November 24, 2008

JCPenney Selling Fear for the Holidays


JCPenney Company, Inc. is aiming to get younger consumers to buy diamond jewelry online at The Jewelry Store. The effort includes viral elements, a new Web site, Facebook, print ads, and a splash of guilt.

The campaign, "Beware the Doghouse," via N.Y.-based Saatchi & Saatchi and digital agency Razorfish, lets people put their spouses or partners in the proverbial "Doghouse" for bad gifting. How does one get out of the doghouse? Diamonds.

A Web site, www.BewareoftheDoghouse.com, includes a short humorous film that features a clueless husband who is suffering a Dantean fate for having given his wife a dual-bagged vacuum cleaner for their anniversary: He is banished to the "Doghouse," wherein other hapless men are paying for their sins by folding laundry in perpetuity and learning to express their feelings as they eat out of dog bowls. The men lament the bad gifts they gave their wives or girlfriends and plot their escape.

Seriously though, who still buys non-Dyson bag vacuums these days? That's the real shame here.

And I find it funny that JCPenney is doing this, particularly since I was flipping through their mailer a week ago and came across 2 "doghouse" gifts parents should beware of:

Knock-off iPods and Wiis. Kids don't want to have to explain to their friends that their parents are too cheap to get real thing, and that's why they can't trade video games. Now, THAT'S the doghouse to beware of!

October 7, 2008

The Maverick

US Constitution Need Not Apply

The United States Constitution very clearly states in Article I, Section 7:

All bills for raising revenue shall originate in the House of Representatives;

How and why does this not apply to the second-time’s-the-charm Bailout, which originated in the Senate? In fact, the Bailout was attached to a bill that had already passed the House and was pending in the Senate.

Despicable on the part of Congress, who takes an oath to specifically "promise to preserve, defend and uphold the Constitution."

As a group, incumbents have won re-election 92% of the time since World War II. I just wish I had more incumbent elected officials to vote out of office, irrespective of party affiliation.

I am not partisan, I’m anti-incumbent, and not afraid of writing in my conscience on election day. The Lesser of Two Evils be damned.

September 30, 2008

September Madness

The FHFA, BoA, and JPMorganChase have already made it to the Elite 8. Will Congress make it to the Final Four?



(Hat tip: Fark)

How House Members Voted on Bailout

MAPlight reports that House members voting Yes on the doomed bailout proposal received 54% more money from banks and securities firms than those voting No.


Who

How Voted

Average Amount Contributed to Member

House (All Members)

Yes

$231,877

No

$150,982

House Democrats

Yes

$212,700

No

$107,993

House Republicans

Yes

$273,181

No

$181,688


Additionally, FiveThirtyEight.com finds a strong correlation between how House members voted on the Bailout and the competitive nature of their re-election bid. Namely, of 38 incumbent House members running in swing districts, 30 voted against the bill.


17 of 20 swing Republicans (85%) voted Against the Bailout;

13 of 18 swing Democrats (72%) voted Against the Bailout.


In case you’re wondering those three gutsy Republicans that voted Yes on the Bailout despite their hotly contested re-election are:

  • CT-4 Rep. Christopher Shays
  • IL-10 Rep. Mark Kirk
  • NV-3 Rep. Jon Porter

September 29, 2008

So What's Next?

228-205. Ding dong. But I suspect we haven't seen the last of this bi-partisan attempt at nationalizing Wall Street. If so, what's next?

My guesses:
  • The mother of all runs by foreign and domestics on US banks.
  • US Banks will halt credit issuances. Corporate bond issuances will plummet.
  • Federal Reserve will expand currency swapping with other central banks. So far they've purchased back $620 billion USD at the expense of US-held foreign currencies.
  • The Federal Reserve will expand its emergency loan program by unknown $$$s, and extend its coverage to more and more types of institutions.
  • FDIC will request a bailout.
  • A Liquidity trap, as clueless opportunists clamor for lower interest rates.
A liquidity trap is much, much worse than it sounds. It occurs when the nominal interest rate nears or hits zero and the Fed can no longer wield effective monetary policies to stimulate the economy. In essence, because people and institutions do not expect high long-term rates of return, they sit their assets out in short-term placeholders.

In it's worst-case, a liquidity trap leads to economic stagnation. Exacerbating this recent turn of events are increasing consumer prices.

Economic stagnation + inflation = stagflation.

September 28, 2008

Ban on Short-Selling Results in Less Liquidity

The SEC's ban on short-selling on 799 financial stocks has resulted in further drying up liquidity. Go figure.

The short-selling ban is taking the 'hedge' out of hedge funds. ...With their hands tied on those stocks and the algorithms that do much that do much of their trading running into technical hitches, many quantitative and other 'market neutral' hedge funds are drastically reducing trading activity.
 
Another way of saying reduced trading activity is less liquidity in the market. Way to go Team Technocrat. Way to go.


September 25, 2008

On Open Thievery & The Bailout

Warren Buffet’s Open Thievery

Buffet agrees to buy a $5 billion stake in Goldman Sachs. Later that same day, he is on CNBC for 20 minutes promotingthe Paulson Plan which would directly benefit himself. One day later, Buffet’s already made a $783 million return on investment.

Reading the Bailout Plan Clearly

The Paulson Plan requests authority for the Treasury Department to purchse up to $700 billion in mortgage-related assets at any one time. Ill-informed journalists serving as our news sieve, have interpreted the plan to be a lump sum $700 billion resuce.

In actuality, this means $700 billion is only the very beginning of the newly-acquired power wielding. The plans text below (emphasis added):

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

One last thought on collusion and how it pertains to what will likely be our closed-door bipartisan bailout compromise, brought to you by economist Steven Landsburg:

"When an industry is dominated by two highly profitable firms, theory tells us that if there is no price war then there is probably collusion. In the case of the Republicans and Democrats the requisite collusion is on display for all to see. It is called bipartisanship."

September 24, 2008

G1 vs. iPhone

 

In defiance of my typical latent excitement at consumer product announcements, I am utterly excited by the official roll-out of T-Mobile’s G1 phone. (The G1 is, of course, the vehicle for Google’s Android software platform.) Why?

First, I’m a PC guy, meaning I instinctively hesitate before handing any money over to Apple. I bucked this long time trend during mid-2005 by purchasing a 4gb 2nd generation iPod Mini, and then replacing it with a 80gb iPod Classic in late 2007 once the battery went kaput (ugh!). Generally if Apple wins me over, it must be by convincing me their product is a superior offering, particularly if I’m going to eat PC crow on a daily basis.

Second, AT&T. While I’ve played with iPhones owned by my friends and colleagues, my overall enthusiasm is muted by my absolute distaste for AT&T / Cingular. My experiences with their customer service is almost as dreadful as my on-going battle with the Verizon FiOS support and billing. Not helping their case is the terribly limited iPhone voice plan, nor the exorbitant data use fees. If I can’t convince my wife I needthe $199 iPhone, how will doubling our monthly wireless bill do me any favors?

Third, I’m an open source proponent. Apple’s closed shop business mentality is tired and frustrating for anyone hoping to deviate from how Apple envisions its customers using their products. Google couldn’t get any more distant from Apple in it’s open source vision, and it is most recently demonstrated through Android’s open access software development. Score one for the wisdom of crowds (which is a fantastic book by James Surowiecki)!

Some issues that have been raised about the "gPhone" are:

  • No syncing or access to an exchange server. These are software issues which can and will be resolved by allowing independent developers to write corrective code. Additionally, the G1 has mini-USB so syncing really is just a matter of time.
  • T-Mobile’s 3G network uses 1700 MHz vs. AT&T’s 1900 MHz.
  • 1gb of on-board storage. The G1 accepts standard microSD, so storage is really just a matter of buying it.

Related Reading

G1 vs. iPhone: The tale of the tape

HTC G1 specifications

Apple iPhone specifications

Android: An Open Handset Alliance Project

September 23, 2008

Answers Without Questions

Let us not forget that our Constitution was designed by the American Founding Fathers for slow, deliberative action, so as to avoid the particular situation we find ourselves. But seriously, to paraphrase Tina Turner, what’s the Constitution got to do with it?

Are we so insulated from our recent past that we have forgotten the costs of rushing the Patriot Act through a midnight session of Congress during the aftermath of 9/11? We were so convinced by our desperation for answers and security that our distinguished representatives in Congress signed off on an earth-shattering bill without even reading it. Neither checks nor balances, my friend. A wink-wink, nudge-nudge will suffice. And yet here we are seven years later, where the stakes are higher but the game remains the same. Secretary of the Treasury Henry Paulson wants an appropriation of $700 billion with no conditions, no terms—nothing written down on how he would spend the money.

Congress, during an election year, is going through the motions of being very, very concerned but will in the end sign off on the Paulson Plan. Later on in the third act, they will again be concerned over how Paulson’s appropriations were used to pay higher-than-market prices for the securities in question and will want answers. The answers, of course, could have come before they signed off, but that will be neither here nor there.

UPDATE 9/25: Questions, questions galore! How wrong was I in predicting a no-brainer signoff by Congress.Hopefully they'll continue their skeptical inquisition through the week.


Related Reading

The Wrong Emergency
Blame Fannie Mae and Congress For the Credit Mess
Anatomy of an Economic Crisis
High Anxiety
A Political ‘Solution’

September 22, 2008

Financial Crises

It seems like every day or two there's another aspect of a tremendous financial disaster looming. Now Treasury Secretary Hank Paulson is looking to get Congress to approve a $700 Billion bailout (that would include foreign banks), and Congressmen and Senators on both sides of the aisle are willing to oblige him. Indeed, it seems the only points of contention are how many additional bailouts will be added to the bill so that Wall Street stockholders won't be the only recipients of this largess. No Foolish Risk-Taker Left Behind would be an appropriate title for it. This is all in the name of financial stability. If we don't do something then the stock market could cease to function. Credit would completely freeze-up and the economy would come to a standstill.

Is this likely? Or more importantly, will the bailout really stop it if it is? Remember that $700 Billion is a lot of money for the government to borrow (and us to pay back with higher taxes), but is really a drop in the bucket compared what is traded in worldwide financial markets. The bailouts of Bear Sterns, Fannie Mae, and Freddie Mac didn't thwart this crisis, so can we really be sure that this additional $700 Billion will actually do the trick?

Additionally, do we want to further the rampant moral hazard that has significantly contributed to this problem to begin with? Are we so concerned with assuaging the guilt and fears of the self-proclaimed Masters of the Universe, as well as the stupid folks who mortgaged themselves to the hilt, that we'll pat them on the head and say, "that's alright. You made a boo-boo, but we'll help you," regardless of the fact that these people are in a position they put themselves in? Especially since the lesson for all investors is: American capitalism means you get to keep the money you make (after taxes, of course), but if you are sufficiently connected to the right folks in Washington, you don't bear the full brunt of your mistakes. The more poor decisions are rewarded, or bailed out if you will, the poorer we will be in the long run for it. This is true on the micro scale when it comes to family interactions, and on the macro scale as we are seeing.

The main counter to this is that there wasn't enough oversight. If we had good regulations in place and good regulators enforcing the rules, then this would all have been avoided. So we pay through the nose now, but we'll have stricter rules going forward. I call BS. We could have regulations up the wazoo and it wouldn't stop people from making dumb investment decisions. What we have to do is make it clear that the consequences of bad decisions are borne by the decision-makers, and turning Goldman Sachs and Morgan Stanley into holding banks so they can get quicker access to federal money does the exact opposite. Similarly, instituting bans on short-selling does nothing more than shoot the canary in the mine before he can suffocate and warn the rest of us.

The laws of economics, like the laws of physics, are immutable. You can't wish or legislate them away, no matter how much they vex you. We didn't start flying because we decided gravity was holding us down (pun intended) so let's pass a law, but because we figured out how to work within its confines and developed the airfoil. We can't solve this problem by throwing money at it and adding more onerous regulations. We have to suck it up and let these institutions fail. Yeah, the consequences would be terrible, but continuing to put band-aids on a gushing head wound won't do us any favors either.

Of course, the politicians will never let that happen. In order for the Democrats to win the White House and take more seats in the House and Senate they have to seem very concerned and pass the bailout, with plenty of goodies included for their core constituencies. It's not like Democrats understand how economics works anyway, or they wouldn't be Democrats in the first place, but that's a rant for another time. :-)

And don't think I'm giving a pass to the Republicans. If there is anything the last 8 years have taught us, it's that they are perfectly willing to forgo their stated principles of limited government and personal responsibility if it means increasing their power. This current bid by Paulson to control huge I-Banks is a perfect example.

So what do we average slobs do? Buy gold. Hedge the American dollar and start saving for that rainy day, since the forecast looks cloudy, to say the least.

Eroding Capitalism

Let’s be frank. With every news headline, political stump speech, and conversation held from Wall to Main streets, we’re not discussing the failure of capitalism. We’re focused on the failure of government intervention. Skimming the nasty landscape that riddles today’s headlines, we are awash in corporate socialism, where good risks and resulting profits are private, but bad risks and their resulting losses are passed onto the tax payers.

During the early 2000s, cheap money drove our economy into a long-term spending spree, reminiscent of the Japanese economy of the late1980s. It took nearly 12 years for Japan to recover. During that time, monetary policy was completely ineffective by lowering its interest rates, to the extent that only the priveleged few could receive funding.

In Japan, the economy never felt an overnight shock that may have prevented the long-term ailing that prevailed. Industrial policy was aimed at stability, rather than economic correction. In today’s case in the US, sure, an overnight correction would decimate our short-term economic activity and/or prospects. But that may be preferable to stitching together a quilt of misguided solutions, in the hopes that we’ll get it right someday.

Rather, wouldn’t it be best for all to be held accountable to the same standard– Where an individual (or a corporation) takes responsibility for its own actions. By having Andy feel the pains of Beth’s mis-management, why should Beth ever correct her ways – particularly when Beth has already prepared her golden parachute?

Related Reading

Greenspan’s Sins Return to Haunt Us

The Government Is Not Supporting Stability