Thursday, February 28, 2013

Apple and JC Penney

Joined at the hip by prior experience there are two CEO's here who talk finance when they should talk product.  These two guys have no idea about investor comunication.  The question is whether they have destroyed their stocks enough by their obvious overly confident and misguided approach to communication.

Tuesday, February 19, 2013

Two stocks being watched, VOD and RAX

VOD,Vodaphone appears to be an undervalued equity.  Its telecomunications footprint in Europe, India, the Middle East, and Africa is strong.  Near term benefit from these positions is not assured, but long term it is more than probable.  Paying a 5.9% dividend and at the bottom of its trading range for the year, the picture could be painted postively or negatively.  View here is positively.  Their capital position is solid based on accepted ratios, although the nature of their banking relationships is not known here.  Their revenues are somewhat diminished of late but their cash flow is ok.  The risk/reward looks positive, but not guaranteed.

RAX, Rackspace Hosting has had a collapsing stock price since an earnings report last week.  Now at around $58, it traded at $80 in September and $75 before the earnings release.  It traded at $41 in June '12 so expections were obviously quite high and were not met.  It missed the consensus earnings estimate by just a penny and slightly exceeded revenue projections.  Once again this shows that consensus has nothing to do with what the real holders and the most optimistic are expecting.  This has been a seriously good long term holding here, and modest additions have been made today.  Once again, however, one wonders what they don't know in this world of little real coverage by the analyst community of small to mid cap equities.

"Prosecutors Build New Wall Street Cases"

That's the headline in the NYT business section today.  This is dangerous.  Obama and his lackey Holder are focusing now on political opponents.  The huge economic decline enabled by the housing mess in 2008/2009 that extends even until today in many ways was not just a banking issue, it was also a regulatory issue, a flaw in our society's intelligence, a somewhat immmoral real estate brokerage community, a lack of oversight of Fannie Mae and Freddie Mac, and a complicit Congress that encouraged banks to dig deep into their credit standards.

The past is foreign territory, especially if it is recast in political terms.

Monday, February 18, 2013

Assessment time

Nassau County, New York  --- The due date for housing assessment renewals is March 1.  This is an annual ritual here that pits neighbor against neighbor after the fact as results of the appraisals become almost a year later.  This year's work will be reflected in the 2014-2015 results.  How boring is this.  Boring is not an issue, it is essential to participate in this charade here.

There is a big business among attorneys to do this work for homeowners and take, immediately, 50% of the benefit that only comes a few years later.  No can do.  We always do the work here, not so easy, so all of the benefit comes here.  For the attorneys it is no doubt boilerplate and that in this exceedingly corrupt county no doubt has some wrinkles that we cannot know.

Every year I file our own assessment request and each year the assessment has come down.  So far so good, except the taxes never come down.  The assessment is only over the portion of the ever rising taxes that one will pay, not the amount one will pay.  That's why it says "neighbor against neighbor".

While our success in assessment has been decent, last year it was substantial.  Looking at the records now, that was the case all around us.  People who have poured hundreds of thousands into their houses, and have no comparison to our "live in it fully and like it" approach, have the same benefits.  Nothing against our part-time Florida or Vermont living neighbors, which most are, but their homes are ready for a magazine photo shoot and ours is just the way it was when we bought it 15 years ago.  We just want a full house generator, a project that is underway, and that is it until we sell this behemoth and get out of Dodge a few years from now.

For the unaware, lazy, and elderly, and people in transitions such as divorce, serious illness, or death, this is a project which just benefits the attorneys and the county coffers.  For the annoyed like myself, it is necessary work even if somewhat enlightening.  Driving around the area looking at addresses like a spy, trying to see who has updated or sold their house.  Soon to be done for this year.

Sunday, February 17, 2013

Apple's big decline

It is well known that Apple's stock price has declined in a major way over the last five months.  From a high of $705 in September 2012, it has traded a low as $435 and now stands at $460.  The stock now trades at roughly a 10x P/E versus a 15x average for the S&P 500.  The dividend yield is now 2.3%.  Both revenues and earnings were up approximately 50% in 2012.  What's going on here?  Some thoughts follow, not necessarily answers.

---With the huge gain that investors have had in AAPL over the last ten years and everyone almost certainly knowing that a rise in capital gains rates in 2013 would come, it can be suggested that tax motivated selling went on throughout the fourth quarter.  Investors could sell a partial amount of their AAPL position to avoid the increase in taxes, and yet still have a large position remaining in the stock due to its appreciation over the years.

---New competition is on the rise.  Hewlett Packard, Dell, and others were vanquished.  Now Google and Samsung seem to be on the rise as viable competitors.  No one so far has the uniform technology platform that Apple has to link all devices seamlessly or has anywhere near the applications available, but in certain products there is, on the margin, product development that could rival Apple, in price and quality.

---Steve Jobs is, of course, no longer there.  He was an icon of the industry and investors had blind faith in him for good reason.  Tim Cook is no lightweight, an accomplished and capable experienced Apple hand by all accounts, but no one can replace the aura that surrounded Jobs.  It will take time to build management's reputation to that level again, despite their product superiority and range.

---Higher costs can be expected as pressure on their supply chain in China for higher wages and better working conditions will filter through.  Apple's standards and supervision were apparently high for Chinese workers relative to many firms, but that bar is rising and Apple must and will respond.  The prospect of moving some production back to the U.S., as Obama lauded on his State of the Union address, will have an unknown cost in money and quality.  Maybe it will be neutral or beneficial but until investors know the answer to that question, it will remain an open issue.  Are there American workers that will do that kind of precision and tedious work, that have the skills to do it, and the tenacity to stick with it.  There must be, but there might be documented immigrants involved.  Once established, will the unions or the Justice Department step in and focus on the company in a negative way.  There are so many variables here.

---This final thought is directed not just at Apple but at other firms with top tier market capitalizations.  What is the impact of having so many passive investors in the form of index funds and unidentified retail, insider, and foreign positions.  With Apple passive index funds hold 15% of shares and that's just the part that is held by the top ten holders.  It is likely quite a bit higher.  Unidentifiable retail, insider, and perhaps foreign positions account for 35% of all stock outstanding.  So is there any importance to the fact that less than 50% of stock outstanding is involved in pricing the stock.  Looking at Exxon and Microsoft one could suggest that it is not a moot issue.  I am not convinced that it is important in Apple's case but would like to understand the importance of this better now that a big rebound in stock price makes sense.  Any thoughts out there? --- public response JL???

Should Apple do a four for one split or some similar gimmick.  Should it make a spectacular dividend distribution to shareholders or begin a massive stock buyback, ideas to address their cash hoard that are now afloat in the investment community.  One part of Apple's secret sauce is that they use this cash to make below market loans to suppliers who must ramp up investment with each new device that they make, each new upgrade to existing devices.  No advice here but the stock must be undervalued under any analysis at these levels.  Unless there is some slowdown in new product delivery and earnings and revenue growth, and that is not expected, Apple is now, as they say, a "screaming buy".

Postscript, 3/23 --- the comment attached by "your Irish friend" several weeks ago is worth considering as another comparative valuation issue.  Part of its premise was validated in an NYT business section article today.  Take a look if this post is still on anyone's radar.

Saturday, February 16, 2013

Bad driving habits in places that I have lived

This comment is occasioned by a bad driving habit in the North Shore area of Long Island that I live in.  In thinking about this, it seemed to be an opportunity to choose one or two exceptionally clear examples of this in each of the places that I have lived for an extended period of time.  So here goes, starting with the example that led to the thought, and then going in chronological order.

---North Shore of Long Island - there is an ingrained habit here to swerve gently out, or sometimes not so gently, when making a turn, especially right hand turns for some unknown reason, taking a sort of semi-circular route into the turn.  Young people, old people, and women here seem to be the prime offenders but many men and middle aged people participate as well.  This is totally unnecessary unless one is turning into a very tight parking space or a very tight driveway due to piles of snow.  It can be dangerous in many ways, lanes of traffic affected or someone seeing the signal and thinking that it's the right time to pass.  Despite that, you can see on people's faces that they think that this is the clever way to drive.  It certainly is annoying.

---Hometown Danville, VA - there is one double laned highway that runs through part of town and over the river on the major bridge.  It has ramps to get on as expected everywhere with this type of road.  Merging is required to get on, and for many Danvillians that is some kind of violation of their space.  Drive up a ramp and see a normal merge opportunity but in Danville that will not be allowed.  Seeing the probable merge, most drivers on the highway will speed up, sometimes dramatically, to block you.  Sometimes just as you want to get on they will slow down to do the block.  It's another world.  Maybe it's a manifestation of the intense Nascar following there, with the Martinsville Speedway and it's Nascar sanctioned races nearby and the VIR(Virginia International Raceway) just outside of town.

---Washington, D.C. - this city has many circles, called roundabouts in other countries, that deal with the normal grid of streets being broken by large diagonal avenues.  Locals and those familiar with D.C. driving, and I was once one of them, speed up as they enter the circle in order to get to the correct turn off as expeditiously as possible.  The practice is sort of exciting in its own way.  To out of towners or occasional drivers, it is a huge challenge to meld in with the experienced D.C. driver, almost impossible at times.  I am now an out of towner.

---Louisville, KY area - it's difficult to think of some exceptional example of a bad driving habit in Louisville proper as my last visit there was maybe 1987.  Living in the no stoplight country town of Goshen for a  few years, the biggest fear was high speed driving on narrow winding country roads, but that was mostly done by those who lived there and familiarity made it almost normal.  The other more common and accepted real bad habit in the seventies was drinking and driving and that no doubt is dated and probably not such a ubiquitous issue now.  But THEN, as an example, the gracious and wealthy parents of a girl, maybe 21 so that's not an insult, who I was seeing had a "to be explained" game party for maybe about 20 of us in the 21 to 25 year old age range.  We went to their estate out in the near Louisville country, near a town called Prospect, and had a reception of sorts with lots of fine snacks and an open bar with everything.  Everyone chatted and enjoyed the wait for the game.  When the game was explained it was a scavenger hunt divided into five teams, and each team was given a list of addresses to which they needed to drive to pick up proof that they had been there.  While some of the locations were nearby, others were in Glenview or other neighborhoods of the well-to-do, not so nearby.  The first team to complete the hunt won.  It turned out that many of the locations were the homes of the elderly who had been certainly told of this and that were thrilled to have a group of young people stop by.  Some had prepared more snacks and drinks and being the winner was less important than being polite.  One could always make up the time by driving faster.  I don't remember who won, but you the reader of this get the picture.  This was not safe game.  Of course I was all in, but it was a way life there at the time.  I do have many stories from those great days there but...

---Glendale, AZ, a suburb of Phoenix - often in Phoenix to go to clubs and hang out with my girlfriend at the time, the major bad habit was speeding into intersections to run lights.  Phoenix has many big roads going through it, just roads and not highways, where the speed limit at that time, 1979-1980, seemed to be unenforced, or maybe unenforceable given a somewhat rough independent Western mentality in many parts of the area.  Major intersections were often the scene of terrible crashes, as cars speeding along these roads would hit an intersection and fly through yellow or lights already turning red.  Don't know if that is the case now and last was there at a banking conference in 1996 or so, but caution had to my rule there and would be now.

---New York City - never owned a car when living in Manhattan but often rented them since my coverage area of clients was for several years Westchester County, NY and Fairfield County, CT.  The unequivocal bad habits of Manhattan drivers were tailgating and forced merging.  By forced merging I mean just moving into a lane and making someone else give in.  Cab drivers are reliably using this tactic at all times but not necessarily expert.  The only accident that I have ever had was when I lived here on the North Shore and was driving our Volvo wagon in Manhattan and a cab driver making a "forced merge" just ran into the side of the car.  Police, yelling, insurance claims, it was a mess but not important because no one was hurt.

That's it.  Drive carefully.


Thursday, February 14, 2013

About that uneven State of the Union address

It's time to weigh in on President Obama's State of the Union address now that everyone else has had their say.  There is "uneven" in the title of this comment as the many positive initiatives that were discussed were balanced to the downside by the exaggeration of the administration's accomplishments.

The stirring close on gun control was the most passionate part of the speech, a high note to end on while focusing on tragic events.  While passage of any bill may not be possible, his "they deserve a vote" line was powerful and would require each Congressman to be on record as to their opinion.  Who knows where the next gun facilitated horrific act by some maladjusted person will happen, but each congressman knows that, if it happens in their district or their state, their position will be on record.  It is ludicrous to think that the founding fathers who wrote the second amendment could imagine military style advanced assault rifles or handguns that could fire 30 to 60 rounds in minutes would exist and then be put in the hands of ordinary citizens, and filter their way widely through to criminals and those who are mentally ill.

Obama's call for infrastructure spending is critical for our economic future, quality of life, and would boost employment levels with constructive, or construction, work.  Coming up with public/private solutions to funding this should make it a real possibility and it's essential.  His call for a comprehensive immigration bill makes complete sense and is long overdue.  The proposal for a vast national expansion of pre-school education is laudable, sensible, and needed.  How to fund and administer this needs to be examined closely.  This is not a minor proposal.  His initiatives to address climate change also need to be accepted by the anti-science pro-business at all costs crowd, but progress can be made here if the President truthfully and constructively addresses the real issues and does not just make symbolic progress.  An increase in the minimum wage to $9 is a directionally sensible goal, worth considering seriously but has some complications, such as the usual gripe here about the government refusing to use available technology to take into consideration cost of living differences.  In poor areas, that increase may actually deter small business owners from hiring while in big city urban areas it may not be material enough to attract the unemployed and unmotivated youth who may have other sources of funds.  Over time, businesses will adjust by raising prices in stores and on items that the poor more than others depend on.  On balance it is a bold and positive move, but not one without issues that deserve discussion.

There were many other constructive suggestions in Obama's speech, but quite a few distractions.  He kept using the word "bipartisan" but made many statements that would only anger those that he was suggesting that he worked well with.  Those misleading statements were directed at the American people and not at Congress.  For example, he said in the present tense that the administration had doubled the average distance cars could go on a gallon of gas.  That's the 2025 goal, and during his first four years information seen here suggests that the average went from 21 miles per gallon to 24, an improvement for sure but...  Same with the budget deficit, he stated that it had been reduced by $2.5 trillion.  That's the imbedded 2022 goal if all items passed work, are implemented properly, and if there are no complications in the interim.  Note that these statements that could be misinterpreted are to be fulfilled well beyond his time in office.  What the heck are the 2016 goals for progress on these initiatives when your time is up Mr. President.  Where is your accountability?

On the Affordable Care Act(healthcare bill), Obama claimed that the bill was responsible for reducing the growth of healthcare costs.  Actually the decline in the growth in healthcare costs began in 2008 and economists, virtually everyone, attribute the decline to the huge economic downturn that became a disincentive for many people to seek treatment or preventive examinations unless absolutely necessary.  The health bill was not passed until 2010 and is still is in phases of implementation.  With the slow improvement in the economy, the decline in the growth rate of health care costs moderated in 2012 but the growth rate is still below 2007.  At least results so far indicate that the health care bill is not yet adding to overall costs.

Obama mentioned the growth of renewable energy production, specificially wind and solar.  Solar has grown hardly at all while wind has made some progress, but together they are still a minor part of our energy resources.  There's nothing wrong with being optimistic or working toward bigger goals, but let's put things in context.  He mentioned simplifying the tax code for small business, but what about the rest of us.  He is making no effort to radically change the tax code so that "citizens" can understand it, keep up with rule changes, and actually do their own work.  Here last year we gave up, and now have an accountant, a great relief but there was no recognition by Obama of the monster that it has taken years to create and needs to be dismantled, totally revamped.

Build and manufacture in America was a recurring theme, but another theme less clearly stated but definitely part of his agenda is to provide penalities and tax disincentives from manufacturing overseas.  We like Toyota, BMW, and others building their cars here where they sell so many.  Why would this administration not understand the logic of globalization that makes manufacturing in other countries and being closer to the customer a constructive action that makes American multinationals competitive?

After lambasting the banking industry for four years, almost making bank a four letter word, Obama bewailed the lack of credit available for housing refinancings and small business.  Mr. Obama, the OCC and FDIC report ultimately to you.  Their examiners in the field are rigid in examining the capital positions and risk positions of banks.  Many smaller banks have been shuttered in the last four years and the power that your regulators have to do this cannot be challenged.  Many large banks still have lawsuits coming out of their ears from your Justice Department over the housing crisis, many of the charges related to actions taken by firms before they were acquired during the economic crisis and finally controlled by the banks coming to the rescue.  The Treasury Department encouraged and at times facilitated these acquisitions.  Your remarks on this issue were incomplete and  continued a policy of scapegoating.

This could go on and on, just like the opposite side of the coin which is the many constructive suggestions that Obama made.  How is it all to be paid for.  Everyone with half a brain knows that bureaucracies have their own momentum for creating work and jobs, much of it not necessary.  Why not come up with some solutions that involve cutting the size of government departments.  Maybe the State Department and the Defense Department could be excluded but announcing across the board cuts of 10% in the white collar and administrative staff of most cabinet departments would make little difference in efficiency, and maybe even lead to greater efficiency, after a short term adjustment, and that statement has been validated many times in cuts by corporations that were under pressure to slim down.  Why not look at the benefits and pension programs offered to Federal government employees, which are now more generous than what is available in much of the private sector.  That issue is already wrecking the budgets of state and city governments but the Federal government is not held to any standard so can just ignore this issue.  In fact, it must face up to it.  There was nothing visionary about Obama's approach to the deficit.  Eliminating "loopholes" for the wealthy and upper middle class and taxing corporations more will not solve the problem alone.  That's a political stunt.

This has gone on long enough.  The positives in Obama's State of the Union address show respect and caring for the American people.  The exaggerations, statements out of context, and political gamesmanship were just not necessary and show a disrespect for the intelligence of the American people and a willingness to risk his agenda in a continued political firefight.



Wednesday, February 13, 2013

"Silver Linings Playbook", appreciated here

If one were to, in conversation, describe the storyline of this film, it might sound like a superficial emotion laced feel good comedy about mental illness, a hard sell.  In fact, this is a special movie that has both multiple strong performances by the players and a harder edged story to tell than what might have been expected.

Among the performers, the 22 year old Louisville native Jennifer Lawrence stood out.  A best actress Oscar nominee for her amazing performance two years ago in the underviewed "Winter's Bone", this second time nomination could be the charm.  Here, many of her moments on the screen were mesmerizing.  Robert DeNiro's supporting actor role broke his usual type cast as a tough persona in crime films or a tough guy with a good heart "Meet the Parents" type comedian.  The role in Silver Linings was a great one for him.  Almost uniformly the performers, from small roles to lead ones, contributed to the effectiveness of the message.

The humor in the film worked.  The ever present theme, whether hit head on or just as an undercurrent, of the challenges of mental illness on both the victim of the disease and all family and friends involved could not be lost on any viewer.

Were there a few flaws in the film.  Of course, but they were minor compared to the overall impact, both in entertainment and content.  I'll write no more so as not to be a spoiler.  Film recommended.

Tuesday, February 12, 2013

Rating agencies and Obama's S&P case

The Justice Department case against S&P is long overdue, not necessarily because it has significant merit(to be determined) but because an examination of rating agency practices and the rules of regulation that the government has long approved need examination and focus.  What follows are a few brief thoughts as going into these issues thoroughly is being covered intensely by others and has many complex aspects.

--- Why just S&P?  What about Moody's and Fitch, especially Moody's and they and S&P are the real duopoly.  Is this just a test case against the largest that will encourage quick and easy settlements with the others, or is there another agenda here?

--- Why has the practice of investment banking underwriters paying all of the rating agency fees been sacrosanct?  While there are relationship aspects to fixed income and equity analysts in research departments at investment banking or pure research firms, there is definitely no explicit payment by corporations for research ratings and never has been.

--- Another practice is highly questionable.  Rating agencies are allowed, by practice and regulation, access to confidential information on corporations that is not available to fixed income or equity analysts at research firms, or to anyone for that matter.  Why this practice exists is inexplicable to someone who has little belief in confidentiality outside of small groups of insiders at high levels.  It gives their ratings more credibility when in some ways it should do the opposite.

--- Rating agencies do not, in general, attract top tier talent.  For the most part they do not pay enough in incentive pay except at the highest levels to do so, and their vetting process of employees talent is weak.  One old example, maybe dated but I doubt it - I had an employee who was known to me since graduate school who was always well dressed, reasonably popular among some, and had a quick, cocky, and at times insulting acerbic wit.  He gave the impression at a distance of being smart and alert.  As it turned out he was completely dysfunctional as a worker.  He rarely completed an assignment and when he did it was lame and thoughtless work, often simply lifted from the work of others.  In phone coversations with clients he was not helpful and lacked confidence.  He was let go.  Where did he find his next job?  At Moody's as and oil and gas analyst, a field in which he had no experience at all and notwithstanding the fact that he was incompetent.  Enough said.  He looked the part.

--- In the rating agencies defense, the complexity of the instruments that they were rating and are being sued about was stunning.  Since their main avenue of "research" was listening to what the underwriters and corporate issuers(think Countrywide, Bear Stearns and others) told them, both public and confidential information, they trusted them as that was their long term m.o. and their path to profits.  Almost no one outside of the most savvy underwriters understood the role of derivatives in these new issuances and the pitfalls that products like credit default swaps represented.  There was little disclosure of these risks anywhere, and many of the best research analysts and invesment management firms were in the dark as well.

--- Not in the rating agencies defense, it was in fact their role in the system to be the impartial evaluator of these securities, and they were in fact cheerleaders.  Their long time masquarade ended badly.  Now only investors like pension funds and certain mutual funds whose charters require that they follow guidelines related to issued debt ratings pay attention.  Most active investors do their own research and for the most part ignore the ratings that the SEC requires from the rating agencies.


Monday, February 11, 2013

The Grammy awards were watched here

Why write about this?  Here it is notable because the entire 3 and a half hour program was watched.  It is doubtful whether even an hour of the Grammy awards has ever been watched here.  I don't do award shows well, the Oscars, the Golden Globes, I take breaks or lose interest knowing that the results can always be found online and in the morning newspaper.

Last year I watched the beginning of the Grammy awards and saw the opening act by Bruno Mars.  It was probably the best thing that I saw on television in 2012.  He was one of the acts this year so I settled in with no expection that it would be, to me, such a spectacular show.  There were of course a few duds but the highlights were true highlights and there were many of them.

Start with the New Orleans tribute with the Black Keys, the Preservation Hall band and Dr. John and his hoodoo hat.  Go to the Bob Marley tribute led by Bruno and with Sting, Rihanna, two of the young Marleys, plus a bunch of others.  Even all, that's all, of the music celebrities in the front rows were standing, clapping, singing along, and some were just wide-eyed agog.  Then there was the Levon Helm tribute with another great cast of musicians, many of which I am barely, if that, familiar with including Mumford and sons, Zac Brown, and led by Mavis Staples.  These were all special.

Rihanna gave an amazing solo performance of a song called "Stay".  No dancing, no showing off her beauty, just singing with intense emotion.  Here it was stirring.  I had no idea that she could do that.  Alicia Keyes and Kelly Clarkson also had exceptional solo roles, and Jack White did two amazing songs.  I had forgotten how uniquely talented he is.  Mumford and sons did an energetic song that had the complexity and energy of the finest bluegrass, although I have been away from bluegrass for so long that may not be a credible statement.

There were other performances that were notable, but it's time to cook dinner and in fact I don't even know the names of some of the performers.  There were two performances that I just don't get, don't know how they belong in this group of talent.  One is Justin Timberlake, certainly a charming personality but I have no idea what is so special about his music and never have.  The second is a group called "Fun" that was nominated for many awards and won one or two.  They certainly seemed congenial but their music was more boring and bland than fun, from this perspective of course.  Each to their own.

One other thing about these Grammys - many of the advertisements were obviously made especially for this program, featured music, and many were not boring, and had never been seen before.  It was like a Super Bowl concept of advertising except much better and certainly much cheaper for the advertisers.

Discovering a surprise like this show was special.  I had always been put off by the amount of rap, the amount of bland Nashville "talent", and the fact that I was already familiar with many of the artists.  That is true no more, and Nashville and any harsh rap were barely present.

Now to the kitchen. 

Sunday, February 10, 2013

Who likes taxes?

To some extent, many people are fine with taxes, at least reasonable and explainable taxes.  To a large extent most people do not like the tax process and the many hidden and irrational charges that accompany those that make sense.  Well, that's not much of daring statement to start this comment.

On the first thought the example of our New York suburb property taxes comes to mind.  They are high and painful, and to add to the pain anyone falling into the AMT trap and now into the coming Schedule A limitation shave finds that these taxes are not deductible on a Federal return.  At times it feels like one pays twice, the same as the accepted regimen of being a risk taking provider of capital to companies(a shareholder) and paying taxes on dividends from company profits that have already been taxed at the company level.  These things are annoying, but the fact is that the property taxes paid for my children to go to reasonably good schools(with the occasional exceptional educators) for 19 years combined and to pay for a nice comfortable public library that is used constantly here despite the fact that it alone probably pays enough for multiple copies of James Patterson, Clive Cussler, Janet Evanovic and Nelson DeMille and other like "minded" books to open a wing just for real new actual literature, which seems to be bought one book at a time and needs to be foraged for.

With all of that, the school system worked and the library serves it purpose, both with a little work and attention required.  Those were well spent if not perfectly administered taxes, including the Federal haircuts.  On top of that, maintaining the educational services in the community maintains housing values and housing liquidity, the latter in short supply in much of the country.

General county taxes are also high but necessary.  The police, teachers, and municipal workers here are paid handsomely compared with almost any other area in the country but maybe they deserve it.  They too must be able to afford to live somewhere within driving distance of  this fairly expensive area.  What they don't deserve is all of the opportunities to game the system through fake disability claims and the collusive massive overtime arrangements in their last year or two of employment that boosts their pensions through the roof.  But back to the last paragraph, apart from the hugely incompetent LIPA they mostly do their jobs and reassure those who choose to live in or buy into these communities.

The New York Times Sunday Business section today has an entire section entitled "Your taxes".  It's six full pages.  The lead article is "The Tax Deal That Simplified Nothing".  It details the complexity of the tax system in a way that is almost exhausting to read, and you know that they are just able to scratch the surface on this.  Over the past six years this blog has had enough rants on the lack of inflation adjustments to the tax system and the lack of recognition of cost of living differences in the country to probably create a small exceptionally boring book.  Same for the insipid growth of government bureaucracies at both state and especially Federal levels.  There is no "conservative" here that wants to castrate effective government, just someone who can see what anyone with open eyes can see.  Bureacracies have a strong tendency to grow on their own, without purpose.  I have previously written about a young acquaintance who worked at Elaine Chao's Labor Department for a summer and found that most employees came in at around the required 9am, took hour and a half lunches, and left at 5pm or modestly before that time.  During the day they sat in meetings and most of their productive time was spent angling for attendance at out of D.C. conferences where they could stay at nice hotels and eat on expense accounts.  Sounds real productive?

So there is no need to cover the "Times" articles of today.  Readers here can go to the internet tonight, start reading the articles on NYT online, and be crawling to their beds and sleeping comfortably soon.  Despite what the politicians say every election season, there is no appetite to simplify the tax code or take on these bureacracies in any meaningful way.  Most politicians within the beltway are just looking out for themselves, most notably Congress by far, and that is, in every poll, clearly a consensus thought among the American people.

To close this overly long commentary,  there is an example of a tax that was not much appreciated here and it is a certainty that most readers have their own examples.  Selling a mixed use building in Chinatown recently by nine members of a family was a coup in the sense that it was done before year end and avoided the much higher capital gains taxes that would have been applied in 2013.  Nevertheless, calculating the estimated taxes paid before January 15 was painful.  Purchased in the 1960's, without any inflation adjustments the cost basis was essentially nothing.  This historic building was maintained at no small cost and actual lots of personal work by the family but that added little to the miniscule cost basis.  As a New York City and State landmark building, every improvement had to be approved by a bunch of upper east and west side commissioners with time on their hands but took their time about it, and at times irrationally denied improvements on the interior that would not in the least have been visible from the outside.  Police protection in Chinatown is almost non-existent except in cases of violence and the tong gangs patrol much of that anyway.  So with almost no police patrol prescence or effort, those semi-legal buses that cart people to casinos were allowed to use the front of the building as one of their loading and unloading spots.  Graffiti was constantly being scrubbed from the walls or painted over.  Late night bus arrivals would have people freely urinating around the building and bums would huddle in the doorways.  A metal front door that was criticized in one travel book as the one unfortunate eyesore was a necessary move to repel periodic break-ins.

All of this is meant to say that paying significant amounts of money to the Federal and especially the State and New York City governments seemed somewhat abusive.  The Federal government protects our country, does not tax the truly poor, and provides entitlements to those who need them(and some who don't) so ok, they get theirs despite the approach to cost basis.  The State and City were primarily non-supportive and impediments to good management.  That's a personal tax gripe although none of the proceeds came to yours truly and none of the taxes were paid personally.  That said, I was involved in the transaction and the local tax side was really insulting and not liked.

Enough of this.  This reality must be accepted and change of any consequence is unlikely.

Friday, February 08, 2013

Misadventures in Chinese equities

While owning the ETF FXI here as well some BRIC funds and emerging market funds, there was a phase several years ago when I tried to invest directly in Chinese equities.  At one point there were about eight positions.  They never offered any comfort despite the choices having been derived from reading some research and recommendations. 

Of those eight, five were sold within two weeks or up to six months of purchase.  The transparency was weak and the performance was non-descript.  There were small losses and small gains on these five, but on the whole it was toe in the water investing that ultimately said don't go any deeper, or stay out.  The financial experience was essentially neutral, other than opportunity cost and some lost sleep.

Three stocks were committed to the portfolio for a much longer period of time.  They seemed at the time like obvious winners.  Baidu is essentially the Google of China, and with Google eventually for all practical purposes kicked out of China they were the primary search engine.  Sina was also a powerful search engine but evolved into what can only be called the Twitter of China, and still is.  Sohu also had search, but is a wide ranging platform not unlike Barry Diller's IACI if combined with Zynga as well.  All three of these firms were, and are, market leaders in their primary businesses in China: search; messaging; and gaming respectively.

They did not work out well.  None were major investments as prior experience had led to a timid approach, but I had hope for some outsized gains that would lead to the opportunity to invest more.  That did not happen.  Sohu was let go first early in 2012 with a loss as it seemed incomprehensible and was slowly sliding downward.  Then in the fall of 2012 Sina had to go as well.  It too was not performing in the hoped for trajectory, leading to another modest loss.  Finally the largest of the positions, although not outsized, was waved a negative goodbye last month.  Baidu(BIDU stock symbol) is still something that will be watched for a really attractive entry point, although that may never happen.

So what happened?  Here are some thoughts, some factual and some just complete personal opinion:

---As these sites led to more transparency and China's leaders watched the role of social media in the "Arab spring" two years ago, in strange fits and starts they began to exert greater control over these firms.  The firms were already closely watched and monitored, but that was slowly stepped up.  Then in the last year as the enormous extent of official corruption in China became more of a topic on these sites, the clamp down began to be more thorough.  The sites are still widely used but not in a way that leads to the type of growth once expected, in eyeballs or in revenues.

---China itself seems to be an immense island of opportunity for firms like these with its 1.2 billion people, or I think that's the latest number.  Then one could wonder how many of that number are anything that approaches participants in a real consumer economy.  Is it possible that even with the expanding growth of a middle class, the number of real participants in a "modern" economy is actually no more than that of the United States.  The opportunity for cell phone and mobile device expansion is no doubt immense as that bypasses the last phase of communication technology that much of China did not participate in.  That opportunity will not materialize overnight, and whether it is used to access heavily censored content in any extensive way is a question. 

---As an investment thesis, the biggest hurdle for these seemingly market leading three stocks is that they will not participate in a global economy.  The Chinese people are stuck with them, but real multiple expanding growth comes from being part of something bigger.  Google, Facebook, and other firms can grow over almost the entire world, absent China, but the Chinese have no real outside growth opportunities.  Even if they fashioned English language versions of their content, who would have much interest in Chinese government censored factual content, syrupy soap operas and lame game shows.  Investors want growth, and China itself does not offer as much as it would seem on the surface.  The rest of the world has no real interest beyond journalists, monitors from other governments, those looking for any business opportunity, and students focusing on the country or the language. 

Baidu will be watched here, but for the most part direct equity investing in China is sort of hopeless for a retail investor from this perspective.  Oh, I will also watch DATE, check that out.  At the right price that could be a big one.  It seems that giving up completely is not possible here.

National Grid displaces LIPA in responsibility

As we are faced with another record breaking storm, this time snow and wind, National Grid has taken charge of the major decisions and planning to deal with the inevitable power issues on Long Island.  My guess is that Governor Cuomo forced this decision given the Long Island Power Authority's(LIPA) complete incompetence in dealing with Hurricane Sandy.

National Grid is a public company that supplies and manages gas consumption to many areas in the Northeast, as well as handling electric power as well in much of upstate New York.  This seems like an almost unprecedented move, and it is so welcome.

LIPA is saddled with a corrupt union that has been aided and abetted by corrupt politicians for years.  The work rules are ruinous, the salaries and benefits unusually high with seniority being the main variable rather than competence, and the trustees of LIPA are almost totally, if not totally, patronage appointees with none having any extensive experience with utilities, most actually having none at all.

As a public company National Grid has been held accountable by shareholders, a competitive environment, and a regulatory regimen not run by lazy bureaucrats under political pressure.  They will not be able to control mother nature, but the preparation for this storm is already light years ahead of what LIPA did with Sandy.  LIPA is still involved of course, but they effectively report to National Grid.

Here we go again, with a snow storm and blizzard of a size that has apparently not been seen seen on Long Island since the 1970's.  Whatever happens, at least there will be an element of competent and experienced management involved.

Thursday, February 07, 2013

Volatile and Resiliant equity market --- source of money?

A constant subject of late on CNBC and other business media outlets has been the "fact" that money is finally moving back into the equity markets after four years of many living in fear.  Many pundits suggest that it is simply a move out of the bond markets by retail investors tired of no yield and more downside than upside(almost obviously) in the bond markets.  Some suggest that it's small institutional players, meaning hedge funds, that are moving from bonds to equities.  All of that seems logical.

There is one problem.  According to Bill Gross, the largest bond manager by far, there has been little or no decline in investor holdings of bonds.  On top of that, if these self satisfied pundits think that retail is moving or holding up the market, they are miguided.  Maybe that was the case during the wild technology gold rush of the late 1990's, but there is no such phenomenon now.  Fear is still alive and well, although some who retreated with abandon during the great recession are now inching back in. 

So where is the money coming from, or does it matter.  Stocks are often priced in the short term by money flows but in the longer term, for one who has any faith rational pricing, stocks are priced based on their value, meaning capital strength, earnings, cash flow, growth, and competitive positioning.  For the sake of argument let's for now just accept that stronger money flows into equities are the source of the resiliance and jagged growth.

Certainly the pundits are right that some funds are coming from folks or firms that can no longer tolerate the almost no rate returns of short to medium term Treasuries, various bank deposits, or anemic annuities.  That it is not really visible in bond market volumes is the quandary.  Here are some thoughts:

---Overseas money invested in bond markets or bank markets that are not so transparent are moving into the U.S. equity market.  China's equity markets are weakening, increasingly government controlled, not so transparent, and many companies are beyond heavily leveraged.  Europe's equity markets have some opportunities, but decisions made by a handful of career politicians and bureacrats in Brussels can lead to radical changes in direction of financial markets quickly.  Even Germany, the strongest country by far in the E.U. has an equity market that is far from attractive, just outright dull.  Brazil has seen its big run, Peru as well it seems, and there is not enough liquidity in Indonesia, Vietnam, Malaysia and other southeast Asian countries to absorb major investment even if they have opportunity.  On top of that, India has become a complete mess with no leadership of consequence in government and much of the population impoverished in a way that would embarrass even China.  Japan's equity market continues at its moribund pace of the last 15 years or so, but yours truly may be one of the few who thinks that there is finally hope and has taken a little bit of that risk recently.  For most investors, the U.S. is the place for the money to move.

---With wealthy investors, real estate owners, corporations, and hedge funds all working for the second half of 2012 to monetize assets and avoid higher capital gains taxes, that's new money for the equity market from people and companies that have always embraced some degree of risk.  No way they are settling into two year Treasuries.  As other opportunities develop, as in acquisitions, mergers, or new projects, they may move some money out of equities but for now it's the only parking place.

---As of the end of 2012, the Fed ended its great recession policy of essentially guaranteeing all deposits in smaller banks, so that they could stay in business and not lose their business to the biggest and most highly capitalized banks.  With no guarantee on money above $250,000, there would likely seem to be a tendency to allocate some money not just to groups of other banks but also step back into a few equities.  After all, while sitting on the sidelines since 2009, many relatively wealthy, maybe those retired or approaching retirement, have simply watched the equity markets rise more than 100% while they sat "safely" on their money. 

Those are some thoughts.  Maybe there is nothing new here to many, but to those who listen to CNBC it might be something to think about.  Even Bill Gross suggests that bonds may have peaked and returns will fall, but they are still alive and well with minimal withdrawals.  The equity market, with its UPS and DOWNS remains thought provoking or worse, but the returns in the most recent years have, in the aggregate, been rewarding.