The Economists' Roundtable

Just a wonderful, wonderful exchange between prominent economists:

http://www.nybooks.com/articles/22756

Nouriel Roubini:

[F]iscal policy cannot resolve problems of credit, and it is not without cost. Over the next few years it's going to add about $9 trillion to the US public debt. Niall Ferguson said it's the end of the age of leverage. It's not really. There is not deleveraging. We have all the liabilities of the household sector, of the banks and financial institutions, of the corporate sectors; and now we've decided to socialize these bad debts and to put them on the balance sheet of the government. That's why the public debt is rising. Instead, when you have an excessive debt problem, you have to convert such debt into equity. That's what you do with corporate restructuring—it converts unsecured debt into equity. That's what you should do with the banks: induce the unsecured creditors to convert their claims into equity. You could do the same thing with the housing market. But we're not doing the debt-into-equity conversion. What we're doing is piling public debt on top of private debt to socialize the losses; and at some point the back of some governments' balance sheet is going to break, and if that happens, it's going to be a disaster.

He makes so much sense, it's almost painful to listen.

Rita Pavone: IL BALLO DEL MATTONE (1963)

Movie: Nine Queens

Just saw the 2000 Argentinian film, Nine Queens (Nueve Reina). I try to remember at least one line from each film I see. This film's memorable line occurs after a character asks someone how much it would take for him to do a particular sexual act, hears rejections, and then increases the price until he sees hesitation:

You see? We're not lacking pillow-biters, just financiers.

Ah, the ongoing issue of morality, sex, and price. Overall, a good film. I give it 4/5 stars.

Guantanamo held a 12 year old boy

Congrats to all the Americans who supported Guantanamo under Bush. You favored locking up a 12 year old indefinitely without a trial:

http://sanfranciscochronicle.info/cgi-bin/article.cgi?f=/n/a/2009/05/25/international/i114756D65.DTL

https://www.washingtonexaminer.com/us-lawyers-ask-afghan-court-to-help-gitmo-inmate 

U.S. military lawyers asked Afghanistan's highest court Monday to demand the release of a Guantanamo prisoner they say was only about 12 years old — not 18, as the military maintains — when he was sent to the detention center in Cuba.

We knew President Bush was relying on secret evidence and refusing to be transparent. These kinds of embarrassments always happen when citizens don't demand government transparency. The government gets away with violating the Constitution and destroys our goodwill in the process.

Many years ago, I attended a speech by an ACLU attorney who was representing some of the Guantanamo Bay detainees. She told everyone, in a public meeting, that America was holding a 12 years old child in Guantanamo without a trial. If I remember correctly, she also said Guantanamo was holding a 75 years old man. Everyone knew. No one listened.

The next time you decide to trust your government, just ask yourself, "Is secrecy worth violating our own Constitution, the rule of law, checks and balances, and our goodwill?"

© Matthew Rafat (2009)

Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety. --Benjamin Franklin

I am willing to know the whole truth; to know the worst, and to provide for it. --Patrick Henry

Core-Mark Annual Shareholder Meeting (2009)

I attended Core-Mark's (CORE) annual shareholder meeting on June 2, 2009. The meeting was held in a small conference room at the Hyatt Regency San Francisco Hotel. The only refreshment offered was Starbucks coffee. I was a little disappointed, because food-related companies sometimes display their own products. I did not get a chance to try Java Street items or other Core-Mark products.

Around eight people sat in the audience. Core-Mark's executive team, except for the CFO, sat in the front. Other than my friend and I, everyone attending the meeting had a business or employment relationship with Core-Mark. The Chairman of the Board handled the formal part of the meeting.

Core-Mark started out as a tobacco storefront in San Francisco. It grew into a major supplier of consumer goods to various retailers and became known as Fleming Companies. In 2003, Fleming Cos filed for Ch 11 bankruptcy/reorganization. In 2004, Core-Mark emerged from the ashes of Fleming Cos. For more information on Core-Mark's history, click on the following link:

http://en.wikipedia.org/wiki/Fleming_Companies,_Inc

Cigarettes and other tobacco products accounted for 74.9% of Core-Mark's net sales in 2008; however, cigarette sales accounted for only 29.2% of Core-Mark's total gross profit in 2008. (See 10K, page 3.) In short, while Core-Mark continues to sell cigarettes, it has revamped itself into a food/consumer kiosk company. Food and non-food (batteries, etc.) products accounted for 71.0% of Core-Mark's gross profit in 2008. (See 10K, page 4.)

Core-Mark supplies convenience stores, such as 7-Eleven, with refrigerated kiosks containing various products. These kiosks contain packaged salads, bakery items, drinks, sandwiches, juices, fruit, and other items. Core-Mark touts its ability to re-stock its kiosks several times a week, which allows customers to select fresh food. In other words, Core-Mark strives not to be like your grandmother's food kiosks, which tended to sell month-old sandwiches, cigarette packs, and stale candy.

I was the only person who asked questions at the meeting. CEO J. Michael Walsh graciously answered all my questions. I asked how the company would deal with declining cigarette sales and higher "sin"/SCHIP taxes. Mr. Walsh answered that cigarette consumption has been declining for a long time, and as a result, Core-Mark had consciously shifted to the new consumer trend, which was selling fresh food products. He said that Core-Mark wanted to become the leader in fresh food products.

Mr. Walsh also said that higher cigarette taxes actually helped Core-Mark's bottom line. He indicated that rising cigarette taxes allowed Core-Mark to get a higher return on its "working capital." This concept is a bit counter-intuitive, but I will explain it as best as I can.

According to the CEO, Core-Mark must buy "stamps" from states before it can purchase cigarette cartons. These state-issued stamps allow Core-Mark to purchase a certain number of cigarette cartons over a certain period of time. Different states levy different taxes per carton. In California, the current carton tax is $8.70; it is higher in New York.

The "stamp" process functions as a VAT, allowing states to ensure they are paid carton taxes up front rather than at the final point of sale. This process helps states keep track of cigarette sales and may reduce the black market for cigarettes. This system is not perfect. Some entrepreneurs buy cartons in states with lower carton taxes and then illegally re-sell them in nearby states that have higher carton taxes.

Higher carton taxes may help Core-Mark, because Core-Mark buys "stamps" at the beginning of the month; however, it does not have to actually pay for the stamps until later--sometimes up to 30 days later. In the meantime, it still receives its allotment of cigarette cartons and the cash from those carton sales/distributions. That regulatory quirk means Core-Mark sometimes gets a "free" money float of up to 30 days, which helps increase its liquidity. In short, the way states issue "stamps" may result in some companies receiving temporarily subsidized cash flow, which minimizes capital costs. (I hope I've explained this correctly--if not, feel free to correct me by adding a comment.)

Mr. Walsh also indicated that Core-Mark was in a position to consolidate deliveries and take market share from less efficient competitors.

I then asked why cigarette companies wouldn't decide to sell directly to customers, thereby eliminating Core-Mark as a middleman. Mr. Walsh replied that doing so would cost cigarette manufacturers "more money." They would have to "build the infrastructure" first and deal with the "administrative burden" of handing 100,000+ billable accounts. In fact, Mr. Walsh said that some cigarette companies, such as Philip Morris (PM), were favoring third parties as distributors to cut costs. Mr. Walsh's explanation makes perfect sense. If Core-Mark has a highly efficient supply/distribution chain, then its advanced inventory management might act as a wide moat. Walmart, for example, is able to cut its costs by having superior inventory management, but its internal tracking system took years to develop.

I then asked about Core-Mark's pension plan, which is underfunded. (See 10K, page 11.) Under ERISA and other laws, different levels of pension underfunding trigger different corporate fiduciary duties. Companies typically indicate pension funding levels by referring to one of three funding categories: "80% and under"; "80% to 60%"; or "60% and under." When a pension plan falls in the "60% and under" category, it may be a sign that pension assets and investments are being poorly managed. Core-Mark's CFO indicated that the pension was at the 60% level.

I then asked about Core-Mark's executive team and board, which appeared to be non-diverse. More specifically, all Board members appeared to be older Caucasian men. I asked what Core-Mark was doing, if anything, to increase its executive team's diversity. Mr. Walsh pointed out that Core-Mark's CFO was obviously not a white male (she is a white female), and the company was open to diversity. He said that Core-Mark was always open to qualified candidates. Mr. Walsh also indicated that the Board was chosen by Core-Mark's unsecured creditors following Core-Mark's Chapter 11 filing. (In other words, the unsecured creditors were responsible for the Board's composition, and they might be the more relevant party to contact on this issue.)

For a company that was in bankruptcy court just five years ago, Core-Mark has done remarkably well. I especially enjoyed CEO J. Michael Walsh's demeanor and responsiveness. Unlike many CEOs, he answered every single question thoroughly. He had no trace of the arrogance so common in upper-level management. It was a pleasure to meet him.

I had only one issue with the meeting. The Chairman interrupted me once when I was in the middle of a question to ask me for my name, how I held my shares, and the number of shares I owned. He asked me these questions after I had already announced my name and shareholder status. I thought it was inappropriate to ask me how many shares I owned. A shareholder is a shareholder, period. Companies should welcome questions from all shareholders, not just major ones. To date, this is the only company I've seen that has requested this kind of information, i.e., the number of shares held. (There was another issue, but it was minor--a shareholder relations representative wanted me to fill out a name-tag and then complained that my handwriting was illegible. Note to all shareholder relations personnel: you get one day a year to make ordinary shareholders feel welcome. Use it wisely.)

I don't have an opinion on Core-Mark's stock. I haven't bought products from their kiosks, and I'm not a smoker, so I don't have sufficient personal knowledge to state an opinion. It does appear, however, that Core-Mark provides a valuable service to many convenience retailers.

Note: the picture above is of Mr. Walsh and myself.

Disclosure: I own an insignificant number of Core-Mark (CORE) shares.

Update on June 5, 2009: The more I think about the sin/stamp tax issue, the more I think I may have reversed the payment schedule. Perhaps CORE has to buy stamps first and then wait a month or more before receiving cartons to distribute. Otherwise, I am still unclear as to why CORE would make more money when the number of smokers decline. Any comments are appreciated.

More Wisdom from Charlie Munger

Charlie Munger on desire:

I had a considerable passion to get rich. Not because I wanted Ferraris - I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t where I got that notion from, but I had it.

More from Charlie Munger here.

McGovern on the Military

George McGovern had a great op-ed in the WSJ yesterday (June 1, 2009):

http://online.wsj.com/article/SB124381226265170437.html 

He makes a lot of good points. For example, I knew we were still spending billions of dollars per month in Iraq and Afghanistan, but $12 billion month? 

We now spend $12 billion a month on wars in Iraq and Afghanistan -- two mistaken invasions that have increased violence and terrorism in the Middle East... 

There is the terrorist danger, but this is not a military problem. Terrorism is a by-product of military weakness. The terrorist has no battleships, bombers, missiles, tanks, organized armies or heavy artillery. 

The only significant terrorist attack on the U.S., on Sept. 11, 2001, was carried out by 19 young men from Saudi Arabia and Egypt armed only with boxcutters. They used these devices to intimidate the crews of four airplanes into surrendering control of their planes. The terrorists then suicidally flew the planes into buildings. 

This event, which took place nearly a decade ago, dramatized the limitation of a huge military budget in assuring national security. Nonetheless, our military budget is higher than ever -- $515 billion annually, not including the cost of Iraq and Afghanistan. 

This figure is greater than the combined military budgets of the rest of the world. We could defend ourselves with an arms budget half that size. If we directed the $250 billion we could save annually into national health care, improved education, a better environment and restoring our infrastructure, the nation would be more secure, better employed and have a higher standard of life. Or the savings might be used for annual reductions in the national debt. 

McGovern and I seem to think similarly when it comes to this issue. I've voiced similar thoughts in the past:

http://willworkforjustice.blogspot.com/2009/05/susan-faludi-911-and-military.html