Being Self-Employed

Carrie Belt explains what it's like to be self-employed and trying to save for retirement:

http://www.associatedcontent.com/article/5582958/at_28_investor_bitten_by_a_bad_market.html?cat=3

We can't file for unemployment income when work is scarce. There's no severance plan when clients zip shut their pocket-books. While I continue to contribute to my retirement savings when I can, my financial focus is simply staying out of debt. For retirement, I'm on my own. I've never had a plan through another employer. I'm OK with that independence, but I'd love for someone else to pay for my coffee breaks, sick days and health care expenses.

Amen, sister.

Civil Liberties? What Do You Have to Hide?

Warning: article at the link below uses snarky language:

http://www.cracked.com/article_18620_6-completely-legal-ways-cops-can-screw-you.html

Oh, the busy populace.

Derivatives Trading: a Dangerous Game

[Note: this post has been updated since its original publication.]

HERE is one of the best-written articles on the 2008-2009 financial crisis [Washington Lawyer, June 2010]. The numbers in Anna Persky's article are breathtaking, and not in a good way. I've added some other numbers, including two interesting numbers from a recent Economist issue.

300 trillion. The CFTC's Chairman "[Gary] Gensler has estimated that the [2010] OTC derivatives market is worth $300 trillion." If you think that's a large number, brace yourself: according to The Summer 2010 edition of The Hedgehog Review, The Bank for International Settlements in Basel, Switzerland estimated that at the end of 2007, the market for unregulated derivatives was $1 quadrillion.

54.5 trillion. The net worth of U.S. households on or around August 2010 was approximately $54.5 trillion, according to "The Globalist Quiz" (re-published by the San Jose Mercury News on August 8, 2010).

47 trillion. According to a July issue of The Economist, the total value of stock trades executed on the American stock market in 2009 was $47 trillion. American stock markets were "the world’s most active, with shares worth nearly $47 trillion, thrice the market capitalisation, changing hands during the year."

45 trillion. "The market size for credit default swaps increased rapidly—-by 2007 the market had a notional value of $45 trillion, about twice the size of the U.S. stock market."

15.1 trillion. According to a July issue of The Economist, the total market capitalization of the American stock market at the end of 2009 was $15.1 trillion. Also, people traded American-listed stocks so many times in 2009, by the end of the year, the value of their stock trades totaled three times the value of the entire stock market. (See 47 trillion number, above.) And yes, in 2007, just the market for credit default swaps was three times the value of the entire stock market at the close of 2009. Shadow banking, indeed.]

14.2 trillion. According to "The Globalist Quiz," re-published by the San Jose Mercury News on August 8, 2010, the U.S. GDP--the amount of the goods and services produced by all Americans in a given year--stands at around $14.2 trillion.

13.2 trillion. According to the U.S. National Debt Clock, as of July 2010, our national debt was approximately $13.2 trillion.

9 trillion. According to Niall Ferguson's book, The Ascent of Money, "Between 1997 and 2006, US consumers withdrew an estimated $9 trillion in cash from the equity in their homes. By the first quarter of 2006 home equity extraction accounted for nearly 10 per cent of disposable personal income." (page 267, paperback)

1 trillion. At the end of fiscal 2008, states had a $1 trillion funding shortfall in public sector retirement benefits. From the Pew Center: "There was a $1 trillion gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises."

992 billion. From ABA Journal, page 59, March 2010: "[R]evolving credit grew from $48 billion in 1978 to $131 billion in 1985 and reach[ed] a high of $992 billion at the end of 2008."

434 billion. "Between 2004 and 2006, Freddie Mac and Fannie Mae, government-chartered mortgage finance firms, purchased $434 billion in securities backed by subprime loans."

On Complexity: “The beauty and the danger of derivatives is that you can create almost anything, and the degree of complexity that is available is almost limitless,” says Robert A. Wittie, a partner specializing in securities finance and investment management at K&L Gates. “Used properly, that can be terrific. But it can become very opaque. It can be hard for investors to understand the assets they are buying.”

Passing the Buck: “When you tell someone that they can sell a hand grenade with the pin out, but they don’t need to worry about it because someone else will own it when it goes off,” [Attorney Philip] Johnson says, “you get a lot more hand grenades with the pin out being sold.” [I've talked about this attenuation problem in detail HERE.]

Canaries in the Coal Mine?: Orange County went bankrupt in 1994 after its treasurer "invested the funds in a leveraged portfolio of mostly interest-sensitive derivatives contracts." Then came Barings Bank in 1995 and LTCM in 1998. The LTCM disaster required a 3.6 billion dollars bailout, which now looks like a paltry sum. In 2001, Enron declared bankruptcy in part due to its derivative trading.

The Fed Asleep at the Wheel?: In 2008, Alan Greenspan emphasized that, excluding credit default swaps, the “derivatives markets are working well.” [Earlier, in 2003, Warren Buffett called financial derivatives “weapons of financial mass destruction.”]

Will the recently passed financial regulation help prevent future problems? On July 15, 2010, CFTC Chairman Gensler said: “The Wall Street reform bill passed today is historic and comprehensive. Over-the-counter derivatives dealers will – for the first time – be subject to robust oversight for their derivatives activities. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. This will greatly improve transparency and lower risk in the marketplace. I look forward to the President signing this crucial legislation. The CFTC stands ready to implement the Dodd-Frank [Wall Street Reform and Consumer Protection] Act to best protect the American public.”

What took Congress so long?

Funny Stuff My Mom Sez

Breakfast

Saturday morning, 8:00AM.

Me: "Okay, Mom, let's go get some pancakes."

Mom: [excited] "Are we going to IHOP?"

Me: "No, someplace better, called Stacks."

Mom: [incredulously] "Better than IHOP???!!"

Me: [shaking head] "I can't believe you think IHOP is the pinnacle for pancakes."

[Update: she liked Stacks, but didn't think it was significantly better than IHOP.]

Not sweet smelling by any name

Mom: "What smells? Something smells really bad."

Me: [finally noticing a smell]

Mom: "It's a skunk, be careful!"

Me: "Uh, Mom, I think that's m*rijuana."

Mom: "In the daytime?"

One Immigrant's Perspective on America

Below is one of the most awesome letters I've ever read. First published in the San Jose Mercury News (July 3, 2010): 

It took awhile for me, an Indonesian Muslim who works and lives in America, to appreciate the significance of July Fourth. Then, I came across a quote of President John F. Kennedy that helped me understand: "Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty." 

Since I have lived here, this nation has given me an education, freedom, security and the liberty to become a part of its society. I understand and realize that this country has paid a huge price and sacrificed many of its citizens for me, and so many others like me, to enjoy these freedoms. For this I am very grateful and this July Fourth, I simply want to say to the Founding Fathers, "Thank you." 

Tahir Ahmad 

Milpitas, CA 

Props to Mr. Ahmad.

Do Anti-Immigration Activists Use Funny Math?

Check out THIS article, alleging that illegal immigrants cost California 10.5 billion dollars a year.

The basic premise is that the children of illegal immigrants constitute 15% of the school-age population, which costs California 7.7 billion dollars annually. I call shenanigans.

How does adding an extra 15% to the school-age population add 7.7 billion dollars in expenses? Does that sound right to you? If you increase class sizes, other than extra classroom supplies, how exactly do costs go up by the billions?

At some point, new teachers have to be hired (usually resulting in jobs to American citizens), and new classrooms built, but new construction and new supplies do not cost billions of dollars each year. In short, there is some funny math going on here.

Here's how I think the partisan institute came up with $7+ billion: California's K-14 education programs receive about 50 to 60 billion dollars a year total. Take 15% of that, and you end up with about 7.7 billion dollars, a very rough estimate that doesn't factor in teacher pension costs, lifetime medical benefits, and other undefined wage/benefit obligations.

Remember: 80 to 85% of education funding goes to teachers and administrators (mostly to teachers and teaching staff). That leaves 15% to the kids. 15% of 15% = just 2.25% of total education expenditures--not an additional 15% increase in education costs. A billion dollars is still significant, but it's nowhere near the scary 7.7 billion dollars number.

Another person's response: Fact: illegal immigrants "tax" our system through free schooling, healthcare (going to emergency rooms for simple colds and ridiculous laws forcing hospitals to treat them), and the thousands of examples of illegal immigrants committing crimes and packing out jails. I know both legal and illegal immigrants. Guess which ones care about laws?

If illegal immigrants even cost the system $10 it's too much. THEY ARE ILLEGAL. Not sure what's so difficult to understand about that. Or, do you support rapists rights, too? How about bank robbers? How about people who double park or run red lights?

The article is a brief synopsis of expenses. Do you really need it broken down to understand that it's bankrupting our state? Maybe the public hospitals that have closed down in the Bay Area are example enough. No? How about the school closings?

Response to above: Illegal immigration is a complicated topic, made even more complex by the absence of reliable statistics on tax revenue (which includes sales, gas, and uncollected Social Security taxes). I just worry when anyone singles out a particular group for much of society's woes. Such resentment is easy to inflame into hatred—and easy to exploit.

I will say this: we've had illegal immigration for many decades, and we still managed to have schools and public/county hospitals do well. Thus, it seems that the issues facing schools and county hospitals result from a multitude of different factors, not just illegal immigration. Also, if the children of illegal immigrants do well and become net contributors to the tax base, many of the financial issues relating to illegal immigration become moot. Just my two cents.

Sigma Designs Annual Shareholder Meeting (2010)

Sigma Designs Inc. (SIGM) held its 2010 annual shareholder meeting in its San Jose, California headquarters. CFO Thomas Gay handled the business portion of the meeting, introducing the Board and executive team. VP of Worldwide Sales Sal Cobar handled the informal presentation, which included a slideshow. Chairman of the Board and CEO Thinh Q. Tran was also present.

Mr. Cobar talked about Sigma's status as one of the top providers "of integrated home entertainment chipset solutions." (Sigma's main competitor is Broadcom (BRCM).) The easiest way to describe Sigma is that it's the NVDIA for non-gaming consumer electronics products, i.e., it makes the IC chip that goes into set-top boxes used with numerous consumer devices, from your home security system to your home entertainment system to your DVD player.

Mr. Cobar said that Sigma creates a more "stable environment" for connectivity. This connectivity allows the consumer to integrate numerous home entertainment products. (Note: Sigma's connectivity solutions work on coax, phone lines and power lines.)

For example, Sigma plans on releasing a product that allows consumers to take content from their laptops and project it onto a large television screen. This product, Neo-Vu, will use UWB (ultra wide band) technology to stream content including HDTV from a computer to a television. The computer may be using Wi-Fi or other technology to obtain the content.

Mr. Cobar also mentioned that Sigma recently completed its acquisition of Coppergate, which creates good "synergy" and increases Sigma's sales volumes and ability to scale its technology.

Some slides showed Sigma's FY 2010 net income as $2.5 million on $209 million of revenue. Sigma also has $133 million in cash or cash equivalents, a very high amount for its market capitalization.

In the overall market, 29 million units of IPTV set-top boxes were installed in 2010, and one slide showed that iSuppli, a market research firm, predicts sales of 37 million units in 2011 and 46 million units in 2012. Sigma wants to be on the forefront of this increased demand by powering the "digital home" in three ways: creating the digital family room; the connected home; and the smart home (i.e., energy, security, and entertainment).

Indeed, some Sigma-related products are truly cutting-edge. For example, one device is a combination security system and energy saver. Rather than try to change personal behavior or habits, this product makes energy conservation automatic. No more debating about how to save energy, researching what kind of lightbulb to use, or telling the kids to turn off the lights when you leave the house. When you set this security alarm, the device powers down electronic devices and other energy sources in your home, lowering your monthly energy bill automatically.

Another product tells you when your water pipes are in danger of freezing and automatically shuts down the water flow if a dangerous situation develops. In short, the product prevents burst water pipes and saves you from having to install new pipes in your home, which can be very expensive.

[Note: the products mentioned above use Sigma's Z-Wave technology inside, thus allowing them all to inter-operate, but the actual finished products are manufactured and marketed by members of Sigma's Z-Wave Alliance family including 2Gig technologies (e.g., the alarm panel) and FortrezZ (e.g., the water shut-off valve).]

One interesting piece of lingo: in its presentation, Sigma used the term, "prosumer"--a combination of professional and consumer. I only mention it because I've never heard the term before.

CFO Gay opened the Q&A session after Mr. Cobar's presentation. I asked about content availability. Some of Sigma's home entertainment technology is ahead of its time, such as 3D movies. It's true the technology is there, but if there are only ten or twenty movies that incorporate 3D technology, how quickly can the market grow? Mr. Cobar said that several years ago, he had been working with HDMI televisions, and the exact same question came up, i.e. "Where's the content?" In a play on the better mousetrap, he said, "If you build the ecosystem, the content will come." He also contended that people don't want to go back to the old/standard way of watching television, so at some point, these new technologies will become mainstream just like digital TV and HDTV.

Mr. David Lynch, VP and General Manager of the Media Processor Group, also pointed out that Sigma is set up to handle all coding and DXP sources, i.e., it doesn't matter what the standard is, Sigma can handle it. CFO Gay lauded Sigma's ability to adapt, saying that the "majority of [Sigma's] engineering talent is software-based," meaning that Sigma can adapt its software to work with any hardware.

I mentioned that a financial analyst had predicted Sigma's FY2011 EPS to be $1.17/share, which is significantly higher than the FY2010 $.09/share. CFO Gay indicated that he could not comment on analyst predictions, but the analyst might be relying on "pro forma" or non-GAAP earnings, which don't include certain charges, such as stock option expenses, amortization expense related to acquisitions and other lesser adjustments.

Another shareholder questioned the size of Sigma's Board of Directors, saying it was too small. He also said that having the same three Board members on the audit and compensation committees might present a conflict of interest. CFO Gay responded that the current Board system has "worked very effectively for" Sigma, and Sigma also relies on external compensation studies and outside experts, not just internal sources.

Overall, Sigma seems to be on the cutting edge of consumer electronic, energy, and security products. Let's hope the consumer catches up.

Disclosure: I own an insignificant number of Sigma (SIGM) shares.