Wednesday, June 27, 2007

Salt Lake City or Portland: which is greener?

Here are two screenshots of satellite images from Google Maps; the resolution on both images is the same. Click on each to see the large view and decide which city has a greater amount of vegetation or green space:

The honest answer is that Salt Lake City is far greener...both images are from summer, because Forest Park in Portland shows as green. Forest Park has many, many deciduous trees...if the image were from fall the color would be significantly different.

Tokyo real estate still too expensive

Burbed came up with this link:

Japanese find sleep, shelter in cyber cafes


Men make use of the internet service in the private rooms of an internet cafe in Tokyo May 2, 2007. Some low-wage earning young people who cannot afford apartments in Tokyo are choosing to live in internet cafes, which are cheaper than a hotel and even offer showers, microwaves and large libraries of manga to read. Picture taken May 2, 2007. (Kim Kyung-Hoon/Reuters)

I guess as long as you pay for a certain amount of internet time, the cafe owner won't kick you out! Howard Schultz has nothing on these guys...Starbuck's is all about the "third place". Who needs a "third place" when you can just have work and the cafe. Leave out the whole "housing" problem out of the picture...

Drive by shooting at house in CA recently bought for $600k

San Jose Mercury News - East Palo Alto woman shot while standing in driveway
Police are searching for suspects after a 20-year-old East Palo Alto woman was shot, police said today.

Meleseni Kupu was standing in the driveway of 2529 Fordham Ave. around 9:15 p.m. Wednesday when she heard gunshots and realized she had been shot, according to police. Kupu was transported to a local hospital with two non-life-threatening gunshot wounds to her upper left chest.

Witnesses told police that two or three suspects wearing black hooded sweatshirts stood across the street from the residence and fired seven to 10 shots. Officers at the scene collected 15 9-millimeter bullet casings at the scene, according to police.

Another link from Burbed that was too good to pass up...there's more at that site...

Buy a shack in Milpitas, CA for a measly $600k

LSlistings Property Detail for MLS number 727905
Milpitas, CA 95035


This Single Family Residence has the following features:
MLS#: 727905 Approx Age: 52 Years Approx Sq Ft: 1436
Detached Single Family 1 Story 4 Bedrooms
2 Bathrooms 2 or More Showers over Tubs 2 or More Tubs

Thanks to Burbed for the pointer....the above house is a burn-down as far as I am concerned. Bulldoze it and build something new on the property...since the structure is over fifty years old there is likely no part of it worth preserving. The satellite view of the neighborhood from Google Maps looks pretty good...there's a house with a pool about 200 feet down the street. That just confirms that this should be a small additional detail: this place is likely sitting very close to the Hayward fault...just something to consider...

Editorial idiocy in today's Oregonian (Portland)

Sticker shock at the farmers market
An excerpt from the above:

"it was time for the woman to pay for her cherries, and that's when her pleasant visit hit a slight bump. "That'll be $8," said the vendor.

"For Bings? You're kidding," exclaimed the woman.

" 'Fraid not," the vendor politely replied. "They're $4 a pound, and that's a two-pound carton."

The woman abruptly set it down. "Thanks anyway, but I bought Bings last week in the Bay Area for $1.88 a pound."

"Ah," said the vendor, turning to his next customer, "but those cherries weren't from the Hood River Valley." The Portland man happily paid his own $8 tab, then took it upon himself to help the wary visitor understand what it means for a cherry to come from the Hood River Valley. The world's best sweet cherries are grown in Oregon and Washington, he explained. And a lot of people think the Northwest's best cherries come from the Hood River Valley.

He told her about its unique geography, about an hour east of Portland, hemmed by Mount Hood and the Columbia River Gorge. He mentioned the scores of varieties grown there -- the Bings, the Lamberts, the Rainiers and Vans and Royal Annes. He explained the unrivaled difficulty and expense of growing Hood River Valley cherries, the most labor-intensive fruit crop in Oregon. Then he opened the clear plastic carton holding his newly purchased treasure -- fabulously plump and perfectly ripe -- and offered her a sample. She took one of the deep burgundy Bings by its springy stem, cleaned it a little and popped it into her mouth. "Oh, my gosh," she gasped, even before extracting the pit. A moment later she was back at the booth, buying two cartons to take home to California. "The world's best cherries," she said, smiling broadly, "and not even a sales tax."

Doing the math in our schools

Here's a quote from the second editorial:
"Oregon fruits, vegetables and other products could provide a bonanza of health benefits for overweight Oregon schoolchildren, and new vitality, as well, for some Oregon farms and ranches. There are dozens of Oregon products kids could consume every day, including Oregon beef. So why don't more of our schools feature these foods regularly?"

Gosh, I wonder why Oregon schools don't serve locally grown produce? Uh...because its $8 a pound even when the farmer is employing illegal aliens?

I suppose that is part of the appeal of Portland to some folks: the snob value of being able to say you can eat $ per pound cherries...I'd be willing to bet that the Portland local buying cherries doesn't want his income taxes raised enough to buy those Hood River cherries for Oregon's schoolchildren...

Tuesday, June 26, 2007

Unforeseen consequence of Prop. 13 tax law in CA

A commenter at Calculated Risk made a comment that "retirees and empty-nest boomers won't sell the family homes nearby, since they'd lose the Prop 13 tax rates, and so younger families have to move further out"...that statement made the proverbial lightbulb go on over my head. That is a factor in limiting housing supply in CA that I hadn't thought of. Theoretically, as home prices rose in CA, it would have made economic sense to bulldoze a couple of adjoining SFR's and replace with a number of townhomes. But I can see why the SFR owners wouldn't sell to a developer, because the homeowners would have to buy a new house with the much higher property tax rate.

I was in Anaheim recently taking the family to Disneyland and was quite surprised at how much of the city that I saw was still SFR's on quarter-acre lots. The whole property tax issue seems like a reasonable theory to explain this. Of course, I also saw a lot that still was a grove of orange trees that was within a couple of miles of Disneyland. That was a mind-boggler...

Depopulation of marginal post-Communist states in Europe

A few years ago I moved into a brand new subdivision in Washington state in the US. About 50% of the homes in our neighborhood were occupied by families that had immigrated to the US from Eastern Europe. My direct neighbor on one side was from Ukraine, as were most of the other families. One family was from Romania. Needless to say, none of them had any intention of returning to their home country. I was given to understand that Ukrainians liked Washington state as opposed to other places in the USA because its climate and forested landscape were reminiscent of the old country.

I have not been able to locate the source of the story, but I recall recently reading a piece in a US monthly (I thought it was Atlantic Monthly, but couldn't find it on that website) that described how the countryside of Russia outside of Moscow, St. Petersburg, and a few other cities is rapidly emptying of people. A comment at posits that "We might be seeing the formation of permanently depressed zones in Europe, places where the labour force available just isn't productive enough for catch-up to take place, creating a self-perpetuating situation." As support for this hypothesis , "Into the Woods" is an MSNBC report describing depopulation trends throughout Europe. One point from that story that backs up the idea of emergence of permanently depressed zones is "One third of Europe's farmland is marginal, from the cold northern plains to the parched Mediterranean hills. Most of these farmers subsist on EU subsidies, since it's cheaper to import food from abroad." The marginal farmlands are likely to be abandoned, precisely because they are relatively unproductive. In these areas, it is a question of how long it will take for the elderly farmers to die off, as it is unlikely that many young people wish to stick around, even to receive a farm subsidy. Perhaps a partial solution to agricultural trade issues in Europe might be to have farm subsidies for properties in marginal farmland expire permanently on the death of the current landowner.

I think that another valid point made at is that in some parts of the the CIS the young people simply might not be able to leave that swiftly since they have to take care of the elderly population. I wonder, though, if entire families including the elderly might not make the trek westward. I would think even for an aged person with attachments to the homeland, a flat in an old East German apartment block would be preferable to say a rapidly disappearing village in the Carpathians. My Ukrainian neighbor brought his aged mother to the US.

Tne MSNBC article makes another point that supports the conjecture that major cities in Eastern Europe could avoid collapse; its author says "attractive areas within striking distance of prosperous cities are seeing robust revivals, driven by urban flight and a rising influx of childless retirees." Tallinn, Riga, Vilnius, and perhaps Bratislava might fit into this category.

CDO and CMO problems: a simple explanation

CDO's and CMO's are in essence nothing more than loans; there's complicated paperwork involved, but at the core there is what I'll call the primary lender and a borrower. Well, the problem these days is that the primary lenders borrowed money to make loans to the end borrowers. The lenders had to put some of their own money in, but most of the cash came from funds borrowed from what I'll call secondary lenders. So far, not all that different from how your neighborhood bank operates. However, these primary loans don't just sit on the primary lenders' books; they trade in similar fashion to stocks and regular bonds. So the value of the loan can go up and down.

Well, the value of a lot of these loans have gone down(because end borrowers are defaulting). The money that the primary lenders borrowed from the secondary lenders to make the primary loans is now a greater amount than the value of the primary loans, whereas when the primary loan was first made it was the same dollar value as the secondary loan.

If the primary loan defaults, then the primary lender doesn't have enough cash to pay back the secondary lender. Then the primary lender has two choices: cough up their own cash, or default themselves. If the primary lender wants to stay in business, they've got to find another secondary lender, or get the first secondary lender to essentially refinance them. If the first secondary lender doesn't think the primary lender is willing or able to come up with the cash and that the primary loans have actually defaulted, they take the collateral (which is the primary loans that were made) away from the primary lender and absorb a loss of the difference between what they loaned to the primary lender and what the end borrower can actually pay back. The primary lender, of course, loses all of its cash that it put into the primary loans.

So in the end, all of the hoo-ha in the financial press is nothing more than a debate about who is going to end up eating the cash losses.

There are deeper issues regarding whether the borrowers and lenders at every level were honest about their financial condition and creditworthiness, and also about self-dealing and graft in the whole process; but those are entirely different matters.

Chicago Fed National Activity Index

Thanks to William Trent for introducing me to this particular economic indicator:

The indicator is now in negative territory, but just an eyeballing of the entire chart seems to indicate that the indicator has spent more time below zero than above during the time frame being charted. That doesn't seem right, given that the expansion after 1991 didn't end until the dot-com bust, a period of about 10 years. A deeper exploration of the underlying data would seem worthwhile.

Monday, June 25, 2007

Expectations for capital spending in the US

naked capitalism says:
"One of the hopes, or more accurately, fantasies of a few months ago was that increased business investment would offset slowing consumer spending. This forecast defied basic logic. Why would businesses take on more risk if consumer buying, the big driver of the economy, was sluggish? One would expect lower rather than higher capex.

And that's precisely what we are seeing. A Financial Times story says that business analysts forecast a significant decline in capital spending in the US and Europe. Some experts argue that the projections are too dire and that companies are lowballing their requirements. Others say that the figures are misleading, since large corporations are increasingly investing in operations in emerging markets."

Given that consumer spending is slowing, then a slowing of business investment would seem to radically increase the chances of recession in the US sometime soon.

Japan's Low Fertility

Over at Japan Economy Watch, Edward Hugh has posted an excellent essay on the above subject, with links to supporting data and related essays available on the web. In particular, take note of the list of similarities in the situations of the "three most "elderly" societies in terms of median age - Japan, Germany and Italy"...

I think the similarities between Germany, Japan, and Italy on Edward's list are all accurate. It is rather coincidental that the three most elderly societies happen to be the countries that formed the Axis during WWII; but I do think it is merely coincidence. In the cases of Japan and Italy, a major factor in the rapid decrease in fertility has been the rejection/decline of family
norms that had supported fertility. In Italy, the Roman Catholic church's positions on birth control, abortion and divorce had served to facilitate high fertility, but with certain general changes by the Vatican in the 1960's I think served to motivate Italians to feel free to reject Catholic doctrines beyond those that were changed, and therefore they rapidly adopted particularly modern birth control methods. In Japan, somewhat more recently, young women have been rejecting the traditional family system where women married, moved into a house with their husband and inlaws, and did not expect to work. Perhaps that is a blinding flash of the obvious, but I think that the rapidity of the change in attitudes among young women in Japan towards avoiding the burdens of traditional marriage and therefore having children is remarkable. I think it boils down to the idea that the traditional family in Japan has been much more burdensome on the wife than in other countries; particularly the USA and Germany, and so given the opportunity Japanese women have been rejecting the traditions wholesale because they don't want to get trapped into a traditional system.

In Germany, of course, Catholicism has not had as strong of an influence as in Italy. It has been more of a case of West Germany reaching US levels of prosperity more rapidly than Japan or Italy, and therefore young people bought into postponing childbirth for economic reasons.

I think a danger to these three countries as great as that of low fertility is their resistance to in-migration of individuals of differing ethnic backgrounds due to their national identities and political systems being based on ethnicity rather than on a set of principles (as opposed to the USA, UK and France which naturalize immigrants of any race). I suppose this attitude might be somewhat less prevalent in Italy due to its central Mediterranean location and historical political turbulence. In the case of Japan, rapid shrinkage of the population would likely make that country even more dependent on the USA for its military defense, the consequences of which are hard to foresee.

Review of Hong Kong's history since the handover to China

David Cuthbertson at the Adam Smith Institute Blog has posted a brief editorial on this subject with the thesis that
"It's now almost 10 years since Hong Kong was 'handed back' to the Chinese. At the time, sckeptics were predicting that the uniquely Anglo-Asian success story would come crashing down and that the city would quickly loose its place as an international economic powerhouse. Of course, the skeptics have been proved wrong. In some cases, spectacularly wrong."
I had the opportunity to visit Hong Kong in late June of 1989; shortly after the Tiananmen Square problems. I found the city to be a wonderful mix of English and Chinese influences. The engineering and architectural expertise on display in the amazing office towers impressed me. I imagine that there will be a flood of press coverage of the transition and subsequent change or lack there of in Hong Kong this summer to mark the anniversary.

I found a story in the International Herald Tribune based on comments made by former British PM Margaret Thatcher, which quoted her as follows:
"Margaret Thatcher has said her fears that Hong Kong's economy could not prosper under Chinese Communism have proved to be largely groundless.

She said she has not been disappointed by Hong Kong's development since Britain handed over the former colony to China a decade ago.

"I think we must be realistic," Thatcher said in a rare interview broadcast Tuesday by British Broadcasting Corp. radio.

"Let's think over a moment how great our private worries were about what would happen in Hong Kong after the handover. Now those worries have largely proved groundless.""

A review of everything that has transpired in Hong Kong since 1997 seems it would be well worth the time of anyone interested in China's future.

Thursday, June 21, 2007

Private equity-excerpts from Wikipedia article

I include here some parts that I think are noteworthy:

-Private equity funds are the pools of capital invested by private equity firms. Although other structures exist, private equity funds are generally organized as either a limited partnership or limited liability company which is controlled by the private equity firm that acts as the general partner. The limited partnership is often called the "Fund", and the general partners are sometimes designated as the "Management Company" (although at times, that is a separate company affiliated with the general partner). The fund obtains capital commitments from certain qualified investors such as pension funds, financial institutions and wealthy individuals to invest a specified amount. These investors become passive limited partners in the fund partnership and at such time as the general partner identifies an appropriate investment opportunity, it is entitled to "call" the required equity capital at which time each limited partner funds a pro rata portion of its commitment. All investment decisions are made by the General Partner which also manages the fund's investments (commonly referred to as the "portfolio"). Over the life of a fund which often extends up to ten years, the fund will typically make between 15 and 25 separate investments with usually no single investment exceeding 10% of the total commitments.

-General partners are typically compensated with a combination of a management fee (defined as a percentage of the fund's total equity capital), monitoring fees (fees paid to the general partner by portfolio companies for services), as well as transaction fees (fees paid to the general partner in their M&A advisory capacity). In addition, the general partner usually is entitled to "carried interest", effectively a performance fee, based on the profits generated by the fund. Typically, the general partner will receive an annual management fee of 1% to 2% of committed capital and carried interest of 20% of profits above some target rate of return, which is typically 8% to 10% (called "hurdle rate").

-Private equity firms generally receive a return on their investment through one of three ways: an IPO, a sale or merger of the company they control, or a recapitalization. Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund, which pools contributions from smaller investors to create a capital pool.

-Most private equity funds are offered only to institutional investors and individuals of substantial net worth. This is often required by the law as well, since private equity funds are generally less regulated than ordinary mutual funds. For example in the US, most funds require potential investors to qualify as accredited investors, which requires $1 million of net worth, $200,000 of individual income, or $300,000 of joint income (with spouse) for two documented years and an expectation that such income level will continue.

Please read Arnold Kling's post regarding Michael Moore's new film "Sicko

where Dr. Kling discusses the concept of "Hail-Mary" medicine; the idea being that when someone is about to die, doctors suggest non-standard therapy in hopes that such therapy might save the patient. Kling also discusses how
"beliefs shape the health care system. My guess is that other countries believe that when someone has passed the point where reasonable, proven treatments are available, it is ok to stop throwing lots of resources at the patient and instead use those resources where they are more helpful. In the United States, this runs up against an intense belief in saving lives, an enormous faith in doctors, and a strong desire never to give up.

In this country, we have not really come to terms with the ethical issues concerning hail-Mary health care. Some people even view desperate, last-ditch measures as an entitlement. As long as we believe that, the component of our health care spending that goes for futile care will not go down."

Kling describes Michael Moore in these terms:
"Speaking at the premier, Moore was mild-mannered, witty, and self-effacing. He made a plea with the audience to reach out to conservatives and Republicans, and when this received a tepid response from his partisans, he expressed gentle disappointment."

Blackstone IPO a smashing success

Reuters reports today that
"Private equity firm Blackstone Group's initial public offering was about seven times subscribed, boosted by demand from Asia, the Middle East and Europe, the Financial Times reported on Thursday...The flotation on the New York Stock Exchange, worth up to $4.75 billion and underwritten by Morgan Stanley and Citigroup, is set to be priced later on Thursday. Blackstone earlier said it expects to sell 133.3 million common units at $29 to $31 each. The banks will be permitted to sell an additional 20 million shares to meet excess demand"...
I think that purchasing shares of Blackstone would be very is one reason why:

Interest Rate Roundup posted back in November of last year that
"I wondered out loud the other day about whether Sam Zell's deal to sell Equity Office Properties to private equity buyer Blackstone Group was the mother of all bells signaling a top for REIT shares. Lo and behold, the iShares Dow Jones U.S. Real Estate Index Fund (IYR) closed down 2.59% today. That's the worst one-day percentage decline going all the way back to August 2005, and twice the decline in the Dow. Maybe investors are slowly regaining their sanity ... or maybe it's just a blip. You never know. What I BELIEVE, however, is that ...

* Real Estate Investment Trusts are wildly overvalued by a wide variety of measures (including price-to-earnings and price-to-Funds From Operations (FFO) ratios)

* A weaker economy will crimp rent growth in the office and retail markets. And in the apartment market, you have a very large (and growing) supply of "shadow rentals" from stuck house flippers who can't sell and are trying to rent instead. That will likely throttle down the rent growth we've seen at key apartment REITs.

* Lastly, REIT yields are far below what you can earn on risk-free Treasuries, much less other fixed income investments. The IYR has an indicated yield of a whopping 3.38%, for instance, versus 5.13% on a 6-month T-bill"...
and then Interest Rate Roundup posted today that
"I have gone on record in numerous venues (here's a post from May 2 ... and here's a longer story from around that same time) claiming that commercial REITs could be in trouble. I pointed out that valuations were extremely stretched, that tighter credit conditions and rising interest rates could cause them problems, and that the apartment sector in particular faced significant headwinds due to the supply overhang of former-flips-turned-rentals.
Today, the Dow Jones U.S. Real Estate Index Fund is breaking down from critical support, continuing a sell-off that has stretched back several weeks. Yep -- looks like Sam Zell sold out at the top to the geniuses at the Blackstone Group, as I mused back in November"...
In any case what you would be buying is essentially a chance get some of the lucrative fees that the firm's management charge to investors for managing "private equity" investments. But by going public, I would think that would put some limitations on what a private equity firm could do relative to non-public private equity firms due to SEC/Sarbanes-Oxley reporting requirements. So it looks to me like Blackstone's people are thinking that their returns are going to shrink so they get some extra cash now by selling shares to offset what they expect their shrinkage in future fees will be.

The high demand for the shares indicates to me that they are literally capitalizing on their brand name...

Wednesday, June 20, 2007

Ranking of top 100 health care blogs

The top 10:

1. Random Acts of Reality 6 19 24 8 57
2. 6 14 26 8 54
3. Bad Science 6 16 25 7 54
4. NHS Blog Doctor 6 13 24 8 51
5. Kevin M.D. Medical Blog 4 16 19 9 48
6. Respectful Insolence 7 7 25 8 47
7. Healthbolt 5 4 27 9 45
8. The Health Care Blog 6 12 18 9 45
9. 6 13 18 8 45
10. The Examining Room of Dr. Charles 6 10 18 8 42

Unwinding of mortgage backed securities positions

Bloomberg is reporting in "Bear Stearns's Attempt to Save Hedge Funds May Falter" this morning that "creditor Merrill Lynch & Co. decided to seize and sell $800 million of bonds held as collateral for loans to the funds"...referring to a couple of funds in trouble due to bad mortage loans...the bigger issue is as Greg Newton describes it here that "what happens when the whole world reprices its CDO and RMBS (residential mortgage-backed securities) [on the] basis [of] forced liquidation"...other commenters raise the same issue, specifically in the Bloomberg article of this morning as follows:
"The real fear has to do with just how many other funds and warehouses could be in trouble,'' said Jeremy Shor, who oversees about $3 billion in asset-backed bonds as a portfolio manager at Brown Brothers Harriman & Co. in New York", and " Asset sales could force the banks to reduce the value of their own investments and loans they made to other funds, said Josh Rosner, managing director at New York-based investment- research firm Graham Fisher & Co."...
The Bloomberg piece also states that
"As defaults rise, bondholders stand to lose as much as $75 billion subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts"...
Also referenced is the bailout "of Long-Term Capital Management LP, which lost $4.6 billion, in 1998, he said. At the time, lenders met and agreed to slowly liquidate the fund's assets to limit the impact of its collapse"...a quick unwinding at any time would likely result in greater repricing to the downside than a more measured, gradual recognition that the mortgage-backed securities and associated derivatives are worth far less than what the owners have them valued on their books currently. Recognizing the $100 billion in losses mentioned above in a short time period would likely cause a lot of fear-driven market activity that might be avoided by the more measured workout.

Tuesday, June 19, 2007

Not all property prices in US falling at this time

According to RECON, a newsletter put out by the Real Estate Center at Texas A&M University,
"land prices are reaching historic highs north of the Dallas North Tollway in Denton County. The area is in the direct path of growth, with easier access coming with the extension of the tollway, which is set to grow to six lanes from Hwy. 121 to US 380 around September. Parcels, largely agricultural, in far northern areas, are selling for $75,000 to even $99,000 an acre — almost triple the prices from a decade ago. Pricing on commercial land is also spiking, said Andrew Beckman of Dallas-based Glacier Commercial Realty LP. Selling for $1 to $1.50 per square foot just a few years ago, tracts now average $5 per square foot. In 1963, long-time broker Morris Orr sold land in Frisco for $275 per acre. In the early 1990s, it sold for $35,000 an acre. If it were available today, Orr says it would list for $75,000 or more. Today, all types of buyers are flocking to the market, including institutional and public buyers. About 20 percent of buyers in Denton and Collin counties are buying through a 1031 exchange tax format. The July 2007 issue of Tierra Grande will feature an article detailing rising Texas land prices"...

doubtless the buyers are looking at 5 to 30 year investment horizons...

Unnecessary medical procedures

The Street Light points out a
"Pennsylvania government survey of the state’s 60 hospitals that perform heart bypass surgery, the best-paid hospital received nearly $100,000, on average, for the operation while the least-paid got less than $20,000. At both, patients had comparable lengths of stay and death rates"...

With respect to heart surgery, I noticed a roundtable discussion in Businessweek about cardiac surgery that opens the discussion as follows:
Each year, Americans get about 400,000 bypass operations and 1 million angioplasties, in which doctors open up narrowed arteries and typically insert metal tubes to hold the vessels open. That works out to a rate far higher than that of any other country.

Are we performing too many of these heart operations? Some doctors say yes, pointing to data that show only a small minority of patients get a longer life or suffer fewer heart attacks as a result of the operations. Other physicians say that the benefits, mainly in reducing angina and disability, outweigh the risks.

There are many good quotes from the researchers participating. The participants in the discussion included:

-Nortin Hadler, M.D., is a professor of medicine at the University of North Carolina at Chapel Hill

-Timothy J. Gardner, M.D, is co-editor of Operative Cardiac Surgery. Formerly a professor of surgery at the University of Pennsylvania School of Medicine, he is now a cardiothoracic surgeon at the Christiana Care Health System in Delaware.

-Robert A. Guyton, M.D., a professor of surgery and chief of the division of cardiothoracic surgery at Emory University School of Medicine,

-L. David Hillis, M.D., is professor and vice-chairman, department of internal medicine/division of cardiology at the University of Texas Southwestern Medical School

Dr. Hadler says "Americans invented the concept of a back injury in the 1930s. Before that, if your back was hurting, you would not come in to the doctor -- instead you'd consider it like a headache [which would eventually go away or you would live with it]. With workers compensation, it became an injury, and doctors did surgery. Other countries never leapt to that. Similarly, for carpal tunnel syndrome. Only the American wrist gets sliced. Ours is the only country willing to do the surgery and pay for it."

The moderator of the discussion, responding to Dr. Hadler, states that "you show in your book that, except in a small percentage of cases, patients in clinical trials got no benefit in survival from coronary bypass surgery or angioplasty"...that is quite provocative...

Dr. Gardner, referring to coronary bypass surgery, says "The issue when you look at coronary bypass surgery is whether it's justified to put yourself though that kind of procedure to improve quality of life and longevity. It's one of the questions that have been there from the beginning of the bypass era...Certainly it isn't the majority of patients who get a clear survival benefit. Here's an example of the dilemma for a heart surgeon. We see an 85-year-old woman in assisted living. She has chest pain and shortness of breath with minimal exertion and is unable to function comfortably. Is it reasonable to offer her surgery? We say to her, You're at a stage where your heart is deteriorating. You will be increasingly limited, and no medical therapy can restore you to your old level of activity. But we have an operation. It has a 10% risk of death and other risks, but it can get you back on your feet and allow you to live out the next several years with more functional capacity. A lot of people want that"...

Q: Does coronary bypass surgery extend life?
Guyton: The average prolongation comes to six to seven months. In patients where the degree of impairment of [blood flow] to the heart is serious, we can prove statistically that coronary bypass will prolong life...

Q: But the clinical trials showed only a small percentage of patients survived longer than those who didn't get the surgery.
Guyton: The problem with many clinical trials're not going to get a statistically significant difference unless you're looking at 100,000 patients. Some would leap to the conclusion [that there's no survival benefit in most patients] when the real answer is that the trials are just underpowered.

Beyond that, even if there isn't an expectation of prolonging life, we often operate for relief of symptoms.

Q: The clinical trial data suggest that coronary bypass surgery and angioplasty don't enable most people to live longer. Are those data right?
Hillis: The overwhelming number of heart procedures that are done these days exert no influence whatsoever on mortality. The patient's survival would be similar with only medical therapy.

The conclusions that I draw from the discussion are that in many cases, a person won't seek out a medical professional unless someone else is perceived to be paying the bill; that most heart procedures do not prolong life, and that operations are being performed on individuals whose life expectancy is effectively zero. Cost-benefit analysis of medical care is long overdue in the US system...

Friday, June 15, 2007

China and US debt

According to Bloomberg,
"Chinese investors sold more U.S. Treasury securities in April than any time in at least seven years...China sold a net $5.8 billion of Treasuries, the first drop in holdings since October 2005...the nation held $414 billion of the $4.4 trillion of marketable Treasuries in April, according to today's report."

So China holds a little under 10% of marketable Treasuries...I don't see that as being a worrisome fact. As the Bloomberg report notes, "Chinese officials have said they have no intention of doing anything that would devalue their holdings." In fact, as an owner of so much of the float, the Chinese government would have a difficult time getting rid of a major portion of their holdings without pushing prices down significantly. So really you could look at China as an ally of the US Treasury.

The political implications of this are important to consider; in spite of occasional saber-rattling, China and the US need each other to succeed. China is a nation with no history of democratic rule, and until recently primarily negative experience with Western capitalism. The twentieth century was a period of extreme political and economic instability for China, to say the least. So Chinese leaders and the country's people as a group are learning as they go along in managing a capitalist economy. It seems that ideally China would make a political transition like that of South Korea, which has shifted from dictatorship to an electoral democracy.

From the US perspective, China is at least moving toward a more open economic system; unlike Russia, which seems to be reverting to a kleptocratic oligarchy. Given that the US has developed deep economic ties to China, the US has a strong interest in improving its political relations with China.

Solution to pollution havens

Matthew E. Kahn, who posts at Environmental and Urban Economics, discussed "Pollution Havens, Asymmetric Information and Product Quality", and mentioned that "plenty of papers have been written about the rise of poor nations as pollution havens as international trade grows"...I think that a policy that the United States could adopt with regard to imports of manufactured goods that would be reasonable would be to require that imported goods be manufactured at facilities adhering to the same environmental standards as those that are law in the US.

For example, steel imported from China and Russia would have to be produced at plants that meet US emission standards. Short term, this would please US workers, as it would take some time for many foreign operations to get their facilities improved. Long term, it would benefit everyone as citizens of the exporting countries would be exposed to less pollution.

Thursday, June 14, 2007

Seattle megahome scaremongering

The Seattle Times story starts out:
"In an area with little land to build new houses, residents are fighting the megahome — McMansions that balloon to the edges of their properties, three-story giants that block views from quaint craftsman bungalows....Seattle is just beginning to consider reducing the size allowed for single-family houses that replace demolished homes. About 330 single-family homes were torn down from 2003 to 2005, and most were replaced with larger homes, according to the city's Department of Planning and Development."

Yes, that is a huge wave, 330 homes in two years in a city of more than a half a million residents. What a joke...I guarantee that there are quite a few homes in Seattle that are just one story wood-siding tract homes. If someone builds a bigger house in your neighborhood, get over it...

Rising mortgage rates mean home prices MUST go down

According to the AP,
"Rates on 30-year mortgages rose for a fifth straight week, hitting the highest level in 11 months as prospects dimmed further for possible rate cuts from the Federal Reserve.

Mortgage giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.74 percent this week. That was up from 6.53 percent last week and marked the biggest one-week rise in 30-year rates in more than three years. The five consecutive increases have pushed 30-year mortgages to their highest level since they were at 6.80 percent for the week ending July 20, 2006.

"Mortgage rates moved sharply upward this week," said Frank Nothaft, Freddie Mac's chief economist. "These moves parallel rising yields on Treasury securities as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut."

The monthly payment required for a mortgage depends on the purchase price and the mortgage rate...if rates go up, the portion of the monthly payment going to interest increases. Whatever a buyer's maximum that they can devote to the mortgage payment, if the interest portion increases, the purchase price portion must decrease. Decreasing rates drove home prices up the last 7 years; increasing rates will force home prices down regardless of supply factors.

When I bought a home 6 years ago, I was happy to get a 7.00% fixed and thought rates would never go lower. Silly me...

Wednesday, June 13, 2007

Recent migration patterns in Europe

In a discussion thread attached to a post on "Fertility News" at Demography Matters, Edward Hugh points out some recent data on this subject. First,

"this week the figures for inward migration to Spain for 2006 were released, and surprisingly (perhaps, for some), there were only 13,000 migrants from Morocco, as compared with over 100,000 from Romania. Thus - and as forecast in this post - migration out of Morocco is now more or less done as fertility in Morocco steadily falls towards replacement level and the country starts to develop. Same case Turkey, despite all the preoccupations inside the EU about what might happen when Turkey becomes a member"

Since Romania is a member of the EU, it is not suprising that there has been significant migration relative to that from countries outside the EU, as migration within the EU is significantly easier than the alternative case. Also, the fact that developing countries' fertility rates are converging towards those of the developed world is important to remember and has a significant effect on the pool of potential migrants.

Edward also notes that
"Looking around the low fertility countries I am struck by some similarities which I see between four of them: Germany, Japan, Italy and Poland. All four of these have very low fertility, and all four of them are characterised by having had very conservative attitudes to family values, values which are then increasingly out of harmony with the aspirations of the newer generations of young women.Three of these countries are now suffering from protracted economic problems which only seem to contribute to sustaining the low fertility, while the fourth - Poland - is currently growing rapidly, but given the massive outflow of young people which has recently taken place, would seem - as I have argued in recent posts - to face imminent capacity problems which may well put a break on growth. As and when this takes place it will indeed be interesting to see what happens next."
The shift in fertility in countries that Edward mentions above took place without any kind of overt governmental "natalist" policy such as that implemented by China.

US oil and gas update

It's time to take a look at where these markets are, thanks to the US government's analysis you can find at the link. I include here three charts that the EIA updates weekly:
The first thing that jumps out to me is that the crude oil stocks are now above the high end of the historical range for this time of year...that is a conundrum to me. Spot prices have been flat for a while, and now gasoline prices are finally going down. The EIA's analysis suggests we will see volatility in gas prices through the summer, noting that " in Ohio...retail regular gasoline prices have dropped by nearly 34 cents in just two weeks!" I'd like to see that in my state...

The EIA has noted that imports of gasoline as a share of all gas sold in the US have increased; it would seem to me that particularly the Gulf countries might have incentive to build gasoline capacity and increase exporting gas to the US at these prices. I doubt that the regulatory environment with respect to building refineries is as restrictive as of that in the US. Perhaps other countries could profit from gasoline production as well; one country that came to mind was Japan, which obviously has technical expertise and shipping expertise. They could import crude, refine it into gasoline and sell it in the US...

Anecdotal evidence of mortgage credit tightening overshoot

From Bloomberg:

“Josh Tullis, who in his eight years as a senior loan officer rarely felt compelled to reject a first-time home buyer’s mortgage application, is sending people away empty- handed in 2007.” “Tullis’s latest clients are a married couple that banks ought to love. Between them they make $70,000 a year and they’ve been renting the same apartment for three years with zero late payments, he said.”

“Lenders won’t approve them because they don’t have enough money in the bank, said Tullis, Virginia sales director at A. Anderson Scott Mortgage Group in Falls Church. With mortgage companies cracking down due to rising subprime defaults, Tullis needs them to sock away two months of payments for the $500,000 townhouse in Fairfax.”

“‘Six months ago, these folks might have qualified, a year ago, definitely,’ Tullis said. ‘It’s a lot, lot harder than it used to be for first-time home buyers.’”

The story doesn't say if the couple had a down payment ready, if so then asking for an additional two months of payments essentially in escrow seems excessive to me...

One hedge fund takes it in the shorts

According to Business Week,

“Investors in a 10-month-old Bear Stearns (BSC) hedge fund are learning the hard way the danger of investing in risky bonds with borrowed money. The investment firm’s High-Grade Structured Credit Strategies Enhanced Leverage Fund, as of Apr. 30, was down a whopping 23% for the year.”

“The situation is so bleak that Bear Stearns’ asset management group is suspending redemptions at the onetime $642 million fund—meaning investors have no choice but to sit on their losses. And that’s got some hopping mad.”

“‘At the end of the day, I’d like someone to be honest with me about what’s going on,’ says one investor in the hedge fund, which bet heavily on bonds backed by subprime mortgages.”

“An investor in Europe, who didn’t want to be identified, says he’s been trying to get his money out of the hedge fund since February.”

“In a June 7 letter to investors, Bear Stearns says it’s suspending redemptions because the ‘investment manager believes the company will not have sufficient liquid assets to pay investors.’”

Hey, that's what happens sometimes to risky investments...

Credit default swaps conference

I got an email today advertising an upcoming 2nd Annual Credit Default Swaps and Loan-Only CDS Forum with the tagline "Hear from the experts responsible for driving the growth of this industry"...that ought to be a rather tumultuous gathering considering the mortage industry issues and events that have transpired recently...I can't go but it would by interesting to hear what the experts are saying now about the topics to be discussed:

Pricing and Valuation:

Calculate the probability of default, determine the present value of the expected future payoff /payments and address the issue of counterparty risk

LCDS Trading Strategies:
Discuss single name LCDS trades, Legacy LCDS trades, Total Return Swaps and more!

Overcome issues with market liquidity, combat the problem of too many buyers and examine whether there are enough names in the ABX


Evaluate the Risk, Settlement, Documentation and Operational Aspects

McKinsey on health care payment reform

A recent edition of the McKinsey Quarterly discusses payment reform, and the abstract of that discussion is as follows:

  • The hugely inefficient US health care payment system is ripe for transformation.
  • The inefficiency is concentrated in the $250 billion that consumers pay doctors and hospitals and the $1.3 trillion that insurers send to these providers. The heart of the problem is a mix of high transaction-processing costs and the lack of an efficient way to make consumer-to-provider payments.
  • Over the next five years, rapid innovation may lead to a restructuring of the value chain of health care payments and to a shift in the sector’s balance of power. Financial institutions have an opportunity to take on a more prominent role, while payers risk losing influence to new entrants. Providers stand to benefit as fewer dollars are wasted on transaction-processing inefficiencies.

The system has certainly been ripe for transformation for a while...the basis for high transaction processing costs lies at least partly in conflicting incentives of payers and providers that exist...for example, payers may stall payment as long as possible...

Remove employers from health care equation

Clive Crook, of National Journal, writes,

Much more needs to be done to push employers out of the health insurance market. Most of the reforms now being touted, by Democrats and Republicans alike, aim to do the opposite.

...You could give everybody a voucher (which could be used as partial payment for a more expensive policy) and recover the cost from general taxation. Or you could give full vouchers only to people on low incomes, tapering the value to zero as incomes rose, again asking taxpayers to pick up the check -- and in this case also mandating that everybody buy at least the basic plan. You could satisfy the "ignore pre-existing conditions" criterion either through regulation or by adjusting the value of vouchers according to health risk. The cost would depend on such details, and many more besides -- but you can be sure it would not be small.

Eliminating the tax deductibility of business expense on health care premiums would be a good start...

Tuesday, June 12, 2007

Negative consequence of employer-funded health care

The link is to an article in the NY Times titled "Health costs spur monitoring of workers' health"...the title says it all. Employers already know an enormous amount about their workers; giving employers health information adds risk of accidental disclosure of this confidential information and adds the temptation to use the health data for personnel decisions...

Hedge funds as a group and the S&P 500 correlate closely

Per a number of studies referenced by Christopher Holt, who mentions that " Bridgewater CEO Ray Dalio was in the news again last week with this New York Times story on his concerns over the “high correlation” between hedge funds and the S&P 500 during the past few years"...

It would seem that the S & P 500 is a pretty good index, after all. If after all the scrounging for opportunities done by all of the hedge funds, they come up with returns similar to the S & P, that says to me that the index is a pretty good proxy for the market as a whole.

Civil war in Palestine

The AP is reporting that "A rocket-propelled grenade hit the home of the Hamas prime minister Tuesday...There were no injuries in the attack on Prime Minister Ismail Haniyeh's home — the second in two days. But it underscored the increasingly ruthless nature of the fighting, which has killed 18 people in recent days. Exasperated Egyptian mediators said the bitter rivals turned down an appeal to meet for truce talks...Palestinian President Mahmoud Abbas accused his Hamas rivals of staging a coup"...the two parties aren't interested in a truce and mediators give up, and there is talk of a coup; that sounds like a civil war to me.

The AP report elaborates that "Heavy gunbattles erupted in what security officials described as a Hamas assault on positions of the Fatah-allied security forces. Hamas-affiliated radio stations said the group took over security installations in northern and central Gaza, as well as the southern Gaza town of Khan Younis"...

Value of a name

According to the Wall Street Journal,
"Golf icon Jack Nicklaus is selling a substantial minority stake in his company to New York real-estate mogul Howard Milstein to expand the Nicklaus empire around the world, extending its reach in golf course-designs, clothing, equipment and real-estate… The Nicklaus name on any course significantly increases its worth to developers, because it allows them to sell the accompanying real estate or resort properties at a higher price. Under the traditional business model, Mr. Nicklaus got only the design fee and in some cases also a small cut of the developments' profits."

That is pretty remarkable...that people are willing to pay extra to say that they live next to a Nicklaus course means something...I'm not sure what...

US consumer weakness showing up in bank data

The Federal Deposit Insurance Corporation (FDIC) reported last week that charge-offs in nearly all loan categories at U.S. banks in the first quarter of 2007, including a 29.2 percent increase in credit card charge-offs...the FDIC produces a report called the "Quarterly Banking Profile", and in the most recent one the headlines are all bad:

Industry Reports Year-Over-Year Earnings Decline
 Rising Loan Loss Provisions Reduce Profits at Larger Institutions
 Net Interest Margins Decline at Small Institutions, Rise at Large Banks
 Loan Growth Slows for Fourth Consecutive Quarter
 Mortgage Assets Decline for Second Quarter in a Row

Monday, June 11, 2007

Some things wrong with the US healthcare system

After perusing the June issue of the Healthcare Financial Management Association magazine, I came away with the sense that progress in improving how health care is paid for is going slowly. A transcript of a roundtable on shifting payment systems to electronic systems indicated that hospitals are having a hard time getting insurance companies to set up electronic systems and also are having a hard time getting payers to agree on a consistent set of transactions that would ease a shift to electronic payment. This is in spite of the fact that the HFMA estimates that $35 billion could be saved by shifting to electronic payment.

Also in this same issue I learned that doctors regularly fail to write down basic things on medical records such as reasons for a particular therapy, thereby delaying payment for treatments. That is a sad fact.

Loosened credit standards now = failure later

Credit magazine's June email alert pointed out that a "study of more than 7,000 syndicated loans over the past 10 years from Fitch Ratings found a sudden drop in covenant protection in 2007. Just 52% of loans in the first quarter of 2007 had any guarantees at all in place – down from 68% in 2006 and 80% in 2004"...the newsletter author posits that "with a small handful of private equity firms now powering so much investment banking business, banks are being coerced into providing covenant-lite financing for them...banks are increasingly selling on these loans: they’re not the ones holding the risk any more"...the private equity people and the banks are mainly interested in the deal fees at this point, it seems...that they are able to sell this kind of debt shows how needy for yield bond investors are these days...

Friday, June 08, 2007

Electricity prices in US pretty stable

Here is a table from the US EIA on electricity prices:

Table 7.4. Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, 1994 through 2005
(Cents per kilowatthour)
All Sectors
Total Electric Industry

Over the 11 year period the retail price to residential customers increased 12.7% or about 1.1% per year; hardly a radical change or a huge burden on consumers.

Another table from the same link, this time containing revenue of US electricity producers during the same time frame:

Table 7.3. Revenue from Retail Sales of Electricity to Ultimate Customers by Sector, by Provider, 1994 through 2005
(Million Dollars)
All Sectors
Total Electric Industry

So prices remained stable but usage went way up. Revenue increased 52% over the 11 years, so the annual rate of increase is 4.7%. So adding capacity was not a problem for the industry. And electricity used in the US is pretty much produced domestically.

I would say that electricity demand at least for consumers is more inelastic than that for gasoline. So one method of reducing US dependence on foreign oil would be to convert cars to electric engines. Food for thought...