October 31, 2007
Positive surprises in the economic growth report
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.
October 30, 2007
Merrill Lynch guy's golden parachute: $161.5 million
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.
I'll be on Ron Smith on WBAL (1090 AM) at 3:30 pm to talk about the special legislative session to raise taxes.
A Washington official dares to tell the truth
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.
October 29, 2007
Grassley: Colleges should use endowments to cut tuition
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.
On the radio today...
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.
Something I forgot
Johns Hopkins has an MBA program.
October 28, 2007
Asia stocks to the moon
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.
October 26, 2007
O'Malley crams too much into special session
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."
Bankers: Know your customer!
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.
October 25, 2007
The silver lining of real estate
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.
October 24, 2007
iPhones are NOT being used on Verizon, Sprint
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.
Apple: Welcome to the horizontal world
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.
Most would prefer a la carte cable TV
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.
October 23, 2007
T. Rowe profits boom with target retirement funds
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.
How long will gold take to prove me right by plunging?
He's referring to a May 2002 column that said, among other things: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.
October 22, 2007
College students shouldn't trade stocks
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.
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.
October 19, 2007
Why can't greedy oil companies just cover costs?
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.
October 18, 2007
Secret graphical preview of my Sunday column
FOOD PRICES: YEAR-OVER-YEAR PERCENT CHANGE
Credit: Bureau of Labor Statistics
Maryland car sales plunge in September
Car dealers sold 5,000 fewer new cars in September than they did in September 2006 -- a 14 percent decline, the Motor Vehicle Administration reported. It was the worst month of what is turning out to be a disappointing year. Marylanders also bought 5,000 fewer used cars last month than in September 2006 -- a 9 percent decline. As bad as the sales figures are, dealers tell me that their bottom lines are worse. They're discounting and competing like crazy to move the metal. Not a good sign for Maryland's economy, but if you're thinking about a new car there are probably some deals out there, especially for gas guzzlers.
Recent column on Maryland car sales is here.
October 17, 2007
Stupid PR pitch of the day
Dear Baltimore Media:
Hanala Stadner, L.A. author, TV personality and substance abuse counselor to celebrities, is coming to town Oct. 26-28 with an interesting story to tell -- as well as personal insight into the real reasons behind recent meltdowns by Britney, Lindsay, Paris and others.
Hanala knows exactly why these celebrities are struggling with the law and various addictions because she's been there herself -- and is now using her own recovery experiences and new Hollywood memoir, a humorous blend of wit and wisdom to help others.
She is available for timely media comment and speaking engagements Oct. 26-28. Scroll down for details and photos.
October 16, 2007
Stupid PR pitch of the day
WASHINGTON, D.C.///October 4, 2007///In two weeks, the “Black Monday” stock market crash of 1987 will mark its 20th anniversary. As that date draws near, leading financial advisors are cautioning U.S. investors against giving in to the fears and trepidations that such a milestone can trigger, particularly in the wake of the rollercoaster stock market ride of this past July and August.
In a news conference organized today by the Zero Alpha Group (ZAG), three top U.S. financial advisors -- Glenn Kautt, president, chairman and chief investment officer, The Monitor Group, Sterling, VA., Kimberly Sterling, president, Resource Consulting Group, Orlando, FL., and Ed Green, partner, Foster Group, West Des Moines, IA. – explained why investors should resist the anxiety associated with a dreaded anniversary. In response to questions from clients and a recognition of the need to address investor fears that may not end up getting articulated other than through panic, the financial advisors detailed several different ways that the financial world of 2007 differs from and resembles that of 1987.
Glenn Kautt, president, chairman and chief investment officer, The Monitor Group, Sterling, VA., said: “It is entirely normal for investors – or any human being for that matter – to reflect on a dark date as it draws close. Americans have done this over and over again with such anniversaries as Pearl Harbor and 9/11. When it comes to the 20th anniversary of ‘Black Monday,’ the trick is to get out of the trap of obsessing about every up and down in the market. You are much better off framing a long-term plan and then sticking with it, leaving the stock market to gyrate as it does now on a regular basis. In the final analysis, that is the best prescription for anyone suffering from anxiety about the return of ‘Black Monday.’”
Howard Dean gets conservative
Caught part of Howard Dean's appearance at Johns Hopkins' Milton S. Eisenhower Symposium last week -- via CSPAN. He had a proposal for expanding U.S. health care coverage that I had never heard before and that sounded relatively responsible and doable. The plan has two steps: 1) Expand Medicaid coverage (currently for low-income folks of all ages) to include all uninsured people under 30 -- regardless of income. 2) Expand Medicare (currently for those over 65) to include all uninsured people over 55.
It bears several hallmarks of constructive conservatism. It doesn't reinvent the wheel. It doesn't tear up exisiting institutions and ways of behaving. It leaves private insurance companies intact -- they would continue to serve people through employer-provided insurance. It plumbs new policy depths not by diving in but by sticking in toes and feet and legs. It's not as fiscally risky as other plans; because people under 30 rarely get sick, making them eligible for Medicaid would be quite affordable. It builds on existing structures and lays ground for more change later on, which can also be said of Dr. Peter Beilenson's plan to expand Howard County health coverage.
Of course, the other virtue is that the plan is politically realistic, which is presumably what Dean likes most about it. When he ran for president his health-care plan was also incremental, but not as much as this.
October 15, 2007
Study: Stock options induce CEOs to make risky bets
Professors at Penn State and Brigham Young find that the more stock options executives get, the more likely they are to make risky decisions that will harm stock value. That's because options have no downside. If your option price is $40, it's all the same to you if the stock is $39 or $5. So, the authors say, too often CEOs swing for the fences and strike out instead.
A big package of stock options is no substitute for actual ownership when aiming to encourage chief executives to take prudent risks that provide reliable stock returns, according to a new study.
CEOs whose compensation packages include a large percentage of stock options tend to make risky decisions that generate big share price losses more often than big gains, said study authors W. Gerard Sanders of Brigham Young University and Donald Hambrick of Penn State University.
Proponents of stock option awards say they attract and retain talented executives, and give managers a vested interest in the company's future stock performance.
But the study's authors say they are hardly effective in boosting company results.
"While they were implemented as a substitute for stock ownership, they don't mirror stock ownership because they have no downside," said Sanders, associate professor of strategic management at Brigham Young.
"It's somewhat akin to walking down the Strip in Vegas and handing money to a gambler and... promising to share only the upside," he said.
The study of 950 companies, randomly selected from the Standard & Poor's 500 Index, as well as mid-cap and small-cap indexes, is to be published in the October-November edition of the Academy of Management Journal.
Income share for top 1 percent hits postwar high
October 12, 2007
How many feet make one story in a building?
Help us out, engineers & architects. Without consulting each other, my colleague Tom Pelton and I have come up with different estimates about how many stories high the proposed Ocean City wind turbines would be. They're 404 feet tall. To get "40 stories tall," Pelton figures on 10 feet per story, which is probably too little. To get "26 stories high," I figured 15 feet per story, which is probably too much. How many stories tall would these things be, anyway?? How high is a story including living space, structural stuff and HVAC & electrical? After thinking about it, I bet Pelton is closer to reality than me.
My favorite windmill comment so far
From Erin, on the wind turbines proposed to be placed off Ocean City:
It's almost a shame they will be so small. I think watching them would be entrancing--almost as hypnotic as the waves themselves. Maybe they could be built with an eye towards creating sailboat slalom races. How cool would that be?!
Ocean City wind turbines will prompt huge opposition
Wind turbines 12 miles off the Eastern Shore? "Small but visible" from the Ocean City beaches? "Half the size of your thumbnail and the thickness of a toothpick"? So far this year Ocean City has missed having a real hurricane, but they're about to see a figurative one. Bluewater Wind wants to build 150 windmills -- each 26 stories high -- on the continental shelf. Expect the same reaction that we've seen from Martha's Vineyard and Nantucket off Massachusetts, where the Brahmins object in very forceful terms to the idea of whirligigs on their horizon. All those tree-hugging Kennedys want to save the world from fossil energy, except when it requires a minor change in their view.
This is the central problem of electricity these days, in Maryland and everywhere else. Everybody knows we need clean generation. Almost everybody knows we need generation, period. Almost everybody knows we need new transmission lines. The only ones who disagree are some environmentalists who would like society to freeze energy consumption or cut back to the levels of years ago, which would involve economic hardship, increases in the poverty rate etc. But nobody wants to see new energy assets anywhere close to their neighborhood or their friends' neighborhoods.
October 11, 2007
Why not raise Md's alcohol tax instead of its sales tax?
A reader says:
Mr. Hancock, I do not think the alcohol tax has been raised in many years. With all the traffic accidents and crimes related to drinking, I do not know why the governor did not consider raising this tax. Could it have anything to do with the liquor lobby? I certainly hope not. Do you know?
Any thoughts? Anybody smart about alcohol taxes?
October 10, 2007
Credit-card come-ons for the college kid
This is the newest to arrive at my house for the 19-year-old college sophomore. I guess that one arrives at least every three days or so. Yesterday two came.
Chase Student MasterCard:
"Trust Chase to help you." (This from the bank that a few years ago paid millions to settle lawsuits alleging that credit-card customers were forced to pay late fees and extra interest even when monthly payments arrived on time.)
-- BIG print: Starter teaser rate of 0 percent for six months
-- No annual fee
-- Smaller print: 18.24 percent variable interest after teaser rate expires
-- 3 percent charge on cash advances
-- $39 fee for exceeding your credit limit
-- Really small print: Cash advance interest of 15.99 percent plus prime (prime is 7.75 percent)
-- Really small print: "Default" rate if you start paying late etc.: 23.99 percent plus prime
-- Really, really small print: "You authorize us to allocate your payments and credits in a way that is most favorable or convenient for us. For example, you authorize us to apply your payments and credits to balances with lower APRs before balances with higher APRs." (This is the worst feature of all.)
Memo to college students (and everybody else). Get ONE credit card. Pay off the balance in full every month. Do not buy more than you can pay off. NEVER get a cash advance. NEVER use the checks the card company sends. Tear them up and throw them away immediately. Do not allow your hard-earned money to get siphoned off by the card companies through your own cluelessness. This is what they are counting on. Disappoint them.
Credit cards for college kids: Slow down!
As the Dad of a college sophomore, I'm amazed at how many credit-card offers he's getting. He could easily borrow $20,000 before the card companies had any idea what was going on. So I'm happy that U.S. PIRG -- the group that grew out of campus public interest research groups started by Ralph Nader in the 1970s -- is pounding the drum about this. Credit card companies are being too aggressive at recruiting college kids. Some of the practices sound like subprime mortgage shenanigans. To the extent that the universities are encouraging this in exchange for "revenue sharing," it's really objectionable. From the U.S. PIRG press release:
Credit card companies are targeting college students with enticing teaser offers for low-cost credit cards that turn into a credit card “trap” with high fees and penalty interest rates. Often, the card companies set up tables right on campus and hand out free gifts to applicants. The students, already facing high and increasing costs of education, may be misled into taking on high-cost credit card debt. The project will educate students about credit card practices and will urge colleges to adopt principles for responsible credit card marketing.
Campaign will include counter-marketing educational projects on 40 campuses across the country, a new website, a coalition urging colleges to adopt marketing principles, and publication of research reports on credit card marketing practices. This project of the U.S. PIRG Education Fund and participating PIRG student chapters is funded by the Ford Foundation.
October 9, 2007
More tidbits from the T. Rowe Price symposium
Mary Miller, director, Fixed Income Division, T. Rowe Price:
"I worry that economists are overestimating the effect of the [weak] housing market on the U.S. economy... The housing market is 4 percent of GDP."
Mary Miller, on investment by foreign central banks in U.S. debt:
"At the margin, the pace of investment has slowed a bit."
Brian Rogers, chairman & chief investment officer, T. Rowe Price Group, on collateralized debt obligaitons, collateralize mortgage obligations and other exotic kinds of debt:
"Innovation is great, but at some point innovation outstrips utility. At lot of the time Wall Street invents a security that is of interest only to the buyer and seller and not to the economy."
Wall Street's worst fear in August, he said was that "an eligible borrower couldn't place commercial paper."
Mary Miller, on credit derivatives:
"Today we have a credit default swap market that is six times the size of the cash corporate bond market. It has produced an instrument to hege risk, but it has also provided an instrumente to increase volatility."
The globalization of stock investing "is a clear megatrend."
David Warren, president, T. Rowe Price International:
"I would feel personally that the dollar has fallen quite a long way." He implied the steepest part of the decline is over.
Growth in the U.S. trade deficit "is beginning to slow a bit and perhaps turn in a better direction."
There is "very, very, very aggressive commercial lending activity in China."
Brian Rogers on whether T. Rowe Price will introduce exchange-traded funds:
The polite way to describe it, he said, is "We're studying hte issue." The more direct way to describe it is: "We're trying to figure out what the heck to do."
David Warren: "Residential real estate in Moscow is through the roof."
Stock tips straight from the T. Rowe Price symposium
A couple thousand institutional investors and other money managers spent big money to fly in from New York, Boston and London to attend T. Rowe Price's annual investment symposium at the Marriott Waterfront. We give you symposium panelists' best ideas for free. Panelists speaking on "The Global Investment Environment" this morning were asked for investment recommendations for next year.
Brian Rogers, chairman & chief investment officer, T. Rowe Price Group:
Large-cap growth stocks. "The trend is your friend" for large-cap growth, he says, both inside and outside the United States.
Mary Miller, director, Fixed Income Division:
Intermediate-term bonds. The "yield curve" will get steeper, she says, meaning the spread between short-term rates and long-term rates will widen. So the place to be is in the middle, maturity-wise. She also likes inflation-protected securities (TIPS), whose payouts increase along with inflation.
David Warren, president, T. Rowe Price International:
Large-cap growth stocks in international markets. Emerging markets also have more to go, he says. Emerging market valuations are getting high, but emerging-market profits are also growing by 20 percent annually. He also likes Japan stocks, although he admits he has said the same thing in previous years, when Japan stocks disappointed.
October 8, 2007
Sometimes stabs at the future go wildly astray
From a Hancock column in December 2006, four months before AstraZeneca agreed to buy MedImmune:
Someday David Katz's wish will come true, and Abbott Laboratories or some other huge pharmaceutical company will buy MedImmune, Maryland's largest biotech company.
MedImmune and Big Pharma each has something the other lacks. MedImmune has drugs in development that might someday be prescribed by doctors. Big Pharma has armies of salespeople who give doctors cool pens.But don't expect the match to happen for a long time.
Big Pharma isn't desperate enough to overpay for MedImmune, although it's getting closer. Gaithersburg-based MedImmune likes its chances as an independent, and so, apparently, do its shareholders.
Sometimes stabs at the future hit home
Textron is buying United Industrial Corp, owner of AAI Corp. of Hunt Valley, maker of pilotless airplanes, for $81 a share. From a Hancock column in May 2006, when the stock was $54:
... prospects for UAVs and the companies that sell them go beyond the current conflict and even war itself. Expect UAVs to multiply in number and use in coming years. Look for United Industrial to thrive and eventually be bought by a giant such as Lockheed.
October 5, 2007
Good economic news
The Labor Department reports this morning that the country added 110,000 jobs in September. And it didn't lose jobs in August, as previously had been estimated. Instead of shedding 4,000 jobs in August, which was reported a month ago, the nation added 89,000 jobs in August. These numbers are not gospel. To get these figures the Bureau of Labor Statistics makes some very large and generous assumptions about brand-new companies creating jobs that can't be seen and counted yet. It has a history of overestimating these jobs as the country heads toward a recession and underestimating them as it heads out of a recession. But the report is a large improvement over last month's. Unemployment is basically unchanged at 4.7 percent.
Why are phishing emails so lame?
You would think the phishers trying to scam us with emails would have upped their game by now. But almost all the phish bait I get is so transparently phony you wonder why anybody even takes the trouble to send it out. Are people really responding? This morning comes:
IRS NOTIFICATION -- TAX REFUND!
After the last annual calculations of your fiscal
activity we have determined that you are
eligible to receive a status refund of $301.17.
Please submit the tax refund request and allow
us 3-6 days in order to process it.
To access the form for your status refund, please CLICK HERE.
Internal Revenue Service
First of all, the real IRS would never -- NEVER! -- put an exclamation mark in any piece of internal revenue verbiage. Second, the real IRS would never sign off by saying "Regards." The real IRS does not need to ingratiate itself with its correspondents. Even the draft board starts letters with "Greetings." But this kind of epistolary pandering is beneathth the IRS. Third, when you click on the link, the URL is nothing like the IRS. It's "http://www.zanarkand-ruins.net/khsd/ezcounter.php.php," which would make even very clueless phishees start to get suspiciouis. Fifth, the link doesn't work anyway. I don't get this.
October 4, 2007
Using documents to gauge smuggled antiquities
This is a great paper. Raymond Fishman and Shang-Jin Wei of Columbia University noticed a huge discrepancy in paperwork on shipped antiquities such as statues and mosaics depending on where it was filed. In the source country where objects were exported, paperwork was sparse because smugglers often bribe customs officials. In the destination country where objects were imported, paperwork was copious because nations such as the United States require all kinds of documents and there is a presumption that the objects are legal.
The professors calculated a "reporting gap" in various source countries by comparing destination paperwork with origination paperwork. Not surprisingly, there was a high reporting gap in countries that are rich in antique objects and are also highly corrupt. There is a cool scatter graph showing how dozens of countries score, which I am unfortunately unable to reproduce here. Biggest reporting gaps are in Syria, Iran, Egypt, Greece, Vietnam and Russia. Canada, New Zealand, Britain and Hong Kong have low reporting gaps. Norway has a surprisingly high one for a country with a low corruption score.
This paper reminds me of the one Erik Lie did at the University of Iowa on the uncanny correlation of executive stock-option dates with low prices in stocks. A database analysis revealed striking patterns that implied impropriety that upon further investigation proved to actually be impropriety. The Columbia paper suggests that U.S. import officials need to do a much better job of checking the provenance of antique objects.
From the abstract:
We empirically analyze the illicit trade in cultural property and antiques, taking advantage of different reporting incentives between source and destination countries. We thus generate a measure of illicit trafficking in these goods based on the difference between imports recorded in United States' customs data and the (purportedly identical) trade as recorded by customs authorities in exporting countries. We find that this reporting gap is highly correlated with the corruption level of the exporting country as measured by commonly used survey-based indicies, and that this correlation is stronger for artifact-rich countries. As a placebo test, we do not observe any such pattern for U.S. imports of toys from these same exporters. We report similar results for four other Western country markets. Our analysis provides a useful framework for studying trade in illicit goods. Further, our results provide empirical confirmation that survey-based corruption indicies are informative, as they are correlated with an objective measure of illicit activity.
October 3, 2007
Power line decision was crucial -- and inevitable
Democracy is great. Markets are terrific. But sometimes you need a powerful, centralized economic authority to plan things. That's the case with the Energy Department's ruling on building mid-Atlantic power transmission lines. (Libertarians -- let me know if you disagree.) The Energy Department essentially said that the federal government can trump state regulators and legislators who oppose building big, powerful lines to pipe electricity from Appalachian coal-powered generation plants to the East Coast.
"It usurps the local powers," Piedmont Environmental Council spokesman Robert Lazaro told The Sun's Paul Adams. "It says if power companies don't like the answer they get [from state regulators], they can go to the federal government for an answer."
Yep, that's exactly what it does. And it's exactly what it should do. If you waited for multiple states and localities to approve power lines, it would never happen. And then we would get blackouts and brownouts. Maryland is starting to bump up against the limits of its generation and transmission system. We need investment now, and the Energy Department knows this. States have a year to act; if they don't, power companies can petition the Feds for redress.
Expect the same decision from the Feds on another energy matter affecting the mid-Atlantic: The request to build a liquefied natural gas terminal in southeastern Baltimore County. Here, too, the federal government can overrule local and state authorities. The ruling is less of a sure thing than the power-line decision, but the answer will probably be "yes."
October 2, 2007
Pittsburgh utility quits electric grid over high costs
Duquesne Light, which distributes electricity to Pittsburgh, is asking federal regulators for permission to quit PJM Interconnection, the grid for Pennsylvania, Maryland and a dozen other, mostly Mid-Atlantic states. The reason: High costs the PJM has built into its pricing system that are helping cause big bills Duquesne customers, Baltimore Gas & Electric customers and many others. Being on the border between PJM and MISO -- the Midwestern grid -- allows Duquesne to seek another partner. Duquesne objects to PJM's "capacity pricing" that pays incumbent generators for guaranteeing electricitiy for the grid at times of peak demand, spokesman Joseph Vallerian told me. MISO doesn't have capacity charges.
While increasing grid reliability, capacity pricing also produces an incredible and outrageous windfall for the generation companies. They already have a tight hold on the PJM market; capacity pricing makes it even tighter. Unfortunately, Maryland utilities can't quit PJM; most are many miles from the next-nearest grid network. And BGE would never quit anyway; its parent, Constellation Energy, is reaping big windfalls from capacity pricing. Here's what I wrote earlier this year about capacity charges:
The rigging of the electricity marketplace to enrich power companies and executives looks even worse than we thought.
Just as Maryland was getting shocked by higher kilowatt prices, grid managers have allowed extra profit for generation outfits such as Constellation Energy, parent of Baltimore Gas and Electric Co. The bonus, whose magnitude was revealed Friday, might eventually cost the typical BGE household $10 a month or more and add hundreds of millions of dollars to Constellation earnings.
Apparently, it wasn't enough that, after deregulation seven years ago, Constellation took over the BGE generation plants with no compensation to BGE customers. It wasn't enough that Constellation charged customers an additional $528 million in "stranded costs" by arguing that the valuable generators might be obsolete.
It wasn't enough that, after last year's expiration of deregulation-required price caps, the plants' cheap coal and nuclear fuel costs give Constellation supercharged profits in a market inflated by more-expensive natural gas generation.
Now grid managers will let generation companies such as Constellation levy a surcharge that Baltimore energy experts South River Consulting calculate could eventually cost BGE households about $200 a year. BGE says it's less -- maybe $120 a year. Either way it's too much.
The capacity charge is a humdinger, destined for a Ripley's museum. It does not pay for coal, uranium, salaries or any other expense. It's basically a fee that BGE, Mittal Steel and other users pay to ensure access to potential megawatts at times of high use.
But as a practical matter it is pure profit for generation outfits, especially those with plants in areas such as Central Maryland, where demand exceeds supply. Based on auction prices announced Friday, the capacity charge could eventually net $200 million a year just for Constellation's Brandon Shores and Calvert Cliffs plants, says South River.
October 1, 2007
Hancock spews "serious and irresponsible innaccuracy"
Some reactions to the Sunday column on the "rich middle class":
Sun columnist Jay Hancock ("O'Malley tax starts with rich in middle," Sunday, September 30, 2007, C1) concludes that this is the label we ought to affix to a married couple earning a combined $225,000. But according to Census 2000 data, only 7,869 families in all of Baltimore County -- 3.9 percent! -- enjoy family incomes of even $200,000 or more. In Howard County, the figure is still just 6.0 percent -- about 4,000 families in the whole county.
It might not be quite right to call them "rich," either, as your headline writer did. These are still families for whom a single pink slip might result in a home foreclosure or a tuition crisis, and with downsizing, age discrimination and everything else, they're as susceptible to such calamities as anyone. But neither is any group in percentiles 97, 98, 99 and 100 in a "middle," no matter how you qualify it. Painting them simply as "rich" is tired class warfare, but permitting such earners to carry the "middle class" connotation is unfair -- the product of serious and irresponsible inaccuracy.
Jay, You overlooked MOM's proposed (read actual) corporate tax increase of nearly 15%, which of course, will be passed along to the consumer. Another regressive tax!
Jay, there is far too much fat in government, at every level, and we need to have a serious reduction in government costs, and spending, before any tax increases are approved! Government never reduces a tax, even those that they sell as "temporary", why is that? Tax increases in today's economy are almost indefensible! The increase in energy and health care costs are enough to insulate us from further tax increases; when will it stop? It will stop when "they" finally break the back of the true middle class, because it is the middle class that carries the cost of this Nations' over-inflated government, on its backs!
I truly enjoyed your article about the wealth tax. I think it is about time someone has shine some light on this subject. We moved here from Texas and we have been here three years. I am a stay at home Mom, and my husband is a six figure income bread winner. In Texas we were upper middle class with a first class lifestyle. We have often felt like we got down graded once we moved here. We do not see a class structure, and we are starting to feel like we are all equal. Why should a plumber with no formal education be equal to an engineer who works full time while earning a third degree? I think this tax is a tool to work toward making us all equal. The truth about the matter is we are not all equal. We speak different dialects of English, and we have different priorities. Our differences between us and our neighbors is like night and day. In conclusion I think Maryland works at eliminating the Upper Middle Class, but who knows maybe the Upper Middle Class will eliminate Maryland because opportunity is everywhere.
His columns appear Tuesdays and Sundays.
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