Microsoft takes it in the shorts.

First quarter 2006 earnings for MSFT surprised analysts, resulting in a bunch of downgrades and an almost 11% one day loss of value for the company.

The old joke goes "We lose money on every item we sell, but we make it up in volume." Microsoft has been following this strategery with the Xbox for years. It's a case of pure oneupsmanship with Sony: "Gotta have the better hardware and better games!" The result is both companies are pumping out huge quantities of consoles and losing money like crazy. The big winners are the software companies - as long as there is intense rivalry between Microsoft and Sony, they get to pick and choose where to go and get to pay lower licensing fees.

Furthermore, MSFT missed shipping their new Operating System in time for Christmas. Let me be brutally honest here: Operating systems are becoming irrelevant. Within a matter of the next three to five years, most applications you use everyday will be through the interface of your browser. It won't matter if you're using Linux, Windows, or OS X. It'll all be the same. Think I'm wrong? Take a look at salesforce.com, Googles new efforts such as their purchase of writely, and quickbooks, which has an online version of their incredibly popular accounting software.

Microsoft is missing yet another trend. Why isn't there a web version of Office?

The solution is less roads.

Peak Oil is coming or has already passed, depending on who you ask. What is peak oil? It's the point at which the maximum output of oil on Earth is reached, after which production starts declining. This is a big problem, as the population of humans is ever growing and oil consumption continues to grow. It doesn't take much beyond a basic understanding of economics to realize that if supply is declining and demand is growing, prices are going to shoot upwards.

The US is the the largest consumer of oil on the planet. China is a a distant second, though it's thirst for oil is growing at 6% per year.

So what can be done? Well, we can reduce demand by requiring more fuel efficient vehicles. We can increase dependence on other forms of energy, such as solar/wind/nuclear/coal/etc. We can produce more ethanol and biodiesel (although there is some disagreement over whether takes more energy to produce than it nets.) We can switch to some other wacky scheme of energy storage, like hydrogen gas. The bottom line is that we're going to have to do ALL OF THESE THINGS and then some.

Let's face the facts: The United States is full of assholes.

These assholes want to drive a 5000lb V8 SUV to work everyday from their house in a distant suburb. They don't want a nuclear plant anywhere within a thousand miles. They don't care about the price of oil, as it really works out to probably 20% or less of their total car expense anyhow, and a 50% jump in prices won't hurt them too much. Sure, they'll bitch a whole lot. And they'll support an invasion of an oil rich country like Venezuela just to reduce the price a few pennies per gallon. And you can't take their SUV's away. Big oil wants them on the road. The Big Three even more so, as it's their major profit center. And you can't make them live in the inner cities. That's too... plebian. No one wants to live in an apartment. Oh no. "I've got to own my own roof."

So what can we REALLY do to reduce demand for oil?

Stop building roads. Bring highway construction to a screaming halt. Stop funding connection roads to new developments. Reduce the number of lanes on the freeway. Let traffic congestion SOAR. The more difficult it becomes to commute long distances to work, the more you force people away from distant suburbs and into the inner cities. If it takes you an hour to drive three miles, don't you think you'd consider walking instead?

Extreme commuting is becoming a "growing lifestyle" according to the US census bureau - meaning these assholes commute 90 minutes a day. Can you imagine driving 370 miles a day? Even with an incredible 60mpg, you'd still be consuming over 6 gallons of gas a day.

So, let's stop the spread of cities. Let's kill these "extreme commuters". Let's save money on infrastructure. Traffic will eventually force people to work close to home. They won't have a choice. Commute times will drop drastically, and people will start living in multiunit housing.

Norton Simon Museum: absolutely top notch.

I hit up the Norton Simon Museum in Pasadena California this last weekend. I've got to say, I was extremely impressed. Since I've lived in Southern California, I've been to the Getty, LACMA, the Huntington. All of them were impressive; the Getty has an incredible building, LACMA has a wide variety of art in a small area, and the Huntington has some of the best gardens I've ever seen. But none of them have the collection of Norton Simon. I believe they have six Van Goghs. I was also very impressed by the Pablo Picasso's - I've seen replicas all my life, but the real thing is so much brighter and more vivid and amazing. Anyhow, I'd HIGHLY recommend it.

GM bankruptcy to cause derivatives market collapse?

Jim Jubak, a journalist for MSN Money, wrote an interesting article about a possible collapse of the derivates market triggered by a GM bankruptcy. An executive summary of the article is as follows:

GM bonds, given the impending doom of America's stupidest company, are trading at much lower YTM (yield to maturity, the total interest you receive if you hold the bond until the end) than they should be. The reasoning for this is simple - buyers of these nearly junk bonds are purchasing "insurance" on these bonds on the derivatives market. This means if GM defaults and can't pay, someone else will.

In theory, this seems like a good idea for both parties. If GM doesn't default, the party selling the insurance makes a nice premium and the buying party "locks in" their returns. The problem lies in the fact that certain "weak hands" are selling this insurace, meaning that in case of default by GM they won't be able to pay the "claim" on the insurance they sold.

This is analogous to a company selling you expensive health insurance, then disappearing when it comes time to pay the bill for your major heart surgery. The difference is that the insurance industry is highly regulated - the government goes to a lot of effort to make sure this doesn't happen because it's bad for both the insurance companies and the consumers. The derivative market is hardly regulated at all. Even if it were regulated, it is so complex that a team of PhD's couldn't determine if another party could possibly be a "weak hand" in the future.

This brings me back to something I read in one of Warren Buffet's letter to shareholders (pdf, pg 14) about derivatives. Bluntly, Buffet states "Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system."

When Berkshire Hathaway purchased General Re, it had a huge book of derivatives. After failing to sell the derivatives division, Buffet decided to try to close it at massive expense. Buffet is a financial genius, perhaps one of the best financial minds of all time. He doesn't intentionally waste money. Ever. His decision to get out of the derivates market at incredible cost demonstrates his feelings about the danger of derivatives contracts.

General Motors lost around $11 billion dollars last year. GMAC, the credit portion of General Motors which was recently sold to Cerebus Capital Management, accounted for 97% of GM's profits in 2004. It earned $2.8 billion in 2005. Without GMAC, GM would have actually lost almost $14 billion dollars. General Motors is a rickety old car, loaded with more weight that it can handle trying to climb a steep mountain road - and they just sold their engine.

I believe a General Motors bankruptcy and restructuring is a 100% certainty at this point. I don't think there is any way for them to turn it around. People won't buy the junk cars sold by GM without a huge discount and good financing. GM doesn't seem to be in the business of selling cars anymore. They seem to be in the business of financing cars. Without a finance arm to provide the financing (and make money), they will lose even more money on every automobile sold.

At the most recent autoshow, I was SHOCKED at the incredible decline in quality of the GM products at the show. Panels didn't match, welds looked like they came out of a high school shop class, and even the plastic parts didn't seem to align. And these were the very best that GM had to offer. At least, I assume they wouldn't just pull a random car off the line to show to hundreds of thousands of people. I think GM is already cutting every corner it can.

When the GM bankruptcy hits, will it result in disaster for the derivatives market (and the US economy as a whole)? Or will Uncle Sam follow the "Too big to fail" philosophy and bail them out, a la Long Term Capital Management? I think either way, the US economy is in for a severe bludgeoning that will have repercussions for years to come.

Oil Price Danger: US may have plans for a massive bombing campaign of Iran's Nuclear Facilities


"Seymour Hersh wrote in The New Yorker that undercover American troops were already in Iran collecting precise targeting data needed by US weapons systems and to establish contact with ethnic groups antagonistic to the Iranian regime."

To make matters worse, the nuclear option may still be on the table, as there is no reliable way to destroy properly fortified underground bunkers using conventional weapons. Atomic weapons, with their incredible power can rip asunder even the most fortified bunker.

According to the CIA world factbook, Iran is the number 4 oil producer in the world with 3.98 million barrels a day of oil production (or almost 5% of total production). While none of this oil reaches the United States, it does go to Asia and Europe. A temporary disruption in production from say, a nuclear attack on Iran by the United States resulting in all the workers fleeing for shelter from the fallout, could create a MAJOR crisis on the worlds oil supplies.
Basic economics: if supply can't meet demand, prices will rise until demand drops. Without even half of the 3.9MM barrels from Iran for a period of a few weeks, the worlds oil markets will go into meltdown.

Interested in non-Opec oil supplies? Check out this link to the Department of Energy's Non-OPEC fact sheet.

"Winner will be named El Presidente of Taco Bell and will not assume any official corporate duties"

Taco Bell is having a contest to win 1,000,000 Pesos. I found this out today as I was eating a health and nutricious lunch consisting of lard, beans and rice. On the bottom of the softdrink cup, it says "El Presidente assumes no official duties."

I got a good laugh out of it. It's also here in the official rules. Sadly, I was not an instant winner.

For a minute, I sat there wondering if Taco Bell hedged the Peso. The rules state that the dollar figure is from 11/15/05. Todays exchange rate, according to google, was 1 Mexican peso = 0.0906495 U.S. dollars. So, 1 Million Pesos = $90,649.50, a $2,350.50 difference from the $93,000 USD promised on my cup.

Ameriprise and Buffet: The Oracle of Omaha is a hypocrite.

On page 16 of his latest Chairman's Letter (PDF warning), Warren Buffet gives a longwinded lecture about "frictional costs" - or basically an attack on the financial services industry.

"Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of
the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one. "

The irony here is that Warren Buffet himself partially owns and supports one of the most vile Helpers, Ameriprise. This company agressively recruits kids straight out of college, has them call everyone they know ("Hello, Grandma?") and has them sell horribly overpriced financial planning services and products that don't make much sense. Don't believe me? Try reading one of the Ameriprise Sucks forums, such as Amerisux or Ameriprise Sucks. From my understanding, they charge anywhere from $1,000 and up for a financial plan that many other financial advisors provide for free. And worse yet, this isn't a masterful plan - it's basically a "universal plan" which has been mildly customized by an inexperienced kid fresh out of college.

Recently, Ameriprise bought back $275 Million in stock from Buffet's Berkshire Hathaway. However, Berkshire Hathaway still owns 9.8% of the outstanding shares.

I think it's interesting that Warren Buffet would advocate not using one of his own services. What's next? "Don't shave with Gilette, those razors will kill you!" or "Drinking Coca Cola will rot your teeth and make you fat!"

Google breaks $400 again.

According to MSN Money the average of 24 analysts put the 2006 EPS at $8.78. With a closing price of $404.34, this gives GOOG a forward P/E of 46.

Compared to it's nearest competition, Yahoo, Google is a "value." 26 analysts place Yahoo's 2006 EPS at $0.64. Today it closed at $32.10, giving it a forward PE of over 50.


From my research, the "historic norm" of the S&P 500 P/E ratio is 15.17. During the dot bomb bubble, it got up into the 40's.

I think both Yahoo and Google show more promise than the average tech company. Both are big names, and are "The Internet" to most people. However, I have concerns about long term revenue growth for both companies. For example, adsense is already almost everywhere. I don't think there is as much room to expand as the analysts predict.

Anyhow, I think a "fair" PE ratio for both companies is ~25. This puts the forward price on Google at $219.50 and Yahoo at $16. This is before Google sells an additional 5.3 million shares, diluting the value even further. During the next correction, investors in these modern dot bombs are going to be in for a hell of a surprise.

Free credit reports: Don't get burned.


The government now allows you one free credit report a year. However, you have to find the website, and let me tell you, it's not easy. There are a TON of imposters trying to sell you credit monitoring services.

For your information, here is the Federal Trade Commissions website that talks about it and even more important is the actual website: annualcreditreport.com.

Don't fall for "yearlycreditreport.com" or "freecreditreport.com" because they aren't the official site. If you don't believe me, go to the FTC's website and see for yourself.