Posted by Jay Hancock at 12:34 PM | Permalink | Comments (0)
                    

From the Commerce Department's dispatch on third-quarter economic growth, which came in at a surprisingly high annual rate of 3.9 percent. This is 30 percent better growth than economists expected and shows that housing problems have been less of an overall economic drag than many thought.

-- Car production increased tenfold: "Motor vehicle output contributed 0.33 percentage point to the third-quarter growth in real GDP after contributing 0.03 percentage point to the second-quarter growth."

-- After-inflation consumer spending accelerated even as the mortgage crisis got worse: "Real personal consumption expenditures increased 3.0 percent in the third quarter, compared with
an increase of 1.4 percent in the second." (The report also shows that residential investment plunged by a fifth.)

-- Imports increased even as they got more expensive because of the cheaper dollar: "Real imports of goods and services increased 5.2 percent" compared with 2nd-quarter imports.

-- Not surprising but very good news: "Real exports of goods and services increased 16.2 percent in the third quarter, compared with an increase of 7.5 percent in the second." A 16 percent pop is the best quarter-to-quarter gain since 2003. The cheaper dollar makes U.S.-made goods more affordable for overseas buyers.

Posted by Jay Hancock at 11:52 AM | Permalink | Comments (0)
                    

Stan O'Neal is out as Merrill Lynch's boss after presiding over an epic, $8 billion loss. But don't worry, he'll be fine. From the Associated Press:

NEW YORK (AP)— Merrill Lynch’s departing chief executive, Stan O’Neal, will walk away with $161.5 million in stock, options and retirement benefits, the company said Tuesday.

O’Neal, the second-highest paid Wall Street CEO in 2006, retired from Merrill Lynch & Co. Inc. on Tuesday, almost a week after the investment bank reported its largest-ever quarterly loss. The $2.24 billion loss was precipitated by a $7.9 billion third-quarter writedown, as the company revalued assets backed by shaky mortgages. O’Neal’s ouster was expected after the loss.

O’Neal left with a $131.4 million equity package of stock, options, restricted shares and restricted units. His restricted stock and restricted stock units will continue to vest on their original schedules, the company said.

He also has retirement benefits worth $24.7 million, while his deferred compensation stands at $5.4 million, according to the company. He will be entitled to an office and an executive assistant for up to three years.

Since O’Neal will keep his options and his stock grants, he could do even better if the stock rises under a new CEO, said James F. Reda, a compensation consultant. A $10 jump in the stock under new management could mean $30 million for O’Neal.

There is some precedent for such an ironic windfall. After Michael Eisner was ousted as CEO at The Walt Disney Co. in 2005, he made another $100 million when the company’s stock price improved under his replacement, Reda said.

“It’s a funny dynamic,” Reda said.

But Reda questioned both the size of O’Neal’s package and why Merrill made O’Neal, 56, eligible for retirement at 55. The policy guaranteed O’Neal so much money that “he was basically indifferent,” Reda said.

O’Neal’s parting wealth comes after he spent five years as Merrill’s CEO, earning nearly top dollar. O’Neal’s 2006 pay was approximately $48 million, second on Wall Street only to the $54.3 million earned by Goldman Sachs Group Inc. CEO Lloyd C. Blankfein.

Posted by Jay Hancock at 4:37 PM | Permalink | Comments (1)
                    

I'll be on Ron Smith on WBAL (1090 AM) at 3:30 pm to talk about the special legislative session to raise taxes.

Posted by Jay Hancock at 12:38 PM | Permalink | Comments (1)
                    

Washington is bankrupting future generations. The longer we wait to address the $9 trillion national debt and ongoing annual budget deficits, the more taxes our children and grandchildren will have to pay, says David M. Walker, comptroller general of the United States, head of the General Accountability Office and just about the only public official in Washington these days telling the truth about the country's fiscal situation. We're basically taxing future generations without representation (because they can't vote or haven't been born), which he says is immoral.

Walker was at the University of Maryland, Baltimore County yesterday in Catonsville on the road show he calls the "Fiscal Wake Up Tour" to shake America out of denial about where we are going. He was accompanied by people from different parts of the political spectrum: the deficit-hating Concord Coalition, the moderate Brookings Institution, the right-leaning Heritage Foundation. Walker himself, according to a New York Times profile, was once a conservative Democrat, then a moderate Republican and now is an independent.

This is the 24th state that the Wake Up Tour has called on. Walker has been on 60 Minutes and gotten lots of press. His audience at UMBC yesterday was largely made up of the people who most need to hear the message: young people whose standard of living will be hurt and whose taxes will rise because of the profligacy of the baby-boom generation. Some highlights from the session:

Walker: "If you want low taxes [in the future], then all the more reason that we have to act sooner rather than later." The longer we wait to address the problem either by raising taxes now or cutting benefits for Medicare and Social Security, he says, the higher taxes will have to rise for our children.

Walker: The present value of future unfunded liabilities for Medicare, Social Security and other plans is $53 trillion.

Walker: "You're supposed to leave the country not just the way you found it, but better prepared for the future. The baby boom generation is failing on that."

Walker: President Bush's Medicare drug plan and the way it was sold to Congress and the public was "unconscionable." The true, $8 trillion pricetag "was never calculated, disclosed or debated."

Walker: The $9 trillion national debt is much more important than the budget deficit. Through the miracle of compound interest on the debt, he says, it will eat up more and more of the country's resources.

Walker: Bush's commission to address Social Security was "a total waste of time" because it refused to rule out personal accounts, which was a deal breaker from the start.

Walker: The wars in Iraq and Afghanistan are "going to cost $2 trillion by the time we're done." [They're up to around half a trillion now.]

Walker: The biggest deficit in this country right now is "leadership."

Walker: If private corporations published balance sheets the way the federal government does, their leaders would go to jail.

All four panelsts gave impassioned calls for maturity and leadership from Washington. The country has to start paying for new programs without borrowing more money. There must be spending caps on new programs. Once programs reach a certain size there should be "mandatory reconsideration triggers" to make sure they don't swallow the budget. True cost estimates must be published. The budget process has to start looking forward more than five years or ten years at the most. The federal government needs to make full disclosure of liabilities the way industry and state governments do. We desperately need an independent, blue-ribbon commission to make hard budget choices the way the realignment commission makes tough choices on closing military bases. That would allow the chickenhearted Congress to avoid making the hard choices and merely vote up or down on the plan.

Why doesn't a White House that has injected politics even into the process of choosing federal prosecutors fire Walker tomorrow? It can't. He was appointed in the Clinton administration and has a 15-year term, which means he has great independence. Listen to him. People under the age of 30, especially, should be raising hell.

Posted by Jay Hancock at 10:54 AM | Permalink | Comments (8)
                    

Another reason why Sen. Chuck Grassley, an Iowa Republican, is a good congressman. He's again holding tax-exempt, super-subsidized non-profit organizations to account. Here's an op-ed piece he submitted to Iowa papers recently.

Endowments May Help Rein In Tuition Hikes By U.S. Sen. Chuck Grassley

The College Board’s new annual survey reveals that the escalating costs of higher education continue to outpace inflation and saddle new graduates with crushing debt that can take years to repay.

According to the survey, tuition for in-state, public, four-year colleges rose 6.6 percent over last year. Calculate the average tuition, room/board and other fees, and the price tag for the 2007-08 school year climbed to $13,589. At private colleges, undergraduate students face even higher sticker shock, paying on average $32,307.

The rates of increase are eye-popping. Consider paying $15 for a gallon of milk or shelling out $9.15 per gallon of gas. That’s what those items would cost today if their prices climbed at the pace of college tuition since 1980.

As a federal policymaker, I understand educating tomorrow’s mathematicians, engineers, health care professionals, business leaders, teachers, public servants, entrepreneurs and vocational experts is vital to America’s long-term economic and national security interests. For generations of newcomers and long-time citizens, earning a higher education is a gateway to the American dream. A college degree traditionally paves the way toward higher lifetime earning power and gives graduates a head start to succeed professionally in the workplace.

The new report should push federal and state lawmakers to address out-of-control tuition increases. Along with other worries about making ends meet, parents are feeling overwhelmed at the prospect of saving for a child’s higher education, especially when many still may be repaying their own student debts.

Many policymakers believe the way to make college more affordable is by pouring more money into financial aid. However, staking out a bigger claim of the Federal Treasury isn’t going to do anything about uncontrolled tuition increases. It’s going to take a creative, think-outside-the-box approach to rein in tuition.

Just as raising taxes is not the solution to controlling the federal deficit, more government aid is not the answer to tuition control. Counting on federally-subsidized and private loans to pay the bills only puts students deeper in debt and encourages tuition increases year after year.

Don’t get me wrong. As the Ranking Member of the Senate Finance Committee, I strongly support using incentives in the federal tax code to make higher education more accessible and affordable to more Americans. In fact, this summer I helped make permanent a college savings tool known as 529 plans, a popular state-sponsored college savings program. As chairman of the committee in recent years, I also worked to create the deduction for tuition and secured the tax deductibility of interest on student loans.

Obviously more must be done to make college affordable, and we ought to unleash the brain trust working within the ivory towers of academia. College administrators and trustees need to study cost-control and money management. Something’s not adding up when rising tuition rates keep climbing year after year while many universities are flush with ballooning endowments.

At a U.S. Senate Finance Committee hearing in September, witness testimony revealed college and university endowments have grown enormous fortunes. The top 25 college and university endowments are $11 billion more than the combined assets of the top 25 largest private foundations. Investment returns often exceed 12 percent or more. However, college endowment spending averages a paltry four percent.

Some of those endowments are massive and have gotten so big, in large part, because they benefit from very generous tax breaks. Yale University’s endowment equates to $2.8 million per undergraduate. Tapping endowment returns to help keep college accessible to non-wealthy families seems more than reasonable.

As the tax-writing Senate Finance Committee hammers out details of an education tax package, an endowment pay-out requirement ought to be included in the discussion to reduce tuition and help students afford college.

Let’s not forget why colleges are in business. They are institutions of higher learning which receive significant tax breaks to fulfill this noble mission. In turn, the taxpaying public deserves access to affordable education.

As a strong proponent of openness in government, I’d like to shed the light of day on basic college endowment statistics. The public has a right to know how tax-deductible donations and tax-free endowment income are serving the public good.

Beyond that, policymakers and higher education leaders must work together. If tuition hikes continue to climb year after year, some families will never realize their hopes for a college education.

Colleges and universities benefiting from tax-advantaged endowments have a non-negotiable public obligation attached to their tax-favored treatment. I’d like to see America’s elite institutions do more to make college more affordable for everyone.

Posted by Jay Hancock at 10:42 AM | Permalink | Comments (5)
                    

I'll be on the Marc Steiner Show (WYPR 88.1 FM) at noon with two other guests talking about the effect on business of Gov. O'Malley's proposed tax increase and what the effect on the economy might be.

Posted by Jay Hancock at 9:52 AM | Permalink | Comments (0)
                    

Johns Hopkins has an MBA program.

Posted by Jay Hancock at 9:50 AM | Permalink | Comments (0)
                    

Whee! Asian stocks are blowing a nice little balloon. Hong Kong's Hang Seng Index, which broke 30,000 for the first time last week, is up another 900 points as I write this -- early Monday there. That's another 3 percent pop.

Posted by Jay Hancock at 10:53 PM | Permalink | Comments (0)
                    

I don't know whether the notion of "railroading" bills through the legislature originated in Maryland, but it might have. In the early 1800s General Assembly leaders pushed through enormous taxpayer subsidies for the nascent B&O Railroad before most legislators had any idea what was happening. Now the part-time legislature looks like it has too much on its plate for the special session called by Gov. O'Malley for next week.

Not only is there a revenue package with many moving parts (state real estate taxes down; some income taxes up, some down; sales tax up; sales tax expanded). Now O'Malley wants to increase health coverage at the same time. That's way too much for a two-week session. Legislatures are supposed to be a about deliberation and debate. This session looks like it'll be about rubber stamps. There's a lot of pre-cooking going on. (If you're keeping count, that's three incompatible metaphors in two paragraphs: transportation, clerical and culinary.) I've heard few Democrats express skepticism about any of O'Malley's tax plan, which is not a good thing. There is very little talk of cutting spending where possible. What House Minority Leader Anthony J. O'Donnell, a Southern Maryland Republican, told The Sun last week sounds about right: "Only a fraction of the entire legislative body will make these decisions."

Posted by Jay Hancock at 10:10 AM | Permalink | Comments (10)
                    

Associated Press

CHARLOTTE, N.C. - In addition to scaling back its investment banking operations, Bank of America Corp. is exiting the wholesale mortgage business and eliminating about 700 jobs, bank officials said Thursday.

The nation's second-largest bank will stop offering home mortgages through brokers at the end of the year to focus on direct-to-consumer lending through its banking centers and loan officers. The move also eliminates the jobs in the bank's consumer real estate unit.

The bank shared details of the decision with The Associated Press before its public announcement scheduled for Friday.

The wholesale debt biz always looks great to banks -- until they relearn the perils of loaning money through third parties who don't have the same incentives. It's starting to look like the mortgage brokers really went on a bender this time, and bank after bank is deciding it doesn't want to have anything to do with them. Baltimore's First Mariner Bancorp got out of the wholesale mortgage business earlier this year after getting shocked by up to $42 million in bad loans. So far the mortgages that First Mariner originated with its own employees and oversight, by contrast, have been pretty much problem free. See this coming Sunday's column for more.

Posted by Jay Hancock at 9:00 AM | Permalink | Comments (1)
                    

The (almost) always optimistic Ed Yardeni, or Yardeni Research, on existing-home data released yesterday:

Whew! Home prices didn’t crash in September. That is single-family home prices didn’t crash, though they were down 4.9% y/y. But that’s after increasing 56% since the start of the decade and 100% since 1994 (based on 12-month ma). Condo and co-p prices actually rose 1.4% y/y.

Notwithstanding the widely feared crash scenario, existing home prices are not falling widely and wildly, not yet anyway. They were roughly unchanged in the Northeast (-0.7% y/y) and in the Midwest (+0.6%). On the other hand, it must be feeling a bit more like a crash in the West where the median existing home price dropped 9.0% y/y. In the South, it was down 5.7%. Just how much have prices in these four regions gone down from their record highs? Let’s review, using the 12-month moving averages:

(1) In the West, the median existing home peaked at $349,875 during December 2006. It is down 1.2%, after increasing 86.1% since the start of the decade.

(2) In the South, the median existing home peaked at $186,350 during July 2006. It is down 2.8%, after increasing 52.5% since the start of the decade.

(3) In the Northeast, the median existing home peaked at $285,800 during June 2006. It is down 1.1%, after increasing 80.8% since the start of the decade.
(4) In the Midwest, the median existing home peaked at $168,425 during March 2006. It is down 3.5%, after increasing 39.1% since the start of the decade.

(5) While prices in the Northeast and Midwest are down from recent peaks, both are actually showing signs of bottoming. Prices are up 1.0% in the Northeast since February, and up 0.4% since July in the Midwest.

Posted by Jay Hancock at 10:17 AM | Permalink | Comments (1)
                    

A reader sets me straight. Seems the unlocked iPhones are being redeployed in non-U.S. cellphone services. Pulled from comments:

You are quite uninformed. No amount of soldering or hacking is going to get an iPhone to work on Sprint or Verizon. The iPhone is a GSM phone. Sprint and Verizon are CDMA networks. It's not possible. The only other GSM network in the US is T-Mobile, and there is zero indication that people are leaving AT&T for T-Mobile in droves (quite the opposite, actually). The vast majority of people that are unlocking iPhones are doing so to use them in foreign markets where the iPhone is not available. Pure and simple. That people are going through so much trouble and expense to get their hands on Apple's product is a GOOD PROBLEM to have. Welcome to the 21st Century.

Posted by Jay Hancock at 3:03 PM | Permalink | Comments (0)
                    

It took only a few weeks after Apple started selling the iPhone for smart people to disable the restrictions that forced them to use the device with AT&T's (Cingular's) cellphone service. George Hotz posted how to do it on his blog on Aug. 21. Now, Hotz is off to other things as a freshman at Rochester Institute of Technology. But he has left his mark. Apple disclosed yesterday that nearly one in five iPhones isn't used through AT&T. 250,000 users have mimicked Hotz, grabbed tweezers and soldering irons and cut AT&T out of the equation and signed up with Verizon, Sprint or whomever. The iPhone is well and truly unlocked.

This is a problem not just for AT&T but for Apple, which gets royalties from AT&T for the people who sign up for AT&T service with an iPhone. So: Yet another vertical technology relationship is challenged. Apple has been about about vertical bundling from Day 1. Unlike Microsoft, Apple wouldn't license its operating system for use on anything but Apple computers. Apple's iPod has been all about digital rights management and making sure the music can't get distributed willy nilly. With iPhone, Apple tried to bind users to AT&T. Sun Apple blogger extraordinaire Dave Zeiler notes that some countries are making these arrangements illegal. It's not just the vertical-iPhone model that's under pressure. Amazon and others are stepping up the sales of non-DRM music, forcing Apple to cut the price of its own non-DRM music.

It's getting to be a horizontal world. From a business point of view, going vertical and restricting vendors and platforms raises profit margins and lends an aura of exclusivity. But going horizontal increases demand and volume. At the right volume, even small profit margins can become very profitable indeed. Horizontal is winning.

Posted by Jay Hancock at 12:19 PM | Permalink | Comments (11)
                    

Wouldn't you? Why buy the whole smorgasbord when you only use the melba toast, raspberry jam and butter? I'm surprised only 52 percent of the people surveyed in this Zogby study said they would like to buy their cable programming channel-by-channel instead of in one big lump the way cable companies make us do it now. The Federal Communications Commission has been talking about requiring a la carte programming for months, but I'd be surprised if they do anything about it. We're already starting to get a la carte cable TV anyway -- over the Internet.

Cable subscribers who only watch a few channels out of the bundle they purchase from their cable provider are hoping efforts by the Federal Communications Commission could make “a la carte cable” a reality—purchasing channels individually instead of in bulk packages is preferred by more than half the nation’s cable subscribers, a new Zogby Interactive poll shows.

Fifty-two percent of cable subscribers said they would prefer to buy individual channels, while 35% favor the current bulk package system. Another 12% were undecided about which channel system they would prefer.

Though overall, slightly more than half readily say they would prefer an a la carte option, the survey shows a high level of dissatisfaction with the idea of paying for channels that may only make an appearance on the screen as viewers flip past them – 71% say they disagree with having to pay for cable channels they don’t watch, and nearly half (46%) strongly disagree. But when it comes to the cost of cable television, most subscribers (82%) agree the cost of cable television service is too high, with 46% who say the current cost is much too high.

Posted by Jay Hancock at 8:59 AM | Permalink | Comments (1)
                    

The mutual-fund company reported 3rd-quarter results. Investors poured $7.2 billion into T. Rowe's funds for the quarter. Nearly a third of that came from the company's relatively new target retirement funds, which are supposed to be "invest and forget" vehicles based on the projected date of your retirement. As you get older the funds shift more assets into lower-risk bonds instead of stocks. Investors also plowed into domestic and foreign stocks. T. Rowe's New Asia, Growth Stock, Blue Chip Growth and Equity Index 500 funds each added more than half a billion dollars in new investment.

The company hit analysts' earnings estimates and stock was up as high as $1.40 this morning. It has added 350 employees since the beginning of the year.

Posted by Jay Hancock at 10:53 AM | Permalink | Comments (3)
                    

Jay I would like to hear you say that you were wrong about "the shiny rock 'comment you made a couple of years ago. It (gold) has outperformed EVERYTING the past ten years.your precious dividends from Merk are being eaten up ny a declining dollar and inflation numbers which are being manipulated.

I agree that gold looks better than a Treasury bond on a wrist or a bosom, but as a long-term investment it doesn't seem more attractive than it did a decade ago.

Gold fanatics bring to mind Europe's 19th-century aristocracy, which, to its misfortune, largely shunned the new joint-stock corporations because it believed wealth grew only from the land. Gold bullion pays no dividends or interest. The world's central banks hold more reserves in U.S. Treasury securities than gold these days.

For all its beauty, gold is a commodity like rubber or oil, one whose scarcity is automatically undercut by new sources of production when prices rise. To bet on gold is to bet against human ingenuity, which has a pretty decent record. The cost of finding and processing a barrel of oil plunged by more than half in the 1990s; there is no reason to think Earth's gold reserves are not similarly vulnerable to technology.

The valuable capital of the 21st century is intellectual, not mineral. That's why stock in Eli Lilly & Co. sells for 10 times the assets on its balance sheet. The drugmaker's worth is in its patents and scientists' brains, not in its buildings and beakers. My wager is on the system, Greenspan and an eventual waning of present troubles. For the long haul, I'll take a few shares of Lilly or any attractive U.S. company over a high-class rock.

The reader's memory was wrong on one point: the counterexample to gold wasn't Merck but Eli Lilly, which has performed even worse than Merck since 2002. The relevant data are below, courtesy of the cool new Google Docs graph feature.

My feeble defense: I said "for the long haul," Lily should outperform gold. Is five years the long haul? It's pretty long. I would still guess, however, that over coming decades stocks will do better than gold or other commodities. Even so, my confidence in central bankers to manage the money supply and in global competition to keep prices down is not nearly what it was five years ago. Gold fans justifiably should feel very righteous these days. 

Posted by Jay Hancock at 9:36 AM | Permalink | Comments (1)
                    

The query via email:

Hi Jay, I'm a college student(on a pretty minimal budget), and I want to start trading online. What online brokerage website would you recommend to begin buying/selling? - preferable one on the cheapest side.

My reply:

I'm going to give some advice that will sound patronizing. Your phrase "trading online" suggests you will be making short-term bets on stocks. If you're a college student on a limited budget, the only way you should be in the market is in diversified mutual funds that you won't touch for decades. The best thing on your side right now is time -- the ability to let money appreciate for decades, ride out the volatility that normally comes with stocks and take advantage of the miracle of compound returns. Study after study shows that people who buy and hold a diversified portfolio of stocks -- usually an index fund that tracks the market -- almost always outperform active mutual fund managers and active investors who trade in and out of stocks. The exception to this rule can often be seen over relatively short periods -- maybe a year, or five years or even ten years. And with all due respect, the people producing the market-beating returns are trained professionals with years of experience. Professional managers almost never beat the market over a matter of decades. Amateurs never do.

If you have any income, I would open a Roth IRA at Vanguard, start buying Vanguard's total stock market index (VTSMX) as an exchange-traded fund each and every year (this ensures that you'll buy when the market dips as well as when it rises) and let the money sit there for 50 years. After you build up some assets you can think about diversifying into international funds and maybe putting a bit more in small-cap and mid-cap funds. I would recommend reading Jeremy Siegel's "Stocks for the Long Run" or "Unconventional Success" by David Swenson.

Sorry -- I know that's not what you asked. My apologies if I misunderstood your query -- but if you're investing for the long term it doesn't really matter what your online brokerage costs are. I can't in good conscience give you or any other young person the idea that online trading is a promising way to make money.

Posted by Jay Hancock at 11:14 AM | Permalink | Comments (1)
                    

A reader emails The Sun's public editor with a question heard over and over:

"If it's just the price of crude oil which is skyrocketing, and the price increases at gas pumps supposedly only reflect that additional cost, why are the oil companies experiencing unprecedented, historic windfall profits? Basic accounting would suggest that they should only be keeping up with expenses."

The answer: It's the oil companies' oil. They looked for it, found it, drilled it and pumped it out. They didn't do so with the understanding that once it became profitable they would be limited to recovering their marginal costs. My Howard County house has doubled in value since I moved here in 1994. It's worth more than my mortgage. But when I sell I have every expectation of being the beneficiary of the increase in value. The oil companies feel the same way about their asset.

Should the government end the indefensible tax and lease subsidies that oil companies get? Of course. But if you start monkeying with the profit they're allowed to make, you diminish their incentive to produce the oil that the world economy runs on.

Next question: Why do I defend oil companies while beating up on electricity companies?
Answer: The oil economy is a functioning market. Wholesale oil prices are transparent. There are numerous competitors. There are inventories to cushion supply and demand shocks. U.S. refineries aside, there are low barriers to capital investment and capacity upgrades. None of this is true for the electricity business, which so far is a flawed market requiring scrutiny and regulation.

Posted by Jay Hancock at 4:35 PM | Permalink | Comments (1)