Stocks Update

I just did the math, and from December 7, 2007 to today, October 24, 2008, I've lost around 24% in my retirement funds.

Remember, if your accounts decrease by 10%, you need to make more than 10% to break even. Thus, my portfolio has to go up 32% so I can get back to where I was in December 2007. Sigh.

Update on October 27, 2008: another blogger is in the same boat:

http://escapebrooklyn.blogspot.com/2008/10/sounds-good-in-theory.html

Capitulation, Japanese-Style

Apparently, Japan's market has now gone down to 1982 levels. Oh, it gets even worse--DJIA futures are down 352+ points last time I looked. [It got worse--see chart above.]

http://www.bloomberg.com/apps/news?pid=20601101&sid=aRTtcZqFRnII

Sigh. I wish I could go to sleep and wake up in May 2009, when I think the Dow will be back up to 10,000. In any case, I call capitulation. I called it too early before, but I call it now. October 24, 2008. Capitulation.

Update on October 24, 2008: no 1,000 point drop today, but it's still a bad day--DJIA still down 200+ points.

Atwood on Debt

Atwood hits the nail on the head in her 10/21/08 NY Times Op-Ed:

Atwood Op Ed

But at some point we stopped seeing debt as a simple personal relationship. The human factor became diminished. Maybe it had something to do with the sheer volume of transactions that computers have enabled. But what we seem to have forgotten is that the debtor is only one twin in a joined-at-the-hip pair, the other twin being the creditor. The whole edifice rests on a few fundamental principles that are inherent in us.

In my "OCM" post, I made the same point:

OCM Post

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

Somebody Saw It Coming

Check out the Economist's cover, dated March 2007. Hat tip to "Escape from Brooklyn" blog:

http://escapebrooklyn.blogspot.com/

South America Decoupling from U.S.?

Is South America finally decoupling from the U.S.? The CS Monitor seems to think so:

http://www.csmonitor.com/2008/1024/p06s01-woam.html

Greenspan at the Confessional

I hate to kick a man when he's down, but the NY Times beat me to it:

http://www.nytimes.com/2008/10/24/business/economy/24panel.html

I remember Greenspan raising interest rates towards the end of his tenure (ah, the days of earning 5% on basic money market accounts). Greenspan did see the excess--just not soon enough.

As Tom "American Treasure" Toles implies in this 3/4/05 Washington Post cartoon, how independent was Greenspan? Was much of Greenspan's unwillingness to raise rates was because of the Bush administration's policies and Greenspan's desire not to lose his job?

Living on a Prayer

From The NY Times:

http://www.nytimes.com/2008/10/23/garden/23foreclosure.html

Forty-four percent of employees live paycheck to paycheck, according to a survey conducted by MetLife in late 2007, and 48 percent of American households have less than $5,000 in liquid assets according to Edward Wolff, an economist specializing in the study of poverty and income distribution at New York University.

Funny: Bernanke to the Rescue

In these volatile times, we gotta have some humor. Here's a funny Bernanke montage explaining the monetarian philosophy (i.e., when times are bad, the government should inject/drop money to stimulate the economy). Make sure the music is on--it's the music that makes everything so good:

http://moneyhelicopters.ytmnd.com/

Hat tip to Prof. Mankiw.

European Econ Forecast

Clever economic weather forecast from the FT:

http://www.ft.com/cms/s/0/3af6c64c-9eb6-11dd-98bd-000077b07658.html

Hat tip to Barry "The Big Kahuna" Ritholtz.

Hoover Institute

The Hoover Institute has a great link to some educational videos:

http://www.hoover.org/multimedia/uk/

Not exactly economics per se, but close enough.

B&N Free Cappuccino Offer (Thru 10/31)

I love cappuccinos. B&N is offering a free one through October 31, 2008:

Barnes and Noble Coupon

Hope it works.

Don't Worry, Be Happy

NY Times says many Americans won't be affected by the bailouts because relatively few of them pay any taxes:

http://economix.blogs.nytimes.com/2008/10/20/americans-shouldnt-worry-about-the-bailout/

Law: Performance Reviews

Here is an interesting article on whether companies should keep doling out performance reviews:

http://www.hrlawyersblog.com/2008/10/articles/hr-management/getting-rid-of-performance-reviews/

From my experience, performance reviews are used against the employer and constitute one of the few pieces of evidence readily available to a potential plaintiff.

Colin Powell on an American

Colin Powell on Kareem Rashad Sultan Khan:

http://news.yahoo.com/s/mcclatchy/20081021/pl_mcclatchy/3078971

There is a picture accompanying this article elsewhere that apparently belongs to Platon for the New Yorker. The picture shows the soldier's mother, Elsheba Khan, clasping her son's tombstone. It is not to be missed:

http://www.newyorker.com/online/2008/09/29/slideshow_080929_platon?slide=16

Natural Gas Partnership

Russia, Iran, and Qatar may create a natural gas partnership/cartel, similar to OPEC:

http://news.yahoo.com/s/ap/20081021/ap_on_re_mi_ea/ml_gas_cartel

Think now would be a good time to invite Russia into the G-7?

Here is what I said earlier on the G-7 (Earlier Post):

With those three new players [including Russia], the G-7 can exchange political capital for hard cash. Then, we can show them the advantages of being part of the club. Perhaps then, Russia might feel less inclined to continue to occupy Georgian soil and will avoid establishing a consortium of natural gas producers, which would include Iran.

AllThingsD on Yahoo and Yang

AllThingsD has a good post on Yahoo:

http://kara.allthingsd.com/20081021/yahoo-earnings-what-to-expect-when-youre-not-expecting-much/

I am surprised no one is mentioning Bostock anymore. He is more unpopular than Mr. Yang. I like Mr. Yang--don't forget, without him, there's no Yahoo at all.

Update:

Yahoo stock up around 5% in after-hours trading on 10/21/08. Here's why--Yahoo met expectations and earned 9 cents a share, excluding special items.

From
http://sanjose.bizjournals.com/sanjose/stories/2008/10/20/daily40.html:

Marketing services revenue was $1.56 billion, 1 percent increase from the same period of 2007.

Excluding items, the company's income would have been $123 million, or 9 cents a share, compared to non-GAAP income of $153 million or 11 cents a share for the same period of 2007.

Analysts, on average, expected earnings of 9 cents a share on $1.37 billion in revenue.

Some more encouraging words from the earnings call itself. Susan Decker speaking:

We have no debt. We ended the third quarter with $3.3 billion of cash and marketable debt securities. As of the end of the quarter the value of our direct and indirect interests in the publicly traded securities of Yahoo Japan, alibaba.com and Gmarket were valued at approximately $7.9 billion in the public markets or over $5.50 a share.

Earnings, Yahoo and Calm before the Storm?

Yahoo (YHOO) releases earnings after the market close today. I am on pins and needles. CEO Yang should have some good news, and if not, he should consider a temporary sabbatical.

Yahoo isn't the only belle of this week's ball--tomorrow's the big event:

http://biz.yahoo.com/ap/081021/the_day_ahead.html

All those major companies are reporting earnings. If the market doesn't drop more than one percent, I will be very, very happy. I am betting, perhaps foolishly, that most company-specific bad news is already priced in. Although I've reduced many positions, my retirement accounts are still around 80% in stocks and mutual funds.

Recession?

Apparently, a majority of U.S. states are now officially in a recession:

http://abcnews.go.com/Business/Economy/story?id=6075580&page=1

I'm not sure what to make of this--usually, when the mainstream press starts calling a recession, we're in its middle or late stages, not the beginning.

Anyway, the above chart isn't sad or tragic--we've become somewhat desensitized to recession calls. If you want to see something really sad, read up on Mattie Stepanek. Keep the Kleenex nearby before you make the jump:

http://abcnews.go.com/GMA/story?id=6069915&page=1

Scott Burns on Financial Nitwits

Scott Burns raises an interesting and terrifying issue--what happens when all those ARMs adjust upwards? I see an "uh oh" in the future...

http://assetbuilder.com/blogs/scott_burns/archive/2007/08/10/the-nitwit-sector.aspx

Also, if financial services is 20% of all market value, what is going to replace it as its percentage shrinks? I don't see any killer apps on the horizon--do you?

Peggy Noonan on Sarah Palin

Peggy Noonan, one of my favorite columnists, has broken party lines and questioned the Republican Party's VP choice:

http://www.peggynoonan.com/article.php?article=438

Talk about a true maverick.

The Two-Headed Monster

Denis MacShane, in this quarter's WQ (Autumn 2008, p. 51), reminds us that we desperately need a third party:

I'm reminded of President Julius Nyerere's joking retort decades ago to American visitors who criticized his one-party state in Tanzania. The United States is a one-party state, too, he would say, but since America is so big, it takes two parties to do the job.

Touché.

The Three Ideals?

Joshua Kucera had a good line about Greenlandic culture in the Autumn 2008 WQ edition:

Both Danish and Greenlandic cultures "value communitarianism, egalitarianism, and emotional restraint."

It's not as poetic, but to me, it sounds substantively better than France's "Liberté, égalité, fraternité."

Bruce Schnei­er on Terrorism

I don't usually like Jeffrey Goldberg's articles, but this one is hilarious and tragic at the same time:

http://www.theatlantic.com/doc/200811/airport-security 

I couldn’t believe that what Schneier was saying was true—in the national debate over the no-fly list, it is seldom, if ever, mentioned that the no-fly list doesn’t work. 

Gotta love Bruce Schnei­er's honesty and intelligence. Here is his blog: 

http://www.schneier.com/ 

http://www.schneier.com/blog/archives/2008/10/me_helping_evad.html

PinDebit Blog on Visa

The PinDebit blog (pindebit Blog) has a great article on Visa:

http://pindebit.blogspot.com/2008/10/it-all-about-visa-forbes.html

They apparently liked my post on Visa:

http://pindebit.blogspot.com/2008/10/visa-1st-annual-sh-meeting-called-non.html

G-7 Redux

The CS Monitor has an interesting article on the economy:

http://www.csmonitor.com/2008/1020/p16s03-wmgn.html

Froehlich suggests the G-7 reflect the "changing global landscape" by adding China, India, Mexico, South Korea, Russia, and Brazil, all with economies exceeding $1 trillion in size, to the current members – the US, Britain, France, Germany, Canada, Italy, and Japan.

Sounds similar to what I suggested in this post:

http://willworkforjustice.blogspot.com/2008/10/g-7-to-rescue-dont-bet-on-it.html

Housing Graphic of Foreclosures

From Bloomberg comes a great graphic showing the hardest hit areas in the U.S. housing crisis:

http://www.bloomberg.com/apps/data?pid=avimage&iid=ibDX8eWtKfZs

Visa's Shareholder Meeting (2008)

(CEO Joseph Saunders and me)

Visa's first annual shareholder meeting was held on October 14, 2008 at the San Francisco Museum of Modern Art. You would think that the very first shareholder meeting of an internationally known company would be exciting. Unfortunately, the meeting was anything but.

I spoke with a Visa (V) employee prior to the meeting, who said that October 14, 2008, happened to be the first day that employees could sell their restricted shares. Given all the volatility in the stock market, it must have been an interesting day for Visa employees. (At least someone was experiencing interesting times.)

The food spread was small and consisted of the basics--bottled water, some drinks, and coffee. Security guards hovered around shareholders, which seemed strange--who is going to show up at 8:00AM at a shareholder meeting to cause trouble? Perhaps the company was concerned shareholders who had bought at the 52 week high would arrive en masse, but the stock is still slightly above its pre-IPO price, so many shareholders haven't actually lost anything. It appeared that around 15 non-employee shareholders appeared for the meeting. One woman insisted she owned 4000 to 5000 shares, but didn't have a proxy statement or other proof of ownership. She was not let in. To give you an idea of the meeting's entertainment value, this incident was the highlight.

Shareholders were let into the museum's theater and saw Mr. Joseph W. Saunders, Visa's CEO, and Visa's general counsel sitting at a table in front of a blank theater screen. Eagerly awaiting some kind of presentation, many shareholders were let down when the informal portion of the meeting consisted of only ten minutes of Q&A. With 6 billion dollars in the bank, surely Visa could offer some branded trinkets (a notepad, at least) or a preview of its upcoming commercials. Alas, most of the meeting was just the CEO and CFO answering questions. I suppose for its first meeting, Visa wanted to take no risks at all, which, ironically, made it look like a small, unprofessional company instead of the international brand it is.

I asked about Visa's exposure to consumer debt. The CFO said Visa had "no debt issued to consumers." Visa is only a financial intermediary. It facilitates transactions between banks, shoppers, and retailers and receives a fee for its limited participation, called an "interchange" fee. If a customer defaults, the bank that issued the credit card is on the hook, not Visa or Mastercard (MA). For this reason, Visa has an almost fail-proof business model. Collecting a fee for safely transferring money is boring, but profitable--again, Visa has 6 billion dollars in the bank. A shareholder asked how safe this cash was, given recent financial turmoil (e.g., some money market funds had "broken the buck"). The CFO answered that of the 6 billion dollars, less than 30 million dollars were held in illiquid auction rate securities, and Visa was in the process of unwinding those positions.

I knew Visa had some debt, so I asked about Visa's debt obligations. This is where the meeting became somewhat interesting. Apparently, the day before the meeting, Visa settled litigation involving Discover Card (DFS). Some of you might remember that Discover, American Express, and a collection of retailers had sued Visa, Mastercard and several issuing banks alleging anti-trust violations. In a nutshell, retailers, especially small businesses, are concerned that Visa and Mastercard have virtual monopoly power because banks may have colluded with the two companies to exclude competitors. The plaintiffs alleged that the exclusion of Discover, American Express, and other potential competitors placed many retailers at the mercy of Visa and Mastercard, who could increase interchange fees at will. More below on the litigation:

Anti-Trust Lawsuit:

http://home3.americanexpress.com/corp/pc/2004/lawsuit.asp

Settlement:

http://www.bloomberg.com/apps/news?pid=20601103&sid=axrdWpuRyQPQ&

There may have been some truth to the allegations--we've all heard of retailers rejecting Discover and American Express cards. One of my favorite lines from Futurama has Fry trying to use an old Discover card in the future and being told, "Ooh, sorry, we don't take Discover." Also, Discover and American Express, unlike Mastercard and Visa, do have some exposure to consumer debt, perhaps to facilitate being more involved in the interchange market.

The CFO said the terms of the settlement required Visa to pay $800 million to Discover (DFS) at $200 million per year for four years. This is good news for Discover, which may see a slight but significant impact on its bottom line. (More on the impact of the settlement on Discover after the jump: Article)

I asked whether the DOJ or FTC was involved in the settlement. The CEO answered that neither agency was involved, which means government intervention may still occur. I asked whether any "non-financial concessions" were made as part of the settlement agreements. The CEO answered with a resounding, "No."

After the meeting, the CEO Saunders was gracious enough to grant me a picture with him. Mr. Saunders seems like a genuinely decent person and lacks any trace of arrogance. Another shareholder said he reminded her of "bread and butter America and the Midwest," and it's an indication of the kind of respect Mr. Saunders inspires. I have no idea whether Mr. Saunders is from the Midwest, but these days, companies could use more CEOs who exude honesty and throwback values. Unfortunately, the same cannot be said of Visa's Investor Relations. After I took the picture with the CEO, a woman from Investor Relations immediately approached me, telling me repeatedly not to publish the picture. Then, she took out out a piece of paper and demanded to know my name. After telling her she was behaving rudely, I gave her my first name and this blog's website address. The next day, someone did a search on my blog for "Visa." Why is Investor Relations so paranoid about a picture? One expects more confidence from a company that is supposed to have solid international standing.

To characterize my experience with Investor Relations, I was going to borrow Chuck Thompson’s line about being “blocked at every turn by an army of protective minions reminiscent of David Spade as Dick Clark’s personal assistant on Saturday Night Live”; however, the analogy wouldn't be exactly applicable, because the Investor Relations employee tried to block me after the picture was taken, as if my camera somehow had a way of morphing the CEO into Satan himself. (See first picture above for yourself–the CEO looks good and healthy, which Joe Nocera and Apple shareholders might appreciate). So, one last bit of advice to Visa: leave the Wehrmacht, er, overly nervous employees, at home next time. Shareholders, being owners, should be treated like friends, absent erratic or strange behavior. Attempts to block them from gaining access to company officers make a company look insecure, weak, and unprofessional. Let’s hope a company that relies on its good public image will teach its employees the delicate art of handling admirers.

There was some upside to being accosted. Investor Relations' misplaced energy produced an epiphany: Visa's greatest strength--its ease of making money without taking on risk--is also its greatest weakness. Its business model is so simple, Visa employees and officers might feel compelled to overreach out of sheer boredom. Privately, another shareholder complained that Visa was holding too much cash and should return some of it to shareholders in the form of an increased or special dividend. Historically, companies tend to make bad decisions and acquisitions when they have too much cash. Symantec (SYMC) is one example of this phenomenon--just review its acquisitions of Axent and Veritas. Let's hope that Visa's CEO and top brass really are "bread and butter" American types. If not, Visa could be in for a wild ride.

To sum up, the first Visa shareholder meeting was a non-event. The CEO, CFO, and general counsel shined, even if no one else did. Next time, if Visa has a video or pays more attention to the informal part of its presentation, shareholders might feel more vindicated for getting up at 5:00AM to catch the train to San Francisco. Another shareholder gently admonished Visa for not introducing its Board of Directors, as is customary at shareholder meetings. The CEO indicated he appreciated the advice and would remember to do it next year. Because it's Visa's first year being public, Visa gets a pass for having a dull, ordinary meeting. In the future, however, shareholders should hope that Visa settles into its new public skin and acts more confident.

Disclosure: as of October 17, 2008, I own around 20 shares of Visa (V); between 90 and 100 shares of Discover (DFS); and no Mastercard (MA) shares.

Update on 10/20/08: here is the Futurama bit:

Fry: "Do you take Visa?"
Clerk: "Visa hasn't existed for five hundred years."
Fry: "American Express?"
Clerk: "Six hundred years."
Fry: "Discover Card?"
Clerk: "Hmmm...sorry, we don't take Discover."

A Fishful of Dollars

Funny: Reality of Elections

"Points in Case" has some hilarious articles. This one seems perfectly timed:

http://www.pointsincase.com/articles/we-drunk-chick-united-states-america

If the link doesn't work, google the author, "Eric Cheesic," and "We the Drunk Chick of the United States." This one's destined to become a classic. Here are some excerpts:

[N]either of these candidates cares about you and me. They really don't. It's just a big pissing match. The match isn't conservative verses liberal; it isn't even John McCain versus Barack Obama. It's Republicans versus Democrats—-McCain and Obama are just the PR firm picked to sell you the wares. They are a face and a name to be associated with the big political machine that is the United States of America...

So where does the American public come in?

Well, here's the deal: we, the people, are the drunk chick at the bar. We are expected to do very little. Our responsibilities are to:

1. Obey all the rules posted above the door to the bathroom (The Constitution).
2. Pay for the food and drinks we consume (taxes).
3. Leave the bar when it's closing time (die).
   

Warren Buffett Says "Buy"

The Oracle of Omaha to the rescue? Warren Buffett has issued a "buy" signal:

http://www.nytimes.com/2008/10/17/opinion/17buffett.html

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.