Monday, August 18, 2008

May You Live in Interesting Times

After applauding the federal courts and their judges, I received a loss in one federal case (after the judge sat on the opinion for over 8 months), and the very next day, another federal judge issued sanctions against me (a first) and my clients for over 11,000 dollars, without a hearing, because he believed we should have kept a case in state court rather than assert federal court jurisdiction.  Although the removal to federal court provided my clients additional time, and the sanctions were paid in full, the net result still left me questioning the experience my clients received.

This brings me to Rafat Rule #2: systems don't matter--people matter (more specifically, people with integrity).

We assume the U.S. system is the best in the world, in no small part because of the rule of law. But any system requires people to behave with integrity and honesty, and any system that attracts such people will succeed. Thus, even if the federal court system is better than the state court system due to several factors--more efficient discovery rules; the ability to call a judge during a deposition instead of having to get up and file a protective order or motion to compel; lifetime appointments, allowing judges more leeway to make tough decisions; clear deadlines issued at the beginning of each case, etc.--if you have an octogenarian federal judge who hasn't practiced law in 40+ years or who delegates to law clerks that lack extensive practical experience, even an inherently superior system won't necessarily lead to fair results.

Our systemic superiority should not cause us to be less vigilant. For example, even if the free market system is inherently better than centralized planning or socialism, if the people in the system do not have the relevant or recent experience or are out-of-touch, results will be poor. This is why Singapore, despite not practicing Western-style free markets, is more successful than the U.S. in spreading wealth and stability--with the best people in government, Singapore's system can be more centralized, and as long as it adjusts quickly to any mistakes, Singaporeans will be prosperous. What does this mean for Americans as we adjust to a period of less prosperity? It means we can learn from other countries, and we cannot assume our systemic superiority will allow us front seats to economic growth.

In principle, I agree a constitutional republic should be more successful than a country with centralized planning. The advantages of a constitutional republic with elected representatives are twofold: one, eventual accountability; and two, the diffusion of power, allowing a statistically higher chance of having good (and bad) representatives. But without honest, diligent people in any system, there is nothing inherently good or bad about an American political or economic system versus a British system, or a Russian system vs. Singaporean system. For example, one could reasonably argue the Singaporean and Russian systems, despite being more centralized, created more wealth and prosperity for more of their people than the British and American governments in 2008. This recent, perhaps brief, reversal in economic prosperity is going to create a conundrum for political scientists and economists. How do they explain why a Singaporean system has done better for its people than the American system, if centralized planning has no place in politics or economics? This reversal in fortune should lead to more analysis of the roles of ethics and accountability in government systems.

With Singapore, my hypothesis is smaller communities automatically generate some form of accountability, and this accountability leads to more "morality" in the form of closer ties in the community. All this takes me back to Rafat Rule #2: systems don't matter--people matter.

Update on October 17, 2008: the company that received sanctions of around 11,000 dollars just filed for Ch 11 bankruptcy. Looks like the lawyers might be the primary people benefiting at the end of the day.

Friday, August 15, 2008

Greenspan Wants More Educated Immigrants

According to yesterday's WSJ (8/14/08, David Wessel, A1), Greenspan agrees with my pro-immigration views, at least with respect to educated immigrants:

"The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said...

"Perhaps 150,000 of [new households] are loosely classified as skilled...A doubling or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale--and hence stabilize prices."


So far, so good; however, the Journal makes a mistake when it tries to do its own analysis:

The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes would accomplish that...

The Journal doesn't seem to understand that skilled immigrants mainly come to the States by way of H1-B visas and would settle in already-strong economic areas, such as San Jose, San Francisco, Chicago, and other large, diverse cities.

The housing crisis is mainly in places where mortgage brokers and lenders granted credit to low-income employees or workers with unsteady incomes.

Las Vegas, NV is a prime example. Although Vegas is a strong union town, too many uneducated people entered the market with hopes of making it to the middle-class. The city simply couldn't absorb all of its new entrants. As for attracting educated foreigners, how many M.A.s in Physics does a casino need?

Stockton, CA and Merced, CA have become notorious for their high rate of foreclosures. Their residents are mainly non-college-educated workers. While that situation may change because of the new UC in Merced, for now, if you have a PhD in engineering, would you end up in Merced, CA or San Jose, CA? (And yes, that's a rhetorical question.)

When residents bought homes outside but near Boulder and Denver, Colorado, they forgot the law of supply and demand. When you live near cities with only 1/2 million (Denver) and 100,000 (Boulder) residents, there's not enough demand to justify a large, immediate increase in supply. While Denver does have Qwest and ProLogis, there aren't enough companies there to sustain an inflow of high tech talent. In contrast, in Santa Clara County, I get lost driving in Sunnyvale because there are so many little streets that lead to massive warehouses filled with tech companies I've never heard of.

Greenspan is still correct in his pro-immigration view, but there's a missing step. We need companies to open new branches outside of the major cities. Perhaps if the government changed the H1B program to increase the cap on companies willing to place educated workers in mid-sized or smaller cities, educated immigrants could be a boon to overlooked cities suffering from the economic downturn.

Greenspan has recovered some of his credibility--he said this in November 2002:

It's hard to escape the conclusion that at some point our extraordinary housing boom...cannot continue indefinitely into the future.

Then again, this is the same person who said this in October 2004:

[Home price declines] "likely would not have substantial macroeconomic implications... (2004)

And this gem comes from October 2006:

I think the worst of this [housing price decline] may well be over. (2006)

At the end of the day, we need more skilled immigrants or immigrants willing to work hard, but the question is where should they go? State governments and smaller to mid-sized cities should be more active in working with national and local corporations to set up the infrastructure necessary to attract foreign talent. It's
a win-win situation for everyone. Local residents and businesses would benefit from higher prices due to increased demand. Foreign talent gets to come to America and make more here than they would elsewhere. I hope the local governments of Merced and Stockton are reading and thinking outside the box--if they don't follow the Rafat Rule ("being pro-immigration necessarily means being pro-capitalism"), more Southern cities like Louisville, KY, will beat them to the punch.

Thursday, August 14, 2008

U.S. Foreclosure Activity (July 2008)


Above is a map of American foreclosure activity in July 2008. One issue is defining "foreclosure activity" in a meaningful way. Many homeowners can file for bankruptcy, thereby preventing actual foreclosure. Therefore, a particular homeowner does not necessarily lose his or her home merely by having "foreclosure activity," such as a notice of default (NOD).

Wednesday, August 13, 2008

Sports Blog

I just found an entertaining blog on sports--even the tagline is great:

"By the common man, for the common man."

Check it out after the jump:

http://www.barstoolsports.com/

Some coarse language, but it's used effectively, not gratuitously. I like the article on Phelps, titled, "Swimming is dumb." An excerpt:

So while Michael Phelps is clearly a legendary swimmer all this talk about how he’s the greatest Olympian of all time is nuts. He just happens to compete in a sport where you can win like 42 times for doing virtually the same thing.

The man's got a point.

Government Unions and their Salaries and Benefits

Here is an interesting article, published in 2005, on government workers and their benefits:

http://www.city-journal.org/html/15_4_taxpayers.html

Astonishingly, the average state and local government employee now collects 46 percent more in total compensation (salary plus benefits) than the average private-sector employee, according to the nonpartisan Employee Benefit Research Institute.

Wages average a hefty 37 percent higher in the public sector, but the differences in benefits are even more dramatic. Local governments pay 128 percent more, on average, than private employers to finance workers’ health-care benefits, and 162 percent more on retirement benefits.

The Conspiracy Against the Taxpayers
by Steven Malanga
City Journal, Autumn 2005

Update on Nvidia (NVDA) and Long's Drugs (LDG)

A couple of highlights:

1. CVS bought out Long's Drugs. I predicted this would happen on May 29, 2008:

http://willworkforjustice.blogspot.com/2008/05/longs-drugs-stores-corporation.html

Longs is going to be a good company and attractive takeover target, assuming its insurance company purchase works out. It's too difficult for new entrants to get into the pharmacy business, so there seems to be a wide moat here. Also, no one (except maybe Walgreen's) has the stores in California that Long's has, so CVS is going to be knocking one of these days. As long as anti-trust issues don't harm any possible deal, Longs should be a decent long term investment.

2. NVDA stock increased 10.75% today, one day after I indicated the stock was oversold and bought shares. I sold today, making 8% (I had existing shares bought at higher prices, lowering my gain).

People seemed concerned about NVDA's numbers, and some headlines mention "big quarterly loss" and "disappointing" results. These headlines are overblown. Analysts expected 12 cents a share. If you exclude one-time charges and go with the non-GAAP numbers, NVDA beat earnings and earned a diluted net income of 13 cents per share. See numbers here:

http://biz.yahoo.com/prnews/080812/aqtu102.html?.v=54

Put simply, I believe the non-GAAP numbers and the share buyback are the reasons for the 10.75% increase today.

Tuesday, August 12, 2008

Nvidia (NVDA) Reports Earnings After Market Close

If you're looking for a quick, high risk bet, check out Nvidia (NVDA). They release earnings after the close today. I now own over 600 shares at a purchase price of around 11.10. Although both AMD and Intel are going after NVDA's turf, NVDA has no debt and its competitors have been trying to muscle into the high-end GPU business for years, without success.

In addition, Intel's Larabee won't be released till 2009, meaning NVDA needs to duke it out only with AMD/ATI for X-Mas laptop and desktop sales. Bottom line: from my vantage point, NVDA stock looks oversold at 11 dollars a share.

I don't expect NVDA to go above $13-15 in the near term because whenever Intel enters a market, a rough road lies ahead for everyone else. For now, the only real competitor is AMD, with its ATI GPU chips; however, AMD/ATI chips have a reputation for poor quality here in Silicon Valley, whether deserved or not, so NVDA probably isn't concerned about ATI.

Right now, I am captivated by the siren songs of value investors: one, no debt; and two, very low expectations.

Greatest Hits List: I correctly called a short-term bottom in the financial stocks; I was correct about CNB; and about the oversold dollar. If NVDA goes to 12 dollars or more within the next week, I will add them to my list of greatest hits.

Disclaimer:
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.