Archive for February, 2008
Prince Harry and I have little in common. In the fall of 2003, while I played a polo match opposite Harry’s brother William, Harry was a world away, spending time on a sheep ranch in Australia. Then he joined the military, which is something I don’t see myself doing.
Harry and I do agree on one thing, though: in an interview last week, Harry said that he “[doesn't] like England that much.” Perhaps he was referring to the British media, who seem to dwell on his drunken nightlife adventures. Still, the quote is quite telling; my question is: was his experience in wartorn Afghanistan more fulfilling than life in England?
I think England is a fantastic place to visit, but no place to live. London’s weather is garbage, its people antisocial and curt, and the cost of living is stratospheric. I feel the same way about New York City. They’re just not for me. Perhaps some of my feelings towards New York and London are just things that all big cities have in common. Everyone is in a hurry, so they tend to come off rude to outsiders. The weather is garbage because it’s a necessity for productivity. Imagine how productive those same people would be in Miami; I imagine they’d have a lot more ‘sick days’ at the beach.
A relative of mine, Abraham Newland, was the chief cashier of the Bank of England from 1782 until his death in 1807. Britons at the time called banknotes “Abraham Newlands” because all banknotes bore his signature. He was a pretty confusing guy. He owned a grand country estate, yet chose to sleep at the office every night for 25 years.
Bankers can be quirky, but banks take the cake:
What is now Bank of America was originally called Bank of Italy when it was founded, in 1904, not in Italy but rather San Francisco, California. It’s now headquartered in Charlotte, North Carolina. North Carolina split off from South Carolina in 1710, during Queen Anne’s reign. 19 years prior, a Scotsman named William Paterson loaned the Crown £1.2 million, becoming the Government’s exclusive banker. Thus, the mighty Bank of England was founded — by a Scot. An Englishman named Holland created the Bank of Scotland a year later.
China’s one-child policy is a triumph of responsible planning.
China says its policies have prevented several hundred million births and boosted prosperity, but experts have warned of a looming social time-bomb from an aging population and widening gender disparity stemming from a traditional preference for boys. With the world’s biggest population straining scarce land, water and energy resources, China has enforced rules to restrict family size since the 1970s. Rules vary but usually limit families to one child, or two in the countryside.”
The problem in China is the same one Italy and Japan are facing: with the birthrate hovering lower than the replacement rate of 2.1 children per female, a country’s population ages while the younger generation comparatively shrinks in size. This poses problems of logistics, economics, and taxation, as a smaller workforce could be stretched too thin to support an larger society.
China’s birthrate is 1.8 children per female.
“We want incrementally to have this change,” Vice Minister of the National Population and Family Planning Commission Zhao Baige told reporters in Beijing.“ Still, the government has previously expressed concern that too many people are flouting the rules. State media said in December that China’s population would grow to 1.5 billion people by 2033, with birth rates set to soar over the next five years. Officials have also cautioned that population controls are being unraveled by the increased mobility of China’s 150 million-odd migrant workers, who travel from poor rural areas to work in more affluent eastern cities. China has vowed to slap heavier fines on wealthy citizens who flout family planning laws in response to the emergence of an upper class willing to pay standard fines to have more children.
China already fines those with the means for having more children, but what is missing is a national target for births linked to a variable fine to keep births in line with their desired projection. This would allow anyone to have as many children as they want (as long as they are willing to pay for the extra strain their children exert on society’s resources), while ensuring that population growth doesn’t get out of control. Also, there are some external effects that would be very positive. For instance, allowing only the wealthy to have more than one or two children ensures that those children will have access to better education and more opportunities. As we’ve seen in North America, where everyone is allowed to reproduce without fine or consequence, we see the opposite effect: that of more reproduction among the poorer classes, who likely have less time and resources to ensure their children have every opportunity in education and personal development.
My hope is that China makes only subtle changes to its already very successful program, for the benefit of both the Chinese people and the world.
Los Angeles is now requiring all pets to be spayed/neutered by the age of 4 months. The reason: too many pets are euthanized every year in shelters, and stopping the breeding will eliminate a large portion of the unnecessary euthanizations. The effort goes towards making L.A. a “no kill” city.
Luckily, the law isn’t overreaching and doesn’t apply to everyone. Breeders and people who compete in dog shows and competitions are exempt, as are police dogs and guide dogs.
Also, the whole system is pretty fair. Non-adherents are fined and assigned community service, and subsidized spaying services are on offer to make them more accessible.
My question is, when will we roll this law out to reign-in the already out of control human population?
Yesterday, an acquaintance asked me if I’d consider buying shares of Visa’s IPO. It’s really gotten people talking. As many of you know, MasterCard had an IPO in 2006 and shares were priced at $39. They’re now trading for $195, a 400% gain in less than two years. Hot IPOs are back.
In my reading I came across another hot IPO that might surprise you:
“I found a hot company with the most interesting story. It went public on July 4th at $25 per share. On its first day of trading, it jumped to $40, then $50. A month later, on August 10th, it was trading at $280 and on August 11th, it peaked at $310. The next day it fell to $212 and by the 15th it was down to $172, ending the year at $150. Amazon.com? Internet Capital Group? Yahoo!? Guess again. The year was 1791. The stock was the Bank of the United States, set up by Alexander Hamilton in 1790 to help restructure the new government’s $80 million of debt from the Revolutionary War and General Washington’s bar tab. And you just won’t believe it, but this hot IPO somehow ended up in the hands of 30 members of Congress, the Secretary of War and wealthy citizens. Some things never change.”
-Andy Kessler, How We Got Here
The stock market had once been Wall Street’s greatest source of revenues. Commissions were fat, fixed, and nonnegotiable. Each time a share changed hands, some broker somewhere took out a handsome fee for himself, without necessarily doing much work. A broker was paid twice as much for executing a two-hundred-share order as for a one-hundred-share order, even though the amount of work in either case was the same. The end of fixed stock brokerage commissions had come on May 1, 1975-called Mayday by stockbrokers-after which, predictably, commissions collapsed. Investors switched to whichever stockbroker charged them the least. As a result, in 1976, revenues across Wall Street fell by some six hundred million dollars. The dependable money machine broke down.
-Michael Lewis, Liar’s Poker, page 62
Though it wasn’t too helpful to stockbrokers, the deregulation of the brokerage industry helped bring down fees and ultimately allowed people of more humble means to own common stocks. Some brokerage firms did benefit from the change, like the disruptive enfant terrible Charles Schwab. Schwab was the posterboy for discount brokerages and reigned supreme all the way up until brokerage fees took another fantastic fall toward zero with the advent of electronic trading over the internet.
Intrade, a prediction market where you can make money by correctly predicting outcomes in political races, awards shows — even the weather — has a tradeable contract for Michael Bloomberg (my choice for America’s next president). Bloomberg has repeatedly denied that he’s running in 2008 as an independent, but that’s normal behavior for someone who has yet to declare their candidacy. Hillary Clinton herself jumped around the issue of her candidacy for years, denying it right up until she announced she’d run.
Asked Monday at his regular news conference whether it’s too late for third-party candidates to be entering the race, Bloomberg gave a long answer that showed he is well-informed about the intricacies of ballot access rules.
In recent months he has sought the advice of ballot access experts like Clay Mulford, who served as campaign manager for another billionaire third-party candidate, H. Ross Perot.
These developments have been reason for the price of Bloomberg’s Intrade contract to rise in value, but most punters are still pegging the chances of his run at only about 10%. I think that’s an underpriced contract, and I’m considering buying some myself, though the low trading volume on the contract means I wouldn’t get far without drastically ballooning the contract price. Maybe I could find someone who’d enter a derivatives contract with me on this.
Here’s a historical chart of the contract’s price (if Bloomberg runs, each contract picked up now for $0.10 pays out $1.00):
Just for kicks, here is the graph of the Dem nominees:
I was perusing the 2008 Starbucks Proxy Statement in preparation for the upcoming shareholders meeting, and came upon this gem:
Executive Stock Ownership Guidelines
We adopted stock ownership guidelines for senior executives during fiscal 2007 to ensure that our executives have a long-term equity stake in Starbucks. The guidelines apply to all executive vice presidents and above. The guidelines require covered executives to have achieved a minimum investment in Starbucks stock within five years.
Minimum investment levels for each job title are:
President and CEO – 5,000,000
Chairman – 5,000,000
CEO – 2,000,000
President – 2,000,000
Executive V.P. – $750,000
The unrealized value of vested, in-the-money stock options counts for up to 25% of the required minimum investment.
This is a fantastic way to ensure that all of the executives have their interests aligned. I think all organizations – no matter the size – should adopt rules like this one.
Brown University has ended tuition for students whose families earn less than $60,000 per year, and is providing grants in place of loans to students whose families earn less than $100,000.
This comes at a time when Harvard, Yale, Dartmouth, and Stanford are also moving toward more progressive tuition, charging less (or nothing) to lower-income students while wealthier students along with the universities’ endowments bear the rest of the charges.
University endowments have been growing very large over the past 20 years, and many have seen a boon from non-traditional investments such as investments in private-equity and hedge funds.
Brown’s endowment hovers around $2.8 billion, about $285,187 per student. Assuming a conservative rate of return of 10% (university endowments tend to average a higher rate of return), Brown can spend nearly $30,000 per student per year. Though this may seem large, Brown ranks 32nd nationally in endowment dollars per student. Princeton’s endowment boasts ~$2,000,000 per student, more than six times Brown’s relatively humble amount. Yale, Rice, Harvard, and Stanford each have more than $1,000,000 in endowment dollars per student, which makes it easy to comprehend how they can continue to decrease tuition for lower-income students.
Perhaps we’re at the beginning of a gilded age for universities, one in which the massive value provided to society by universities is really taken into account by benefactors, who in turn give the gift of education to the next generation at little to no cost. With their newfound popularity among philanthropists, universities may be able to eschew public funds. It’s about time universities became more financially independent because government grants have decreased their usefulness to students over the years. 20 years ago, Pell grants covered 60% of a student’s tuition, and now cover much less – closer to one-third of the tuition at a public four-year university (with a maximum payout of $4,310 per year.)
Investments in education have proved to pay outsize dividends to society. I applaud both Brown’s newfound tuition policies as well as the generosity of all benefactors who give to education.
Reading this month’s issue of Institutional Investor Extra:
Global Alpha, Goldman’s flagship quantitative hedge fund that began last year with $10 billion under management, continues to bleed assets following a 39 percent loss in 2007. The firm’s mathematical algorithms, which are designed to generate profit by capturing price discrepancies between stocks, stopped working in the equity market fallout from the subprime crisis. Goldman had to bail out another quant product, its Global Equity Opportunities Fund, with a $2 billion capital infusion in August when the subprime crisis caused big losses for that portfolio…
…Goldman CFO David Viniar revealed that GSAM suffered client losses of about $3 billion in the fourth quarter, with close to half of that coming from Global Alpha. He also warned of more damage to come. “We think redemptions in the first quarter will be even greater,” Viniar told analysts.
To help make up for that shortfall, Goldman is, gasp, launching a new hedge fund! Clearly, this will solve everything!
Goldman Sachs Asset Management has raised roughly $7 billion for Goldman Sachs Investment Partners, a new long-short equity hedge fund. The offering is the largest hedge fund launch ever.
“Goldman is undoubtedly the best hedge fund brand out there,” says James Hedges, president and CIO of Naples, Florida–based advisory firm LJH Global Investments.
Really? The best? Well, why is it that their flagship products have gotten hammered?
The article then gets even more gleeful, pointing to the successful hedge funds launched by guys who have left Goldman.
Sure! Great! Let’s all put our money with Goldman Sachs – the guys who couldn’t stand it there have made it big! And their flagship fund was only down 39% last year!
Goldman Sachs has a proven ability to make money when it’s their own money at stake. However, managing others’ money is a different story.
I think people should take their meds regularly, and give their assets to dedicated asset managers, not the banks who should rightfully act as intermediaries.
In their first meeting at the white house, President George W. Bush warned the young Barack Obama: “when you get a lot of attention like you’ve been getting, people start gunnin’ for ya.”
Barack Obama has been oft-compared to JFK. Today, on the 22nd day of February (JFK was assassinated on the 22nd of November) Mr. Obama is touring Dallas, Texas (where JFK was shot in 1963), and the Secret Service has just decided to stop weapons screening at his rally and relax security. What could possibly go wrong?
Here’s according to the Fort Worth Star-Telegram:
“The order to put down the metal detectors and stop checking purses and laptop bags came as a surprise to several Dallas police officers who said they believed it was a lapse in security. Dallas Deputy Police Chief T.W. Lawrence, head of the Police Department’s homeland security and special operations divisions, said the order — apparently made by the U.S. Secret Service — was meant to speed up the long lines outside and fill the arena’s vacant seats before Obama came on. “Sure,” said Lawrence, when asked if he was concerned by the great number of people who had gotten into the building without being checked. But, he added, the turnout of more than 17,000 people seemed to be a “friendly crowd.”
Friendly. A friendly crowd. I’m sure the crowd of people looked “friendly” in ’63 when JFK was shot.
The order was made by federal officials who were in charge of security at the event. “How can you not be concerned in this day and age,” said one policeman.
This lapse in security (and the odd coincidences with JFK’s assassination) is a kind of curiosity to me, because this isn’t the first time I’ve heard anyone mention the possibility of Obama being purposefully assassinated.
Our conspiracy theorist is the doorman in my building, James. He seems outwardly crazy by appearance. He sometimes talks to himself, humming tunes or singing a few lines from an old song. He’s socially awkward but friendly, and his voice is rough and chalky, which adds to the grittiness of his character.
I got into a conversation with him last week in which he seemed much more composed and regular. Still, he was telling me about some conspiracy theories that he’s concerned about, something about the Trilateral Commission and the Bilderberg Group, the North American Union stealing our sovereignty, along with the Clintons trying to control our minds and our lives with propaganda and martial law. I’ve heard stuff like that before, but personally, I think it’s a little pessimistic to hold the view that everybody is always out to get you, control you, and take your freedoms. It’s possible, but not realistic.
He showed me some 12-part YouTube documentary that’s very critical of the Clintons and told me that he would vote for Barack Obama so that “Hillary wouldn’t take control,” obviously referring to some sort of conspiracy theory about her. He then postulated that “they” (the Illuminati/powers that be) would probably take Obama out at some point.
It’s an interesting idea. An upstart motivational candidate who seeks to foment change is just too much of a risk for the corrupt, dealmaking elites, who take out the upstart so that their horse (who will maintain the status quo in politics) will win the race. It’s definitely possible – but considering where the idea came from, the seemingly crazy doorman full of conspiracy theories, maybe assassination is less likely, just like all of his other wild ideas that haven’t come to fruition.
UPDATE: Facebook’s PR firm got back to me – according to them, Boombox’s developer took the application down on their own.
My favorite Facebook application, Boombox, is dead.
Yesterday I noticed that its flash component in my profile wasn’t working, instead the Boombox profile widget just lists song titles using quintuple-spacing. Now it doesn’t turn up in application searches, and its old profile listing has been removed.
Facebook has, in the past, yanked a popular application without notifying any of its confused and disappointed users.
The former #2 application in the Music category of Facebook applications was called Audio, which boasted more than 750,000 users. VentureBeat gave this description of the applicatoin: “Audio allowed users to upload audio files in mp3 format, share them with each other and listen to them within Facebook.” According to the application publisher, it was given a DMCA takedown request from a record label, sent via the RIAA — then Facebook decided to take Audio offline while the matter remained unresolved.
Audio is now back, and has made some changes so as not to draw the ire of record companies. “To lessen the possibility of illegal activity, Audio does not include a song directory — a feature that, if abused, allows users to share and duplicate copyrighted material.” However, the new Audio application isn’t as powerful as Boombox, which allowed up to 20 songs to appear in a tidy playlist. Audio allows only one.
Boombox used a model very similar to that of the old Audio application. There was a song directory of music uploaded by other users, which one could browse and then post on their own profile. When Audio was taken down last July, it was no surprise that Boombox was next. Another thorn in the RIAA’s side was that songs in Boombox had to be hosted on a public webservers and be accessible to all – hardly something the music industry would encourage.
It’s a really painful thing to login to Facebook and have your favorite application missing, with no explanation. This is a PR blunder for Facebook, and they should be more transparent about applications being removed in the future. A simple explanation as to why the application was taken down would suffice.
Facebook’s PR people got back to me:
Regarding your question about Boombox, the application was taken down by the developer.
La mia applicazione favorita di Facebook, Boombox, è guasto. Ieri ho notato che il relativo componente istantaneo nel mio profilo non stava funzionando, invece il widget di profilo di Boombox elenca appena i titoli di canzone usando il quintuplo-gioco. Ora non gira in su nelle ricerche di applicazione e il relativo vecchio elenco di profilo è stato removed.
Hillary Clinton is poised to increase taxes on hedge funds and private-equity partnerships if she is elected. Oddly enough, her daughter Chelsea works for a hedge fund that would be adversely affected, and John Edwards worked for a hedge fund as recently as last year. Barack Obama has been echoing her calls for tax reform (he even went as far as co-authoring a bill to end the tax loophole available to funds who form overseas). However, I don’t think Barack Obama will ever go as far as increasing taxes on private investment partnerships because a) he’s a logical man who can mull over the potential consequences, and b) a lot of the money and support he’s received has come from hedge fund managers. He doesn’t want to bite the hand that feeds him. Basically, his criticism of hedge funds has been muffled a bit.
That doesn’t stop his supporters from writing about their feelings that hedge funds need to be taxed at higher rates. In a google search, I came upon this entry by Walter Hecht, a Barack Obama supporter from St. George, Utah:
Hedge funds are tax loopholes that allow the rich to become richer with little risk to themselves by using borrowed money to speculate, that is gamble, in financial markets where you and I the taxpayers bear most of the risk.
If you or I invest in the stock market, we can borrow no more than 50% of what we invest. That is a government regulation. On the other hand, a hedge fund in some cases can borrow as much as 99% of their investment. That means a 1% increase in the worth of the investment can double the hedge fund’s money. A decrease of 1% can wipe them out. The kicker is that hedge funds borrow so much that banks and governments cannot allow their losses to stand because the shock to international markets could cause the worldwide financial system to collapse. It’s a case of heads they win, tails the taxpayers lose.
Only the wealthy are allowed to invest in hedge funds which are largely unregulated. The taxes the wealthy pay are less than what are paid by investors in the stock markets. Hedge funds charge their investors 2% per year to manage the funds and take 20% of the gains if any that they manage to win. No wonder hedge funds can afford to pay their owners/managers 100′s of millions per year.
How do I start a hedge fund? Hire a bunch of smart people to write computer programs (algorithms named after former VP Al Gore the inventor of the internet) that spot differences in the markets for financial products wherever they occur on earth. The differences can be momentary and small but the sums of money involved are huge. The computer programs model the real world and work well until the unexpected occurs. Then huge losses are a possibility and you and I will be forced to stand those losses through taxes that finance government giveaways.
Walter’s article was riddled with generalizations and inaccuracies, which I kindly pointed out to him:
First, hedge funds are not tax loopholes. They’re limited partnerships, just like many other businesses.
Second, not all (or even most) hedge funds gamble/speculate. Only certain hedge funds use the kinds of leverage or derivatives that you say contributes to their volatility (and risk to the broader financial markets in the case of a loss/default). Many hedge funds actually increase returns with less than average risk, by buying stocks as well as selling them short, minimizing their net exposure to day-to-day market gyrations. In many ways, these hedge funds are SAFER investments than mutual funds (mutual funds are 100% exposed to market gyrations both up and down, such as the ones we’ve seen recently in august 2007 and january 2008, which have been costly for mutual fund investors as well as index fund investors).
Your contention that, somehow, hedge fund investors pay less taxes than traditional investors is just plain false. The managing partners of hedge funds make investments, and their gains are taxed as capital gains just like anyone else’s. Their income comes from their investment gains, and is not in the form of a salary and should not be taxed as such.
Also, you mischaracterize hedge funds as being all quant/algorithmic, controlled by computers finding small inefficiencies in markets and taking positions to capitalize upon their eventual movement. However, all investors since the dawn of time have been opportunistic, hoping to make a gain from price movement. There are a few hedge funds that are quantitative/algorithm driven, but these don’t make up the brunt of the industry. Most of the industry is composed of investment managers who deal in common stocks, not complex mathematical arbitrage with tons of leverage.
I agree that regulation is important so that the worst cases (like Long-Term Capital Management and Amaranth, which used the methods you so vilify) would be eliminated. I believe that transparency is important, and that strong risk management standards that the industry could agree on would be helpful to financial market stability. However, increasing taxes on investment partnerships just chases away the very investors that make our markets so efficient in the first place. That would be a step in the wrong direction.
I really wish that people would get rid of their preconceived notions about hedge funds. We’re not all bad.
I really hope that we get some sensible legislation as to risk management standards for investment funds. Standards that the industry can agree on. Standards that could protect investment banks from lending out too much leverage or having too much derivative exposure to over-extended funds (like LTCM). Also, I agree with Obama that these funds out to pay their fair share of taxes. If they’re located in Connecticut, they should pay CT and federal tax, and not be taxed as a firm based in the Cayman Islands, as they are treated today. However, raising the tax rate on the whole industry would be cause for many firms to shut down, and we’d end up with a less efficient marketplace.
Bespoke Investment Group just posted some interesting graphs on domestic retail sales trends.
“…over the last ten years, Americans have been spending more of their money on eating out and less of their money on playing sports.“
Perhaps the extra food/drink and the less exercise has something to do with our obesity epidemic.
Also, I read recently about a new term being being tossed around, passive obesity.
It’s definition: “flabbiness caused by physical inactivity rather than caloric excess.” Recent studies blame much of the obesity epidemic on the increasing amount of time people spend seated — at desks, in cars, and on couches. Corpulence, the theory goes, is the fault of modern lifestyles, not individual behavior.
I combat this daily by reading news and doing work while walking on the treadmill at three or four miles per hour (and switching to the stationary bike if I want to get my heart rate up a bit higher). I find the exercise keeps me on task (it’s good for your brain/productivity), and keeps me in decent shape.
American Apparel (which has only been publicly traded on the AMEX since December) is getting a lot of attention from hedge funds. Some recent SEC filings indicate that Morgan Stanley, Fir Tree, and SAC Capital Advisors each own in excess of 5% of American Apparel (AMEX: APP). SAC has a notable record of finding moneymakers in youth retail, making this development something to watch.
Click over to the article at FashionInvestor for more.
(Full disclosure: author owns shares of American Apparel both directly and indirectly at the time of this writing.)
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