The Noble Pundit

Jobless Claims Down

The Labor Department is reporting that for the week ending Feb.14 new jobless claims dropped significantly, posting their largest decline since November.

Now I'm not going to sit here this morning and analyze how this might fit into the overall ecnomic environment. There are enough other blogs, along with CNBC, MSNBC, FOXNews, CNN, and the major networks who will be doing that. Instead I'm going to take a different approach.

Let me begin by stating that I believe that the job market is starting to improve - just a little bit. Many of my longtime readers may recall that back around July of last year I started looking for a new job. It wasn't until Mid-November that I was able to find anything that was a step up. It essentially took me nearly 5 moths to find a new job - and I was employed at the time, which supposedly makes it easier to get a new job.

Now since November, I've received another job offer, for significantly more money and better benefits, and was felt out about yet another. Since last July, I have gone from being extraordinarily unlucky to extraordinarily lucky. Nothing has really changed in my approach (although I have not actively sought a new job since November). But something has begun to change in the job market.

I think that right now what we're beginning to see is a move towards bringing in new people in the revenue producing segments of businesses. Salespeople, manufacturing people, and customer service positions all seem to be in a little bit of demand right now.

This is great and wonderful, but most of the unemployed at the moment seem to be from support positions, IT particularly. Those types of positions are not being created just yet. So support staff candidates are going without offers.

Now some will argue that the job that are being created now are the low eage positions. And that, by and large, is true. But in order for there to be a need for support staff, there needs to be a staff to support.

I think that a lot of companies learned a very tough lesson back in the late '90s. The last brokerage firm I worked for went on a hiring spree from 1996-1999 and more than quadrupled the size of the company - and then from 2001-2003 they let go basically everyone they hired, plus some. It was a painful lesson for them. And I think that right now, there are a number of companies that are trying to take too much away from that experience. In an effort to make sure they won't have to let people go, they are foregoing revenue and profits to avoid hiring people.

In the late '90s the hiring pendulum was at one extreme, where anybody could get a job in very short order, regardless of anything. In the last 2 or 3 years, we've been at the other extreme, where very few could get a job, no matter how well qualified they might be. At both extremes, the job market was operating very inefficiently and companies have paid a price, either in realized layoffs or unrealized profits.

My sense, and I have nothing really to back it up with it is just a gut feeling, is that things are starting to return to a more normal state. It should be interesting to see how long it takes for hiring to really return to normal.

Pro-Market Vs. Pro-Business

Via the Flemish Beerdrinker

Bruce Bartlett over at Townhall.com has written an excellent article that points out that the normal conservative reflex of pro-business is not always pro-market. As similar as the two terms sound, they are not the same. In fact, many times they end up opposed to each other.

Now Ivan over at the Flemish Beerdrinker does a pretty good job of looking at the relationship between pro-business and pro-market over the last decade (I don't appear to be able to link directly to the article so look for the one datestamped 14/02/2004 - 14:42:13 and titled: Is being pro-market conservative?).

I believe that the lessons of pro-market vs. pro-business can be best illustrated by one of my favorite industries - the airline industry.

From it's earlier beginnings the airline industry was largely unregulated. The barriers to entry were simply buying an airplane, getting a pilot's license, and finding some passenger that wanted to fly from point A to point B. Some folks managed to do well and were buying bigger, faster airplanes and were building mini-aeronautical empires, but by and large, the industry was very much pro-market.

Right on up until 1934 and the Spoils Conference of Postmaster Walter Folger Brown. Brown was a man who hated disorder and inefficiency, so he organized a meeting between the airline chiefteins in which they swapped mail routes, with the Big Four: American, United, TWA, and Eastern organizing with the first three being east/west airlines and Eastern flying north/south.

Brown was happy, as were the heads of the Big Four, but the public was outraged. Pro-business was the watchword of the day. Overnight the airlines had gone from one extreme to the other.

Now, as a reaction to the Spoils Conference, the airmail contracts were reawarded, with the Big Four maintaining most of the contracts, although a few other smaller airlines: Delta, Continental, Braniff and Northwest notably, picking up a few of the routes. But the die had already been cast. Brown had effectively set up significant governmental barriers to entry as mail was the most significant profit cargo for the early airlines.

Another pro-business, anti-market institution that was formed around the same time, at the behest as the airlines, was the Civil Aeronautics Board or CAB. The CAB became quite literally the biggest barrier to entry in the airline industry as it approved new routes and new pricing. The only way for an airline to form without the explicit approval of the CAB was to become an intrastate carrier. Since there were few states (California, Texas and Florida were the real exceptions) that could support an intrastate carrier, there was no real way to enter the market.

The CAB was the ultimate pro-business, anti-market entity. It maintained the competitive positions of the Big Four. It set pricing so that the weakest airline in a market made money. The CAB wasn't interested in allowing the market to work. It was interested in maintaining the status quo.

Now the CAB was sunsetted out of existence, one of the few governmental organizations to have actually disappeared. And once it went away, along with its barriers to entry, competition exploded in the industry. It became even safer to fly, more passengers fly and at lower prices than under government regulation. In short we have gone back to a more pro-market environment in the industry, and while everything is not perfect, it is certainly better than it was in the 1970s.

So what's the lesson to take away from the experience of the airline industry? A pro-market economic environment responds better to the needs of the marketplace than does a regulated pro-business one. Pro-market is best for the consumer and the nascent business; pro-business is the desire and wish of the existing businesses. The two are not the same.

Generally, the convential wisdom is backwards. The Democrats, preferring regulation to market pressure, tend to take more true pro-business positions. Republicans tend to be more pro-market. The Bush Administration, though, tends to take a more true pro-business stance than most Republican administrations (although it can also be argued that what they are doing is simply a continuation of the path started down by the previous administration), which is a bit disappointing, but still much better than the alternatives being proposed by the Democratic candidates.

We really need to start swinging the pendulum back towards the pro-market side of the spectrum. When the market is relatively unfettered is when our economy performs best. We have the most innovation and the best profitability (along with generally the highest employment) during periods of laissez-faire policy by the government.

All in all, I thought the article by Bartlett was pretty interesting. Definitely well worth the read.

Maximizing Shareholder Value

In my last post I talked about how I believe that the sale of Disney is now, basically, a foregone conclusion. Let me explain why.

The CEO and Board of Directors have one goal when in the employ of a public company: maximize shareholder value. They don't need to be charismatic. They don't need to be innovative. They don't need to have ice water running through their veins. Those personality traits all help immensely, but in the end greed is good. They were hired to be greedy. They were employed to gather the greatest possible value for their shareholders.

CEO and Boards have been sued many times in the past for failing to maximize shareholder value. Most of the suits are bogus and get tossed out pretty quick, but the fact that they can even be filed demonstrates the importance of maximization.

Companies that are doing well, returning decent growth numbers every year usually are not targets for unsolicited takeovers. Why? Because there is a reasonable and defensible belief that shareholder value is being best served by the current management team.

Most boards want to keep the company independent (I'm guessing that there is a greed factor in that, also, since the directors are paid handsomely for their oversight duties) which is why they are so apt to change the management team should the maximization of shareholder value begin to falter. They have seen the history. Companies that are afraid to shake it up at the top end up either being taken over or becoming failures. Now there is, of course, a point at which too much shaking up becomes a problem in and of itself, but still, sometimes change is good.

Disney has needed to make a change at the top for a while. Eisner has not had the magic. It was well known on Wall Street. It is well known in Orlando area (at least for anyone who has been around here for a while). It was even known amongst the Board. Remember Roy Disney's departure from the company a while back? The signs were out there. People in power just didn't heed them.

And now Disney is a takeover target. Comcast offered to buy the company out for 10% premium. 10% for one of the true icons of Americana. A franchise like Walt Disney should have been able to command much, much more than that as an opening bid. 10% for Mickey Mouse. It just goes to show how far the fortunes of the company have fallen over the last few years.

It would be very difficult for the company to make the argument that the current management team will be able to provide returns that justify turning down the deal. The Eisner team hasn't performed up to standards over the last five years. Yes, he has done a pretty good job of managing to the quarterly numbers. But along the way he has allowed the company to lose its vision towards the future and as a result the company has stagnated. Disney has no great plans. It has nothing earth-shatteringly exciting on the drawing board. It is a company marking time right now.

And so, Comcast, believeing that they could do a better job of managing such a great franchise, has put the company in play. Unless Eisner can pull some great secretive plan to overhaul the company out of Mickey's magic hat, he needs to now start concentrating on finding other suitors for the company and starting a bidding war. That will be the only way that he will be able to ensure that he has, in his last days as CEO, maximized the shareholder value.

Is starting a bidding war greedy? Yep. But as Gordon Gecko said: Greed is good.

It's time for Eisner to get greedy for the shareholders instead of himself.

Welcome To Walt Disney World Presented By Comcast?

Oh, boy. Comcast has announced an unsolicited tender offer to buy the Walt Disney Company for approximately $66 billion in stock and debt.

I don't really see the deal going through as proposed, but it does effectively put Disney in play. Someone is likely going to end up owning the American icon. The only question now is, how high will the bidding go?

There will also, of course, be a great deal of teeth gnashing and complaining about the loss of independence for such a great, household name. But his is an issue of Disney's own making.

Michael Eisner should have been gone a few years ago. The board should have been involved in the governance of the corporation than they were. But they were a rubber stamp for all of Eisner's ideas - both the good and the bad.

By rubber stamping the reign of King Eisner, the board effectively failed to maximize shareholder value. Originally, they could say that the lack of return was due to taking a long term approach. But the long term is here and the value still isn't.

Disney has been a company in a bit of a crisis for a while. They had a crisis of leadership. Eisner is no longer a great leader like he was in his early days. The board is finally coming around to finding its collective voice, but it appears that it will be too little too late.

Soon, we will be entering the Walt Disney World Magic Kingdom presented by So and So, maker of This and That. The great iconic theme park will become but another tawdry shtick for some company.

The days of Disney being the 800 pound gorilla are officially over. Soon, they will be part of another 800 pound gorilla.

And a part of the magic of the Magic Kingdom will be gone.

Infotel

Recently, Justene at Calblog was threatened by the lawyers from Infotel over some things that the commenters on her blog wrote. She believes that she has a solid defense, but she ended up taking down the comments for that post (mainly because she was heading out of town). xlrq has posted his take on the situation and also copies of all the comments from Calblog.

Two of the charges the lawyer sending the letter brought up were misrepresentation and interference with economic relations. For some reason, I don't think that the company has any kind of leg to stand on (from the Buffalo Better Business Bureau website):

The Bureau has received numerous complaints concerning this company's selling practices. Most complaints claim their business was billed for a directory listing which was never ordered, or that Infotel sales personnel claimed to be asking for a renewal of a listing when none existed....

This company has an unsatisfactory business performance record with the Bureau due to a pattern of complaints claiming deceptive selling practices, a pattern of complaints concerning credit and billing procedures, and for failure to eliminate the cause of those complaints....

Number of complaints processed by the BBB in last 36 Months: 495 ...

I've read the comments. I don't really see how they are a misrepresentation of the company's business practices. The company uses shady sales and collection techniques, as the commenters claimed and as the BBB site verifies. The truth is not a misrepresentation, even if it is painful to have exposed.

By the same token, when a company is using deceptive and possibly even illegal sales and collection tactics, I fail to see how it is an interference in the economic relationship to warn someone about a potential deception or a deception in progress. There is no economic relationship when one party is deceiving the other. And again, the BBB report appears to back up the claim that there is deception taking place on the part of Infotel.

Taking these common sense measures recommended by the BBB should help to stop the sleaze and Infotels of the world:

How to Protect Your Business

* The best protection is knowledge and vigilance. Your company's accounting department, or the individuals responsible for paying bills, should carefully review all invoices, particularly those from unfamiliar companies.

* Never place an order over the telephone, unless there is no doubt that the firm you are dealing with is reputable. Obtain the organization's name, address, and telephone number, as well as its representative's full name and position. Then check on the company's reliability with your local Better Business Bureau.

* Establish effective internal controls for the payment of invoices.

* Channel all bills through one department.

* Insist that employees fill out pre-numbered purchase orders for every order placed.

* Check all invoices against purchase orders and against goods or services received. Make certain that order numbers correspond with the invoices.

* Verify all invoices with the person who gave written or verbal authorization.

* Clear all invoices with the appropriate executives.

* If the invoicing company claims to have tape recordings of the order and verification calls, insist on hearing them.

Consumers who wish to file a complaint can contact the Federal Trade Commission at 877-382-4357 and Phonebusters for Canadian companies, by calling 888-495-8501. (Phonebusters is the national deceptive telemarketing call center operated by the
Ontario, Canada, Provincial Police.)

(Found via Dean Esmay)

Mutual Fund Misinformation

I've touched on the mutual fund trading scandal just briefly mainly because I didn't find it to be overly surprising and the reporting that I had seen seemed to be relatively responsible in light of what was going on. Until today.

Jon Markman at MSN Money has a column ripping on the mutual fund industry. I agree with him that there are problems in the industry and even agree on some of his reasoning such as lax enforcement, light punishment, and exploitation of legal loopholes. I also thought that he was just a little over the top. His shilling makes it sound as though every broker and every mutual is corrupt, which is as untrue as saying that the scandal is a tiny insignificant event.

What really bugged me though was that he based a large part of his argument on two erroneous statements. The first is just a statistical distortion; the second is an outright misstatement.

Lawrence Lasser, disgraced former head of mutual-fund powerhouse Putnam Investments, took home $30 million annually over the past six years until he was ousted over improper trade allegations at his Boston firm. He certainly didn't make that by enriching his retail customers. In the past five years, the median annualized return of all Putnam stock funds in the MSN Money database is 0.6% (emphasis mine)

0.6% That certainly isn't much, now is it? Sounds like Lasser was just sitting there not doing a goddamned thing for his clients, huh? Know what the 5 year annualized return for the S&P 500 is up to today (which includes a 21.62% increase this year alone)? It has been 0.05% (updates daily so the number you see may be different, this number taken at 9 pm EST, 11/13/03) I'd also be interested in hearing how the Putnam bond funds performed over that same time frame. Especially given the fact that the Aggregate Bond Index returned over 6.5% over that same time period.

The author picked the 0.6% number because it sounded impressive. He never pointed out that Putnam outperformed the market over a similar time frame. He didn't include the returns that Putnam may have earned in either balanced funds or pure bond funds as they almost certainly would have made the numbers more palatable given the economic climate. He threw out a statistic without the context to make it relevant. He manipulated it to make his point, which just happened to be diametrically opposed to what the statistic tells us.

His misstatement:

Late trades were clearly a criminal fraud that cheated law-abiding investors who innocently took the other side of a loaded transaction.

This statement betrays an utter lack of understanding about how an open ended mutual fund works. There is no one taking the other side of a trade. This isn't like a regular equity trade. With mutual funds, shares are created when the purchase is made and destroyed when the shares are sold. There is no direct harm to another investor. Indirect through higher fees and operating expenses, maybe. But not directly.

Even if the author were discussing a closed end fund, where there are a set number of shares or even a regular equity, this still wouldn't be true. When you buy a stock or closed end fund, delivery will be made. If a firm is allowing its clients to back out of trades, that does not absolve them from making delivery. It is the firm for the weasel that suffers the consequences of his renege, not the investor on the other end.

I don't mind articles that are designed to inform people about potential problems. I don't mind articles that are designed to expose potential fraudsters. I do have problems, however, with articles that use manipulation and misstatement to hype a problem into something more than it is.

There are problems in the mutual fund industry, no doubt about it. But there are also problems in this author's story.

Investing is shrouded in mystery enough without having to sift through lies also.

Boeing Unconcerned About Slip To #2 In Market Share

Phil Condit, CEO of Boeing, has expressed a lack of concern about Boeing possibly slipping to #2 in the race for global aircraft market share. Normally, I'm not one to agree with accepting a decline in market share, but in this case, I think that Mr. Condit has it right.

He states that Boeing is more concerned with profitability than it is with market share. In the battle with Airbus, that is a good thing.

Airbus has never truly been upfront with their finances. Most, but not all, of the early sales they won over Boeing were bought. They aircraft were sold under cost, pure and simple. Since those early "victories" they've been able to sell through a combination of using the "family" approach and more buying of market share.

For Boeing to even try to compete with Airbus in the market share arena would be corporate suicide. Airbus has no concern with making profits. Boeing has to have that concern.

The two companies have very different goals. Boeing is company concerned with making profits for the shareholders. Airbus always has been, and likely always will be, a political concern. It is more concerned with the glorification of the French and German aerospace industries, technology industries and workforces than it is with making a single Euro.

I think Boeing has made some mistakes along the way. I think that they have dithered too long on a 747 stretch. I think that they mishandled the 757. Boeing is by no means a perfectly run corporation. In fact, I have even said once or twice that I think that they are being mismanaged.

But this call by Condit is the right one. He knows that Airbus is not playing by the same rules as Boeing, and doesn't have to. Condit has to look out for the best interests of Boeing and in this case that meant giving up market share leadership to Airbus.

Gee, This Is A Real Surprise

The Securities and Exchange Commission has come out with news that more than 25% of brokerage firms broke the law by allowing late day trading in mutual funds by certain select investors. Further, they have discovered that 70% of the firms know about customer's market timing activities.

What does this mean? Well, it means that 30% of the brokerage firms are lying. They all know that they have customers who are trying to time the market. Nothing is done about the timing because you can always blame the failure on the client and it can be awfully profitable while they're self-destructing. At a time when trade revenue is down, does anyone really think that there is going to be a brokerage firm out there that is going to discourage trading, no matter how ill-advised it might be? I don't think so.

As for the late day trading, I'm guessing that the 25% number is probably about right. Before now, late day trading was really viewed as a distasteful thing, not a significant illegality. Even at firms that did everything through computerized trading systems instead of on paper tickets, it would have been simple to get around the 4 o'clock cutoff times. Time stamp a couple of paper tickets beforehand, do something to lock up your computer right at four o'clock, and then hand in the paper tickets with the time stamps after the client makes the decision.

Gaming the system like that would work, because there are really no controls on the paper ticket system. The last firm I worked at was completely computerized, yet I had a stack of paper tickets two inches thick on my desk, just in case the system went down. Getting them stamped would have been simple. Just claim to be checking the time, date or function of the time stamp. Probably would have shown up on a review as taking the initiative or some such positive.

Most established, respected brokers are going to have your best interest at heart. The article talks about brokers being dismissed from Merrill Lynch and Prudential, but I'm guessing that the vast majority of illegal activity was talking place among the boiler room crowd. Use diligence in selecting your broker. If they offer to "bend a rule" for you, take your money elsewhere. In the securities industry, rules don't bend - at least not legally. And the SEC will come after individuals also. Don't let your broker get you into trouble. Use your common sense and your sense of right and wrong.

If it doesn't feel right, it probably isn't.

Memo To My Readers

November 5, 2003

To: ALL LOYAL AND NOT-SO-LOYAL NOBLE PUNDIT READERS

From: Chris

Subject: Writing an effective memo

One of the skills that is most lacking in today's workplace is the ability to write clearly. Oftentimes, the ability to communicate effectively via writing will make the difference between who gets promoted and who doesn't. By following a few of these simple steps, you can get a leg up on everyone else.

Grammatically, writing an effective memo is very simple. Keep the language simple and clear. Be concise. Use simple sentence structure. Use the KISS principle: Keep It Simple, Stupid!

The biggest challenge facing you in writing an effective memo is organization. Your first paragraph must tell the reader why this memo is being written and why it is important to them. Miss either of those requirements and you will lose most of your readers. Your middle paragraphs should tell the reader the information you want them to know. Try to limit the memo to no more than three middle paragraphs. And finally, close with a paragraph reminding the reader of what was written and why it is important. Most memos fail to communicate because they lack a basic outline structure like this.

When writing a memo, your goal is to quickly and efficiently communicate an idea to the reader. You do not want to waste their time or yours. Learning to write that kind of memo is a skill that can be practiced and perfected. Being able to effectively communicate is one of the key skill sets managers look for. Writing effective memos will help you to excel in that area.

Chris

On my way into work this morning, the Orlando Sentinel billboard along I-4 was flashing a notice about an article on the do and don'ts of writing memos. It occurred to me that most people see these articles, but never see how to apply them. A list without context is pretty useless.

I've always found that the best way to write a memo is, like I did above: tell 'em what you're going to tell 'em, tell 'em, and tell 'em what you told 'em. Or in grammatical terms: intro, body, conclusion.

In the intro paragraph make sure that you tell them why you're writing and why it's important to them. Otherwise people will question why you're wasting their time and they may never get to an otherwise excellent point.

In the body, get across your information in a clear, concise manner. Leave no room for ambiguity. You don't want people to be sitting there questioning what you meant. You want them to act! Make absolutely sure that they know what they have to do, without question.

In your conclusion, recap what you wrote. Give a quick synopsis and call to action. Your conclusion needs to be short, but effective.

For most bloggers, the problem won't be writing something coherent - it's rare that I stumble across a blog post that is simply impossible to follow. The problem will generally be keeping it simple. Big words and grandiose flourishes are out. Simple sentences and a third grade vocabulary are in. It's tough. I know it is. At my last job I had one supervisor who was constantly telling me that I needed to be a little less verbose. So I know it's a challenge, but if you can overcome it, the benefits are huge.

Hopefully, a quick example of a good memo will help more than another bullet-pointed list to hang on your cube wall. Hopefully, it will help you to write a better memo, rather than the stilted sounding memo born of religiously following a do/don't list.

I am consistently amazed at how poorly most people write. For people who can communicate effectively through writing, the opportunities out there are legion. It is, by far, the most in demand skill I've found.

How Not To Treat Employees

As I've mentioned before, I work at a retail furniture store just outside of downtown Orlando. In my job I handle everything from accounts payable to accounts receivable to inventory management to human resources. Out of all the various and sundry responsibilities I have, HR is, by far, the most challenging.

When I'm dealing with my employees, I try to treat them right. I try to give them respect. Mistakes are not acceptable, per se, but they are viewed as learning opportunities. They know that if they mess up, they'll have to make it right, but so long as they learn how to avoid it in the future everything is cool. I try to talk to them, to get to know what's going on in their professional life as well as their personal lives. This allows me to nip problems in the bud before they become real issues. And most importantly, when I ask someone to do something for me, I try to make sure that they have the tools and/or information necessary to succeed.

My boss, on the other hand, would manage to get kicked out of a Dale Carnegie course. She has not figured out how to talk to people to save her life - or her business. Here are some of the most poignant examples of her in action:

She completes a sale with a customer. She gives me the item numbers of what she sold so I can place the order (mind you, she did not give me any description or idea of what we were ordering). We order it. It comes in. We place it on her desk - and she promptly loses it for a month. After she finally finds them, she delivers them to the client, who turns around to complain that the parts are wrong. My boss' response: "I don't know why I pay eight of you guys when I just end up doing it all myself anyways."

She hires flamboyant, gay designers because they're gay and flamboyant and then threatens to fire them because they're too gay and too flamboyant.

She discusses hiring a replacement for me with a third party not affiliated with the store - while I'm at lunch with them.

When employees try to inform her of the actions of a certain ethically challenged employee, she threatens to fire everyone else for telling her what's going on.

She goes on shopping sprees in which she buys tens of thousands of dollars in new merchandise. When the bills come due and she doesn't have the cash for them (the store budget is on a tighter shoestring than my own personal one), she accuses me of "trying to ruin her credit."

In responding verbally to a racial discrimination complaint lodged against her, she tells the city human relations board that she can't be a racist because she has "lots of those people working for me."

She accuses honest employees of stealing from her and of trying to ruin her and thinks the ones who actually are thieving and plotting against here can do no wrong.

She hires people after five minute interviews (questions: "When can you start?" and "Is $6.50/hr OK?") and no reference checks and then wonders out loud, in front of them, why she can't seem to get good help.

A picture falls off a wall onto the head of an employee, breaking the glass in the picture. First question: "Is it [the picture] salvageable?"

I go across the street to get a drink from the store as a guy in a suit walks in and come back to find that she hired a new employee in the meantime. When he turns out to not be the ball of fire she wanted, she asks: "Why did you bother to hire him?"

She complains about inventory not moving, yet when we propose various basic advertising ideas, she refuses because we don't have the sales to make those expenditures worthwhile and we can't get the sales until we figure out how to increase the floor traffic. So we have to increase our floor traffic before we can begin advertising to increase the floor traffic.

I could go on and on (her daughter is getting divorced; she wants to know if she still can use her soon to be ex son-in-law's employee benefits), but I think you get the point.

The business is failing. It is failing mainly because she has no idea what is actually going on. She thinks that everything is going just fine; we all think that her favorite sport is kick the dog. No one will tell her what's going on. She doesn't just shoot the messenger; she shoves bamboo shoots under our nails before drawing and quartering - without the mercy hanging to start. I keep trying, but it's like talking to the wall - as it falls on you.

If she had treated her employees better, we would be on the verge of booming. Instead, we're on the verge of making a real boom - as we implode.

Managing the human resources aspect of a business is tricky at best. But it can be every bit as important as finance or advertising (and this is coming from someone with a heavy finance and accounting background). Look at the examples I gave above. Learn from them. HR is tricky enough without the self sabotage. Properly managed, HR adds little to the bottom line. Managed poorly, HR will crush it.

Grow Tall; Make More Money?

Well, this should work out well for me. A University of Florida management professor has come out with a study showing that tall people earn about $789 dollars a year more per inch than short people.

The author claims the results to be "troubling." I think that it's interesting, but I'd want to see a corroborating study before I truly bought into the idea. This sounds like one of those studies in which the data fits the hypothesis, but the results only represent a loose correlation, not causation. I don't know. Show me that it replicable.

That being said, if it is true, I'm going to have to ask for a raise. I am obviously not getting paid what my height dictates I'm worth.

Interesting stuff.

Supply, Demand, Price Controls, Economics, Etc.

While I had the honor of compiling this week's Carnival of the Capitalists, one of the articles that was submitted (by Jonathan Wilde of catallarchy.net) was an analysis of an article by Paul Krugman about a babysitting co-op in the Washington DC area.

Now Jonathan did an excellent analysis of the article itself, one that I wholeheartedly recommend reading, and I do not plan to recreate his wheel, as it were. Instead, I want to use the article to help illustrate how inflation and deflation are both vital to a healthy economic cycle.

The biggest flaw that I saw in the co-op's scheme was that of price controls. The value of the coupon was pegged at 1 hour of babysitting per coupon. Period. It did not vary upwards in times of great demand; it did not vary downward in times of little demand. Consequently, the only tool available to influence the "economy" was the size of the money supply, which is not entirely realistic.

Jonathan also pointed out that they coupons used in the co-op were not true money, as their use was limited. They could only be exchanged for other babysitting services. In doing full blown economic effectiveness analysis, this would be a significant factor hampering the extrapolability of the results, but for the discussion I want to have, this isn't really a factor.

Hypothetically, let's eliminate the price controls in the co-op and create a given coupon supply. The number of coupons is a fixed number and their par value (or issuing value) is, as it was in Krugman's article, 1 hour/coupon. Further, we're going to say that there is no banking mechanism, no issuance of additional scrip, and no "virtual" coupons. Every coupon is paper, there is no credit, and every transaction is paid immediately in scrip.

Now when the coupons are first issued, people will freely exchange them for 1 hour of babysitting, just as the par value indicates. But what happens as we head towards winter and people decide that they need to start saving coupons, perhaps in anticipation of the State of the Union? The demand for babysitting services naturally declines, but the demand for coupons is still there. So how can people acquire more coupons?

Well, we have already prevented the co-op from issuing more coupons, so the value of the coupon should naturally begin to deflate. Coupons should begin to be valued at say 2 hours per coupon, maybe more. Eventually, prices will drop enough (coupons will buy more hours per coupon) to begin to stimulate activity again. People who want to collect and hoard coupons will have them become available and people who maybe have more coupons than they really need or who want to spend more time going out will begin to use more of them as they see the value increase.

Eventually, though, the spenders will need more coupons and the service providers will need to use the co-op services. At that point, the coupons start to flow the other direction and the value stabilizes at the new lower level.

But then what happens when the State of the Union comes up and everyone wants to go? Now you have huge demand and little supply. Prices will begin to rise (each coupon will buy fewer hours of babysitting) until a point is reached where there are enough people willing to spend the night at home working that the need is satisfied. That point may be at, say, 10 coupons per hour. Inflation will have eroded the value of each coupon substantially, but eventually there will be more people willing to work than that price level will support and prices will deflate back towards a reasonable level, followed by the whole process running its course again.

The cycle I've just described could be described something like this: contraction-bust-growth-boom. Look at a sine graph for a graphical representation of what
it would look like. It is a "perfect" cyclical model.

Unfortunately, the textbook, theoretical model does not exist in the real world, as we all know.

Let's look at what might happen if there was a bank involved in the process that was capable of creating and destroying scrip at will, not unlike the Treasury (although the Treasury does it through the issuance and open-market redemption of bonds).

In the contraction phase of the cycle, the bank could, as Krugman proposed in his original article, make more scrip easily available through low interest rates (maybe borrow 10 scrip, only repay 11) to help stimulate demand. It makes sense to do so, because it avoids the harsh effects of deflation on an organization (in this case the co-op), which has debt as part of the capital structure. The risk, however, is ending up in the dreaded liquidity trap where no amount of Keynesian pushing the string will stimulate demand.

During the boom part of the cycle, the bank could, attempt to contract the scrip supply by making it more expensive to borrow (say borrow 10 and repay 20), which would contract the scrip supply by the process of some people paying off their debts, while limiting the amount of scrip being created. This would help to avoid inflation by reducing the number of coupons available to chase after the limited supply of babysitting time (it limits how high up the demand curve the economy can go). The risk here however is that if people have been borrowing scrip to repay with scrip, it makes sense to encourage the continued rise in prices through further borrowing as it then takes less effort to repay the debt than the value received in incurring it.

Notice the similarities between the two. In the first scenario, we are expanding the money supply to encourage spending, thereby discouraging deflation. It is assumed that a little inflation is a better alternative than a little deflation. In the second scenario, the goal is to rein in inflation, but it is still assumed to exist.

In other words: inflation=good; deflation=bad.

Here are the two problems I see with that the actions of the bank. First, deflation is the monetary equivalent of a check and balance in the government. Deflation discourages the piling on of debt by making it more difficult to repay that debt down the road (imagine the person who borrows 10 coupons for 1 hour of services, only to have to repay 20 coupons in which they receive 1 coupon for every 2 hours of babysitting - a 40 to 1 ratio in hours).

Inflation, conversely makes saving less attractive by devaluing the worth of each coupon (imagine the person who hoards 10 coupons at 1 every 2 hours only to use them at a rate of 10 per hour - that's a 20 to 1 ratio). Too much of either extreme, savings or debt, is bad for the economy. Inflation and deflation are the checks against the extremes. By cutting out one, we remove one of the consequences of poor economic decision-making.

The second problem I have, is that constant inflation erodes confidence in the value of the scrip. You run into a scenario where people eventually ask what the point is of working for a coupon that will get you half of what you put into it, so they either remove themselves from the economy by transitioning to a barter system, or they immediately spend their earnings, regardless of the utilization value, in an effort to stave off the effects of inflation, when if fact they are simply exacerbating the problem (this is where it turns into hyperinflation).

In our economic system, we have virtually eliminated (on an economy wide scale, in certain industries the effects are still felt and even then I would argue that they are offset to a large degree by substantial productivity gains in those same industries) deflation as a real risk to business today. That's not good. There is no check against out of control borrowing and we're now starting to see the effects of an economy being strained under the weight of simply too much debt. I think that we're at a crossroads, economically right now. Our nice little 2-3% inflation rate has been outstripped by our mushrooming debt. If businesses start hiring large numbers of people again, I think we're going to see the inflation rate increase significantly. If they don't start hiring pretty soon, I think we're going to see debt induced deflation - which will not be pleasant at all, as each default will lead to more defaults as everything is based on a house of cards, where one debt backs another debt which in turn is backed by another debt which is backed by the original debt. Default on any one and the whole group comes down.

What really scares me is that a form of the circle may, in fact be what our entire economic system is based on. In another article from the Carnival, Mike Northover of Master of None did an excellent post on the Real Bills Doctrine, in which it is proposed that our currency is in fact backed, backed by commercial paper issued by corporations and bought and held by the Fed.

Before I go too far into this discussion, a little look at what commercial paper is. Commercial paper is basically an IOU written by a company in which they promise to pay you back x number of dollars plus interest in say 90 days. Commercial paper has absolutely no backing; if the company defaults there is no recourse - you're just out of luck. Generally, commercial paper is issued by the largest and most stable companies out there as a way of doing short term financing. It saves the companies on the costs of doing a bond issue and generally commercial paper is easy to roll over. It is usually attractive to investors because it offers a combination of decent return (due to the risk associated with no recourse) and relative safety from the short time period.

But what is the commercial paper backed by? It is backed by the full faith and credit of the issuing corporation. One of the reasons why commercial paper is considered to be such a decent short term parking place is because it is denominated in dollars. People like the perceived strength and stability of the US dollar, which is fine. But it means that to a degree, the value of the commercial paper is backed by the perception of the US dollar (GE commercial paper issued in Mexican pesos will not be as valuable to a Mexican as a dollar denominated scrip is to an American because of the perceived risk in the peso, even removing exchange rate risk).

And according to the real bills doctrine, the value of the dollar is backed, to an extent, by the value of the commercial paper. In other words, the paper provides some backing to the dollar, which in turn provides some backing to the paper. But so what, you say?

What happens in the event that some event shocks one side of the backing or the other? Say an active paper issuer like GE goes bankrupt? If real bills holds true, the dollar should lose some of its luster, which in turn would devalue the rest of the commercial paper, which would take the dollar down more, so on and so on and so forth.

Think it can't happen? It already has once. In 1970, the Penn Central railroad, then the largest issuer of commercial paper in the market, went belly up. It was at the time, the largest bankruptcy in US history. It can happen. It has happened. The question is, could our economy, if the value of our money is based on the real bills doctrine, withstand another shock like that? Luckily, in 1968 when we left the gold standard, we were about two years from the end for Penn Central. The Fed would have had an opportunity to avoid stocking up on PC scrip. But even so, the revelation of the true depths of the problem at PC came out in early June of 1970; by the end of the month they were in bankruptcy - and all the paper holders were SOL.

Today, if something like that were to happen, if real bills is at work (which I don't doubt it is), it could be a devastating blow to our economy. Particularly now that a number of companies are issuing Euro denominated commercial paper, which now adds in exchange rate risks on top of everything else. A blow to the dollar could dry up significant parts of the paper market, leading to more insolvencies, further hurting the dollar and putting us into a vicious circle until some sort of equilibrium is reached.

But here's something to consider that kind of ties together both parts of this post: We left the gold standard in 1968, Penn Central went bankrupt in 1970, and Nixon imposed price controls in 1972 that lasted until 1974. This all coincided with the beginning of the bear market of '70s and was followed by stagflation. It was nearly 15 years, until about 1983, before we were able to pull out of the issues caused by the events of the late '60s/early '70s. Recently, consumers and corporations alike have seen an explosion of debt burdens and we're now possibly approaching the end of the debt boom. Our economy is sick, there is no doubt about that (and before someone says look at the stock market, that is not a reliable indicator of the health of the economy.), what is in question is whether or not the sickness is getting better or worse.

I think that we've harmed our ability to rectify difficult economic circumstances by taking away one of our check and balance tools - deflation. It is a necessary evil to maintaining a healthy economy. Just a few months ago I was arguing the need to depreciate the dollar to try to export our way out of recession. The more I study the whole situation, the more I'm becoming convinced that we need a broad based deflationary environment for a short period of time to try to introduce a measure of rationality into the economy. The biggest obstacle I see is that we have accrued so much debt in anticipation of never ending inflation that deflation would be catastrophic to many. We may have inflated our way into a situation where we can no longer inflate, but we cannot afford to deflate like we need. We, too, may have hit a liquidity trap, and may be in for a long ride while the economy tries to absorb and/or wring out all the extra debt created money floating around out there. I'm not sure what's worse: rapid fire deflation where all the pain comes now and we can begin rebuilding, or a long drawn out economic collapse, like Japan has gone through for the last 10 years, where the pain just keeps coming and coming and coming in little increments for a long time before you can begin the process of rebuilding.

Do I have the answer? No. Just kind of thinking out loud here. And getting really tired of seeing supply and demand curves in my head.

Fiduciary Irresponsibility

As I'm sure that most of you are aware, I worked for several years as a stockbroker. As a broker, one of the most important concepts we had to keep in mind was the idea of fiduciary responsibility. Boiling it all down, it basically came down to the idea that because of our position it was very likely that we knew more than the client about investing and financial matters (which was true) and as such, we had a responsibility to ensure that any actions taken by the client were consistent with their needs, requirements and goals. A breach of fiduciary responsibility was a serious offense (and it was treated as such by the regulators).

So I always am interested when I see some finance company promoting an idea that seems to run 180 degrees contrary to most everyone's needs. CNN/Money has a great article about the Home Equity Lines Of Credit (HELOC) which are one such creation in my opinion.

I noted a week or so back that people were really starting to take on way too much housing debt. Yes, it is really what has kept the economy going over the last few months, but that still doesn't mean that it was a wise decision for many of these people. Now, with the HELOCs, companies like Wells Fargo are making it even easier to tap the equity in your home for whatever purpose you might want: travel, home improvement, education, dinner, groceries, fries from McDonalds. For whatever reason you deem necessary, you can put your house at risk for foreclosure.

Most people probably never realize that. They see the little VISA logo on the card and think that everything is hunky-dory and that it works just like the VISA card they got from Citibank. It never occurs to them that the whole reason they got that massive credit line is because it is secured by the equity in their home. It never occurs to them that if they fail to keep up the payments, they could end up living in the cardboard box that their shiny new refrigerator came in.

Do you think that Wells Fargo or any of the other HELOC companies are emphasizing that point? No. They may mention it in passing; it may be in the fine print, but they're going to be spending much more time selling the prospect on the ease of use of this card when they need that hot dog and Slurpee.

As I see it, that's promoting a financial product that is likely not in the best interest of the client. In other words, a breach of fiduciary responsibility. Are there times when an HELOC might be appropriate? Sure, but buying designer clothes and lunch from Wendy's are not two of them.

The finance companies are beginning to make a big push to remind people of how easy it is to use these HELOCs. They are trying to make more from merchant fees and interest charges, which are good for the company, but they're doing it at the expense of the financial well-being of their clients.

The HELOCs will not be the downfall of Western Civilization; they won't even push our economy into recession. But they are not the ideal solution for everyone. They have real and significant risks to people.

And those risks need to be made clear, much more so than the ease of buying a Slurpee out of your home equity.

Why The Bush Tax Cuts Weren't Enough

Last night I mentioned how the Bush tax cuts were almost certainly not the cause of the current bull market in stocks. In fact, the Bush tax cuts, while a nice and kind gesture, won't have their effects felt for years, possibly even well into the next decade. So if they weren't enough to have a real lasting effect on the stock market, what good were they and what would be needed to create that kind of effect?

What good were the tax cuts? Well, they were certainly better than a swift poke in the eye. And they did provide a short-term boost to the economy, in the form of the rebate checks, at a time when it was really on the verge of a demand collapse. In that sense, they were good and well-timed, plus anything that reduces the government's confiscation of resources is good in and of itself.

The biggest problem with the Bush tax cuts is that they were too little, too targeted, and too phased. In short, they were a half measure compromise.

In order to effect a real and lasting economic boost, there needs to be a fundamental and profound structural change in the tax system. The marginal rates need to be reduced across the board, and it needs to be a real and significant reduction, not just a token cut here or there. The long term capital gains rate needs to be significantly reduced. I don't agree with eliminating it completely, but for long term gains it should be small, on the order of 5 or 10%, not the current 20%. The tax on dividends needs to be eliminated, or if that is politically unpalatable, reduced to the long term capital gains rate.

Before I go further on some of the fundamental changes that need to be made, I want to explain the dividend rate cut in a little more depth. I had a long discussion with my father about this last night and I think that there were a number of important points as to why it would be wise to cut the dividend tax rate.

The theory of financial rationality tells us that a company should always look for the most efficient use of capital in order to maximize the return to the shareholders. Some years the company may have investment opportunities that would lead to them retaining more earnings than in other years, all depending on the expected rate of return for those retained earnings. If the expected internal rate of return is less than what the investor could expect to earn on their money in another investment, then the company should pay a dividend. If the expected rate of return is greater than what an investor could expect to earn in another investment then the company should retain those earnings, invest the money, and maximize the return to the shareholder through capital gains. In an efficient market, where companies are driven by strict financial rationality, dividend payments would fluctuate wildly from year to year or even quarter to quarter.

Obviously we don't function in a world driven by financial rationality. There are companies, like Coca-Cola, GE, GM, and Kellogg that like to maintain a constant, stable dividend payout as a shareholder service. They have made a conscious decision that stability is more important than absolute financial rationality - and this is not to be unexpected in a market where there is such stiff competition for investing dollars.

But the current tax system, which taxes dividends as ordinary income, adds a third level of complexity to the decision. Now companies no longer just take into account their financial needs when making their dividend/retained earnings decisions, they now also try to balance the tax burden that they are imposing on their shareholders.

Eventually, this leads to a situation like you currently have with Microsoft. Microsoft is no longer a growth company. It has become a mature, stable company, not unlike a GE or a Boeing. It has grown to a size where the internal rate of return on retained earnings is no longer significantly greater than what investors would earn in other investments. It has grown to a size where the law of large numbers indicates that the growth rate has to slow down. Even in the annual report the company is indicating that it is having trouble finding adequate investment opportunities for the cash on hand. This is why it is now hold cash measured in tens of billions of dollars.

Financial rationality says it is time for Microsoft to start paying a dividend. The structure of the tax system, and the burden a dividend would levy on the shareholders, says not to pay it (there is also the desire to maintain the perception of Microsoft as a growth company that is almost certainly playing into the decision also).

When the company sits on large piles of cash like that, it reduces the overall return on assets for the company. That in turn allows more suspect and questionable projects to proceed, as they appear to exceed the corporate return on assets. Over time, this would serve to further drag down to corporate return on assets, until a point is reached, where the expected return is essentially the same as the return the company can receive on cash. This appears to be where Microsoft is now.

Cutting the dividend tax rate would make companies much more likely to return some of the excess capital to the shareholders in the form of dividends. The money could then be reinvested more wisely and more efficiently, with the end effect of improving the state of the economy.

The other big tax that needs to be eliminated is the estate tax. All that it is is a tax on success. The elimination of the death tax, as the estate tax is often called, would obviate the current need for tax havens and tax dodges. The amount of wealth lost every year to this sort of legal tax evasion is staggering. And every bit of that money is wasted, not going back into productive use in the economy, which helps to hold us back. Bush realized this with his tax cut proposal, but it only eliminates the death tax in the tenth year of the plan - the final year unless Congress chooses to make the cuts permanent.

My purpose with this post isn't to denigrate what Bush has tried to do with his tax cuts. The idea and the reasoning for the plan was sound, it is only in the implementation that it loses effectiveness, and the implementation was watered down into little half-measures through politics and compromise.

As a result, the cuts had a temporary effect on the economy - which likely kept us from falling into to a depression induced by a drop in demand. Over the long term though, they will be of minimal consequence as they do little to nothing to change the structural disincentives of the existing tax structure. Only a true overhaul, no half measures, no compromise solutions, will truly create a tax system that works for us, instead of against us. And that in turn is why I personally favor (somewhat lukewarmly, granted) a move to a National Sales Tax.

10 Overblown Reasons

MSN should have named this 10 overblown reasons why you shouldn't get investment advice from the mainstream media.

At some point or another during my stockbrokering days, I have worked with just about every 401K administrator out there. Some were more responsive than others. Some were more forthcoming than others. Some were easier to work with than others. But in no case did I ever see an administrator who was flat out dishonest.

Look at the ten warning signs here (which were apparently provided by the Department of Labor):

1. Statement is consistently late or comes at irregular intervals. Could be a problem, sure, but the problem is more likely with either the post office or with the company stuffing the envelopes for the administrator.

2. Your balance doesn't look accurate. Might it just be bad investment choices? I've seen quite a few mutual funds that have lost significant amounts in a very short time.

3. Your employer didn't send your contribution to the plan in a timely manner. For the employer this is a very bad choice. For the employee, if you see this happening, first check to see if it's a clerical error. If not, start looking for a new job. Your one contribution is the least of your worries at this point.

4. Your balance has dropped significantly and can't be explained by market ups and downs. This almost assumes some sort of illegality on the part of your employer. See #3 for how to handle it. And, for what it's worth, 99.999% of the time, even extreme drops can be explained by market movement. Deal with it.

5. Your statement shows that the contribution from your paycheck was never made. Go back to #3 again. Common sense should tell you to question it the first time the contribution is missed. If you miss both April and November (7 months apart), you earned one of the losses through neglect. This is supposed to be your money. You need to be watching it.

6. Investments listed on your statement aren't the ones you authorized. Realize that in most cases, the administrator will be able to pull some kind of phone record or computer log showing that you, in fact, made the change - probably without realizing it.

7. Former employees are having trouble getting their benefits paid on time or in the correct amounts. I found two words to rectify this problem: fiduciary responsibility. Firms don't like to lose the assets under management, but they want even less to pay for a loss incurred due to their foot dragging.

8. There are unusual transactions listed, such as a loan to your employer, a corporate officer or one of the plan trustees. This one, especially with their example, just really doesn't make sense. It almost sounds as if they're hinting at illegality, only to turn around and say, but it might be ok. Companies get creative in their executive compensation plans nowadays. Some of the things look shady and some of them probably are shady, but without a fair amount of deeper research, you're in no position to know simply from a line item on a report.

9. There are frequent and unexplained changes in investment managers or consultants. Managers and consultants move on all the time. The different administrators are constantly working to improve the quality of the offering. Chances are, if your employer is changing administrators, they're probably trying to improve the plan.

10. Your employer has experienced severe financial difficulty. If your employer has experienced a financial difficulty severe enough to warrant tapping retirement contributions for operating funds, then you should have been looking for another job for a while anyways. Putting food on the table should be more important than retirement, and the food on the table routine is at risk.

The biggest thing with all this is to simply pay attention. Your retirement funding is your retirement. Not your employer's. Not the administrator's. Not your stockbroker's. None of them have a vested interest in making sure that you succeed. Only you do.

Keep an eye out on your investments. No one else will do it for you.

All 10 of these warning signs are way overblown. In the entire time I was a broker, I only ever dealt with one, #7 and that was very infrequently. If you want to be successful, spend more time researching your investment choices and less scouring the Summary Annual Report.