Thursday, June 12, 2008

Circuit City's Annual Report (2008)

I picked up a few shares of Circuit City (CC) on a lark when Carl Icahn came in (CC was his pet project before he became consumed with making Yahoo's Jerry Yang pay him off). CC sports a yield of about 3.5%, but that's probably going to be reduced at some point. Even with Icahn's participation and the dividend, CC will need more long-term catalysts to turn itself around. So how is CC revamping itself?

1. CC has expanded its online presence through its website, www.firedog.com Firedog.com is easy to navigate and seems like a Geek Squad for consumer TVs and car electronics.

2. CC is going to remodel some stores into a concept called "the city," a term it has trademarked. What is "the city"? I have no idea. I live near a few Circuit City stores, and I've never seen this advertised. On the other hand, I've been in a Best Buy several times. That's not a good sign.

3. CC seems to be banking on consumers trading their analog signal/broadcasting televisions for digital televisions. "We expect a large number of consumers to replace analog television sets in the next few years." (page 14) Most of CC's revenue is generated during the time period from Thanksgiving through the Super Bowl. I don't think the rebate checks will last until November. That's a problem for CC, unless people are upgrading now.

I didn't see much else in its annual report that made me think that a turnaround was imminent. Some other highlights:

1. CC "had a net loss of $319.9 million for the year ended February 29, 2008, and a net loss of $8.3 million for the year ended February 28, 2007." And you wonder why the shares are trading at around 4 dollars each.

2. Looks like IBM is doing a good job selling its products--CC outsources its "information technology infrastructure operations to IBM."

3. Most of CC's stores are in CA (92), TX (61), and FL (53). No other state has more than 50 stores. Unfortunately for CC, the economies in CA and FL have not been doing very well.

The key point to take from all of the above is Circuit City's net losses expanded by over 300 million dollars in one year. If consumers are going to be hurting even more financially in 2008, I don't see how Circuit City will be able to reduce its net losses. What I predict will happen is that CC will sell off some assets and report artificially inflated earnings as a result of one-time sales. When that happens, I am going to dump its shares. For now, I will be holding onto the tiny number of shares I own.

Stocks Update: PFE Sold Today, 1.3% in One Day

I sold the 2000 shares of Pfizer today that I bought yesterday, netting a 1.3% gain. Thus far, my short-term trades have been 100% successful, while my other trades have a mixed record. Some of the ongoing debates in the stock market are as follows:

a) Does active trading reduce gains?
b) Can investors time the market?; and
c) Do long-term investors always do well if they buy-and-hold for several years?

Conventional wisdom would say "Yes" to (a) and (c), and "No" to (b). One of the reasons I disclose my trades is to see whether the conventional wisdom is actually correct. Warren Buffett and Charlie Munger believe that investors can time the market and view the "efficient market hypothesis" (i.e., all public information is immediately factored into a company's stock price, making it almost impossible to time the market) with disdain. Thus far, I am in the Berkshire camp. But we will see as the years go by.

Open Positions
CNB = -5.40
EQ = -5.54
EWM = -1.17
GE = -3.75
ICE = -2.11
IF = -6.53
PFE = -7.64
PNK = -2.97
PPS = 0
WYE = -3.52

Total: losing/negative average of 4.29%

Closed Positions
:
Daytrades: PFE (+0.5%)

Held less than 7 days: MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%) (Overall record in this category is a 4.23% average gain)

Total: up/positive 3.48%

Wednesday, June 11, 2008

Stocks Update: Beware the Ides of June?

Between June 3 and June 11, my portfolio took a hit. I had sold almost everything prior to June 3, but put a small toe back back in the water recently to buy Pfizer. As a result, I am now down almost 3,000 dollars since June 2, 2008. Given the overall size of my portfolio, I am not concerned (although my ego has taken a severe hit). Most of the open positions are in a retirement account, and I am perfectly happy waiting four or more years for Pfizer, my current largest holding, to get back on its feet.

Have we hit the bottom yet? Probably not in all sectors. Future earnings per share (EPS) for almost all companies need to be adjusted downward. But with respect to the shares below, I would not have bought them unless I believed they were near a bottom. I still believe that the shares below are near or at a bottom. One year from now, I will issue a new "Stocks Update," and I expect each and every stock below, except for EWM, ICE, and IF, to be in positive territory. ICE probably will be so volatile it won't make much money until it merges with another exchange or is bought out. EWM and IF, two international ETFs, were bought as long-term hedges.

Open Positions

CNB = -2.6
EQ = -4.44
EWM = -2.26
GE = -1.52
ICE = -1.31
IF = -7.2
PFE = -8.57
PNK = -1.36
PPS = -2.24
WYE = -2.43

Total: losing/negative average of 3.39%
(DJIA lost 3.35% from June 2 to June 11)

Other Open Positions
06/11/2008 Bought 2000 PFE @ 17.65

Closed Positions:
Daytrades: PFE (+0.5%)

Held less than 7 days: MMM (0.5%), MRK (0.1%), SCUR (15%) (Overall record in this category is a 5.2% average gain)

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.

Stocks Update: Not Time Yet to put Pfizer on Ice--It's Still Not at its Pinnacle

Here is what I bought today:

06/11/2008 Bought 100 PNK @ 12.46
06/11/2008 Bought 17 ICE @ 118.67
06/11/2008 Bought 2000 PFE @ 17.65

Let's take these one at a time--

PNK is Pinnacle Entertainment Inc. Although their HQ is in Las Vegas, they don't own casinos there. The six casinos they own are in Louisiana, Indiana, Missouri and Reno, NV; in addition, they operate casinos in the Bahamas and Argentina. This is a fairly small company--its market cap is still under 1 billion. Why choose this stock over WYNN, LVS, or MGM?

I watched a PBS documentary on Vegas recently, and let me tell you, Steve Wynn and his vivacity are a hoot to watch. The documentary reminded me of how cool Vegas used to be, starting with the Mafia and the Rat Pack, moving to JFK/RFK and Howard Hughes coming in to clean it up, and then ending with shareholders and Wall Street finishing the job. What struck me most during the documentary is that Vegas seems like it's all out of gimmicks. The old Sands, where the Rat Pack used to play, is gone. Steve Wynn's Mirage is no longer the epitome of cool. By focusing so much on the future and demolishing anything older than a decade, Vegas has neglected to preserve its history, which would have been a tourist draw (who wouldn't want to walk on the same stage that Sammy Davis Jr. danced on?).

To be fair, when I went to the new Wynn hotel in Vegas, I was impressed. I wasn't impressed in the sense that this hotel was something wild, something fun--but it was a darn nice hotel and casino, and the no-smoking sports book didn't hurt (of course, it's impossible to find a seat). Would I fly out from California to Vegas just to see the Wynn hotel? That's the million dollar question, isn't it? I wouldn't--and if I did, there's nothing in that particular hotel that I couldn't get by staying at another hotel nearby and, say, walking over to view the Wynn's Ferrari display. The problem with sinking so much money into these hotels is that it's based on the hope that the high rollers will come to you and make up for the initial costs. But other than Charles Barkley, it's unclear why an international client would fly to the Wynn rather than another more exclusive resort, say, in Macau.

The next stage for Vegas hotels is to do what the Hard Rock Hotel has done--make each room unique so that customers are paying for the inside of their room, not the outside. I genuinely look forward to staying at any Hard Rock Hotel (HRH), because you don't know ahead of time which rock star your room will be based on. The problem with the HRH is that they don't have good locations (the one in Vegas is off the strip), and it's harder for them to expand in a saturated nationwide market. But Vegas as a whole doesn't seem too much different than it was ten years ago, and so far, other than making its hotels more lavish, there's no new major attraction. With a looming recession, people might go to Reno or a cheaper hotel instead. Even I will be going to Reno in a few weeks rather than Vegas because 5 dollar blackjack tables are easier to find in Reno, and I am tired of the Vegas crowds and not being able to find a good seat at the sports book.

What does any of this have to do with why I bought PNK? Simple. PNK is building casinos in areas where they are a unique, new attraction. It's like a Walmart coming to a tiny town--even if it's not fancy, even if it's just downright ordinary, the lack of competing attractions will still allow a steady stream of business.

Also, labor costs are cheaper in Indiana, Missouri, Louisiana, etc. A major cost of any Vegas casino is their unionized workforce and sheer number of employees needed to run all the attractions (or did you think the lions at the MGM fed themselves all day?). Especially in a slower economy like Indiana, casinos won't have as hard of a time finding cheaper labor and good employees. That's good news for the Midwestern and Southern-based casinos.

Today, the St. Louis Business Journal confirmed that PNK's Missouri branch was doing well: "Admissions at Lumiere Place grew almost 22 percent from 510,448 in April to 622,088 in May. Revenue in May was $15.3 million, a 17 percent increase from April's revenue of $13.1 million."

I didn't buy much of PNK--but I definitely like it better than MGM or LVS shares. (I don't include WYNN in the previous sentence because its shares seem to hold up better on down days.)

ICE is InterContinental Exchange, Inc. It's basically a trading forum for commodities. It has enjoyed a spectacular run-up to 194 dollars per share because of the rise in commodity prices, which forced many companies to use futures contracts and take more of an interest in managing their cost of materials. But it's now trading at 118 dollars, probably because of the fear that commodities themselves are in a bubble and the Dems will regulate traders/speculators out of existence. It's a tough call between buying this company or CME Group, Inc. (CME). As you can see, I did not buy much of this stock, either. It's just a small hedge, and I expect to lose money on it in the near term, because it is so volatile. This is a long term hold--if I could just erase it from my screen until five years from now, I'd probably save myself some gray hairs.

Finally, we are back to Pfizer (PFE). Why buy over 35,000 dollars worth of this stock? Two reasons: one, this company is still a blue-chip in a business with excellent margins. If I have to hold onto it for the next five years, I don't mind, especially not with a 7% dividend. Second, the Wall Street Journal is showing that it has the fourth highest money flow of all traded stocks on June 11, 2008. Either someone knows something we don't, or it's possible this stock has finally hit the bottom. I will look to flip soon, because I still have 700+ shares in a different account.

Tuesday, June 10, 2008

The American Dollar and the Currency Carry Trade

You would think that after Bernanke talked up the American dollar and the Saudis agreed to boost oil production, the U.S. dollar would go up. You would be correct. See chart for currency ETFs and look at June 10, 2008 chart:

http://finance.yahoo.com/q/cq?d=v1&s=fxc+fxf+fxm+fxy+fxe

But for American investors still shell-shocked by the dollar’s decline, is now a good time to jump into the foreign currency pool? Probably not. While I own some shares of FXF, a Swiss francs ETF, I will not buy any more. There are so many other ways to get foreign currency exposure it makes no sense now, after the dollar’s steep decline, to buy other currencies directly. The U.S. dollar might keep increasing, or it might decrease in value–there is no sure way to determine which way the trend is going now that the federalis have finally awoken and removed their muzzles.

So what’s an investor to do? My pick is DBV, the PowerShares DB G10 Currency Harvest. (Disclosure: I own some shares of this unique ETF as a currency hedge, along with my FXF.) Basically, DBV is one manifestation of the “currency carry trade.” DBV borrows low-yielding currencies and lends (buys) high-yielding currencies; theoretically, returns should be automatic, assuming only slight variations in interest rates (and yes, that's a major assumption). Making these kinds of trades in a personal FOREX account would be too complicated and time-consuming, and that’s why DBV is an interesting product–as an ETF, it carries a low fee, and it further hedges its risks by using only ten fairly stable currencies, including the Euro. Any diversified currency product with ample exposure to the Euro is beneficial, at least to hedge a personal portfolio. As Dallas Fed Reserve President Richard Fisher told me at the Commonwealth Club, the ECB has only one mandate–to fight inflation, which makes it more politically palatable to maintain higher interest rates, leading to a more stable currency.

DBV is selling for 26.78, and FXF is selling for 95.93 as of the close of business on June 10, 2008. But if you don’t like DBV and you don't like the idea of dabbling in currency products, you’re in luck. Almost every major DJIA-listed company derives much of its revenue from overseas. Even Pfizer (PFE) has substantial currency exposure because of how much cash it has abroad. But General Electric (GE) would be my pick of the bunch if you are looking to buy a multi-national conglomerate with overseas exposure–it is at a five year low, and as of June 10, 2008, yields around 4%. That’s hard to beat when money market yields are around 2%. (Disclosure: I own GE and PFE.)

I hope that the federal government soon heeds President Eisenhower’s prescient words: “to support progress in our country, and indeed throughout the free world, we must make certain that there is no cheapening, no debasement of our currency” (Presidential Reflections, 1960). Until the Federal Reserve starts raising interest rates, I will keep looking for ways to protect myself from a government that seems to openly disrespect savers.

Terrorism: The Unusual Suspects

"Who is most likely to be a terrorist?" In 2008, most honest Americans would answer a Muslim male between the ages of 20 and 30 from the Middle East. In reality, however, an effective terrorist is more likely to be an educated, middle-class European resident because of his ability to integrate into Western society. Without the ability to blend in, a terrorist will have difficulty implementing a large-scale attack. If the most dangerous terrorist threat comes from European residents, not Americans or Middle Easterners, then any military strategy that focuses on the Middle East will waste trillions of dollars without much increase in safety.

Let's start with Osama bin Laden. Although he resides in the Middle East, he comes from an affluent family. He has not personally killed Americans on American soil and probably never will, because of his inability to blend into American society. Osama bin Laden's inability to directly kill Americans renders him a lesser, though important, target than others, who can personally attack U.S. citizens on American soil. As we will see, Osama bin Laden is an exception to the list of cross-border terrorists, because most cross-border terrorists do not live in the Middle East.

For example, the persons allegedly responsible for the 7 July 2005 ("7/7") London bombings all lived in the U.K. The alleged ringleader, Mohammad Sidique Khan, was middle class, a college graduate, and married a woman so connected that the Queen invited her mother to a Buckingham Palace party. Another alleged bomber, Shehzad Tanweer, left behind over 225,000 dollars (121,000 pounds) and was a U.K. college graduate. Mr. Tanweer lacked a job related to his sports science degree. Mr. Khan also lacked a job related to his business studies degree, which he received in 1996. All persons who allegedly carried out the London bombings lived in Britain and had most recently lived there, not the Middle East, prior to the attacks.

The persons who murdered Americans on 9/11 on U.S. soil did not live in the Middle East prior to their attack. Most of them actually lived in Germany for years before deciding to commit terrorism. Many of them lacked jobs related to their university degrees. Going down the list of 9/11 participants, a clear pattern emerges of highly-educated, underemployed, long-term European residents--not Middle Eastern residents.

Zacarias Moussaoui, a would-be hijacker, is a French citizen. He did not live in the Middle East when he decided to kill others. He holds a master's degree in International Business from South Bank University in London.

While we will never know his exact devolution, Mohammad Atta, the person most associated with 9/11, did not become fundamentalist until after he came to Hamburg, Germany. Atta lived in Hamburg for at least five years before committing any act of terrorism. He graduated from Hamburg University of Technology and studied for years in Germany without attracting any significant attention. He also lived in the U.S. for around a year before committing any terrorist act.

Said Bahaji, an alleged 9/11 attacker, was a German citizen and lived in Hamburg since 1995. He attended a European electrical engineering university program. He even enlisted in the German army for a few months. He did not live in the Middle East prior to the attacks.

Marwan Yousef al-Shehhi, another alleged 9/11 terrorist, lived in Germany in 1996, and had lived in Hamburg since 1999.

Ziad Jarrah had a wealthy and secularist upbringing and moved to Germany in 1996.  Prior to going to Germany, some sources indicate he attended private Christian schools. [Listed source: FBI, 4/19/2002; McDermott, 2005, pp. 49-50]

Hani Hanjour, another alleged 9/11 hijacker, first came to the United States in 1991, enrolling at the University of Arizona, where he studied English. According to Wikipedia, this was "prior to any intentions for a large-scale attack." He came back to the United States in 1996. According to the timeline, no evidence of radicalization or attack plans happened until he came to Arizona: "It is clear that when Hanjour lived in Arizona in the 1990s, he associated with several individuals who have been the subject of counterterrorism investigations.”

After 9/11, the other major terrorists who have attacked Americans on U.S. soil are the following persons:

Jose Padilla. An alleged terrorist, he was born in New York and lived in America, not the Middle East.

Richard Colvin Reid, the "shoe bomber." He was born and lived in Great Britain, not the Middle East.

Timothy James McVeigh. He was born in New York and was a member of the U.S. Army.

Ahmed Omar Abu Ali, an alleged terrorist. He graduated as valedictorian from a school in Alexandria, Virginia and attended the University of Maryland. He was born in Texas, not the Middle East. His conviction was upheld by the Fourth U.S. Circuit Court of Appeals, a rare victory for the Department of Justice in domestic terrorism cases. (To be fair, if you review the details of the case, it appears Mr. Ali's trial was highly irregular. The prosecution relied on a confession elicited while Mr. Ali was in Saudi custody.)

Theodore John Kaczynski aka the Unabomber. He had no relation with the Middle East. Born in Chicago, he graduated from Harvard University and then earned a PhD. He taught at Berkeley as a professor of mathematics.

We'll include the 11 March 2004 Madrid train bombings (11/3). No al-Qaeda link has been established with these attacks, but we will include Jamal Zougam, who was convicted of terrorism. He lived mostly in Madrid, Spain--not the Middle East. If you look at this link, you will see that most of the alleged terrorists were born in Spain or Morocco--not the Middle East.

The above persons have or may have been directly responsible for the loss of most American and European lives through terrorism, and it appears not one of them had resided in the Middle East for several years when they decided to attack Americans on U.S. and European soil. Also, most of the terrorists above were not born in the Middle East.

How is it possible that people who should have been the European version of the American Dream--fluent in the host country's language, well-educated, and well-traveled--committed heinous acts? If we can answer that question, we will be much closer to determining how to make ourselves really safe, rather than "take your shoes off at the airport," "don't worry, let us spy on you," and "watch the Homeland Security color codes" safe.

What strikes me most about the terrorists mentioned above, especially the 9/11 terrorists--some of whom were able to get advanced degrees from German universities--is their inability to attain economic success. Richard Reid probably wasn’t middle class, but under Europe's generous-benefit state, he wasn't starving, either. As for the other British-born terrorists, despite having college degrees, some of them worked in a family-owned restaurant after college or spent a lot of time in the British version of the YMCA. One was a youth sports coach and worked in a field unrelated to his college degree.

What is most significant about all of these terrorists is their failure to launch any kind of career, not their birthplace or religion. If religion was the cause of terrorism or its common trait, it would not explain how at least 99% of the one billion Muslims worldwide manage to live peacefully. More saliently, to believe that religion is the common trait of terrorism, you have to believe that Islam, which has been around for thousands of years, suddenly inspired terrorism in the 20th century after centuries of no significant mass violence. (Before you research examples of Islamic violence prior to 1900, remember that World War I, World War II, the Korean War, the Vietnam War, the Bosnia genocide, Mao, Stalin, the Khmer Rouge, and the Holocaust destroyed the most lives in the 20th century, and no rational person would argue what caused these deaths was the presence of white or German Christians--even though such backgrounds were a common trait in most of the aforementioned killings.) But if it's not religion or race that is the primary cause of terrorism, then what factors should we be reviewing?

Age and gender certainly have something to do with terrorism--almost all terrorists are men between the ages of 18 and 30, and most people agree that after 30, the male tendency to commit violence decreases. In fact, one reason Americans lock up violent men for such long periods of time is to age them out of their violence. In addition, there may be evolutionary aspects that promoted violence in younger men, who had to be strong and physical to fight off invaders and perhaps hunt. But we cannot accelerate age in men, so we have to turn our attention to a factor we can change.

The main factors we should examine are the economy and educational levels. The European residents became terrorists despite fulfilling what they believed were their "dues"--education, graduating in the top of their class, working hard, and even joining the military in some cases. They ended up worse off after their attempt to assimilate. Almost all of them came from affluent families and could have enjoyed a more simpler life had their parents stayed in the Middle East. When Atta, who had a successful father, who graduated at the top of his class, could not find a job as an engineer, he must have felt ashamed and powerless.

This unexpected result would create a problem psychologically for someone who uprooted himself from his native country, did everything he could to assimilate, and failed despite reaching the top levels of academia. It cannot be easy for an educated immigrant with an advanced degree to be unemployed or employed in a job unrelated to his degree and see seemingly lazy soccer hooligans with higher-paying jobs. Put another way, I am not concerned about a migrant Mexican worker committing mass scale terrorism in America; however, the Berkeley professor who can't get tenure or feels disrespected worries me.

Indeed, most researchers agree the 9/11 terrorists became more religious only after residing in Hamburg. I submit to you that when they could not find jobs related to their university degrees, they--having passed numerous benchmarks indicating they should be successful and respected--refused to believe the fault lay with them or their social skills. Consequently, they tried to assert themselves so as not to go gently into that good night.

Of course, I am not saying that being unemployed is a certain indicator of terrorism. But committing a major act of terrorism requires the same set of characteristics for success in jobs and universities: patience, ambition, and a quest for respect. Therefore, common sense tells us that "successful" terrorists will come from the same pool as the more educated population.

While my hypothesis may sound overly simplistic, whenever violent socialists or terrorists come into power, take note of who they kill. Revolutionaries never wipe out or exterminate the poor or uneducated. They know, deep down, the poor and uneducated are not a threat to them or any government. It's always the "intellectuals," the professors, the doctors, and the rich businessmen they kill. This pattern is clear and unambiguous. See Mao, Pol Pot, etc. The self-proclaimed "leaders of the common people" almost always kill people they believe have held them back from true and deserved greatness–and it’s usually the educated and affluent who are affected.

What does this have to do with economics, you might ask? In an economy that elevates service-based professions, most successful people follow a similar pattern: they (e.g. lawyers, doctors, engineers, MBAs, etc.) typically come from educated families themselves, making it more likely that their families can support them emotionally and/or financially while they put in the time after graduation to build up professional networks and skill sets. Eventually, most educated Europeans and educated American families are able to put their children into well-paying jobs, even if their children lack the same level of practical skills as immigrants.

Meanwhile, the system encourages immigrants to go to school, and a good job is expected after graduation. When the terrorists mentioned above did well in school and were relegated to working in a restaurant or having a dead-end job, they probably felt cheated. They may have believed the problem was with a decadent or capitalist society, not with them, because they had played by the rules and had succeeded by any measurable metric (e.g. diplomas, tests).

As a result of feeling tricked, these educated, European residents retracted into themselves and became more austere. Their reversion into fundamentalism created a self-fulfilling cycle--it certainly would not have assisted them with better employment prospects. Thus, the economy and education system put these terrorists into an embarrassing position--despite having a good track record of success per the metrics of the society in which they lived, they were similar to the unemployed and uneducated residents. Such a result would not be acceptable psychologically and may have created a need to lash out. It is important to note the terrorists who were born in the Middle East never committed violence and were not radical, for the most part, until after they left the Middle East.

If you don't have programs that employ successful immigrants who play by the rules, there may be an increased possibility of terrorism due to the cognitive dissonance created by what appears to be a "bait and switch." Indeed, a capitalist system based on attracting immigrants to a strange land, having them succeed academically, and then relegating them to the same status as uneducated native-born citizens will not function in the long term. Will it cause terrorism? I don't know--but such a "bait and switch" would explain the cognitive dissonance that caused the 9/11 terrorists to become more religious and violent only after they emigrated to Europe. Not one of the 9/11 terrorists had a documented reputation for any violent incidents when they lived in the Middle East. There are no reports of Jeffrey-Dahmer-like killings or Son of Sam hallucinations. In fact, almost all the data leads to the opposite conclusion--the 9/11 terrorists were chillingly normal for a group of educated, under-employed people.

Having said that, one reason America may not have to worry as much about native-born terrorists is because it is easier to be an entrepreneur in America than almost anywhere else in the world. As a result, an unemployed, educated male in America cannot automatically blame racism or society. The opportunity to open up a business means the government is able to transfer your angst or psychological problems about being unsuccessful unto you, absolving itself of blame (at least as a psychological defense to a cognitive dissonance). Indeed, American Muslims are highly successful. See WSJ article (Stephens/Rago, 8/24/05).

If my hypothesis is correct, America's culture of embracing small businesses and entrepreneurs is a significant weapon in warding off domestic terrorists. Successful educational programs and economic opportunities, not religion and not race, may be the keys to understanding terrorism. This is not as far-fetched as it seems, especially when you consider how much time you spend at your job and how isolated you would be if you were unemployed.

Lest Americans get too pleased with themselves, the "blame-anyone-but-yourself" mentality when faced with failure isn't restricted to potential terrorists; indeed, externalizing seems be to a part of human nature. For example, whenever Americans get worried about the economy, they seek to pass laws to exclude immigrants and other "hostile" races. Americans have a long history of doing this, and you should review the Chinese Exclusion Act to see how easy it is for anyone to lapse into a "blame-the-other" mentality. (Ironically, a recession may be the precise time to work harder to integrate all residents.)

What should we do if age, gender, economic opportunity, and education are the most relevant factors in identifying terrorists? You might be surprised--my answer is government intervention (an admittedly strange answer for a person who leans libertarian, like myself).

Remember: most immigrants are in a vulnerable situation. In a democratic republic, the majority doesn't have to kill whom they believe is their enemy--they can outvote people they believe are hostile. Due to the lack of grass roots organization and necessary critical mass of voters, the political process is inefficient at integrating or serving most new immigrants or minorities in a foreign country. A strong case may therefore be made for more government intervention on behalf of new immigrants who are invited to any country with the promises of jobs if they achieve certain benchmarks. Such programs will be controversial because current residents will complain that taxpayer monies are being diverted to non-citizens. However, America already spends billions of dollars in taxpayer monies stabilizing international governments, including Jordan, Egypt, Israel, Lebanon, Palestine, and Syria. A few additional million dollars shouldn't be controversial if our government promotes a smoother immigration system for educated transplants.

I have sought to prove nothing more than the fact that a man's economic future and age matter more in the calculus of committing terrorism than his race, religion, or birthplace. If correct, Americans should be spending more money on two fronts: one, working with Europeans to create programs assisting all highly educated immigrants or drop-outs who are not employed within six months of graduation or arrival in Europe; and two, more closely tracking under-employment or unemployment among America's H-1B immigrants or other educated invitees. Such programs, unlike the Iraq War or the War on Terror, won't cost a trillion dollars or more in taxpayer monies and will sustain America's position in the world as attracting the best and brightest.

Update on September 11, 2008: Today's SJ Merc had a column by Trudy Rubin titled, "So-called 'war on terrorism' can't be won on a battlefield." Mr. Rubin quotes Al-Qaida expert Peter Bergen, who "believes the terrorist threat to Western countries will come from Europe. Alienated young educated Muslims in Europe were behind the 9/11 attacks, and subsequent bombings in Europe...This fight requires smart long-term strategy, not mass mobilization."

Update on March 15, 2009: if you still disagree with the link between educated, middle-class persons and terrorism, review the SLA (Symbionese Liberation Army). Almost all its members, including Sara Jane Olson, were from the middle class and educated.

See also reports about an MIT grad, Aafia Siddiqui, below. Of all the allegations of terrorism, this case is the most interesting to me:

https://www.bostonmagazine.com/2006/05/15/whos-afraid-of-aafia-siddiqui/ 

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/04/AR2008090402245.html

It's strange and almost unbelievable that an MIT graduate couldn't think of more productive ways to live her life. If true, Ms. Siddiqui herself may show a link between high education, intelligence, and terrorism.

Update on March 29, 2009: the "high intelligence" and "terrorism" link may continue with an OU student, Joel "Joe" Henry Hinrichs III. He was a National Merit Scholar allegedly responsible for the 2005 University of Oklahoma bombing.

Update on April 4, 2009: the Red Army Faction (Baader-Meinhof Group) fits the profile above. With the exception of one member, all participants were educated.

Update on May 22, 2009: I wanted to add this link
[Editor's note: use Wayback Machine to access link] because it shows that focusing exclusively on Middle Easterners is a flawed strategy. Most of the men in the alleged 2005 plot were Americans with American names: Kevin James, Levar Washington, and Gregory Patterson. All were men under the age of 30.

Update on August 2009: As the George Sodini shooting demonstrates, the ignored male can be the most dangerous beast of all. Sodini's case is particularly interesting, because he was much older than 30 years old and had plenty of money (at least 225K, which he tried to bequeath to the University of Pittsburgh).

Update on September 10, 2009: A British jury convicted British-born Abdulla Ahmed Ali, Tanvir Hussain, and Assad Sarwar of conspiring to murder by setting off liquid bombs smuggled aboard seven North American-bound airliners. See here.

Update on December 28, 2009: Umar Farouk Abdulmutallab recently attempted to blow up a plane. According to the AP's Jon Gambrell, he "received the best schooling," from various elite schools, including the British International School in West Africa and the University College London. 

This article also has the following insight: “'There remains in London a problem of assimilation for outsiders. The society is closed. The city is open, but the people are not,'” argues Mr. Fandy." It's hard not to see that a European residency is highly correlated with recent radicalized immigrants.

Update on January 18, 2010: Cuneyt Ciftci staged a suicide bombing in Afghanistan in March 2008, killing four people, including two American soldiers. He was born in Germany. (From WQ, Winter 2010, page 45.)

Update on May 5, 2010: From this Guardian story: Faisal Shahzad, an American citizen, "came from a wealthy family. He earned an MBA. He had a well-educated wife and two kids and owned a house in a middle-class Connecticut suburb."

Added on May 30, 2012: see Karim Thami el-Mejjati, a French citizen born in Morocco to a wealthy Moroccan father and a French mother.  Casablanca is known as a very open, secular city and similar to many European cities.  Karim was either a medical or engineering student.  Press accounts indicate that growing up, he liked the United States and was a fan of Clint Eastwood.  He married a law graduate who worked at a Casablanca medical school. He was a secular European prior to 1991, and by then, he had enjoyed vacationing at various European resorts.  According to his wife, Fatihah Mohammed Al-Taher Hosni: "I married Al-Majati on September 25, 1991 [he would have been around 24 years old]. All the events I've told you about so far took place in within a year. I believe it was God's will that I brought Al-Majati back to Islam, because before the veil issue, both of us were Muslims in name but not in practice...At the time, we were both Westernized, similar to other young non-religious Moroccans who aspired to get a good job and live abroad. For both my husband and I, our connection to God and Islam was almost non-existent."

Added on July 20, 2012: James Holmes was a graduate student in the neuroscience program at the University of Colorado Medical School campus in Aurora, CO.  The 24 year-old Holmes was a member of the Phi Beta Kappa and Golden Key honor societies.  On July 20, 2012,  Holmes used several weapons to kill 12 movie-goers and to injure about 60 of them in a movie theater.  According to MSNBC, a "neighbor, Tom Mai, told The Los Angeles Times that Holmes was a shy, well-mannered kid who was very active in the church. He had trouble finding work after college, Mai said, and then went off to graduate school."

Update on January 19, 2011: Reza Aslan, in Beyond Fundamentalism (2009, 2010) echoes some of my thoughts:

"[L]ack of integration is hardly an issue for Europe's jihadists. Hasib Hussain was, by all accounts, well integrated into British society, as was the leader of the 7/7 attacks, Mohammed Siddique Khan...Jamal Zougam, the man thought to be responsible for placing the explosions on a Spanish commuter train that killed 191 people on March 11, 2004, was a fairly successful businessman in Madrid. Ahmed Omar Saeed Sheikh, the murderer of Wall Street Journal reporter Daniel Pearl, was a highly educated British-born Pakistani from a well-adjusted middle-class family.

These men are doctors, lawyers, and engineers, the best and brightest...Jihadism attracts the same kind of person who, in other circumstances and with different challenges, would have joined an antiglobalization or civil rights movement." (pages 146-147, "Generation E," paperback edition)

Update on April 19, 2013: (Boston Marathon alleged bombers) Dzhokar Tsarnaev, 19, a naturalized U.S. citizen, attended the Cambridge Rindge and Latin high school in Massachusetts.  In May 2011, the city of Cambridge, Massachusetts awarded him a $2,500 scholarship to pursue higher education and honored the award recipients at city hall.

"I like the USA," Tamerlan [Tsarnaev] was quoted as saying in The Sun of Lowell, Mass. "America has a lot of jobs. That's something Russia doesn't have. You have a chance to make money here if you are willing to work." (From AP, Jeff Donn, April 19, 2013)

From WSJ (4/22/13, Alan Cullison): "[H]is [Tamerlan Tsarnaev's] boxing career stalled, he drifted in and out of community-college courses...he didn't have a job..."

"It was hard because you realize that you used to be somebody there, but here, you're a nobody," said Maret Tsarnaeva, the brothers' aunt.

Update on January 8, 2015: re: attack against France's Charlie Hebdo newspaper on January 7, 2015, at least one of the attackers was known to authorities: "Attorney Vincent Ollivier said his client, Cherif Kouachi...22, lived his entire life in France and was not particularly religious... He drank, smoked pot, slept with his girlfriend and delivered pizzas for a living. His parents, Algerian immigrants, are dead." (From Mark Houser, May 29, 2005--almost ten years before the attack.)

Bonus: "Most of the future 9/11 hijackers are middle class and have relatively comfortable upbringings, even though, after 9/11, some people in Western countries will say one of the root causes of the attacks was poverty and assume that the hijackers must have been poor. The editor of Al Watan, a Saudi Arabian daily, will call the hijackers 'middle class adventurers' rather than Islamist fundamentalist ideologues."  From here.
[Update: possible broken link] 

Update on February 15, 2016: http://www.cnn.com/2015/02/19/opinion/bergen-terrorism-root-causes/index.html  (Peter Bergen, "The bourgeois terrorist," published 2/27/15)

In "his important 2004 book 'Understanding Terror Networks,' psychiatrist Marc Sageman, a former CIA case officer, examined the backgrounds of 172 militants who were part of al Qaeda or a similar group. Just under half were professionals; two-thirds were either middle or upper class and had gone to college; indeed, several had doctorates." 

Monday, June 9, 2008

Education: CA Schools, 60 billion, and Melinda Gates

In today's WSJ, Melinda Gates implies that the 60 billion dollars the Gates Foundation possesses might not be as grand as it sounds. Ms. Gates reveals that the state of California spends 60 billion per year on education alone. Yup, 60 billion dollars on education every single year...and California is ranked among the lowest in the nation (47th or so) in educational attainment.