Sunday, March 16, 2008

Alan Greenspan and Moral Hazard

If you thought the era of free money would result in no repercussions, think again. A buddy and I at work once found ourselves arguing with someone who stated that Alan Greenspan was the greatest Fed chairman ever. Too bad he was in the politician's back pocket. Read what Alan is saying now, thanks Alan, keep doing those speaking engagements for $100K a night. You had no responsibility in getting us here. True, you didn't design the CDO products based upon subprime mortgages that imploded Bear Stearns, but you certainly primed and enabled the system that these products were ultimately based upon. (Please read my earlier post on Alan's moral hazard.)

Bear Stearns just went bankrupt, the rumors that have been out there are true. Lehman can't be far behind. Please read Robert Shiller's article on how the housing bubble that was created by easy credit has led to this day of reckoning. Levers are multipliers of power; when things are good, leverage is amazing, but the reverse is also true.

Link to NYT Article by Robert Shiller

Link to Alan Greenspan the wise's most recent comments

And the Ass of the Week is....

Eliot Spitzer. In case you've been living under a rock, Mr. Spitzer was the former governor of New York, and was elected because he was seen as a reformer for Wall Street with a holier-than-thou attitude. He made no apologies, and stated that he would go after the Street for it's excess and dishonestly to protect the little investor.

Which is why his fall from "grace" is so spectacular, but sadly predictable. Doesn't Eliot's self-righteous railing about Wall Street remind you of:

1. the born again Christian who tells you not to snort coke up your nose because they lacked self-control and had a coke problem for years

2. the catholic church telling you how you should feel about abortion, etc., but looking the other way when it comes to their pedophile priests? (Check the prevalence within that population, it is most likely statistically significant.)

3. organized religion telling you we should accept everyone, but then telling you that homosexuality is a sin

There is a term used in psychology called "projection" and these are all classic examples of projection. Think about it, you either know right from wrong, or you don't. For those who are reading this and still struggling, if you have any doubt whether what you are doing is right or wrong, ask yourself this: "what would my mom say if I told her?"

These are your noble, elected leaders folks. Congratulations Mr. Spitzer, you just bought your 3 daughters years of therapy. You are a true champion of the people. From where we're looking, it seems like you too were looking for the same free lunch that you went after everyone else for.

You win Eliot, you're a jackass.

Wednesday, March 5, 2008

MSFT Millionaires Laughing at GOOG Millionaires

MSFT's millionaires were heard laughing at GOOG's millionaires recently when GOOG reported results. Google's brass suggested that revenues from clicking on Google related ads were decelerating. The Street obviously took notice of Google's warning, and has since punished the stock.

If you're worried about Google's employee morale, think again. It's been well documented that Google has some of the best employee perks. What great growth company doesn't, since it's a virtuous cycle. Great employee perks attract the best and brightest talent, which ultimately allows you to create killer strategies, produce great products the world needs and wants, and generate unbelieveable shareholder returns.

I do however think one perk that hasn't gotten as much attention at Google is their "nap pods". Google has these pods for its employees to escape, recharge, during the no doubt, stressful work day. I bet there's a lot of employees there that are worried their options with strike prices at $400 are now in danger of being underwater. I could say more, but I think the picture speaks for itself.

Tuesday, March 4, 2008

Sugar Substitutes and Gaining Weight

I've posted a link below to an article that was recently in Time, Inc. magazine. Researchers at Purdue University studying Behavioral Neuroscience have conducted a series of tests with rats that suggest eating high levels of sugar substitute "aspartame" (Sweet n Low) results in greater weight gain than rats that eat diets with glucose, a naturally occurring sugar in nature. While the results seem counter-intuitive, they make good sense.

The thesis is that the rats given a sugar substitute gained more weight because they ate more food. Why did they eat more food? Well all else being equal, the researchers believe that the body, when hungry and in need of energy, wants something chemically equivalent to nature's natural source of energy, which is glucose. If you give your body a sugar substitute, all you are really do is provide the taste receptors on your tongue with something that tastes sweet. But biochemically, the body says "Wow, that tasted sweet, but you know what, I really still need energy, so I'm going to keep stuffing my face till I get some glucose."

Therefore, the researchers contend that the weight gain isn't directly caused by the artificial sweetener, but rather, gaining weight is indirectly caused by the calories your body takes in due to its "search" for real sugar/energy. It's the best theory I've seen so far. Last I checked, aspartame is a dipeptide, so breaking down a dipeptide takes more energy than breaking down sugar to utilize a monosaccharide like glucose for energy. (Sugar is a disaccharide made up of glucose and fructose monosaccharides linked together.) Nature is efficient, so the body will always prefer glucose to everything else for energy. And all those drinks that are loaded with high fructose corn syrup? These too are less favorable from a "natural energy source" perspective than glucose, but certainly more natural than the aspartames and other substitutes of the world. But fructose in concentrated form is still not that good for you, relatively speaking.

You know, Ben Franklin defined insanity as doing something over and over, thinking things will change, yet your reptitive actions don't produce the desired outcome. Eating sugar substitutes to lose weight is the biochemical version of insanity, if this research is marginally true.

The final note in this article is a good reminder that, while evidence might argue for eating natural sugar vs. a substitute, in excess, diseases like obesity and diabetes are still possible if you lack self restraint. Choosing to binge on sugar vs. a sugar substitute are not mutually exclusive...but diabetes and obesity are certainly a zero sum game.

Link to Article in Time

Link to Paper by Dr. Susan Swithers of Purdue

Green Bay Wisconsin in Mourning

Brett Favre has decided to retire. With everything going on in sports these days, this guy was a real as it gets. He was the ultimate, imperfect at best like all of us with real problems, but all he did was leave it on the field every game, and live and die for his team.

Enjoy your retirement Mr. Favre, the NFL will miss you.

Links to Favre

ESPN Story

SI's Sportsman of the Year Article

YouTube Video1

YouTube Video2

Sunday, March 2, 2008

Subprime -- "A funny presentation"

This is a nice diagram of how Collateralized Debt Obligations are constructed. All structured finance products, (CLOs, MBS, CMBS) are based upon this principle, but what changes are the underlying asset that the cash flows are based upon. In the case of Mortgage Backed Securities, the underlying cash flows that support the constructed finance product's price are pools of mortgage payments. There are other asset-backed securities that are based upon consumer credit card payments...

However, rather than get into the gory details, I've posted a link to an interesting presentation going around the web. It's titled "Subprime -- A Primer" and for what its worth, it's fairly accurate. If you have seen already, my apologies, but I actually heard two people talking about this very presentation on the train one night. I was going to try and show the different parts of the capital structure that subprime, and what all of the structured finance products (CDOs, CLOs, MBS, CMBS) are based upon, with CPRs and pre-payment rates, but I think this powerpoint cartoon pretty much tells you everything you need to know.

Link to Powerpoint on Subprime Cartoon

For what it's worth, most think that the amount of sub-prime exposure out there is well into $350 - $400B, as in Billions. So everytime you listen to a pundit on TV (CNBC, etc.) state that the last writedown by bank "x" signals the end or bottom, think again. At last count, with the big banks reporting their 2007 results, we're at less than ~$100B in writedowns, so most believe we have a long way to go.

The other issue is that while subprime "homeowners" have no incentive to make payments on a house that is worth less than their mortgage, and will thus enter foreclosure, foreclosure itself is apparently a process that takes a long time because there are a lot of costs and involved parties (legal, financial). So after Citigroup announces "$xxB" of writedowns, and folks say "oh good, we can now look forward to the future because we hit the bottom" realize that the Citi's of the world know there's more bad loans out there that they will have to writedown. But because this process takes so long to play out, the Citi's of the world won't be able to assess which loans are bad, thus can't write them off until they have some precision around the writedowns.

Net-Net: This will be a much slower unwind than the 2000 tech bubble bursting. Repricing assets happens quickly with assets that are traded fairly heavily and thus somewhat efficient in price.

But don't worry, Bernake, the Fed and W. Bush II apparently think that the US will not enter into a recession, given the stimulus package and rate cuts. Most on Mainstreet and Wall Street believe we're already in a recession. Who knows, maybe decelerating GDP growth isn't indicative of a recession if "inflation is still a threat." Too bad inflation is partially being driven by the Fed cuts, globalization, and the world's demand for oil. Oil is probably involved in most manufacturing processes, so where the price of oil goes, so too goes food and most other prices.

Outsourcing of American Jobs -- Boeing

Guess which line is Boeing and which is EADS?

Boeing just "lost" a $40B contract to produce the Air Force's refueling supertankers to European airplane manufacturer, EADS (the parent company of Airbus). Obviously, a lot of rhetoric about outsourcing US jobs and the idea that US taxpayer money is being diverted to a European airplane manufacturer has followed. There's been much written about the issue of protectionism and subsidies that the EU has used to make the European airplane manufacturers more (and unfairly) competitive vs. Boeing.

But in this case, the issue might ultimately come down to the simple idea that EADS designed a better, more efficient supertanker than Boeing. Maybe jobs wouldn't "get outsourced" if America remained competitive from a product offering perspective.

I mean absolutely no disrespect to any worker who's job might be at risk, quite the contrary. I would argue that the management teams at the top of the pyramid are ultimately responsible for setting the strategy and execution to design and build products which are better than its competition. So again, for me, this feels like an "agency issue"; if the CEO of Boeing sets a crappy strategy and gets out maneuvered by the competition, he might lose his job, but his quality of life and earnings are not impacted as greatly as the person who puts the rivets into a wing so that you and I can get somewhere safely. (Yeah, think about that, and then hope that there is redundancy built into the plane your on so that the disgruntled rivet dude can forget a rivet or two. )

For Boeing, it's a lot like my complaint about McNabb. Shut up and play. If Boeing made an aircraft that's better than the EADS design, then jobs wouldn't get "outsourced." But then again, I don't know, maybe the folks at Boeing do get it, and quite possibly, it's the media and the politicians who beat the "outsourcing" drum in the name of ratings and votes. Outsourcing for low-cost labor to remain competitive is a legitimate issue in a lot of industries. And there is no doubt about it, jobs that may have been created here will be created in France, which from a national view, totally sucks. But competition is absolutely neccesary; it drives innovation and moves us forward. Without it, there's no incentive to create better things. The media and politicians are putting the cart before the horse in this case, IMHO.

If you want a simple solution to this "problem"
, have key gov't contracts like this only open to U.S. based companies. Then you can avoid the problem. But you do realize the law of unintended consequences. Maybe the plane is less fuel efficient, costs more in fuel and operation costs, which then translates into higher taxes, and worse, a plane that puts our soldiers in harms way. There are no easy answers except that to stay competitive, design and build a better product. Sometimes fear of our competition can be a great motivator.

Saturday, March 1, 2008

Personality Tests and Handwriting Analysis

There was a time when I wanted to be an FBI profiler. In college, I minored in neuropsychology, and I have always been fascinated by this field.

I've listed several links below that allow you to take a personality test. The familiar test that most in corporate America have seen is the Jung based test that asks you several questions and then characterizes you based upon 4 letters. I have taken several, and more often than not, I come back as an INTJ, for "Introverted iNtuitive Thinking Judging". Something to read to pass the time.

Links to Free Personality Tests

Jung Test

High Level Overview of Each Personality "Type" (Jung)

INTJ Description

Or you could just take this test, which tells you which Muppet you are based your answers to several questions:

Which muppet are you?

Handwriting analysis is another tool that FBI forensic experts use. Handwriting analysis, or "graphology", can tell a lot about a person's personality or tendencies. I was fairly skeptical, until I read a book (in Barnes and Nobles) called "Handwriting Analysis: Putting it to work for you" by former FBI profiler Andrea McNichol. The whole premise is that certain things about your mood state or tendencies in your personality subconsciously manifest themselves in your penmanship. For example, crossing your "t's" high suggests the writer has high self-esteem, while the opposite is suggested if you cross your "t's" low.

The most compelling evidence that supports this field is an incredible study. This study followed folks who had become paralyzed and lost the use of their hands, but eventually regained their ability to write whether by holding a pen in their foot or mouth, and writing again. Over time, their penmanship, and the way the wrote their letters, returned to nearly the same exact state as the way they wrote prior to the loss of motor skills in their hands. The book was amazing, and I found her website that she started...

Link to Andrea McNichol's Website called "Brainprints"

McNichol's book is a fascinating read if you have the time and are interested in this stuff.