Where Else but California?  One of my recent posts listed California as one of the top states in the USA for repossessed homes. Well, nothing like a good start up, yep in San Diego you can call the Repo Express. Realtors have organized bus tours of repossessed properties. The tour takes one on an inspection tour of repossessed homes.  Sure they are less now but are they a buy yet?  I am sure the realtor is there to help….

One phrase I heard while watching the tv report about this was ‘selling below market value.’  How is it possible that anything sold ‘below’ market value? Isn’t the price it fetched between a willing buyer and seller necessarily the definition of market?

I have enjoyed reading your papers on the stimulation and regulation issue. My overall reaction is that most of you do not seem to embrace any consistent form of econolmic philosophy. In the same sentence you may come out for fiddling with interest rates, extending unemployment and other social programs and lowering taxes along with a ‘funmdamental long term program’ whatever that is. Others quote whichever professor they found who issues the ususal sort of thing that Mike Royko used to pen from his favorite, Dr. I M Kooky. Which is to say they hrummph and pronounce that whatever we have been doing was a mistake, see the headlines, and they would have done it differently.

There are basically two schools  of thought about intervention in an economy-hands on or hands off. The hands on version would be  Keynesian Economics.  Keynes thought that the economy could literally be fine tuned by the governemnt expanding and contracting whet it spent. While he advocated spending with deficits in hard times, politicians have expanded that notion to include deficit spending most of the time.

The other view would be to Friedman’s MOnetarist Theories.    Margaret Thatcher was influenced by Hayek.  At a minimum an MBA should be able to explain them all and then defend his or her position by citing the basic tenets of the chosen philosophy.

The idea here is that a free market will right itself given the time and inclination. Meddling may cause more problems than it solves. Or take a look at some of Tom Sowell’s explanations.  

But my point is, pick something as the basis for your thinking. Then explain the proposition using that theory.  One need only watch the voters in early states to wonder if they do not reflect some sort of People Magazine political science, ie, I am voting for the sexiest politician of the year if only I could figure out who that is…..apparently they have no vision of what they would like and how they plan for society to get there.

Many of you are blithely assuming that in fact the FED can do what it says. This flies in the fact of the matter that the FED has not prevented numerous financial crashes since its re incpetion in 1913.    As I said in my comment to several articles, the FED did not prevent the crashes of 1929, 1987, 2001, or the sub prime mess now. By what leap can you assume they will do the right thing now?  Indeed, perhaps the lowering of rates to such an extreme, and I would concur, brought on the whole sub prime lending excess, which in fact is exactly what happened. So you are going to entrust solving the problem to the agency that created it?  In 1987 we did nothing, and the market resume its upward march in a matter of months regaining all its lost ground. But no one cited that as an example, why not?

Consider today’s action. The talking heads on tv watied breathlessly for the FED announcement, wow, they cut 50 basis points, and the market jumped 175 DOW points, only to lose every one of them by the close. Well gee how many more times will the FED shoot before they run out of bullets, then what, at zero interest it will be hard to cut any more. Perhaps we should limit the $300 or 600 or whatever to only those that can explain what a 50 basis point cut means, gee, eveyrone is so certain it will work everyone must know what that means, right?

Well this is great fun and I look forward to our next topic.

dle

Most would say that one person is pressed to make a difference in a large organization.  Well, as Societe General is learning, that is not always the case. One rogue trader has proven that theory incorrect.  While this article disputes Kerviel’s claim that the Bank would look the other way when I was profitable, my experience at such things is that this is quite correct. Great gains only come with assuming greater risk. Again and again this is fine when it works. But oh how the same gate keepers are aghast when that Risk thing runs the other way.  I have never received any invitations to join a Board of Directors of any kind. I am sure that my tendency to ask uncomfortable questions has much to do with that. But when this kind of situation occurs, it is most always because someone was not asking those kinds of questions. This is a perfect example of why Internal Auditing and Managerial Accounting are rising in importance. Like the old Holiday Inn advertisement said, the best surprise is no surprise!  And Boards do not like to be surprised. Yet most of them resist the rogue Director who asks hard questions that demand answers. Ross Perot’s short time on the GM Board is the perfect exaample.  Ross remaked that there were lots of great people at GM, too bad you can’t say that about the cars. Then CEO Roger Smith’s reaction was to buy him off with 25% of GM’s total cash-$750 M.  Yet history has proven him right as their company is a shadow of its former self.

The SG Board is meeting, in the tradition of the French Revolution there are calls for, figuratively, the head of the CEO, and talk of the very future of the ownership of the Bank. This is how fears of Recession become a Recession.  FDR was not kidding when he spoke the famous words that ‘what we have to fear is fear itself.’  The FED may or may not cut interest rates another 50 points this week, will cutting something most Americans cannot define rally their optimism?

Walter Williams weighs in on the stimulus package.   Are you familiar with Dr. Williams?Learn more about him at his website. I put a link to Tom sowell’s column a couple of posts back. Togethter these two profs represent pretty claer economic thinking, a rarity in that discipline. If you are looking for a book to review check out the 40+ Dr. Sowell has written.

Here is an article explaining the Fair Tax.   Accountants have been all too silent on tax issues.  It does not appear that Huckabee, the only candidate embracing the idea, is getting a lot of traction but at least he has floated the idea. Do you think the current tax sytem is a good idea?

Fair Tax Website Here.

Flat Tax summary here.

IRS System Here.

We report you decide…..I would agree with Walter Williams that I would not think any alternative to the current system would work unless we replealed the Constitutional Amendemt which made the Income Tax legal. Otherwise we will end up with two tax systems.

As Always, Tom Sowell weighs in on the probablity that the goverment will arrive, idealy  like the cavalry in the Western,  in time to do anything but muck things up. Couple this thought with the last article making the point that if one does not have a job skill one is not likely to find a job.

More from Dr. sowell at his his website.

You will find some forty books he has authored any of which would make for a good book report.

Charles Wheelan makes the point that politicians cannot create jobs unless workers have some job skills. While he falls back on the ladder of more education, I would argue that there are lots of college degrees that can only saddle one with debt while not improving job prospects. If the degree does not involve an employable skill set or prepare you to take a state licensing exam to become a specialist, you would probably be much better off  learning MSFT or CISCO engineering at the community college. There is more demand for accounting grads than ever before, accounting is an employable skill set.

He also echoes my comment to one paper on WEB CT that the government never did solve the depression, WWII did that.

Not surprisingly the most over built condo states California, Florida, and Nevada lead in foreclosures.  The fourth state is Michigan which has the weakest economy in the USA. While foreclosures are up 79% over last year, one tracking organization sees most of the sub prime mess written off by this summer.

Risk Magazine named Societe General  as a great risk manager. In the light of their $7.2 B loss maybe they want to reconsider.  If this can happen in a highly regulated institution like a bank, what could happen in an unregulated industry like hedge funds?  One never knows who is doing what and this is a great example. Read the article to get a feel how little SG knew and for how long.

Come to thnk of it, instead of scrambling to give us our own money back perhaps Bush Pelosi et all could explain how Citicorp with Robert Rubin more or less running the Exec Committee and Merrill Lynch could lose so much money, just what does the SEC do with those financial reports it gets?  Where is Sarbanes Oxley when you need it?  Did htose CEOs and CFOs sign off on the financial statements?  Did anything happen to them when the losses were 4x the original estimates? Just wondering…..

Eddie Lampert’s Sears Holdings SHLD, a combo of the remainder of K Mart and Sears is looking for a new CEO.   After being toasted as the new Warren Buffet, SHLD jumped to about $180, today it is about $100 and market share is going nowhere. Predictably Lampert has announced a re shuffling of the organization, a new interim CEO, and a search for a new one. That of course will get the water cooler talk going around the lawmower section of Sears, eh? 

My point. Look for more re shuffling, interim CEOs, and searches for the right formula from lots of companies.  Mired in a recession, amid daily negative reports from the media, Americans are shopping less.  I doubt changing who heads what or who is the CEO fo the quarter will change that.  Still that is what most will do.

SHLD reminds me of my original Theory of Black Holes on Wall Street. I happened on this realization when I was a struggling broker working for Ross Perot during the massive recession of 1974-75. For those of you that missed it the DOW went from 1,000 to 577 by December of 1975.  Those are actual DOW values not the drop itself.  So for those of you that think DOW 13,500 is a normal state of affairs, thnk again.

Here is the Black Hole Theory. When stocks go up in price we have a positive sum game, everyone wins. While only a fraction of the outstanding shares of a company regularly trade, when the value of that fraction rises, they all rise.  As rising tide if you will, lifts all boats.  Let’s take my previous example, SHLD. From its inception it went from bout $12 to $195.  Let’s  use round numbers to make this easy. So 200-20 bucks for the stock increase is 180 x 140 M shares or about an increase of $25 Billion dollar in value. Well no wonder everyone was proud of Eddie. That is money creation that did not exist before. With their portfolio value swelled by a factor of 9x, those lucky optimists that bought the original stock had to be happy.  You will recall the multiier effect from economics. Each $1 of value created gets spent multiple times as it passes from the butcher to the baker to the candle stick maker so to speak.

Now for the Black Hole or converse side of the Theory. This would be the negative sum theory of the game.   As the stock fell $100 from 195 to 100 or so, we wiped out 140 M shares x $100 or about $14 B of value. Where did the money go?  Again only  a fraction of the shares trade every day but the value of all of them fall in total. And  in eight short months the Black Hole of Wall Street has wiped out half the value of the company.  Investors ‘lost’ half their value.  Now we are up not 9x but about 5x. Truth be told, probably only Eddie and his inside circle held shares all the way up. A  lot of folks probably piled in on the way up. They are not feeling so warm and fuzzy bout the overall 5x increase cause they may have actually lost money. And so the Black Hole takes the money away.  If a Black Hole in outer space is an absence of matter, a Black Hole in Wall Street taketh away previous gains from the later comers.

All of this relates to psychology, herd mentality, etc.  When your portfolio swells, you are optimistic, when it shrinks you pull in commitments and spending. Now imagine what has happend with a 15% overall drop in the stock exchange. That friends is a mighty deep Black Hole. And as you can see from SHLD, and many of the stocks I assigned for the presentations, their drops have been from 50% to say 80 or 90% for say  Pier One or World Market (those are retails stores). Economists may talk today of a mild recession, but as investors total their losses, the mild turns to wild.  No doubt they were talking of a mild pullback in SHLD as it started dropping from $195.  This is why economists are usually way behind the curve. They are all using historic data. As They continue to factor in for say SHLD lower and lower prices their predictions get gloomier. On the way up they factored in higher and higher prices and their predictions got ever more rosy. In inveting terms this is known as the whipsaw effect.