Wednesday, March 28, 2007

Links of the day

What's So Special About Debt-Financed Dividends?...the author questions the rationality of same, and I agree...if your company has cash in the bank, then pay dividends; otherwise you have no basis to pay dividends...

Wolfowitz is right on corruption..."At the heart of what Wolfowitz is doing is a campaign against corruption. Fighting corruption and poor governance is vital in the fight against poverty. After all, if money goes to Swiss bank accounts rather than building roads or providing vaccines, how do the poor benefit? Wolfowitz's work has involved, for example, banning 58 firms and individuals from competing for World Bank contracts, and the removal of World Bank staff who have acted corruptly. Where countries have failed to tackle corruption, money has been withheld. This is the right strategy for the Bank"...amen!...

e-coli gets its day in the sun...the Adam Smith Institute Blog points to an MIT study that proceeded as follows: "I
ntrigued by the prospect that a single piece of DNA is really all an organism needs to harvest energy from light, the researchers inserted it into E. coli. They found that the microorganisms synthesized all the necessary components and assembled them in the cell membrane, using the system to generate energy. "All it takes to derive energy from sunlight is that bit of DNA," says Ed Delong, professor of biological engineering at MIT and author of the study" the ASI blogger points out, "it could be that we're about to acquire a new way to turn sunlight into power"...exciting stuff...

Is There a Science of Success?...Arnold Kling discusses a book The Science of Success (SOS)...which promotes management advice made up of five "dimensions":

1. Vision

2. Virtue and Talents

3. Knowledge Processes

4. Decision Rights

5. Incentives


The Fraud in the Housing Bubble...nice summary of the issues by Beat the Press...

Truck Shipment Slowdown Confirms Weakening Consumer Spending..." U.S. trucking shipments declined by 1.7 percent in February compared with a year earlier, an industry trade group said. The American Trucking Associations, in a monthly report released Monday, said shipments have declined on a year-over-year basis for eight straight months. Its truck tonnage index rose 1.6 percent from January, however. Because more than two-thirds of all manufactured and retail goods in the U.S. are carried by truck, the industry is considered an important economic bellwether."

Tuesday, March 27, 2007

Greater Seattle metro housing market-condos is a good source of compilations of reports from the mainstream media. This quote from the News Tribune gives food for thought:

“Downtown Tacoma’s condominiums have helped to transform a once-troubled downtown where few previously wanted to live. Today, a patchwork of exposed steel, scaffolding and cranes showcases a decade of marketing, recruiting developers and trying to convince buyers of the area’s merits.”

Dozens of condo buildings have gone up or been renovated in the city’s downtown core. As of December, all six neighborhoods surveyed averaged 14 months of condominium inventory, which measures how long it would take to sell everything built and approved.”

“Buyers enjoy some advantage and prices don’t appreciate as quickly, said Deanna Sihon, the study’s author. Tacoma also is subject to a hesitation common in areas remaking themselves and having to overcome long-held perceptions, Sihon said.”

“‘People are being careful and almost waiting to see, gosh, is this renovation and this new place really happening?’ she said. ‘It is in Tacoma.’”

“‘I think everyone would like the strongest sales possible. You’d like to see them fly off the shelf, and they’re not doing that right now,’ said consultant J.J. McCament.”

“Since 2004, nearly 400 condos have been sold downtown with another 525 for sale and about 1,500 proposed.”

“A year ago, a hot market meant condo shoppers had to make rapid buying decisions, said real estate agent George Pilant. Not so now. ‘Buyers have so many choices they don’t feel a sense of urgency,’ he said.”

“But condos are a niche product that at higher inventory levels, he said, raise this question: Will good-paying jobs needed to sell such downtown housing continue to be created? ‘I suppose that’s where the gamble is,’ said Paul Turek, an economist with the state Employment Security Department. ‘In the Tacoma area, we have some high-paying jobs. Whether there’s enough to support the building of the condos remains to be seen.’”

I highlighted in bold some points that seem especially noteworthy. First of all is the fact that a number of neighborhoods have 14 months of condo inventory at current sales levels. That should mean decreasing prices if the builders' business plan called for selling each condo within a couple of months of completion, which I think is a fair assumption. Does a sale at a lower price than planned for (which means a lower rate of return on the investment) yield a better outcome than eating the carrying costs for the finished units for 14 months or longer?

Next, the article commented that downtown Tacoma hasn't been considered a residential area in the past. I don't think that factor should be a major roadblock longterm. Tacoma has similar geography to Seattle in that it is on the Sound, mountains are nearby, and the city is within reasonable distances of much of the rest of the metro area. I think that the status issue is a key, as the article quote seems to imply. If the early adopters(buyers) make the emotional investment in the downtown area, I think that would mitigate concerns from potential buyers and jump start the in-migration to the urban core.

With respect to the issue of high paying jobs, I would guess that a commute from Tacoma to Redmond couldn't be much worse than a commute from Belltown to Redmond.

Efficiency of US healthcare spending

From The Street Light is this information: Some Statistics on Healthcare..."The productivity of the US health care system is terrible compared to other developed countries"..."in short: the average American receives mediocre-to-bad health care outcomes while paying twice as much as citizens of the rest of the developed world."

Some information that seems relevant to The Street Light's point here can be found at Arnold Kling's post today "Doctors, Pharmaceuticals, and Statisticians", where a study referred to as the "Courage Trial" found that

"angioplasty on average provides no benefit in terms of longevity. The thinking of the researchers is that the other therapies, particularly the medications, take care of the artery problems."

Dr. Kling states "Doctors think that they add value by giving advice on issues such as angioplasty. But the advice of statisticians may be better." According to the American Heart Organization's website, "1,285,000 angioplasties were done in the United States in 2004."

My point: in the US we are spending tons of money on a surgical procedure that appears to offer no benefit to the patient. That would help to explain why our expense/positive health outcome ratio is so poor relative to other countries.

Links of the day

Corporate Debt Bubble: Not If, When -- WSJ..."Big bank insiders are 'eerily candid' about credit cycle dangers, but admit they don't want to miss the 'next big deal,' lest their banks, or their bonuses, suffer. 'Covenant lite' loans, so called because of their scant performance requirements, are already at $41 billion in 2007 -- more than the last 10 years combined -- and represent 37% of all corporate loans, vs. 1% in 2005. Still, while admitting that the markets simply can't go any further, S&P analyst Steven Miller warns: "If you tried to call the end, you'd be really poor waiting for it."...this is a partial explanation for the existence of business cycles...the incentives for dealmakers to overextend leads to booms and busts...

Subprime Meltdown Could Affect Car Loans..."A slight uptick in delinquencies among subprime car loans suggests that subprime mortgage holders, unable to make their house payments as their adjustable-rate mortgages are reset upward, are also having trouble making their car payments"...this is a logical extension of debt problems for people who are in trouble...the question is, if you are in this situation which would you rather lose, the car or the house...

Some Statistics on Healthcare..."
The productivity of the US health care system is terrible compared to other developed countries"..."in short: the average American receives mediocre-to-bad health care outcomes while paying twice as much as citizens of the rest of the developed world."

Monday, March 26, 2007

Links of the day

Shocking Truth About Economy -- We're Content: Kevin HassettThe decline followed a 15.8 percent plunge in January, the biggest one-month decline in 13 years."..." Indeed, a recent, thorough study of public attitudes by my colleague at the American Enterprise Institute, Karlyn Bowman, reveals startling patterns in the attitudes of Americans toward the economy. At this moment, they are about as satisfied as they have ever been"...

CD Sales Plunge 20% From Year Ago...Barry Ritholtz comments on the state of the music fact from his comments: " Major retailers have closed about 800 music stores"...that's a lot of mall space that needed to be re-filled...

Sales of New Homes Fall Sharply...says the AP.."The Commerce Department reported Monday that sales of single-family homes dropped 3.9 percent last month to a seasonally adjusted annual rate of 848,000 units, the slowest pace in nearly seven years"...

Revisions to new home sales...
Last report (sales):

This report:


All three months revised downward!...

2000 1990 1980 1970 1960 1950 1940
25.8% 24.6% 22.7% 17.6% 13.3% 9.3% 7.7%

2000: 2.66 persons per dwelling unit.
2007: at the same 2.66 persons per dwelling unit would require 114,000,000 dwelling units.

Current estimate of housing stock: 128,000,000 dwelling units.
Excess: 14 million dwelling units.
Rob Dawg | Homepage | 03.26.07 - 3:48 pm

Silicon Valley House Prices Never Go Down...
Buyers who closed on their slice of the California dream in 1989 spent the next decade underwater...

A Raw Deal in Restaurants...."Management buyouts of public companies raise such basic, inescapable conflicts that it seems the practice would receive considerably more scrutiny and less acceptance than seems to be the norm."

Friday, March 23, 2007

Links of the day

Willem Buiter's Doubts on Continuing China/India's Meteoric Rise..."Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however"...also..."
Brad DeLong...
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk"...

Thursday, March 22, 2007

More on the music industry

Following up on my recent post, it turns out that ArsTechnica has done some analysis of music industry trends just yesterday. The author points out that "legal downloads continued to grow, but so far the focus from analysts and the press has been on how legal downloads have failed to "fill the revenue gap" created by the shortfall in traditional CD sales. What deserves further examination, however, is whether legal downloads are causing that shortfall. We do believe that they play a significant role in the music industry's current situation." Further described in the story is the projection that "this quarter, 81.5 million CDs will be sold. While that's down 20 percent from the same period last year, digital singles sold by the likes of Apple's iTunes store grew 54 percent, to account for 175 million songs sold. In other words, the quantity of downloaded songs far outweighs the quantity of CDs sold as a whole." The remainder of the ArsTechnica story discusses the author's hypothesis that the massive decline in song revenue is due to the fact that since buyers can now purchase their music by the song, they are not bothering to purchase the "filler" songs that in the past made up the bulk of the content on albums/CDs.

This seems like a blinding flash of the obvious to me; since we can now preview songs before buying and can purchase songs one at a time, we are only going to buy the songs we like and will ignore the rest. The author states the question this way: "how often does a consumer opt to buy just one or two songs off an album rather than buy the whole thing? This phenomenon must affect the top of the music charts quite viciously. I know I'm reluctant to buy an album, especially anything approaching a "hit album," unless I know that there's more than 2 to 3 songs on it that I like." The answer to the question is "approaching 100%". There's no doubt in my mind that just about every adult American has bought a CD after hearing a song they liked and then were disappointed with the rest of the songs included. I personally have had the misfortune of purchasing several CD's due to a popular song only to find out that the style of the hit song was nothing like the artist's core style or any other songs on the CD. That means you, Goo Goo Dolls!

The conclusion I draw is that the incumbent music industry infrastructure will inevitably shrink to the point where the fixed costs can be supported by what consumers are willing to pay for music.

Links of the day

Credit counselors overwhelmed by U.S. mortgage crisis...Reuters tells us that "when rising interest rates began driving up mortgage payments last year, homeowners started to feel the pain. Phones at credit counselors across the country are now ringing off the hook" and that "Demand for counseling appointments at CCCS's Cincinnati offices has risen 87 percent from a year earlier"...

Motorola's Warning: Unmitigated Disaster...the gist is that mobile phone sales have stalled because consumers are in the process of getting their hands on an IPhone or are holding off of any purchase until they see how the IPhone works out...that makes sense to me...

Rating Agencies Beholden to Issuers Rather Than Subscribers...investors should have this statement tattooed to their foreheads so they see this every morning...

The LA Times says that "
Two years ago, former New York Atty. Gen. Eliot Spitzer launched an investigation into mortgage lending practices. But instead of backing Spitzer’s demand for lending records from three national banks, the Comptroller of the Currency filed suit seeking to block the probe"...ouch...

Greg Mankiw says "
Maybe it is time for people to recognize that our tax code discriminates against renters--a policy that has little to recommend it on the basis of either fairness or efficiency"...I agree with that 100%..

Followup on Blackstone IPO coverage

In an earlier post, I commented negatively on the prospect of an IPO by Blackstone Group. It seems I'm not the only one who has questions about this deal. David Weidner at Marketwatch has a lot of questions. He says

"Since the news broke late last week, journalists, analysts and bankers have been trying to justify why Blackstone would need or want public ownership in any form. The consistent explanations are that stock would allow executives to "cash out," would provide another means of compensation and would give the firm another currency to use in deals. Sounds pretty weak. Even if one accepts those justifications, public ownership will bring a lot of anguish to the firm: disclosure of financials, earnings expectations for a business where returns are known to be uneven and the prospect that a once-autonomous management that did what it pleased, when it pleased will now have to answer to the hoi polloi of outside investors."

Allowing the executives to cash out just means that they are looking for some chump to trade cash for paper. Plus, the points that Weidner makes about the limitations that come from public ownership show that a public "private equity" firm would have its flexibility and opportunities for exploiting market inefficiencies eviscerated.

The big kicker is this: "The firm's plan for public ownership also smells of hypocrisy. Schwarzman and Blackstone executives have been wooing small- to medium-sized public companies like Montecito, Tragus, Center Parcs and TeamHealth into the private fold by telling CEOs and managers that by going private they would throw off the shackles of shareholders, regulatory filings and Sarbanes-Oxley compliance." Avoiding the tightened regulatory environment has been a primary rationale for going private. I agree with Weidner 100% here.

Update: found some more commentary by Roger Ehrenberg at SeekingAlpha: A couple of his comments, which I agree with, include

In my earlier posts on Blackstone and KKR, I made it pretty clear that their steps - going public and creating lower risk, lower return investments - are a foreshadowing of what's to come: namely, a much tougher environment for private equity.

These difficulties will emanate from several sources, principally:

  • Less friendly debt markets (both higher rates and tougher terms);
  • Fewer attractive buy-out candidates;
  • Too much liquidity across the alternative investment landscape (PE, HF and large VCs); and
  • Greater regulatory scrutiny"
  • and "Too much liquidity can cause perverse decision-making, and the brash and brainy private equity financiers are only too willing to take advantage of this market anomaly (that is, the inadequately-priced risk that is willingly underwritten by sheep-like investors awash in cash)." Amen, brother...

    Bookstores and Borders' plans for restructuring

    Marketwatch says that today "Borders Group Inc., lagging in an "increasingly competitive" industry, on Thursday outlined a reinvention strategy, with a plan to focus on domestic superstores, slash the size of its Waldenbooks chain and consider alternatives for its international business." One of the primary features of this restructuring involves " nearly halving its Waldenbooks chain to 300 stores from 564 by the end of 2008."

    Waldenbooks stores are located in malls in rectangular spaces with stacks of bestsellers at the front backed by a magazine rack and then a few rows of shelves with genre inventory. I am an avid book purchaser and before Barnes and Noble re-invented the bookselling business Waldenbooks was one of the few places I could find a source of new reading material. Market conditions have changed now. I personally have walked by Waldenbooks sometimes but have never been tempted to go in. I expect to be able to sit in a comfortable chair and be able to read a few snippets of the books I am thinking about buying; and I expect the broad selection and variety of price points that can be found at Barnes & Noble and to a degree at Borders' eponymous stores.

    I think that Borders should jettison the Waldenbooks concept altogether. Given that bookselling is a thin-margin business and mall rents are high relative to other types of retail real estate, exiting malls should provide a boost to gross margins. The capital tied up in these stores would be better invested in their superstores. I believe the reason that they are not closing all of the Waldenbooks stores now is due to mall leases that don't expire for a while. I'm not making a stock recommendation here, but I think that these moves will be positive for Borders.

    Wednesday, March 21, 2007

    Homes in Detroit sell for less than new cars

    Yahoo posted a story that says "After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: "The lumber in the house is worth more than that!"". Several other bloggers have picked up on this...Tim Iacono and Paul Kedrosky, for example.

    A couple of more quotes from the Yahoo article:

    "The city, which has lost more than half its population in the past 30 years and struggled with rising crime, failing schools and other social problems, largely missed out on the housing boom that swept much of the country in recent years.

    Prices have gained less than 2 percent per year in the five years since 2001, when the auto industry entered a renewed slump"... and :

    "At least 16 Detroit houses up for sale on Sunday sold for $30,000 or less. A boarded-up bungalow on the city's west side brought $1,300. A four-bedroom house near the original Motown recording studio sold for $7,000."

    There has to be opportunity here. If the auctioneer was right about the lumber in the house, one could buy the house, take it apart, and sell that lumber. I know from a friend in the design business that there has been a market for distressed lumber of a certain age, where such wood commanded premium prices. With metals prices still elevated, the wiring in these houses ought to be worth something, as well

    In any case, cheap acreage could make a worth-while long term investment. And I do mean long would compare this to buying 30 year Treasuries. The primary negative factors for Michigan is the climate, and in the medium term the potential for increased crime rates.

    Music CD sales shrinking constantly

    Paul Kedrosky provides a couple of valuable nuggets of information:
    -this chart
    -this quote:
    "In recent weeks, the music industry has posted some of the weakest sales it has ever recorded. This year has already seen the two lowest-selling No. 1 albums since Nielsen SoundScan, which tracks music sales, was launched in 1991.

    One week, "American Idol" runner-up Chris Daughtry's rock band sold just 65,000 copies of its chart-topping album; another week, the "Dreamgirls" movie soundtrack sold a mere 60,000. As recently as 2005, there were many weeks when such tallies wouldn't have been enough to crack the top 30 sellers. In prior years, it wasn't uncommon for a No. 1 record to sell 500,000 or 600,000 copies a week."

    The system for getting music to listeners has rendered the CD distribution system completely obsolete, in my view. The music industry incumbents are resisting this, of course. To me, the biggest source of resistance from the music industry lies in two areas. One is that their investment in CD-production facilities have been fully amortized and so the marginal cost of producing CD's is trivial. Protecting those CD profit margins is at the top of their list. I would venture that the CD-duplication plants are essentially worth scrap value at this point, except for marginal revenue from CD production. The second source is the traditional system where A & R people would spend tons of money on throwing promotional parties, expense account meals, payola and so forth. These people don't want to see their gravy train derailed.

    Links of the day

    KKR's Sun Investment: Good for Company, Bad for Investors?...Roger Ehrenberg analyzes whether this investment is a good sign for KKR or not; instead of whether it is good for Sun or analysis of where the private equity business is going...

    Why Have a Biotech Venture Fund?...Paul Kedrosky says "I was playing with some CalPERS venture investing data today while on planes. I decided to split the data into pre-2004 vintage non-biotech and biotech funds. The results were as follows:"


    Those are some crappy returns. A related post is by Don Dodge titled
    Venture Capitalists and Angels invest $40 Billion per year but see only $18B in exits...
    the gist of Dodge's commentary can be summarized as:
    -VCs and Angels expect to wait an average of 5 years before they get their money back...
    -No matter how you look at it VCs and Angels are not doing very well...
    -The top quartile of VCs and mutual funds make most of the money. The rest under perform...sometimes badly....

    FedEx Corp. said Wednesday a slowing economy, severe winter storms and lower fuel surcharges contributed to a 2 percent decline in the package shipper's third-quarter profit...that doesn't bode well for the next GDP figures...

    Switzerland's banking system now..."
    Stodgy Swiss banks have to work harder for their fees. Nor is Swiss banking quite as secretive as it once was. Legendary banking secrecy laws date back to 1934 when Nazi Germany tried to seize assets that German Jews had hustled abroad. These laws have been loosened. A federal law passed in 1997 made money laundering, and abetting it, a criminal offense. "There has been no money arriving in suitcases for at least ten years," says a senior executive at one of the big banks. "We need to be seen to be cleaner than clean."...har, har

    Thanks to Paul Kedrosky for this:
    "You never ask board members what they think. You tell them what you're going to do."
    [From a Fortune interview with Seagate CEO Bill Watkins]...this kind of attitude is why there have been so many issues with corruption in executive management...rubber stamp boards are worthless for representing shareholders at large...

    Yet another Paul Kedrosky gem: An Underreported $120m Hedge Fund Meltdown..."
    the story of GMM's meltdown is great reading. Absolutely remarkable how many people put money into a fund without audited performance results, as well as how no-one did a simple search to discover that the fund's managing partner and main trader had been fined/barred multiple times by securities agencies"...always do background research into the people you're giving money to...

    Fitting data curves...
    "One of the problems with standard economics training is that the econometrics focuses on linear regression and tends to skip over non-linear functions. Most economists would never consider a curve may be, say, a Poisson distribution. Many sem to think adding a squared or cubed term to their model is the height of sophistication!"...since pretty much all economic phenomena have non-linear components this means that most economics research does not approximate reality very well...

    Tuesday, March 20, 2007

    Seattle Real Estate Market Conditions Jan 2007

    Courtesy of ZipRealty:

    The percentage of homes on the market where the asking price has been reduced *: 24.6%
    Average December 2006 January 2007 % Change
    Asking Price $480,767 $454,247 -5.5%
    Sales Price $474,647 $452,620 -4.6%
    % of Asking Price 100% 99% 1.0%
    $/SQFT $285 $282 -1.1%
    Days on Market 73 86 17.8%
    Total Transactions 802 574 -28.4%

    Market numbers as of 2/8/2007: 2,277 properties on the market with 560 showing price reductions.

    Current situation with housing and mortgage lending

    The Census Department's release of data on building permits issued through February showed a 26% drop year on year. Bloomberg has the following quote: “‘The market is definitely tightening standards, and to the degree the market controls the flow of capital, the Fed does not have to,’ said Carl Tannenbaum, chief economist at ABN Amro Holding.

    And from the LA Times, “The shakeout in the sub-prime lending industry continued Monday, with more people losing their jobs and a prominent lender losing its name on a baseball stadium.” “Fremont General Corp. of Santa Monica said it had told ’significant numbers’ of its 2,400 home-loan employees to expect pink slips in two months.”

    “The Orange-based parent of Ameriquest Mortgage Co. and Argent Mortgage Co. announced large but unspecified layoffs last week. On Monday, Ameriquest said that its name was coming off the Texas Rangers’ baseball stadium in Arlington, Texas.”

    “‘You almost can relate this to the aerospace industry, when they had those massive layoffs’ after the end of the Cold War, said Jack Williams, president of the California Mortgage Brokers Assn.”

    One thought is that the Rangers should do a little more research on their next stadium sponsor to make sure that the sponsor won't collapse in a cloud of illegal activity.

    If Williams is right, I would expect to see significant outmigration from California over the next few years.

    The United States likely will see 1.1 million foreclosures during the next six to seven years on adjustable-rate mortgages issued when home prices were at or near the peak of the market, a study released today by First American Corp. of Santa Ana says. The study assumes that home prices remain unchanged over the next six to seven years. A hypothetical 10 percent price drop, for example, would result in 1.9 million foreclosures, vs. 1.1 million, or 22 percent of the adjustable loans issued in the 2004-06 period.

    I think it is fair to say that the assumption regarding home price change is faulty.

    From Fortune:
    "Janet Tavakoli, who runs Tavakoli Structured Finance, points out that AA-rated tranches of CDOs backed by subprime mortgage paper now yield far more than AA-rated debt backed by other assets - a sign that the market doesn’t trust the ratings.” “‘No one believes the ratings have any value,’ she says. Opined Grant’s Interest Rate Observer: ‘We are willing to bet that the agencies assigned too little weight to greed, ignorance, and soft criminality."

    Links of the day

    Subprime Mortgage Mess: Get Ready For the Option ARMs Sequel..."Without getting deep into it, take a look at the financial statements of Countrywide, Washington Mutual (WM) and a host of companies that do option arms. (These are the loans that let you pay little to no interest or all of the interest.) See how many of those being held for investment are already negatively amortized. (Hint: High percentage.)

    Once these things get to 110% to 120% of the principal, they will be forced to do a recast, or refinance. These recasts will be forced on homeowners who were likely paying the bear minimum, many with less than 20% down. Now they'll be forced to ante up considerably more money in cash and/or refinance at sharply higher rates than they were paying. If they couldn't afford the loan before, what makes you think they can afford it now?"...agreed...

    Is Globalization Driving Accenture's Consultant Hiring Frenzy?..."
    Accenture, the giant consultant firm, says it wants to double its ranks of 13,000 "management consultant professionals." Meanwhile, Accenture said it wants to add all those consultants in the next three years."...what this means is companies that hire Accenture are going to have a lot of rookies hanging around their facilities looking for projects to pitch...this is good news for Ivy League MBA students...

    The Yen and Monetary Liquidity...from the Ludwig von Mises Institute...makes a couple of worthwhile points:

    -"Since Japan doesn't print US dollars, it cannot determine the overall supply of dollars. Japan also, cannot alter the overall demand for dollars. From this we can infer that the increase in Japanese liquidity cannot have much effect on the American liquidity, all other things being equal. Consequently, Japan cannot have much say with regard to monetary liquidity of the United States or any other country."

    -"as long as the pool of real funding available to Americans is still growing, and as long as the growth momentum of liquidity is heading up, US financial markets will remain well supported regardless of the yen carry trade"...

    When Form Follows Function: China's Property Pangs...TCS Daily tells us that "The People's Republic of China late last week gave private property equal legal status to state property"...that is a huge author Philip Levy says, "Proclaiming an individuals' right to private property at least offers the hope that some day they will be able to enforce that right"...

    Brontes Technologies...the product description from their website reads "
    Brontes will change the way dentists treat their patients by enabling practitioners to perform ImpressionFreeTM dentistry. Brontes’ 3D intraoral imaging technology can quickly and painlessly scan both arches of the mouth, thereby replacing the antiquated dental impression process.

    Over 50 million dental impressions are performed in the U.S. each year for the production of almost all dental prosthetics and appliances, including crowns, bridges, implants, braces, aligners and retainers. The average dentist takes several impressions each day in spite of the costly, time consuming, inconsistent, and unpleasant process.

    Digital tools for production have been available to the dental industry for many years, but all of these tools start with the same problematic physical input – the dental impression. Brontes will enable a long overdue digital revolution by taking 3D digital data directly from the patient’s mouth and removing the barriers to digital production. The Brontes 3D product will offer the following benefits:

    • Patients - Higher quality of care – quick, painless and "goop" free
    • Dentists - Significant time and cost savings
    • Laboratories - Consistently accurate models to simplify production"
    I think this is a great thing; personally I hate having the goop in my mouth. The question is whether they are pricing this product so that dentists charge a premium for a goop-less impression or not. I imagine most folks would pay a few extra dollars for this; would dental insurers do the same?

    Margin debt and the stock market

    Barry Ritholtz mentions over at SeekingAlpha that "NYSE Margin Hits All Time High" and comments that "It's borrowed money - not margin data - that matters" in reference to the fact that borrowing of stock for shorting purposes is not included in the number he is referring to. A linked chart of margin debt looks like this:

    One item from the Wikipedia entry on the stock market crash of 1929 states "The crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying." Granted, conditions now are not precisely the same as in 1929, but I agree that we are in "uh-oh" territory. has some commentary on margin debt. A good statement is this: "One of the things that margin does is accelerate moves in the market in either direction. When the level of margin swells, as it did late last year and early this year, the market is getting a huge dose of liquidity. Usually that makes for a higher stock market. And when margin goes down, that liquidity is being taken away." It is fairly obvious that margin would accelerate market moves because as prices go up an investor has more collateral to borrow against and can so borrow more to purchase more stock. Conversely, as prices drop, the stock collateral shrinks, margin calls are made, and the investor must sell stock to meet the margin calls.

    A counterintuitive statement to me is the idea that "margin...over the long term tends to trend up." After considering it, it makes sense in that the money supply increases over time and therefore investment banks have more to lend as margin.

    Finally "Margin, then, tells us not just how enthused or unenthused investors are, but something about the kind of capital constraints they're facing. When margin contracts, it indicates that people are feeling pinched, and that there is not as much money in general coming into the market." So margin levels could be a useful indicator to examine when considering where the market is going. Here is a chart that provided:
    The year on year growth levels in margin debt are remarkable. It seems to suggest that a large chunk of the stock market's valuation is being supported by borrowed funds. If there had been significant margin calls, one would expect to see some years where there were significant negative growth in margin debt. Seems like we're still building a house of cards.

    Monday, March 19, 2007

    Links of the day

    Recent Reports Hint Of Trouble on the Chinese Front...collection of troublesome quotes..

    Deepwater Cutters cancelled..."
    The U.S. Coast Guard has canceled a roughly $600 million contract awarded to a joint venture of Lockheed Martin Corp. and Northrop Grumman Corp., and said it plans to award a new deal next year"...due to serious design flaws...

    China to Build State Owned Competition for Boeing, Airbus...
    CrossProfit says "China is sitting on top of a trillion Dollar surplus and has finally figured out how to spend it constructively, thus helping its people while simultaneously preparing the Chinese economy for the next fifty years"...this move would make sense...

    Blackstone is planning an IPO...apparently "
    Blackstone Group, one of the most powerful private equity players, is reportedly planning an initial public offering that could come to market in the next few months" my opinion this is a sign of a market top in private equity...the big dogs are looking to dump on anyone foolish enough to buy into this..

    Homeowners Drop Insurance After Katrina...The AP has a story saying "Facing soaring premiums or feeling shortchanged by their insurers, a growing number of homeowners and businesses in Louisiana and Mississippi are "going bare," or dropping their coverage altogether, insurance agents and consumer advocates say. Many more are drastically reducing their coverage"...that is not an unreasonable response to the higher insurance rates that are being quoted. The probability of another major hurricane hitting New Orleans is publicly available, and one can weigh the expected value of all those premium payments vs the cost of just walking away...

    Friday, March 16, 2007

    Links of the day

    Carlos Ghosn To Cease Heading Nissan's N. American Operations..."In an attempt to address worse-than-expected sales, Nissan Motor Co. CEO Carlos Ghosn will no longer control the company's North American operations"...makes sense since he's been running two car companies simultaneously for a while(Renault)...even the most energetic person is going to get burned out by that kind of pace...

    Amgen Shares Continue To Plummet..."
    Here’s a look at Amgen’s stock with the earnings-per-share line in gold. The two lines are scaled at 25-to-1 (when the lines cross, the P/E ratio is exactly 25):"
    My question is why the disconnect in the two trends; theoretically the share price should be following the EPS number. According to Motley Fool author Brian Lawler "There have been some recent negative developments for two of Amgen's top compounds." That might be the reason. But Lawler says that "at current share price levels, investors practicing a long-term buy and hold strategy have a slam dunk on their hands with shares of the company, once it scales back its enormous amount of R&D spending and new products start to bring in meaningful sales." Needless to say, there is plenty of risk in getting new products through the approval process...

    Mark McQueen at SeekingAlpha posted this handy list:

    Top U.S. Subprime Mortgage Lenders

    Rank/Lender/Location/Q4 2006 originations, in U.S. billions

    1 HSBC Finance (HSBC) Prospect Heights, IL $12.3
    2 New Century Financial (NEWC.PK) Irvine, CA $12.2
    3 Countrywide Financial Calabasas, CA $10.1
    4 WMC Mortgage (GE) Burbank, CA $9.0
    5 First Franklin (Merrill Lynch) (ML) San Jose, CA $7.8
    6 Wells Fargo (WFC) Home Mortgage San Francisco, CA $7.4
    7 Option One (H&R Block) (HRB) Irvine, CA $6.1
    8 Fremont Investment & Loan* Santa Monica, CA (FMT) $6.0
    9 Washington Mutual* ((WM) Seattle, WA $5.7
    10 CitiFinancial (Citigroup) (C)* Baltimore, MD $5.0

    Thursday, March 15, 2007

    Cisco vs Microsoft

    Over at, Kris Tuttle provides some interesting details regarding Cisco's purchase of WebEx. He says that

    "WebEx has a network of 3000 servers and over 2M subscribers who use their technology as an on-demand platform for collaboration. Cisco sees that unified collaboration and communication are growing fast and particularly important in the SMB market when it can be offered in a SaaS format" and also "Because WebEx has established distribution channels, partners and a strong business model, it will be run as a stand-alone business and integrated into Cisco operations over time. This is said to represent a “new model” for Cisco. It seems similar to the VMWare structure at EMC for now."

    The questions raised are:

    1. "If more and more people are going to use an expanded WebEx/Cisco platform to collaborate does it mean for the usage of Microsoft Office products?
    2. Does this move by Cisco put more pressure on Google to add communication collaboration to their Docs and Spreadsheets platform?"
    I had never thought of Cisco as a direct competitor to Microsoft before. Interesting...

    Links of the day

    According to the Labor Department,the number of Americans collecting unemployment checks in the week ended March 3 increased by 48,000 to reach 2.58 million. Comparing that to the BLS's number for total employed persons of 145,919,000, I get a ratio of 1.7%. It's unfortunate for those who can't find a job, but the bigger picture is that this is manageable number...

    IndyMac: 'Don't Label Us a Sub-Prime Lender'...
    it's always nice to be able to issue a clarifying press release like theirs..."Based on the definition of subprime established by the Office of Thrift Supervision (OTS) for our regulatory filings, only 3.0 percent of Indymac’s $90 billion in mortgage loan production in 2006 was subprime."...

    Novell: The Numbers Just Don't Add Up..."
    SuSE Linux sales just aren’t growing fast enough to offset plummeting NetWare sales"...I don't know why ownership doesn't split this company up by spinning off the Linux business, packaging the Netware maintenance business and sell that to some third party, and liquidate the rest. I don't know if they can get back the cost of the tower that they built in Provo, UT...

    Thanks to Calculated Risk for this from USAToday: " Workers find it tough to relocate
    The offer was too good to turn down. Just after selling his home and moving to a new place, Joe Cashen landed a marketing job with Nissan North America. The catch? He would have to sell his newly purchased home and move his wife and two young daughters from Los Angeles to Nashville.

    Two years ago, amid the feverish housing market, such a relocation would have been simple.

    But the real estate slowdown means there's no such thing as an easy move anymore: Slumping prices have put a sudden chill on employees' ability to relocate for a job and employers' ability to get new hires to move. Cashen's house languished on the market for more than three months, and he was eventually forced to take a $90,000 loss."
    This is a fresh angle on this whole home lending implosion. A lot of blogs and mainstream media are rehashing the same stuff about the plight of the mortgage brokers.

    I can definitely see this as a potential problem for a lot of companies. When you take into account the thought that a majority of individuals whose relocations are being paid for are at the higher end of the income bracket, you have to figure that the homes they are looking to unload are going to be in the higher end of the price ranges which generally take longer to sell in any market...

    Ten Ugly Truths...Nouriel Roubini lists the reality of the housing implosion as follows:

    Ugly Reality #1: The housing recession not only is not bottoming out; it is getting worse and it will be the worst housing recession in the last five decades as my recent analytical paper with Christian Menagatti shows

    Ugly Reality #2: The same garbage lending practices used for sub-prime – no/low down-payment, no/low documentation of income and assets, interest rate only, teaser rates, negative amortization, option ARMs - were prevalent among near prime and other (option ARM) prime mortgages. These risky mortgages add up to about 50% of originations in 2005 and 2006, as my research and that in Credit Swiss (among others) shows.

    Ugly Reality #3: Not only there is a severe credit crunch in subprime (30 plus lenders out of business); there is also the beginning of a generalized credit crunch for the broader set of near prime and other risky prime mortgages. Default and foreclosure rates sharply up in all mortgages, including near prime such as Alt-A. Lenders and regulators are seriously tightening standards for all mortgages. There is now a sharp swing from very loose to very tight lending behavior by every type of mortgage lender. Ivy Zelman of Credit Swiss recently published an excellent analysis showing that is not just a sub-prime problem. As she put it this credit crunch "will affect the entire housing food chain." There is also a risk of a systemic banking crisis if the economy has a hard landing.

    Ugly Reality #4: There is a severe disruption of the CDOs market – given the losses of CDO managers and investors - that risks to lead to a seizure of the entire RMBS market as CDO investments are the foundations of the mezzanine tranches of the RMBS market. See the recent excellent Rosner and Mason paper.

    Ugly Reality #5: There is the beginning of a slow contagion to other credit risks: widening of spreads to near junk for major broker dealers; widening of CDS spreads for corporates and non residential real estate as measured by CDX, iTraxx and CMBX indices.

    Ugly Reality #6: There is already significant contagion from the worst housing in decades to the other sectors of the economy: auto is in a recession; manufacturing is in a recession; employment growth is slowing down; every component of real investment (residential, non-residential, equipment and software, inventories) fell in Q4 and is falling at a faster rate in Q1. And now the saving-less and debt-burdened consumer is faltering too as two mediocre consecutive months – January and February – of retail sales show. The US consumer is on the ropes and at its tipping point.

    Ugly Reality #7: The economy will experience a hard landing, at best in the form of a growth recession (growth in the 0%-1%) for most of 2007 or, more likely, an actual recession starting in Q2. Greenspan thinks a recession by Q4 has a 30% probability; the Fed’s yield curve model prices a 54% probability of a recession in 2007.

    Ugly Reality #8: The coming aggressive easing by the Fed will not prevent the US hard landing for the same reasons why the aggressive Fed easing in 2001 did not prevent a recession then: when you have a glut of investment/capital goods – then tech goods, today housing glut, consumer durable and auto glut – the demand for such goods becomes interest rate insensitive. So the Fed will try but will not be able to rescue the economy.

    Ugly Reality #9: Decoupling of growth for Europe, Asia and emerging markets will occur only if the US has a soft landing. If the US experiences a hard landing there will be no decoupling whatsoever.

    Ugly Reality #10: Previous market corrections were temporary blips and market opportunities because macro fundamentals were sound. The spring 2006 “inflation scare” turned out to be a “scare” without basis; thus markets recovered after a brief turmoil. Today we do not have a “growth scare”; we have US growth fundamentals that are severely weakening and leading to the risk of a hard landing. In that scenario the market will not have a brief correction; instead all sorts of risky assets – equities, commodities, corporate credit risks, emerging market assets – will have a severe downturn once sucker rallies following expectations of a Fed ease will run out of steam when the reality of a hard landing sinks in.

    WCI and Icahn

    According to Marketwatch, "Analysts are having a hard time putting a fair value on Florida-based tower and home builder WCI Communities Inc. in advance of an expected bid from financier Carl Icahn." That seems like a blinding flash of the obvious. Florida's real estate market is all fouled up and the current management of WCI got themselves into a bind by overbuilding. No one knows where the value of much of the land in Florida is going to wind up. Icahn has deep pockets and the patience to hold on to assets until he can get a good value for them, from what I've read. I don't plan on buying WCI, but this does seem like a case where the corporate raider will in fact put together a better deal for WCI shareholders than what the current management has to offer.

    Apparently, I'm not the only one who thinks so: WCI Communities: Sandell Asset Supports Icahn's SaleSuggestion...Sandell said

    "We support Carl Icahn's efforts to create change at WCI by nominating and electing an alternative slate of directors at the WCI annual meeting, and see his recent tender offer as a positive step in value maximization at WCI. The onus is clearly on WCI's management, board of directors and financial advisors at this point to step up their efforts to achieve the best possible result of the strategic review process. If that process does not yield a higher value, we encourage the board to work with Mr. Icahn toward a negotiated deal rather than attempt to hide behind the recently adopted poison pill. In the absence of a higher bid, the shareholders may have little choice in the decision of selling to Mr. Icahn or leaving the company in current management's hands and risking further value destruction"...

    Wednesday, March 14, 2007

    Links of the day

    Quote of the day: says "Distressed debt investors take note: Babson’s new credit fund is called Fugu, after the highly toxic puffer fish which causes several fatalities a year."

    That's what I call truth in advertising. The fish will either taste really good, or kill you. Likewise with the fund's returns...

    Why Linux Isn't the Answer to Dell's Problems...

    "What it comes down to is a similar issue that got Dell into this mess in the first place. As the price of the average computer system they sell drops, Dell is less able to profit from that sale. One reason is due to shipping- as prices slip the percentage of the total purchase that shipping takes up rises. This means that Dell’s lack of retail outlets, once a strength, is now a major weakness. The same goes for the operating system because as the price of the total computer drops, the software becomes relatively more expensive. A side point to this is that the company already operates on slim margins (and with tough price competition) so the inability to profit from the operating system will also hurt. If this was all not enough, the addition of Linux could be even more of a problem because it would present an option besides Vista, something that many people once saw as being a major boon to computer manufacturers because of all the systems that would have to be upgraded to run it"...that sounds right to me...

    Tuesday, March 13, 2007

    What China does with its trade surplus proceeds

    Brad Setser has provided a wealth of detail in one of his latest posts called "Just what is in China's portfolio?"...some key items:

    -"China has roughly $100b in U.S. mortgage backed securities"

    -"China holds $600b in Treasuries...$350b of Treasuries and $250b of agencies is, well, $600b."

    The Chinese government is essentially fairly exposed to the issues with mortgage lending that are now coming to light and causing problems in the financial markets, in my view.

    Brazil, Russia, India...

    Brad Setser says this about these three countries:

    "the private markets don’t want to finance a $900b US deficit at current US rates. Not when the BRIs offer a better return. But right now the private money flowing into the BRIs gets sent back by their respective central banks to the US and Europe. The BRIs, by paying more for money borrowed from abroad than they get on lending those funds to the US, effectively subsidize both speculators bringing money into their countries and the United States. To me, it is nuts."

    Also: " One thing is clear: the willingness of the central banks of Brazil, Russia and India to turn private flows seeking yield in their markets into demand for US treasuries and agencies has become an increasingly important component of the global financial system. "

    I agree with both statements. I think the key is that the central bankers of these countries see the US as the safest place to park the cash; even though all three countries have major political issues with the US.

    Links of the day

    How 'the suits' destroyed a billion-dollar happens fairly regularly...

    Those Who Can, Code; Those Who Can't, Architect...

    Unemployment Rate Declines, May Raise Fed Concerns...take a look also at a paper on the non-accelerating inflation rate of unemployment...

    Analysis of US federal debt...key point is that issuance of Treasuries doesn't create wealth...

    White House Trades New Weapons for Troop Support...this is a wire is a logical trade-off to shift the money to current needs when your country has a budget deficit and you're fighting a war..."an additional $1.5 billion on armor kits and transport vehicles, including $500 million for Mine Resistant Ambush Protected vehicles, the newest generation of tactical vehicles designed to protect troops against mines and roadside bombs"...something tells me the US is going to get a lot more use out of the MRAP's than the F-35 in the next couple of years:)...

    Monday, March 12, 2007

    Links of the day

    Halliburton Moving Headquarters to Dubai..."Located amid conservative and sometimes troubled neighbours, Dubai’s political stability and tolerance of western lifestyles have made it a magnet for foreigners setting up in the largely tax-free Gulf"...

    NCAA sued (again)...a College Athletes' Coalition is suing over NCAA regulation of what athletes can do to earn money while on scholarship...

    Whodathunk The Mega Events Ain't All They're Cracked Up To Be?...big events drive away the locals because of congestion concerns...

    Chunnel a financial failure...the linked article describes some of the bankruptcy proceedings that have been taking place with regard to the company that runs the Chunnel...

    Ex-Disney Chief Launches Surely-Doomed Web Effort..."So here's the high concept of Vuguru, in short: The small, niche audience of the Web meets the cost structure of Hollywood"...yep, definitely a failure in the offing...

    New Delhi's vertical ambition aims to ease overcrowding...constructing multi-story residential structures..seems like an obvious solution, but there's more to the story...

    Balanced budget trend: still June 2008...see the chart...

    Friday, March 09, 2007

    Mini-size me, Seattle-style

    Seattle Condo Review reveals this:

    "Want upscale Belltown living, but can't afford the price tag? A new development set to break ground in October 2006 and begin occupancy in summer 2008, attempts to do just that. In exchange for a great location, relatively low prices and luxury finishings, future owners must be willing to compromise on space. This idea, borrowed from bigger cities such as New York or London has already been successful in Seattle at The Montreux building constructed in 1999 at 425 Vine St with studios hovering around the 300 sq. ft. mark.

    • Prices range from $150,000 for studios to the $400,000s for two bedroom, two bath units.

    • Studios begin at 296 sq. ft. and 2 bed/2 bath units just break the 1,000 sq. ft. mark.

    That price per square foot and total square footage is approaching Tokyo levels. The neighborhood better be really, really hot or this is a sucker purchase.

    Housing bubble: condos in Seattle

    Check out Seattle Condo Review; it’ll make you get mad, laugh, or choke depending on your point of view. Here’s a couple of quotes from the site:

    “Designed for the hip and trendy, Carbon 56 (formerly known as Aristo Apartments) is located in the Denny Triangle neighborhood on 2015 Terry Ave. Capitalizing on the success and cache of 2200 and the new Whole Foods located a block away, Carbon 56 is aimed at the young professional urban dweller who can’t afford or doesn’t want to pay over $500,000 for a condo.” Who wants to pay over $500k(if they could pay less)?

    “Every now and then, clients will ask if I can find a condo in the heart of Belltown that is also quiet and safe. One would think that might be hard since you are after all picking an urban neighborhood; however, there are exceptions. ” What we have here is a failure to communicate…

    “Seattle Heights on 2nd Ave between Wall St and Cedar St has always been a client favorite. This 26 story high rise condo was built in 1994. A few years ago, it had water intrusion problems and the building was wrapped up for more than a year. New siding and windows were replaced. ” Seems like those construction defects cropped up mighty quickly…

    Some of the buildings that can be seen at the site are nicely designed, it's the prices that are mind-boggling.

    Bank of America and credit cards for illegals

    David Yen over at Credit Slips points out that "To a lender a borrower who it knows is undocumented is in one way more attractive than a citizen or legal resident: he or she is effectively barred from filing bankruptcy. Strictly speaking, there is no requirement that someone be in the United States legally in order to be a debtor in bankruptcy. But someone who is undocumented and wants to stay in the country would be inviting trouble if he or she filed bankruptcy. A debtor now must present a picture ID and proof of social security number at the creditors meeting. Interim Bankruptcy Rule 4002(b)(1). The debtor must also provide the most recent Federal income tax return, or explain why there is none. Interim Rule 4002(b)(3). This should be enough to deter most undocumented borrowers from filing bankruptcy. If one does file despite this risk, whether out of ignorance or recklessness, the lender has a powerful threat -- withdraw the bankruptcy or else the trustee will be told the truth. At a minimum the debtor risks denial of discharge for presenting fraudulent documents. Deportation is much more likely; even prison is a possibility."

    I think that Bank of America has certainly considered the issue raised here regarding the choice that illegal aliens will be faced with when they reach the stage in their finances where bankruptcy would be considered. Even if some kind of restructuring of the credit card debt needs to happen, the bank will prefer that over the card-holder filing bankruptcy. Although the outcry now is that B of A is aiding illegal immigration, I think that this will turn out to be a way to exploiting illegal immigrants financially because of the fear of deportation.

    "Immigrants who wire money get help from the Fed"

    That's the title of an article in the L.A. Times that describes how a "Federal Reserve-sponsored service allows customers without Social Security numbers to wire money through the Fed system to Mexico's central bank at little cost. In September, the Fed expanded the remittance program by allowing immigrants, legal or not, to open accounts at participating banks and credit unions in the U.S. or Mexico. About 27,000 transfers are made through the program each month."

    Needless to say, this is controversial. The article references a number of organizations that are trying to get the government to stop this program, but a Fed official is quoted to the effect that "the program complied with the Patriot Act, the Bank Secrecy Act and other laws against money laundering. Customers must provide identification — a consular identification card or other picture ID — and banks regularly check the documents' authenticity, she said."

    Links of the day

    Coke, Pepsi Losing Market Share..."Beverage marketers Coca-Cola and PepsiCo experienced a 0.6% drop in soft-drink volume in 2006, significantly steeper than a 0.2% slip in 2005, on waning consumer interest in core brands Coca-Cola Classic and Pepsi-Cola"..."Coke's soft-drink market share slid to 42.9% from 43.1% in 2005, while PepsiCo's fell to 31.2% from 31.4%"...this looks like a major change in the beverage market that I hadn't noticed before...

    The Carry Trade...alternative advice for the Bank of Japan to the effect that if they raise rates Japanese savers will repatriate their savings from foreign currencies (where they've stashed them due to the ultra-low rates at home) and said funds will be available for domestic spending and investment..

    BlueFire Developing Back-To-The-Future Energy Solutions..."
    The Southern California Biorefinery Project will turn green waste and wood residues at landfills into about 19 million gallons of fuel grade ethanol per year"...sounds like a good thing to me; this is based on DOE support from a cellulosic ethanol grant program..

    Stop loss orders aggravate stock market downturns..."This had been a market that had been trending up for many months, which means it attracted a lot of what we call trend followers and momentum players. They ride the trend, and they ride the trend until they see it is broken. Many trend followers use stop-loss orders to automatically sell stocks when prices fall a pre-determined amount. Thus, a relatively small price decline turns into a plunge when more and more sell orders are triggered"...this makes sense...

    Thursday, March 08, 2007

    Ethanol as a source of energy

    Todd Sullivan over at SeekingAlpha has posted a very interesting analysis of ethanol as a source of energy. He quotes Vinod Khosla of Sun Microsystems and venture capital fame to the effect that ethanol has double the energy balance of gasoline and that looking at energy balance calculations is a waste of time anyway.

    Sullivan lists and "debunks" what he refers to as myths about ethanol as follows:
    1. Lack of production yields...I agree with Sullivan that once ethanol gets traction as a fuel that production yields will increase rapidly as investment in yield improvement takes place.

    2. Not enough cropland...This one is patently absurd; the US government is paying a large number of farmers not to plant crops of any kind, and many crops are heavily subsidized (sugar, for one). The problem with agri-business is that there is far too much farm capacity, which is why international trade negotiations frequently revolve (and stall) around farm exports.

    3. Food prices will go up...more nonsense. See 2 above for the agricultural capacity explanation.

    4. Ethanol is more is now because production hasn't reached the levels where economies of scale kick in. Once ethanol is in wide use the price per gallon will at least be competitive with gasoline if not less.

    Good food for thought...

    Links of the day

    Loan Officer can see in real time what is happening in the mortgage broker business; a lot of the messages are loan officers and mortgage brokers looking to get loans done...

    Private Equity Enthusiasts: Will Someone Please Expose Their Delusion?..."A string of corporate collapses is likely next year as debt-laden private equity deals begin to unravel, a leading firm of accountants said yesterday. The complexity of the deals and the timing of debt repayments will undermine companies that under previous ownership structures might have survived, said insolvency experts from Ernst & Young"..."Keith McGregor, an insolvency partner at Ernst & Young, said the complex nature of many private equity deals was likely to make them more prone to collapse if they suffered a downturn in sales or increase in costs"...""The quality of the debt has dropped off in the last few years. Debt with a CCC rating has a one in three chance of going bust within two years. But it is the fastest growing element of debt in private equity structures," he said."...these transactions are all about the deal fees for the PE firms and pension funds' need for yield in a low interest rate environment when promised pensions won't be able to be covered at realistic rates of return.

    Automotion Parking Systems...their automated parking garage technology is very impressive. It is essentially a ferris-wheel like structure with "pallets" that you park your car on; after you get out and lock up, the pallet with your car is raised into a slot out of the way. Some of the benefits that I can see include elimination of car theft (since your car isn't sitting in a giant garage), reduced footprint of the parking area for a structure, and reduction of accidents (a significant percentage of auto accidents take place in parking lots). It would be interesting to see the cost to build one of these systems versus the cost of a traditional concrete parking structure. I have no financial stake in this company...

    Towards a 3D search engine...
    a 3D molecular search engine that is over 1,500 times faster than anything previously developed. The researchers, from Oxford University, developed a lightning-fast way to quickly match 3D shapes mathematically.

    Wednesday, March 07, 2007

    Links of the day

    Hyman Minsky's Financial Instability Hypothesis:
    The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable.

    The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

    In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make positions by selling out positions. This is likely to lead to a collapse of asset values."

    x=Control, y=Responsibility...Control must be correlated with responsibility.

    And you don't have to wipe your feet anymore...enviro-freaks putting a dirt floor into a home in California: "Rowell and Farnsworth, 26, were working with a dozen friends to install a dirt floor — an "earthen floor," as it is known — in their 50-year-old home in this Oakland suburb." word for this idea; MORONIC...

    How to publish (and not perish)...includes a link to "Top ten ways to get published in a scholarly journal"...

    Most firms find financing in domestic the conclusion of the linked study...

    CEO pay is window dressing?....

    Elimination of M3 reporting: a problem or not?

    Dr. James Hamilton has a good explanation of the measures of money supply used in the US at his post M3 or not M3?. A couple of good quotes and my comments:

    1. "Economists define "money" as an asset that is used to pay for transactions. Thus, for example, we don't include your credit card in any measure of the money supply, because it's not an asset. Having a credit card doesn't make you rich-- I hope I'm not the first person to tell you that. We likewise don't count holdings of stock equity, because you can only use your stock wealth to buy your groceries if you first convert it into another asset. The quantity of money in circulation would be of economic interest insofar as it bears a stable relation to the dollar value of transactions that get undertaken."

    2. "there is the now-no-longer-published M3. This added to M2 a number of liquid assets used by large institutions or wealthy investors, such as institutional money market funds, time deposits in excess of $100,000 with penalty for early withdrawal, repurchase liabilities of depository institutions, and dollar-denominated accounts held by someone with a U.S. address at certain foreign banks or foreign branches of U.S. banks.

    I have to confess that in a quarter century of teaching and research, I never had any occasion to make use of M3. It always seemed to me that this unambiguously failed the definition of an asset that is used to pay for transactions. If you're going to include such assets in your concept of "money", why stop there? Don't you want to include T-bills as well, and if them, why not Treasury bonds? You have to stop somewhere, and I always stopped with M1 or M2.

    In addition, a primary reason for focusing on the money supply for policy purposes is that it's a magnitude controlled by the government. The physical dollar bills are of course printed by the government, and a bank that issues checking accounts must hold credits that could be used to obtain physical dollars (known as Federal Reserve deposits) in a certain proportion to the value of the outstanding checkable deposits. However, it is unclear how the government is supposed to control the M3 components. Balances at foreign banks, for example, are clearly outside the control of the U.S. government." I agree with Dr. Hamilton's assessment...

    The purpose of the Federal Reserve system

    Excellent historical analysis at Econbrowser of why the Federal Reserve system was created and how it has reduced the incidence of financial crises in the US...a quote:

    "If you're a smaller country like Korea for which a lot of the short-term debt is denominated in dollars, your central bank does not have the power to create extra dollars if everybody suddenly demands their payment and refuses to extend credit. Trying to flood the market with more of your own currency is just going to make the outflow of capital more severe."

    One can see from the chart provided that short-term volatility in commercial paper rates decreased significantly after the creation of the Federal Reserve. In my view this has been beneficial for the US economy as it reduced the variability in access to working capital for businesses.