December 31, 2007
Albert Einstein on what's important
Quote of the day:
"Not everything that counts can be counted and not everything that can be counted, counts."
-- Attributed to Einstein
Shiller says housing slump could last years
Losses arising from America’s housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world’s leading economists has told The Times.
Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years. Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”
He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.
“Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,” he said.
Professor Shiller, author of Irrational Exuberance, a phrase
later[No. Earlier -- JH] used by Alan Greenspan, the former Federal Reserve chairman, said: “This is a classic bubble scenario. A few years ago house prices got very high, pushed up because of investor expectations. Americans have fuelled the myth that prices would never fall, that values could only go up. People believed the story. Now there is a very real chance of a big recession.”
Baiting the Ron Paul trolls on the income tax
Atlantic magazine blogger Megan McArdle (a libertarian, by the way, whose former nom de blog was Jane Galt!) notes that the U.S. federal income tax is, in fact, legal.
I wish . . .
That Ron Paul supporters would stop informing me, in ALL CAPS, that various current policies are UNCONSTITUTIONAL, when in fact those very things were WRITTEN INTO THE CONSTITUTION via the AMENDMENT PROCESS. The FOUNDING FATHERS deliberately gave future legislators the ability to AMEND the constitution, because they wisely assumed that in the FUTURE there might be circumstances they were unable to FORESEE in 1787. Whatever you may think of the income tax, it is not only constitutional, but actually in the constitution, via this very clear amendment:The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The complaints that I don't know what I'm talking about would be more convincing if the people making them gave evidence of having actually read the document that they claim validates their most dearly held beliefs.
December 28, 2007
How to get rich: Buy when everybody else sells
Quote of the day:
"We have argued for many years that the No. 1 rule of asset allocation is that returns on capital are in markets in which capital is scarce. Investors should always want to play the role of the provider of scarce capital."
-- Richard Bernstein, chief U.S. strategist, Merrill Lynch, 2006
This is exactly what Warren Buffett and Berkshire Hathaway are doing by opening up a bond insurance company at the worst moment for bond insurers in many years. From AP:
Warren Buffett's Berkshire Hathaway will receive a license in New York to open a new bond insurance business, a state regulator said Friday.
The license for Berkshire Hathaway Assurance Corp. will officially be approved no later than Monday.
Also on Friday, Berkshire Hathaway agreed to buy NRG N.V., the reinsurance unit of ING Group said for about $435.7 million in cash.
Buffett's new insurance unit could take some business away from other insurers, said Donald Light, a senior analyst with Celent. Light owns Berkshire Hathaway shares.
Buffett will have the advantage of setting up operations with a strong balance sheet and a clean book of business, making his operation attractive for bond issuers, Light added.
Buffett's foray into the bond insurance sector comes at a tumultuous time for his new competitors. In recent weeks, bond insurers have come under fire as rating agencies have downgraded them, or warned of possible downgrades, because of their exposure to the deteriorating credit markets.
Standard & Poor's downgraded ACA Capital Holdings Inc.'s bond insurance unit to "CCC" from "A" on Dec. 19, while Fitch Ratings has placed two of the largest bond insurers, MBIA Inc. and Ambac Financial Group Inc., on negative credit watch.
Baltimore-Washington inflation worse than country's
You probably didn’t know this, but your wallet does. The post-2001 federal spending boom has made inflation substantially worse in the Washington-Baltimore corridor than in the rest of the nation. This will be the sixth year in a row in which consumer prices have risen more locally than in the rest of the country, according to the Bureau of Labor Statistics.
The national figures are bad enough: In November consumer prices were 4.3 percent higher than in November 2006, one of the worst showings in a decade. The news caused stock markets to plunge two weeks ago when it was announced. In Baltimore-Washington, however, the 12-month price pop was even higher — 4.5 percent. Driven by electricity prices and housing and food costs, Baltimore-Washington inflation hasn’t trailed that of the nation since 2000 and 2001, when the regional technology bubble was letting out air.
Monetarists, who believe that inflationary price increases are always explained by increases in the money supply, would not be surprised. The housing-credit bonanza, the war in Iraq and the rapid rise in homeland security spending have showered the region with dough.
Check out David Nitkin’s story in Thursday’s edition of The Sun, which reported that Maryland companies reaped $24 billion in federal contracts for fiscal 2006. This is an enormous amount — about a 10th of Maryland’s entire economy.
Thanks to annual compounding, local-inflation pain has gotten worse with time. Baltimore-Washington consumer prices have risen 22 percent since 2001. Nationwide, prices have risen 18 percent. Unfortunately, the recipe for lower local inflation — the end of the boom — would cause trouble even worse than higher prices.
December 27, 2007
JHU's Hanke: U.S. should intervene to boost dollar
In today's Wall Street Journal, Steve Hanke, professor of applied economics at Johns Hopkins, and Stanford's Ronald McKinnon argue that the United States and other developed nations should intervene in the currency markets to support the greenback's value against the Euro and other currencies. The move would increase Americans' wealth, bolster the balance sheets of allies holding U.S. liabilities and diminish expectations that inflation will rise, the two argue.
By RONALD MCKINNON and STEVE H. HANKE
This article appeared in the Wall Street Journal, December 27, 2007; Page A11
Central banks ended the year with a spectacular injection of liquidity to lubricate the economy. On Dec. 18, the European Central Bank alone pumped $502 billion -- 130% of Switzerland's annual GDP -- into the credit markets. The central bankers also signaled that they will continue pumping "as long as necessary." This delivered plenty of seasonal cheer to bankers who will be able to sweep dud loans and related impaired assets under the rug -- temporarily.
But the injection of all this liquidity coincided with a spat of troubling inflation news. On a year-over-year basis, the consumer-price and producer-price indexes for November jumped to 4.3% and 7.2%, respectively. Even the Federal Reserve's favorite backward-looking inflation gauge -- the so-called core price index for personal consumption expenditures -- has increased by 2.2% over the year, piercing the Fed's 2% inflation ceiling.
Contrary to what the inflation doves have been telling us, inflation and inflation expectations are not well contained. The dollar's sinking exchange value signaled long ago that monetary policy was too loose, and that inflation would eventually rear its ugly head.
This, of course, hasn't bothered the mercantilists in Washington, who have rejoiced as the dollar has shed almost 30% of its value against the euro over the past five years. For them, a maxi-revaluation of the Chinese renminbi against the dollar, and an unpegging of other currencies linked to the dollar, would be the ultimate prize.
As the mercantilists see it, a decimated dollar would work wonders for the U.S. trade deficit. This is bad economics and even worse politics. In open economies, ongoing trade imbalances are all about net saving propensities, not changes in exchange rates. Large trade deficits have been around since the 1980s without being discernibly affected by fluctuations in the dollar's exchange rate.
So what should be done? It's time for the Bush administration to put some teeth in its "strong" dollar rhetoric by encouraging a coordinated, joint intervention by leading central banks to strengthen and put a floor under the U.S. dollar -- as they have in the past during occasional bouts of undue dollar weakness. A stronger, more stable dollar will ensure that it retains its pre-eminent position as the world's reserve, intervention and invoicing currency. It will also provide an anchor for inflation expectations, something the Fed is anxiously searching for.
The current weakness in the dollar is cyclical. The housing downturn prompted the Fed to cut interest rates on dollar assets by a full percentage point since August -- perhaps too much. Normally, the dollar would recover when growth picks up again and monetary policy tightens. But foreign-exchange markets -- like those for common stocks and house prices -- can suffer from irrational exuberance and bandwagon effects that lead to overshooting. This is precisely why the dollar has been under siege.
If the U.S. government truly believes that a strong stable dollar is sustainable in the long run, it should intervene in the near term to strengthen the dollar.
But there's a catch. Under the normal operation of the world dollar standard which has prevailed since 1945, the U.S. government maintains open capital markets and generally remains passive in foreign-exchange markets, while other governments intervene more or less often to influence their exchange rates.
Today, outside of a few countries in Eastern Europe linked to the euro, countries in Asia, Latin America, and much of Africa and the Middle East use the dollar as their common intervention or "key" currency. Thus they avoid targeting their exchange rates at cross purposes and minimize political acrimony. For example, if the Korean central bank dampened its currency's appreciation by buying yen and selling won, the higher yen would greatly upset the Japanese who are already on the cusp of deflation -- and they would be even more upset if China also intervened in yen.
Instead, the dollar should be kept as the common intervention currency by other countries, and it would be unwise and perhaps futile for the U.S. to intervene unilaterally against one or more foreign currencies to support the dollar. This would run counter to the accepted modus operandi of the post-World War II dollar standard, a standard that has been a great boon to the U.S. and world economies.
The timing for joint intervention couldn't be better. America's most important trading partners have expressed angst over the dollar's decline. The president of the European Central Bank (ECB), Jean Claude Trichet, has expressed concern about the "brutal" movements in the dollar-euro exchange rate. Japan's new Prime Minister, Yasuo Fukuda, has worried in public about the rising yen pushing Japan back into deflation. The surge in the Canadian "petro dollar" is upsetting manufacturers in Ontario and Quebec. OPEC is studying the possibility of invoicing oil in something other than the dollar. And China's premier, Wen Jiabao, recently complained that the falling dollar was inflicting big losses on the massive credits China has extended to the U.S.
If the ECB, the Bank of Japan, the Bank of Canada, the Bank of England and so on, were to take the initiative, the U.S. would be wise to cooperate. Joint intervention on this scale would avoid intervening at cross-purposes. Also, official interventions are much more effective when all the relevant central banks are involved because markets receive a much stronger signal that national governments have made a credible commitment.
This brings us to China, and all the misplaced concern over its exchange rate. Given the need to make a strong-dollar policy credible, it is perverse to bash the one country that has done the most to prevent a dollar free fall. China's massive interventions to buy dollars have curbed a sharp dollar depreciation against the renminbi; they have also filled America's savings deficiency and financed its trade deficit.
As the renminbi's exchange rate is the linchpin for a raft of other Asian currencies, a sharp appreciation of the renminbi would put tremendous upward pressure on all the others -- including Korea, Japan, Thailand and even India. Forcing China into a major renminbi appreciation would usher in another bout of dollar weakness and further unhinge inflation expectations in the U.S. It would also send a deflationary impulse abroad and destabilize the international financial system.
China, with its huge foreign-exchange reserves (over $1.4 trillion), has another important role to play. Once the major industrial countries with convertible currencies -- led by the ECB -- agree to put a floor under the dollar, emerging markets with the largest dollar holdings -- China and Saudi Arabia -- must agree not to "diversify" into other convertible currencies such as the euro. Absent this agreement, the required interventions by, say, the ECB would be massive, throwing the strategy into question.
Cooperation is a win-win situation: The gross overvaluations of European currencies would be mitigated, large holders of dollar assets would be spared capital losses, and the U.S. would escape an inflationary conflagration associated with general dollar devaluation. For China to agree to all of this, however, the U.S. (and EU) must support a true strong-dollar policy -- by ending counterproductive China bashing.
Mr. McKinnon is professor emeritus of economics at Stanford University and a senior fellow at the Stanford Institute for Economic Policy Research. Mr. Hanke is a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute.
Quote of the day
"Pakistan was once called the most allied ally of the United States. We are now the most nonallied."
-- Zulfikar Ali Bhutto, President of Pakistan, New York Times, July 6, 1973
Mortgage bond insurer gives control to Maryland regulators
ACA Capital, a bond insurer hammered by mortgage defaults and partly owned by Bear Stearns, said yesterday it has agreed to not pay dividends or pledge assets without the permission of the Maryland Insurance Administration. This is the latest domino in the mortgage debacle. First the homeowner defaults, then the mortgage bonds go bad, then the bank that owns the mortgage bonds has a crisis, and then the bond insurer has its own crisis. Then the bank that depended on the bond insurance to limit its losses has a crisis. From Gretchen Morgenson's and Vikas Bajaj's recent story in the New York Times.
It also means that the major banks that insured their securities with ACA Financial Guaranty might have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company.
The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. In June, the value of bonds underlying credit default swaps rose to $42.6 trillion, up from just $6.4 trillion at the end of 2004, according to the Bank for International Settlements.
''The hedge is only as good as the counterparty, or the other party, to the hedge,'' said Joseph Mason, a finance professor at Drexel University and the University of Pennsylvania. ''This is part and parcel of the financial innovation that has grown very rapidly in recent years.''
Canadian Imperial Bank of Commerce said Wednesday that there was a ''reasonably high probability'' that it would incur a ''large charge'' in its first-quarter results because of its exposure to ACA Capital, Reuters reported.
Turmoil at ACA Capital has been evident for a few months. In a filing last month, the company said it wrote down the value of its swaps contracts by $1.7 billion and reported a negative net worth of $883 million, about $25 a share. The merchant banking affiliate of Bear Stearns owns 29 percent of ACA Capital. The company also insures municipal bonds and manages collateralized debt obligations, pools of assets like mortgages and other loans.
December 26, 2007
Now showing: Credit problems in electricity market
PJM Interconnection, which manages the electric grid from New Jersey to North Carolina and as far west as Illinois, issued a news release today on an $80 million default in the wholesale electricity market by Power Edge LLC. Another participant, Exel Power Sources LLC, defaulted on a $4.5 million payment, PJM said.
Power Edge had purchased "financial transmission rights," one of myriad pieces of the wholesale market that PJM has created by slicing and dicing the basic process of generating electricity, shipping it to a certain location and selling it to distributors. FTRs are ways for financiers as well as power companies to bet on "congestion" charges that PJM levies in the summertime when transmission lines get clogged up by too much demand. If you own an FTR for a certain line at a certain time and there is congestion, you make money. In Power Edge's case, PJM says, the financial products were "counterflow" FTRs, which pay off when "the flow of power on a transmission line flows in the opposite direction of a transmission constraint."
No word about what Power Edge's problems might be. They don't even seem to have a Web site. Apparently, however, the company couldn't get bankers to extend credit to pay its bills.
Economic strength is more than rock-bottom taxes
Update, 7:59 PM Wednesday: Goof in column that occurred to me as I washed the dishes:
Family income is only 11 percent less than that of the nation and ranks 39th - ahead of every southern state except Texas, Florida and Georgia.
Virginia, of course, is also a southern state. In 2006 median family income in Virginia was $66,886. In North Carolina it was $52,336.
My Wednesday column is on the American Legislative Exchange Council's state-by-state economic scorecard. I argue that low taxes and low wages -- ALEC's preferred criteria -- aren't the only way to measure a state's economic competitiveness. The column includes a few pieces of data and state comparisons in other categories, such as household income and education. Below are the footnotes, as it were.
"Virginia Crushes Maryland in Economic Ranking of All 50 States" was the provocative headline on last week's announcement by a pro-markets, pro-limited-government research group. That's true -- if you don't measure poverty, education, business creation, household income, homeownership growth, venture-capital investment, broadband access, major-league sports, cultural opportunities, sprawl and pollution.
Poverty: 8.2 percent of Marylanders lived below the poverty line in 2006; 9.2 percent of Virginians lived below the poverty line. Source: U.S. Census Bureau, American Community Survey.
Education: 35 percent of Marylanders over 25 held a bachelor's degree in 2006. 33 percent of Virginians held a bachelor's degree. Source: U.S. Census Bureau, American Community Survey. Maryland wins in advanced degrees, too.
Business creation: In 2002 and 2003 Maryland ranked 23rd for the number of jobs created by start-up businesses. Virginia ranked 33rd. In 2005 Maryland ranked 12th for new companies while Virginia ranked 20th. Source: U.S. Small Business Administration and Census data compiled by the Corporation for Enterprise Development.
Household income: Maryland was No. 1 nationally for median household income in 2006. Virginia was No. 9. Source: U.S. Census Bureau, American Community Survey.
Homeownership: Maryland ranked 28th for growth in the homeownership rate between 2001 and 2005; Virginia ranked last in the nation, with a decline in homeownership.
Virginia, however, edged Maryland out last year in the percentage of owner-occupied homes, 69.9 percent vs. 69.4 percent. Sources: Census data and Census data via the Corporation for Enterprise Development.
Venture-capital investment. Maryland was 8th in the nation in 2005; Virginia, 9th. Source: Corporation for Enterprise Development.
Broadband access. Maryland was 9th nationally in 2005; Virginia, 14th.
Major league sports, cultural opportunities: Self-evident, I believe.
Sprawl: More people (53 percent) work outside their county of residence in Virginia than in any state in the country. Maryland is No. 2 at 47 percent. Source: Census Bureau. The Sierra Club's 1999 sprawl and land-planning report ranked Virginia behind Maryland in every category measured.
Pollution: Maryland ranked 19th in toxic releases per capita in 2002; Virginia was 24th. Source: Corporation for Enterprise Development.
Maryland is No. 4 in per-capita college graduates, No. 3 in doctorate-level engineers and scientists and No. 7 in the recent increase of high-school graduates.
All from the Corporation for Enterprise Development.
In 1959 [North Carolina] was one of the poorest places in the nation, ranking 45th with a median family income 30 percent below that of the country as a whole.
Source: Statisical Abstract of the United States, 1981. North Carolina median family income in 1959 was $3,956, compared with national median family income of $5,660.
Today, North Carolina... family income is only 11 percent less than that of the nation and ranks 39th -- ahead of every southern state except Texas, Florida and Georgia.
Source: U.S. Census Bureau, American Community Survey. 2006 North Carolina median family income was $52,336 compared with median family income of $58,526 for the nation.
Complaints about Christmas commercialism...
are nothing new. Quote of the day:
"We have much to learn of the right keeping of Christmas. I do not think children now-a-days find the pleasure we found when we were young in preparing our simple little gifts and hiding these from one another. Now there is a surfeit of gifts, and a most unwise choice, and the children are not trained into the joy of giving. The hurry and bustle obscure the sacredness of the season."
-- Elizabeth Channing, Dec. 25, 1900. Autobiography and Diary of Elizabeth Parsons Channing (Boston: American Unitarian Association, 1907) 253.
December 24, 2007
Back on Wednesday. Happy holidays.
December 21, 2007
Merrill Lynch: Tax-refund delays could cause defaults
The always-interesting David Rosenberg from Merrill Lynch:
Delayed refunds could result in increased delinquencies This year's individual tax refunds will be delayed since Congress just finally passed the one-year patch for the Alternative Minimum Tax (AMT). This will play havoc with the January-February after-tax (disposable) income and spending data, which will be based on seasonal factors that expect the typical distribution of tax refunds. Moreover, the delay could result in increased credit card and mortgage payment delinquencies. Many early tax filers count on the refunds to paydown credit card balances following the holiday season. The timing is not good, since it comes at a time when we are already seeing rising delinquency rates.
Poor disclosure penalizes efficient charities
Pulled from comments. This is a terrific point. By pulling punches on disclosure requirements, the IRS hurts charities that work hard to keep expense ratios low. Better disclosure would make these nonprofits look good on Form 990, which many donors use to direct giving. Without the relevant ratios front and center on the IRS forms, the groups' light is hidden under a bushel.
People need to understand these ratios and know where there money is going. I sit on a board of a national non-profit out of Rockville and know what sacrifices the staff, including the Exective Director, take to keep the admin and fundraising costs low. They have a clear understanding of the fact that if those costs are low, there is more going to the programs which is why anybody should be working for a charitable cause.
Did Apple pay Think Secret to shut down?
Nick Ciarelli, the Harvard student who was proprietor of the Web site that tried to scooped Apple on its own technology news and often succeeded, isn't saying. But if he accepted money to shut up and settle litigation with Apple -- even if he was moving on to other things anyway, as Wired magazine suggested -- it's too bad. Even the idea of a journalism subject silencing a journalist with money and threats is disconcerting. And make no mistake, Ciarelli was a journalist. Thanks to the Web, we all can be journalists now.
Quote of the day
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
IRS avoids shedding full light on charities
The Internal Revenue Service just blew a beautiful chance to give donors the most relevant, accessible financial information about charities.
Scandals at United Way, the Nature Conservancy, the Red Cross and other nonprofits helped prompt the agency to revamp Form 990, on which charities report activities to the public. But the unveiling of the new form on Thursday shows that the IRS caved in to pressure from nonprofits to keep disclosure as full as it should be.
A draft form proposed earlier this year included statistics on a summary page giving a clearer idea about how much donations pay for executive salaries and other non-charity items. But the IRS scrapped requirements to disclose the number of employees making more than $100,000; fundraising expense as a portion of contributions; total expenses as a percentage of assets and executive compensation as a portion of total compensation.
Charities dismissed the IRS proposal to list easily accessible fundraising expenses as "value laden." You bet it's value laden. If 90 cents out of every donated dollar goes to pay some for-profit fund raiser, that's valuable information for givers.
Although the new form will require disclosure of first-class air travel and club dues for executives, the IRS rejected proposals to list all executive expense reimbursements and allowances. The agency will require better disclosure of loans, business deals and other transactions with insiders, but even this could have been improved.
The new requirements stop far short of information available on publicly traded, for-profit organizations. Donors are investing in charities no less than shareholders are investing in Merck and Exxon. The information they receive should be at least as comprehensive.
December 20, 2007
College kids & credit cards
The university attended by my oldest son polled students' parents on their kids' credit-card use.
Results (statistically unsound, to be sure) weren't as bad as I expected. 44 percent had 1 card. 39 percent had no card. 14 percent had two cards, and 2 percent had three cards. College people: 1 card, used responsibly and paid off every month, is a good way to go.
Quote of the day
"Balbus has assured me that you are going to be a rich man. Whether he uses the word in plain Roman style, meaning that you will have plenty of cash, or after the manner of the Stoics when they say that all are rich who can enjoy the sky and the earth, remains to be seen."
Feds bust Cuban cigar buyers while "greater threat" looms
The Government Accountability Office issued a study yesterday on how U.S. agencies enforce the stupid embargo against Cuba. Among other things, it found that Treasury's Office of Foreign Assets Control spends a huge amount of time tracking down and punishing people who buy Cuban cigars on the Internet. "After 2001," the report says, "OFAC opened more investigations and imposed more penalties for embargo violations, such as buying Cuban cigars, than for violations of other sanctions, such as those on Iran."
"OFAC penalties for Cuba embargo violations represented more than 70 percent of its total penalties in 2000-2005, falling to 29 percent in 2006. Most Cuba embargo penalties were, on average, smaller than the penalties for violating other sanctions... Our analysis of OFAC data shows that from 2000 through 2006, the agency collected fines totaling about $8.1 million for 8,170 violations of the Cuba embargo -- and average of $992 per violation. Most of these violations were relatively minor, such as purchasing Cuban cigars on the Internet. Over the same period, OFAC imposed fines totaling about $12.4 million for 3,054 violations of other sanctions programs, such as those on Iran, North Korea and Syria -- an average of about $4,071 per violation. Although the Cuba embargo is one of more than 20 sanctions programs that the agency administers, OFAC data show that from 2000 through 2005, Cuba embargo cases -- most involving unlicensed travel and imports of Cuban cigars -- accounted for over 70 percent of the agency's total penalty cases."
Be very thankful the government is on the job here. Otherwise somebody could be enjoying an illegal, $10 Gloria Cubana and financing employment for poor Cubans. GAO did note that other agencies -- Commerce and Justice -- concentrate more on "export violations and crimes that present a greater threat to homeland and national security or public safety."
December 19, 2007
Where the houses are depreciating
Larry Summers: Wost economy since 1980s "distinctly possible"
The former Treasury Secretary and Harvard President spoke today at the Brookings Institution.
“In my view it is almost certain that we are headed for a period of heavily constrained growth, quite likely that the economy will experience a recession as technically defined and distinctly possible that we are headed into a period of the worst economic performance since the stagflation of the late 1970s and recessions of the early 1980s.”
Prepared remarks here.
Quote of the day
“If I had been much broader than I am, I would have been so shallow that I couldn't have managed an academic career at all. I suppose I could have been a journalist.”
Best Buy: What recession?
For the quarter ending Dec. 1, from the company's news release:
Best Buy Co., Inc. (NYSE:BBY) today reported net earnings of $228 million, or $0.53 per diluted share, for its fiscal third quarter ended on Dec. 1, 2007. The leading consumer electronics retailer's diluted earnings per share increased 71 percent, compared with $0.31 per diluted share, or $150 million, for the prior-year third quarter. The better-than-expected EPS growth was driven by 17-percent revenue growth, which stemmed from new store openings and a 6.7-percent comparable store sales gain. The comparable store sales gain included the benefit of an additional post-Thanksgiving holiday shopping week. The strong revenue growth, which helped drive selling, general and administrative (SG&A) expense leverage, coupled with a flat gross profit rate, drove a 120-basis-point improvement in the operating income rate for the quarter.
December 18, 2007
Quote of the day
“At a most basic level, there can be only two rationalizations for the state's participation in an economy. The first is as a social equalizer, redistributing the fruits of a nation's production under the presumption that a particular social need takes precedence over private desires. The second justification for government intervention is the assertion that markets may fail to produce an efficient outcome."
-- Jerry L. Jordan, (now former) president of the Federal Reserve Bank of Cleveland, speech to the Pacific Northwest Regional Economic Conference, 1997
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December 17, 2007
Big business, Ralph Nader agree: Electricity probe needed
Delivering the biggest, best-coordinated protest yet against deregulated wholesale electricity markets, a wide array of stakeholders asked federal regulators to investigate whether prices are truly "just and reasonable," as they are supposed to be. From Dow Jones:
WASHINGTON -(Dow Jones)- A coalition of some of the U.S.'s biggest industrial electricity consumers and public interest groups filed a petition with federal regulators Monday to expand their investigation of wholesale power markets.
The coalition, which included the American Chemistry Council, the Steel Manufacturers Association and the Consumer Federation of America, said regional transmission organizations were producing "unjust and unreasonable wholesale power prices." RTOs run centralized wholesale electric power markets in the mid- Atlantic states, the Midwest, New England, New York and California.
The groups said some large, integrated utilities operating within the RTOs were earning "supracompetitive returns that are not commensurate with returns on investments in other enterprises."
In the deregulated markets, the most costly power generated to satisfy electricity demand - often from an older natural gas-fired power plant - sets the price for all generation. As natural gas prices have risen sharply since 2003, electricity prices have followed, in many states hitting record levels, and low-cost coal and nuclear plants can sell their power at this price and earn large profits. Many of the plants were bought by independent subsidiaries at discounted values when the markets deregulated nearly a decade ago.
"Deregulation was supposed to have brought about vigorous competition in the wholesale market, resulting in better electric rates for customers," said Donna Harman, chief executive of the American Forest & Paper Association, one of the 41 signees. "Unfortunately, that has not happened," Harman said.
Hancock: Poster boy of Sun liberalism
This email is typical of several I have received on my Friday column on the unfair discrepancy between the 6 percent Maryland sales tax on in-state retailers and the zero percent sales tax on out-of-state retailers who ship goods into Maryland.
I can't get over your recent "Amazon gets help it doesn't need article".
What a backwards point of view you have towards taxation.
If Maryland is taxing its businesses too much, then the only fair thing to do is to tax the hell out of the rest of the world to level the playing field?
Give me a break.
Amazon has no prescience in MD, and your "they use our roads to deliver"
is totally pathetic. Local businesses have many other advantages, including the ability to buy a product immediately, and not having to pay money for shipping.
Hey, maybe we should have local businesses pay a "shipping tax" to even out the playing field! That would be perfectly consistent with your philosophy perfectly.
And emails should require electronic stamps!
And who in his right mind would ask himself while shopping "Man, I wish the state was fleecing me on this purchase". You obviously do not represent the working man of MD.
On top of it all, you frame your discussion as if the state is actively losing millions of dollars - as if it was entitled to that money in the first place!
Wow, you are a real poster boy of Sun liberalism.
Apparently favoring equal treatment under the law for all businesses and opposing policy interference by outside jurisdictions is "liberal." If you like tax-free Internet shopping, there's no reason why you shouldn't love the importation of cheap, government-price-controlled pharmaceuticals from Canada even though it mocks U.S. law and flouts free enterprise. Taxes and regulation are sometimes unfortunate necessities. But however they're constructed, they shouldn't discriminate against entities based on their physical location. Maybe we should exempt another large group of Maryland entities so the rest of us can pay even more tax.
Quote of the day
How low can housing/mortgage stocks go?
James Bartholomew writes an investing column for the Daily Telegraph in which he tells readers what he's buying when and at what price. Two weeks ago he bought shares in Paragon, a British mortgage company that specializes in lending to landlords. He was lured by the price charts, which showed Paragon stock falling by half from its highs; the P/E ratio, which showed Paragon selling for only 4.5 times projected earnings; and the dividend, paying 9 percent at those depressed prices. He bought. He immediately lost.
Then came Tuesday this week; the day of the results. I turned on the computer and found the list of my shares. There, looking back at me was the price of Paragon and next to it "minus 51 per cent ".
It is not often that one buys a share and sees it fall by more than half within a week. I can tell you it is a rather numbing experience. The company statement made it clear that banks were not exactly falling over themselves to keep the money flowing towards Paragon despite its superb record of minimal bad debts among the landlords it lends to. The banks were nervous.
As a result, Paragon may be forced to have a rights issue. I have to admit that this incident has been a bit of downer. It has also challenged my previous view of the market.
Only two weeks ago I wrote here in optimistic, even complacent mode. Now I am wondering just how bad are things going to get. First Northern Rock. Then reliable information that a former director of a well-known bank has sold every share he had in that bank. Now Paragon has problems raising funds at a reasonable rate.
Know the feeling? Legg Mason's Bill Miller does. He bought Countrywide Financial in 2006, when it was in the 30s, down from a high of $45. He bought more in 2007, when it was still in the 30s. He bought more this fall, when it was in the high teens. Now you can buy Countrywide for $10. I have no doubt that people who invest in Miller's Legg Mason Value Trust now will do quite well if they hold on for five years. But the ride for them, and everybody else in the market, is going to be rough. The risk isn't just that some mortgage loans aren't going to get paid back. The risk, as Bartholomew's column shows, is leverage, liquidity and solvency. Your mortgage portfolio can be as solid as a castle but if you rely on third-party financing (who doesn't?), the value of your assets has plunged (whose hasn't?) and you can't get credit (or even worse, if you've got a note coming due), you've got problems.
December 14, 2007
Provident mortgage case not as pro-consumer as touted
The Maryland Court of Appeals decision that state-chartered banking companies may not recover home-equity loan closing costs if a loan is retired within three years is quite stunning. For years state banks have required borrowers to repay appraisal and courthouse filing fees if they close an equity line or pay back a loan within three years. When banks extend home-equity credit they incur ~$1,000 in costs usually paid by the borrower. They agree to waive the costs -- and extend the loan closing-fee-free -- if the borrower agrees to continue as a customer for three years.
The court's ruling will make it difficult for state banks to extend equity loans without closing costs. It really makes it difficult for them to compete with (Maryland-based) federally chartered banks, which can still require closing-cost repayment if loans/lines are repaid/closed early. I like the idea of minimizing prepayment penalties for first mortgages if the borrower pays the closing costs. But 2nd mortgages and home-equity lines extended closing-cost-free should be different. (Full disclosure: I opened a home-equity line with Allfirst a few years back and had to repay the closing costs when I moved before three years were up. As I recall, the penalty was $1,200 or so. But I was [more or less!] happy to pay because these were genuine costs the bank had incurred and I had agreed to the deal.)
"This is a very satisfying win for consumers," said M. Albert Figinski (who represented the plaintiff) in Laura Smitherman's story in The Sun. Sorry, it's another satisfying win for trial lawyers and that's about it. The money at stake for this particular plaintiff -- $680 -- is confetti. Look for Figinski and his boss, Peter Angelos, to try to certify this as a class action with new plaintiffs.
Quote of the Day
December 13, 2007
Ciena burned by mortgage meltdown
Watch out. Even when investors don't think they're exposed to mortgage problems, they may be. Ciena, a Linthicum-based maker of networking hardware, announced this morning that it would book a $13 million loss related to investments in debt issued by two mortgage vehicles. Cheyne Finance, sponsored by a London hedge fund, and Rhinebridge, sponsored by IKB Deutsche Industriebank, both invested bigtime in U.S. mortgages. Ciena has a ton of cash, much of it raised in the nutty public equity market of the late 1990s. It needs to be put to work, but in this case the money fell down on the job. Ciena shareholders who thought they were investing in fiber-optic hardware technology were also financing subprime mortgages.
The Cheyne portfolio, according to Asset Securitization Report, was 56 percent residential mortgages and the rest collateralized debt obligations and commercial mortgages. The Rhinebridge portfolio was 65 percent U.S. residential mortgages, mostly subprime, EuroWeek has reported. Ciena invested in short-term debt (commercial paper) issued by the entities, known as structured investment vehicles. Both defaulted. A $13 million loss won't put much of a dent in Ciena's $1.7 billion cash hoard, but it's still a black eye.
Quote of the day
“All wars are full of incompetence, mendacity, fear, and lies. War is big government, authoritarianism, central planning, command and control, and bureaucracy in its most naked form and on the largest scale. The Pentagon is the Post Office with nuclear weapons.”
Maryland November retail sales nearly flat
Bad news fiscally and for the retail economy. Comptroller Peter Franchot just sent his monthly revenue report to the governor and the General Assembly. Looks good at first glance: General fund revenue for November hit $812.4 million, up 7.1 percent from the same month in 2006. General fund revenue for the year to date is $4.1 billion, 3.2 percent higher than last year and about even with inflation.
But buried in the fine print are disappointing results from sales taxes, which are connected to the real-time economy maybe better than any other kind of government revenue siphon. While sales-tax receipts grew 5.7 percent in October, the second-best showing in 15 months, they grew only 0.2 percent in November. That's a very poor result, especially after reports of vigorous shopping on Black Friday in response to markdowns. Tom Saquella, executive director of the Maryland Retailers Association, says merchants are telling him December has been slower than November. Year to date through October (November sales tax receipts weren't added into Franchot's report) sales-tax collections have risen 3.9 percent compared with the same period last year. (These figures aren't on Franchot's Web site yet.)
Today the Board of Revenue Estimates is scheduled to give its latest projections to Annapolis, so maybe we'll get some more detail.
December 12, 2007
Annapolis Democrats too eager to change the rules
There has been a disturbing tendency in Annapolis for Democrats to tear up the rulebook when they don't like how the game is going. Last year, during the brouhaha over the 72 percent BGE price increase, the legislature tried to fire the entire Public Service Commission despite a law requiring the governor to appoint the body and despite commissioner terms extending well into the future. Granted, it was not the best PSC ever to preside over Maryland's utilities, but those were the rules. Maryland's Court of Appeals rejected the Assembly's coup, calling it "repugnant to the Maryland Constitution."
Now the legislature is making the same kinds of noises regarding the reappointment of Nancy Grasmick as schools superintendent. Senate President Mike Miller says the appointment is a "sore wound that will fester and will be excised by litigation or legislation." How can Gov. O'Malley be held accountable, he asks, if he can't appoint his own people? That's the same kind of question politicians frustrated with democracy, multi-party systems and the separation of powers have been asking since the days of the Roman Republic. We may not like the people who end up in positions of power in a representative democracy, but there should be a strong presumption to respect the system that put them there.
From today's story by Liz Bowie and Andy Green:
House Speaker Michael E. Busch and Senate President Thomas V. Mike Miller had sent a letter to the board Monday urging it not to reappoint Grasmick. Yesterday, they strongly suggested that the Assembly might take up legislation in January to overturn the action or change the appointments process.
"This board has done the state of Maryland a huge disservice, and Nancy Grasmick has done the state of Maryland a huge disservice," Miller said. "It'll be a very sore wound that will fester and will be excised either by litigation or legislation."
Miller characterized yesterday's vote as a move by "hanger-ons" appointed by former Gov. Robert L. Ehrlich Jr. to embarrass Gov. Martin O'Malley. The governor, Miller said, is entitled to have his appointees in place if he is to be held accountable.
O'Malley, who has made it clear that he wants Grasmick out of the job, appoints the board but does not have power to appoint the superintendent. He is charged with appointing three board members to terms that begin July 1 - and issued a statement yesterday that he would announce their names today. When they take their seats in July, O'Malley will have appointed a majority of the board.
Quote of the day
"I have always felt that, as a first approximation in handling questions relating to the lives and actions of large masses of people, the approach which counts one man as one, and, on that assumption, asks which way lies the greatest happiness, is less likely to lead one astray than any of the absolute systems. I do not believe, and I never have believed, that in fact men are necessarily equal or should always be judged as such. But I do believe that, in most cases, political calculations which do not treat them as if they were equal are morally revolting."
Lionel Robbins, London School of Economics, 1938
December 11, 2007
The vigilante stock market
In the 1990s, when the Federal Reserve and the White House's Office of Management and Budget didn't do what the bond market wanted, it exacted painful revenge. Now the stock market is doing the same thing. By falling 294 points this afternoon, the Dow placed a horse's head on the Fed's polished mahogany boardroom table. "Ben, you're our Fed chairman and we love you. But we're very disappointed in your behavior. We expect that next time you'll do better."
Stocks plunge after quarter-percent rate cut
Come on Wall Street! Does a quarter of a percentage point really matter that much? The Dow dropped 200 points after the Federal Reserve cut short-term interest rates only by a quarter point rather than the wished-for half point. Thanks to Yahoo for the graphic.
Maryland Nonprofits: Program is more than good governance
Here is Peter Berns, chief of the Maryland Association of Nonprofit Organizations, responding to a commenter's opinion (below) that MANO's Standards for Excellence program is onerous, especially for small organizations.
As the Executive Director of the Maryland Association of Nonprofit Organizations, the sponsor of the Standards for Excellence program, I feel I must jump in. I'm afraid that the discussion to-date is really missing the richness and value of what the Standards for Excellence program offers.
In fact, certification and the award of the Standards for Excellence seal is only a very small part of the overall program. The program has three components, which work both individually and collectively to improve governance and management practices in the nonprofit sector.
First, is the Standard for Excellence code itself. The code has 8 guiding principles and 55 standards that provide a model for how well-managed, responsibily governed nonprofits operate. From the introduction of the program nearly 10 years ago, we have encouraged nonprofits to simply use the code as a benchmarking tool to assess how they are doing and then to start a discussion about improvements they could make.
Second, the program includes a wide array of educational materials, including 22 educational resource packets, and workshops and seminars to help organizations learn how to make improvements in their governance and management. We have tried to create a system to make it as easy as possible for organizations to implement positive organizational changes. From the outset we believed that we don't have a right to articulate standards if we can't help organizations to meet them. Both the code and educational program are readily accessible to even the smallest nonprofits.
Third, of course, is the certification program. While quite rigorous, the organizations that have gone through it attest that it has been a very valuable process to participate in and that they feel they are stronger and more sustainable as a result, as well as more successful in fundraising.
While clearly we would like to see more nonprofits become certified (and we believe that over time the market will demand that they do), we don't measure the success of the program by the number of certified organizations. Rather, we see success everytime an individual organization, large or small, makes use of the Standards to benchmark how they are doing and decides to make even one small improvement in their governance and management practices this year... and then another improvement next year, and so on.
Over time the program is serving to build stronger, more sustainable and more accountable organizations. And a growing body of research bears this out.
A longitudinal study we conducted based on analysis of IRS datafiles from 1995 to 2005 indicates that Maryland Nonprofits members are more likely to grow and less likely to go out of business than non-members. And Standards certified groups are more likely to grow and less likely to go out of business than our members at large.
Research elsewhere has demonstrated that "high performing nonprofits" engage in the governance and management practices that are described in the Standards for Excellence.
Over nearly ten years now, it has been an interesting challenge to try to create an implement a meaningful system of self-regulation in the nonprofit sector. Clearly, Maryland's nonprofit sector is leading the nation in this field.
I don't disagree with anything you said about enforcement, policing, and even the low standards of non-profit Board members.
But the program as implemented by MANO is incredibly onerous. There's a 13-page application that requires lengthy answers to dozens of questions and attachments of more dozens of documents all of which takes literally hundreds of hours to complete. ( See http://www.marylandnonprofits.org/html/standards/documents/Application2006.pdf )
There's a $1500 application fee for non-MANO members, and there's a re-certification every three years. (Another $750 for non members.)
My main point is that in small organizations with small budgets funded by small donors, the Standards program is essentially out of reach, regardless of how squeaky clean or well-run the organization is.
It's OK, BWI: New international routes will come sometime
Icelandair is dumping BWI, leaving the airport even more bereft of international routes. But I believe things will turn around. BWI is in a sweet spot to benefit from European airline deregulation, starting with the opening of London's Heathrow Airport next year. Up until now, only British Airways, Virgin, United Airlines and American Airlines were allowed to fly to the United States from Heathrow. Everybody else had to use Gatwick or other 2nd-grade airports. With European deregulation, BWI and its huge, barely-used international wing should look attractive. With luck discount European carriers will schedule BWI service and then code share with JetBlue, AirTran etc. for domestic connections. From a recent Barron's story:
Other European carriers, including leaders like Lufthansa and Air France, were barred from flying to the U.S. from anywhere except their own nation's airports. That was a huge disadvantage, and clearing away the prohibitions -- slated for this coming March -- could give a real lift to the global airlines industry.
A study prepared for the European Union by the consulting firm Booz Allen Hamilton suggests that the initiative will generate at least 26 million additional trans-Atlantic passengers annually within five years, a 50% increase over the current 50 million. That could help the global aviation industry continue increasing its earnings, after a long slump following the terrorist attacks of Sept. 11, 2001.
The spoils, however, won't be divided evenly. Air travelers certainly will win, with trans-Atlantic fares falling by 10% or more. And depending on exactly how it plays out, the deregulation could help the stocks of U.S. carriers like Continental (ticker: CAL), Delta (DLA) and US Airways (LCC), previously barred from Heathrow.
IT MAY TAKE SOME TIME FOR THE changes to become evident. Though Heathrow will be opened legally to all airlines, in practical terms it will be hard for newcomers to break into, at least in the short term. The airport operates at nearly 99% capacity, with its two parallel runways handling about 1,300 takeoffs and landings, or "slots," every day. The airlines now using the airport control no less than 97% of these slots, and the new Open Skies accord contains no provisions to force the "Heathrow Four" (BA, Virgin, American and United) to give or sell these rights to other airlines.
But eventually Heathrow will expand; traffic through the airport could increase 50% by 2020. A new runway would add more capacity and more slots but, given public opposition, isn't likely before 2015 at the earliest.
December 10, 2007
So much for canny, parsimonious Swiss bankers
ZURICH, Switzerland (AP) -- UBS AG will write off a further $10 billion in losses from the U.S. subprime lending market, the Swiss bank said Monday, and raise billions in capital through share sales to Singapore and an unidentified investor in the Middle East.
UBS said it will post a loss for the fourth quarter and may now record a loss for the full year as well. That comes on top of the 4.2 billion francs written off in its third quarter, making 14.2 billion francs ($12.6 billion) in writedowns from the subprime crisis by UBS this year.
The Government of Singapore Investment Corp., a sovereign-wealth fund, is investing 11 billion Swiss francs ($9.75 billion), while an undisclosed strategic investor in the Middle East is contributing 2 billion francs ($1.77 billion).
As recently as the middle of November, UBS had predicted a profit for the fourth quarter despite ongoing speculation about its subprime holdings.
Harvard uses $35 billion endowment to cut tuition
What are endowments for, anyway? Harvard has long been pressured to invest some of its $35 billion endowment in making its tuition more affordable. Now it seems to have done so in a significant way, cutting the cost of attendance by as much as half for students in families making between $120,000 to $180,000 a year and by more for families making less. From Bloomberg:
These families [making 120k to 180k] will pay just 10 percent of their yearly earnings to send a child to Harvard, the Cambridge, Massachusetts, university said today. The payments decline on a sliding scale, with those making less than $60,000 attending for free. The school also eliminated student loans, saying students will get additional grants as needed.
The newest initiative expands a program started in 2004, when former president Lawrence Summers added a tuition-free financial aid program for students from low-income families. The program, which begins next year, will cut costs for a family earning $180,000 to $18,000 per student, compared with $30,000 this year, according to the school.
``What you see here is a real commitment to try to identify a response to the enormous stress that a particular group of families feel about the cost of higher education,'' President Drew Faust said in a conference call. The new program focuses on a ``middle-income group,'' she said.
Excluding home equity from financial aid formulas, another part of the initiative, may save some students about $4,000 a year, according to a statement from Harvard.
Here's Senator Charles Grassley, who has been pushing for this:
“This is big news. Universities hold at least $340 billion in endowments. Harvard has the biggest endowment of all. This could inspire other expensive colleges to make tuition more affordable. Choosing a college should be based more on brain power than bank account size. As a society, we need to avoid saddling families with tuition they can’t afford and students with sky-high debts. I hope the colleges that are taking steps to reduce tuition will make the costs known up-front, so families can comparison-shop ahead of enrollment and don’t get any rude surprises afterward.
"I hope Congress is motivated by Harvard’s action to continue a discussion of whether to impose a mandatory endowment pay-out requirement on well-funded colleges. Colleges are tax-exempt, and other tax-exempt entities, such as most private foundations, have a mandatory pay-out requirement of 5 percent a year. Tax-exempt organizations are supposed to provide public benefit in exchange for their special status. Helping the next generation afford college is a public benefit. It’s good to see a top college recognize that.”
Dow's October record: A Barry-Bonds-style asterisk?
That's what the New York Post suggests. Why? Because the only reason the Dow hit 14,164.53 on Oct. 9 was the fact that Dow financial members Citigroup and GE and the rest of the market were pumped up on subprime steroids. HT: Big Picture.
Critics of credit reporting agencies and Wall Street analysts say their failure earlier this year to properly warn investors about the possible extend of the subprime mortgage meltdown tainted the 14,164.53 record high of the Dow Jones industrial average.
Therefore, the critics say, the record high hit on Oct. 9 should carry a Barry Bonds-like asterisk - because it was reached unfairly.
"These were phantom Dow highs in that they were predicated on unrealistically low expectations of risk in the housing market," Christian Stracke, a senior strategist at CreditSights in London, told The Post last week.
"It was a fool's rally and a fool's record Dow high in October," snapped Chris Whalen, managing director of Institutional Risk Analytics. "This whole thing was built on colossal and very deliberate deception of investors with opaque products like CDOs."
Laws require nonprofits to be honest -- yes, but...
Apropos of my post on Maryland Nonprofits' Standards for Excellence, TJ Harris says:
It is generally true that the "Standards of Excellence" are a good way to minimize the chances that the organization is infested with the "incompetent, negligent, venal or larcenous."
But the Standards themselves are onerous and bureaucratic and somewhat redundent with basic non-profit state and federal laws and general corporate principles.
Meeting the Standards will guarantee that the organization has squandered hundreds of board and staff hours coming up with the pointless documentation and "written policies" required by the Standards of Excellence program.
Not to take away anything from Parks and People's achievement (and they are an outstanding organization), but smaller, but quite effective and non-larcenous non-profits will do fine work without meeting the Standards. Donors should look to a record of effectiveness rather than this particular overly-bureaucratic seal of approval.
Standards for Excellence DO overlap with "basic non-profit state and federal laws and general corporate principles." Problem is, state and federal laws purporting to keep nonprofits honest are lightly enforced, at best. Nonprofit enforcement by the IRS, which is in the best position to do so, has been a joke, although it's getting better. On a state level it takes blatant, ham-handed embezzlement to spur prosecution, and many people profiting from private inurement at nonprofits are too sophisticated to get caught doing that. (The accountant taking money from the till goes to jail while the executive director steering exorbitant contracts to his/her for-profit company gets a pat on the back.)
As for "general corporate principles," nonprofit boards tend to be disengaged, undertrained and ambivalent about enforcing ethical and financial standards. And by definition nonprofit organizations have no shareholders, so there is nobody left to watch the ball. So what's left? The nonprofit industry, if it values its reputation, must undertake to promulgate and enforce standards itself.
Take that, Bill O'Reilly
Alan Dershowitz takes down the Fox blowhard and his new book, Kids Are Americans Too, in Sunday's Washington Post. In 2000 O'Reilly banned Dershowitz from his show and Dershowitz told his administrative assistant to refuse to take calls from Fox. Look for O'Reilly to bellyache and bring up Dershowitz's legal defense work for O.J. Simpson etc.
[O'Reilly] tells American kids -- many of whom, in his view, are "complete morons" -- that "Ben Franklin, Thomas Jefferson and the rest of the guys" who "got together in Philadelphia in 1787" to write our Constitution "believed that a lot of laws -- a lot of rights -- should be decided by the individual state, or even the individual county or city." Never mind that Jefferson was in France when the Constitution was being drafted and ratified.
And never mind, too, that the first court decision used by O'Reilly to illustrate his screed says precisely the opposite of what he tells the kids it says.
O'Reilly also purports to teach about morality and responsibility. He complains about secret legal settlements "in which no one admits any 'wrongdoing' in the matter." You mean, like the one he entered into with Andrea Mackris, one of his former Fox News producers, after she filed a lawsuit accusing him of harassing her with sexually explicit phone calls and of threatening that she would be "destroyed" if she "ever breathed a word" about it? This is the same Bill O'Reilly who tells kids that "any kind of bullying is a bad thing."
The author of this book also preaches to kids about their right to express themselves freely. Contrast that author with the talk show host of the same name, who said in a June 20, 2005, radio broadcast:
"Dissent, fine: undermining, you're a traitor. Got it? So, all of those clowns over at the liberal radio network, we could incarcerate them immediately. . . . Send over the FBI and just put them in chains, because they, you know, they're undermining everything."
December 7, 2007
Collateralized debt obligations -- in pretty pictures
This animated graphic from Felix Salmon & Portfolio.com is a great explanation of CDOs, which have much to do with why Wall Street firms are losing billions on mortgage investments.
Down with economic nationalism
Here is libertarian George Mason University economics professor Don Boudreaux replying to liberal UMBC political science prof Thomas Schaller's column in Wednesday's Sun. Schaller is the author of Whistling Past Dixie: How Democrats Can Win Without the South. Boudreaux is author of the forthcoming Globalization.
The consequences of blind devotion to suspect economic theories are stark, as the Nobel-winning economist Joseph E. Stiglitz points out in the current Vanity Fair. "Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion," he writes. "Most likely, these creditors will not call in their loans - if they ever did, there would be a global financial crisis. But there is something bizarre and troubling about the richest country in the world not being able to live even remotely within its means."
Regardless of this debt's merits or demerits, what is the relevance of creditors' nationalities? Whether the creditors are in Utah or Ukraine, Baltimore or Beijing, the debt must be repaid. And that is the burden of the debt; the nationalities of creditors are irrelevant.
How to donate to a good nonprofit
I know nothing about the Baltimore Parks and People Foundation except what I just read in its press release and on its Web site. "Since 1984, Parks & People Foundation has worked to improve the quality of life in Baltimore’s neighborhoods, developing innovative solutions for restoration of natural resources and the academic enrichment and motivation of the city’s children."
But I know that Parks & People just qualified for Maryland Nonprofits' Standards for Excellence program, which reduces chances that certified organizations will turn out to be incompetent, negligent, venal or larcenous. Standards for Excellence is a bright signaling device saying, "This nonprofit is likely to use your philanthropic donations and government grants in a productive, efficient manner." Not a bad screen to use when deciding on your year-end donations. Here is a list of qualifying organizations.
Congress refuses to make fatcats pay their share
Last night the Senate passed a bill to fix the Alternative Minimum Tax, which keeps vacuuming in non-rich households and hitting them with high taxes, an outcome Congress never intended. But it failed to replace the lost revenue and refused to tax venture-capital and hedge-fund partners at the rates everybody else pays. In other words, it made sure regular folks don't have to pay fat-cat rates. But it refused to make sure fat cats pay regular-folks rates. Charles Rangel, chairman of the House Ways & Means Committee, reportedly said he won't oppose removing a tax increase on venture- and hedge-fund managers in a bill that the House passed.
Much of the personal compensation that private-equity partners receive is taxed at the low (15 percent) capital-gains rate, even though it's not capital gains. Called "carried interest," it's employment income for coming to the office every day and doing a good job. The low long-term capital-gains tax is for people who actually put capital at risk in the economy. To the extent that private-equity managers aren't doing that, they shouldn't be given the capital-gain rate. They should pay income rates -- of up to 35 percent. This loophole costs the government billions that it should be getting from people who receive a sweetheart rate and can most afford to pay it. From Bloomberg:
Some Democrats said they would oppose scaling back the alternative minimum tax unless other taxes are raised to avoid adding to the federal deficit. House Majority Leader Steny Hoyer, a Maryland Democrat, said yesterday that he ``will not vote for an AMT patch that is not offset, even if I am the only member to do so.''
December 6, 2007
Reuters covers the stupid press release of the day
On how to impress the boss at the company holiday party. But they sorta made fun of it, too. Hoisted from comments, here is the reply of John McKee, who wrote the book on which the press release was based. He is certainly entitled to have his say:
I was surprised to see that you felt our tips for Holiday schmoozing deserved to be your stupid press release of the day. My intention was to provide individuals with some easy to use advice for events which many view with a great deal of concern. It seems you also recognized there were some good ideas included, based on your decision to show them to your readers under your banner.
Fortunately, other organizations agreed that these tips were valuable for
their readers. Today Reuters decided to share it at:
I plan to continue offering insight and suggestions which could help individuals enjoy a little more success in their daily lives. Hopefully you'll choose to allow your readers to decide what is stupid and what is helpful each time.
John M McKee
What does Black & Decker pay in BaltCo tax?
In comments, Bryan in Timonium asks about the top taxpayers in Baltimore County: "Where does Black & Decker fall on that list?" Interestingly, Towson-based Black & Decker is not on the list of the top 25 county taxpayers. In fact only two county-based big-corporation headquarters are on the list: McCormick, at No. 14 and paying $882,000 a year in tax. (McCormick also has manufacturing facilities in the county, which boosts its taxable assets.) The other is CareFirst BlueCross BlueShield in Owings Mills, at 25th and paying $574,000 in tax. This is all property tax, of course, so most of the county's big taxpayers are big malls and commercial real estate partnerships. But now I'm curious about Black & Decker, so I'll try to find out in the next few days.
Verizon: We're not dumping pay phones
Good news for Marylanders on the go who don't have cell phones. (Are there any left besides me?) Verizon, the last major telecom company in the stationary pay-phone business, says it has no intention of exiting. In the wake of news that AT&T
(formerly known as Cingular, which was formerly known as SBC Communications) ("which changed it's name from SBC after buying AT&T who also acquired Bell South who owned the other half of Cingular" -- thank you reader Jeff) is trying to sell its pay phone business, I asked Verizon (the former Bell Atlantic) spokesman Harry Mitchell if Verizon would be next.
Although the company has only about 225,000 pay phones in 28 states and D.C. these days -- half what it had in 2000 -- it apparently still likes the business. It gets pay-phone revenue not only from quarters dropped in slots but from phone-booth ads, discounted international calling and a collect-calling number (1-800-USE-THE-VZ), says Mitchell. Naturally, Verizon makes the most money from phones at BWI, bus stations and other transportation hubs, where the pedestrian-to-phone ratio is especially high.
"Pay phones continue to provide an important service for millions of people – the person who prefers to pay as he goes, for example, as opposed to having the fixed monthly payment associated with cell service," says Mitchell. "They can be very valuable in a personal or social crisis; the Sept. 11 attacks and the New York City blackout a couple of years later produced a new appreciation for payphones, when customers lined up 20 deep to use them."
Verizon will, however, keep "managing the inventory" of pay phones and whacking locations that don't perform.
BGE natural gas cost inches up for December
BGE has posted its core natural gas price for the month. It's 95.6 cents per therm -- up slightly from November's 92 cents. This is above last year's December price of 86.6 cents, but below the $1.037 hit in January of this year and way below the $1.262 of December 2005, right after Hurricane Katrina disrupted gas supplies. So far people who did not sign up for independent offers locking in a price of $1 per therm for 12 months are coming out ahead. But January and February will be the true test.
In any event, people who heat with natural gas this winter are probably better off than people who heat with oil or electricity, all other things being equal.
December 5, 2007
Baltimore County's top 15 taxpayers -- outed
I read municipal bond prospectuses for fun in my spare time. What do you do? Here are Baltimore County's top taxpayers, as listed in bond documents filed with the Securities and Exchange Commission.
1. BGE: $26.4 million
2. Verizon: $10.4 million
3. Merritt Management Group: $3.3 million
4. TRP Suburban: $1.7 million
5. Oak Campus Partners: $1.6 million
6. Towson Town Center: $1.6 million
7. Wal Mart: $1.5 million
8. Comcast: $1.5 million
9. Maryland Health & Higher Education (who is this?)
10. Sparrows Point steel mill: $1.1 million
11. White Marsh Mall: $1 million
12. Cellco Partnership: $891,000
13. Security Land Development: $889,000
14. McCormick: $883,000
15. Home Depot: $823,000
Stupid press release of the day
It's been too long... This is from the PR firm for John McKee, who wrote a book about "Strategies to Ensure Workplace Success." They're trying to get him some press by coming up with a holiday angle. You thought office holiday parties were chances to unwind with co-workers and celebrate the season. Apparently they're actually do-or-die social-performance challenges in which only the most motivated flunkeys will capitalize on the opportunity to pander, pose and obsequiate (new word I just invented) for the bosses. But you musn't seem like you're doing so.
But how does one appropriately schmooze without coming off as brown-nosing? And, how does someone aptly parlay friendly party chatter into an opportunity to showcase their talents?
In time for the festivities, John M. McKee, one of America’s leading business success coaches and author of “Career Wisdom - 101 Proven Strategies to Ensure Workplace Success” among other titles, offers these tips on how to “schmooze” your way to career success at a holiday office party:
Determine the objective. In advance of an event, expert “schmoozers” think through what the best possible outcome would be relative to career growth. Think through a few realistic scenarios of how you might work toward achieving your objective.
Debrief your guest. As important as it is for you to know who the “important people” are at an event, the same holds true for your guest. The person you have chosen to accompany you to a business function, and how they behave, reflects directly on you – whether positively or negatively.
Early bird special. Arrive at the event early. Make a point of speaking to and thanking your boss and the host of the party, introduce your guest, and generally spread good tidings.. Show your humanity and connect on a different level before things really heat up.
Presence pays…literally. Generally speaking, great schmoozers are interesting and entertaining to those around them, and exude self confidence. It’s imperative to present a comfortable demeanor– however “important” or intimidating the other person may be. Appearing at ease during a time when others are feeling anxious or uncomfortable will make you look more like a “natural leader,” thus making yourself a stand out.
Maintain your visibility. The location where you are situated should be highly visible. Stand in a place that is approachable - not behind chairs or the kitchen door where there is high traffic.
Maximize first impressions. How you introduce yourself to people, especially superiors, is important. Develop more than one way of introduction, and keep in mind that the secret to a good first meeting is self-confidence, poise and emitting a generally affable air.
Due diligence. There’s nothing more awkward than standing face to face with a power player amid uncomfortable silence. Schmooze pro’s always know the right thing to say. Review current news events before the office event so you may participate in – or, even better, start – mainstream conversations about the economy, foreign affairs, and relevant “happenings” around your city. This macro awareness can put you in a whole new light in the eyes of a superior.
The great can articulate. Being able to effectively communicate, off the cuff, what you do for an organization, without gloating or over-inflating, is critically important. Long-winded answers with ebbs and flows can render the actual answer lost in translation. When and if appropriate, use the opportunity to self-promote and impart any new ideas you may have in a way that will not be construed as bragging or credit hogging way.
Nix the narcissism. Rather than focusing on self-talk, make the other person your focal point. Feed their ego by asking him or her open-ended questions, and be sure to include everyone in the conversation –with both questions and eye contact. When it’s your turn to speak, don’t monopolize the conversation, use jargon or terms that others may not understand – they won’t impress!
Calling card critical. Keep business cards with you at all times, which are often forgotten by those attending informal company meetings or social events, and dole out liberally. You want to not only remain top of mind, but also completely accessible, post-event.
Grievances need not apply. A social business event is not the time to clear the air about things, or people, that have been bothering you, nor is it a time to speak at another’s expense. Speaking negatively about others will be a greater loss for your image and career.
Imbibe and socialize with caution. There is no quicker career killer than public displays of drunkenness at a business function. Don’t embarrass yourself by dancing like a crazy person or like a predator at a club, get caught necking or act aggressive in any way.
A Nexis search shows that no newspaper or magazine has done this story -- yet. I'm sure there are some worthwhile things in the book. One chapter -- "How to Work for a Jerk and Succeed Anyway" -- surely is worth the price. But warning office partiers not to make out with their dates or do kamikaze shots in front of the boss may not be a good use of expensive newsprint.
Emerging markets: Uh Oh.
A Merrill Lynch chart that I cannot reproduce because it's a PDF shows us that the price-earnings ratio of emerging stock markets has fallen so far that it is now equal to that of developed markets. Translation: You're now paying as much for a dollar of earnings in countries such as Germany and the United States as you are in countries such as Bulgaria and Indonesia. Great, you say. The economies of Bulgaria and Indonesia are growing faster than those in Germany & the USA, so stocks there will keep going up! However: Bulgaria and Indonesia do not have the same securities laws as Germany & USA. Bulgaria and Indonesia do not have the same property rights, court systems, accounting standards, political systems etc.
Merrill Lynch, however, is not especially cautious about this. Emerging market stocks, it says "have reached valuation parity with developed market equities but can certainly keep going due to superior earnings growth." And: "We are bullish on EM equities for 2008."
But there was a reason why, as recently as 2002, a dollar's worth of emerging-market earnings cost more than twice what it took to buy a dollar's worth of developed-country earnings. The risk was greater. Sometimes emerging countries go through coups d'etat. Sometimes corporate assets in emerging countries get nationalized. Sometimes investors in emerging countries get ripped off by other investors, and the securities cops leave something to be desired. Sometimes emerging stock markets crater for a decade or more. That's what they did after 1996 -- the last time P/E ratios in developed markets and emerging markets were the same. I agree that emerging market stocks will probably do well next year. Huge foreign reserves held by developing nations will prevent the kind of currency collapses we saw a decade ago. But eventually something will cause them to reverse in a huge, painful way. Maybe inflation in China. Maybe a U.S. recession. Maybe a war. And boy, emerging stocks are already really expensive, based on historical valuations.
December 4, 2007
The quote John Grisham may wish he could take back
Here is the bestselling author, being quoted in today's Wall Street Journal (subscription required), on allegations that his friend, superlawyer Dickie Scruggs, tried to bribe a judge.
"'This doesn't sound like the Dickie Scruggs that I know,' Mr. Grisham said yesterday. 'When you know Dickie, and how successful he has been, you could not believe he would be involved in such a boneheaded bribery scam that is not in the least bit sophisticated.'"
If that sounds like he's saying the Dickie Scruggs he knows would have been involved only in bribe schemes that are sophisticated and successful, that's not what he meant. But the way the words came out, that's what you're left thinking. Scruggs and several others were indicted on charges of bribery by a federal grand jury in Oxford, Miss. His lawyer has denied the allegations.
But what about losers with no cell phone (like me)?
I hate cell phones. I hate having to answer them when I'm doing something away from a desk. I hate bothering innocent bystanders who might overhear my private conversations. (Sometimes I borrow my wife's or my kids' wireless phones.) And I really hate having to overhear cell phone conversations of strangers yacking it up in a public venue. So what do I do when I'm out and I need to make a call? I use the invention that was high-technology in 1900: the pay phone. Pay phones, however, are going the way of the dime call.
A decade ago there were 2.6 million pay phones in the United States, says AT&T. Now there are only about a million. Here is the latest blow, from Ma Bell (which is really what we used to know as Cingular): "AT&T Inc. announced today plans to exit the shrinking pay phone business by the end of 2008."
"This is the right time for us to take this step on behalf of our
customers, employees and stockholders," said David Huntley, senior vice
president for Customer Information Services. "We expect that independent
providers will pick up much of this business, and, as we exit the business,
we will be able to refocus our resources to areas that offer stronger
growth potential and greater opportunity for the company."
This affects only 13 states (not Maryland) with pay phones operated by the Baby Bell that became Cingular and then became AT&T. AT&T's (Cingular's) main business, of course, is wireless phones. So can you blamed me for seeing a nefarious plot to make me buy a cellphone? What AT&T is doing, however is only part of a larger trend. Country singers will no longer have pay phones as props for scenes of heartbreak and betrayal. Nothing rhymes with "50 cents" anyway. Somebody needs to write Carrie Underwood a song about texting and IMing.
December 3, 2007
PSC: No economic benefits from new wind power
Maryland badly needs to increase its internal electricity generation and its access to juice made out of state. The PSC asked consultants to rate investments in various types up infrastructure. The best bang for the buck, consultants said, is not in building new in-state generation but in building capacity to import electricity from out of state:
Transmission offers the highest total economic value added compared to the costs. New transmission affects both capacity and energy costs because it relieves the physical transmission constraints in the grid. From this perspective alone, it is the most attractive option economically. It is, however, the "option" that is the most uncertain because its fate resides largely in the hands of other state and federal officials.
Even if approved, transmission alone probably wouldn't solve Maryland's impending electricity shortage, anyway. So the consultants looked at different options to boost generation.
The nuclear case provides the highest cumulative economic value added of all scenarios. Given the lead time associated with such a project, however, price benefits [for consumers] are not realized until 2017.
For short-term relief, the consultants recommend building 1200 megawatts worth of natural-gas powered plants. These are relatively cheap to build, but the fuel has gotten expensive. They say that, despite the environmental benefits of wind power, the addition of significant new wind generation in Maryland wouldn't bring prices down.
The wind option our consultants modeled does not provide net economic benefits in either the short- or long-term. Wind does, however, represent a source of clean, carbon-free power.
PSC: We will "force" new electricity generation if needed
As expected, after much study, the Public Service Commission is starting to weigh in on what to do about Maryland's electricity quandary. A couple big reports came out today, and more will come out later this month. The reports were posted on the PSC's Web site at 5:30. Some highlights:
The data the PSC has gathered, itself and through consultants, reveal convincingly that we do NOT have the luxury of waiting for the markets to address Maryland's reliability and pricing problems. Instead, the PSC recommends and plans to undertake a series of interventions designed to respond to these problems directly:
-- First, the PSC will, if necessary, force an increase in the available supply of electricity, both to ensure a reliable supply and to relieve some of the upward pressure on wholesale prices...
-- Second, the PSC will, as part of a pending proceeding, require the utilities to implement aggressive and cost-effective demand management and energy conservation programs, consistent with Gov. Martin O'Malley's EmPower Maryland initiative.
-- Third, the PSC will rule shortly on whether, and if so how, the process by which utilities purchase electricity... could be modified to achieve better and more stable prices for ratepayers.
-- Fourth, the PSC will continue to expand and elevate its presence as an advocate at FERC [Federal Energy Regulatory Commission] and PJM [PJM Interconnection -- the Mid-Atlantic regional grid] and in other forums on behalf of Maryland's energy future, reasonable rates and fairness in the wholesale electricity markets.
U.S. national debt grows by $1 million a minute
Good story by the Associated Press on the national debt, which is one reason the dollar is cratering and people despair for the country's fiscal future. Young people: Pay Attention. You will be the ones stuck paying this debt off or suffering the inflation needed to reduce it monetarily.
Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day -- or nearly $1 million a minute.
What's that mean to you?
It means almost $30,000 in debt for each man, woman, child and infant in the United States.
Even if you've escaped the recent housing and credit crunches and are coping with rising fuel prices, you may still be headed for economic misery, along with the rest of the country. That's because the government is fast straining resources needed to meet interest payments on the national debt, which stands at a mind-numbing $9.13 trillion.
And like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt -- now at relatively low interest rates -- rolling over to higher rates, multiplying the financial pain.
So long as somebody is willing to keep loaning the U.S. government money, the debt is largely out of sight, out of mind.
But the interest payments keep compounding, and could in time squeeze out most other government spending -- leading to sharply higher taxes or a cut in basic services like Social Security and other government benefit programs. Or all of the above.
A la carte TV pricing will come -- on the Internet
More attention was focused on Chairman Kevin Martin's defeat in an attempt to impose stiffer cable-TV regulations at the FCC last week than on what those regulations are. Martin tried to invoke the "70-70" rule, which gives the Federal Communications Commission tighter control when cable companies reach 70 percent of the nation's households and 70 percent of THOSE homes subscribe to cable. Martin said we've reached that point. No we haven't said the industry, loudly complaining. Martin's study showing 70-70 liftoff looked a bit forced, anway, so it's not going to happen.
What he wanted to do was allow cable TV customers to buy channels "a la carte" instead of in the bulk, prix fixe manner that the cable companies and the TV evangelists prefer. You want ABC and Ugly Betty? OK, but you have to buy Joel Osteen and the bass-fishing channel and QVC as part of the same package. Cable companies hate a la carte because it would hurt their cash flow and profits and diminish their leverage with content providers. But you can already get many shows a la carte -- on the Net. They're free now. But look for technology to improve, Net video to get better and networks to consider start to charge for Net viewing. The process will take a while -- and may prompt food fights with cable-broadband companies who will get mad that networks are piping programming behind their backs on their own fiber. But I bet it will happen for certain premium content before there are any a la carte menus from traditional cable-TV outfits. Then maybe it will force the cable companies to offer their own a la carte as a defensive move.
His columns appear Tuesdays and Sundays.
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- Now showing: Credit problems in electricity market
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PSC: No economic benefits from new wind power (4)
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