Monday May 3 2010
Do you recall the Oil Spill Liability Trust Fund? While the admin kept saying Sunday that this is on BP read about this fund which was created for just this purpose.
Professor Elam
Accounting & Investing Info for San Antonio A & M
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Professor Elam
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Professor Elam
Sunday May 2, 2010
A report by three CPAs suggests that the City of Houston is broke and probably needs to take Bankruptcy. Interestingly Bill White, the past mayor of Houston is running for governor, we report, you decide.
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Professor Elam
Sat May 1 2010
Perhaps you have noticed that your wine bottle may no longer have a cork cork, but a plastic corc. The reason why is explained in this interesting article. Innovation through design is a key to market breakthroughs. -
Professor Elam
Sat May 1, 2010
Warren Buffet defended Goldman Sachs to his BRK investors at the annual meeting in Omaha.
Readers will recall that Buffet invested $5 B in GS preferred in 2008 with a whopping 10% dividend, as Warren puts it, $500 M a year, $15 a second. Reading the article note this is a convertible preferred in that he has options to buy lots of GS stock, his strike price is $115. So with GS common falling, it is in Warren's best interest to ride to the rescue to bolster the price of stock he has options to buy. Note that Warren did not recuse his opinion due to conflict of interest…..
GS common has been falling over the fallout from accusations that GS sells one thing and then bets against it versus its own clients. Gee another $30 and Warren's profit is kaput in the common!
Warren like Goldman, is his own best client…
Charlie Munger is Buffet's long time confidant, Munger added
Though Mr. Buffett said the S.E.C. lawsuit had not yet negatively influenced his opinion of Goldman, he said he would revise his thinking if new evidence came to light.
Mr. Buffett added that Goldman is a longtime adviser that “helped build Berkshire Hathaway” by selling them businesses for more than 50 years.
Mr. Buffett’s longtime lieutenant, Charles Munger, tempered his boss’s kind words. Mr. Munger, Berkshire’s vice chairman, said that there is a difference between behaving legally and behaving ethically — and that a business should not simply follow the former. »
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Professor Elam
Well there is no joy at the BP headquarters today. And as the Federal govt piles on claiming BP is not doing enough, we fail to hear any constructive suggestions of what they should do. Drilling for oil is dangerous business, especially with the pressures a mile deep in saltwater. From an ethics standpoint, here is an interesting question. Click for the company website.
Please understand that the rig is owned by RIG, Transocean.
The rights to the oil are owned by British Petroleum which absorbed Amoco which one hundred years ago was part of Standard Oil, Rockefeller's company.
Now understand that teh failed blow out preventer shown above sits on well head which sits on casing which was cemented into the ocean floor. This is to prevent the well bore from moving and allow the drill pipe to move in and out of the hole. Now, Halliburton cemented the casing for the well, this is standard procedure for land or underwater drilling.
No doubt the actual blow out preventer is owned by someone else or perhaps Transocean and rented to BP.
Okay, so who is to blame, just wondered…..good ethical question eh?
Appreciate that 11 people have already died. Given the potential exposure to the coastline and fishing area, not to mention oyster beds, etc. there is no way to insure against such an event. As Drudge likes to say, developing…
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Professor Elam
Saturday May 1, 2010
Happy Days are Here Again
Cullen/Frost Bankers Inc. surpassed
profit expectations for the first quarter, crediting Texas' resilient economy
for the performance.“My colleagues and I believe the
worst of the recession is now behind us,” Cullen/Frost Chairman and CEO Dick
Evans told analysts in a conference call Wednesday. “The economic headwinds are
no longer pushing people back.”The
Texas economy continues to outpace the rest of the country, Evans said, citing
job growth and the housing market.This is precisely the sort of comment that one would
expect at this point in the stock market recovery. Actually the best of the Wave 2 recovery is behind us, the worst of the real adjustments to failed promises
lie ahead. The worst of the Wave 1 move down was behind us March 9, 2009. Remember our analogy to this period is 1968-82. Let’s examine where
we are now.March 9, 2009 was the bottom of the stock market sell off.
The S & P, oil, and previously, gold in November 2008 had all
bottomed. Worried investors
had dumped stocks at the wrong time and scurried into bonds. Bond yields
dropped below 3%. It makes
sense then that the next turn will exhibit precisely the opposite behavior. We
should expect stocks, metals, and oil to make tops, bond prices should be
making a bottom. Social mood
should be the opposite of gloom and doom, confidence should blossom, just as it
did from the fall of 2007 to the summer of 2008, prior to the Fall 2008 crash.So the quote from Chairman Evans fits perfectly with this
scenario. I would agree that Texas will weather the storm ahead in better
fashion than perhaps anywhere else.
The State has a surplus and is properly cutting back on spending. The
economy is well diversified and not hamstrung with impossible union contracts
and promises.Elsewhere there are problems that are unsolved.
Most stock exchanges have rebounded about the same 50%
that the Dow did in 1930. Everyone thought the all clear had been sounded then
as well.The EU is coming apart. Greece has been in default more
than not in the last 150 years this time is no different. It will be easier to leave the
EU, pay 50 cents on each dollar of debt and start over. At least it will be for
the politicians in Greece.Protestors are on the march, worldwide. Google protests in Thailand, Portugal,
Britain, Russia, and you will receive plenty to read. This replicates the dissent of the late 1960s. Everyone is
unhappy they will not be paid pensions or salaries.Congressional hearings continue non-stop. The stimulus has only gone to the
international banks that were the biggest contributors to the President’s
campaign. As the social mood
sours, expect some Wall Street types to be skewered as Nixon and Milken were in
their respective eras. The result is , as with FDR, the failure to stimulate
any private hiring or investment. Indeed, mandates for health care and endless
unemployment will only send more jobs offshore. Ten percent unemployment with
16% U-6 unemployment is here to stay.States like CA, NY, NJ, IL have done nothing to solve
their grandiose promises to government unionized employees. Just yesterday the AFL CIO held a Make Them Pay rally on
Wall Street demonizing those same
Wall Street types that the President bailed out of course. Tea (taxed enough
already) party protestors are happily clicking photos of the SWAT teams called
to monitor their potential rebellious behavior.The price of oil peaked in June, 2008, stocks peaked in
October 2007. The same pattern is holding forth now, stocks are up and while
oil is up, potentially higher prices lie ahead. There is always a fundamental
event to validate such predictions. And now we have the Big Leak in the Gulf.
This will no doubt hamper oil deliveries and lead to more measures that will only make oil
production and delivery more expensive, think Exxon Valdez. That should boost
oil over $100 short term.Gold peaked in March 2008, so metals and oil lagged stocks
and recovered before stocks. So, expect a final run up in stocks, metals, and
oil. They will not all peak together. Bond prices should have a final dip. That should set up the exact opposite
of the March 9 2009 picture. This summer on exiting stocks metals oil and
parking some money in government bonds.
We warned of the danger of $145 oil in the summer of 2008, here we go
again. -
Professor Elam
Sat May 1, 2010
Deborah Alvarado campus representative for Becker CPA Review addressed the students in the Graduate Ethics class this past Wed April 28. The reason to attain an MPA is generally to take the CPA exam. She mentioned the suggested method of taking the exam, which is two parts per testing period of two months. In this way, one would study during the two off months of the period and complete all sections in six months. Hopefully that would allow another two six month periods to pass any sections not completed the first time around.
Becker has been in the CPA review business since 1957. I have no affiliation with Becker. Deb speaks at many college campuses on this subject which is of great interest to the students. Thanks Deb!Becker Professional Education
1502 Creek Hollow
Austin, Texas 78754
512-491 – 5223
512-924 – 4436 cell
dalvarado@becker.com
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Professor Elam
Sat May 1 2010
The initial run up in the stock market from 1982-87 was accompanied by the development of the junk bond market. An enterprising trader named Mike Milken realized that a lot of unrated or low rated debt was the lifeblood of many entrepreneurs. He argued that those entrepreneurs would not default as they would lose their entire business. And so people started investing in junk bond funds. A bond rates less than investment grade Baa is defined as junk. Soon Milken raised the ante by convincing insurance companies to buy bonds which would be used to take over entire companies. Previously banks would not loan money for such purposes. Among the reasons, corporate boards usually had enough bankers sprinkled around to discourage that. And so corporate stalkers like KKR and Boone Pickens had treasure chest of money to mount 'green mail' attempted takeovers. Green mail being the polite term for black mail.
It worked like this. Pickens would find an underperforming company like say Gulf Oil. Gulf was not finding as much oil as it was selling, its future was doomed. He realized that the execs would do anything to keep their jobs or secure their future, including selling the company. So,
Milken raises money selling junk bonds for a takeover
Pickens uses the money to start acquiring shares of Gulf at say $30. Once Pickens has 10%, he has to register as a major shareholders. Now the stock price is rising. Pickens mounts a bid for a Board Seat saying the company is not delivering value for the shareholders.
Terrified that they will all lose their phoney baloney jobs, as Mel Brooks put it in Blazing Saddles, the execs frantically turn to anyone to 'rescue' the company as a white knight. Anyone but Pickens, he will fire all of us, indeed he would. And so everyone starts buying Gulf, the price gets higher than it has ever been. Pickens then says, see I told you so these guys don't know how to raise the stock price, I do.
In this particular case, Gulf turned to Chevron. In the meantime as the stock price rises, the execs of course vote themselves stock options to cash in on this unexpected turn of events. Now there is a bidding war and a proxy fight for votes to elect a new Board. The stock price soars past $50.
The end of that story is that once the President of Gulf manages to get $10 M for his holdings, he announces they should sell to Chevron for $80. Gulf does just that. Chevron then of course fires everyone anyway. Pickens cashes out at $80 a share, making a bundle. He is easily able to re pay the junk bond holders and pocket the difference. He then looks for another target.
This is all a repeat of the milken deal, then an up and coming aggressive prosecutor named Rudi Guliani went after Milken to make a name for himself. Milken had become both the creator and market maker for the bonds he sold. And he managed to flaunt some securties laws in the process. Oh did I mention that Ivan Boesky and crew were using inside information to find out what happened at various companies and then used the junk bonds to acquire stock. The Gordon Gecko character in Wall Street the movie was modeled on Boesky. Boesky was another fraud claiming to be a brilliant investor while dealing inside information from Dennis Levine.
Guliani was an ambitious prosecutor in the Justice Dept and zeroed in on Milken. The whole story is told in the book at the left. Goldmnan is now doing about the same thing with CDS and derivatives that Milken did with junk bonds, insider trading, front running, playing themselves against the clients, etc. There is surely some one in the Justice Dept now that knows that same story, Rudi ended up Mayor of NYC, the quest for power in Wash DC never ends, and for a bunch of Justice Prosecutors, Goldman is a target rich environment.
End of the story
Guliani ended up Mayor of NYC
Milken now runs the Milken Institute and is good friends with Rudi
Chevron eventually gobbled Gulf, Texaco, and Unocal, and of course fired just about everyone at all those firms.
And no doubt Goldmand remembers that this process vaporized Drexel Burnham, Milken's firm. Seeking to avoid that they had best settle quickly.
The stock market crashed in 1987 after prosecuting Milken, it crashed in 2000-02 after the government sued Microsoft, it crashed in 2008 after Greenspan inflated the money supply and people bought houses they could not afford, and now the government is going after Goldman, guess what happens next….
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Professor Elam
Friday April 30 2010
It's a tough call, all the fat cats at Bear, Lehman, Goldman, paying themselves as their very firms fell apart, John Thain redecorating the office for $1 M, demanding $10 M in bonus for saving Merrill an hour before Lehman evaporated, Blankfein denying Goldman bet against their clients, a true rogue's gallery but
my nomination goes to Richard Fuld at Lehman. Now he is back on the witness stand and apparently engaging in perjury about just how much he did make. Come prosecutors, make my day, march re election glory for putting this guy where he belongs, off the yacht and into jail.Breaking update, look at the post from Bloomberg on April 30 at Jesse for more on this hapless victim of circumstance, yeah right…Incredibly he will apparently walk all this misbehavior.
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Professor Elam
Thursday April 29 2010
Just a round of various thoughts on the blogs this morning.
At Franklin Templeton, Mark Mobius suggests it would be best to let whatever happens, happen to Greece. They wont' default but will do a self imposed bankruptcy. Greece has been in default about half of the last 150 years. They pay less than what is owed to the bondholders, they do not get a bailout, Spain, Portugal, take note.
Former junk bond king Mike Milken at his own conference suggests this is THE time to sell stock and junk bonds to investors as demand is high. No kidding.
Dave Rosenberg, economist at Gluskin Sheff in Canada, notes that WMT is still cutting prices. WMT sees its customers as very price conscious.
Dave goes on to suggest that most of the 8 M jobs lost in the US are not coming back. This means a long term high in unemployment. Again it is the 1970s all over once more. All of this is deflationary, not inflationary.
And so states and cities here are not going to default altogether but pay less than what is owed to both pensioners, workers, and debt holders, again, deflationary.
Dave also noted that Obama actually said, at some point you have earned enough, ie, it is then the govt's money. Here is a picture of top tax rates in the 1930s. This was an attempt then as now to soak the rich. This is of course completely counterproductive. Large earners will re work their incomes to avoid such taxes. Individuals will not begin enterprises if they believe they will not reap the rewards of their efforts. Again, my belief is that this explains the lack of innovation in Europe, a nice place to visit but where is the Steve Jobs of Europe? By the way such confiscatory tax rates were also part of the 1970s, our preferred comparison of long term economic stagnation.We suggest that students re read our post from two days ago about crowd sourcing. All these taxes are going to increase the number of jobs going overseas. Today I read one observation that accounting services are still here simply because business has not managed to safely store the information somewhere else where it can be accessed by lower cost workers. They have of course done this in terms of assembling lap tops….Which is to say that higher minimum wages, endless unemployment taxes, higher required benefits are all discouraging to new job growth.
Professor Elam 