Watching China

By Ben Blanchard - REUTERS | via (UNCENSORED) yahoo!news

May 08, 2008

China will not guarantee it won't censor the Internet over this summer's Beijing Olympics, nor can it guarantee to stamp out piracy of Olympic-branded goods, officials said on Thursday.

Wang Wei, executive vice president of the Beijing Olympic organizers, had promised media would have "complete freedom" to report over the event, but rights groups have regularly criticized China's commitment to that pledge.

China maintains a tight grip over the Internet, whose use is exploding in the world's most populous nation, preventing access to sites it considers anti-government, such as those of the banned spiritual group Falun Gong or Tibet independence groups.

"China has always been very cautious when it comes to the Internet," Technology Minister Wan Gang told a news conference as the Olympic torch was being paraded atop Mount Everest.

"I've not got any clear information about which sites will be shut or screened. But to protect the youth there are controls on some unhealthy websites.

"We will guarantee as much as possible" that sites will not be blocked over the Olympics, he added. "Every country limits access to some websites. Even in developed countries not every site can be accessed."

As part of China's plan to hold a "high-tech Olympics," broadband wireless Internet services will be widely available, according to a handbook issued at the same news conference, to ensure "convenience for journalists (and) promptness of news."

Last week, the United States said again it was concerned about Internet controls in China.

>>read on

 

It is shocking enough that a Chinese national, rather than an American, won the commission to sculpt the body of Martin Luther King. Even more outrageous that the model of the sculpture is fashioned in Changsha.

But look at it! An aggressive, unsympathetic posture -- arms crossed! Not representative of the inspirational Reverend leader, but of a Communist war-hero. What a horror!

A powerful federal arts commission is urging that the sculpture of Martin Luther King Jr. proposed for a memorial on the Tidal Basin be reworked because it is too "confrontational" and reminiscent of political art in totalitarian states.

This commission should be taken away from the sculptor and awarded to someone who understands, in the American context, the value and meaning of the movement for equal rights and Martin Luther King's place in it.

Haverty Furniture Companies, Inc. (HVT)

Q1 2008 Earnings Call

Country funds often get a bad rap from mainstream media even though any S&P 500 index fund is also a single-country product. The utility of country funds is that they allow access into an investment destination without having to pick a stock. The downside to them, for example, could be that a weighting in banks might hold back what might generally be a technology exporting-based country.

A potential issue with using a bunch of country funds is ending up too lopsided in some sectors and zeroed out in others. I was curious to see if a portfolio of just country funds could be assembled that captured some regional and economic diversification without ending up 35% in financials. So I plugged in the following ETFs into Morningstar to see what I could see.

By Heather Bell

Companies offering fundamentally weighted ETFs have launched a lot of funds over the past year, but one thing we haven't seen yet are traditional "style" funds. That makes sense, as fundamental indexes tend to be value-tilted. As a matter of fact, some people would already consider them to be style indexes, just leaning towards the value side.

In our Daily Morning Lineup available to Bespoke Premium members, we provide a list of the most overbought and oversold stocks that typically reverse when reaching these price levels. To do this, we look at the price action of stocks in the S&P 1,500 over the last three years. Once we find the stocks that are the most overbought (oversold), we find the average performance over the next week and the percentage of the time the stock has been down (up) when it has been this overbought (oversold) in the past three years.

In the table below, we highlight the ten stocks in the S&P 1,500 that are overbought and typically go lower, along with the ten stocks that are oversold and typically go higher. As shown, ACS, DOW, and ADBE are the four stocks that are overbought with the weakest performance over the next week when getting this extended in the past.

Goldman Sachs is out positive on Synchronoss (SNCR) following meetings with the company's management. The Firm says they came away with greater clarity on the company's approach to its revised 2008 expectations. They believe management has a strong appreciation of its need to rebuild credibility with the investment community after two quarters of disappointment due to the iPhone, and therefore decided to make adjustments around guidance to provide a baseline from which it can be constructive going forward.

Goldman retains its Buy rating due to the strength in non-iPhone core accounts which are set to accelerate throughout 2008 and into 2009, as well as its belief that iPhone contributions have now been appropriately managed down. At this juncture, iPhone trends are largely outside management's control, with unlocked activity resulting in very low visibility into volumes. As a result, iPhone revenue expectations now incorporate meager volume assumptions for the rest of 2008, in Goldman's view, in an effort to avoid further disappointment.

Over the past several years, a host of new ETFs from State Street (STT), Barclays, PowerShares, Rydex, WisdomTree (WSDT.PK) and other fund sponsors have opened up formerly difficult-to-access markets to individual investors. Asset classes such as commodities, foreign real estate and currencies that used to be open primarily to institutional or high-net-worth investors have become accessible to nearly everyone with a brokerage account.

While these new ETFs have provided investors with a myriad of opportunities to diversify their portfolios, they have also brought some surprising—and not altogether welcome—tax consequences. Unlike ETFs built on traditional equity or bond indexes, funds that hold currencies, futures contracts or hard assets such as precious metals receive different treatment under the U.S. tax code. Individuals looking to diversify into these areas need to know the sometimes arcane tax rules that govern these asset classes before they decide to commit their investment dollars.

The April announcement that Japanese drug maker Takeda Pharmaceutical would buy Massachusetts-based Millennium Pharmaceuticals (MLNM) (which sells the anticancer injection Velcade) for $8.8 billion sent Millennium shares markedly higher.

The acquisition also lifted expectations for a run of biotech M&A, boosting much of the sector.

Energy Conversion Devices (ENER) is an interesting tale - this has been for many many years a "hope" stock i.e. more promise than execution - I remember the hoopla surrounding it at the turn of the century ... the last time people were all hyped up about alternative energies (at the time the big fuss was about new wave car batteries and the like).

his company has morphed over the years with a confusing array of business lines (trying to decide what it wanted to "be"), but recently has added a newer and more-business savvy executive team, and while they still have a few business lines .... the excitement is their solar business, which has turned into the dominant line at the company.

Mother's Day, is this Sunday, so if you haven't done the shopping for your mother and/or wife, then you had better get a move on. You may want to consider a gift of some shares in companies that may participate in sales of Mother's Day-related products. Here are a few that can benefit from the widely celebrated day, including chocolate, flowers, and jewelry. Don't forget the greeting card and gift-wrap.

Hershey (HSY), founded in 1894, is the largest manufacturer of chocolate in North America and one of the largest chocolate and candy companies in the world. Hershey's Kisses were invented in 1901, and Hershey's chocolate chips were introduced in 1928. The stock has a P/E of 47, a PEG of 3, and a favorable yield of 3.1%.

I don't own these 2 names directly but do own peers, and these are bellweathers for their sectors so I thought I'd post them. One thing to note  - despite great numbers, the stocks are not reacting. Hence, we could be prone for a pullback shortly in these names. When stocks do not react to great news, that is a potential change in character, just like when stocks shake off bad news and go up. The charts in "commodities" despite some pullback, are still quite overextended and yesterday's call of Goldman $150-$200 oil [Goldman Sachs: Gasoline Not Driving Oil Price - Oil Going to $150-$200] would be the perfect catalyst to mark a near term top...

Despite my Kool Aid infusion I am still quite bearish, and I view this period akin to Sep/Oct 2007 when we partook in the foolishness to make money but realized there were more shoes to drop. I am sort of laughing at how the market goes up on $110, $115, $120, $125? oil ... as if it won't have any effect on profits or people across the globe. It is essentially a world tax on all productivity and profit. But oh well, it won't matter until it matters. If we cannot break through this 200 day moving average I would not be surprised to see a meaningful move downward - we have ignored the facts for about 6 weeks now since the "Fed put" was brought underneath the market via Bear Stearns. At some point ignorance must turn back to reality...

On to the earnings reports.

Deep sea oil driller Transocean (RIG) reports a doubling of profits

• Transocean Inc (RIG), the world's largest oil and gas drilling contractor, said on Wednesday quarterly profit more than doubled, beating Wall Street expectations, on higher rates for its deepwater rigs and lower-than-expected expenses.
• Record high crude oil prices have created a boom in demand for floating rigs and drill ships that operate in the deepest waters. Drilling contractors have benefited as tight supplies have pushed daily rig rates above $600,000 in some cases.
• First-quarter profit jumped to $1.19 billion, or $3.71 per share, from $553 million, or $2.62 per share, a year earlier. Excluding one-time items, the company earned $3.80 a share. Analysts, on average, had expected $3.32, according to Reuters Estimates.
• "The beat was mainly due to lower operating expenses," Mark Urness, oilfield service analyst at Calyon Securities, said. "It's probably deferred maintenance, so it will come back later in the year. Still it's still a good quarter."
• Average daily rental rates, or dayrates, for the Houston company's total fleet rose 15.6 percent to $229,000. The increase in average dayrate was seen in all categories, primarily due to rigs starting new contracts at the higher dayrates, Transocean said.
• Costs for the first quarter of 2008 benefited from the postponement of several shipyard and major maintenance projects to later in the year, according to the company.

Devon Energy (DVN) beats by $0.41

• Devon Energy Corp., the largest U.S.-based independent oil and natural gas exploration and production company, said Wednesday its first-quarter profit rose 15 percent as higher prices and production offset one-time charges and increased expenses.
• Excluding one-time charges -- including a $780 million loss on derivatives instruments due to rising natural gas prices -- the company posted earnings per share of $2.74.
• Analysts polled by Thomson Financial expected, on average, earnings per share of $2.33.
• Production rose 9 percent over the year-earlier quarter to 640,000 barrels of oil equivalent per day. The company's average price of natural gas rose to $8.03 per thousand cubic feet, from $6.77 per thousand cubic feet, and the average price of crude oil rose to $97.67 per 42-gallon barrel, from $58.33 per barrel.
• Combined, the company's average oil, gas and natural-gas liquids production from continuing operations was 640,000 oil-equivalent barrels a day, up 9%. The production growth was concentrated in onshore fields within the United States and Canada.
• Devon's net production from the Barnett Shale field in northern Texas averaged a record 995 million cubic feet of gas equivalent a day in the first quarter, up 36%. We can grow that for a long time to come. That's what's exciting," Devon CEO Larry Nichols said in a CNBC interview.

The main thing we want to see for exploration companies is a good replacement rate - that is, they can replace old production by either new finds or expanding current locations, and push production at a higher rate going forward. The inability to do this is a problem some of the larger players, i.e. Exxon (XOM) are now facing. And potentially an issue with some of the world's large state owned producers are facing (which would lend credence to the high energy prices being a permanent fixture in society)

Uranium equities have continued their downturn after a period where it appeared we may have been flat-lining. Unfortunately for those still holding, many of these stocks dipped further in recent trading days resulting in a new all-time low for theinvestar's Canadian Uranium Average [TICUA]. We noticed during those down days that volume spiked on many of the smaller uranium stocks included in the average as well as those which we follow on the side. Some of these stocks reversed course during high volume days and finished up after being down 5-10% which brought to mind the word capitulation. Even if the uranium mining stocks have reached a bottom, it will take some time to achieve the highs set in previous years as many stocks would need to triple just to get back in the neighborhood of their old highs.

For all the good "spin" and taxpayer dollars funneled to ethanol and biofuel production over the past decade, it is time to seriously consider the ramifications of this policy on futures markets, the environment, and most of all our food supply. We here at theinvestar.com, LLC have continually argued against burning food rather than drilling for further oil supplies and are convinced that this is an issue which must be confronted sooner rather than later.

Wesco Annual Meeting, Pasadena CA 2008
May 7, 2008

Notes courtesy of Peter Boodell; thank you!

(As is standard, no recording equipment was used to reproduce these notes. My high school typing teacher gets all the credit. As a result, these notes are recollections only – not quotes, and should not be relied upon as a literal transcript. –PB)

CM: Testing, can you hear in back? Mr Denham has an announcement.

Denham: We ask you not to use your video recorders, thanks.

CM: Welcome to the 49th annual meeting of shareholders of Wesco Corp. Please register to vote at entrance. Anyone wishing to speak, state name, wait for microphone. List of shareholders, 96% of outstanding proxies received. Election of directors? All in favor? [Aye]. Motion is carried.

Six nominees are elected. There will be a long Q&A preceded by Socratic solitaire conducted by the Chairman. Meeting is adjourned.

We now begin Q&A, starting with a long game of Socratic solitaire. During questions, do not ask what we are buying or selling. Any other question is fair game, but we don’t agree to answer them.

Because many of you have come from such a long distance, I will talk before I take your questions. I will address two topics, general investment climate [and learnings from Berkshire Hathaway]. We normally avoid [discussing the general investment climate] like the plague. Most assets are priced to a level where it is hard to get excited. It is hard to get 4% yield on a nice apartment, and it doesn’t include replacing the carpets. Bonds of strong corporations are 4% yield. Corporate equities are paying 2% pa, growing 4% per year. Such a world isn’t the one that made all of you able to come to the meeting. Last generation has been in hog heaven – some bumps, but it had easiest time getting ahead. In the eighteen years that preceded hog heaven, the purchasing power of Yale’s endowment went down 60%. They were getting real investment return of 0%, negative. It is not at all impossible that brilliant investors like Yale get bad results in the future.

People are used to laying money aside and investing in standard fashion, and become quite comfortable. It is easy to forget that this isn’t guaranteed. Many have recognized this, but for those running pensions it is difficult [to adjust down assumptions] —like the agony of raising taxes or not looking good as CEO of a company. Some of them wonder if they have signed up for something too hard when running a defined pension plan. That crowd doesn’t want to go to a 4-5% assumption, because the pain of the money needed to correct the plan is large. Bonds pay 4%, so they go to alternative investments with profit sharing. They solve the problem by giving ‘reasonable return’ and sell hedge funds and venture capital fund, mid-stage, late stage, private equity, etc etc etc. They do complex trading strategies, private equity in Africa. They buy timber. [audio system malfunctions] Evidently that machine didn’t like the remark. People go into alternatives, and this has worked very well so far. A lot of university endowments have done it – and that is game we are in. If natural return is 5%, getting it to 9% is very unlikely to work well long term. It’s going to be difficult for people to have high real returns from deferring consumption. The reason my generation did so well was kind of a fluke, and won’t necessarily continue. There will be lots of chicanery in future. Many claim alpha – but really they are just taking earthquake risk. At end of year, when there is no earthquake, they take the money. This is a dishonorable way to invest. It is always easier to get felicity by reducing expectations instead of seeking extreme results.

We have plenty of scandals coming. Lots of rot has gotten into system. It has caused unpleasantness. What is next? I suggest the derivative trading books of the world are next. The accounting allowed in derivative books has been god awful. The morals and intelligence has been god awful. ‘I’ll be gone and you’ll be gone’ is phrase they use. What is buried in those books is dangerous, with clearance risks with optimistic assumptions that the accountants allowed. I was at Salomon when interest rate swap accounting was changed. They had a matched book. They were making $7mil, 25m over 18m. Both sides wanted to mark trades profitably. They couldn’t retain derivative traders if they didn’t have bad accounting. There is a lot of Gresham’s law here, where the bad practice drives out the good.

If you run a good bank, and testosterone bank around corner pressures you, there are tremendous pressures to conform. Everyone starts replicating. If every university puts 2% into timber, that can go on a long time. But it is self-fulfilling. When it comes to the unwind, when they all want to get out. A lot of things rely on momentum. Valuations make everyone look good for a while.

We have seen consequences in this mortgage meltdown, not pretty. The amount of knavery and folly revealed in last eighteen months has been unbelievable. I will ask a question, then I will attempt to answer it. Why did this happen? Greed, envy, and terrible accounting was part of it. There was a general lack of conservatism. The engineering mindset that everything must withstand great stresses was thrown out for ‘if music is playing, you gotta dance’. I don’t feel compulsion to dance, to join the crowd.

One of my favorite stories is boy in Texas, when the teacher asked the class the following question. There are nine sheep in pen, and one jumps out, how many are left? Everyone got it right, and said eight are left. The boy said none are left. The teacher said you don’t understand arithmetic, and he said ‘no you don’t understand sheep’. Sam Goldwin had a saying – ‘include me out’ – it is one of my favorite expressions.

People were distributing stuff that they wouldn’t buy themselves. It is the structure of the modern world. Favorite philosopher: Frankl. He said the systems have to be responsible. People who are making decisions must bear results of decisions. In Rome, the builder and designer stood under the bridge when the scaffolding was removed. In parachutes, you pack your own chute. Capitalism works that way too. At a restaurant, owner is bearing the consequences. If he slips, he doesn’t do well. Frankl would be pleased with restaurant business, and not pleased with investment banking. They sell, take the money, go home – it doesn’t work. And people wouldn’t get by if accountants didn’t bless it. When I was at Salomon, I was on the audit committee. A group came and said that we want to change our accounting, and where our credit is terrible – we want to report automatic profits – ie, to buy counterparties out cheaply because they want to sell. I told them that ‘You will have that accounting over my dead body’. I won that battle, but I lost the war.

Post Enron, accountants made mandatory that where the worse your credit gets the more profits you make. In the old system, the liabilities are always 100% good – it’s the assets you have to worry about. Accountants have thrown it out. They have made it standard. If you ask accountants about it, they say it is so complicated we won’t get to it in 3 yrs. They want something simple to do. A silly procedure and silly result doesn’t bother them as long as it is in some book. That is not wisest way to run a profession.

Legal profession comes in for own opprobrium. Knavish people were deliberately blind. They didn’t want to wrestle punch bowl away from a couple burly drunks. I had a friend who once proposed a rule at the partnership that they would fire one client per year on moral grounds. They would get rid their most venal and dangerous client once a year. That proposal went down in flames. There is a certain amount of deliberate blindness. If you want to prevent, you must have whole lines of activity that people are not allowed to engage in. [more problems with sound system] We are in shadow of Caltech and we can’t get the sound system right. Envy effects corporate compensation. People want to be paid like movie stars rather than archbishops. I don’t think it is necessary. Most would occupy top position at lower compensation rate. It is terrible to civilization. It brings extreme envy into population at wide. In Britain, they took taxes so high that anyone with property was leveled down to growing their own tomatoes. It was not good, very counterproductive. It was matter of envy. The working population required it and it was reaction to envy effects. It is not good to have the results we have had.

If we turn to Berkshire Hathaway, we have faults, but some of standard faults we deliberately avoid. Someone recorded what we would have had if Warren had paid himself 2&20. We would have had much lower taxes, so some other shareholders would have been better off, but Warren would have had 3x what he has now. Would world have been better if it had been run that way? I don’t think so. There is a lot to be said that people in power make money with shareholders, not off them. I’m not asking for an unreasonable ethos. It was compulsory in Athens. Liturgos, means required behavior. You had to give like hell if you were a leader. They had banishment. When language and traditions impose these… we might need it. We should restrict people in a more old fashioned way.

I remember what I was going to say. Privileges. If you are an investment bank and had to be rescued, there should be limits on leverage and the complications of your business. There should be qualitative limits too. By and large banks behaved well when it worked this way. When I was young, Bank of America – would not have done things they do now. Derivative trading, no good clearance, no rules, excess and craziness feeding on itself. The plain vanilla products got priced down to no profits. They wanted to do complicated stuff. Not sure if it cleared, or other side would be good for it. It didn’t bother anyone since they wanted the profits. The hidden trouble in derivative books is awesomely large. Greenspan overdosed on Ayn Rand ethos. He never got it out of his system. As long as axe murders were a natural outcome, then they were okay. I don’t think it is necessary – and think you can regulate ax murders away. People talk about marvels of system and risk transfer – but some of our troubles COME from having so much risk transfer.

After South Sea Bubble, Britain outlawed public corporations – only private ones allowed. And they led the world for 100 yrs. A modest amount of liquidity will serve the situation. Too much liquidity will hurt human nature. I would never be tenured if I said that. But I’m right and they are wrong. We don’t need worst excesses. We do not need smartest people in science and math in computer driven strategies. This is not a plus for wider civilization. Derivative trading books – is one big clump of excess not having had its denouement.

I am now going to turn to a more interesting subject, the Berkshire Hathaway phenomenon. What are the lessons? On investment side, people are realizing that old fashioned idea of trying to get more value than you are paying for. I think that idea is gaining, and I think a plus for rationality. It doesn’t make it any easier. By the nature of things, it will be difficult to make easy money.

How is it organized? I don’t think in history of world has anything Berkshire’s size organized in so decentralized a fashion. Net amount of bureaucracy is tiny, costs are low, autonomy in subsidiaries is vast, no common culture shuffling people around. How far can this go? This system has gone farther than any other system. Low cost, not a lot of envy effects – where everyone compares everything. People in subsidiaries have a feeling – whereby there is less fealty to headquarters. If you want an imperial headquarters which exacts a big overhead charge on the provinces – they will resent it. Net number of intra-subsidiary transfers is tiny. It has worked well. It can go a lot farther. No one else has been here before.

There are defects to the conglomerate system, where you have a separate quota system driven by headquarters driving provinces to meet central numbers. It causes a lot of expenses at headquarters. GE is good at running a conglomerate system. Berkshire has avoided the minuses. It can go farther. It has a system of running a financial system with low leverage and extreme willingness to let assets run out – that is quite rare. Most financial institutions talk our talk but don’t walk our walk. People can’t stand watching a place shrink. If you take General Re, they needed a derivative book like I needed a case of syphilis. It made headquarters more interesting. When we reached for money it wasn’t there. Out derivative book produced $400m of losses, and we were more conservative than most places.

[break to fix the sound system]

We have moved to a hard mike, so please return to your seats. Microphone system has an educational value. What they should not be allowed to do – is anything that is too complicated. The hard mike system [vs the wired], lo and behold, is working as it always did. Systems need duplicative systems, back up system one, and back up system two. Complicated systems – the high priests usually don’t understand it either. The system just goes out of control. Now we have government guaranteeing credit and then letting investment banks do what they want -- it is a very foolish system. They ought to have behavioral standards. They feel entitled, and that is not what they should feel with privilege of Federal Reserve backing. At Berkshire, we are ridiculously conservative. Even our reserves have reserves. We don’t have to renew our credit every Monday morning. We behave in way that we never need to renew our credit, and we still don’t need the money.

There have been comments on derivative trades we have done. If other people shouldn’t be doing it, why are we? Other people pay us money because people know we don’t have clearance risk, we are not at whim of other parties. It is a very different kind of a trade. The only reason we can make those trades is because there aren’t many out there who others would trust to make those trades. If you ask me, would I give up all of the opportunities of derivative trading to go back to a simpler cleaner world like engineering of yore--I would do it in a heartbeat. But what we have seen in mortgage market is only an aperitif to what we would see, in a system with bad rules and incentives. Especially with the appetites of males – women wouldn’t get us into this mess. In a soccer game, if there were no rules, people would destroy the body of the person on the other side. That is what referee is for. So we need referees to tell boyish adults not to hurt others. I don’t make this stuff up. Mark Twain said that truth is stranger than fiction because fiction has to make sense.

Some people call you people cultists, but most here are people who want to learn. It is a very good thing to be in this world. I think we are accidently creating something which is a learning institution, which may work that way for a long time. I don’t think Berkshire will perish when Warren dies. I had lunch with two Berkshire executives, and my heavenly days, those two guys are likely to make that business one of best in the world. How could there be a business like that buried in a place like Berkshire? There are very good things in this place. With reputation, comes duty. We should try to earn it. And run it in a way that people who succeed us do the same thing. That is what we are trying to do. Warren will never spend any of the money. He has never given a way a dime he needed. He deserves no credit as a philanthropist. I think we are part of something quite interesting and worth following. We get calls from people who trust us, and who don’t trust anyone else. We don’t get many calls like that, but how many of you get any?

I have rambled on. Academic response to Berkshire has been pathetic. It is soft science with enviable formulas. So you had to program a computer to buy only highly volatile stocks in order to make 7% per annum more? But if true, computers would do it. I don’t know why people pay attention to those ideas. Down boy, they say, you just don’t understand modern finance. And these are grown up people. One man, to whom they gave the Nobel, he kept saying Berkshire just lucky. A six sigma event – he wasn’t going to change his theory on the facts available. Business is simple, the details are hard. You need mementoes in place to help you in daily fight.

The only duty of corporate executive is to widen the moat. We must make it wider. Every day is to widen the moat. We gave you a competitive advantage, and you must leave us the moat. There are times when it is too tough. But duty should be to widen the moat. I can see instance after instance where that isn’t what people do in business. One must keep their eye on ball of widening the moat, to be a steward of the competitive advantage that came to you. A General in England said, ‘Get you the sons your fathers got, and God will save the Queen.’ At Hewlett Packard, your responsibility is to train and deliver a subordinate who can succeed you. It is not all that complicated – all that mumbo jumbo. We make bricks in Texas which use the same process as in Mesopotamia. You need just a few bits of ethos, and particularly engineering ethos. Think through the system, and get a margin of safety. Like this backup microphone.

Q1: Thank you Charlie. Financial risk transfers – 500trillion notional value. Sort of like Lilly Toms – things will get worse before they get worse. How does this all unwind?

When the Chinese A-shares went utterly crazy, you could predict this has to collapse. When mortgage excesses got crazy on slicing and dicing by scummy hucksters, it was similar. Derivatives trading books however are not similar. It has no automatic collapse surely to come. Some day it will be a mess, but I don’t know when. The mess that would have been if Bear Stearns went under would have been awesome. In CDS, assume $100mil bond issue, and they allow issuance of $100b notional contracts. You have huge incentive for company to go broke. You are not allowed to buy insurance on other people, unrelated parties. There is no reason in America to have vast bets on $100m bond issue to which no one is party. It creates needless complexity and very perverse incentives. They say “it’s a free market”. The correct adjective is insane.

Q2: Mark from Auz. Last year I was concerned about solvency in banks. I had stocks sent to me in scrip form. Is it now safe to let large corporations hold our stock or safer to keep at home?

Good question. I think risks are low in a cash account at reputable firms. Even in a margin account I think risks are low. It is inconvenient to keep them at home. They all end up in depositaries anyway. Everyone relying on electronic blips. I think fairly safe.

Q3: NY. The amount of derivatives out there today 30tril, 3x GDP. Do you think volumes will present danger in future, have you ever spoken to someone who writes derivatives?

It is complicated. They show large profits. It is peculiar thing – allowed to morph to huge size. Interest rate swaps – overstated. So imperfectly regulated it has a danger to the rest of us.

Q4: CA. Named our son after Warren. We are in market for a house in CA. Wanted your views on house prices.

Housing prices are going down in most places in CA. If you want house in Pasadena, if offer price 1.8m better to start bid at 1.85m. So not going down everywhere. Generally speaking the time to buy a house is when you need one. If you make money on it, it is just a byproduct of you doing your family duty.

Q4: NY. Have you ever asked quality programs at subsidiaries to improve margins?

We try to buy companies so permeated by good ethos that they don’t need checking from headquarters. We are trying to live in a seamless web of deserved trust. It has worked for us, and it is the ideal way to live. If your marriage partner has sixty page contract, you shouldn’t enter. You want to get a seamless web of trust. If life is hard, you may need a command control system. But we try to avoid it.


Q5: NJ. Railroad regulation?

CM: They are regulated. Earned so little money for years, that I expect rules will be better in future. They have increased capacity in a great way. It has been costly. I would not anticipate regulatory burdens to be high because the railroads have behaved well.

Q6: NY. Rationality? No one is 100% rational. How do you reconcile rationality with irrationality required for successful human relationships?

CM: There are some relationships you couldn’t have if you were rational. If someone asked you to join heroin smoking party, you wouldn’t qualify if you were rational. I think rationality is of immense benefit. It is a deep moral duty, you must hold it in trust and must hone it. People who are no good at it, they have to go to a different guru. I was born into a different skin.

Q7: WA. Inflation?

CM: If you have competitive advantage, and make 10% of sales, and sales go up 10% due to inflation, you will tend to make a little more money. Whether we will earn less or more, my answer is probably earn a little more.

Q8: UT. General Re. Brandon resignation.

We want to stay away from that subject. But we will stand behind Joe Brandon. He did a magnificent job. We stand behind that observation. I would trust him personally. [applause]

Q9: TX. Howdy. US force feeding 2bil per day. $2b a day to other countries, is it sustainable?

I would not be running twin deficits if I was running this country. I would have policies that didn’t push things as far as they have been pushed.

Q10: Dan Rizowsky. Discuss opinions and which model to reach a resolution?

We come to agreement once in a blue moon. Very seldom does he do something I wouldn’t do. Once in a while will we change each others’ view. We’re like an old married couple, humph humph and a nod and it is decided – no conversation necessary.

Q11: Harold from LA. Comments on Alan Greenspan and Ayn Rand and finance professor who can’t believe the success of Berkshire. Has there been a time like today when facts on the ground count so little for people in position of power?

You hang around with fellow ideologues. You should avoid this. Many people are totally confident they know the answer. When you have this confidence you need to get over it.

Q12: James Armstrong from Pittsburgh. You have said that Moody’s and HBS have the best pricing power of anyone in the world. What causes Moody’s moat to shrink?

All the rating agencies with 20/20 hindsight have performed poorly. When you perform poorly you impair your franchise. They weren’t quite fundamental enough. Exact example of the kind of thing I was speaking about. In an attempt to make more, they made their position a little worse. This is obvious isn’t it?

Q13: Scott from LA. With portfolio of $2m, vs. that of Berkshire, how would your mandate be different? Small vs mid, us vs intl, etc?

If I was managing smaller money I’d be looking in smaller places, I’d look for mispricing. But I don’t want to change places with you. [laughter]

Q14: Matt from San Jose. California is single A rating. Only other one is worse is Louisiana.

Both parties have been gerrymandering the legislature. It’s hard to get elected unless you’re a left or right wing nut. It’s a perfectly natural result in an insane system. We are not voluntarily going to change the system. I was the largest donor to the last attempt to change this system. We went down in flames. Stay tuned.

Q15: Sam from Santa Monica. What are your thoughts on the war on terror and the war in Iraq?

A: You’re going pretty far afield. Terror is a hell of a problem. People are vastly overconfident in the solution. They are probably making an error.

Q16: Phil, shareholder. What would you do if you were Fed. Suggestions on short and long term solutions to credit crunch?

Changing the system so the system is more responsible. We had margin requirements for decades and the fed forced this. Now with the combination of options and derivatives margin requirements have vanished. Federal Reserve has no power to deleverage. I think the system is seriously wrong.

Q17: Casey from Pasadena. Strong return on intangible assets is what WB likes. What else do you look for?

We buy Kraft these days because we have so much money. We are accepting way lower returns now than we were ten years ago. It is natural consequence of the world getting more competitive.

Q18: What do you think of the treasury market with negative real yields?

It would be depressing if that was my best opportunity.

Q19: Forest from Ft. Worth Texas. Do you look at railroads from a replacement value standpoint?

Do you know what it would cost to replace Burlington Northern today? We are not going to build another transcontinental. And those assets are valuable, have utility. Now they want to raise diesel prices on trucks. Wish I was smart enough to identify this few years earlier. Avoiding the most extreme follies of man makes you better.

Q20: CA. Why has commercial property not fallen as much as residential?

Cap rates came way down and asset values went way up. Financing transactions are getting away from euphoric conditions. A lot of the real estate fortunes have been made with extraordinary leverage. Commercial real estate is not a good business for us but ok for the entrepreneurial types. We shouldn’t be doing it.

Q21: Matt from NYC. How does Berkshire thru its subsidiaries manage an annual budgeting process?

We don’t have one. Obsessing over budgets creates bad incentives. Just eliminate unnecessary costs. Budget committees tend to do just the opposite.

Q22: John, shareholder. Any recent books you recommend?

I’m a bug for history and science. Yes by Cialdini is good. Most of the psychology professors can’t handle this real life material. It’s not a perfect book and not as good as Influence. As Warren says, experience is what happens when you’re looking for something else.

Q23: Peter, Yonkers NY. Which is better, insurance based float or money management float?

A: In terms of pure utilitarian perspective, you can make way more money in money mgmt than insurance business. There are few businesses as good as money management. Average returns in insurance property and casualty have been pretty pathetic. Once you have enough money you stop accepting compensation and just manage money -- it is more manly. At least 95% of the insurance businesses in the world are worse than ours.

Q24: Ashok from LA. Checklist?

I don’t have a simple checklist. You have to work at it a long long time. I still do dumb things after years of hard work. The more big ideas you have the easier. We exclude a whole lot of things because they are in the too tough pile. If you exclude, you do better. Then you must have field where rationality will be rewarded. Some of political ideas – it is very hard to know how they will work out over next few centuries. We are not trying to involve ourselves. We look for things that can be done. But I have no little short list. People who sell strong abs on TV at night might have one. I have no rule for a strong brain.

Q25: Whitney Tilson. NY. You reported earnings, but not a single shareholder asked about it. I was hoping for a comment on Berkshire earnings, and on mark to market derivative losses.

It was a very remarkable occurrence. Like the Sherlock Holmes story – about the remarkable happening with the dog’s behavior. Sherlock Holmes asks about the behavior of the dog in the night. “The dog didn’t make a sound.” “Yes, that was remarkable.” That perhaps is teaching a lesson. Those people trust us. They trust Warren, and rightly so. You saw an interesting example of deserved trust working in real world and in Omaha. By the way, we love that position. The accountants don’t know what they are doing but I don’t criticize them.

Q26: LA. In 25 yrs, where would you see oil production? What year do you see the peak?

This is very flattering, but I don’t think question nor my answer will do much for my reputation. We don’t know year, and the reason Warren picked up on my answer last weekend so strongly is that it is a radically different world where oil production is down 25 yrs from now, with radical adaptations necessary. Hubbert pretty accurately predicted peak. If it hasn’t peaked, it soon will, and it will go down. At $120 / barrel, there are obvious strains in the production system.

Q27: LA. I went to private school where you donated science building. For many minorities, there are low graduation rates. What can government do to help? What can we do?

Very serious problem, anguish causing. CA had once the best public education system in USA. It is a very sad thing. The private system is very competitive. Warren has suggested that if no one was allowed to use private schools, citizens would make sure public system was good. Not sure Warren is right on this. Personally I am better at lifting top up than the bottom up. Why shouldn’t I stick to game where I’m better suited? If you want to know how to raise top higher, I think I could help you a lot. If you want to raise lowest, I don’t know how to do it.

Q28: Boston. Swiss Re transaction. Could you add some color? Long tail insurance?

It will be long tail. It won’t be a bonanza. It ought to be reasonable, we like Swiss Re.

Q29: I’m curious, you are student of history. Does today remind you of any time in past, and why?

I punched premium channel in hotel in Tokyo, and out came exercise in pornography. I would argue Soddom and Gomorah is still around. I think Athens of Pericles is still around today. Our bullies are similar to past eras.

Q30: LA. How will meltdown affect Brazil and China. Will you invest there?

We have [economic] system which is interdependent. [A slowdown here] would have repercussions elsewhere. Will Brazil have troubles? No. Brazil is favorably located now. If I could get equivalent business prospects I would prefer USA. That iron mine that Brazil owns, you only need small knowledge to know that it is one of best in world. Agriculture – they are in a very strong position. We are not invested there at the moment. We have a small position in Brazilian Real.

Q31: CA. Health insurance?

The health insurance industry gets bad press it doesn’t deserve. When medical care fails, they say that characterizes it. But they also prevent a lot of interventions too. But Hollywood assumes everything is bad about health care. I don’t know what will happen. I think single payer could happen, and might not be too far in future. In fact it probably would happen, maybe 50% likely if Democrats win both houses.

Q32: LA. Absurd leverage in banking system. Large mess. Only response is that government has taken toxic portion and thrown it onto their books.

Not at all clear what will happen. If government intelligently spent $500bil dollars, it wouldn’t be that bad. But now they do it unintelligently. I am not shocked that we all have to pony up $500b. We did it in savings and loan crisis, $150bil.

Q33: CA. Hyperinflation. Real estate and gold?

I don’t have a good opinion on that subject. We have not been good at taking advantage of inflation. Net inflation at Costco was zero for ten years. Even Costco is starting to feel it. Not desirable. The previous situation was too good to continue. If it can’t go on forever, it will eventually stop.

Q34: Germany. Many managers typically would be carried away by all the success. Is it genes or is it still to come?

Very flattering. Success tends to make most people pretty pompous. Someone once suggested in a public setting, ‘Don’t you think financial success is making Munger pompous?’ An old friend of mine stood up and responded, “No, that is unfair criticism, I knew him when he was young and poor and he was still pompous.”

Q35: Beverly Hills. Berkshire has history of acquiring operating companies. Wesco has been less active. Will you get more active?

Berkshire will be better at stuff than we are. We have not bought our last operating business at Wesco, so, stay tuned.

Q36: Auz. Wells Fargo, how did you get comfortable with their derivative positions?

They will not be exempt, but we believe they will have less than their share of troubles. I think they have a better culture.

Q37: CA. Common stock returns going forward? Should we go overseas? So much less transparency… hard to satisfy conservativeness.

P&G and Coca-Cola is in developing world. We have exposure there. For a great many investors, the best way to do it may be to own Coca-cola. We’ve thought about these things. We do not lack participation in the rest of the world. And we may get more.

Q38: LA. If you were younger, what asset management type would you join?

If doing it again, I’d find someone I really liked being associated with, and I’d serve little time in a pompous place doing a lousy job. But most of jobs are in lousy places. My Harvard law professor used to say – ‘tell me what your problem is and I’ll try to make it more difficult.’

Q39: Germany. Insurance accounting: Cost or market, or lower of cost or market? Was this good move for accountants of insurance coompanies 30 yrs ago?

Very tough question. Generally speaking, lower of cost or market (standard for inventories) – but various financial types wanted to get away from this. There is a risk of self fulfilling prophecies, like an autocatalytic reaction in chemistry. Conservative insurance companies marking common stocks to market is not a bad thing. If we had lower of cost or market in derivative books, they would have worked better. All intelligent people find it so. You are to be complimented for being bothered by it.

Q40: CA. Average investor should invest in index funds.

All intelligent investing is value investing. Calling something a value fund doesn’t absolve it. You can call yourself a ballet dancer if you dance like me, but it is not a good thing. I wouldn’t recommend people broadly invest with any value fund. I would avoid funds that have 100% turnover per year. It is a ridiculous way for an ordinary index fund to behave. It is imperfect, but best outcome for most know-nothings, in order to avoid being misled by fools and liars.

Q41: USD Currency. How many months would it take for exporters benefit?

I don’t think USD weakness will fix trade deficit.

Q42: MN. Insurance and healthcare: How can we go about having best medical care at lowest cost? Also, could we get your book in schools?

A lot of people think existing system is all bad. People tire of dealing with dumb insurance companies. There may be some reality. Changes have been hard. If you look at hospital I am Chairman, we used to knife the kidney. Now we use lithoscripsy, with a 100% cure rate. I would argue our specialist doctor was one of greatest doctors Los Angeles ever had. I think there are good things in system as well as bad. It isn’t clear how it will work out.

I do have one clear opinion. There is way too much intervention when dying. It is a national disgrace. They are way better at handling it in Europe than US. You can take pride in Europe at dealing realistically. We blow more money on stupid cases near death where no one is helped by the intensity of the interventions.

I have trouble getting my family to read my book.

Q43: US. Are we losing our competitive edge? Education failing, infrastructure falling down. Should corporations move abroad?

Some movement offshore for tax reasons is happening, and it hasn’t ruined the country. It is the natural response to incentives. Berkshire could save a lot of money, but we just haven’t done it. We have some companies in lower tax zones. But we pay enormous income taxes. There is a huge taxation claim between you and your money. We pay taxes that are astronomical. I hope they become more astronomical. There is some development to shift around to save taxes.

Should be concerned if it gets big, but it isn’t really big at the moment. Pharma co’s make drugs in Puerto rico, etc etc.

Q44: CA. Insurance linked securities. Can you discuss insurance linked securities? Are they a threat to quality of underwriting?

Of course. Like slicing and dicing insurance risk – it wouldn’t improve matters.

Q45: What has changed since you first started investing?

I owe a great deal to Mr Buffett. It took a while to convince me. Warren and I together got very good at reinsurance transactions and portfolio transfers. We’ve learned together at it. Berkshire would have been a mess if it had ever stopped learning. Only reason we’ve been able to keep a shred of decency in our record is that we have been hell bent to keep learning.

Q46: There is no shortage of well regarded financial experts about debt – equal to great depression?

Pushing credit hard makes me nervous. I know how countries got ahead, and it wasn’t by pushing consumer credit to its extreme. I am not wild about the developments. But a great system will handle a fair amount of abuse. Some of the [credit] expansion was good. Do I like multiple credit cards being juggled? Do I look like kind of person who thinks that is good idea? It turns someone into a serf. You get customers just screwed together enough to pay you but who don’t realize cost of 36% interest... I don’t admire the guys who are good at acquiring the serfs.

Q47: Sweden. Why do you have so few followers?

From my point of view, we have too many damn followers. I don’t think we have shortage of followers. Of course great bulk of people do things differently because people running the systems have incentives to do it differently. For a security to be mispriced, someone else must be a damn fool. It may be bad for world, but not bad for Berkshire.

Q48: Germany. What do you think of energy drink business and how to can you avoid a bad marriage?

I abuse caffeine, and I like soft drinks. I’ve never even tried an energy drink. There seems to be a growing market for it. Marriage: Ben Franklin gave best advice, keep your eyes wide open before marriage and half shut thereafter. [applause]

Q49: TX. You said at the Berkshire meeting that if there is inflation, Iscar would make a lot more money.

Iscar is selling to very professional customers who know a lot. They can just raise prices like some consumer goods. If I gave impression they would make a lot of money, I didn’t make myself clear. Iscar is so good at delivering good products, it is hard for me to imagine them not selling more to customers who are making more money. They don’t have automatic pricing power. But a price increase is a price increase.

Q50: In 2005 both Berkshire and Bill Gates bought NZD. What do you think now?

I don’t have an opinion about NZ. Some things Warren does I just ignore. [laughter, pause] If I had something intelligent to say, I would say it.

Q51: Why the reluctance to own real estate?

Total real estate holdings are close to zero in the total enterprise. The Chairman has quirks. Old real estate purchases, at times we did borrow out equity in old real estate in order to reinvest it in Coca-cola and other things. We have huge surplus of cash now. But believe me we know all the tricks. We may behave differently in future.

Q52: Where would you sell an operating business?

We tend not to sell operating businesses. That is a lifestyle choice. We have bought well. We have a few which would be better if we sold them. But net we do better if we don’t do gin rummy management, churning our portfolio. We want reputation as not being churners and flippers. Competitive advantage is being not a churner. Warren says, ‘you should take high road since so much less crowded.’

Q: Amex Visa Mastercard. Can you compare these companies?

American Express has better customers, and we like that position, a lot.

Good friends – you are through another of our idiosyncratic meetings.

[standing applause]

Summer is around the corner. Rebate checks are in the mail. So what are people going to buy with their checks? Wal-Mart (WMT) is cashing the checks for free. Sears (SHLD) is offering a 10% match with a purchase of any gift card -- all this to lure enthusiastic shoppers who can't wait to spend their dollars.

But being that it is wedding season (which incidentally also means a season for wedding anniversaries), Tiffany (TIF) will be one of the beneficiaries of this double impact.

Cities and municipalities have been promising government workers more in salaries and pension benefits than cannot possibly be met. Unfunded liabilities are mounting and the ticking time bomb finally went off. What had to happen, did. Vallejo California Declared Bankruptcy.

The North Bay city of 117,000 now heads into largely uncharted territory, as no California city of this size has ever opted for this route. "This has been a long frustrating process for everyone," said City Manager Joseph Tanner. "There are no winners here tonight."My Comment: I disagree. Taxpayers of Vallejo are winners, perhaps more so than if a deal was struck.
After about four hours of discussion and public comment from the standing-room-only crowd, the council voted 7-0 to approve Tanner's recommendation to declare Chapter 9 bankruptcy protection as a means to reorganize its finances, which have been shattered by spiraling public employee salaries and the plummeting housing market.

The move allows the city to freeze its debts while maintaining city services. Police, fire and other unions and many in the audience were outraged at the move, accusing the council of poor leadership.My Comment: There was indeed poor leadership in Vallejo. Failed leadership is decades old. Year after year Vallejo has agreed to contracts the city could not afford. This move attempts to correct the error.
The city and its police and fire unions held a final contract negotiating session Sunday but failed to reach an agreement before Tuesday's City Council meeting.

The city and its public safety unions have been at the bargaining table for about two years. The city is asking for its police and firefighters to take salary, benefit and staff cuts, while the unions say any further cuts would endanger public safety as well as the safety of the police and firefighters.My Comment: Exactly how does a cut in pay or benefits endanger public safety or the safety of the workers? Clearly it doesn't. This was all or nothing hardball by the unions and it could be a fatal mistake. Pension benefits will now be under court review. Anything goes.
Vallejo spends 74 percent of its $80 million general fund budget on public safety salaries, significantly higher than the state average. The generous contracts are the result of deals struck in the 1970s, following a police strike that left the city in turmoil.My Comment: If I was a Vallejo taxpayer, this is what I would be asking: What special talents does the firefighter and police force in Vallejo have that merit "significantly higher than the state average" wages and benefits?
The City Council had been split on whether to declare bankruptcy. Some, including Mayor Osby Davis, said the stigma would threaten the city's long-term economic development and discourage investors, while others said it would give the city time to restructure its budget and offer protection from creditors.

What's unknown is whether bankruptcy will dissolve the city's labor contracts, which most City Hall staffers say is the primary reason for the city's financial mess. A judge will have to decide whether to dissolve the contracts.My Comment: Taxpayers everywhere should be rooting for those contracts to be dissolved. And if that happens, it will set a nice precedent for renegotiating all unaffordable government contracts, which is to say thousands of city and municipal contracts across the nation.

No Balls In D.C.

It's a game of union hardball in Vallejo, but there are No Balls In D.C.

Please consider this Pentagon Threat: If Congress doesn’t act, soldiers will go unpaid.
Pentagon Press Secretary Geoff Morrell briefed the press, starting with a statement about the Global War on Terror budget supplemental request, which is slated to go before the House this week. He said that currently the military is borrowing form Army payroll accounts in order to fund the wars in Iraq and Afghanistan and that if the Congress does not act the Defense Department will not be able to pay soldier, including those in Iraq and Afghanistan after June 15, 2008. He said the only options available if Congress does not pass $108 billion in war supplementals would be for the Defense Department to petition Congress to allow certain “re-programming” of other funds so that soldiers don’t’ go without pay.This is not about paying soldiers, this is about inappropriate spending. And Congress does not have the balls to do what needs to be done: Balance The Budget.

If the US government was required to have a balanced budget then this stupid war would not have been fought in the first place.

This is what I want Congress to do.

• Keep paying the soldiers.
• Stop paying themselves until they pass a balanced budget that includes future liabilities.

If Congress wants a war or war funding then fine. At least have the balls to raise taxes to pay for it. If we want to station troops in Europe and Japan, same thing. If taxpayers were given a choice to invade Iraq, station troops in Europe, and raise taxes, or not station troops in Europe and exit Iraq, it is perfectly clear how everyone but the neonuts would vote.

Want a bridge to nowhere in Alaska? Fine. Hike taxes or cut spending elsewhere. There would be some easy choices if Congress just looked at things like a household budget instead of money growing on trees.

Ball-less neocon chickenhawks started this mess, but they do not have the balls to pay for it. Ball-less Democrats keep giving in to Pentagon threats such as the one presented above for fear of being accused of not supporting the troops.

The reality is the only way to support the troops is to bring them home. The way to bring them home is to cut funding for the war and balance the budget. There is no balls in Congress to do either.

Addendum
I was looking for this yesterday but could not find it.
"Joe A" just sent me the link.

City of Vallejo's $100K-plus Earners

During the calendar year 2007, there were 292 City of Vallejo employees who had total gross wages of $100,000 or more. Find out who they were, what departments they worked for and how much they made by searching that database below.

The data was provided by the City of Vallejo's Finance Department.
Click here to enter your own selection criteria.

$200,000 to $299,999



click on chart for sharper image

$100,000 to $199,000



click on chart for sharper image

Activision (ATVI) has confirmed that three times as many Guitar Hero SKUs will be coming in the next fiscal year, as well as that Call of Duty 5 will be released for Wii, PS2 and DS, in addition to Xbox 360, PS3 and PC.

With regards to Guitar Hero, the company commented that there will be three times as many SKUs during the next fiscal year. An SKU refers to any particular platform of a game, so Guitar Hero III: Legends of Rock, released on Xbox 360, PS3, PC, PS2 and Wii represents five SKUs. The company hinted that other studios will be joining Neversoft in handling additional versions of the game. Vicarious Visions is currently working on the DS version of the game, Guitar Hero On Tour, and the company confirmed that it will be bundled in a Nintendo DS package by Nintendo (NTDOY.PK).

I have been talking about the non-stimulus of tax rebate checks for a while. My latest were Stimulus Checks Already Spent and Economic Stimulus Not a Silver Bullet.

Professor Kevin Depew added yet another reason today why there will be no stimulus from stimulus checks. Please consider Point number 1 of Thursday's "Five Things".

1. Where Your Tax Rebate Is Really Going

Economic "stimulus" the form of tax rebate checks is on the way, and in some cases may have already arrived in a few mailboxes. But economists remain divided on, a) how much of those rebate checks will be spent to boost the economy, b) how much will be socked away in the bank and saved, or c) how much will be used to pay down debt. The reality is it may be none of the above.

The Financial Times this morning had an interesting piece on what looks like it will be a first wave of a multi-wave event: California state legislators are considering radical revenue-raising measures including a new services levy and a temporary tax on high earners to address a budget crisis that has spiraled into a $20 billion deficit. As one of the states hardest hit by the real estate bubble collapse, California is struggling. Yesterday Vallejo, a city in in northern California, voted to file for bankruptcy protection after running out of money...

It's a game of smoke and mirrors; tax money that would have gone to the federal government, instead goes back into our pockets so that it can pay a portion of the tax increases that will soon accumulate at the state and local level. There is no free lunch, not where taxes are concerned. No free lunch is correct.

And that is important to keep in mind as the city of Vallejo is struggling in bankruptcy because it made too many promises it simply cannot keep. Please see Hardball In Vallejo, No Balls In D.C. for more on Vallejo and what may be facing scores of cities as the recession worsens.

By the way, the concept of no free lunch applies equally well to the myriad of proposals supposedly designed to bail out homeowners and/or stimulate the economy. All these programs will do is rob Peter to pay Paul, when Paul was a spendthrift buying more house than he could afford, with financing provided by lenders that should have known better.

Foreclosure Prevention Madness

Bloomberg is reporting U.S. Senators Agree on Foreclosure-Prevention Bill.
U.S. Senate leaders agreed on legislation aimed at curbing home foreclosures, dropping a provision that would have allowed judges to alter mortgages for borrowers in bankruptcy proceedings.

The plan includes funds for foreclosure-prevention counseling, tax credits for people who buy foreclosed homes and clearer loan disclosures for consumers buying a home, according to an outline of the proposal released today by Senate Banking Committee Chairman Christopher Dodd and the panel's top Republican, Richard Shelby...

Dodd and Shelby's plan would offer a $7,000 tax credit for people who buy homes in foreclosure to be claimed over two years, $10 billion in federal tax-exempt, private-activity bonds for refinancing subprime loans, and $100 million for housing counseling to help homeowners avoid foreclosure.Bush Threatens Veto

President Bush has threatened to veto this bill. Please call and/or email the White House to voice your support of a presidential veto of any housing bailout bill:

Phone: 202-456-1414 or 202-456-1111

Just say, "I am calling to ask you to veto any housing bailout that comes out of Congress."

Click Here To Email President Bush: comments@whitehouse.gov

Economic Stimulus Nonsense

The entire concept of a 'stimulus plan' is complete nonsense. The government cannot, and does not, create additional resources. It can only take money from 'A' and shift it to 'B' , either via confiscation (taxes), borrowing, or printing.

In the first two instances, money goes from one pocket into another, in the latter case, the entire money stock loses value to the extent that additional money is printed. Not one of these cases results in an economic gain. On the contrary, this artificial redistribution hampers the flow of scarce resources to where they are needed most, and thus delays economic recovery.

Prices of Treasury coupon securities have posted modest gains in overnight trading amidst a news cycle which has generated some angst amongst the equity crowd. AIG initiated the queasy feeling when it announced a gargantuan loss for Q1 of nearly $8 billion and credit losses of $15 billion. Oil surged to nearly $125 per barrel and sparked fears of inflation and a collapse of discretionary spending by strapped consumers.And not to be outdone the overnight press is replete with stories that Citibank will look to shed $400 billion of non core assets over the next several years.

Most of the preceding I have lifted from the Financial Times. There are several other stories on the home page of that fine periodical which I will not chronicle here but suffice to say that if you read those in addition to these which I have cited ,then you will quickly race out to buy three month bills and canned tuna.

• Fateful Friday? Overseas markets were none-too-excited by AIG's massive loss (see below), and oil's surge to almost $126/barrel. U.S. futures are trading down in like, and portend a weak opening. See Today's Markets below for all the figures.
• Citi's $600B garage sale. Citigroup (C) CEO Vikram Pandit is considering a massive "non-core" asset sale of up to $400 billion in order to jump-start the troubled bank's recovery. Pandit will say at an analyst meeting that about 20% of Citi's $2 trillion balance sheet, including complete businesses and trading assets, are not crucial to its operations. He will also confirm plans to cut the bank's $60B cost base by 20%, and will reject calls for its breakup.
• AIG aches. AIG posted a record $7.81B loss on the heels of a $9.11B writedown, prompting it to seek $12.5B to prop up its sagging balance sheet. AIG's total credit-crisis damage of over $30B puts it in the elite company of Merrill Lynch (MER), Citigroup (C) and UBS (UBS). Credit default swaps on its debt surged 11% as its shares fell 7.1% in extended trading. "While we anticipated a difficult trading environment, the severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," CEO Martin Sullivan said.
• Harris Corp. may be for sale. $7.3B electronics and defense company Harris Corp. (HRS) is considering selling itself, among other options. Potential buyers include Raytheon (RTN) BAE Systems (BAESY.PK) and Northrop Grumman (NOC). Shares ($54.41) trade at about the midpoint of their 52-week range.
• Commodity surge not speculative. Economists say surging food and energy prices are not the result of unbridled speculation on world financial markets, but rather are firmly rooted in market fundamentals. 40% of those surveyed by the WSJ worry the Fed isn't doing enough about inflation. Most think the Fed's target rate will stay put at 2% at least until year-end.
• Cash crunch easing. Commercial banks borrowed $11.49B from the Fed's (once stigmatized) discount window, down from $11.96B last week. Lending to investment banks totalled $16.26B, down quite a bit from $17.78B a week ago. The drops, together with a decline in the bids for the Fed's Term Securities Lending Facility auction loans, suggest dealers are becoming less pressed for short-term cash.
• A friend in need... Google (GOOG) executives sounded positive Thursday about a potential advertising partnership with Yahoo (YHOO), despite media reports that threw their support into question. "We have been talking to Yahoo and we are very excited to be working with them," co-founder Sergey Brin said. Chairman Eric Schmidt said he's happy the Yahoo/Microsoft threat has dissipated, and described Google's current relationship with Yahoo as "very, very friendly."
• Microsoft abandons proxy threat. A source says Microsoft (MSFT) has released candidates it signed on to serve as alternative directors in a proxy battle for Yahoo's (YHOO) board.
• Port bottleneck. A shipping overload, due largely to a lack of containers and transportation equipment, continues to hurt U.S. exporters. Larger companies such as Archer Daniels Midland (ADM) may have the resources to weather the shortage better than small firms.
• Warner shutters indie ops. Warner Bros. (TWX) is closing two of its once-coveted boutique labels, Picturehouse and Warner Independent. Costs to produce nouveau passe indie films have grown to the extent that its business model no longer makes sense.
• Home rescue plan in limbo. The federal homeowner rescue plan, part of which was passed Thursday by the House, is getting a lukewarm reception from both mortgage lenders and senior government officials. Lenders, MBA chairman David Kittle says, are in no rush to write down loans, and will likely only do so if home prices continue to decline steeply. Keith Hennessey of the National Economic Council says a current proposal to allow the FHA to refinance up to $300B in mortgages is way too costly to muster presidential approval.
• Trade platinum. The first two U.S.-traded platinum ETNs (long and short) are set to launch today: UBS's (UBS) E-Tracs UBS Long Platinum ETN (PTM) and E-Tracs UBS Short Platinum ETN (PRD). The ETNs will deal in futures contracts, and will not buy platinum. Platinum is up about 30% this year, and analysts say it could hit $2,400/ounce (futures closed Wednesday at $2,018.80). Norilsk Nickel (NILSY.PK) is the world's number-one platinum producer.

Earnings: Thursday After Close

• Activision (ATVI): FQ4 EPS of $0.17 beats consensus of $0.05. Revenue of $602.5M vs. consensus of $269M. Shares: +3.4%.
• AES Corp (AES): Q1 EPS of $0.39 beats consensus of $0.27. Revenue of $4.1B vs. consensus of $3.34B. Shares: +3.6%.
• AIG (AIG): Q1 EPS of -$1.41 misses consensus of -$0.76. Shares: -7.1%
• Assured Guaranty (AGO): Q1 EPS of -$0.08 misses consensus of $0.65. Revenue of $108M vs. consensus of $112M. Shares: -9.4%.
• Heelys (HLYS): Q1 EPS of -$0.02 misses consensus of $0.05. Revenue of $13.1M vs. consensus of $14.8M. Shares: -4%.
• Limelight Networks (LLNW): Q1 EPS of -$0.02 misses consensus of $0.02. Revenue of $30M vs. consensus of $31M. Sees Q2 revenue of $28-30M vs. consensus of $32M. Shares: -8.5%.
• Live Nation (LYV): Q1 EPS of -$0.47 misses consensus of -$0.42. Revenue of $636.5M vs. consensus of $568M. Shares: -0.5%.
• MoneyGram (MGI): Q1 EPS of -$4.40 misses consensus of $0.03. Revenue of $263M vs. consensus of $230M. Loss includes $307M in investment portfolio losses. Shares: -8.9%.
• Mylan (MYL): Q1 EPS of $0.09 beats consensus of $0.08. Revenue of $1.07B vs. consensus of $1.13B. Sees full-year EPS of $0.40-0.50, short of consensus of $0.53, and full-year revenue of $4.3-4.6B vs. consensus of $4.77B. Shares: -4.1%.
• Nvidia (NVDA): Q1 EPS of $0.36 misses consensus of $0.38. Revenue of $1.15B in line. Shares: -3.6%.
• priceline.com (PCLN): Q1 EPS of $0.76 beats consensus of $0.60. Revenue of $403M vs. consensus of $377M. Sees Q2 EPS of $1.25-1.40, better than consensus of $1.30. Sees full-year EPS of $5.25-5.65, better than consensus of $5.12. Shares: +14.3%.
• Quest Software (QSFT): Q1 EPS of $0.21 beats consensus of $0.19. Revenue of $173M vs. consensus of $166M. Sees 2008 revenue of $705-720M vs. consensus of $712M. Shares: +6.65%
• RealNetworks (RNWK): Q1 EPS of $0.02 beats consensus of -$0.03. Revenue of $148M vs. consensus of $142M. Sees Q2 EPS of -$0.04 to flat, in-line, and revenue of $151-155M vs. consensus of $150M. Sees full-year EPS of -$0.05 to flat, better than consensus of -$0.06. Shares: +11.1%.
• Sapient (SAPE): Q1 EPS of $0.06 beats consensus of $0.05. Revenue of $154M vs. consensus of $158M. Sees Q2 revenue of $159M or higher, vs. consensus of $162.1M. Shares: -1.8%.
• Scientific Games (SGMS): Q1 EPS of $0.24 beats consensus of $0.23. Revenue of $257M vs. consensus of $270M. Shares: -0.2%.
• Sonus Networks (SONS): Q1 EPS of $0.00 beats consensus of -$0.01. Revenue of $74M in line. Shares: +2.6%.
• Stillwater Mining (SWC): Q1 EPS of $0.03 misses consensus of $0.15. Revenue of $173M vs. consensus of $199M. Shares: -4.9%.
• True Religion (TRLG): Q1 EPS of $0.29 beats consensus of $0.26. Revenue of $53M vs. consensus of $46M. Sees full-year EPS of $1.52-1.56, better than prior $1.48-1.52, vs. consensus of $1.51. Sees full-year revenue of $220-225M, better than prior $210-215M, vs. consensus of $214M. Shares: +5%.
• Verisign (VRSN): Q1 EPS of $0.21 beats consensus of $0.20. Revenue of $354M. Shares: +2%.
• World Fuel Services (INT): Q1 EPS of $0.61 beats consensus of $0.54. Revenue of $4.49B vs. consensus of $4.33B. Shares: +9.1%.

Earnings: Friday Before Open

• Cinemark (CNK): Q1 EPS of $0.05 misses consensus of $0.07. Revenue of $401M vs. consensus of $400M.
• Clear Channel (CCU): Q1 EPS of $0.32 beats consensus of $0.21. Revenue of $1.56B vs. consensus of $1.53B.
• Clear Channel Outdoors (CCO): Q1 EPS of $0.04 misses consensus of $0.05. Revenue of $776M vs. consensus $738M.
• Cogent Communications (CCOI): Q1 EPS of -$0.21 misses consensus of -$0.18. Revenue of $52.1M vs. consensus of $52.5M. Sees 2008 EPS of -$0.20 to -$0.30, short of prior guidance of -$0.10 to -$0.20, vs. consensus of -$0.23. Sees 2008 revenue of $225-235M vs. consensus of $229M.
• Gray Television (GTN): Q1 EPS of -$0.08 beats consensus of -$0.10. Revenue of $71M vs. consensus of $70M.
• Huntsman (HUN): Q1 EPS of $0.07 misses consensus of $0.22. Revenue of $2.54B vs. consensus of $2.37B
• Leap Wireless (LEAP): Q1 EPS of -$0.27 misses consensus of -$0.02. Revenue of $468M vs. consensus $459M.
• PHH Corp (PHH): Q1 EPS of $0.55 beats estimate of $0.26. Revenue of $642M.
• Sotheby's (BID): Q1 EPS of -$0.09 misses consensus of $0.10. Revenue of $129M vs. consensus of $141M. Shares: -1.7%.
• Southern Union (SUG): Q1 EPS of $0.64 beats consensus of $0.61. Revenue of $953M vs. consensus of $831M. Sees full-year EPS of $1.80-1.90 vs. consensus of $1.86.
• Westar Energy (WR): Q1 EPS of $0.33 beats consensus of $0.31. Revenue of $407M vs. consensus $396M. Sees full-year EPS of $1.50-1.65 vs. consensus of $1.53. Shares -3%.
• Windstream (WIN): Q1 EPS of $0.27 beats consensus of $0.25. Revenue of $812M vs. consensus $804M.

Today's Markets

• Asian markets closed down Friday. Nikkei -2.06% to 13,655. Hang Seng -1.5% to 25,063. Shanghai -1.19% to 3,613. BSE Sensex -2.01% to 16,737.
• In Europe, markets are down substantially at midday. FTSE -1.15% to 6,196. CAC -2.4% to 4,934. DAX -1.3% to 6,980.
• On this side of the sea, equity futures aren't rosy. Dow -0.67% to 12,737. S&P -0.61% to 1,383.50.
• Nasdaq -0.53% to 1,954.50.
• Oil +1.14% to $125.11 (futures almost hit $126!). Gold +0.54% to $886.80.

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