Category Archives: Front Page

How to Ford a Dry River

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This Buisnessweek article has the air of trying hard to ignore the story to focus on the story. It’s about how Wal-Mart’s growth is slowing down, and how this is supposed to be some kind of catastrophe for the Wal-Mart empire. But saying that Wal-Mart has a problem is studiously ignoring the problem.

The problem is that whatever sales momentum there is at Wal-Mart is coming from the lowest-margin items at its stores—staples like food and $4 drugs. Indeed, company executives have said in the past they would rather take a hit on profits from these items to attract a large amount of shoppers into its stores who will then stock up on higher-margin goods like apparel. But that’s not happening. Even gift cards, which are usually viewed as something people would use for goods to treat themselves, were being redeemed in January for basics like food.

The article tries quite hard to fault Wal-Mart’s marketing, especially of apparel, in contrast to Target, although “Wal-Mart’s fourth-quarter same-store sales rose 1.7%, which beat Target.” My own take is that Wal-Mart needs to worry a lot more about its overall customer satisfaction and a lot less about keeping up with the Joneses. I think Wal-Mart is showing more of the impact of the “dust” in the economic slowdown than this article credits. If you are going to go in debt, why shop at Wal-Mart? While you are whipping plastic, go for the prize bull and shop upscale. The people who are still playing out their credit are shopping elsewhere, while more upscale markets haven’t hit the end of their credit line yet. When that happens, Wal-Mart’s growth will probably look pretty good again.

Watch your wallet

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From Blomberg……

New York state taxpayers’ weekly borrowing costs increased $2.3 million after banks failed to attract bidders to auction-rate bonds and stopped buying unwanted securities.

Interest rates on Dormitory Authority bonds sold for the City University of New York rose to as high as 6.26 percent last week from 3.42 percent on Feb. 6, according to data compiled by Bloomberg. Buffalo’s rate on water system revenue bonds soared to 11 percent from 3.30 percent. Bonds issued by the Museum of Modern Art climbed to 4.47 percent on Feb. 13 from 3 percent at the end of January.

Rates in the $330 billion auction-rate bond market are rising nationwide after banks from Citigroup Inc. to Goldman Sachs Group Inc. stopped bidding for the debt at periodic sales they oversee, according to Bloomberg data. New York, with $4 billion of auction debt, may convert the bonds to a fixed rate or a different type of variable-rate security, state budget director Laura Anglin said in an interview in Albany last week.

“It hurts,” said Anthony Farina, executive assistant in the Buffalo comptroller’s office. Interest costs on the $63 million of auction-rate bonds rose $93,000 for the week, he said. “Nobody expected this kind of jump.”

Say a prayer for all those who are counting on their pension

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I saw this over at Calculated Risk and it just about made me choke….

The PBGC currently has approximately $55 billion to invest in the new investment policy. Under this new policy, the PBGC will allocate 45 percent of its assets to a diversified set of fixed-income investments, 45 percent to diversified equity investments and 10 percent to alternative investment classes. The agency’s previous policy set an equity investment target of 15–25 percent, although the actual level of equity investments was 28 percent at the end of FY 2007.

The PBGC had an accumulated deficit of $14 billion as of year-end FY 2007.

Because the PBGC’s obligations are paid over many years, the new investment policy is designed to take advantage of a long-term investment horizon. The strategy of increased diversification—including use of alternative investments—aims at generating returns, while providing superior protection against ultimate downside risks over time.

For those that don’t know, PBGC stands for Pension Benefit Guaranty Corporation. They are the ones who guarantee pension payments in the event that a pension fund goes broke.

In plain English, they are saying they are short $14 billion dollars so they are going to pursue a riskier investment plan in order to try to make up for their shortfall. They try to disguise this by saying that in any 20 year period their new investment strategy would have outperformed their old one so it is safer. (They state this later in their press release. Read the Calculated Risk post for more.)

But even granting this is true, it does not mean that it is safer. For example, let us say that a bond would pay 5% every year for 5 years. Let us say the stock market will go down for 5% for the first two years but go up by 20% for the next three. In this case the stock market would be a far better investment over the long term. But if your bills all came due in the first two years you would be far better going with bonds. If you can’t know for sure when you bills are going to come due, you would be far safer buying bonds than stocks.

PBGC is taking a really big risk in spite of trying to claim otherwise.

Think about it. Under what circumstances are pensions funds most likely to go bust? During times the stock market is going up or going down?

The answer is obvious. If stock markets ever go sharply down for a period of time, the PBGC is likely to have to rescue a lot more pension funds. So at the very time their assets are losing value, they will be taking on new obligations.

PBGC would argue that when they take over a pension fund, they take on an obligation that they have to pay for over a long period of time. Therefore, they have time to wait for the stock market to go up.

But I don’t buy this. If they have a lot of obligations dropped on them all at once (as I expect), they will have to pay out a lot more money than they are right now. To fund this they are going to have to sell assets. A major portion of their assets is now going to be stocks. So at the very moment that stocks are down they will have to be selling.

If you sell stocks while they are down (even if you only sell a portion of them) you can really wreck your long term return. This is why buy-and-hold is the recommended investment style. This is because stocks can really go down before they go up.

For example, let us say that you buy 100 shares at $10 a share and you hold them for 5 years. Let us say that after you buy the shares they drop to $5 a share and stay there for 2 years. But let us say that after that they start climbing again so that by the end of those 5 years those shares are worth $20 dollars a share. You have just made a 100% return in 5 years or a 20 percent return per year. Not bad.

But let us say that in those first two years you suddenly need $400. That is only 40% of the money that you invested. But because your stocks have halved in value you are forced to sell 80 of your shares. Even if you hold the rest of your 20 shares till year 5 you still will not make back the money that you lost by investing in shares. On the other hand, if you have bonds with a constant return, you are unlikely to have the same kinds of problems. Even if you have to sell they are unlikely to drop as sharply in value as stocks will (assuming high quality bonds).

That is just to give you an example of the types of problems that can crop up even if you are sure that your investments will perform better over the long term.

The Government will probably bail out the PBGC. But I still wish they would not do stupid stuff like this. The Government is going to have enough trouble as it is with having to pay extra because PBGC was stupid.

Big Beef Recall Underway….

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Its kind of funny this should pop up today, because we were all talking the other night about slaughter houses and the butchering of cows in particular. This from ABC news…..

A disturbing undercover video showing cows too sick to stand being shoved with forklifts or dragged with chains across a cement floor at a Southern California slaughterhouse has sparked the largest beef recall in the nation’s history.

The U.S. Department of Agriculture ordered a recall of 143 million pounds of beef Sunday evening from Chino-based Westland/Hallmark Meat Co., which is the subject of an animal-abuse investigation. The recall affects beef products dating back to Feb. 1, 2006 that came from the company.

Here is a portion of the video….

See a longer video here.

Compare and Contrast

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Lately, it has become common to compare Obama’s speaking abilities and popular appeal to Reagan’s. Its kind of tricky to judge the validity of this comparison. Most of Reagan’s famous speech’s happened after he was already President were as most of Obama’s speeches so far have happened on the campaign trail. You can’t really draw a fair comparison between the two types of speeches.

But there is one similarity between the two men. They both rose to prominence with a famous speech they gave at convention for another man. With Reagan it was a speech he gave at the convention that nominated Barry Goldwater called “A Time for Choosing.” With Obama, it was a speech that he gave at the convention that nominated Kerry called “The Audacity of Hope.”

In both cases, the candidate that they where supporting would go on to lose. But in both cases, the speech’s laid the groundwork for their personal future campaigns. This allows us to compare their speaking ability at a similar points in their careers.

So here is the closing portion of “A Time For Choosing”….

And here is the closing portion of “The Audacity of Hope”……