Sony BMG Gets Away With Murder.

Sony BMG just settled with the states of California and Texas over their fantastic XCP and Mediamax rootkit that they shipped on 2.1 million CDs.  

Back in December of 2005, I offered to take the job of Senior Vice President of Common Sense after this debaucle first came to light.    Later on that same month, I posted about their "patch" that introduced even more problems to victims computers.

You would think installing invasive software without permission on millions of your customers computers that allows just about anyone root access to the victims most sensitive data would be a criminal act.  Any normal person would go to jail forever and ever for doing this sort of thing. But not Sony. Oh no.  Their punishment isn't even a slap on the wrist.

"Under the terms of the separate settlements, each state will receive $750,000 in civil penalties and costs. In addition, Sony BMG agreed to reimburse consumers whose computers were damaged while trying to uninstall the XCP software. Customers in both states can file a claim with Sony BMG to receive refunds of up to $175. State officials estimate some 450,000 compact discs carrying the XCP software were sold in California, while about 130,000 were sold in Texas."

So the maximum liability for these two settlements, assuming EVERY consumer can come up with a $175 receipt proving they had to pay to have this malicious software removed would be:

California: $750,000 + ($175 x 450,000) = $79.5MM
Texas: $750,000 + ($175 x 130,000) = $23.5MM
Total of two states: $103MM (max)

In reality, I think we'll only see a few hundred people actually take advantage of the settlement, since the majority of people that know about it are computer geeks - and those geeks wouldn't pay to have the product removed and will thus have no receipts to get reimbursed with.

So pretty much, Sony BMG got away with only paying a few million dollars for damaging millions of machines with the most VILE form of software imaginable. Pennies per CD.  This is a complete travesty of justice and I firmly believe that someone should have gone to jail.  

Want to know more? Read the slashdot responses.

Escapades in Genealogy: Thoughts on Making an Impression on History.

A few nights ago, I watched a documentary on PBS on the rescue of the Willie and Martin Handcart Companies in 1856. Some of my family were mormon pioneers, and so I was somewhat interested.

After the show, I decided to see if I had any relatives that were in the ill-fated companies.  An uncle of mine had mentioned once that we had "handcart pioneers" in our past.  It turns out he was entirely wrong.  Our common mormon ancestors arrived in Salt Lake in 1850, 1852, and 1864 - completely missing the handcarts from 1855-1860.  They travelled mostly by wagon.

Anyhow, it was interesting in that I never realized just how Mormon my family really was.  For example, my great great great grandma was born in Nauvoo, IL - and my great great great great grandpa helped build the temple there. By the time I was born, I guess my chunk of the family had fallen mostly away from the church.   

What was most interesting of all was the fact that nearly all of my ancestors had RIDICULOUS NUMBERS of kids.  My great great grandpa, for example, had 13 total children over his lifetime - and had 10 of those after the age of 41.  Pretty incredible.   Math wise, if every generation had that many children - think how big the family would be by the time it reached my generation.

Great great grandpa is 4 generations back.  So:

4 back. Great great grandpa has 13 kids.  Next generation = 13
3 back. Great grandpa and kin have 13 kids. Next generation = 169
2 back. Grandpa and kin have 13 kids. Next generation = 2,197
1 back. Father and kin have 13 kids. My generation = 28,561

So in just 4 generations, you can have almost 30,000 people that call you "common ancestor."  That's in a perfect world of course, where no one ever dies or goes sterile.  So I guess you don't just have to do something great to be historically meaningful - you can also go by the "have a ton of babies" route.

Amtrak: A federal jobs program?

Yesterday, Amtrak pulled a switcheroo with it's senior management.  The idea, of course, being that the new management will be able to somehow miraculously resurrect the rail lines and turn it into a profit machine. According to the article:

Amtrak has $3.6 billion in debt and is heavily dependent on government subsidies. Its operating loss for 2005 topped $550 million.

I've always been a big fan of trains.  I don't know why. Perhaps from riding the Heber Creeper too much as a kid?  Anyhow, I've been really wondering - why is it that Amtrak is perpeptually a financial failure? I'm going to try digging into their consolidated financial statements to see if I can find the answer.

Let's start with the income statement on page 4 of the 2005 statements.

2005 Revenues: $1.886 B
2005 Expenses: $2.940 B

You can see right away that there is a big problem.   What are the major items in their expenses?

Salaries, wages and benefits: $1.477 B (50.24%)
Depreciation: $0.557 B (18.95%)
Fuel, power, utilities: $0.227 B (7.72%)
Everything else: $0.679 B (23.10%)

Let's start by looking at Fuel. Supposedly, Amtrak is more fuel efficient than other forms of travel.

The U.S. Department of Energy (DOE) has reported that Amtrak - on an energy consumed per passenger-mile basis - is 18 percent more energy efficient than commercial airlines. According to DOE's Transportation Energy Data Book, Amtrak energy intensity was 2,935 British Thermal Units (BTUs) per passenger-mile and commercial airlines were 3,587. Commuter rail was 2,751 and automobiles were 3,549 BTUs. The DOE figures are from calendar year 2003, the latest available.

In addition, Amtrak uses less refined diesel fuel instead of more expensive jet fuel.  Assuming those facts are true, fuel isn't the problem.

I'm going to generalize about depreciation, because I think it's pretty safe to assume that a train is cheaper to own and maintain than most other forms of travel.  Except for internal wear and tear, the cars last nearly forever.  Some railroads are still operating cars from the turn of the century.  The power units might be more expensive, but when you consider that you need fewer complex engines to move the same amount of weight, it seems like maintenance would be cheaper than a bus and easily more than a jet liner.  I may at some point go into more depth on this subject in another post, but for now let's assume that it is cheaper to operate trains.

Next, lets look at employement. I found an interesting analysis of the employment during 2004 which comes to the conclusion that Amtrak is a pork barrel federal jobs program, mostly for the North East Corridor (NEC).

"Collective NEC state Amtrak expenditures (for all trains that serve these states, including regional and long distance trains) - $281,140,685. Collective NEC state Amtrak employees (for all trains and services that serve these states, including regional and long distance trains, and the company headquarters in Washington, D.C.) - 13,452. Collective NEC state Amtrak employee payroll (for all trains and services that serve these states, including regional and long distance trains, and the company headquarters in Washington, D.C.) - $626,356,482. When you add the expenditures and payroll figures together, Amtrak poured raw cash of $907,497,167 into these eight states and the District of Columbia for Fiscal Year 2004.

Amtrak ticket revenue for FY 2004 was $1,256,424,267 (with an average ticket price of $50.15, a very low figure). Of the revenue, 53% was generated in the NEC. Yet, Amtrak spent $907,497,167 in the NEC states, or 72% of its ticket revenue, a very negative return on investment.

The point I think he's missing in his analysis is that Amtrak executives are trying to expand the NEC because it's one place where the trains have an operational advantage over other forms of travel.  In the NEC, the population is tightly packed in close proximity. If you only need to go 100 miles, it hardly makes sense to fly.  Driving is problematic because of traffic.  Trains MIGHT be the way to go.

But I think he is dead on with naming Amtrak for what it is: a federal jobs program.  In a normal company, you would NEVER see salaries exceed revenues for an extended period of time because 1) Management would layoff as many people as possible, and 2) The company would eventually go bankrupt if they didn't.  I hope that someday, Amtrak is allowed to fail and that new, commerically viable train companies take it's place.  

Who says SoCal doesn't have seasons?

I live just outside Los Angeles. On July 22, 2006 (150 days ago) I was whining because it was 109.9 degrees outside.

This morning, it is 58 degrees inside my office with the heat on full blast.  When I got in my car this morning, the back window was covered in frost and the temperature was 38 degrees. Supposedly it got down to 34 last night.

That's a temperature variance of 75.9 degrees. Seems pretty seasonal to me. I guess I've just grown weak and soft from years of California living. 

2006 Subaru Impreza Fuel Surge Problem.

A few months back, I purchased a 2006 Subaru Impreza 2.5i. I wanted something that was cheaper, more reliable and better built than my previous Audi. Up until this morning, I hadn't had a single problem with it.

I've still been trying to figure out how many miles I can get per tank of gas. I've been averaging about 24 mpg, which isn't fantastic - but isn't terrible either. AWD is a drag on the powertrain, but it's worth it.

This morning, I was running somewhat behind and didn't want to be late to work. The problem was that the fuel light had come on in my car the previous night on the way home. I sat down and looked in the manual. Supposedly, the Impreza has a 15.9 gallon tank and the low fuel light comes on when there is around 2.3 gallons left. So, milage wise, 15.9 - 2.3 = 13.6 gallons x 24 mpg = 326 miles for the low fuel light. This seems to be about right. The most I have ever put in my car before this was 14.6 gallons.

The light came on last night with about 8 miles left on my drive home. It's a 15 mile drive to work. I figured that 2.3 gallons x 24 mpg = 55.2 mile range. 55.2 - 8 = 47 more miles to go. My 15 mile drive to work should be easily within that range, right?

About 10 miles into the drive on the freeway, the car seemed to stumble. It's an eerie feeling. You press the gas and the car just stutters, and the speed drops. Then it shakes a bit and picks back up. It did this a few times and I decided "Uh oh, I'm almost out of gas." So I jumped over a few lanes, got off the freeway and pulled right into a gas station. It was dumb luck that I found the gas station - I'd never exited there before.

The car only took 14.9 gallons. I should have had 1 gallon left, or at least another 20 miles to drive. A little research on the internet shows that this problem is not uncommon with Subarus. I guess it has something to do with the shape of the gas tank and isn't fixable. The solution is fairly weak. "Keep your car filed up with gas."

The Cost of Sending 40,000 More Soldiers to Iraq.

After a lot of thinking, and the recommendation of a bipartisan panel, President Bush has apparently just about decided to put another 40,000 soldiers into Iraq. Whether you agree or disagree with this move, you realize this will be a frightenly expensive proposition.

According to this (somewhat dated) article from the Wall Street Journal:

Monthly expenditures are running at $5.9 billion; the U.S. commitment in Afghanistan adds roughly another $1 billion. Taken together, annual spending for the two wars will reach $117.6 billion for the fiscal year ending Sept. 30 -- 18% above funding for the prior 12 months.

According to, we currently have 152,000 troops deployed in Iraq. Using an obviously simple analysis:

$117.6B - $12B (Afghanistan) = $105.6B

$105.6B / 152,000 = $694,736.84 per soldier per year.

40,000 soldiers x $694,736.84 = $27.8B more money spent on the war.

$27.8B / 300MM Americans = $92.63 per year for every man woman and child in the US.

It seems like an awful lot more money to spend on such an unpopular war, especially given the fact that it might not even work out. When you consider that the population of Iraq is only 26,074,906 people, by adding 40,000 soldiers, we will be spending an additional $1,066 per person to provide them with security for a year or $5,116 total. GDP per capita is only $1,800. So we will be spending roughly 3 times as much as the entire Iraqi GDP to provide security, which clearly isn't very secure.

I'm going to go out on a limb here and say that this is completely unacceptable.

Heifer International: One Very Impressive Nonprofit.

Last night, I watched a documentary by Bob Gilner on PBS about Heifer International. To say the least, I was very impressed by the organization. The idea behind Heifer is that they go to the very poorest places on earth, partner with locals, and give them the ability to feed themselves.

Their methods are downright brilliant. Instead of just giving temporary aid to improve the immediate situation of an area, they shoot for the real long term survival of the population. They find partners who are willing to work hard, give them training on how to produce food through livestock, get them to agree to some basic terms, then provide them with the animals they need. The partners agree to "pass on the gift" which means that at some point, the partners will give some portion of the offspring to new partners in the same area.

This approach makes a lot of sense to me. Instead of just giving away goods UN-humanitarian-relief-style, they are very carefully giving away capital and training with the understanding that it will eventually spread to the entire surrounding community. The impact of the training is permament - even without the capital, the farmers learn new methods of farming that are easier and more effective (and also have the side benefit of having less environmental impact.) The capital is in a form that is hard for corrupt governments to steal. How many corrupt dictators will go to the far reaches of a country to steal a few goats from a dirt poor farmer?

Looking at Heifer's financial info, it appears that they are about a $100MM organization. Around 25% of the money is used by fundraising/administration the remaining 75% goes directly to programs. It seems reasonably efficient to me. Most of their donations are directly from individuals. They've been around since 1944, so it looks like they are here to stay.

Heifer International has an impressive donation page where for as little as $10 you can choose an animal (or a share of one) to give.

Anyhow, I was really moved by the documentary. One part showed a "pass the gift" ceremony in Albania. The people were living in abject poverty. The documentary followed an old man to his home which was a simple stone hut. He slept on a pile of rags on the floor and there were a few chickens crawling all over his bed. The goat he received in the ceremony clearly would make a real difference in his life; he planned on selling it's offspring for a little money and consuming the milk it produced. The original small gift of a few goats and training had spread throughout the entire community and improved many lives.

Microsoft going private? PIMCO's Ray Kennedy predicting a $50 Billion dollar LBO in 2007.

In an article today on, PIMCO's Ray Kennedy was quoted as having said:

"It's just going to get bigger and bigger," Kennedy said. "We will test a mega-deal. You have to accept a $50 billion deal likely will occur."

If I understand his meaning correctly, he's saying that at some point in 2007, there will be a megadeal leveraged buyout that will result in a $50 Billion dollar bond offering.

The article gives this example:

"Freescale Semiconductor (Charts) sold $5.95 billion of debt last month, the biggest for a buyout since 1989, to help finance its $17.6 billion takeover by a Blackstone Group-led consortium."

So roughly 34% was financed through the issuance of debt. Another example from the article is the issuance of $6.1 Billion in debt in the leveraged buyout of RJR Nabisco in 1989, which from other sources appears to have been a $25 Billion dollar deal = 24.4% debt funded.

There have been rumors floating around about stagnation at Microsoft and poor management. A few have even mentioned the possibility of a private equity buyout, including this article from August 18th in Financial Times titled "Private equity folk could do wonders with Microsoft" Daniel Pimrack of Thompson Financial argued that this was a virtual impossibility at the time.

Say this mega deal is funded 35% through debt. $50 B / 0.35 = 142.85 Billion dollar deal. Playing with Yahoo's Stock Screener, you can see that there aren't too many companies with that kind of market cap. By my count, there are currently 25 - and IBM is the smallest. Obviously a deal of this magnitude will require a huge consortium of investors or one REALLY big company that has enormous cash flows to support that kind of debt.

A buyout of Microsoft makes a lot of sense. Microsoft is LOADED with fat, but not in the unionized, contract laden way that the auto makers are. Instead, it's mostly in the form of highly educated, very employable workers which can be easily cut down. I believe a good manager could change the strategy from "Growth" to "Cash Cow" in less than a year. Elminate all the products that are unprofitable, cut down the workforce, focus on Microsofts core products, and wham: everlasting cash machine. Well, at least a five year cash machine. Long enough that private equity buyers could generate enormous profits.

If anyone knows about this potential megabuyout, it's Ray Kennedy. Pimco is no joke:

"PIMCO, one of the largest specialty fixed income managers in the world, with more than $641 billion in assets under management and more than 800 employees in offices in Newport Beach, New York, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong."

I just wish I knew which firm it's going to be. Microsoft sounds like a possibility, but I've been wrong many times.

XM Satellite Radio Holdings and Sirius Satellite Radio: How big is the market, really?

Today, Sirius Satellite Radio (SIRI) fell sharply after cutting their "subscriber forecast" on weak holiday sales. It got me thinking, how big is the market for satellite radio, really?

Sirius Analysis

Sirius said it expects to add between 2.6 million to 2.8 million new subscribers in 2006, to a total of between 5.9 million to 6.1 million by the end of 2006. Previously, the company expected to end the year with a higher total of 6.3 million subscribers.

As of the quarter ended September 30, 2006, they had the following revenues:

Subscriber revenue, including effects of mail-in rebates: $155,337
Advertising revenue, net of agency fees: $7,130
Equipment revenue: $3,579
Other revenue: $1,067

Total: $167,113

Two things stand out from this 10-Q.

"As of September 30, 2006, we had 5,119,308 subscribers."
"a monthly subscription fee of $12.95."

At the end of the previous quarter:

"As of June 30, 2006, we had 4,678,207 subscribers."

Let's say that the average number of subscribers they had over the period was 4,898,758. 4.9MM subscribers x $12.95 a month x 3 months = $190.36MM in revenues. But somehow, they only managed $155.3MM in revenues from all these subscribers. So what's the deal here? A significant number of subscribers are either getting the service for free or at a discount. By my calculations, they are only getting around $10.57 per subscriber.

For the quarter ending March 31, 2007, analysts are projecting revenues of $218.11M. Please note these numbers haven't been revised for lower projected growth yet. Assuming similar ratios, here's the breakdown:

Subscriber revenue: $202.74
Advertising revenue: $9.31
Equipment revenue: $4.67
Other revenue: $1.39

Monthly revenue: $202.74 / 3 = 67.58 / $10.57 = 6.39MM users average.
Beginning subscribers: 6,000,000
Estimated ending subscribers: 6,780,000

For the year of 2007, using the same ratios:

Subscriber revenue: 1,208.39
Advertising revenue: 55.47
Equipment revenue: 27.84
Other revenue: 8.30

Monthly revenue: $1208.4 / 12 = 100.7 / $10.57 = 9.53MM users average
Beginning subscribers: 6,000,000
Estimated ending subscribers: 13,060,000

Obviously it's possible that they could also increase their revenue per subscriber or other revenues, but we'll assume they are still in the growth phase right now.

XM Analysis

Now let's do a similar analysis of XM Satellite Radio Holdings (XMSR).

"the addition of more than 868,000 gross and 286,000 net new subscribers to end the period with over 7.1 million total subscribers"

"Our basic monthly subscription fee is $12.95"

10-Q for quarter ending Sept 30, 2006:

Subscription: $214.82
Activation: $4.21
Merchandise: $3.16
Net ad sales: $8.79
Other: $9.46
Total: $240.44

Monthly revenue: $214.82 / 3 = $71.61MM / 7.1MM subscribers = $10.09 per subscriber

To get to December, let's do a projection for the 4th quarter using analyst estimates of $247.18MM revenues.

Subscription: 220.84
Activation: 4.33
Merchandise: 3.25
Net ad sales: 9.03
Other: 9.73

monthly subscription revenue: $220.84 / 3 = $73.61MM / 10.08 = 7.3MM subscribers average
Beginning: 7.1MM
Estimated ending: 7.5MM

One more time, using XM Projected revenues for 2007: $1.24B

Again, using the same ratios to project the entire year:

Subscription: 1,107.84
Activation: 21.73
Merchandise: 16.32
Net ad sales: 45.31
Other: 48.81
Total: 1,240.00

Monthly subscription revenue = $1107.84 / 12 = $92.32MM / $10.08 = 9.16MM subscribers
Beginning subscribers: 7.5MM
Ending subscribers: 10.82MM

Current Size of the Market

So here is the total estimated subscribers of the two Satellite radio services:

3Q 2006: 12.22MM
4Q 2006: 13.50MM
4Q 2007: 23.88MM

At this point, I'm getting a little iffy about the projected growth. Supposedly, there will be 23.88MM subscribers by the end of next year. Assuming it's only 1 subscription per household and there are 2.6 people per household, that represents 62MM people or over 20% of the United States' population of 300MM. How many more people REALLY are willing to pay $155 a year for radio?

Projected Growth

Analysts project XM's five year earnings growth at 25% and Sirius' at 22.3%. Now obviously they will eventually tone down advertising expense and reach a break even point of some sort. But let's say these numbers requires 7% annual subscriber growth for the next 5 years. What percentage of the population will be covered by satellite radio assuming 2% population growth?

2007 20.29%
2008 21.28%
2009 22.33%
2010 23.42%
2011 24.57%

I am, to say the least, VERY skeptical that it will ever reach that level of adoption. I think it is much more likely that we will see a big growth in alternate radio technologies like wireless internet connections with streaming internet radio stations instead.

Financial Issues

In the meantime, the satellite radio companies are BLEEDING money. Take a look at the current ratio for the two as of the last quarter:

CA: 534,976
CL: 641,405
Current Ratio: 0.83

CA: 560,618
CL: 676,099
Current Ratio: 0.83

Both are already basically already insolvent. Without massive earnings growth, they are obviously in big trouble.


I could be completely wrong, but I very much doubt that satellite radio will ever reach the levels of adoption that are guesstimated by the analysts. It seems like alternative, cheaper technologies will overtake the services well before they reach the levels of subscription they need - basically every man, woman, and child in America. More than likely, one or both of these services will be bankrupt in the next 3-4 years. They are already appear to be close to it now.

Hedge Fund and Mutual Fund Suvivor Bias: Rewriting History One Dead Fund at a Time.

Survivorship Bias is:

"the tendency for failed companies to be excluded from performance studies due to the fact that they no longer exist. It often causes the results of studies to skew higher because only companies which were successful enough to survive until the end of the period are included."

An example of it comes from this Wall Street Journal article posted on NYU Professor Damodaran's web site:

"Consider 1986: A decade ago, Lipper reported that 568 diversified U.S. stock funds had delivered an average 1986 return of 13.39%. Today, Lipper, which supplied the data for this section, puts the average 1986 return at 14.65%. Why the improvement? The new number is based on the performance of only the 434 funds from the 1986 group that are still in business today."

In the June 2006 edition of the Journal of Financial Planning, a short blurb notes that Morningstar's data may include suvivorship bias of up to 1.6% between 1996 and 2004:

"A study by the Zero Alpha Group and ZAG member Savant Capital Management claims that because Morningstar doesn't eliminate "survivorship bias" in its mutual Rind data it is "systematically and significantly" overstating the performance of actively managed mutual funds.

Morningstar concedes that it doesn't include defunct funds in its performance rankingneither do other major fund data providers-but it argues that not only is it no big deal, the elimination of survivorship bias creates its own problems.

Savant and ZAG (composed of nine independent investment advisory firms, all proponents of indexing) studied Morningstar data from 1995 to 2004 of actively managed funds relative to their related indexes. The survivorship bias, claims the study, inflated managed fund returns relative to their index, on average, by 1.6 percent a year."

Playing with Morningstar's Fund Screener, after having checked "No load funds" I got the following results (with S&P results in parenthesis):

YTD: 10.87 (11.89)
1 Year: 11.12 (10.44)
3 Year: 10.11 (9.28)
5 Year: 7.74 (4.16)
10 Year: 6.78 (6.35)

Please note this isn't the entire database, there were only 200 results. As you can see, if you deduct 1.6% from the 10 year results of 6.78%, the Mutal funds only returned 5.18% - well below the return of the S&P 500 6.35%.

Apparently, there is a similar issue with Hedge Fund returns, although available data is much less reliable as hedge funds are very conscientious about the information they disclose.

The bottom line is "BE CAREFUL" when looking at historical results and aggregate averages of funds. They are probably skewed.

Revised: Kerkorians TOTAL return on General Motors Co. = 3.93%

The news this morning was that Kirk Kerkorian, billionaire activist investor and owner of Tracinda Corp has sold his remaining stake in General Motors Co. (GM). A few days ago in this post, I figured that Kerkorian's average rate of annual return on the GM stock was 4.26% - but that was BEFORE he sold off a whole lot more stock.

From today's Wall Street Journal [$$]:

"The person familiar with the matter said Tracinda sold 28 million GM shares at $29.25 a share. The shares were sold to Bank of America, a key lender to Mr. Kerkorian. A sale of 28 million shares crossed market-data services yesterday afternoon, but it wasn't clear during trading that the seller was Tracinda.

Earlier yesterday, Tracinda said in an SEC filing that it had agreed to sell 14 million shares for $28.75 a share in a private transaction. Tracinda last week sold another 14 million shares in a private deal for $33 a share. Before the sales, it had held a 9.9% stake."

So we have three chunks:

1) 14 million shares @ $33.00 = $462.00MM
2) 14 million shares @ $28.75 = $402.50MM
3) 28 million shares @ $29.25 = $819.00MM

Combined, we have:

56 million shares sold for $1,683.50 = $30.0625

From the same article:

"Mr. Kerkorian's GM sales come at a point when the 89-year-old investor is ahead on his investment in the auto maker by less than $100 million, when dividends and gains from his recent stock sale are factored in. The gain represents a modest return on his $1.6 billion investment in the company, falling well short of the multibillion-dollar profits he has reaped in the auto industry in the past."

In my previous analysis, I did not factor in dividends because I did not know the precise amount of stock purchased by Kerkorian and on which dates. To guesstimate his total dividend receipts, lets say he averaged an 8.5% stake in GM between the end of May 2005 and today. This number I'm guesstimating based on the graph labelled "STUCK IN NEUTRAL" from an article in the Wall Street Journal on 11/24/06.

Yahoo Finance tells me there were the following dividends during that period: (There was another on May 17, 2005, but we'll assume he didn't hold it then.)

15-Nov-06 $ 0.25 Dividend
09-Aug-06 $ 0.25 Dividend
10-May-06 $ 0.25 Dividend
14-Feb-06 $ 0.25 Dividend
08-Nov-05 $ 0.50 Dividend
10-Aug-05 $ 0.50 Dividend

Total of $2 a share.

If GM has 565.61M shares outstanding, and Kerkorian possed an average of 8.5%, that means he had an average of 48 million shares x $2 a share = $96MM dollars. If his total gain was $100 Million including the dividends, he only made something like $4MM from share price appreciation.

$4MM / 56MM shares = $0.07 a share over a time span of 548 days (1.5 years)

This means his real average purchase price was more like $29.99 - not the $31 a share reported by Nat Worden at on 10/12/06.

$29.99 x 56MM shares = $1,679.44MM initial investment
Return = $100MM
Return on investment = 5.95%
Annualized ROI = 3.93%

Obviously without exact dates and amounts, this is still just a guesstimate, but it shows just how badly things went for Kerkorian during this timespan. He could have easily beat a return of 3.93% with a multitude of less risky investments. I do admire his ability to take a swing at such a risk. He is obviously a wickedly smart guy. It's a shame things didn't work out for him, as his plans for GM may have been a smart move - now we'll never know.

Financial impact of General Motors Corp's sale of GMAC.

Today, General Motors Corps (GM) $14 Billion over 3 year deal to sell 51% of GMAC to Cerebus Capital Management finally closed. I've been wondering, what is the potential financial impact of this decision?

I found the 2005 General Motors Acceptance Corporation 10-K on the SEC's Edgar online. If you go to page 70 and look at the Consolidated Statement of Income, you see a net income of the following: (in Millions)

2005: $2,394
2004: $2,913
2003: $2,793

For comparison, General Motor's net income (which includes these amounts) for the same three year period:

2005: (10,567)
2004: 2,804
2003: 3,859

If you subtract 51% of the income provided from GMAC from these results, you get:

2005: (11,788)
2004: 1,318
2003: 2,434

In 2003, GMAC provided 72% of the net income to GM as a whole. In 2004, it provided more than 100%. In 2005, it reduced already HUGE losses by $2.4 Billion.

Value of GMAC

I'm going to try doing a quick valuation of GMAC. My apologies for using net income instead of cash flows. GMAC's operations are quite complex, so I'm going to stick with that for now.

- GMAC currently produces $2,500 in net income
- Net income growth will be 5%
- Beta is 0.8 (GM's is 1.88, but obviously this will change)
- Risk free is 4.88%
- Risk premium is 7.39% (VTI 3 year return = 12.27%)
- Required return = 10.78%

If this modest growth continues for 15 years, the Present Value would be $25,647.82.

Price paid by Cerberus

"GM will get the $14 billion over the next three years, including the purchase price of $7.4 billion, a GMAC distribution of $2.7 billion and loan repayments worth about $4 billion."

If I understand it right, Cerberus Capital is paying $7,400MM for an asset worth 51% of $25,647MM ($13,080MM) - with the rest coming out of GMAC.


Obviously this is a much more complex transaction than my simple analysis would imply, and my assumptions are not up to par. I can see why GMAC would want to be seperate from GM's terrible credit rating, and I can see that GM is absolutely desperate for the cash the sale will bring in. But it sure seems like a STUPID move to me. When you have an business with a profitable section and an unprofitable section, you sell off the part that is unprofitable. It's common sense. GM is giving up control of a part of it's business that actually makes money. Sure, they'll still own 49%, but now they won't have the "synergy" of controlling their own finance company. Ford's approach of mortgaging out the factories and retaining Ford Motor Credit makes an awful lot more sense to me - you don't slaughter the goose that lays golden eggs.

Billionaire Wilbur L. Ross makes bizzare corporate bankruptcy prediction for 2007. Private Equity firms to blame?

From this Reuters Article.

"Ross, dubbed the 'King of Bankruptcy' by Fortune magazine in 1998, said at a conference in London on Wednesday that defaults would rise to about 7 percent of all companies by the end of next year -- one of the most bearish predictions in the industry -- from about 1 percent now."

More information from an article in US News and World Report:

"A shakeout is coming, experts say. It is just a question of when. Many banks, law firms, hedge funds, and private-equity groups are already bolstering the ranks of their distressed-debt units and are gathering bankruptcy specialists for just such an occasion. Private-equity player Wilbur Ross, known for his astute nose in picking up distressed companies on the cheap, says it won't be long. Too much money is being paid to take on too much risk with too much debt, Ross warns, adding that bets by some highly leveraged buyout firms that they will be able to cheaply refinance their deals in a few years have "been building in a time bomb." In this scenario, higher default rates aren't just likely, he concludes; "they are quite inevitable.""

From what I can tell, Ross is saying that the debt markets are in big trouble because of the rise of Private Equity firms and their extensive use of leveraged buyouts to the point where the companies can't support the debt burden. A great example of this is the recent Hertz Global Holdings, Inc. (HTZ) IPO flop in which a few private equity firms dumped Hertz on the open market after increasing it's already heavy debt load in order to pay themselves a quick cash dividend.

If Ross's prediction is correct, the corporate debt markets are in for a real hammering in the next few years. It might be time to start looking carefully at the loan portfolios of major banks.

Things are looking up for Ford Motor Co.

As a major part of it's "Way Forward" plan, Ford Motor Co. (F) had a goal of buying out 25,000-30,000 of it's 83,000 union workers. As of a few days ago, the rumor going around was that only 15,000 were going to take the offer - a stunning blow to management's plan for a turn around.

This morning it was announced that Ford had managed to buy out 38,000 of the union workers. Although the workers will be unemployed in the short term, from the sound of it these buy out offers will be good for the economy in the long term.

"The eight packages offered to employees ranged from $35,000 to $140,000 depending on their years of service, age and how close they are to retirement. One four-year package offered up to $15,000 per year for college tuition, plus half of the workers' salaries and health benefits. Another offer paid 70 percent of employees' salaries and tuition for two years."

And it appears that it will accelerate the cost cuting measures by Ford. Quoting from an article in this morning's Wall Street Journal [$$]

"Bear Stearns analyst Peter Nesvold said that his initial read of the attrition program is that Ford will increase its 2008 cost-cut target by roughly 6.7%, or $335 million. "While we were pleasantly surprised with the results, at this time we do not interpret them as materially greater than expected," Mr. Nesvold said in a note to investors."

In addition, Ford stated that it expects cash burn to be $17 Billion in 2007-2009. In the past, Ford has stated that it expects to be returned to profitability by 2009. The $18 Billion that Ford recently borrowed against it's assets will keep the company in a strong cash position so it can meet it's current obligations until the expected return to profitability.

Although there are still plenty of tough times ahead for Ford, it sounds like management is finally making progress on it's turnaround plan. The next big step would be for them to stop building so many cars with questionable design/build quality/reliability and start designing products that can actually compete with their Japanese competitors.

California Minimum Wage Increasing to $7.50 an Hour on January 1, 2007.

The minimum wage (pdf) in California is set to become one of the highest in the nation starting on January 1, 2007. It will be raised again on January 1, 2008 to $8.00 an hour. If you look at the history of the California minimum wage starting with the increase on February 8, 1943, you can see that wages have gone from $0.45 an hour to $7.50 an hour over a nearly 64 year period - increasing 16 and 2/3'rds times. Annualized, this is an increase of 4.5%.

In 1943, working 40 hours a week for 52 weeks a year at minimum wage would produce an income of $936. Using the Bureau of Labor Statistics CPI inflation calculator, this amount had the equivalent buying power of $10,918.20 in 2006 dollars. Working the same number of hours after January 1, 2007 - the worker will have $15,600 worth of income. This is nearly a 43% increase over inflation, or 0.56% per year.

Interestingly, this will also impact exempt workers, who are paid salary. California law requires that these exempt managerial, professional, and administrative workers be paid at least twice minimum wage. From a good article on the subject on a law firm's web site:

"Thus, these exempt employees will have to make at least $2,600 per month (which amounts to $31,200 per year) starting January 1, 2007, and $2,773 per month ($33,280 per year) starting January 1, 2008."

Best Marketing Ever: Amazon (AMZN) Denial of Service's Itself.

Browsing the web on Thanksgiving day, I noticed the Amazon "Customer Vote" deal was about to happen at 11am PST. An Xbox 360 Core System for only $100, wow, what a deal right? I figured, what the hell, I'll try to buy one and dump it on ebay or craigslist. Make a quick $100. For 15 mintes, I sat there trying to refresh the page. I tried the home page. I tried ANY Amazon page.

Effectively, Amazon caused a "Denial Of Service" attack on it's own website. So many people tried repeatedly to load the same page that Amazon's server resources, which are significant, couldn't handle it and stopped sending out pages. This didn't only effect the Xbox promotion. It brought down the whole website for 10-15 minutes.

This might not seem like a big deal until you start to think about it. Analysts estimate that Amazon will have $3.77B in revenue in the fourth quarter. Guesstimating that 50% of that business occurs between 11/15/06 and 12/23/06 (the last shipping day before Christmas), that means in 38 days Amazon does 1.88B - or $49.5MM a day. Now, figuring that most shopping occurs between 5am PST (8am EST) and 9pm PST (12pm EST) when most people are awake, that's 16 hours of shopping time or $3.1MM per hour. If the site was down for 15 minutes (1/4 hour), then Amazon lost $0.78MM worth of sales. And that doesn't take into account the fact that they are continuing this promotion every week until Christmas. I bet there are some worried people in their engineering department right about now.

If you figure those 1000 Xboxes cost $200 each, Amazon already lost $100 per unit on them or $100,000. Add the loss in other sales from the website failure of $775,000 for a total of $875,000. Each Xbox cost Amazon $875 a piece. BRILLIANT!

Kerkorian's rate of return on General Motors (GM): 4.26%

According to this article from 10/12/06 by Nat Worden at, Kirk Kerkorian's Tracinda Corp. purchased most of it's 9.9% stake in General Motors (GM) in May of 2005 for $31 a share. We'll assume this was 5/31/05.

Today is the 11/22/06, 540 days later. Kerkorian sold 14 million shares of GM to a private party for $33 a share - a total of $462MM. If he paid $31 a share for that big chunk, it cost him $434MM. That's a total return of 6.45% over a period of just about 1.5 years. Annualized, this works out to 4.26% - a VERY poor return considering this doesn't include transaction costs (like placing an employee on the board or buying the shares). Kerkorian could have easily done better by buying US Treasury bonds.

This brings up the point - what is Kerkorian doing? Is he planning on exiting General Motors altogether? With fewer shares, he has less voting power, and is thus less able to fight it out with management. Yet, he still currently has a significant stake in General Motors of over 42 million shares.

The news of the sale hit GM shares hard, ending the day down 4.66% at $31.09. Just a few days ago on 11/17/06 it closed at $35.37. A 14% slide in only 3 trading days is pretty severe, but I'm of the opinion that the worst is still to come.

The average US family should have an extra $7,039 a year to invest.

The US government has some really fantastic data sources freely available to the public. I recently discovered the Bureau of Labor Statistics Consumer Expenditure Survey, which is absolutely chock full of information on the financial lives and spending habits of the average American. A great summary of this data is contained in "100 YEARS OF U.S. CONSUMER SPENDING" by Michael L. Dolfman and Denis M. McSweeney. Particularily interesting is the last portion of the report, from 2002-2003 (pdf).

From this report, in 2002-2003, the average American family had 2.5 members. It's after tax income was $47,787, and it's expenditures were $40,748. In order, these expenditures were as follows:

Housing: $13,359 (32.8%)
Transportation: $7,770 (19.1%)
Food: $5,357 (13.1%)
Personal insurance and pensions: $3,978 (9.8%)
Healthcare: $2,384 (5.9%)
Entertainment: $2,069 (5.1%)
Apparel: $1,694 (4.2%)
All others (lumped): $4,137 (10.15%)

The others category includes such thing as tobacco, reading and education, alcohol, personal insurance, etc. Read the report for more detail.

Present Value of Potential Savings

I found the present value of potential retirement savings using the following assumptions:

- Inflation rate of 3%
- Savings of $7,039 per year, increasing at the rate of inflation.
- Savings compound at 8% (low, considering the stock market average return has been 12.2% over the long run, but I'm being conservative.)
- Savings being at 21 (2003) ending at 65 (2046)

By the age of 65, the family will have $3,644,023 saved. The present value of this amount is $983,480.


In 2043 dollars, the family will have $3,644,023 saved and expenses of $145,247. Assuming expenses increase at 15% annually to cover increased health care costs, how long will their savings last? Until mid 2079, when they are 79.5 years old. Life expectancy in the US is around 77.6 years, so they should have plenty of money to last through their retirement.


According to the Consumer Expenditure Survey, the average family should be able to save 14.7% of their after tax income. If this amount were placed in a tax free retirement account every year, it should be more than adequate to cover the cost of retirement.

Unfortunately, the US savings rate is currently -0.5%, mostly I believe due to massive overconsumption (for example - in giant houses).

Tom Vu says his system is different than other experts.

Tuan "Tommy" Vu, famous for his incredibly awesome infomercials for a real estate system is still alive and kicking - as a poker player. In 2005, he placed 22nd in the World Series of Poker, earning $304,680 in one fell swoop.

I assume he's doing research for his next round of informercials - this time on an unbeatable poker system. I can hardly wait!

"You a loser! Get out of my way! I make it somehow!"

A short linux user's review of OS X.

I've always been sort of a computer geek, and have used a whole variety of different operating systems for work, school, and just general entertainment. I've used pretty much the whole microsoft family (dos, windows 3.1/95/98/me/2000/XP/2003), a smackload of different unix-es (openbsd, freebsd, solaris, linux, etc), some oddball oses (beos, QNX, Nextstep), and the OLD Mac OS (think Mac Classic and older) but up until recently, I had never tried OS X.

I started with Linux back in the days of 486's. I ran slackware on my blazing fast 486 DX/2 50mhz. I spent hours and hours trying to get XFree configured (and succeeded!) I toyed around with it on and off for years, trying all sorts of different flavors. I was stuck on Mandrake for a while, then for a year or so, I went back to XP. For the last couple years, I've been using Ubuntu on my home machine exclusively. Compared to the old days, this distro is almost unbelievably easy. On my machine, everything just worked from the live CD. No configuring necessary. Automatic updates, Openoffice, Firefox, a variety of video players, and even some video games - it's a pretty tough act to beat.

Last week, I bought a Mac iBook. Honestly, I really intended to install Yellow Dog linux or maybe Xubuntu for Mac on it. But then I started playing around with OS X, in this case version 10.3 which came installed on my iBook. Here are some brief thoughts:

  • The GUI took only a few seconds to figure out. Still working on learning the key combinations. It's basically very similar to the old Mac OS interface, almost anyone can learn it. Everything has a very clean and crisp look and feel.

  • The wireless connections are unbelievably easy. I was able to get onto my school's network with virtually no effort. In stark contrast, the instructions on connecting for Windows XP from the school IT department are 14 steps long.

  • The terminal made me feel right at home. The file structure is different, but otherwise it feels very unix-ey.

  • The built in applications were nice, especially the preview app that opens PDF files. I'm not a huge fan of the Safari browswer - it had a lot of popups and crashed a few different times on me. Solution: Install Opera 9.02 for Mac.

  • Samba seems to work about 200% better than on my Linux box, which is very hit and miss. I was able to easily connect to a XP machine on my home network.

  • Microsoft Office 2004 is pretty damned slick. I picked up the student edition, and I like it very much. Very different from 2003 (which can be used in Linux via Codeweavers CrossOver Linux) and is in many ways better. Again, I haven't learned all the quick key combinations, and some are very different - but the learning curve isn't too steep.

  • Quicktime sucks. Seeing a message pop up about quicktime pro evertyime I want to use it is just downright sickening. It's slow, it's awkward, the interface is poor. I really dislike it. Windows Media Player is very superior to this garbage. I will probably end up installing the very excellent VLC media player for Mac.

    Overall, OS X is pretty sweet. It's easier to use than Ubuntu, and has more commercial apps. However, it also lacks a lot of features and noncommercial apps. Given the choice between OS X and Windows, the choice is obvious. Given the choice between OS X and Ubuntu, I'd probably still have to choose Ubuntu for the higher cool factor.

  • General Motors (GM) will have negative shareholders equity as of 12/31/06 thanks to FAS 158.

    In the Q3 2006 Earnings Call on October 25, 2006 (9:30 am ET) General Motors CFO Fritz Henderson stated that due to a change in accounting rules for pensions, they "expect that reduction in shareholders' equity to be between $18 billion and $25 billion, and that is on a tax affected or after-tax basis" on the 12/31/06 balance sheet.

    This change in accounting rules, FAS 158 (pdf), requires that underfunded pension plans to be posted to the balance sheet - a big change from only having to record it in the comment section. For a more in depth explanation, read this article from the New York State Society of CPAs titled "New Pension Accounting Rules: Defusing The Retirement Time Bomb". Basically, it boils down to the fact that both GM and Ford have made some BIG promises to employees, and have failed to sock away enough money to cover those obligations. In the past, this was ok because it wasn't directly on the financial statements and didn't impact all sorts of ratios. Starting at the end of the year, it will appear as a liability on the balance sheet.

    What this really means:

    If you're not an accountant, this all might be mumbo-jumbo to you. Let's break it down with a simple example.

    Assets = Liabilities + Owners Equity

    Say you have a house that's worth $400,000 with a mortgage of $150,000. What portion of that house is owned by you? $250,000 right? Plug that into the accounting equation:

    $400,000 (Asset) = $250,000 (Liability) + $150,000 (Owner's Equity)

    As you make money from your job, you plan to slowly pay down that liability until (hopefully) one day you won the entire house outright with no mortgage. Unfortunately, instead you have a medical problem and can't work for a few years. Instead of having to sell your house and move out, you refinance and pull out $100,000 of that "owner's equity" to pay the bills.

    $400,000 (Asset) = $350,000 (Liability) + $50,000 (Owner's Equity)

    What if instead of $100,000, you wanted to pull out $300,000? Would the bank loan you the money? Probably not, right? In fact, they'd probably tell you to go fly a kite since your house would only secure 72% of the debt.

    $400,000 (Asset) = $550,000 (Liability) + ($150,000) (Owner's Equity)

    The case of General Motors:

    Now, say you are General Motors, and you have $470.5B of plants, inventory, equipment, etc (assets). You also currently have a LOT of loans - $458.9B.

    Assets = Liabilities + Owners Equity
    $470.5B = $458.9B + Owners Equity
    Owners Equity = $11.6B

    It turns out that they promised a lot more to employees than they actually saved up, to the tune of $18B-$25B. In the previous years, their balance sheet looked like this:

    $470.5B (Assets) = $458.9B* (Liability) + $11.6 (Owner's Equity)

    *Unreadable note that effectively says "we owe an awful lot more than that but fortunately we don't have to include all of our debt in this statement!"

    FAS 158 rolls along and says "Woah there. This isn't the way to do it. How will the shareholders know that you owe all that money?" So now, it will instead look like this:

    $470.5B (Assets) = $476.9B (Liability) + ($6.1B) (Owner's Equity)

    Why does this matter?

    So now you're thinking "This is just an equation, not real life. It doesn't really matter. Even good ol' Fritz said so during the earnings call." The CFO's words exactly:

    "The practical impact of adopting FAS 158 are, to some degree, limited. No impact on pension expense. The statement didn't change how you determine pension expense. No impact on cash flow, no impact on benefit plans. Doesn't result in event of default under any debt covenant that GM has and doesn't have any direct impact on our ability to pay dividends under Delaware law. Under Delaware law, dividends must be paid out of surplus, which is defined as fair market value of the Company's assets, reduced by the fair market value of the liabilities and capital measured by the par value of outstanding stock. The accounting change will impact our book value under U.S. GAAP, but not necessarily the fair market value of GM's assets and liabilities"

    The reality here is that GM has effectively "borrowed" more than it has assets to pay. Liabilities exceed assets, technically the company is insolvent. However, because of the length of the time to repayment on the debts and the amount of cash GM can generate through operations, it doesn't mean that the company will be suddenly declare bankruptcy.

    What it DOES mean is that GM will have a hell of a time borrowing more money. Even if it is able to get loans, they are going to be at one heck of a premium to cover the risk of loaning money to company that may possibly be unable to pay them back. So both GM and Ford have moved to borrow what they can now:

    DETROIT -(Dow Jones)- General Motors Corp. (GM) on Monday said it plans to execute a $1.5 billion senior secured loan with a seven-year term by the end of the year, an effort to take advantage of asset-backed fund-raising opportunities that may not be available to the company in 2007.

    They want to max out the amount of cash they have now, because they are about to go through a period where they won't be able to easily get more until they dig themselves out of the negative shareholder's equity hole. In addition to the loans, they are also selling off assets to generate cash - the GMAC sale should result in $10B in cash for them.

    But here's the catch: Restructuring is EXPENSIVE. And there are new debts on the horizon (Delphi Bankruptcy). If the market slows down further and GM can't sell as many cars or makes less profit on each one, they could be in for a sudden and deadly cash crunch. Between 2003 and 2005, GM burned through $10 billion in cash. In Q3 06, "the company showed negative cash flow of $5.1 billion, double the amount from a year ago, as it poured cash into restructuring initiatives and paid for a large U.S. sales incentive campaign, among other items."


    Although the company is clearly more secure than it was a year ago, the risk of default is still hanging like a noose around the neck of the company. A further slow down in the economy could result in even stronger competition in auto sales, whittling away further from already razor thin margins. GM will be more vunerable than ever before by it's inability to easily borrow more money to cover short term liquidity issues.

    Who is John Galt? Who cares! His internet gift store is badass.

    Found this shirt in my daily surfings.

    Deeply tempted to buy one. Check them out on John Galt

    If you think Google (GOOG) is overvalued, take a look at Yahoo (YHOO)

    Google (GOOG) came within $0.15 of $500 per share today, but ended up closing at 491.93. Per Yahoo Finance, Google's trailing P/E is a breathtaking 62.47. However, when you look at analysts projected growth of earnings from $10.29 a share in 2006 to $13.68 a share in 2007, it's price starts to make sense - forward P/E is "only" 35.96. Revenue will grow from 7.24B to 10.66B - over 47%. P/E numbers like that make sense when coupled with consistent growth; earnings outgrow the price as growth tapers off and the P/E falls into line with the market.

    Yahoo (YHOO) is also growing, but not as fast. It closed today at $27.15. Revenue this year is estimated at 4.55B, next year 5.47B - a growth rate of only 20%. Trailing P/E is only 34.41, but forward P/E is 45.25 - higher than Google! In 2006, Google revenues will be 1.6 times Yahoo's. In 2007, it will be 1.95.

    In other words:

    1) Google is bigger
    2) Google makes more money
    3) Google is growing faster
    4) Google shares are cheaper for 2007 earnings

    I don't believe Yahoo has any strategies in the pipeline to drastically increase it's growth. Instead, Google is pretty much eating Yahoo's lunch. If Google's high price is unjustified, Yahoo's high price is a bad joke.

    Etymology of business and the word busyness: "lively but meaningless"

    The online etymology dictionary states that the origins of the word "business" are:

    O.E. bisignisse (Northumbrian) "care, anxiety," from bisig "careful, anxious, busy, occupied" (see busy) + -ness. Sense of "work, occupation" is first recorded 1387. Sense of "trade, commercial engagements" is first attested 1727. Modern two-syllable pronunciation is 17c. Business card first attested 1840.

    (Side note: I had no idea what Northumbrian meant, so here is the wiki)

    I used the word busyness in my previous post. I thought I had made it up, but said I didn't. Their definition:

    "1. the quality or condition of being busy.
    2. lively but meaningless activity."

    Bearing in mind the two words are effectively the same, I thought the second was a particularily amusing definition. Almost all of us work, have worked, or will work in a business, and to think of it as "lively but meaningless activity" seems to peg American corporate life almost exactly.

    Casinos: Cash flows of operating a single slot machine.

    I've been thinking about slot machines lately. They seem to be popping up virtually everywhere, from dog tracks to local tribal land. It seems like anyone who can legally have one buys ten. How is this such a successful business that it is regulated like it is some kind of drug?

    Just for fun, I'm going to guesstimate some numbers and try to figure out how this works. We'll say the average machine costs $1000. This might be a bit high, but that's the best I could find from my web research.

    I'll make the following assumptions:
    - 30 seconds per spin
    - $0.50 average wager per spin
    - Machine is active 1% of the time
    - Machine has a service life of 5 years
    - Hit frequency of 97%
    - Payout percentage 93%

    I'm going to run with a high payout frequency, cause I can imagine it taking a shorter period of time for the machine to reach it's payout percentage (which many states regulate). For example, Nevada law limits payout percentage between 80% and under 100%. I went with 93%, as it seems reasonable to me.

    By my calculations, this machine would have 10,519 spins per year, and about $5260 wagered. These numbers are probably very low compared to reality, but we'll go with them anyhow.

    If $5260 is wagered, then the profit is 7% of that or $368.20. Keeping it simple, here are the overall cash flows:

    0: ($1000.00)
    1: $368.20
    2: $368.20
    3: $368.20
    4: $368.20
    5: $368.20

    IRR: 24.52%

    Hugo Chavez using the US as a scapegoat for Venezuela's financial woes.

    "If sentencing is to be done," said Chavez earlier this week, "the first one to be given the most severe sentence this planet has to offer should be the president of the United States, if we're talking about genocidal presidents," the Miami Herald reported Thursday.

    In a TOTALLY unrelated story:

    "Nov. 10 (Bloomberg) -- Venezuelan President Hugo Chavez said the nation's banks are ``more solid'' than ever, in response to speculation that some lenders were facing cash shortages."

    Basically, Venezuela instituted a series of "reforms" to trap money in the economy, basically by preventing banks from investing the money outside the country.

    "The $25.8 billion of government debt held by 36 of Venezuela's largest financial institutions accounted for 46 percent of their investments at the end of June, up from 34 percent at the start of 2003, Fitch said. The banks held 5.2 times their equity in government debt at that time, the most in 10 years, up from 2.3 times in 2003.

    Banks in Venezuela face limited investment options because currency restrictions imposed by Chavez in 2003 trap the cash that rising government spending pumps into the economy. Left to buy bonds, banks are more reliant on the government and on the oil revenue fueling Chavez's spending plans. Venezuela is the world's fifth-largest supplier of crude."

    One of the major problems facing Venezuela is massive inflation. Take a look at the exchange rate of the Venezeulan Bolivar (VEB) with the US dollar (USD) (source)

    2001: 723.7
    2002: 1,161
    2003: 1,607
    2004: 1,891.3
    2005: 2,089.8
    Today: 2,147.3

    Over a 5 year span, the Bolivar has dropped in value by almost 1/3 against the dollar. That works out to an average rate of inflation over the period of 24.3%.

    Here's what REALLY doesn't make sense. Venezuela has unimaginable oil wealth. They have proven reserves of 75.6 Billion barrels - at the current spot price of $61.17, this is 4.6 Trillion Dollars worth of oil. Venezuela exports 2.1MM barrels of oil per day, equal to $128.5MM at current prices, or $46.87 Billion per year. At current rates, their proven reserve will last for 67 years.

    You would think that the government would not be having problems with money. The entire population is only 25.7MM people, yet there is 12.2% unemployment and 47% of the population is below the poverty line. Well, the government spends more than it takes in: 39.63B in revenues, 41.27B in expenditures. They have a public debt of $36.2 Billion.

    If inflation is 24.3% (16% for consumer prices per the CIA), this means banks need to lend money out somewhere in the 18%-26.3% range. Since it appears that there aren't many takers at this outrageous interest rate - the banks have been investing the money in government bonds at 4.61% for a 90 day government bond. The 36 banks in the Bloomberg story have 4.96 Billion in equity, which I suppose means they have something like $62 Billion in total capital.

    It appears that the government has been partially funding itself by forcing banks to invest in government debt, then expanding the currency supply to make that debt worthless. 4.61% yield - 16% inflation = -11.39%.

    The reports of cash shortages are symptomatic of some of the banks having a duration of debt that is much shorter than the duration of their loans and bond holdings. This means they will be unable to come up with the cash for payments that become due. Another possibility is that they have already burned through their equity and are now zombie financial institutions - deadly to an economy.

    Hugo's policies are clearly hurting his economy directly. Inflation is out of control, the government is spending more than it takes in, and monetary policies are preventing banks from moving money out of the country. Instead of fixing these problems, he's decided to put the finger of blame on his countries biggest customer for oil - the United States.

    Drudge Report must make very decent profits from advertising. is one of the most popular news aggregators on the internet. Based on the figures he states, I guesstimated his revenues:

    "VISITS TO DRUDGE 11/09/06

    023,788,151 IN PAST 24 HOURS
    405,369,952 IN PAST 31 DAYS
    3,562,389,712 IN PAST YEAR"

    Further, he had a record traffic day on November 7 (election day) of "25.1 million page views, reaching more than 2.3 million unique visitors" Based on his numbers, he is averaging 9.7MM page views per day with around 894,000 unique visitiors.

    I only know a little about Google adwords, and very little about high volume sites (Hearts of the Gods is VERY low volume in comparison). We'll use, from my research, is a very conservative number if he were using google adwords - eCPM of $0.30. I've heard of eCPM's as high as $60, but those are for very targeted sites. I'd imagine his is probably even lower than $0.30, but who knows?

    9.7MM / 1000 x $0.30 = $2,927.99 a day average.
    $2,927.99 a day x 365 days = $1,068,716 a year.

    I'd imagine the server costs are relatively cheap, too. Today, his "default.htm" was around 33k. If each page view takes 300k of bandwidth, he is using about 2,800 gigs of bandwidth per month. With a little research, it appears that this wouldn't be that expensive - even if he were paying the extremely high amount of $5 per gigabyte, it would only cost ~$167,541/year. As far as I know, drudgereport has no staff.

    Net income: $1,068,716 - 167,541 = $901,175 a year for putting up links to news stories everyday. Not too shabby, huh?

    Giant American houses: another symptom of overconsumption.

    In the United States, the median size of newly built single-family residence is about 2,200 square feet (pdf). This works out to about 204 square meters. According to the 2000 census, there were 2.59 persons per household. So this means that the average American in a new home is using 78.76 square meters of living space per capita.

    Comparsion to Asia:

  • China: 73.2 square meters, 2.93 persons per household, 24.97 per capita.

  • Japan: 97.6 square meters, 2.66 persons per household, 36.7 per capita.

  • South Korea: 81 square meters (pdf), 3.1 persons per household, 26.13 per capita.

    Comparison to Europe (source, 2002, pdf warning)

  • Germany: 86.7 square meters, 2.1 persons per household, 41.3 per capita

  • France: 88 square meters, 2.4 persons per household, 36.7 per capita

  • Italy: 90.3 square meters, 2.6 persons per household, 34.7 per capita

  • United Kingdom: 85 square meters, 2.4 persons per household, 35.4 per capita

  • Spain: 85.3 square meters, 3.1 persons per household, 27.5 per capita


    US: 204 square meters, 2.6 persons per household, 78.5 per capita.
    Asia: 83.9 square meters, 2.9 persons per household, 29.3 per capita.
    Europe: 87.1 square meters, 2.5 persons per household, 35.1 per capita.

    Converting back to square feet for readability:

    US: 2200 square feet, 2.6 persons per household, 846 per capita.
    Asia: 903 square feet, 2.9 persons per household, 311 per capita.
    Europe: 937 square feet, 2.5 persons per household, 375 per capita.

    In other words, new houses in the United States are 2.6 times as big as houses in Asia and 2.2 times as big as those in Europe.

    In 2005, the median price of a new home sold in the United States including the land was $240,900 (pdf). A May 2006 study by the Federal Reserve Board of land value as a percentage of home value in major cities found that land averaged 51% of the cost of a home. This means the construction portion of the average home cost $118,041 while the land cost $122,859. Per square foot, this means the sales value of a home per square foot excluding land worked out to something like $53.66 - which is a bit off of the standard $100-200 PSF I have heard in the past. I'm going to run with it, though.

    Analysis of waste in home building:

    I can't assume that the cost of constructing a home scales exactly per square foot -this is obviously not true since a smaller home is more expensive to construct per square foot because some items like a roof, electrical, plumming, etc don't change in cost much when you have a smaller house. We'll adjust it by 50%, just for safety's sake from $53.66 psf to $80.49 psf.

    If Europe can live in 375 square feet per capita, so can America. We have slightly more people per household (2.6 vs 2.5) so we would need slightly larger houses. 2.6 times 375 square feet = 975 square feet (or 90.6 square meters).

    975 square feet x $80.49 per square foot = $78,477. Add back in the cost of land at $122,859, and your total home price SHOULD BE $201,336 - a difference of $39,564.

    Cash flows of the wasted money.

    Per, the average 30 year fixed mortgage is currently at 5.8%. We'll assume the buyers put down 20% and paid the closing costs in full.

    2200 sq foot house: $1130.79
    975 sq foot house: $945.08
    Difference: $185.71/month for 30 years.

    If this difference were invested in the market at 10% return with 3% inflation, the present value of this difference is $153,625!!!


    American preference for MUCH larger homes than world average is resulting in a tremendous waste of wealth. The direct costs of a larger home (mortgage payments, missed opportunity to invest cash flows) are hurting their ability to retire. In addition, the indirect costs, such as higher property taxes and MUCH higher energy costs are further eroding cash flows that could otherwise be invested.

  • By fully utilizing available working hours, the average worker can retire much earlier.

    From the data in my last post, the average worker is WASTING 57 hours of productive time per week.

    What would happen if they picked up a job that paid only $4 an hour for this wasted time?

    $4 x 57 = $228 more a week.

    US worker: $1003 / 102 = $9.83/hour
    California: $1100 / 102 = $10.78/hour
    Los Angeles: $1092 / 102 = $10.71/hour

    $228 a week = $11,856 a year.

    So let's look at the effects of this cash flow of $11,856 a year on an average worker. After taxes, let's say this works out to $8,300. Let's imagine that they invest the entire amount in the market with a 10% annual return, and that inflation averages 3% and that the cash flow grows at the rate of inflation. Look at the PV of savings from this cash flow alone, when the worker starts at age 21.

    Age 30: $112,661
    Age 40: $327,168
    Age 50: $736,363
    Age 60: $1,518,092
    Age 65: $2,145,212

    If you STOPPED the extra work at the age of 30, and just let the $112,661 compound, you'd still end up with an extra $1,090,260 (in today's dollars) at the age of 65. In other words, 9 years of full utilization of available hours translates into being a millionaire at the age of 65 in today's dollars.

    Instead of becoming an investment supergenius, playing finance games, the VERY BEST thing to do is maximize your income and minimize your wasted hours when you are young. Work 3 jobs, spend nothing, save every penny you can. Let the investment grow on it's own. You'll end up far better off in the long run.

    Applying the formula to the Average Worker.

    In my previous post, I developed a very rudimentary method of looking at adjusting wages for wasted hours which could otherwise be used to produce income.

    I found an interesting article at the Bureau of Labor Statistics website on average weekly wages from the first quarter of 2005.

    US Average: $775/week
    California: $872/week
    Los Angeles County: $864/week.

    For how many hours of work? The International Labour Organization maintains a database called LABORSTA, which I found referenced from the US Bureau of Labor Statistics (and I am inclined to believe it is a good source of data).

    According to their data, the average worker in the United States worked 43.6 hours in 2005. Please note: I don't know what methods they used to come up with this number exactly, and how they factored in vacation time, holidays, etc. If you have a better source of data, please post it in a comment. This doesn't include time spent commuting, or being at work on lunch, so I will add another 1.4 hours and make it an even 45 hours.

    We'll still run with the 102 available hours. Hours consumed by "raising children" and the like are a personal choice to reduce income and come with opportunity cost, so I won't factor them into the equation.

    US worker: $775 / 45 = $17.22/hour
    California: $872 / 45 = $19.38/hour
    Los Angeles: $864 / 45 = $19.20/hour

    US worker: $775 / 102 = $7.60 x (45 / 102) = $3.35/hour
    California: $872 / 102 = $8.55 x (45 / 102) = $3.77/hour
    Los Angeles: $864 / 102 = $8.47 x (45 / 102) = $3.74/hour

    168 hours in a week: How can I measure my own economic productivity?

    I've been trying to come up with a method to effectively measure my own economic productivity. My idea here is to find a way to figure out if I am optimizing my waking hours to maximize the number of dollars I can make per hour so I can compare different job options. My first attempt looks something like this:

    1) Determine the maximum number of available hours.

    There are 168 hours in a week. I want to start by determining the absolute minimum hours I need to consume to "get by" on a long term basis. I need to sleep 7 hours a day (49 hours a week). I figure I need another 7 hours a week for food, 10 hours a week for general "getting ready" type stuff such as shopping, showering, laundry, etc. So that leaves a maximum of 102 hours a week that I am available to produce income.

    2) Hours consumed by current employment.

    I work 8am to 5 pm, 5 days a week. It takes approximately 1 hour for round trip commute time each day. That's a total of 50 hours a week.

    3) Hours consumed by other activities.

    I'm currently in grad school. This consumes about 12 hours a week for class time, 12 hours a week of outside the class time, and 1.5 of additional driving time. That's 25.5 hours a week.

    4) Available hours:

    Of my 102 hours a week I am available to produce income, I am currently only utilizing 50/102 = 49%. I am spending another 25% of my time on a non-income producing activity, and the balance of 26.5 hours (25.9%) I am just wasting.

    Options to produce more income

    There are pretty much two things I can do to make more money: work more hours, or make more money per hour. But how can I effectively compare options? I've looked at other jobs that pay more, but I would also end up working a lot more. The ideal job would be one that pays infinite money with no hours worked. Since I am constrained by reality, the ideal job is one that pays a large amount per hour. And since I have nothing better to do until retirement, the ideal job consumes 100% of my available hours while paying that large amount per hour.

    A forumula to adjust income for wasted hours

    Let's imagine two scenarios:
    A) $2000 week with 102 hours consumed by work = $19.60/hour
    B) $1500 week with 50 hours consumed by work = $30/hour

    Per hour of work, A is making $19.61 while B is making $30. Yet, that doesn't explain the whole story since B is wasting 52 hours a week of potential income producing time. If B used 100% of the time, they would make $3060 a week.

    A) $2000 / 102 = $19.60 x (102/102) = $19.60
    B) $1500 / 102 = $30.00 x (50/102) = $14.71

    See the difference? B adjusts her income, and ends up realizing that she isn't making as much as she could be.

    Let's try another example.
    C) $320 week with 40 hours worked = $8/hour
    D) $400 week with 20 hours worked = $20/hour

    C) $320 / 102 = $3.14 x (40/102) = $1.23/hour
    D) $400 / 102 = $3.92 x (20/102) = $0.77/hour

    D is obviously making far more money per hour than C, but is WASTING 82 hours a week of potentially productive time. If both C and D worked 102 hours a week, here's how the adjusted formula would come out.

    C) 102 hours x $8 = $816 / 102 = $8 x (102/102) = $8
    D) 102 hours x $20 = $2040 / 102 = $20 x (102/102) = $20

    The point I am trying to make here is that a job that pays more per hour is only better when you can also work the same OR more hours. The ideal is using ALL of your productive time producing income, and not ending up wasting any of it.

    The part time job example

    E) $1000/week with 50 hours consumed = $20/hour
    Adj E) $1000 / 102 = $9.80 x (50/102) = $4.80/hour

    Add McDonalds job, 20 hours paid per week @ $6 an hour, 4 additional hours consumed from commuting/etc. $120/week for 24 hours.

    E) $1120/week with 74 hours consumed = $15.14
    Adj E) $1120 / 102 = $10.98 x (74/102) = $7.97/hour


    The purpose of this formula is to quantify, in purely monetary terms, the income produced from time spent working AND the value of not wasting extra hours. So many people want to retire early, but instead of spending more time producing additional income - they spend time playing with their investments. Others are satisfied with their yearly salary, but never pause to consider the number of hours they need to work to produce this salary and other available options.

    I'd appreciate it if you'd leave comments and suggestions to improve this formula.

    Election Day: hoping for deadlock.

    I'm not a Democrat, but I sure do hope they win the House tonight. It would also be nice if they lost the Senate. I'd like to see maximum Federal government deadlock. As far as I'm concerned, the less the government is able to "get done", the better it will be for our economy as a whole. Even the things that sound nice like tax cuts really only are nice when coupled evenly with spending cuts - something which neither party seems to be really capable of doing.

    Instead, I'd like to see Congress burn off all their energy fighting it out with each other and the President, Monica Blewensky-style. Maybe they can investigate the face shooting Cheney, I'm sure that'd be good for a few laughs.

    In more important news, Britney decided to ditch K-Fed, her worthless Vanilla Ice like husband. I don't know his music, I've never heard much about him, but I know from the media that I'm supposed to hate him - so by god I do. Here's looking forward to a few years of absolute chaos in the Federal government and an eventual appearance by teh Britster in Playboy.

    Powder River Basin Coal Jobs

    I've had a fair amount of interest in my Gillete Wyoming post, but mainly from people looking for work in the coal mines.

    Just to help you out, I thought I'd try and put together direct links to the employment or human resources pages of the various coal companies. Good jobs are hard to come by, and I'd like to see my readers do well.

    Foundation Coal Holdings (Belle Ayr)
    Arch Coal (Black Thunder)
    Rio Tinto (Cordero/Rojo, Jacobs Ranch, Antelope)
    Peabody Energy (Caballo, Rawhide, North Antelope/Rochelle Complex)
    Western Fuels Association (Dry Fork)
    Kiewitt (Buckskin)
    Black Hills Corporation (Wyodak)

    Please bear in mind that I am not a coal miner, so I don't know what it takes to get hired, or if these are even the best places to look. You may want to start with the United Mine Workers of America.

    Good luck with the job search!

    A cooling economy? Thoughts on the automobile sector and a review of negative thinking.

    For a while now, I've been convinced of two things:

    1) The economy is destined for a slow down.
    2) The big 3 automakers are going to get hit, particularily General Motors (GM)

    In December of 2005, I wrote that a recession was on it's way. I also wrote about the possibility of a bankruptcy at GM, which the doom and gloom crowd thought could cause a collapse in the derivatives market. In May, I wrote about the financial shenanigans at GM that caused them to misstate income.

    I became convinced that Ford (F) was undervalued because of the problems at GM. Four months later, I decided I had been totally wrong as conditions at Ford deteriorated and it's stock price suffered. My initial "buy" idea was at a price of $7.88. In July, it fell to $6.56. Today, it is back up to $8.64. 6 months ago, it looked like GM was in more trouble than Ford. Today, it looks like just the opposite.

    Obviously, I have been the victim of short term thinking and have fallen for the "bear case". US unemployment recently hit a 5 year low at 4.4%. Inflation may or may NOT be in check. The housing market has cooled considerably, yet the effects have not seriously impacted the US economy (yet). Oil prices, particularily the end user price of gasoline, have dropped.

    From looking at the most recent 8-K filed by General Motors ("OCTOBER 2006 GM SALES") it sure looks like the better results are partially being driven by an increase in sales of light trucks and SUVs.

    "Silverado, up 107 percent; Tahoe, up 104 percent; and Suburban, up 83 percent."
    "triple-digit increases for the entire Escalade lineup"
    "a 338 percent increase for 9-7X."

    For the month of October, light trucks sales were up 38.5% over a weak 2005. Car sales were up 2.5%. It also now appears that the Delphi Bankruptcy obligations are about to be settled in the neighborhood of a predicted $6B - which has already been recorded.

    Joseph B. White wrote in an article titled "A Comeback for SUVs? Not Really" in the November 6, 2006 edition of the Wall Street Journal "Nothing makes a monthly or quarterly result look better than having suffered a debacle the previous year. Add a generous helping of new models and pump up the cash back and discount financing offers, and a mediocre month can masquerade as a good result. In reality, it looks like the car business is in for some rough sledding going forward" (I can't link as it requires a subscription).

    I still must be a sucker for the bear case, since I currently believe the following:

    1) Gas isn't going to get cheaper unless there is a major drop in consumption.
    2) Trucks and SUVs are on the decline due mostly to consumer preference.
    3) The Big 3 still rely on SUV sales.
    4) Interest rates aren't going lower in the near future. They may very well increase.

    I still think the economy as a whole is in a pickle. So much potential for inflation, so much government issuance of new debt, and the possibility of the Euro replacing the Dollar with the central banks really concerns me.

    Ford is definitely in big trouble, but I think they will come out of this mess stronger in the long run - due to cutbacks, restructuring, and retaining it's finance company. General Motors, on the other hand, seems to be making a lot of insipid changes. They aren't cutting back production much. They sold their finance company. They may be working to restructure some of their long term problems, but it sure seems to me that they aren't making the moves that need to be made.

    I still the negative thinking problem. And I still think there will be a readjustment. So in another year, I will recap again, and show what an idiot I was once more. For entertainment purposes, here are a few predictions:

    Dow - Now: 12,109.71, Nov 2007: 10,292
    Nasdaq - Now: 2,369.49, Nov 2007: 1,900
    S&P 500 - Now: 1,380.67, Nov 2007: 1,100
    Ford - Now: 8.64, Nov 2007: 6.50
    GM - Now: 34.61, Nov 2007: 20.00

    Dodge Nitro = Jeep Liberty = Jeep Cherokee

    Daimler Chrysler (DCX) in it's infinite wisdom, has decided to further push the very slightly updated Jeep Cherokee again in new sheet metal with the new Dodge Nitro.

    Basically, it appears to be a downmarket Jeep Liberty. Base prices are lower, starting at $19,225 vs. $21,365. This is deceptive though, as Jeep has been offering some crazy financing options to try and boost lagging sales.

    You may have seen the TV ads for this small truck where the owner of Nitro gives an ailing car owner a jump - and ends up blowing the car into the sky. This is to demonstrate the supposedly AWESOME POWER of it's 3.7L V6. Honestly, I think this is a candidate for biggest bullshit ad of the year.

    Per Edmunds, the Dodge Nitro weighs in a nearly 4000 lbs (3932 for a manual SXT to be exact). It has 210 hp and 235 ft/lbs of torque. This works out to 18.72 lbs/hp.

    Lets compare it to a 2000 Jeep Cherokee. Curb weight of 3145 lbs, 190 hp, 225 ft/lbs of torque. This works out to 16.55 lbs/hp.

    Sure the Nitro is bigger. Sure, it can tow more. But where it really counts to most people - acceleration - it's a real dog. Truck trend estimates that it's 0-60 is 9.6 seconds and it's quarter mile is 16.9 seconds. Hardly what I would call powerful.

    Let's look at a superior competitor for comparison - the 2007 Nissan Xterra. Base X style manual starts at $20,050, and you can get discounts from there. It weighs in at a hefty 4150 lbs, but it's 4.0 liter V6 produces an impressive 261 hp and 281 ft/lbs. This works out to 15.9 lbs/hp. For the same price, you get Japanese reliability, a bigger truck, MUCH more power, and you can tow more. Even the gas mileage is comparable - 17/22 for the Xterra, 18/22 for the Liberty (and most likely, the Nitro).

    I am a big fan of the Cherokee. But unless Daimler Chrysler can start knocking out engines with more power and less weight, I don't see how they will ever revive the winner of a truck that they used to have. No one wants a slow truck, no matter how much bigger or "tougher" looking it is than the previous generation.