Below The Crowd

Weekend Reading

OK, to some degree I'm still catching up with late last week:

• Bill Gross has a piece out in the FT asking the obvious question:

  How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority? Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd. It is as if Barney Fife, television’s Sheriff of Mayberry in The Andy Griffith Show, promised to bring law and order to the entire country.

• Mish's endorsement of Obama is, to me, yet another example of how broad his appeal can be, especially as people's "first choice" candidates are dropping out. It's also an example of how the war now cuts across lines, and war opposition has come to include those fiscal conservatives who just don't think it's an effective use of our dollars:

  The public is sick of this war for economic reasons. Polls show the single most important thing we can do economically is leave Iraq. That's all you need to know. There are plenty of reason to vote against Obama. I for one, will not like many of the programs he will support.

  But there is one powerful reason to vote for him. That one reason is enough.

  Obama is smart enough to understand you cannot bomb enemies into an attitude change and it is a waste of money to even try.

• Barry explores previous global financial crises in two pieces published over the weekend. The second one, looking at Norway in the late 80s was quite interesting but both were quite informative.
  

  Norwegian Hangover Cure
  

  • Private solutions were explored before the government intervened.
  
  
  • Share capital was written down to zero before committing public funds.
  
  
  • The government acted swiftly to limit contagion, but did not provide a blanket guarantee.
  
  
  • Liquidity support was given to illiquid, but solvent institutions.
  
  
  • The government did not use an asset management company.

  This is a rather intriguing guide to resolving the current sub-prime debacle. Note that the Norwegians avoided any moral hazard, refused to bail out speculators...

  ...The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion.

How to Fail at Organizing a Meeting

I’m currently sitting in a meeting for the local chapter of a sizable professional organization. The fact that I’m writing this probably suggests to you that I’m not all that excited about what’s going on. The reason is that despite being a supposed professional organization that as part of it’s “agenda” promotes good management, communications, and other process, nobody in this group has ever put together a good quality meeting in their lives.

Look at the agenda:

• 8:30 – 8:45: “Warm up”
• 8:45 – 8:50: Opening, welcome and introductions
• 8:50 – 9:00: Meeting agenda and organization
• 9:00 – 9:55: Department introductions, 6-8 minutes each
• 9:55 – 10:00: Team formation
• 10:00 – 10:10: Break
• 10:10 – 11:00: Breakout Sessions
• 11:00 – 11:10: Closing

What do you think is wrong?

Well, let’s start with the obvious. What is the purpose of this meeting? Can you even divine this from the agenda?

OK, I’ll clue you in. The purpose was to get volunteers involved in the organization and assigned to specific responsibilities.

Can you see on the agenda where this would come across?

Can you see how this agenda drives towards that ultimate purpose?

Neither can I.

And not surprisingly, the meeting is wasting a lot of time and heading towards being a complete failure.

Here’s my agenda, should anybody ever ask me for one:

Purpose: To introduce volunteers to the organization and allow them to select an appropriate volunteer opportunity.

Homework: Review the attached powerpoint describing each of the departments, it’s functions and its volunteer needs. Please complete this before the meeting as we will not have time for review.

Schedule:

• 8:30 – 9:00: Bagels and coffee.
• 9:00 – 9:05: Welcome and quick agenda overview
• 9:05 – 9:20: Quick intro of each department's needs by the director, 1-2 minutes each. (Reminder, we expect you to have reviewed the background information provided in advance for details.)
• 9:20 – 9:30: Break
• 9:30 - -10:10: Department roundtable #1, select one of the departments you may be interested in volunteering for and speak with the director about opportunities in a small group setting. Identify opportunities and fit.
• 10:10 - 10:15: Quick break and reorganize
• 10:15 – 10:55: Department roundtable #2, same as the first roundtable, in a second department.
• 10:55 – 11:00: Closure and review next steps/action items

Action Items::

• Directors to follow up with volunteers to confirm choices and assignments.
• Additional action items to be agreed to between directors and volunteers.
• Other items resulting from meeting

Next steps: Be prepared to present final teams, assignments and expectations at next board meeting on [date]...

[Off topic. I am now listening to one regularly self-interested participant who has hijacked the meeting to discuss his pet topics. Nobody is telling him: “not on the agenda, we need to table this, shut up.” But running meetings is a topic for another day.]

Why is my agenda better?

Brief Notes

Been an interesting couple of days here, but I'm certainly looking forward to my next disappearance to Utah.

• BelowTheCat II (aka the big, black, furry guy) had developed the habit of pawing at my LCD screens, including the four above my desk and the big Sharp AQUOS in the living room. He goes nuts when Cramer is on, but really freaks out at Larry Kudlow's antics and starts pawing like he wants to kill. Smart cat.
• On that note, Barry offers a good translation from Kudlowish to standard English. And I should note that those who have met him in person at Milken Institute events tend to agree that his off-camera persona really is different, unlike Jim Cramer whose persona on TV is real...
• I met Prince Andrew last night. In the course of brief conversation I called him "dude." Probably should not have done that, but to his credit he did laugh and point out that he had been called far worse.
• Toddo's call for buying Apple (NasdaqGS:AAPL) calls with the stock around $120 yesterday was spot on the money. I'm in the same trade and feeling like this one has some legs to it despite already being up significantly in the face of a mostly down market. Tight stop around the $115 level in the stock.

Brief Notes

My Utah sweetie tweaked her back/shoulder a couple of weeks ago. I think the situation is catching, Did the same thing a couple of days ago and haven't been able to sleep well for a couple of nights as a result. If I seem delerious, it's because I am.

• Barry is spot on about the sheer stupidity of credit agencies now saying that maybe they need to have some kind of a "warning label" on various derivative crap products that they rate:

  WARNING: THESE BONDS HAVE BEEN RATED AAA BY A MAJOR RATING FIRM. THESE RATING FIRMS HAVE PROVEN THEMSELVES TO BE CLUELESS, MONEY-LOSING INCOMPETENTS IN EXCESS OF A TRILLION DOLLARS IN LOSSES. THEY WERE PAID HANDSOMELY BY THE BOND UNDERWRITER, AND ARE HOPELESSLY COMPROMISED. PURCHASERS OF THESE BONDS ARE ADVISED TO IMMEDIATELY KILL THEMSELVES, THUS SPARING THEIR LOVED ONES EMBARRASSMENT IN THE FUTURE. ALSO, THESE BONDS MAY LOSE VALUE. I JUST WET MYSELF MERELY THINKING ABOUT THIS PAPER. WHILE PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS, YOU SHOULD BE AWARE THAT PAST PERFORMANCE ALSO SUCKED. DONT BLAME US IF YOU LOSE ANY MONEY, AS WE HAVE NO IDEA WHAT THE F$#@ WE ARE DOING ANYWAY. REALLY, YOU ARE ON YOUR OWN.

• This follows up Barry's earlier revelation, that Moody's was considering a pretty radical downgrade.
• I'm not especially political, but I must confess to being at least a bit excited that a guy like Obama could make it so far. And not only because he was just three years ahead of me at Columbia and we probably bumped elbows in the library at one point or another during my freshman year.
• All this education and I still think I'd be happier as a ski/mountain photographer.
• I did have fun at a winter camping seminar at the local REI. And ran into more people I think I have things in common with than I have anytime since getting back from my last Utah trip.
• Yeah, I know. I need to get the fuck out of L.A.

Going to try to sleep a bit now.

-btc

Brief ISM Implosion Notes

Well, the ISM numbers are in and they're crap. Markets are tanking worldwide.

• Cramer's blog is only available to subscribers, but this headline pretty much sums things up for the day: Market Turns to Drugs After Jobs Number.
• Housing Futures are currently suggesting that I should plan on staying in my current rental for at least another 12-18 months and can expect to buy 15% lower when the time finally comes.
• Of course, that assumes I stay in LA. A dubious proposition at best. But the expectations for the national picture aren't all that different.
• Am I the only one who thinks that -- the Giants win notwithstanding -- the current flood of stadium and arena construction in New York has got to be a sign of a long-term Wall Street top? (Citi Field, New Yankee Stadium, New Meadowlands stadium, Barclays Center, and Red Bull Park, adding to Prudential Center which was completed last year.)
• Am I the only one who thinks it's weird to vote at a lifeguard station? And where they hell did David Hasselhoff and Pamela Anderson disappear to?
• I've been going through a bit of a lifestyle/work choices exercise courtesy of Anderson School Alumni Career Services. I noticed that on a survey about life and career goals we were given last night one of the choices is "Voluntary Simplicity." I've taken this kind of survey before and never seen that one as an option, certainly not when the audience is top business school grads. Maybe Kevin is on to something?

Lose-Lose Thinking

Growing up, I lived for a couple of years in Westport, Connecticut. Back then it was still somewhat of a small town, growing quickly and going through the inevitable growing pains.

I was thinking of those growing pains yesterday when I read in the LA Times about a much smaller town in Oregon that is also, obviously, going through the pain of being not all that far from a big-and-growing-bigger metro area.

In those years in Westport, a guy came on the scene that was happy to challenge the still-modest sensibilities of the town. Arnie Kaye was not a modest guy by the standards of the day. He built what was then considered a mansion. He put in a covered swimming pool. He was not concerned with what the neighbors thought when he drove around town in a Rolls Royce. And he had a business idea.

At the time coin-op video games were all the rage. At least, they were all the rage in places where you could find them. In Westport at the time, you were limited to a game of Pac Man, a Galaga machine, and one other that I forget completely, all located at the local Dairy Queen, which is where many of us went after school.

Arnie figured that there was a business in building a well-run video arcade that would be both safe and fun for kids. He bought property on the Post Road and started planning.

Brief Notes

• I hope Waterford didn't make too many of these ugly things.
• You Don't Know Slack
• Following up on yesterday's comments, I note that Jeff Matthews updated his Shareholder Letter You Should, But Won’t, Be Reading. The follow-up comments are worth a read:

  Coke, P&G and many others that week and in weeks subsequent to the Crash of ’87 used the substantial cash on their balance sheets to take advantage of the market dislocations that caused even the good stocks to be sold with the bad, and cannily bought their own stock back at deep discounts to its inherent worth.

  Why then, were there no share buy-backs announced yesterday?

  Could it be that the Great Private Equity Cash Robbery of 2007, in which previously healthy companies either “cleared” their balance sheets of cash—to use the euphemism employed by Steve Odlund, the Chief Cash Clearer at Office Depot—by buying back their own stock at bull-market peaks or faced the prospect of having it cleared for them by the Private Equity Cash Robbers?

Halftime Notes on Cash, Financial Engineers and Suckers

I am probably one off the few who does not care about the Super Bowl one bit. I have it on in the background with the sound off only so I can know when it's time to get out to dinner and beat the rush. It's halftimee, some band is on and I've had some thoughts:

• Herb is on to something here. But this is just the tip of the iceberg. Over the past decade, companies have been forced into engaging in more and more unnecessary financial engineering by those who have proposed that:

  a) Cash is a bad thing to have
  b) If you're going to have cash, you should maximize the return, regardless of whether you truly understand the risks.

  I doubt that this is the first big company that should have known better that will have to come clean in the same way.

• Smaller companies already have had to come clean. Here's Kevin Depew's note about CKE Restaurants (NYSE:CKR) last earnings release:
  

  Increasingly, earnings for these companies are only tangentially related to their core business. For many of these companies, say, a restaurant operator, or a network equipment seller, how its "business" is going is only a sideshow. Many companies today are essentially hedge funds masquerading as businesses.

• Many of these companies, like the afformentioned CKE are just the suckers in the game. As the old poker adage notes, there's always a sucker, if you can't figure out who it is, it's you. When you're the CFO of a relatively small fast-food chain with $10-12m in earnings every quarter, which is borrowing money to buy up stock and is getting sold on complex derivative investments, then you are the sucker. Period. The investment bankers and consultants selling you on this crap are going to eat you alive.

Brief Notes

I've been in Utah a lot, enjoying the incredible powder this season, as well as a bit of a winter romance. Thus, I've been offline.

• Noticed this one in the LA Times a few days ago. Trying to tap into home equity? We'll see The most incredible quote in the whole story was this one:

  "We didn't deserve this," Thaleia Georgiades, a real estate agent in El Dorado, Calif., said Thursday, two days after she and her husband, a builder, learned that their Countrywide credit line had been frozen.
  
  "When you are self-employed, that's the money you count on to bridge the gap during tough times. And this is a particularly tough time in both the building and housing industries," Georgiades said.

  I can remember when the advice to entrepreneurs was that you had to have a year of money in the bank to survive on when things were slow. To accomplish that you had to scrimp and save when times were good and not spend it all. Today, it seems that the word "money" has been confused with "debt." I mean, get real! Two people whose incomes are leveraged to real estate are counting on the equity in their real estate to bail them out during tough times, when real estate -- by definition! -- is screwed? Do people have brains anymore?

• John Succo at Minyanville has been noting this same problem -- the confusion of debt for savings -- for some time. But I've never seen it quite so clearly called out by the statement of a random individual outside the government or Wall Street. This is actually fairly scary.
• Mish commented on this same article more extensively.
• It should be noted though, that this has been going on for months, with no official announcements until recently. New lines have not been extended and older ones have been killed off for even the slightest misdeed, missed payment, etc. Moving to cut off credit lines that are in good standing does ratchet things up a notch.
• Kudos to Barry for pointing out that sometimes Cramer can be right, and that our government more often than not is wrong. For the record, Cramer was right on this from the beginning, and called out the obvious investment implications and socially negative consequences.