failed Yahoo deal. EA cannot afford to have a competitor like Microsoft get immediate talent and a firmer foothold in the gaming industry because MSFT could potentially limit EA's future X-Box game sales. At the end of the day, EA's impatience may be TTWO's gain.

Update on August 19, 2008: WSJ today reported today that Grand Theft Auto sales were 78% of TTWO's total sales.

Random Thoughts: Religion

I am with Thomas Jefferson when it comes to religion: "it does me no injury for my neighbor to say there are twenty gods or no God. It neither picks my pocket nor breaks my leg." This libertarian strain leads me to get slightly upset when people blame any other religious group for any reason. My friends, knowing I am easily needled, quote Christopher Hitchens (of God is Not Great fame) to me whenever they can. Borrowing from C.S. Lewis' The Problem of Pain, I came up with the following argument, which gently straddles the line between proselytizing and confirming faith as a private matter. 

1. If you agree guilt is innate, explain where it comes from? At such a young age, we've all felt guilt. Assuming socialization at that young of an age could not have played a part, where did it come from, if not God or something we cannot understand and therefore name "God"? 

2. Agree that humanity is not omnipotent. Okay. Agree that humanity will always be subject to the unknown, which will nevertheless have real effects on a person's life. Okay. If you believe in cause and effect, the unknown that causes effects has to come from somewhere. Religion assigns a name to that unknown and calls it "God." To not believe in God is to reject the concept of the unknown. 

One way to escape that conclusion is to say "Yes, at some point, humanity will be able to explain everything or will evolve to be able to explain everything." That is not a humble explanation. 

So the atheist must post this scenario: God-believers are wrong and humble, and atheists are not humble but right and can be omnipotent. Therefore, the main difference under an atheist's view between believers and non-believers is believers are predisposed to humility and possibly stupidity. I agreed with this position my friend advocated. I'd rather live in a world where people are humble and wrong than arrogant and right. That division, at the end of the day, seems to be one difference between believers and nonbelievers. Just my two cents from a former atheist (just like C.S. Lewis). 

As for calling particular religions harmful, the New York Times's Lindsey O'Rourke reminds us that terrorism crosses all lines. See A27, August 2, 2008, "Blaming Islamic fundamentalism [for female terrorism] is also wrongheaded. More than 85 percent of female suicide terrorists since 1981 committed their attacks on behalf of secular organizations; many grew up in Christian and Hindu families...The founder of Hamas claimed 'A woman martyr is problematic for Muslim society. A man who recruits a woman is breaking Islamic law."' And, "95 percent of female suicide attacks occurred within the context of a military campaign against foreign occupying forces, suggesting that, at a macro level, the main strategic logic is to create or maintain territorial sovereignty for their ethnic group" (e.g. Tamil Tigers--see an overlooked but incredible Indian film called A Peck on the Cheek for more). 

Of course, Hamas' anti-Semitic comments contradict the Quran's Sura 2:256: "There shall be no compulsion in religion." Just goes to show you can bring a man to the book, but you can't make him understand it.

Yahoo! Shareholder Meeting, August 1, 2008 (YHOO)

(Susan Decker and me)

Yahoo held its 2008 shareholder meeting at the posh Fairmont Hotel in downtown San Jose. Security at the meeting was tight--proxy statements were checked prior to providing a wristband required for entry.

Yahoo did not skimp this year on the food--we had coffee, juices, and pastries galore (the croissants were especially tasty). In fact, the hotel put out so much food, most of it was untouched.

Outside of the meeting hall were several kiosks highlighting Yahoo's different areas, such as search, mobile, green (environment) and advertising. The "green" area hasn't received much attention, but it's interesting. Go to http://green.yahoo.com for more information--the Yahoo employee referred to the "gift guide" tab as one convenient way to shop for eco-friendly gifts.

The formal part of the meeting was more interesting than usual, because some ballots had to be re-done after the Yahoo-Icahn agreement invalidated Icahn's slate and gold card proxies. The presenter indicated votes for Icahn "will not be cast."

Several pension funds talked about their proposals. The first proposal--pay for superior performance--fell flat because the delivery was stunted and overly prepared.

The second presenter did better--he was from a NY Pension fund and chastised Yahoo for its political censorship. He said "Yahoo actively participated in these human rights abuses," and should "not engage in proactive censorship." His proposal also appeared to demand more public transparency when Yahoo complies with foreign subpoenas for information.

The third presenter, from Harrington Investments, dealt with human rights also. The presenter said that Yahoo "lacked true morality, which is the morality of obligation," and failed in its fiduciary duties.

Voting results were released after the meeting, and Yahoo prevailed on the shareholder proposals it asked shareholders to reject. Shareholders also elected all of Yahoo board members by overwhelmingly wide margins, except for Roy Bostock and Arthur Kern, both of whom had about 20% of shares withheld in opposition. Mr. Bostock earlier had 34% of the vote withheld in protest, and many shareholders continue to revile him for his involvement in outsized compensation despite Yahoo's lagging share price.

As a result of placating Carl Icahn, Yahoo was able to dissolve shareholder frustration; make its annual meeting into just another regular meeting (much to the chagrin of most media, who appeared from numerous outlets); and focus on remaining independent. My perception was Mr. Bostock is now responsible for the negotiating with Microsoft, while Sue Decker and Jerry Yang are focusing on how to maximize ad and search revenue.

Mr. Roy Bostock, Chairman of Yahoo's Board, gave a presentation after the formal meeting had concluded. I'm sure he intended his speech to be a fiery "Sinners in the Hands of an Angry God" type, but it fell flat. The more Yahoo talks about Microsoft, the more it sounds like a jilted but still optimistic ex-girlfriend. Bostock said Yahoo was a "victim of misunderstanding." He indicated they had entered into an agreement with Google as part of a strategic plan, but never elaborated on the details of the deal. Bostock indicated, "At no point did this board or management in any way ever resist Microsoft's proposal," making Yahoo sound more and more like a hopeful ex-girlfriend.

The rest of Bostock's speech seemed to focus on blunting a minority shareholder lawsuit by blaming Microsoft for the failed deal. Bostock said Yahoo "proactively" evaluated Microsoft's original and later hybrid proposal and then seemed to get unnecessarily aggressive when he said, "We called the shots." Not exactly the kind of comments that would make Microsoft too happy about a partnership or a deal.

Bostock said the 31 dollar bid was the only express bid, and the express offer "substantially undervalued Yahoo." Bostock then made the typical comments about maximizing shareholder value and then characterized the 33 dollars a share offer as an implicit Microsoft offer rather than a Yahoo counteroffer. Yahoo had a "long-term strategic vision," he said, and it was a "burden to deal with all these offers." It was a stunning statement by a company that basically cost its shareholders a 50%+ premium.

Jerry Yang made the next presentation. His public speaking skills have dramatically improved. He was prepared and polished. He talked about internet opportunity, referring to the projected growth in "incremental internet users" (335 million). 76% of these users would come from Asia, Pacific and emerging markets. Mr. Yang said Yahoo was investing in mobile and emerging markets and had an enviable "collection of assets."

Yahoo receives 3.6 billion visits per month. 3.6 billion visits a month is incredible. An advertiser can hardly ignore Yahoo if it wants broad and international placement of its product or content. Mr. Yang ended by talking about opening up the advertising platform, i.e. making it easier for advertisers to buy ads.

Susan Decker spoke next. She has a firm grasp of Yahoo's diverse businesses. She indicated Yahoo's top 200 advertisers bought 90% of display ads (e.g., the very large ads, especially for movies, on Yahoo's home page). Yahoo was also improving its "sponsored search" advertising process, where advertisers could big for a term like "plasma tv" in an auction.

Ms. Decker then talked about "Buzz," and other social networking tools. She referred specifically to search innovation, "Search Monkey," and other tools to make search engines more user-friendly and integrated. It appears Yahoo is trying to make its platform similar to Facebook so it can continue to be a one-stop shop for users. Sue Decker ended by reading some positive reviews of Yahoo published by various media outlets. Her skill and presence are such that she could pull this off without appearing arrogant.

The CFO was the final speaker. His slides showed "operating cash flow" has been stagnant since 2006, but he indicated the reasons were acquisitions and other growth-driven items. Yahoo has 3.2 billion dollars in cash. Let me repeat that--3.2 billion dollars in cash.

Yahoo also owns stakes in alibaba.com (China), Yahoo Japan, Gmarket (Korea), and TaoBao.com (China). Yahoo estimates these stakes being worth $7.01 per share, not including Alipay.com and TaoBao.com. One source of disconnect: Yahoo kept talking about emerging markets, but its partners are all in developed economies like Japan and Korea, except for possibly China. I don't see any partnerships in India, Eastern Europe, or Turkey, for example.

Paidcontent.org did a good job summarizing the meeting itself and the Q&A session:

http://www.paidcontent.org/entry/419-live-yahoo-annual-meeting-the-meeting-starts/

http://www.paidcontent.org/entry/419-yahoo-annual-meeting-qa-compensation-concerns-china/

The comments under "Fantasy Sports" and "A New Metaphor" referred to my comments at the meeting. I basically said Yahoo--more specifically Roy Bostock--needed to stop talking about the failed Microsoft deal. We get it--it failed. Using more polite language ("bad breakup"), I suggested Bostock stop acting like a spurned ex-girlfriend, and perhaps Microsoft might come back and be more reasonable. No one wants to deal with a bitter ex who keeps ripping you in the press. It's just common sense. I also recommended Bostock stop using the term, "long term strategic plan"--it sounds hollow right now, and if he wants to use it, he should use it when Yahoo's stock price goes above $30 per share.

I praised Jerry Yang for being the founder of the company, reminding everyone that without him, Yahoo would not exist. I said the criticism relating to the Chinese blogger controversy was unfair, because Mr. Yang never intended for the end result to occur. At worst, I said, you could argue he and the company were naive, but not malicious (even though it was Semel who released the information, Yang apologized publicly for it, associating himself with the incident). I continued, saying perhaps a temporary sabbatical would be best for the company, because Mr. Yang is now associated so deeply with the blogger controversy, it's hard to focus on Yahoo's actual business. Unfair or not, he has become a lightning rod for criticism (two of the shareholder proposals dealt with human rights violations), and with Decker already at the helm, perhaps she could take over temporarily as CEO and President. I also praised Yahoo's fantasy sports platform/franchise.

Jerry Yang seemed pleased with my comments, chuckling at the ex-girlfriend analogy, and pointed out he was not the CEO at the time of the blogger incident. He said he had "condemned the Chinese government" for its actions, something I had not read or heard before. Yang's comment against the Chinese government surprisingly did not lead to major publicity.

Decker said the fantasy sports franchise fit with Yahoo's desire to move more into social networking and demonstrated Yahoo's early adoption of social networking.

Bostock made a remark about how he wouldn't compare the Microsoft situation to a "romantic relationship." Despite his attempt to appear strong, Bostock ended up looking clueless every time he strayed from prepared comments. Bostock isn't a natural when it comes to dealing with the public. If he keeps opening his mouth about Microsoft, he'll start to look like Glenn Close in Fatal Attraction soon ("We called the shots" begins to look eerily similar to "Don't you ever pity me, you smug bastard."). If he's trying to play hard to get, he's not doing a good job--and he's certainly not endearing himself to Microsoft or anyone else with his rehashing of the offers and counteroffers. Obviously, there was some miscommunication. A two dollar difference ($31 or $33) doesn't ordinarily derail a deal. Either play nice so everyone can sit together again, or walk away--it's so simple, even a Harvard MBA should be able to get it.

Other questions involved an accusation Yahoo had not sold Yahoo Japan for the highest value. Yang said he recused himself on the Yahoo Japan board at the time of the transaction and sold a stake at the particular price because of tax implications, preferring to get a continuing revenue stream over ten years.

The same shareholder complained about Sue Decker's other board memberships, such as Berkshire Hathaway, Costco, and Intel. Other board members leapt to Sue's defense, saying she was a hard worker and answered emails at 3AM and had a great grasp of the company. Ms. Decker responded politely and added she specifically rejected several invites to join other companies' audit committees to save time for Yahoo.

Bostock rejected a request for him to step down and said director compensation was not high, disputing the numbers the shareholder provided. The shareholder responded that his numbers came from the proxy.

Other shareholders complained not all the directors had shown up and some did not even own stock in the company. Another shareholder complained about the lack of female board members.

Stephen Shankland and Wendy Tanaka wrote accurate summaries of the meeting:

http://news.cnet.com/8301-1023_3-10004577-93.html

http://www.forbes.com/technology/2008/08/01/yahoo-icahn-microsoft-tech-cx_wt_0801yahoo.html

Here is the BBC's take:

http://news.bbc.co.uk/1/hi/technology/7538469.stm/

All in all, Yahoo had a successful day and pulled off a professional event after settling with Carl Icahn earlier. What was projected to be a media circus was just another shareholder meeting. Jerry Yang's image went up dramatically--he looked poised, prepared, and fresh. Meanwhile, Roy Bostock looked tired, bitter, and combative. I added 50 shares of Yahoo, a nominal amount, when I returned to my office. I like the company, but with Bostock around, I'm not sure a deal with Microsoft will get done anytime soon. I was hoping Decker could pull some strings with her colleague Warren Buffett, who would talk to Bill Gates, but now it all seems too complicated. Almost like a messy, bad breakup.

Small Business Bankruptcies Increased

Barry Ritholtz writes about small businesses getting the shaft:

http://bigpicture.typepad.com/comments/2008/07/what-do-bankrup.html

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

Mark Cuban as Small Business Savior

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

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

http://www.blogmaverick.com/2008/07/28/how-to-jumpstart-the-economy-tax-free-small-businesses/

I blogged on a related tangent myself in April:

http://willworkforjustice.blogspot.com/2008/04/does-overpopulation-cause-declining.html

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

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

Stocks Update, July 30, 2008

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

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

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

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

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

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

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from averages and overall record calculations)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
WYE = +2.4%

[Overall Record: Lost an average of 3.97%]

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

[Overall Record: Gained an average of 2.96%]

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 7.32%
[from May 30, 2008 (1385.67) to mid-day July 30, 2008 (1284.26)]

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

New Positions: SO and GRMN

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

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

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

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

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

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

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

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

http://blogs.barrons.com/techtraderdaily/2008/07/30/garmin-q2-misses-outlook-weak-nuvifone-delayed/

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

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

Educational Attainment and Economic Advantage

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

http://www.nytimes.com/2008/07/29/opinion/29brooks.html?ex=1375070400&en=7286e3c1957017ac&ei=5124&partner=permalink&exprod=permalink

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

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

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

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

BREAKDOWN OF INCOME AND TAXES PAID BY CATEGORY
Income Category	2006 AGI			Percent of All Income			Percent of Income Taxes Paid
Top 1%	Over $388,806			22%			37%
Top 5%	Over $153,542			37%			57%
Top 10%	Over $108,904			47%			68%
Top 25%	Over $64,702			66%			85%
Top 50%	Over $31,987			87%			97%
Bottom 50%	Under $31,988			13%			3%

The above chart is from Kiplinger's:

http://finance.yahoo.com/taxes/article/105468/What%27s-Your-Share-of-the-Nation%27s-Tax-Bill?

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

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

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

Update on August 10, 2012: more on overall tax burdens here: http://online.wsj.com/article/SB10000872396390444246904577571042249868040.html?mod=e2fb  (David Wessel, August 6, 2012, The Numbers Inside a Hot-Button Issue)

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

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

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

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

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

WSJ Review, 7/29/08

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

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

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

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

http://www.federalreserve.gov/newsevents/speech/mishkin20080728a.htm

All FRB speeches in 2008 can be found here:

http://www.federalreserve.gov/newsevents/speech/2008speech.htm

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

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

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

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

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

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

Immigrants and Entrepreneurship

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

http://newsok.com/diverse-entrepreneurs-are-changing-face-of-states-small-business/article/3269257/

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

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

McAfee Shareholder Meeting, July 28, 2008

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

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

http://www.mcafee.com/us/about/management/david_dewalt.html

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

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

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

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

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

http://www.avertlabs.com/research/blog/

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

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

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

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

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

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

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

New Position: EZU

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

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

GOOG, STM, WFR, BRCD, BWS, LAZ, SVU, DEG, MITSY, ENH, NVDA, TSM, AIB, IRE

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

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

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

New Word: filigree

I just learned a new word: "filigree."

http://dictionary.reference.com/browse/filigreed

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

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

http://www.nytimes.com/2006/08/27/books/review/ORourke.html?_r=1&%20scp=2&sq=claire%20messud&st=cse&oref=slogin

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

Juror is Dismissed in Mattel Trial

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

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

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

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

Warren Buffett and Bill Gates Talk Economics

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

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

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

http://creativecapitalism.typepad.com/creative_capitalism/2008/06/bill-gates-and.html

(Conversation took place on May 15, 2008)

Funny: Don't Buy Stuff You Cannot Afford

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

http://snltranscripts.jt.org/05/05lbuy.phtml

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

General Electric (GE)

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

http://www.bloomberg.com/apps/news?pid=20601087&sid=axyID3B8K5bU&refer=home

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

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

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

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

http://www.gemexicoautoins.com/

http://www.gemexicoautoins.com/WhyMexIns.html

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