Nobody's business, or everybody's?

The most indispensable chief executive in the United States, beloved by customers and investors for his magnificent turnaround of the company he founded — and for the amazing gadgets his company produces — can no longer be trusted on the subject of whether he is healthy enough to continue running the company. Although Mr. Jobs says he will return in June, [Needham & Company analyst Charlie Wolf, who follows Apple] wrote in his note that investors were likely to “assume the worst — at the extreme, the possibility that Mr. Jobs will never return to Apple as full-time C.E.O.” And Mr. Wolf has always been a big supporter of Steve Jobs. Incredible.

It is really hard to write about Steve Jobs and his health. Nobody wants to see another human being suffer a recurrence of cancer. Everybody — myself very much included — hopes that Mr. Jobs will get well and come back to work. I can even understand why he doesn’t want to disclose details about his medical problems to the world — it’s very distasteful, and Mr. Jobs also believes strong [sic] that it’s nobody’s business except his and his family’s.

But he’s wrong. There are certain people who simply don’t have the same privacy rights as others, whether they like it or not. Presidents. Celebrities. Sports figures. And, at least in terms of his health, Steve Jobs. His health has become a material fact for Apple shareholders. His vagueness about his health, his dissembling, his constantly changing story line — it is simply not an appropriate way to act when you are the most important person at one of the most high-profile companies in America. On the contrary: it is infuriating.

Joe Nocera: "It's Time for Apple to Come Clean" @ NY Times Executive Suite blog (15 Jan 2009)

Related: Apple's Culture of Secrecy (New York Times, 26 July 2008)

Long bets: index funds vs. hedge funds

Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?

That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers.

You can guess which party is taking which side.

Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.

On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.

Buffett's Big Bet (Fortune)

Related:

Long Bets: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

You only learn who has been swimming naked when the tide goes out

[Warren] Buffett’s annual letter to shareholders, which was released Friday, has become something of a business institution, with the certainty that he will offer caustic comments and the hope that he will shed light on his investments.

This year, his scorn was aimed at the “financial folly” of lenders who financed the housing boom, since vanished, and at companies that use rosy assumptions of investment success to raise reported profits.

The comments, which were released after the market closed, came as Berkshire reported that fourth-quarter profit fell 18 percent, in part because of falling insurance rates. Net income decreased to $2.95 billion, or $1,904 a share, from $3.58 billion, or $2,323, a year earlier.

Mr. Buffett offered no commentary on Berkshire’s foray into the municipal bond insurance business, and no explanation of why he spent $1.5 billion to buy a 1.3 percent stake in Sanofi-Aventis.

But he was willing to say, in effect, “I told you so,” in recalling his warning a year ago about “weakened lending practices” in the mortgage market.

“Just about all Americans came to believe that house prices would forever rise,” he wrote. “That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that H.P.A. — house price appreciation — would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out — and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Buffett's State of the World: There's Folly in Wonderland (New York Times, 1 March 2008)

Related: Warren Buffett's 2007 Letter to Shareholders (BerkshireHathaway.com)

Earth2Tech: How to Index Your Cleantech Investments

With the launch of the FTSE ET50 Index, which is devoted to following 50 large cleantech stocks from around the globe, Wall Street has gone from spotting a trend to beating it to death with specialized financial products. There are now more than three dozen clean technology or sustainable energy funds, and many of them contain companies that overlap.

Earth2Tech: How to Index Your Cleantech Investments

I have a (very!) modest stake in a Powershares ETF (PBW) based on the WilderHill Clean Energy Index, one of the first "cleantech" indexes.

At this stage of the game, picking individual companies for investment in this industry sector would seem almost impossible. Investing in clean energy through an index fund or similarly-structured ETF seems to make the most sense... but don't forget the dirty energy while you're at it; ExxonMobil and Shell are set to post record profits for 2007.

Advice to foreigners: Sell your Treasury bonds

Andy Xie, writing in Caijing (a Chinese business publication that republishes some of its articles in English), states his case bluntly (you'll forgive, I hope, the mild awkwardness in translation):

In a closed economy, inflation is a zero-sum game in wealth redistribution. Investors in fixed income lose and borrowers win. As the US owes so much to foreigners, inflation, at least the unexpected part, adds value to the US economy. It does give the Fed incentives to tolerate more inflation. Why then it just lets it all out and inflates away all the foreign debts? The problem is that foreigners may see what’s coming and sell everything right away. It would trigger the US bond market to collapse, which would wreck havoc on the US economy. Hence, inflation benefits the US only if foreigners can be fooled before it happens. The Fed is still paying lip service to inflation for that purpose.

You probably know what I am getting at. If you hold US bonds, sell. The Fed wants to rob you to help the bankrupting US homeowners. My hunch is that the US inflation would rise to above 4% next year and higher afterwards. Foreigners own 40% of the US treasuries, mostly central banks. They should sell now to demonstrate they wouldn’t accept the broad daylight robbery by the Fed. The selling would cause the treasury yield to skyrocket, which would offset the stimulus from the rate cut by the Fed. The Fed may have to change policy to appease foreigners when it sees the rebellion.

If foreigners don’t act and lay there like lambs, they deserve to be slaughtered.

You Should Sell Treasuries (Andy Xie, Caijing Magazine, October 2, 2007)

Thanks, FASB!

Marc Andreesen: "I'd just like everyone to whom I owe money to know that you're never going to get it back. And I plan on booking the dollar value of your outrage as revenue in my current quarter."

...so 2nite we're going to party like it's 1929

moral hazard: "A situation in which someone insured against risks will purposely engage in risky behavior, knowing that any costs incurred will be compensated by the insurer. A financial system which offers "rescue packages" may encourage borrowers and lenders to undertake low-quality or high-risk investments, thus increasing the likelihood of a crisis."

Related: Markets Soar After Fed Cuts Key Rate By Half A Point (New York Times, 18 September 2007)

Unsafe at any valuation

Watching the rating cuts trickle out of the derivatives forest is akin to searching for elephant dung on a path to try and work out how many pachyderms are in the jungle. There's clearly a herd in there. And it's probably much bigger than the ordure you have seen so far would suggest.

[...]

Here's what is most worrying about the coming flood of downgrades and defaults. The U.S. Securities and Exchange Commission is investigating how the biggest brokerage firms priced securities caught up in the subprime meltdown as their values collapsed. My colleague Jonathan Weil last week detailed some of the accounting shenanigans that accompany how banks measure the "fair value'' of their assets.

What happens if the SEC discovers that different units of a single bank assign different values to identical securities? That seems like a viable scenario for what might happen when a complex market of infrequently traded securities whose prices are dependent on a series of assumptions hits trouble.

And what happens if the SEC finds that banks marked the securities they owned at high prices, while attributing much lower values to identical securities offered by their hedge-fund clients as collateral? Again, that seems like a plausible strategy for a bank concerned about the longevity and liquidity of its customers.

Suppose regulators decide to play hardball on how the financial community marks to market, imposing rules that outlaw the existing freewheeling approach to how over-the-counter derivatives are assayed.

Moreover, suppose those new decrees come just as much of the underlying collateral is so tarnished as to be almost worthless compared with its initial valuation.

The ensuing carnage in the balance sheets of every financial-services company in the world would dwarf the damage wrought in the securities industry by the subprime crisis so far.

Bloomberg.com: Unsafe at Any Rating, CDO Speeds to CCC From AAA: Mark Gilbert

via pmarca

Information Arbitrage: Keep it simple

Discipline, especially when it goes against one's native instincts, is hard. When your friend brags about a particular stock or strategy on the golf course, you are jealous, right? And when you hear stories of people making tons in _____ (choose your era - tech stocks, commodities, currencies, gold, etc.), regardless of a lack of documentation (self-reporting is notoriously poor as people tend to remember wins and forget losses), you want in, right? It is very hard to be the tortoise when you are seemingly surrounded by hares. But you know what, you can try your hand a bit if you adhere to a few simple guidelines:

1. Set an asset allocation mix that makes sense for your age, stage, family circumstance, etc. If you can't do this with confidence get some help;
2. Establish the majority of your allocation using low-cost, liquid instruments like index funds and ETFs;
3. Figure out if you want to try and dicker with investing at all, and if the answer is yes;
4. Limit your "play money" to 5-10% of your total portfolio.

By all means have some fun. Do some research. Collaborate with others. Try and generate some real alpha. But don't, DON'T have this be the core of your investment strategy. Please. Don't. Do. It.

Retail Investors + Complex Investments = Failure (Information Arbitrage, 16 Aug 07)

(Speaking of investing, the White Trash and Minor Vices Portfolio is taking a beating but, with its emphasis on consumer staples, doing one hell of a lot better than the markets as a whole. The White Trash Portfolio is only up 0.3% since inception, but that's compared to a 0.4% loss for the S&P 500 over the same time period and a 1.1% loss for the US stock market as a whole, as measured by the VTI ETF.)

Understanding liquidity risk

A few generations ago, savers responded to financial panics with runs on banks, and even healthy institutions could fail if they could not raise enough cash quickly enough.

For a long time, that all seemed to be safely relegated to the past. But now the runs are back — and this time the targets are not banks but the securities that have replaced them as the prime generators of credit in the new financial system.

“Our current system of levered finance and its related structures may be critically flawed,” said William H. Gross, the chief investment officer of Pimco, a mutual fund company. “Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.”

A New Kind Of Bank Run Tests Old Safeguards (New York Times, August 10, 2007)

Cashing in on the Carry

The most controversial tax break on Wall Street, known simply as the Carry, is not authorized by any law and was never approved by Congress.

Instead, it grew quietly over several decades, hinted at but never directly addressed in obscure court cases and arcane regulations issued by the Internal Revenue Service.

Unchallenged by lawmakers, it swelled into a benefit that, by one back-of-the-envelope estimate, spares a small band of the country's richest and most powerful financiers $6 billion a year in personal income taxes.

Wall Street's Lucrative Tax Break Is Under Fire (Washington Post, 3 August 2007)

In a nutshell, here's how it works: fund managers and venture capitalists and those sort of folks arrange to receive much of their compensation as "carried interest," which is then taxed at capital gains rates (15%) instead of the twice-as-high (for their income bracket) personal income tax rates.

I agree with Judge Learned Hand on the subject of taxes: "Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

Further, I think that low capital gains tax rates, which encourage investment, are a social good.

But the private-equity managers who are cashing in on the carried-interest loophole are, for the most part, not investing and managing their own money; they're performing services on the behalf of others. In other words, they're doing a job and being compensated for it.

As a society, we would do well to abolish the fiction that fees earned for managing hedge funds and performing other feats of financial engineering aren't "income" or shouldn't be taxable as such.

Sock-puppetry at Whole Foods

Rumors on stock discussion boards being seeded and spread by sock-puppets are nothing new.

Usually the sock-puppets only claim to have inside information and are looking to manipulate a stock's price.

Sometimes, the sock-puppets actually HAVE inside information, and their goals are... hmm.

In January 2005, someone using the name "Rahodeb" went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

"Would Whole Foods buy OATS?" Rahodeb asked, using Wild Oats' stock symbol. "Almost surely not at current prices. What would they gain? OATS locations are too small." Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5. A month later, Rahodeb wrote that Wild Oats management "clearly doesn't know what it is doing .... OATS has no value and no future."

The comments were typical of banter on Internet message boards for stocks, but the writer's identity was anything but. Rahodeb was an online pseudonym of John Mackey, co-founder and chief executive of Whole Foods Market Inc. Earlier this year, his company agreed to buy Wild Oats for $565 million, or $18.50 a share.

Whole Foods Is Hot, Wild Oats a Dud -- So Said 'Rahodeb' (Wall Street Journal [subscription required], 12 July 2007)

BusinessWeek: The Million Dollar Waitress

Via Reason's Hit and Run blog:

It's not quite the random walk hypothesis in action, but it looks like the winner of a stockpicking contest sponsored by CNBC might be a waitress who "never even paid much attention to the markets before signing up for the challenge."

Business Week reports that Mary Sue Williams "of the tiny Appalachia town of St. Clairsville, Ohio" is showing a 29 percent return so far in the two-week contest.

And, from the linked BusinessWeek article:

Williams, 46, has been a waitress for 20 years and was a welder before that. She has never bought or sold a real stock in her life. In fact, she says she never even paid much attention to the markets before signing up for the challenge. Yet Williams has already bested thousands of financial professionals who entered the contest with Ivy League degrees and complex trading models. "Part of this was luck," she says. "A lot of it was a gut feeling, some eenie-meenie-minie-moe, and common sense."

There's an interesting side note in the article (and on the CNBC contest page) about people who have been trying to exploit weaknesses in the game to artificially boost their gains and win.

BusinessWeek: The Million-Dollar Waitress

Related: CNBC's Million-Dollar Challenge

White Trash on Wall Street

It's time for our monthly review of the White Trash and Minor Vices portfolio.

To refresh your memory, in late March we set up a model portfolio of the following stocks, and have been tracking its performance against major indexes on a periodic basis:

• BFB - Brown-Forman Corp. Cl B
  
• BUD - Anheuser-Busch Cos. Inc.
  
• CHB - Champion Enterprises Inc.
  
• F - Ford Motor Co.
• GM - General Motors Corp.
  
• IGT - International Game Technology
  
• KO - Coca-Cola Co.
• KFT - Kraft Foods (not part of original portfolio; spun off by Altria, but it clearly still belongs)
  
• MCD - McDonald's Corp.
  
• MO - Altria Group Inc.
  
• WMT - Wal-Mart Stores Inc.

With some effort, we pried ourselves away from the news about Britney Spears' latest struggle with mean radio station advertisers to note, with pleasure, that since inception, the White Trash Portfolio has returned a healthy 8.7% on initial investment.

Over the same time period, exchange-traded funds (ETFs) tracking the major indexes performed as follows:

• DIA, which tracks the Dow Jones Industrial Average, is up 9.7%
• SPY, which tracks the S&P 500, is up 7.2%.
• VTI, which tracks the performance of the broad US stock market as a whole, is up 7.4%
• IYC, which tracks the Dow Jones Consumer Cyclical index, is up 3.4%.

White Trash Portfolio Update

As the Dow soars to record levels, remember that a rising tide floats all crackers: the White Trash and Minor Vices Portfolio is now up 2.5% since inception.

Over the same time period, exchange-traded funds (ETFs) tracking the major indexes performed as follows:

• DIA, an ETF which tracks the Dow Jones Industrial Average, is up 3.5%
• SPY, an ETF which tracks the S&P 500, is up 3.2%.
• VTI, an ETF which tracks the performance of the broad US stock market as a whole, is up 3%
• IYC, an ETF which tracks the Dow Jones Consumer Cyclical index, is up 2.3%.

You're never too old to enjoy playing with trains

Just ask Warren Buffett.

Burlington Northern added $5.45 to $88.17 after Berkshire bought a 10.9 percent stake in the company, which is one of the largest train companies in the United States. Berkshire had accumulated 39 million shares of the company as of Thursday, paying between $81.18 and $81.80 for the final 1.6 million, according to regulatory filings.

Berkshire bought "major" stakes in two other unidentified North American railroads, CNBC television reported, citing an interview with the head of Berkshire, Warren Buffett.

Other companies in the railroad transportation sector, including CSX,Union Pacific and Norfolk Southern , were buoyed by the disclosure.

"Railroad firms surge after Buffet invests in the industry," Bloomberg News via International Herald Tribune, 10 April 2007

Smart investment, Mr. B. (I always bought the railroads when I played Monopoly... nice income stream...)

Commuter rail works in dense urban areas, when heavily subsidized, and absolutely worth the cost in traffic and pollution avoidance.

Although as an admitted, card-carrying railfan it pains me to say this, intercity passenger rail in America (now consolidated as Amtrak) should have been euthanized in the 1970s, and outside of areas like the Boston-Washington corridor, it has been a shriveled husk of its former self, in a kind of living death, for the last four decades. (Passenger rail works in Europe and Japan because of the relatively short distances involved; in the US, cheap airfares made it irrelevant and would have killed it long ago if not for massive government intervention. )

But freight rail in North America is a great business that is more relevant than it has ever been.

Transporting freight by train costs less per mile and is more energy-efficient than trucking; these economies are multiplied when freight is packaged in standardized shipping containers, meaning that they can go straight from ship or truck to train (and vice-versa) without unloading and reloading.

In the long term, fuel and transportation costs are going nowhere but up. The train vs. truck equation is going to be tilting even more heavily in favor of trains... and Buffett, who is more of a buyer than a trader (he rarely liquidates a position; he buys and plans to hold for the foreseeable future) is in this for the long haul, pardon the expression.

White Trash Update

Last week was a better one for White Trash on Wall Street; the White Trash and Minor Vices Portfolio is now up 1.1% since inception, helped along by solid performances in the "beverages that are bad for you and made by companies with hyphenated names" (aka Brown Liquids) category (Brown-Forman, Anheuser-Busch, and Coca-Cola) and a surprisingly good showing from Ford.

The spinoff of Kraft Foods from parent company Altria has been a net win as well.

Over the same time period, exchange-traded funds (ETFs) tracking the major indexes performed as follows:

• DIA, an ETF which tracks the Dow Jones Industrial Average, is up 1.3%
• SPY, an ETF which tracks the S&P 500, is up 1.1%.
• VTI, an ETF which tracks the performance of the broad US stock market as a whole, is up 1.15%
• IYC, an ETF which tracks the Dow Jones Consumer Cyclical index, is up 1.67%.

Never let it be said that white trash can't keep up with the Dow Joneses.

And once again, the complete White Trash portfolio is comprised of:

• BFB - Brown-Forman Corp. Cl B
  
• BUD - Anheuser-Busch Cos. Inc.
  
• CHB - Champion Enterprises Inc.
  
• F - Ford Motor Co.
• GM - General Motors Corp.
  
• IGT - International Game Technology
  
• KO - Coca-Cola Co.
• KFT - Kraft Foods (not part of original portfolio; spun off by Altria)
  
• MCD - McDonald's Corp.
  
• MO - Altria Group Inc.
  
• WMT - Wal-Mart Stores Inc.
  

Happy investing!

Announcement: The White Trash and Minor Vices Portfolio

Everyone says "invest in what you know."

I'm about to put my money where my big mouth is. Carrie and I invest, mostly in index funds and ETFs, every month through Sharebuilder, which allows fractional purchases of shares in stocks and funds for a flat monthly fee.

The vast majority of our modest monthly stake goes into a total-market index fund and an aggregated bond fund.

But I'm going to make a modest investment in a stock portfolio -- a mini-fund of my own making, if you will -- called "White Trash and Minor Vices" (motto: don't beat your wife, beat the Dow) the constituent stocks of which are:

• BFB - Brown-Forman Corp. Cl B
  
  Holding company for distilleries that produce Jack Daniel's, Early Times, Canadian Mist, Southern Comfort, Finlandia, and others. Recently acquired a major stake in a Mexican tequila manufacturer.
  
  
• BUD - Anheuser-Busch Cos. Inc.
  
  Brewer of cheap domestic beer; owner of theme parks.
  
  
• CHB - Champion Enterprises Inc.
  
  Major manufacturer of mobile homes and modular buildings.
  
  
• F - Ford Motor Co. and GM - General Motors Corp.
  
  Contrarian picks to be sure, but here's the key: GM's share of U.S. pickup truck sales is 38.2%. Chrysler has 16.4% of the market. FordMotor Co. has 36.5%.
  
  GM is in talks to acquire Chrysler. Enough said.
  
  
• IGT - International Game Technology
  
  Designers and manufacturers of the most sophisticated video gaming machines (slot machines, video poker) on the market; they own the supply lines for low-end gambling.
  
  
• KO - Coca-Cola Co.
  
  Fizzy, flavored, caffeinated water.
  
  
• MCD - McDonald's Corp.
  
  Supersize me. I'm lovin' it.
  
  
• MO - Altria Group Inc.
  
  Holding company for Philip Morris USA and Kraft Foods, among others. Marlboros and Velveeta, baby. Spinning off Kraft on 30 March 2007.
  
  
• WMT - Wal-Mart Stores Inc.
  
  One-stop shopping for lower-middle America.

I've built a portfolio to track these stocks, and will report back periodically on their performance.

(Possibly coming soon: a "Freaks and Geeks" portfolio, including Apple, Google and Starbucks.)