RAHM EMANUEL AND THE PARKING METERS: “GOT TO MAKE THE BEST OF…A BAD SITUATION”

4/30/13

Despite Mayor Emanuel’s latest exercise of his most salient talent, self-congratulation, the settlement he reached with Chicago Parking Meters LLC (“CPM”) was no great shakes for those who park and/or live in Chicago.

Under the settlement, the city still has to shell out $64 mm that it doesn’t have as compensation to CPM for meters used without charge by those with disabled parking placards and for revenue denied CPM due to street closings for police activities and the like, broken down as follows:

Disabled parking placards                     $55 mm

Police activity, etc.                                $ 9 mm

Total                                                    $64 mm

The Mayor, however, in only the latest manifestation of chutzpah bordering on shamelessness, says the deal will save the city “over $1 billion.”   How does he turn an outlay of $64mm into a saving of $1 billion?

CPM was asking for $50mm to compensate for parking revenue lost to police activity and the like.   CPM settled for the above $9mm and presumably agreed to the city’s formula for calculating such compensatable shortfalls in the future.  That is a savings of, using round numbers, $40mm.   The period in dispute was two years, so that works out to $20mm in “savings” per year for the city.   Since the contract runs another 71 years (Thanks, Richard I), by the Mayor’s arithmetic, 71 times $20mm works out to “over $1 billions.”   That the Mayor didn’t give himself credit for something like “almost a billion and a half dollars,” which would be closer to product derived from his political math, shows that even he lacks confidence in his numbers.

The more often mentioned part of the deal is that parking will be free outside the downtown area on Sunday.   In exchange, CPM will be able to charge for parking for an additional hour or three hours on the other six days of the week.  The three hour extension is limited to Streeterville and River North, the areas most likely to be frequented after the current 9:00 limit on evening parking charges for most of the city’s meters.  Whether the Sunday for late night trade-off turns out to be to the city’s or CPM’s advantage no one knows at this juncture, but, in any case, the difference will be slight.  

We do know, however, that extending the charged parking hours primarily, and for the longest period of time, in the city’s prime night life areas is yet another manifestation of Mayor Emanuel’s ongoing drive to impose taxes on those who don’t vote in the city.   Many, maybe most, of the people who will be in the entertainment districts after 9:00, and thus paying for more hours of parking, come from the suburbs.   As with the increase in fees for water, much of which finds its ways into suburban homes and businesses, by allowing CPM to extend parking hours in the city’s night life hotspots, the Mayor is politically wisely making suburbanites pay for city services.   One could argue legitimately that this is only fair; if suburbanites use the city’s services, they should pay for them.   One can argue indisputably that this is politically smart for the Mayor.

To his further credit, Mr. Emanuel is not arguing that the overall deal is great for Chicagoans; he is only arguing that he is making the best of a bad situation, that he is, as he put it, “making some lemonade out of a big lemon.”   

The interesting political story here is that the Mayor is getting closer to outright and unrestrained criticism of his predecessor who, among other bone-headed, or worse, moves in the latter years of his administration, stuck the people of Chicago with this turkey of deal.  But Mr. Emanuel still hasn’t crossed the line and slammed Mr. Daley personally.   Why do you suppose that Mr. Emanuel took no questions from the press after announcing the deal?   Surely some of those questions would have forced him to criticize himself or rip Mr. Daley.   Which would he have chosen?  To ask the question is to answer it, so Mr. Emanuel just dummied up after the announcement.

So why won’t Mr. Emanuel stop dancing around this issue and come right out and say, using the name, that Richard M. Daley left him a city that was broke, crumbling, and nearly out of options?

Part of the reason may be loyalty; without Mr. Daley’s help and encouragement, Mr. Emanuel would not be on the Fifth Floor today.   But we know how far loyalty goes with Mr. Emanuel.   A better answer might be that Mr. Emanuel knows that he will need the help of Mr. Daley and his associates in the future, for reelection or for a return to Mr. Emanuel’s real home, Washington, D.C.   Mr. Emanuel may not show much loyalty; when the tossing people over the side would benefit Mr. Emanuel, he shows no hesitation to do so.  But he knows how not to burn a bridge.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

YEAH, THE BIG DIVIDEND PAYERS ARE GETTING RICH, BUT…

4/29/13

I’ve already written extensively on the virtues, or lack thereof, in investing in stocks that pay big dividends; see, most recently, my 4/16/13 piece, S&P YIELDS VS. BOND YIELDS:  I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS.   However, a page C1 article in today’s (i.e., Monday, 4/29/13, “In Stocks, Payouts Trump Potential,” by Jonathan Cheng) Wall Street Journal, which argues that, in at least some smart people’s minds, the dividend payers are getting rich, prompted a few more thoughts.

First, as I have said in the past, buying the dividend payers has become a crowded trade.  See my 2/2/13 post, YES, I’M STILL HOLDING ONTO MY TIPS, in which I revisited this even then old argument in something of a sidebar.   Nonetheless, I am maintaining a large portion of my equity holdings in big dividend payers.   Why?   Because, after much consideration and reflection, I have determined that companies that pay big dividends, and especially companies that consistently increase their dividends, are sounder long term investments, at least for people with my risk preferences and investment goals, than companies that pay either no or low dividends and have no consistent record of increasing those dividends.  Not only is it nice to receive cash on a regular basis, even if one immediately reinvests that cash, but, as I tell my students, companies can fake net income all they want with the help of a creative accountant.   It is very difficult, on the other hand, to fake dividends.   In order to pay and grow dividends, an enterprise has to generate cash, do so consistently, and come up with ideas for consistently generating more cash.   That is why I like dividend payers for the long run.   That these stocks appear rich at the moment does nothing to detract from that argument. 

Second, the aforementioned Wall Street Journal article states, using Procter and Gamble (“P&G”) as a kind of surrogate for all big dividend payers,

Investors are attracted by P&G’s sturdy dividend yield of 3.1%, ASSURING THEM AT LEAST A MODEST RETURN ON A STOCK KNOWN FOR ITS RELIABLE PERFORMANCE.  (Emphasis mine)

Wrong.  No dividend yield assures “at least a modest return” to investors.  If the price of the stock falls by more than the dividend yield, the shareholder generates a negative return.  A dividend provides a modest buffer against losing money, but provides no assurance of even a modest return.  See again my 4/16 piece.

Third (and I am not the first observer to say this), this near obsession with dividend yield is probably a negative for our economy.   Shareholders demand dividend income due to what I like to call Ben Bernanke’s War on the Elderly and thus bid up the prices, and hence the price earnings ratios (“P/E”s), of dividend paying stocks.   Managements, wanting to do their jobs and keep stock prices and valuations high, thus look for ways to maintain and increase dividends.

If managements increase dividends by returning to shareholders money that would otherwise be blown on unproductive “investments” like acquisitions that make little sense from either a strategic or financial perspective or airplanes, cars, and other ego trips for corporate bigwigs, such a search for dividends is desirable; after all, a company’s profits are its shareholders’ money.  

However, if managements, out of desire to keep dividends high at all costs, forgo productive investments that would enable their companies to grow and thus continue to pay dividends, the results could be deleterious, even disastrous, from the standpoint of the companies involved and their shareholders.   And if this practice is followed throughout the economy as investors demand more immediate income in the form of dividends, the consequences for the growth potential of our economy would be dire.

JASON COLLINS COMES OUT: WHO CARES?

4/29/13

The lead story on CBS radio news at the top of the noon (CDT) hour today was that journeyman NBA center Jason Collins has come out, announcing to the world that he is gay.   Mr. Collins thus becomes the first athlete in a “big four” pro team sport to come out.

With all that is going on in the world, that this was the lead story is troubling enough, and grist for another mill.   I have a more appropriate comment/question on the Collins situation:

WHO CARES?

This is not an entirely rhetorical question.   There are indeed some who care, but these people occupy the fringes of both sides what can only clumsily be described as the “gay rights issue.”   Those who have come to be known as strident gay activists care.   Those who are convinced that being gay is a sin (even while piously arguing that it is not homosexuality, but, rather, homosexual conduct, that is a sin…as if there were much of a  distinction in practice and the rest of us are naïve enough to fall for such a disingenuous proclamation) care.

Most of us, however, simply don’t care who people sleep with.   We don’t think it is as large a piece of someone’s identity as the gay activists would have us believe and don’t think that there is anything wrong with being gay and acting on that preference.

We do care, however, that our airwaves are occupied with such non-news.

BUYING THE 10 YEAR AT 1.66%: THE NEVER ENDING SEARCH FOR THE GREATER FOOL

4/29/13

Holly Liss, ABN AMRO Clearing’s director of Global Futures was on Bloomberg Radio just a few minutes ago talking about the upside potential of the 10 year treasury.   Ms. Liss is one of the brighter traders out there, or at least one of the brighter traders who appears on the financial media, so I generally try to listen when she speaks.

Ms. Liss likes the 10 year treasury, which currently yields 1.66%.   While she says that she can’t see the 10 year trading to a 1.00% (Gulp!) yield, as some bond bulls are arguing, she said she could easily make the case for a 10 year yield in the 1.30% to 1.40% range.   Her argument is straightforward:   the economy remains slow, Fed quantitative easing (“QE”) action will continue and will be skewed heavily toward the long end of the curve, a skew that will be exacerbated by the continuation of Operation Twist.   As regular readers know, I don’t feel equipped to make short term calls on any market (See my two 4/15/13 posts, GOLD:  YES, I’M SCARED…BUT I’M STAYING and SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE?) and suspect that most people have a similar shortcoming, including, perhaps especially, those who claim the degree of acumen necessary to make such trading calls.  Nonetheless, it’s hard to argue with Ms. Liss’s logic, especially when she was careful to argue that she is not advising anyone to buy a 1.66% ten year and hold it to maturity; she is advising only a trade at 1.66%.   If she is right and the 10 year does trade to the 1.30% to 1.40% range, this trade will, of course, prove to have been very lucrative.

But think about this for a moment….

Again, Ms. Liss is not advising buying the 10 year at 1.66% and holding it to maturity.  Very few people with even a reasonably firm hold on their senses would advise such a strategy; if earning 1.66% for 10 years turns out to be a good, or even a not all that disastrous, exercise in positioning, we have a lot more to worry about than the conditions of our treasury portfolios.  

But by buying even for a trade, one is making the implicit assumption either that one is buying value for the long run or that a greater fool will come around quickly enough to relieve one of what appears to be a very malodorous long run investment.   In other words, if we buy the ten year (or any instrument, for that matter) despite not liking it for the long run, we are betting that someone, the greater fool, must believe that the 10 year is a good buy at a yield presumably even lower than 1.66%...or that the fool in turn can find an even greater fool to take him out of his position at an even more absurdly low yield.

This is a dangerous game of musical chairs.   I will let others who are confident of their ability to move quickly when the music stops play this game.   As a long term investor, I want no part of either aspiring to a miserably low yield for 10 years or betting that I can find someone with even more misplaced trading hubris to take me out of what I know, and presumably everybody knows, is a rotten long term position.   I’ll leave that to the clever people.

SO WHAT IS SURPRISING ABOUT ALL THE REVENUE MISSES?

4/29/13

The most salient feature of this earnings season has not been the number of “makes” and “misses” on the bottom line but, rather, that half of the S&P 500 companies that have reported so far have missed their revenue forecasts.

Why should these revenue misses come as a surprise?   Why were the revenue estimates inflated in the first place?  Europe is essentially in the economic toilet.   China is slowing down with repercussions for all those economies, developing (e.g., Brazil) or developed (e.g., Australia) that provide it with raw materials.   Our tepid recovery has been hurt by a number of factors, the largest of which is the elimination of the social security tax holiday this year.   This last factor has drawn a lot of attention, but not nearly the attention it deserves.  The effective payroll tax hike has done more to hobble the consumer in this country than any other development in at least the last year.   Think about it; a guy making $50,000 has seen his tax bill go up $1000, or $83.33 per month.   Somebody making $100,000 gets hit twice as hard.   That’s a lot of money and it affects everybody who draws a pay check.

European nations’ measures to bring their budgets under control only exacerbate the problem.   Companies’ efforts to fortify, or at least maintain, their bottom lines through cost cuts when they can’t do so through revenue increases have the same effect, continuing a downward spiral that will lead to who knows where.

This is not to say that such efforts to save money, at the government, business, and individual level, are not necessary and ultimately beneficial.   Quite the contrary; if we are ever to get our fiscal houses in order, such measures are necessary.   And, despite our tendency to congratulate ourselves over how much we have “deleveraged,” we have a long, long way to go before we approach what was considered a strong financial position even a few decades ago; see my nearly instantly seminal 4/23/13 post, THE ATTACK OF THE McMANSIONS FOR SALE:  A SECULAR BRAKE ON THE HOUSING MARKET.

The important point to remember here is that these painful, yet necessary, adjustments were made necessary by the spending and debt binge of the last two decades or so.   We lost our fear of being in debt, “reasoning” that fortifying our egos by accumulating junk and living beyond our means justified abrogating financial, fiscal, and personal responsibility.   Modern financial thinkers, and politicians, told us that unprecedented levels of debt were no problem; we could always “grow out of it” or some such nonsense. 

Now we are bearing the pain, the hangover, if you will, of years of binging, and it will be a long, hard slog; what can one expect after such a long bout of financial revelry?   Some deep thinkers, unable to imagine any degree of discomfort, are counseling financial hair of the dog, which will only compound the problem…for our children.  My fervent hope is that, as painful as the economic adjustment may be, we will remember that this pain is simply what happens when we borrow too much money.  

Note that I used the noun “hope” rather than “expectation.”

MUNICIPAL PRIVATIZATION: SUBSITUTING ONE MONOPOLY FOR ANOTHER

4/28/13

I sent the following letter to the Chicago Sun-Times in response to an article by Better Government Association (“BGA”) President Andy Shaw on the Midway privatization.   Such a Midway dealer has been on and off and on again, if you will, for years and is reportedly now bubbling up again:

4/28/13

In his 4/28/13 Commentary piece (“Don’t Keep Midway Deal in Shadows”), BGA President Andy Shaw urges the mayor not to

“…play games with city residents who are still angry about that (parking meter) deal, and wary of any more privatization that doesn’t dot every illuminating “i” and cross every transparent “t” before we have to live with it.”

This is indeed a worthy sentiment, but there are more problems with big privatization deals, like the meter deal and the reportedly brewing Midway deal, than lack of transparency, illumination, and accountability.  

The inherent flaw in much of what we call “privatization” is that it merely replaces a public sector monopoly with a private sector monopoly.   For example, instead of the city of Chicago having a monopoly on parking meters in our city, now a politically connected, largely foreign financed Morgan Stanley partnership has a monopoly on parking meters in our city.   Monopolists act pretty much the same whether their origins are in the public or private sectors…they use their monopoly power to maximize revenues.   If anything, private sector monopolists behave even more badly, from the consumer’s standpoint, than public sector monopolists; at least the latter have to answer, however indirectly or apathetically, to the voters.

Regardless of whether our “transparency and accountability” mayor finally lives up to his self-styled billing in any Midway deal, the privatization of our second airport is doomed to failure simply because the airport’s monopoly, or duopoly, depending on one’s perspective, nature will not change.   The only thing that will change is the collector of what economists call the “monopoly rents.”

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

OBAMA AND SYRIA: “…AND A MAN IN MY POSITION CANNOT AFFORD TO LOOK RIDICULOUS!”

4/28/13

Much criticism is being directed toward President Obama due to his clumsy handling of the Syrian situation.   The President had previously said that the use of chemical weapons by the Assad regime would be a “red line,” presumably tripping more vigorous U.S. action on behalf of the amorphous bands of rebels seeking to seize power in Syria.  (See my 4/11/13 piece, SYRIA:  GROUNDHOG DAY FOR AMERICAN FOREIGN POLICY.)   When both the Israelis and our own intelligence sources confirmed that the Assad regime had used chemical weapons against its own population, the President hemmed and hawed, talking about wanting to be very careful before taking further steps toward active military involvement in Syria.   It’s easy to understand, and encourage, the President’s caution; there are those of us who have not forgotten the eagerness of the Bush crowd to get us into the huge military mistakes known as Iraq and Afghanistan.  But the President’s caution looks like pusillanimousness to his enemies and even to objective observers.  What once looked was a red line is starting to fade to a pink line, as some of his critics are fond of saying.

Mr. Obama is indeed looking quite ridiculous at this juncture, but not for the reasons the likes of Senators John McCain and Lindsey Graham would have you believe.  The President does not look silly and indecisive because he is not reacting to Mr. Assad’s use of chemical weapons, but because Mr. Obama drew a red line in the first place.   Rather than saying that use of chemical weapons would be the tripwire for further U.S. involvement in Syria, the President should have stated unequivocally that the conflict in Syria is none of our business, that we have no dog in that fight, and that we are not going to get involved in that conflict.   Period.

Why is yours truly so adamant about keeping us out of Syria?   Again, see my 4/11 piece, but also note the arguments of Senator Lindsey Graham, John McCain’s mini-me, on Face the Nation this (Sunday, 4/28) morning.   Mr. Graham is, of course, urging greater involvement in Syria but not “boots on the ground,” no sir.  He instead favors such restrained measure as enforcing no-fly zones, using “cruise missiles” to destroy Syrian airfields, and vague measures to “secure Syria’s chemical weapons stockpiles.”  Mr. Graham argues that if we do nothing, some combination of four things is going to happen.

1. Syria will become a failed state.
2. Syria’s chemical weapons will fall into the “wrong hands.”
3. Jordan will be overrun with refugees, threatening the regime of King Abdullah, whom Mr. Graham cites as a “loyal ally.”
4. The Iranians, emboldened by our lack of action, will move more quickly to develop nuclear weapons and foment trouble in the Middle East and beyond.

Well, guess what, Senator?   All those things, with the possible exception of the fourth, either have taken place or are going to take place regardless of what we do in Syria.   We have little to no influence on the parties fighting in Syria and, despite elements of our foreign policy apparatus again having fallen for the usual song and dance about “moderate, pro-Western elements,” we have no friends on either side of the Syrian conflict.   We have plenty of people who will flit around Washington professing friendship with America in order to line their own pockets, but we have no genuine friends in Syria.   We can’t influence the outcome of the war and, even if we could, no outcome will be favorable to us or to broad swaths of the Syrian people.   Syria is a mess and has become a hellhole.  Nothing we do can change that; the only impact of American involvement will be further shedding of American blood and expenditure of American money.   Funny how all this concern about the precarious state of federal finances goes out the window when the War Party sees a conflict in which it can get us involved, but I digress.

One would have thought that intelligent, or even sentient, people would have learned something about the limits of American power and influence from the debacles in Iraq and Afghanistan, both of which are failed states, bristling with weapons and breeding legions of terrorists and one of which may very well become an Iranian satellite.  Both of have cost us plenty of American lives and hundreds of billions of dollars we don’t have… and to no good end.

But we don’t learn.   Or, more properly, in a society that seems to equate militarism with patriotism and in which politicians need money from “defense” contractors to sustain their fantasy lives they call careers, we decide not to learn and rush to the next opportunity to prolong conflict, destroy lives, and create enemies.

ANOTHER TRAGIC FACTORY FIRE IN BANGLADESH: WHAT HATH GLOBALIZATION WROUGHT?

4/27/13

As you know, there has been another horrific factory fire in Bangladesh, this one killing at least 300 people.   My post on the now defunct Rant Finance of 11/26/12, only a few months ago, written on the occasion of the last horrific factory fire in what is becoming the garment factory for the world, bears repeating:

 

A TRAGEDY IN BANGLADESH…AND A REEXAMINATION OF GLOBALIZATION

11/26/12

A fire tore through a clothing factory, in Dhaka, Bangladesh over the weekend, killing, last I heard, 140 people.   The building had few working fire escapes and those on the top floors were forced to choose between dying from the direct impact of the fire (burning or smoke inhalation) or from the impact of the dive from the window necessary to escape those impacts.   Those who somehow made it to the factory’s gate discovered that the guards hired by the factory’s operator kept the gate locked.   It is standard practice to keep such gates locked in Bangladesh both to keep workers in and people who want work out.   This factory produced garments under contract for Li & Fung, a buying agent for, among others, American retailers.  Unbeknownst to most of us, Bangladesh is more than an object of pity, a perennial recipient of foreign aid, and the subject of a passable rock song from the ‘60s; it is the world’s second largest exporter of clothing.   Check the labels on your shirts.

The scope of this tragedy is horrendous for the workers killed and injured and for their families, but it seems the scope of the tragedy, as with any such occurrences, wanes as the geographic and ethnic distances from the immediate subjects increase.   But, in addition to being such a horror for those directly involved, this nightmare ought to lead us to think a bit about the global economy we have built.

How in the world are American workers supposed to compete with people who work under such horrendous (Blind eyed cheerleaders for “global free markets” would say “low cost” rather than “horrendous.”) conditions for such little money?   The minimum wage for garment workers in Bangladesh is the equivalent of $38 per month.   Only two years ago, that minimum was $21.00; it was raised in a gesture of goodwill from the government and from the factory owners. 

The argument, of course, is that Americans aren’t supposed to be engaged in such menial tasks as garment manufacturing, which was the mainstay of many communities, especially in the South, only a few decades ago.   And it’s easy to sympathize with this argument; more advanced economies, such as ours, should be engaged in more advanced endeavors, leaving the simpler tasks to the developing economies such as that of Bangladesh.   The argument sounds good until one stops to think that, according to this logic, vast segments of the world’s output, under this design, would be assigned to virtual slave labor.   It’s as if we are saying “Let the real people do the work that is fitting for them; leave the scut work to those who are willing to be paid, and treated, like slaves.”

On the other hand….

The people who worked in that factory, and in many other factories just like it, in Bangladesh and throughout the developing world were and are happy to have those jobs; again, the gates are locked to keep people out as well as in.   Can we deny them this first step on the first rung of the ladder to something resembling prosperity by shutting out the products of their labor?   And if we are to impose some kind of world working standards, would those factories stay in Bangladesh and places like it?   By refusing to buy such products, or by imposing anything like Western labor standards on such factories, we might salve our consciences while at the same time emptying the bellies, and squashing the aspirations, of those at the bottom of the economic food chain who’d like to move up and are willing to bear with horrendous conditions to do so.

And yet…

There are legions of people throughout the world who fit the description in the last paragraph.   They are hungry, desperate and/or ambitious, and are willing to put up with just about anything to ameliorate their situations.   They are certainly more than willing to work under conditions that Americans and other Westerners would consider barbaric for pay that we would deem criminal.   The full implication of the complete globalization that gormless, unquestioning free marketeers ceaselessly cheer for is that, until the supply of people in such situations is exhausted (never, for all practical purposes), all workers will be racing toward those conditions…all in the interest of “efficient, low cost production,” of course.

The answer from the pure free marketeers comfortably ensconced on Wall Street or in academia will be, of course, that we can compete due to our superior “productivity.”   But how much productivity will be needed to compete with $38 a month?   And considering that most of our productivity edge comes from the factories, machines, and processes developed by industrial engineers and others in the business of improving production, what edge do we realistically have if such factories and processes can be built and implemented anywhere in the world?   If we can build an efficient factory here, we could just about as easily build it anywhere, including Bangladesh, Vietnam, or anyplace else where people are willing to work as productively as possible in order to make as much in a month as our workers would demand, and expect, to make in half a day.    

Again, the work done in that Bangladeshi factory is probably not the work that would be done by American workers; we don’t make many shirts and pants and dresses here any more.   That work is somehow beneath us…but only because people elsewhere are willing to produce those types of things under horrible conditions for less than peanuts.   We’ve decided we should be doing only “higher value added” types of things, but our kids can’t do math any more and, even if they could, would it make any difference?  The people who now, and soon used to, make shirts and dresses are more than willing to learn the math and other skills necessary for “higher value added” endeavors…and to work at them for slave labor hours and wages.

There are, of course, lots of winners from unchecked globalization…shoppers, shareholders, moguls and captains of industry, maybe retail workers.   But manufacturing workers, whether in Bangladesh or North Carolina, aren’t among them.

FAA “ADJUSTMENTS”: WHO OR WHAT ARE MORE ANNOYING? POLITICIANS OR FLYING?

4/27/13

In a matter of a few days, our public servants have solved the “crisis” at the FAA in perhaps the most vivid example of bipartisan cooperation (two words that, used in sequence, ought to make all the citizenry nervous, but I digress) many people can remember.   The solution these estimables reached appears quite simple to anyone who lives outside Washington, D.C. and its environs; the legislation enabled the FAA to reallocate about $250mm from other areas of its budget to its air traffic control operations.

Two thoughts spring immediately to mind.

First, what we witnessed was a transformation from political allocation of funds to a practical allocation of funds.   Initially, the cuts to the FAA budget, like all sequester cuts, were designed to inflict the most possible pain in order to force the political parties to the table to address the sequester and, ultimately, the budget problems over which that sequester was to serve as a flimsy band-aid.   With yesterday’s Congressional action, the FAA was allowed to allocate funds to inflict the least possible pain on the traveling public.   Contrary to much popular opinion, people who work for the government are not stupid, or at least any more stupid than the rest of us who elect their nominal bosses, i.e., the elected officials.  Those nominal bosses are vainglorious, pompous, ingenuous and perhaps themselves a tad slow, but the people who do the actual work for the government are not.  The managers and workers at the FAA are perfectly capable of rationally allocating a limiting budget; it was the politicians who kept them from doing so.   The obvious conclusion is that the government and the people who work for it and/or pay its bills can live with reduced budgets.  It’s the politicians who can’t.

Some are asking, with an understandable degree of vehemence, why the FAA is entitled to such “special treatment,” i.e., the ability to manage its own budget, while other functions of the government, such as the military, Head Start funding, and senior nutrition programs, are not.  I wholeheartedly agree; why not permit the people who run these programs, less visible but arguably at least as important, the same flexibility that the FAA has been granted?   That would make sense…to you and me, but not to the politicians.   They continue to insist on political allocation of funds because that is what they do in their isolated little world…until the heat from the outside gets too intense.

Second, the logical and rational response to the heightened inconvenience to fliers brought about by our public servants’ childish games would be to simply not fly.   I’ve brought this up before in another context (See my now seminal 4/21/11 post in the Insightful Pontificator entitled “IS THIS ANY WAY TO RUN AN AIRLINE?”) and got a lot of blowback, most of it friendly but some of it not, but I’ll repeat my point:   Almost all flying is unnecessary.   Pleasure flying is, by definition, unnecessary.   Though one could argue (and I might not) that everyone needs a vacation, one does not have to fly to one’s destination.   There are plenty of places to go that aren’t across oceans and thus don’t require flying.   And, with modern communication devices, just about all business flying is unnecessary.   Meetings, conferences, etc., if they are indeed meetings and conferences and not just excuses to spend time in nice resorts on one’s employer’s, and the government’s dime, can be done over the internet or in some similar way.   There may be some pompous clients who insist that potential vendors pay tribute and convey obeisance in person, but who needs to deal with such popinjays?  I, for one, would insist that anyone who wants to do business with me show enough fiscal responsibility not to pee away money flying out to see me.   Not only is such good sense admirable, but I know that I, as a customer, am ultimately paying for such frivolous flights.

Even those who don’t share my unrestrained, overflowing, nearly indescribable joy at tooling down the open road have a ready alternative to the inconvenience, expense, frustration, and general dehumanization that constitutes modern air travel; it’s called getting behind the wheel and letting ‘er rip.   Driving can be well over half the fun of any pleasure trip and, with a little judicious planning, does not have to be much, if any, more time consuming than flying.

When people aren’t treating me right, my response is (usually) not to yell, scream, and complain.  My response is to stop doing business with those who so treat me.   The entire airline business and flying infrastructure doesn’t treat us right, and didn’t even before the “sequester cuts.”   It’s time we cut them off and take to our modern communication devices or, far better, to the open road.

Now, if someone could convince my wife of the wisdom of forever eschewing air travel….

IMPORTED FROM DETROIT: MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8

4/25/13

This morning’s (i.e., Thursday, 4/25/13, page B1) Wall Street Journal reports that Fiat is considering buying from the UAW Retiree Health Care Trust (“Trust”) the 41.5% of Chrysler Fiat doesn’t already own, effectively merging the companies.

The idea seems to make sense…use Fiat’s cash horde to buy out the Trust, merge the companies, do an IPO of the new company and list it in the States (presumably on the New York Stock Exchange) and get a higher valuation as a U.S. car company than Fiat does as a European car company. 

There is a problem here, though.   Fiat’s $14 billion cash horde would be run down considerably by buying the company; Fiat would be left with about $10 to $12 billion after buying out the trust.  That sounds like a lot of money, but designing, manufacturing, and marketing cars is a capital and cash intensive exercise.   The bet is that money raised in the IPO, along with being able to borrow more cheaply as a presumably more financially sound merged company, would allow Fiat to replenish its cash horde.   To win this gamble, however, Fiat would have to show especially adroit market timing.

U.S. car companies, and their stocks, are doing quite well, thank you, of late.   European car companies and their stocks are not doing nearly as well, to say the least.   And to the extent the Big Two publicly traded U.S. car companies are having problems, those problems emerge primarily from Europe, for obvious reasons.   Given that GM and F are doing well, it would seem at this juncture that Fiat would have to pay the Trust top dollar for its stake in Chrysler.   Valuations on the stake range from $1.75 billion to $4.27 billion (How’s that for a spread?) and presumably will be settled in court, but one has to think that the final price tag for the stake, should this deal go through, will be much closer to the top of that range than to the bottom.

That would be fine for Fiat since it plans to turn around and sell some shares in the IPO and establish a higher valuation.   But the new company might have to move very quickly to effectively immunize itself buy both buying and selling at high prices.  

While I’m not the expert on the car companies and their stocks that I used to be, I get the distinct impression that both profits and stock prices are being artificially inflated by what I like to call Ben Bernanke’s war on the elderly, i.e., the artificially low interest rates designed to encourage spending, borrowing, and taking financial risk to solve a problem born of too much spending, borrowing, and financial risk.   (See, inter alia, my 1/29/13 post, BEN BERNANKE VS. THE DOLLAR AND THE ELDERLY.)  What industry, other than housing, benefits from lower interest rates more than the car business?   All this talk of pent-up demand and the age of the fleet has some surface validity, but you can be sure that if money were not so cheap and readily available for vehicle financing, and payments thus so low, people would be able to satisfactorily, and perhaps happily, drive their old cars for many more miles, given how well cars are built nowadays.  In other words, if financing cars were not so cheap and readily available, so called pent-up demand would stay pent-up.

So yours truly suspects that, once (if ever?) the low interest rate punch bowl is taken away, car sales will plummet.   And such sales may fall even if we are stuck in a Twilight Zone of cheap money more or less forever; even artificially juiced demand gets satisfied eventually and, the way cars have been selling of late, that day may come sooner than later.   So if the very talented and clever Fiat CEO Sergio Marchionne is to pull off this financial maneuver, he better move quickly.   He doesn’t want to pay a high price to the Trust for Chrysler and then be left holding the hot potato when car company valuations deflate; he has to buy at a high price and nearly immediately sell at a high price and/or borrow based on the higher valuations that result from an artificially inflated price.    

Also note that Chrysler may be especially susceptible to artificial inflation and to the resultant corrective deflation in car company prices because of the relative weaknesses in its product line.   See my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!   This situation is like anything else; a rising tide lifts all boats, but when the tide goes out, the leaky boats sink first.

I sincerely hope that Mr. Marchionne can pull this one off; Chrysler is one of the bedrocks of American industry, has a substantial presence in my home state of Illinois, and, as I recounted in my 1/31 piece, I may be a Chrysler owner again some day relatively soon.   But if this deal is done, Mr. Marchionne will be going in at a rich price and must move quickly to get out, or established, at a rich price.

THE AP TWITTER CRASH: THE VALUE OF KEEPING ONE’S COOL

4/24/13

There was much reporting, and handwringing, yesterday and this morning, including a front page article in the Wall Street Journal, regarding yesterday’s “Twitter Crash.”  In the space of about 65 minutes yesterday, the Dow lost and regained 145 points, and the markets lost and regained $200 billion of value, due to a false tweet that there had been an explosion at the White House that had resulted in President Obama’s being injured.  Yours truly was at lunch (Walker’s Charhouse in Naperville…great place.  Check it out.) at the time and missed the whole thing; had I not been a news enthusiast, I would not have noticed that anything had happened.

A group called the Syrian Electronic Army, which is allied with President Bashar Assad and wants to draw attention to what it considers false and one-sided reporting on the conflict in Syria.   (See?   As eclectic as this blog is, there is a connection, albeit often a contorted one, between the topics on which I write.  See, inter alia, my 4/11/13 piece   SYRIA:  GROUNDHOG DAY FOR AMERICAN FOREIGN POLICY.)  The group apparently hacked into AP’s Twitter account and broadcast, if that is the right verb, the offending tweet.

Don’t misunderstand me; I am not saying that this was an innocuous act, that such market manipulations are healthy, or, certainly, that the Syrian Electronic Army and its tactics are at all laudable.   But was there any harm done here to investors?   No, unless those investors were making a rebalancing move, or taking or unwinding a long term position, during that hour in which the markets took their roller coaster ride, and even then there could have been some benefit to such investors.   The whole thing started just after noon Chicago time and was over by just over 1:00 Chicago time, a miniscule window for long term investors. 

The only people who were hurt were traders.   Again, don’t misunderstand me.   Though, as most readers know, my days of trading like a scalded dog are over, I applaud those with the skill, the courage, or, in some cases, the recklessness, to be traders; our markets need them to provide the liquidity that makes the markets function.  (But do see my post, reproduced below, that originally appeared on 8/22/12 on the now defunct Rant Finance.)   However, when one decided to trade, and potentially cash in on the outsized rewards that trading can entail, one assumes the outsized risks of trading.   Among those risks are unexpected events like a group of Assad enthusiasts hacking into the AP Twitter feed.  Indeed, the very definition of risk (with which I admittedly have a problem, but that is grist for another mill) in the finance textbooks is the possibility of unexpected outcomes.

So it was not at all a good thing that a bunch of tech savvy miscreants with a political axe to grind could eliminate $200 billion of value for a few minutes and some traders got hurt in the maelstrom.   But traders are big boys and girls, or at least ought to be big boys and girls, and should realize that taking such risk is one of the costs of being in a position to reap big returns.  Genuine investors were not hurt by the market whipsaw; indeed, many, like yours truly, missed the whole thing.

Of course, there is a lesson here for investors.   As I have both intimated and said on numerous occasions both here and in other forums, the best thing to do in times of market panic, or apparent financial panic, is nothing.  Remain cool, stick to your plan, and keep your emotions in check.   See my 4/15/13 post, GOLD:  YES, I’M SCARED…BUT I’M STAYING.

PROMISED 8/22/12 RANT FINANCE POST:

HOW MUCH LIQUIDITY DO WE NEED?

8/22/12

This morning’s (i.e., Wednesday, 8/22, page A12) contained an article by Lillian Lin entitled “China’s Graduates Face Glut.”  In the article, recent college graduate Wu Xiuyan, expressing her understandable disappointment at the job market for grads in China, is quoted

“My classmates and I want to find jobs in banks or foreign trade companies, but the reality is that we can’t find positions that match our education.”

Such problems are, as many of you know from personal experience, worldwide and I sympathize with Ms. Wu and her colleagues.   But that’s not the point of this post.

Ms. Wu’s comments reminded me of something that Jack Bogle, one of the two guys for whom I always turn up the sound on CNBC; the other is Art Cashin.   Most of the time, I turn up the sound for Rick Santelli, but I digress.   Mr. Bogle, the founder of Vanguard and a true titan of the financial world, appearing on CNBC about a week ago was, as is his wont, decrying what he (and I) consider the excessive trading in securities.   As Mr. Bogle says, there is far too much trading and not enough investing going on.   Even though I write for this trading site, I wholeheartedly agree and have adjusted my financial behavior accordingly, but, again, I digress.

When Mr. Bogle made this comment, one of the trading guys who regularly appears on CNBC (It might have been Jon Najarian, but I’m not sure.) countered, reasonably, that that what Mr. Bogle looks askance at as excessive trading provides liquidity to the marketplace and thus serves a vital function.   Mr. Bogle agreed, partially, but then added something to the effect of, and I can’t quote because it was a few weeks ago, how much liquidity do we need?

Mr. Bogle’s comment is, as are most of his comments, profound.   We have put a lot of money and, more importantly, a lot of human capital into the financial industry, broadly defined, in this country.   One of the major roles of the financial industry, and virtually the sole role of the trading segment of that industry, is to provide liquidity to what otherwise would be parched markets.   This is a vital role, but is it so important that the best and brightest minds, or at least a huge portion of the best and brightest minds, go to Wall Street in this country?   Yes, markets need the capital and smart people necessary to keep them liquid and deep; that is one of our competitive edges as a nation.   But do we need as much capital, and as many bright people, committed to trading as we do?

The markets seem to be telling us that we don’t.   Note the reduction in both jobs and compensation on Wall Street in the wake of the latest financial debacle at least partially concocted by the people who have dedicated their lives to providing liquidity to our markets.  One suspects that these reductions are not cyclical, but secular; they are a signal that too much of our financial and human capital has gone into finance and not enough has gone into, say, engineering or medicine.

Now note the observations and the travails of Ms. Wu.  As China has gotten richer, more of China’s best and brightest have decided that “banks or foreign trade companies” (i.e., providing liquidity to the markets) would be a lucrative and otherwise worthwhile place to spend their careers.   But perhaps the market in China is directing these fine minds away from the Chinese equivalent of Wall Street.

There is another point here beyond the argument that too many of our resources are going into keeping our liquid markets overly saturated.  In this case, the market seems to be telling us that we have over invested in trading and under invested somewhere else.   The market works.   One hopes that the likes of Messrs. Obama, Romney, and their fellow “public servants” who deem themselves worthy of telling us all how to conduct our lives would realize that the markets work.   But one also hopes to win the lottery, I suppose.

THE ATTACK OF THE McMANSIONS FOR SALE: A SECULAR BRAKE ON THE HOUSING MARKET

4/23/13

My generation is known perhaps most saliently for one thing…spending money, and lots of it, on things we don’t need.   One of the most grotesque manifestations of this destructive tendency is the money people have put into their homes.   We have bought, and built, in many, if not most cases, far more house than we need.   Why?   Who knows?   But one suspects that a gaudy, over the top, tasteless gargantuan home is one easy and obvious way to display one’s wealth, and the need to display one’s wealth seems to be an ever present, and ever growing, need among the vast legions of terminally insecure that comprise huge swaths of my generation, but I digress.

We hear constantly about how my generation (Surprise!) is not at all prepared for retirement.  The typical high (and middle and low) income member of the boomer generation has spent his or her last nickel and then some.  While many have 401Ks, IRAs, or similar retirement plans, those plans are woefully underfunded when one considers the cost of just a decent retirement, let alone continuing to live the profligate lifestyles that seemingly have become the object of existence for so many of my generational colleagues.  Increasing one’s income, by whatever means, has proven to be no solution to the problem; new income is spent even faster than it is earned as what once were luxuries suddenly become necessities and people somehow “just can’t make ends meet,” even at higher income levels.   Those payments on the Lexus lease are a bear but, again, I digress.

All this talk about “deleveraging” and “fortifying of balance sheets” has some, but not much, validity; our saving rates rate has improved…from its negative pre-recession levels to a whopping 2.6%.  This compares to our 6% plus savings rates throughout the ‘80s, our 7%-10% rates in the decades following World War II, and the current 10% and 25% savings rates in the Eurozone and China respectively.   Our debt to after tax income ratio is down to around 106% from its peak of 130% in the third quarter of 2007, but nowhere near as low as the 85% average for the decade of the ‘90s.  Want to feel even worse?   That ratio was 69% in 1985 and 36% in 1952.  The share of income used to service debt has fallen, from its peak of 14% in the third quarter of 2007 to about 10% now, but much of that improvement comes from the Fed engineered artificially low rates, or what yours truly likes to call Ben Bernanke’s war on the elderly.

 So my generation lives in too much house, has too much debt, and too little saved for retirement.   So when (if) my faux wealthy generation retires, what will it do?  It has to find some place to save if it hopes to avoid the ignominy of having to adopt a more rational approach to life.  One obvious place to cut expenses is the home.   Homes, especially homes built as gaudy monuments to one’s self, are expensive not only to buy but also to maintain.  Property taxes are outrageous.  Upkeep is high.   And the new kitchen every five years or so (“I just couldn’t LIVE in the old one!”  (especially when the neighbors got a new kitchen)) gets really expensive. 

Simply put, my profligate generation, due to its overspending and under saving, will soon find itself in the position of not being able to afford the McMansions that seemed such a necessity only a few years ago.    Assuming that members of my generation are capable, collectively, of making a wise financial decision, which admittedly is a brave assumption, a logical thing to do would be to sell the big house and get out from under the expenses such an extravagance entails.   Even if the sellers don’t clear anything from the sale, they would have saved themselves a ton going forward.  And, in at least some cases, they can do so while saving the all important face, to wit “We loved our old house, and could certainly afford it, but, with the kids gone, it was time to downsize.”   Their equally in the hole, backs to the wall friends will believe this load of baloney because, after all, they will be doing the same thing themselves and a collective lie starts to take on characteristics of the truth.

The forced sale by the boomer generation of the houses they never needed and could never really afford could thus potentially create a huge overhang of houses on the market.  On the other hand, the federal government could get involved and bail these profligates out by sticking those who save with the bill, much as it is doing now with HARP programs, artificially low rates, and the like.   Such a move might save housing, at least temporarily, but would not only offend any decent notion of fairness but also ultimately further devastate the economy by further punishing saving to reward spending…all in the interest of “solving” a problem born of too little saving and too much spending.

ASIA HAS A CHOICE: GERMAN RESPONSBILITY OR AMERICAN SILLINESS?

4/22/13

This morning’s (i.e., Monday, 4/22/13’s, page C1) Wall Street Journal reports that consumer debt is exploding in Asia, primarily in China, Indonesia, and Malaysia.  Nonmortgage consumer debt in Asia outside Japan has risen 67% to $1.66 trillion in the last five years.  In Indonesia alone, such credit has tripled.   Consumers are lining up to pay interest rates ranging from 15% on secured car loans to 40% on unsecured loans.  No wonder lenders are rushing to Asia.

Why are the newly prosperous Asians borrowing so much?   Such expansion is typical, we are assured, at this stage in their economic development as people start to make decent livings and yearn to buy the things they manufacture for others.   And it is certainly understandable that, after years of having very little, and being inundated with media images of the prosperity of Japan, Europe, and the United States, Asians outside Japan would want to acquire lots of the same junk with which we are curiously so fascinated.   But when one listens to the explanation of one Wiwik Sugiarti, who lives in Indonesia, of why he borrows to buy such things as televisions and DVD players…

“I can buy two or three things at the same time and not have to worry about how to pay for it now,”

one who has seen such misunderstanding and misuse of credit and its consequences gets the urge to utter something like “Uh-oh.”

Again, one can understand Asia’s desire to buy stuff.   But it seems to yours truly that the people in that part of the world can make a choice regarding the development path they would like to follow and the attitude toward money and credit they would like to emulate.  They can be like we Americans, who, through some misplaced sense of entitlement, have decided we deserve everything we want regardless of our ability to pay for our heart’s desires.  Alternatively, they can be like the Germans, who only consider buying things they don’t absolutely need when they have the money to pay for those things and even then agonize over parting with their hard earned euros.   There are, of course, exceptions to these generalizations; I am sure there are some spendthrift Germans out there and there are plenty of Americans (Yours truly comes immediately to mind.) who are much more German in their spending and saving habits.  But there is little doubt that the overall American approach is quite different from the overall German approach.

So which will it be, Asian friends and brothers?   Spend like drunken sailors, eat through the seed corn, and expect, or hope, others will continue to lend you money…or act like mature adults in financial matters?   The choice is, presumably, yours.  

We in America had better hope the non-Japanese (The Japanese are apparently already lost, by the way; see, inter alia, my 4/9/13 post  THE NOT SO INCREDIBLE SHRINKING YEN.) in Asia pick the latter.   If they spend like us, who will pick up the tab for our childish spending?