Electricity: The Failure of the US Government in Iraq

In yesterday's news, there were some numbers on current electricity production in Iraq.

"Despite the setbacks with the power plant, Bowen said Iraq's electricity supply still rose to 4,230 megawatts, compared with 3,900 megawatts during the previous quarter and 3,800 before that. But that is still below the prewar level of 4,500 megawatts, he said."
A focus of the problem is the Al-Doura (also spelled Dora) power plant, which produces 320 megawatts primarily for Baghdad.

In a story from July 20th on Boston.com:
"Bechtel National won a $1 billion contract to rehabilitate the electricity sector in Iraq and began work on Doura in August 2003. The two turbines, Unit 5 and Unit 6, were refurbished in June 2005, at a cost of $90.8 million, and Iraq's Ministry of Electricity took control of the plant. Worried that the staff at the plant would be unable to maintain the turbines, US officials spent $81 million more on "coaching, mentoring and on-the-job training" for 239 staff members at the Ministry of Electricity."
In addition:
"More than a year after the Doura Power Station was handed over to Iraq's Ministry of Electricity, neither of the two steam turbines that the United States paid $190 million to repair is operational, according to the report, released Wednesday evening."
So pretty much, we spent $81MM to "train" the Iraqis and within a year the two turbines failed.

$81MM / 239 = $338,912.13 per employee.

Now I don't want to say that Bechtel skimmed money, but frankly I'm a little skeptical considering the cost of attendance at Harvard is only $50,950 per year including room/board/tuition/etc. It seems like we could have flown every one of those employees to the United States, given them a year of extremely intense training at one of our many fine technical colleges, then put them in a year of training in our power plants and wound up MASSIVELY ahead. Even if we only did it with 50 employees, it would be a big start.

Why is electricity so important?

From a simplistic economics perspective, you need four factors for production:
  • Land
  • Labor
  • Enterprise
  • Capital

    So say I want to make widgets in Iraq. Can I get the land? Sure. How about labor? No problem (60% unemployment.) Enterprise - that's me. Capital is where we run into a tid bit of a snag.

    Modern factories use a wonderful invention we like to call "ELECTRICITY" to drive the machines. From air compressors to conveyer belts to 10 ton presses, the vast majority require electricity at some point to operate.

    When your supply of electricty is tenous at best (3-6 hours a day), how do you apply labor to your capital to produce goods? Do you just tell the workers they won't get any money while the power is out and they stand about the factory floor in the sweltering heat and darkness?

    Electricity is the key to the whole Iraqi puzzle. Without it, there will never be serious production of goods in Iraq. Oil alone is not enough. 60% unemployment is like a bad joke and I would venture to say that it's the cause of many of the problems.

    Possible Solutions

    Electricity production isn't magic. What you need is some form of energy, a power plant, and lines to deliver it to consumers. Iraq has SOME electricity. It's just not produced in a reliable fashion. So what can be done? Here are some steps I'd take immediately.

    1) Decrease demand: Dramatically raise the price of electricity. Cut off areas that don't need it immediately. FLOOD Iraq with the new energy efficient light bulbs. 100 million of them would go a long way, and I'm pretty damned sure we could buy and deliver them for less than $3 a piece. Even if 95% were sold off and only 5 million were installed, 5MM bulbs at 20 watts instead of 60 watts = 40 watts x 5MM = 200 megawatts savings or 62.5% of the entire production of the Dora plant.

    2) Increase supply: Electricty can be transmitted over long distances (up to 4,000 miles per wiki). If we can't build and maintain a plant inside Iraq, why don't we build one OUTSIDE Iraq? Kuwait City is only 344 miles from Baghdad. Iraq also shares a long border with another of our allies - Saudi Arabia. If the environment is unacceptable - let's just put one across the border. Supposedly a 1,000 megawatt coal plant only costs $1.5 billion. We could build three just outside Iraq for only $4.5 billion and increase total electrical production to 7,230 megawatts - a 71% increase! With big money and heavy political pressure, I imagine we could get these plants built in a matter of 2 years or less.

    3) Education Education Education: If there is one HUGE advantage the United States has over the rest of the world, it's having the best universities on the planet. Let's take advantage of that. Let's try rotating 50 engineers from every plant to our universities for a year of training. It'll be good for the Iraqis, it'll be good for our goals in Iraq. Give them each a degree or certificate of some sort. Then rotate them through American power plants for another year. Send the Iraqi managers to business school. Why not? It only costs $150k - that's CHEAP compared to what Bechtel spent on it's failed education attempts. Why are we trying to reinvent the wheel inside a war zone when we have wonderful wheels at home?

  • Monster.com (MNST) cuts 800 jobs - a brief look at their operations.

    Monster.com today, in connections with their second quarter earnings, announced that they would be cutting 800 people from their workforce.

    "July 30 (Bloomberg) -- Monster Worldwide Inc., the world's largest network of online job-hunting sites, said it will cut 800 jobs, or 15 percent of its staff, after reporting that second-quarter profit fell. The shares rose 6 percent.

    Net income slid 28 percent to $28.6 million, or 21 cents a share, from $39.6 million, or 30 cents, a year earlier, the New York-based company said today in a statement. Sales rose 20 percent to $331.1 million, missing the $337 million average estimate of 15 analysts."
    Now I haven't used Monster in years, but I was under the impression that it had seriously degraded in quality. Apparently, I'm the only one that feels that way as it hasn't lost much in the way of traffic.



    I also thought this was a fairly interesting factoid:
    "Job cuts in human resources and finance will eliminate duplication in the U.S. and Europe, Iannuzzi said in an interview. The U.S. sales team will also shrink as Iannuzzi tries to boost the percentage of job ads Monster clients place on the Internet themselves. Monster processes only about 15 percent of ads electronically, he said."
    What is it, 1978? Why on earth are most of their ads being placed by workers and not directly by the companies themselves?

    A few quick numbers:
  • 800 workers / 15% = 5333 workers.
  • $170MM / 800 = $212,500 per worker.

    Following that formula: 5,333 x $212,500 = $1,133,262,500.00

    Gee, something's amiss, seeing as how their total operating expense for Q1 2007 was only $270MM x 4 = $1,083MM.

    So how can they save that much per worker?

    You can read more straight from the horses mouth here. (Not the official 10Q or I would've linked to it below).

    According to the June 2007 Media Metrix report, Monster.com was the 22nd most hit US website with 25,825,000 unique users. Close competitor Careerbuilder.com came in 30th with 21,723,000 users. Other close competitors that offer other services that weren't broken out of the rankings include #1 Yahoo with a total of 133,093,000 unique users and #28 CRAIGSLIST.ORG with 22,529,000 unique users.

    A few interesting things from their first quarter 2007 10Q:

  • Careers – North America: $184,017
  • Careers – International: $106,206
  • Internet Advertising & Fees: $38,805

    Total Revenue: $329,028
    Revenue at our Internet Advertising & Fees segment increased 19.6%, a much slower growth rate than throughout the periods in 2006. Several factors contributed to the reduced growth of the Internet Advertising & Fees segment, however the main drivers were slower growth in overall users and reduced lead generation volume. Revenue from lead generation approximates 48% of our revenue base and is generated from many sites across our network. During the first quarter of 2007, we experienced a reduced volume of users to our sites, and were unable to deliver a high volume of quality leads to our advertisers. Display advertising approximates 25% of our revenue base and is the other main source of our revenue. Our websites across our network realized a higher ratio of remnant versus brand advertising during the first quarter of 2007, resulting in excess inventory and a lower cost per impression, contributing to our overall slower growth rates. We continue to believe that online advertising represents a significant growth opportunity for us, as our audience is appealing to both brand and remnant advertisers.
    It seems that Monster.com has lost their way and are wandering into the "LOTS OF ADS!!!!" as a solution for growth instead of "Let's make our system better for users"

    Another quick analysis:

    25.8MM unique users per month
    $38.8MM revenue per quarter / 3 = $12.93MM per month

    So they are making $0.50 per unique user per month. Not too bad!

  • Business Idea: Rent Your Wifi Connection

    My DSL connection is a waste of money most of the time: I pay $19.99 a month plus the cost of the landline from AT&T. Most of the time, it's not being used at all. The maximum hours I have available to use it works out something like this:

    Monday-Friday: 6pm-12am = 6 hours x 5 days = 30 hours
    Saturday-Sunday: 8am-12am = 16 hours x 2 days = 32 hours

    Out of the 62 hours I'm actually home to use it, I probably really only use it something like 10-12 hours a week.

    And that's not looking at bandwidth at all. I mostly read news sites. I get around 120K down and 40K up. While I'm actively using it, I probably average 20K down and 5K up. Maybe. Considering it's idle most of the time.

    Like most people, I have a wireless router. My laptop tells me that there are usually around 10 other wireless routers in range that are broadcasting SSIDs. There might be 12-15 total. And just like most people, my router is setup as a closed system. Without the WPA key, you don't get to use my DSL at all.

    I have a few reasons I won't share my wifi:

  • Performance: I don't want my connection to be slow.
  • Fear: I don't want some fool to download Beyonce's newest and get me a nasty letter from the RIAA that I can't defend myself against.
  • Security: You have to have a key to have a secure connection.

    Really though it's pretty stupid for all 15 of us in range to be paying $19.99+ a month for broadband. We could probably all get by just fine with 5 connections. But I'm not about to walk up and down my neighborhood trying to work out some complex network sharing arrangement to save a few bucks a month.

    Today I've been looking at Skype Wifi phones. I came to the conclusion that the Netgear SPH101 for $149.99 - $50.00 mail in rebate from Amazon.com is a pretty good deal. For another $29.95 a year, you get unlimited calling inside the US and Canada. Hard to beat that. The downside is that outside of my home and office, it can be tough to find a wifi connection.

    If you want to pay, you can get t-mobile hotspot to go for $29.99 a month with a one year contract. Or with a voice plan, $19.99 a month. Course, it mostly only works in Starbucks and Borders. Some deal that is.

    What if I wanted to use my skype phone someplace else? It would be nice if there were more wireless connections available. Especially if they weren't that pricey.

    I had the idea that it would be pretty nifty to rent out the connections. It would work something like this:

    A new company handles the transactions and accounts. Wireless router makers (Cisco? Netgear? Etc?) installs software on their router to connect to the company website and use a company proxy. From the owner end, you set up an account with the company and set a price for wireless access. Users with Wifi devices see a list of available accounts and a price per minute. It can be competitive. Could look something like this:
    Joe's Broadband
    Signal Strength: 7/10
    Last speed test: Yesterday
    Upstream: 20K
    Downstream: 40k
    Cost per minute: $0.005

    Jan's Broadband
    Signal Strength: 6/10
    Last speed test: Today
    Upstream: 5K
    Downstream: 15k
    Cost per minute: $0.001

    Mary's Broadband
    Signal Strength: 3/10
    Last speed test: Today
    Upstream: 10K
    Downstream: 100K
    Cost per minute: $0.10
    The company is responsible for the following:
  • Setup of accounts (collection of money, etc)
  • Testing line speed to make sure its not being oversold
  • Proxy to record internet usage to protect the wifi provider
  • Public key encryption to keep your use private from the provider or anyone who is snooping

    In exchange, they take some portion of the money - say 30%.

    So say you login to Jan's broadband and use it for 5 hours. 5 x 60 x $0.001 = $0.30. Jan earns 70% of that, or $0.21. Jan has a highspeed connection, so she has 10 available slots (50K upstream, 150K downstream, plus extra for her own use). If all the slots are filled, she can make $0.42 an hour. Say she averages 65% of capacity for 6 hours a day, 30 days a month - she ends up getting paid = .65 x .042 x 6 x 30 = $4.91 for the month. Is it a lot? No. But maybe it brings her DSL expense down dramatically. If she were on the edge of a college or some other busy spot, maybe she ends up actually making a profit by raising her price!

    Following in Google's footsteps, the company would only send out a check when the account balance reaches $100. Also, the providers can use their credits to go out and use other people's wifi connection when they need to.

    In this manner, I think a real market would be rapidly created for dirt cheap wifi access and micro payments to the providers. With the ability to actually profit from a broadband connection, open wifi would become far more common, and the use of nifty wifi internet devices like the Skype VoIP phones would be far more common.

  • Chrysler debt sale postponed. Underwriters to carry debt themselves.

    In a BAD sign for Detroit, the underwriters of the Chrysler/Cerberus deal weren't able to sell the debt to other investors or banks, and are now stuck with it.

    Bankers Postpone Chrysler Debt Sale
    By SERENA NG and GINA CHON, July 25, 2007

    Both Cerberus and Daimler, however, will be helping to lend $2 billion to Chrysler because of weak investor interest in buying its debt, a person familiar with the deal said. The debt underwriters, which include J.P. Morgan, Citigroup, Goldman Sachs, Bear Stearns and Morgan Stanley, will initially lend the auto business $10 billion, but intend to sell some of that to investors at a later date.
    This is an unusual occurance. Underwriters aren't usually a big fan of taking on billions of dollars in risk - especially given that this type of debt is the last in line to get paid during a bankruptcy.
    Chrysler bond deal changes 'very untraditional'
    By Leslie Wines
    Jul 25, 2007

    The underwriters also will hold some Chrysler debt on their books, an unusual practice. "This is a 'sweetheart deal' for Chrysler," Atkins said. "Usually underwriters sell the debt to investors so they don't have to hold it on their books. But this time they are going to hold onto some of it and try to sell it at a later time. This is a big gamble. This is an underwriter-driven deal, not an investor-driven deal and that is very unusual."
    But no one tell the fools in Detroit. They've already started changing signs and planning a big party!
    As changing of signage begins, Aug. 1 party is in the works
    July 24, 2007
    BY TIM HIGGINS
    FREE PRESS BUSINESS WRITER

    As lawyers from Cerberus Capital Management and DaimlerChrysler AG push to complete their Chrysler deal, officials at the Auburn Hills automaker are beginning to remove "Daimler" from some signs and are making plans for a celebration next week.

    Allison Transmission deal in trouble: Is this the death knell for the Chrysler deal?

    On June 28, 2006, Yahoo reported the sale by General Motors of it's Allison Transmission Unit to two private equity firms - The Carlyle Group and Onex Corporation.

    The terms of the sale were:

  • General Motors gets $5.575B in cash
  • Carlyle and Onex put up $1.5B in cash (split evenly)
  • Allison takes out $3.5B in bank loans
  • $1.1B in "high yield" or "junk" bonds are issued by the company.

    The underwriters of the loans - "Citigroup Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co." had planned to sell $3.1 billion of the loans to other banks.

    Well, it turns out that other banks don't want any part of it.
    "Allison Transmission, a highly profitable unit of General Motors Corp. based in Speedway, Ind., has gotten stuck in a traffic jam in the debt-financing market.Wall Street firms postponed a sale of $3.1 billion in loans that would pay for the leveraged buyout of Allison by private-equity firms, said a person familiar with the matter. While the sale of Allison to Carlyle Group LP and Onex Corp. is highly likely to proceed, the trouble raising debt from investors complicates matters for the company and its bankers."
    So now the underwriters are stuck and the junk bond issuance is on hold. I would assume the deal will still close though, since Allison is a very profitable company and it makes sense to me to buy it. Also from the WSJ article:
    "The company posted $2.3 billion in revenue last year and posted an operating profit of nearly $350 million, making it one of GM's highest-margin divisions."
    By my calculations, that's an Operating Profit Margin of 15.22%.

    From their website:
    "Having literally invented the category, today the company continues to dominate with an 80% market share of all medium- and heavy-duty commercial fully automatic transmissions produced."
    Further:
    "This support network provides service and technical support worldwide to the division's 250 OEMs, and the many fleet owners and operators, and end users. Allison Transmission has a workforce of over 4,000 salaried and hourly employees."
    I believe it also comes with a big chunk of intellectual property. From the President's Message:
    "The employees of Allison Transmission have over 600 patents, making the company one of the most prolific patent organizations within General Motors."
    So if a company that has 80% marketshare and 15.22% operating profit margin isn't able to get 1.1 billion in Junk Bonds, how is a company like Chrysler going to get $60+ billion from the debt markets for a buyout from Daimler by Cerberus?

    And how are GM/Ford/Chrysler going to fund a VEBA plan to shift the pension plan/health care benefits over to the UAW? This is going to require even MORE debt.

    The news of the postponement of the Allison Transmission deal caused a pretty big shift in the derivatives markets.
    "The cost of protecting GM's debt for five years with credit default swaps widened by 61 basis points to about 568 basis points a year, or $568,000 for every $10 million of principal protected, according to data from various brokers and dealers."
    Unless the appetite for risk increases again in the credit markets AND the unions give some hefty concessions, I believe the Big 3 are in very big trouble.

  • "College Cost Reduction Act of 2007" will bring some interesting volatility to SLM

    Last Friday, the US Senate passed the "College Cost Reduction Act of 2007" with a vote of 78-18. You can read the text of the bill, sponsored by Representative Miller of Georgia, here. A variation of the same bill was also passed by the House of Representatives on July 11th witha vote of 273-149.

    Speaker Pelosi's blog had this to say about the bill:

    The bill will provide the single largest increase in college aid since the GI bill in 1944. The legislation invests about $18 billion dollars over the next five years in reducing college costs, helping millions of students and families. It comes at no new cost to taxpayers, and is funded by cutting excess subsidies paid by the federal government to lenders in the student loan industry.
    Basically, this is in response to the student loan scandal. Congress decided to punish the big lenders by taking away subsidies. It appears that some of these subsidies will go towards lowering student loan interest rates, increasing pell grants to $4,900 in 2008 and $5,200 by 2011.

    SLM Corporation (SLM) aka Sallie Mae is particularly interesting because they are in the middle of a $25 billion private equity buyout by Friedman Fleischer & Lowe, J.C. Flowers, Bank of America and J.P. Morgan Chase.

    Apparently, J.C. Flowers believes this massive reductions in subsidies will reduce the value of Sallie Mae significantly. This article from last Friday's Wall Street Journal said:
    The buyout group, an investment group led by private-equity firm J.C. Flowers & Co., has said that the bills "could result in a failure of the conditions to the closing of the merger to be satisfied."
    As the bill makes it's way through committee and to the President's desk (where I suppose it could be vetoed), it will be very interesting to watch the ups and downs in SLM stock. I strongly suspect you could make some money betting in either direction as the stock swings wildly up and down based on congressional rhetoric and private equity jockeying for position.

    Movie Review: "Maxed Out" documentary

    Over the weekend, I rented the movie "Maxed Out", which I thought would be a fairly amusing look at the American credit card debt addiction.

    Boy, was I wrong.

    I knew something was immediately wrong when it started by following along a woman in Las Vegas. She's drives around in her Mercedes, giving a tour of the fancy new developments in Las Vegas. Then she starts talking about her house. "I couldn't afford to build it if they hadn't have given me a loan based on it's value when it was completed." Then the screen goes black and in a nearly unreadable font it says "This is the same accounting technique used at Enron..."

    I believe the accounting technique they are referring to at Enron was "mark-to-market" in which Enron booked the entire present value of a contract immediately.

    Example: Enron signs a 10 year contract to deliver 1,000,000 MMBtu of natural gas to a factory per year. The contract is booked at $6.45 per MMBtu and they use a 6% discount rate. The total present value of the contract is $49,598,875 - and so instead of booking $6.45MM in revenue per year you book the entire present value now.



    This woman had a construction loan for her new house. This is WILDLY different than booking the present value of future revenues. For starters, the bank releases the money in segments. If construction stops, or something goes wrong, the bank stops releasing money and the total value of the loan is much lower than it would be if they had just handed the home owner a big check. Furthermore, it's a pretty safe assumption that the completed house will be similar in value to other houses in the market. And this is a secured loan, which means if the woman fails, the bank can take possession of the house and resell it (at a loss, but a much smaller one than an uncollectible unsecured loan.)

    So already I wasn't too impressed. It got much worse from there. It followed the stories of three people that apparently ended up committing suicide over credit card debt, and made it seem like the big bad banks were dealing crack cocaine. It then mixed in some loans made to a boy with mental problems, then went off on a wild tangent about the national debt.

    You might enjoy this poorly researched, poorly edited, poorly captioned film if you are uneducated and possibly intoxicated. Or if you're a film critic (same thing?)

    Otherwise, save your money. If you're like the people in the film, you probably need it to make the minimum payment or to increase your collection of collectible plates.

    Zucca Ristorante, Los Angeles: Extremely Mediocre

    I recently dined at Zucca Ristorante in downtown Los Angeles, which is part of the Patina Restaurant Group, which also owns the excellent Cafe Pinot by the downtown library. Zucca has four and a half out of five stars on Citysearch. I was expecting it to be fairly good.



    From the Dinner Menu (flash warning), I ordered:


    Linguini vongole
    Linguini pasta tossed with cockle clams, garlic, parsley, white wine and diced tomatoes $17.95

    Which was extremely disappointing. It came with five (5) small cockle clams, which were chewy and not particularly good. The pasta was also sort of chewy and cold, and there wasn't very much of it either - perhaps 2/3 of a cup. It wasn't satisfying at all.

    Tortelloni di Zucca con burro e salvia
    Handmade roasted pumpkin tortelloni, butter, sage and Parmigiano-Reggiano 18.50

    Lasagna Bolognese
    Thin home made sheet pasta layered with meat ragoût, béchamel and Parmigiano 17.95

    The lasagna was half decent. The tortelloni was downright terrible - mainly because it was served luke warm, and some of it was downright cold.

    For desert, we ordered tiramisu, which was nothing to write home about, and a chocolate tort - which was like a giant piece of fudge made up to look like a cake. It wasn't very good either.

    The worst part about the whole experience, beyond the bad food, was the service. It was awful. Dinner came out in three groups, broken apart by 10 minute spans. The waitress waited for 20 minutes to check up on us. When we complained about the terrible tortelloni (which came out last and should have been hot), the waitress barely apologized and offered a free desert. She then cleared the table, including the barely eaten tortelloni. 10 minutes later, the manager came out and made another half-assed apology then offered a free desert. We didn't get the desert menu until 15 minutes later, almost a half hour after we finished the meal.

    We ordered desert and coffee. Desert came out 10 minutes later. About 5 minutes after that, the waitress wandered out with a couple cups of cofee and no creamer. 10 minutes later, another guy showed up with the rest of the coffee - but was short one cup. By this point, we'd almost finished the desert.

    The bill arrived, and they had gone ahead and charged us for the inedible tortelloni. I was deeply impressed. There are too many good restaurants in Los Angeles to waste time with bad food and pisspoor service. I certainly wouldn't return to Zucca.

    Congrats to Tuan (Tommy) Vu on his big World Series of Poker Win!

    I'm not much of a gambler, and I don't really follow poker. An old post of mine on Tom Vu has been getting some hits lately, and I wondered why.

    It turns out that on June 5, 2007, Tom Vu (aka Tuan Vu) placed 2nd at Event 8 (No-Limit Hold'em w/Re-buys $1000 buy in) at the 2007 38th Annual World Series of Poker - winning $364,761. He also place 207th at Event 15 (No-Limit Hold'em) on June 9, 2007 winning $3,408.

    By my count, that puts him $365,669 ahead of his buy in. Not bad for a few days work!



    Poker is great. Poker is glorious. But how does it compare to real estate investing? I'd say not too well looking at some of his old infomercials on youtube. (Since you can't attend his seminars, the three little words to success are "Don't Give Up!") Check out the babes in this recut clip!

    ">

    I borrowed the "Make Money Now!" pic from this awesome website on ridiculous infomercials. Another gem from the same site:



    What a blessed life Tom Vu has lived. You can see his overall poker stats here.

    Junk bond market sell off = Bad news for the Big 3

    The collapse of the subprime mortgage market has spooked the so-called "junk" bond or "high yield" bond market.

    10 days ago:

    "US HIGH YIELD-US junk bonds sell off, threatening LBO financing. The U.S. junk bond market is being shaken by the subprime market, raising concerns about the viability of a number of proposed high-yield debt sales which are tied to company buyouts."

    Yesterday:

    "Spreads, which are the extra yield investors get for sinking cash into riskier securities, have widened by their biggest margin since December 2006. On Thursday, the risk premium for junk bonds hovered at about 300 basis points, or 3 percent, over Treasury bonds - up sharply from the 246 basis points, or 2.46 percent, at the end of May. That's because prices move in the opposite direction from yields, and prices have been falling."

    Today:

    GMAC's bonds fall 3 points amid junk bond selloff

    NEW YORK, July 20 (Reuters) - GMAC's long bonds fell three points on Friday as the U.S. junk bond market suffered a broad selloff, according to MarketAxess.

    GMAC's 8 percent bonds due in 2031 fell to 93.56 cents on the dollar on Friday, down from 96.56 cents on Thursday, MarketAxess reported. GMAC, the former finance unit of General Motors Corp. (GM.N: Quote, Profile, Research), is now majority-owned by Cerberus Capital Management."


    Speaking of Cerberus, a few days ago, I made a post titled "Has Cerberus bit off more than they can chew in the Auto Industry?" in which I talked about the difficulties Cerberus is having raising the required capital to complete the Chrysler deal. In today's Wall Street Journal, there was an article titled "Red-Flag Sale: LBO Debt Deals Face New Snags"

    Banks raising nearly $40 billion in buyout-related debt for Chrysler Group and the United Kingdom's Alliance Boots PLC are being forced to sweeten terms for investors and face delays in their sales, in another sign of turbulence in global debt markets.

    Chrysler just started contract negotiations with the UAW, and already started by blaming the unions for it's woes.

    Also in today's news: 2,000 of 17,000 Delphi Workers are ready to strike.

    So to summarize, capital is drying up in the junk bond market. Cerberus is already having a tricky time getting the money they need to buy out Chrysler. The Big 3 have started the negotiations process for a new contract with the UAW, and Chrysler came out swinging. And some of the unions are still prepared to strike, causing a crippling shutdown.

    The Big 3 are going to need more capital to fund a potential VEBA plan where they pass the pension and benefit plans over to the Unions. And more importantly, they are going to need the cooperation of the Unions if they hope to survive.

    It seems like the winds of change are blowing in the wrong direction for the Big 3 automakers. The Unions aren't in a cooperative mood. The flush capital markets are drying up. By the time negotiations are complete, the VEBA plan could be impossible. And they are running out of cash. I would be particularly nervous if I were a shareholder in Ford, which seems to be the weakest of the three.

    *UPDATE*

    Two more related stories in the Wall Street Journal.

    The Junk Bond Market Hangs the Gone Fishin’ Sign

    ---

    Citi May Be Stuck With Bridge Loans

    A look at Adjusted Gross Income (AGI) and Taxes Paid in California.

    The IRS states that Adjusted Gross Income (AGI) is defined as:

    "your taxable income from all sources including wages, salaries, tips, taxable interest, ordinary dividends, taxable refunds, credits, or offsets of state and local income taxes, alimony received, business income or loss, capital gains or losses, other gains or losses, taxable IRA distributions, taxable pensions and annuities, rental real estate, royalties, farm income or losses, unemployment compensation, taxable social security benefits, and other income minus specific deductions including educator expenses, the IRA deduction, student loan interest deduction, tuition and fees deduction, Archer MSA deduction, moving expenses, one-half of self-employment tax, self-employed health insurance deduction, self-employed SEP, SIMPLE, and qualified plans, penalty on early withdrawal of savings, and alimony paid by you. Do not deduct your standard or itemized deductions."

    In a previous post, I had some Data on this subject dating from 2004.

    Los Angeles County:

    Median adjusted gross income (AGI) based on personal income tax returns, 2004:
    Individual: $28,686
    Joint: $52,170

    California:

    Median adjusted gross income based on personal income tax returns, 2004:
    Individual: $33,223
    Joint: $61,084

    With a little bit of research, I found more recent data from the Franchise Tax Board 2005 Personal Income Tax Stats by Zip code (pdf warning). If you are feeling adventurous, you can produce statistics for Los Angeles County from this list of zip codes (pdf warning).

    I'm feeling lazy, so here's some statistics using the state totals at the end of the file.

    Returns: 14,607,696
    AGI: $849,740,344,000
    Tax Liability: $38,747,288,000

    Basic Analysis:

    Average AGI: $58,171
    Average Tax: $2,653
    Effective Tax Rate: 4.56%

    More in Depth:

    I pulled some additional data from the California Department of Finance Financial and Economic Data on the State of California as a whole.

    Population in households (1/06): 36,307,217
    Households: 12,366,218
    Civilian labor force, 2006: 17,901,900
    Non-workers: 18,405,317

    Population/household (1/06): 2.936
    Workers per Household: 1.448
    Nonworkers per household: 1.488

    Returns per person: 0.402
    Returns per household: 1.181
    Returns per worker: 0.816

    AGI per person: $23,404.17
    AGI per household: $68,714.65
    AGI per worker: $47,466.49

    Tax per person: $1,067.21
    Tax per household: $3,133.32
    Tax per worker: $2,164.42

    Conclusion:

    Obviously, this data isn't hugely meaningful by itself. AGI has some pretty oddball adjustments. But it does sort of paint a picture of the financial situation of the average Californian worker and household.

    Los Angeles County Demographics and Statistics.

    I'm always interested in learning more about where I live. The US Census has fairly good information, but sadly even though they update estimates on some data, a lot of it is hopelessly out of date because the census is only conducted every 10 years.

    Today I discovered the California Department of Finance Financial and Economic Data. They have much more recent data on all the various California counties. For use in later posts, I'm going to list some of their key data on Los Angeles County here (data accessed on 7/19/07.)

    Population:

    Population, 7-1-06: 10,292,723
    Percent of California: 27.5%

    1-1-06
    Population in households: 10,066,953
    Population/household: 3.123

    Schools:

    Enrollment, Fall 2006 (public & private schools) Kindergarten-12: 1,833,725
    Enrollment, Fall 2005 Colleges: 539,562

  • UC, Los Angeles: 37,221
  • California State Universities: 100,181
  • Community Colleges: 380,987
  • Independent: 21,173

    Employment:

    Civilian labor force, 2006: 4,860,600
    Civilian employment: 4,631,600
    Unemployment: 229,000
    Unemployment rate: 4.7%

    Nonagricultural wage & salary employment, 2006 (BLS series): 4,092,542
    Percent of California: 27.2%
  • Trade, Transportation and Utilities: 814,083
  • Professional and Business Services: 594,667
  • State and Local Government: 536,267
  • Educational and Health Services: 481,300
  • Manufacturing: 462,275
  • Leisure and Hospitality: 387,508
  • Financial Activities: 248,042
  • Information: 209,692
  • Construction: 156,675
  • Other Services: 145,717
  • Federal Government: 52,333
  • Natural Resources and Mining: 3,983

    Personal income, 2005 (mil.): $342,231.0
    Percent of California: 25.6%
    County Rank: 1

    Per capita income, 2005: $34,426
    Percent of California: 93.2%
    County Rank: 19

    Avg. earnings per job, 2005: $51,806
    Avg. wages per job, 2005: $46,228
    Avg. earnings per nonfarm proprietor, 2005: $33,858

    Median family income, Census:
    1979: $21,135
    1989: $39,035
    1999: $46,452

    Median household income, Census
    1979: $17,563
    1989: $34,965
    1999: $42,189

    Median adjusted gross income (AGI) based on personal income tax returns, 2004:
    Individual: $28,686
    Joint: $52,170

    Number of Employers by Firm Size: (1999)
  • 1-4: 124,760
  • 5-9: 38,613
  • 10-19: 26,286
  • 20-49: 20,150
  • 50-99: 7,123
  • 100-249: 4,008
  • 250-499: 1,008
  • 500-999: 352
  • 1000+: 213
  • Total: 222,513

    Housing: (1/1/2006)

    Housing stock: 3,364,750
    Percent of California: 25.6%
  • Single family: 1,876,512
  • Multiple family: 1,431,547
  • Mobile homes, trailers, etc: 56,691
    Vacancy rate (percent): 4.2%
    Median Home Price
  • January 2007: $525,000
  • January 2006: $490,000

    Retail/Consumer Spending:

    Total taxable sales / Taxable Retail Sales / % of California
    2003: $113,685.4 MM / $79,426.7 MM / 24.7%
    2004: $122,533.1 MM / $86,496.7 MM / 24.5%
    2005: $130,722.4 MM / $92,271.2 MM / 24.3%

    Sales and Use tax rate (includes state, local, and district taxes): 8.250%
    * Rate may be higher in some areas of the county.

    Obviously, there is a ton more data available. But these in particular are what interest me. If you need more in depth data, check out their data sources.

  • Motley Fool: Giant Spam Machine

    I am not a big fan of Motley Fool.com. Their headlines drive me absolutely batty. Check out these "gems":

  • Knock These Stocks Out of the Park
  • Read This Before the Market Crashes
  • 3 Ways to Beat the Market

    See, you just need to add "!!!!!!!!" to the end of each one and gmail will throw it right into your spam folder.

    And the hats? The hats are about enough to make me want to puke blood.



    They might have the greatest advice in the world (as far as I can tell, they don't.) But the way they push information and they way they advertise makes me downright angry. Examples:

    Punch the monkey, win a free iPod?



    Click here to claim your FREE credit report?



    Didn't this kind of crap go the way of the Dodo? Or is it 1999 all over again? Let me jump on my 28k modem and log in to my AOL account! I'll hit you up on instant messenger! Oh no, someone sent me up the blue screen of death! Now my Windows 98 won't load right!

  • The death of traditional media.

    This morning on my way to work, I listened to an NPR story about the loss of book reviews in newspapers. It was sort of interesting in a technologically inept sort of way. Listen to it here: "Book Reviewers Decry Fewer Newspaper Pages by Martha Woodroof"

    If you don't have time for that, here's a quick summary. How do people find books to read? Supposedly, it used to be through book reviews published in newspapers. And now newspaper editors, faced with BIG PROBLEMS such as loss of subscribers and disappearing advertising dollars are consolidating sections that don't generate much revenue for the expense. It turns out that newspapers are a business, who knew?

    This is a real problem for "people who buy a lot of books professionally" aka librarians. Now who can they trust to spoon feed them brief book reviews for their purchasing pleasure?

    In a related subject, on slashdot.org today, there is a story titled "Blogs Are Eating Tech Media Alive" Again, it's the same story. Advertising dollars are leaving, readers are leaving, and it turns out that tech media like Red Herring and PC Magazine can't cope with the changes.



    Instead of lamenting the loss of "REAL JOURNALISM", let's talk a little bit about the economics of journalism. How does dead tree journalism work? Say it's 1980. You want to open a magazine. What do you need?

  • Market Niche: something that people will buy to learn more. You want something that has as broad of a readership as possible without trying to compete too much with established companies that will eat your lunch.

  • Content generation: After all, the content is why people are buying your magazine. This means photographers, illustrators, writers, and editors.

  • Support staff: Just like any other business. Salesmen to sell advertising. Buyers to order supplies. Secretaries to answer the phones. Bean counters to handle the money. Janitors to clean the toilets. Managers to make sure everyone is doing their job and working together.



  • An Office: A place with a roof where everyone goes to work. This means you need desks, utilities, phones, typewriters (or computers, but after all, this is 1980), office plants, etc.

  • Customers: Since you probably aren't going to start by selling every magazine directly to the consumer, you need someone to push your magazine. Like a newsstand, a bookstore, or a grocery store.

  • Advertisers: If you don't have advertising in the publication, you have to charge the full cost of the magazine to the end user. This doesn't work out well if your competition DOES have advertising and can sell the same amount of content for a much cheaper price.

  • Printers: The most important part of dead tree media. You have to have a way to put all that information together on a piece of paper which you can then distribute. This means money for paper, money for ink, money for the printing machines, money for the logistics - warehousing, trucking, postage, etc.



    Almost all of these things share something in common; they require MONEY and lots of it. Photographers have to eat, even if you are just paying them for the photos you use. Paper mills don't give their product away. All of that gets folded into the price of the content.

    Now let's contrast that with the economics of "NEW MEDIA" aka blogs. What do you need to run a blog?

  • Market niche: Or not. You can write about anything you damn well please. Content aggregators and search engines will connect your content with people seeking that content. Today, Britney Spears, tomorrow US Foreign policy. Of course, if you want a large amount of regular readers - you probably want to stick with a single subject.

  • Content generation: You don't need professional writers to run a blog. Would it help? Sure. But professionals are expensive. Most people just write their own, and the market (such as Digg) decides which posts are worthy of reading.



  • Support staff: Probably not necessary at all, unless you run some incredible volume site like slashdot.org. Even then you probably don't need a secretary.

  • An Office: Definitely unnecessary. A "one man" shop that can work from anywhere doesn't need to pay for expensive commercial space.

  • Customers: Content goes directly to the consumers. Or to robots that steal your content to sell advertising. Either way, no grocery store is ever going to sell a paper copy of my blog.

  • Advertisers: You can go out and actively sell your ad space if you really want. Or you can just use Google Adsense like everyone else. Since the cost of the above is ZERO - you can even have no advertising at all.

  • Printers: Blogspace is completely free. Hearts of the Gods is hosted on blogger - which has cost me zip from day one. If you don't like the restrictions of a free service, you can always register your own domain and get hosting. If you pay for 3 years in advance, you can get hosting from Godaddy for $2.80 a month (and there are usually coupons out there to make it even cheaper.) If you look hard, you can find hosting cheaper than that.



    So let's really think this through. What does Hearts of the Gods cost me to publish? Nothing but my time. And eventually, I may even be compensated a bit for that. What would it cost me if I wanted to publish a hardcopy version of Hearts of the Gods? Figuring I'm reaching ~40 people a day x 30 days a month x 12 months a year = 14,400 copies. Say I can print them at $0.07 a page with a cheap high volume laser printer and dirt cheap paper and only print one page - that's $1008. Now I have to find a way to distribute them. Stand on a street corner? Drop them from an airplane? Too much trouble!

    The reason traditional media is being wiped out is that it costs so damned much to produce. You simply can't compete with a free blog. Supply and demand. There are millions of alternative sources of information that cost zip. And all of them can compete directly with dead tree media for eyeballs. Market forces are unstoppable no matter how much you dislike the new reality.

    So what are the librarians to do? How about reading blog reviews by people who read the book? Can't trust a single source? Read three. Or look at the "most popular seller" list on Amazon.com. It can't be that hard.

  • Adobe apparently employing the Irish to spread misinformation.

    Yesterday, I made this post about free software for windows in which I recommended Foxit Reader over the craptastic Adobe Reader.

    A while later, at around 02:20am east coast time "anonymous" made this reply:

    "Regarding the Adobe Reader, It's large, but buggy? C'mon, that's rubbish! Foxit is small and neat but i've had problems with it."

    I say "anonymous" in quotes because my statcounter recorded this tidbit of information:



    If you can't read that, it says "vpn-dublin-ext.adobe.com"

    Why hello there, Dublin-based Adobe employee. You don't think your negative opinion about Foxit reader could be biased do you? The use of the word "rubbish" made me laugh out loud.

    I use Foxit reader every single day. I've never had a single problem with it, even opening very large PDF files. Acrobat, on the other hand, takes forever to load, crashes my computer and occasionally prints page after pages of random characters.

    Budgeting for a move to China.

    In the near future, I am planning on moving to China for the purpose of learning Mandarin and experiencing the culture.

    Budgeting is a tricky thing. You have to be able to adequately plan for the future and guesstimate costs. Even moving to a new city inside the United States can be very tricky. How do you find a job? How can you find a place to live? Is it the right neighborhood? How do you get all your stuff there?

    I plan on going to China to study for about a year. I'll probably move to one of the less expensive schools I discussed here. We'll use Jilin University in Changchun as an example.



    Recurring monthly costs:

  • Food: I figure 45 RMB per day per person should be mostly adequate. This works out to about 1,350 RMB per month.
  • Housing: From discussing it with people familiar with the area, I believe I could rent a moderate quality apartment for 800 RMB a month.
  • Utilities: Since it's the frozen north, I figure 400 RMB per month may be enough.
  • Transportation: I'm guesstimating something like 10 RMB per day for travel within China, or 300 RMB per month.
  • Other: I figure I'll need another 700 RMB a month for incidentals.

    Total recurring expenses: 3,550 RMB per month



    One time expenses:

  • Getting there: A one way airline ticket will probably cost in the neighborhood of $500 x 2 = $1,000. Figure the cost of getting to Changchun from Beijing at another $150 each way. Total cost = $1,300
  • Student visa: An X visa seems to cost something in the range of $50. I'm a little vague about this, so we'll say $100.
  • Tuition: Jilin University costs 16,000 RMB for a year of study.
  • Other: For furniture, bedding, other travel costs, etc - $1,500

    Total one time expenses:: $2,900 + 16,00 RMB



    Coming home:

    I figure I will be able to store what little possesions I need to keep with family in a nearby state. Everything else I will sell or dump. I probably will keep my car, but this means the connected expenses of finding a place to store it and insuring it. So perhaps I will get rid of it as well. With a little help, I figure $5,000 will probably be enough to get started back up when I return to the states (find a job, get an apartment, etc).

    Total return expenses:: $5,000



    Notice that I didn't convert from RMB to dollars yet? That's because I'm concerned about the possibility that the RMB will keep appreciating against the dollar. We'll run with my projected exchange rate from that post of 6.9 RMB to the dollar.

    Recurring expenses: 3,550 x 12 = 42,600 RMB / 6.9 = $6,173.91 USD
    One time expenses: $2,900 USD + 16,000 CNY / 6.9 = $2,900 + $2,318.84 = $5,218.84
    Returning expenses: $5,000.00 USD

    Total cost: $16,392.75

    Add a margin of safety for unknowns of 20%, and it'll be just about $20,000.

  • The cheapest low usage cell phone.

    Want the benefit of having a cell phone? Don't need a lot of minutes? Want to spend as little as possible? Most of the major providers (T-mobile, Sprint, Verizon, AT&T) have pretty high minimum monthly charges. All of them have free phones. Most involve a 2 year contract.

    T-mobile Basic Plus = 300 minutes, unlimited weekend = $29.99/month

    Verizon = 450 minutes, unlimited night/weekend = $39.99/month

    AT&T = 450 minutes, 5000 night/weekend = $39.99/month

    Sprint = 450 minutes, unlimited nights and weekends starting @ 7pm = $39.99/month.

    What is the total cost of one of these contracts in today's dollars? We'll say that there is no activation fee, you don't pay for the phone, you keep the phone to the end of the 24 month contract, and each plan has $7 worth of taxes included. We'll estimate inflation at 3.4%.

    T-mobile: $29.99 + $7 = $36.99/month x 24 months = $857.53
    Verizon: $49.99 + $7 = $46.99/month x 24 months = $1,089.36
    AT&T: $49.99 + $7 = $46.99/month x 24 months = $1,089.36
    Sprint: $49.99 + $7 = $46.99/month x 24 months = $1,089.36

    If you use a lot of minutes, the benefit of having unlimited nights and weekends might work out for you. Or maybe you'll want a bigger plan. But if the you only want to use a few minutes a month or just have it for emergencies - $857.53 is a pretty expensive phone to have ($35.73 a month!) So how can you do it cheaper?

    The cheapest way I've found is using one of T-mobile's prepaid phone. Here's what you do:

    1) Buy the T-mobile-To-Go Nokia 6030 from Walmart. In my area, sales tax is 8.25% - so your total cost of the phone is $29.87 x 1.0825 = $32.33. This phone comes with $10 worth of airtime.



    2) Buy a $100 refill card. This will get you "gold status" which means your airtime won't expire for one year. If you buy this online, there won't be sales tax.



    You'll have a phone and a total of 1035 minutes for $132.33 = $0.1278 a minute. Not a great deal, but look at the cost per month: $11.0275

    Furthermore, from my understanding, at 364 days you can extend out the remaining minutes by buying a refill card. Say a $10 card. Now you have 1070 minutes for $142.33, but thats 44.58 minutes a month for 24 months = $5.93 per month.

    The power of advertising: Baraqyal buys malt liquor.

    Yesterday at the grocery store, I saw a display of Bartles and Jaymes - a life sized cardboard cutout of good old Bartles and Jaymes. If you don't remember these two, they appeared in a bunch of rather strange ads between 1985 and 1991, ending each ad with "Thank you for your support."



    Last night, 16 years after the end of their advertising run, I purchased a four pack of the "margarita" flavor malt liquor. On the side of the bottle, it says "Flavored Beer." This is insulting to both the word beer and the word flavor. It's tastes vaguely like a margarita - and I mean VAGUELY. At 4% liquor per 12 ounces, it sure doesn't do much for you. This is only 0.48 ounces of alcohol - vs a 1.5 ounce shot of 80 proof vodka = 0.60 ounces liquor.

    If you're old enough to remember these ads, hopefully you're also old enough to remember how badly these drinks taste. Don't fall for the same foolishness that got me and my $3.00.

    Hearts of the Gods makes the Wall Street Journal.

    My post " Has Cerberus bit off more than they can chew in the Auto Industry?" appeared at the bottom of the page on the online version of the Wall Street Journal Page One article "Chrysler Deal Heralds New Direction for Detroit. Cerberus Takes Gamble On Union Concessions; GM, Ford May Benefit"



    To be fair, it was an automated link generated by Sphere.com. But what the hell, it's still exciting.

    FAILURE: Cuisinart DCC-2000 Coffee on Demand 12 Cup Coffeemaker.

    After owning it for a mere 415 days (give or take a few days, I can't remember when I bought it exactly) and reviewing it in this post, today the Cuisinart DCC-2000 Coffee on Demand 12 Cup Coffeemaker failed. Loaded it with coffee and water, turned it on to brew, heard it click and NOTHING.



    Now, to be fair, it was under heavy use. I figure it made 1.5 pots of coffee a day, 6 days a week for the ~60 weeks it was in operation. That's 534 pots of coffee. We paid $99.95 for it, minus a 20% off coupon plus sales tax, at Bed Bath and Beyond for a total of $86.56. So each pot of coffee cost $0.16 in equipment.

    Supposedly it has a 3 year warranty. But I'm sure it will cost $25 just to mail it back to Cuisinart - and that's if I could find the receipt. So I guess we'll just go with a different one instead. This is pretty disappointing. I definitely would not buy another one. A $30 coffee pot would be just as effective and would probably be cheaper per pot of coffee.

    And it was pretty crappy too. The thing dripped constantly. Hard to clean. Hard to add water. The coffee guage was wildly inaccurate. Overall, I guess I'm glad it's gone.

    Honda Ruckus: I want one.

    I can't figure out exactly why, but for some reason I really want to buy a Honda Ruckus - a small liquid cooled four stroke 49cc scooter. If I worked within 3-5 miles from work, I'd probably go out and buy one tomorrow.

    It gets 85+ mpg and has a 1.3 gallon tank for a range of ~100 miles. It's motor puts down 4.9 peak horsepower and 3.31 ft/lbs of torque. It weighs 181 lbs. Top speed of 43 mph. Redline of 8850 rpm.



    The Ruckus is no speed demon. Weight to power is 36.93 lbs/hp not including the weight of the driver - which compares poorly to every modern car including the brick-like first generation Scion xB which weighed 2395 lbs with 103 hp for a weight to power ratio of 23.25 - about the worst I've seen. My Subaru Impreza Wagon has dramatically more power - at only 17.75 lbs per horsepower. And it's not exactly fast.

    Add the weight of a 200lb driver, and it gets even worse.

    Ruckus: (181 + 200) / 4.9 = 77.76 lbs / hp.
    Scion xB: (2395 + 200) / 103 = 25.19 lbs / hp
    Subaru Impreza: (3071 + 200) / 173 = 18.91 lbs / hp

    To be fair, I don't know if the Ruckus hp numbers are measured at the crank or at the wheels. The numbers I'm using for the xB and the Impreza are measured at the crank (the Impreza would look much less impresive after drive train loss due to AWD).

    On the other hand, the Ruckus is pretty cheap to own and operate. With tax/license/etc, I believe they can be had for about $2500. Full insurance runs somewhere around $120-200 a year. If you figure it'll last 5 years, and you ride it on average 10 miles a day:

    Gas: 3,650 miles / 85 mpg = 42.94 gallons x $3.10 gallon = $133.12
    Insurance: $200
    Depreciation: $2500 / 5 = $500
    Maintenance: $100
    Registration/other: $50

    Total yearly cost: $983.12
    Per mile cost: $0.269

    Cheap! If you ride more miles, make it last longer, or get insurance cheaper, I'd imagine you could get it down below $0.20 a mile.

    Downsides: Any motorized cycle is dangerous. Even with only 5 hp, you can still get run over by a truck or thrown at 40mph. A face full of pavement can really ruin your day. And it's not exactly quick - if you max out at 43mph, you can probably really only average 30mph. So you better have some extra time to commute. And they are terrible in the rain. And finally, you have to have a M2 motorcycle license in California.

    But for some reason I still want one. It looks like a lot of fun.

    China trying to stop currency arbitrage.

    An article in the Wall Street Journal by Terrance Poon hints at the difficulties that China is facing maintaining it's artificial undervaluation of the RMB.

    "The regulator's statement, the latest on curbing such illegal fund flows in recent months, underscores the difficulties Beijing faces as the local stock market soars and foreign investors speculate on further appreciation of the yuan.

    Coming after China's trade surplus widened to $26.91 billion in June and its foreign-exchange reserves rose to $1.333 trillion, the statement also highlights a dilemma for Beijing's foreign-exchange policy: a faster appreciation of the yuan could help curb growth of the trade surplus, but could also fuel the speculative inflows it is trying to stem."


    Countries that allow their currency to freely float against other currencies don't have a problem with investors speculating on the value of currency. The Forex market is one of the largest, most developed world markets with millions of participating firms and individual investors trading currency daily.

    China, on the other hand, DOES have a problem with speculators. The government is intentionally keeping the RMB 30-40% undervalued to help stimulate exports.

    Example:

    You want to buy 100,000 alternator cores for your new car. The amount of metal in the core costs $10 on world commodity markets, and it requires 2 man hours of labor and $1 of machine time to produce. Let's say that labor in India costs $0.90 an hour. Total manufacturing cost is $12.80 plus a 10% firm profit = $14.08.

    Now let's say one man hour of labor in China costs 6 RMB. So you're looking at 12 RMB to produce the machine. At the undervalued rate of the RMB, labor cost is $0.79 per hour x 2 = $1.59 + $10 + $1 = $12.59 plus a 10% firm profit = $13.85

    The price difference for the 100,000 cores is $23,100 US. Obviously, most sane people will chose the Chinese firm. But if the RMB were fairly valued at 30% higher for an exchange rate of 5.82 RMB / Dollar, the cost of each Chinese produced core would be $14.36 and the contract would instead go to India and along with it, 200,000 man hours of labor = 100 full time jobs for a year.

    Keen investors realize that the currency is intentionally undervalued to stimulate the economy. If the RMB were openly traded on the Forex markets, investors would sell dollars/euros/etc and buy RMB at frightening speed. Supply would stay the same while demand would shoot through the roof. The government of China would be forced to burn through it's foreign currency reserves to maintain the exchange rate until eventually they run out of currency and can no longer control the price. The investors would then sell the RMB and buy the currency they sold at a 30% profit - which could all happen in as little as a few days of trading.

    To prevent this, China has strict controls on the exchange of RMB with other currency. It does not allow speculation, only exchange for the purpose of legitimate trade. The "illegal fund flows" are investors trying to take advantage of the revaluation by converting foreign currency into RMB using Chinese companies to help them move money into the country. This is how it works (ignoring the exchange spread and other fees for simplicity):

    1) Investor contacts Chinese firm, makes an arrangement to bring cash into the country.
    2) Chinese firm "sells" a product at many times it's actual value. Say a container full of a commodity that would normally sell for $20,000 is sold for $20,000,000.
    3) Chinese firm sends an invoice for $20,000,000
    4) Investor wire transfers $20,000,000 into the country
    5) Chinese bank converts the dollars to RMB (at the current exchange rate of 7.5821) giving 151,642,000 CNY
    6) Chinese firm deposits the money to an interest bearing account (say at 2%)

    After a certain period of time, say a year, they reverse the transaction. The new exchange rate is 6.7 RMB per dollar (13.17% change)

    1) The bank account has grown by 3,032,840 CNY. Total balance is now 154,674,840 CNY
    2) Chinese firm "buys" $20,000 of a commodity for 154,674,840 CNY
    3) US investor receives $23,085,797
    4) Return = $3,085,797
    5) ROI = 15.429%

    Not too shabby, considering that it's a fairly liquid transaction that could be unwound at any time. Obviously the transaction costs would reduce this return, but on the other hand, the money COULD be invested at a much higher rate of return in which case you get an enhanced profit above and beyond the interest since your also getting the currency appreciation the interest.

    Interest - ROI
    2% - 15.43%
    5% - 18.82% (difference = 3.39%)
    10% - 24.48% (difference = 5.66%)

    Eventually, given enough of this activity, foreign investors could force the RMB to revalue faster - which would increase returns and increase interest into an avalanche of illegal speculation. At the peak limit of 0.5% per day, the RMB could reach it's true value in only 53 days of trading. This would be absolutely devestating to the Chinese economy as Chinese products jump in price and work flows to major competitors in the Pacific Rim.

    What is the average inflation rate in the United States? An examination of historical data.

    One of the most annoying things in finance is the tendancy to use wildly different numbers for assumptions based on different historical data. It drives me absolutely nuts. I always see calculations where they say the average return of the stock market is between 7%. Or 10%. Or 12.2%. Now wait a damned minute here. It can't be all three at the same time.

    Let's look at those examples briefly. Say we invest $10,000 and leave it for 30 years.

    7%: $76,122.55
    10%: $174,494.02
    12.2%: $316,071.77

    That's one heck of a difference, isn't it? Now what if we want to adjust that for inflation and find the return of the investment in today's dollars? I see inflation rates used from anywhere from 2% to 4%.

    Maximum return range is (12.2% return - 2% inflation) = 10.2% = $552,801.34
    Minimum return range is (7% return - 4% inflation) = 3% = $72,817.87

    Difference: $479,983.47

    What's a half million dollars between friends though, huh? I mean, it only is the difference between eating top ramen and living in a beat down trailer home at retirement and living in your own home and eating well.

    Obviously the future is murky at best and historical returns are no indicator of future performance. But we damn well should be able to agree on a few of the numbers. What is the right length of time to look at? How do you adjust the data?

    To try to answer this, let's look at an interesting web site called measuring worth.com that does much of the number crunching. I believe much of their data came from the Bureau of Labor Statistics.

    1906 - 2006 (100 years): 3.19%
    1931 - 2006 ( 75 years): 3.50%
    1956 - 2006 ( 50 years): 4.09%
    1966 - 2006 ( 40 years): 4.67%
    1976 - 2006 ( 30 years): 4.30%
    1986 - 2006 ( 20 years): 3.09%
    1996 - 2006 ( 10 years): 2.54%
    2001 - 2006 ( 5 years): 2.63%
    2003 - 2006 ( 3 years): 3.09%

    That's one heck of a range, huh? 4.67% to 2.54%. Not particularily useful either. So I pulled some source data (CPI-U All Urban Consumers) and ran some numbers on it.

    1914-2006 (93 years):
    Data points: 93
    Annualized Dec-Dec: 3.2688%
    Annualized Avg-Avg: 3.2831%
    Average Dec-Dec: 3.40%
    STDEV Dec-Dec: 5.14%
    Average Avg-Avg: 3.41%
    STDEV Avg-Avg: 5.02%

    1932-2006 (75 years):
    Data points: 75
    Annualized Dec-Dec: 3.7099%
    Annualized Avg-Avg: 3.6511%
    Average Dec-Dec: 3.63%
    STDEV Dec-Dec: 3.88%
    Average Avg-Avg: 3.57%
    STDEV Avg-Avg: 3.77%

    1957-2006 (50 years):
    Data points: 50
    Annualized Dec-Dec: 3.9950%
    Annualized Avg-Avg: 4.0190%
    Average Dec-Dec: 4.10%
    STDEV Dec-Dec: 2.97%
    Average Avg-Avg: 4.12%
    STDEV Avg-Avg: 2.83%

    1982-2006 (25 years):
    Data points: 25
    Annualized Dec-Dec: 2.9400%
    Annualized Avg-Avg: 2.9900%
    Average Dec-Dec: 3.10%
    STDEV Dec-Dec: 1.13%
    Average Avg-Avg: 3.25%
    STDEV Avg-Avg: 1.12%

    1997-2006 (10 years):
    Data points: 10
    Annualized Dec-Dec: 2.2500%
    Annualized Avg-Avg: 2.3000%
    Average Dec-Dec: 2.45%
    STDEV Dec-Dec: 0.74%
    Average Avg-Avg: 2.55%
    STDEV Avg-Avg: 0.67%

    Summary:

    Over a 93 year span, inflation averages 3.4%.
    68.2% (+/- 1 SD) of the data falls within the range of 8.49% to 1.68%
    95.4% (+/- 2 SD) of the data falls within the range of 13.57% to -6.76%
    2 SD range = 20.3%

    Over a 75 year span, inflation averages 3.6%
    68.2% (+/- 1 SD) of the data falls within the range of 7.43% to -0.22%
    95.4% (+/- 2 SD) of the data falls within the range of 11.25% to -4.05%
    2 SD range = 15.3%

    Over a 50 year span, inflation averages 4.1%
    68.2% (+/- 1 SD) of the data falls within the range of 7.01% to 1.21%
    95.4% (+/- 2 SD) of the data falls within the range of 9.91% to -1.69%
    2 SD range = 11.6%

    Over a 25 year span, inflation averages 3.2%
    68.2% (+/- 1 SD) of the data falls within the range of 4.30% to 2.05%
    95.4% (+/- 2 SD) of the data falls within the range of 5.43% to 0.92%
    2 SD range = 4.51%

    Over a 10 year span, inflation averages 2.5%
    68.2% (+/- 1 SD) of the data falls within the range of 3.20% to 1.80%
    95.4% (+/- 2 SD) of the data falls within the range of 3.91% to 1.09%
    2 SD range = 2.82%

    Discussion and Conclusion:

    The range of inflation appears to be smaller and smaller over time. Whether this is the effect of the Fed doing better at their job, the extreme prosperity of the United States over the period, or just the fact that there is less data is hard to say.

    Based on on the data, I don't think 2.5% is a fair number to use. It seems that we've been very lucky lately, but even as recently as 50 years ago we were not so lucky. I also don't think 50 year number of 4.1% is a fair number to use either. It's really too high.

    In my estimation, the 93 year 3.4% number is probably the best to use for a long term estimate of inflation. This number includes such events as World War I, the Great Depression, World War II, the post war boom, Korea and Vietnam, the Cold War, the tech boom, 9/11, and a big chunk of Iraq. It's hard to imagine that anything more unstable than those events can occur in the future without resulting in the end of the world.

    Has Cerberus bit off more than they can chew in the Auto Industry?

    In today's Wall Street Journal, there is an article about the challenges Cerberus is facing raising the required capital to complete the buyout of Chrysler from Daimlerchrysler AG (DCX).

    "Investors who sat in on Cerberus's presentations as well as bankers familiar with its offering said the market is taking a cautious look at the company's bid to raise $62 billion for the deal. Potential investors are concerned they could lose the bulk of their money if Cerberus's turnaround of Chrysler fails and the auto maker has to seek bankruptcy protection, these people said."

    In a related story, they also canned David Thursfield - an ex Ford executive that had been running GDX Automotive - which appears to be in big trouble and may end up filing for bankruptcy. (Goodbye $150 million dollar investment from Cerberus!)

    Cerberus also backed out of the deal to buy automotive component maker Delphi.

    So it turns out the Auto Industry is full of problems. Who knew?



    Even with the advantages of being private, I don't see how Cerberus is going to magically pull off a turnaround at Chrysler. As I see it, they face too many challenges.

  • Too many dealers. If they can't reduce the dealer network substantially, the self competition will force them to drive prices down.



  • Increased and intense competition from Japanese manufacturers, particularily Toyota which is pushing it's new full sized Tundra pickup truck in a big way.



  • Poor product lineup. Jeep in particular has far too many vehicles that nobody wants, although the new 4 door Wrangler has been a huge hit. Examples of too many models include the ridiculous Hummer-ripoff Jeep Commander, the Jeep Compass, the Jeep Liberty, the Grand Cherokee, etc. They should probably cut Jeep back to two, possibly three designs.



  • If the price of oil shoots up they are poorly positioned to respond to consumer demands for high MPG vehicles. Rather than pushing hybrids and efficient four cylinders, they seem to be pushing their large V8 hemi engine into just about every car in the lineup. They also are pushing their SRT high performance vehicles in a big way. They recently eliminated one of their most popular and best mpg vehicle - the Dodge Neon, replacing it with a sort of crappy "tough" semi-crossover Caliber, which mostly seems to be popular with middle aged women.



  • Unions. This is the biggy. Toyota is eating the Big 3's lunch because they aren't trying to provide health care and retirement benefits for millions of people. The Unions aren't going to budge much. In 20-30 years, I imagine the Japanese competitive advantage will be eliminated union-wise in the United States. But until that happens I don't see how they are going to significantly reduce the cost of labor.



  • Private equity parts suppliers. It's going to be hard to build a car cheap and make a lot of profit when all of your suppliers are owned by private equity that would rather shut down a factory and see you fail than sell you a part at a loss. I think the impact of the aggressive managers installed by these companies is yet to be seen. But for sure, they are going to turn a profit, one way or another.

    Unless Cerberus has the magic formula to solve all these issues, I can't see Chrysler suddenly becoming a reformed company. If I were the banks, I'd be very skeptical too.

  • Whole Foods Market Inc (WFMI) CEO John Mackey doesn't understand the internet.

    In addition to his blogging shenanigans in which he repeatedly smacked the angry hornets nest more commonly known as the Securities Exchange Commission, Whole Foods Market Inc ( WFMI ) CEO John Mackey has apparently been trolling the Yahoo Finance message boards.



    "For about eight years until last August, the company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb. It's an anagram of Deborah, Mr. Mackey's wife's name. Rahodeb cheered Whole Foods' financial results, trumpeted his gains on the stock and bashed Wild Oats. Rahodeb even defended Mr. Mackey's haircut when another user poked fun at a photo in the annual report. "I like Mackey's haircut," Rahodeb said. "I think he looks cute!"

    You don't have to be a vegan to understand what an incredibly stupid move this is for a CEO of any publically traded company. It's only a matter of time before he's up on charges and out as CEO. Way to go, Rahodeb!

    I am absolutely fascinated by Cash Call.

    You've probably seen the TV ads for Cash Call starring Gary Coleman of "Whatchu talkin' 'bout Willis?" fame. They have got to be just about the most interesting company currently in the personal loan business.

    For starters, their rates are absolutely obscene. I have no idea how they get around usury laws. Here are their current rates as of 7/11/2007 for the state of California.



    If you can't read that, here are the worst - starting from the bottom up.

    $2,600 loan @ 99.25% interest - 42 payments of $216.55
    - Total of payments = $9,095.10, total interest paid = $6,495.10
    - Time to recoup original loan amount = 12.01 months

    $5,000 loan @ 59.95% interest - 84 payments of $254.03
    - Total of payments = $21,338.52, total interest paid = $16,338.52
    - Time to recoup original loan amount = 19.78 months

    $10,000 loan @ 44.38% interest - 120 payments of $371.60
    - Total of payments = $44,592.00, total interest paid = $34,592.00
    - Time to recoup original loan amount = 26.91 months

    Did I mention there is also a $75 fee for each loan?

    With a little bit of research, I found a SFGate article about the origins of Cash Call from September 22, 2004.

    "And, Reddam acknowledged, about 20 percent of CashCall customers to date have defaulted on their loans. "We're in a new area and we're learning all the time," he said, adding that he hopes CashCall will be profitable by the end of next year.

    This isn't Reddam's first brush with consumer financing. He also founded the mortgage firm DiTech (the one with the really annoying TV ads), which was purchased in 1999 by General Motors Acceptance Corp. Reddam, 49, resigned from DiTech in 2000. He said the idea for CashCall came from his experience providing second mortgages at DiTech. He became aware that even relatively prosperous people can easily, and frequently, live beyond their means. "People tend to spend as fast as they make money," Reddam said. "Whatever they make, they spend. There's a live-for-today mentality. "It's quite shocking, really.""


    A 20 percent default rate isn't really surprising, considering the interest rate and the foolishness of the people who fall for these types of loans. I'd live in a cardboard box and eat garbarge before I'd sign up for a loan at 99.25% interest. It would be very interesting to find out what their current default rate is - but I can't find much in the way of information.

    Now what sets CashCall apart from other banks is their collection tactics. I believe they start by looking for ideal customers - have a job, have a checking account, not too smart with money. Then they run a credit check to see how much risk the customer has - late payments, outstanding debt, etc. Based on that information, they make a small loan.



    Then they immediately start with strong arm collection tactics. Read some of the hilarity over at rip off report.com. As long as you keep the checking account open, they can just take the money right out of it. It's rather brilliant, really. No waiting for people to make payments. When you don't pay, they go right for the throat - threats, intimidation, lawsuits, garnishing wages, calling your friends, etc. And best of all - they DON'T NEGOTIATE. Default on a credit card - they'll let it go for 80% of the balance, sometimes much less. But default on CashCall, and they won't play ball at all.

    Whatever they are doing, it's working. They are making bundles of cash. Their ads are constantly on TV. They sponsor all sorts of events in SoCal. Here's to you, Gary Coleman. Back from the dead AND you got a free $10,000. Awesome.

    Burn Rate in Iraq: $10 Billion a Month

    In the news today is a new report from CRS to congress. It states:

    "The $12 billion a month "burn rate" includes $10 billion for Iraq and almost $2 billion for Afghanistan, plus other minor costs. That's higher than Pentagon estimates earlier this year of $10 billion a month for both operations. Two years ago, the average monthly cost was about $8 billion."

    Back in December of 2006, I tried to calculate the cost of the "troop surge". In that post, I wrote:

    "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."

    The troop surge seems to have been a bit of a dud, looking at these numbers from globalsecurity.org.

  • 2006 November: 152,000
  • 2006 December: 140,000
  • 2007 January: 132,000
  • 2007 February: 137,000
  • 2007 March: 142,000
  • 2007 April: 150,000
  • 2007 May: 155,000
  • 2007 June: 162,000



    It looks like we've really only managed to increase boots on the ground by 10,000 men. Not very impressive. But somehow, we've managed to REALLY increase the spending. In my previous post, I cited a Wall Street Journal article from March 8, 2006. It states:

    "WASHINGTON -- As the U.S. enters its fourth year in Iraq this month, the annual cost of military operations is growing -- even as the Pentagon assumes the number of troops there will shrink. 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."

    So a year ago, the Iraqi burn rate was $5.9 billion per month. Now it is $10 billion per month.

    Let's look at some updated numbers on Iraq from the handy CIA world factbook.

    Area: total: 437,072 sq km
    Population: 27,499,638 (July 2007 est.)
    GDP (purchasing power parity): $87.9 billion (2006 est.)
    GDP (official exchange rate): $40.66 billion (2006 est.)
    GDP - real growth rate: 2.4% (2006 est.)
    GDP - per capita (PPP): $2,900 (2006 est.)
    Inflation rate (consumer prices): 64.8% (2006 est.)
    Budget: revenues: $33.4 billion
    expenditures: $41 billion (2006 est.)

    Now let's run a few numbers.

    We're spending $10 billion a month or $120 billion a year on 27.5 million people. That works out to $4,363.64 per person - which is pretty far off from my earlier flawed estimate of $5,116 per person. But hey - I was using a lower population number and trying to figure it out as proportionate to the number of troops on the ground.

    The real GDP of Iraq is roughly 1/3 of what we are spending. Per capita, Iraqi's are only making ~$1500 USD per person - although this apparently has the buying power of $2900 using PPP.

    It's interesting to look at the revenues and expenditures of the government. The entire GDP is only $40.66 billion, but they are SPENDING $41 billion. Some of this money is obviously coming from the United States.

    One other interesting feature is the land area of 437K square kilometers. We currently have 1 soldier for every 2.7 square kilometers of area of the country. There are approximately 63 Iraqis in each of these square kilometers. We're spending $22,879 per square kilometer on the war effort.

    You would think that by spending such an enormous amount of money that we'd somehow be able to keep inflation in check. Nope - it's running at almost 65%. Meaning that if you have $100 worth of Dinars in the morning, by the next day it's only worth $99.86. And it keeps compounding like this 365 days a year.

    Given the amount of money spent, the time given, and the effort expended by the most powerful military on earth by far, I have come to the conclusion that we can not turn Iraq into a functioning country. The people simply don't want it to happen, or they'd be damned nearly rebuilt by now. The currrent low level civil war probably needs to be allowed to run it's course until the Iraqis are tired of fighting and are ready to settle down in peace.

  • Cable TV/Satellite TV: The High Cost of Entertainment

    I always wonder how Americans can make such incredible amounts of money, yet actually spend more than they make. Recently, the US savings rate was -0.5%, meaning that people spent more money than they made. While obviously some of this is attributable to the housing boom, some of it is caused directly by complete waste.

    Recently I was shocked to discover that a number of people I know are paying more than $100 a month for cable TV - even up to $150 a month. That's $5 a day just for the service. Now I suppose that doesn't seem like a lot of money if you're making $100,000+ a year. But it certainly adds up, especially considering there are so many more enjoyable healthier hobbies with a cost of $0 per month.

    Let's look at the long term financial impact of spending your cash on fancy TVs and expensive cable service.

    Assumptions:

  • You buy a new TV/soundsystem every five years. It costs $3,000 adjusted for inflation.
  • The money you spend would otherwise be invested in the market on a monthly basis
  • The return of the market is 12.2%
  • Inflation is 3%, prices increase once a year.
  • There are no costs or taxes on investing (for simplification)



    10 year timespan:

  • Amount Spent on the TVs: $10,509.57 (3 purchases @ $3,000 each growing w/inflation at 3%)
  • Amount Spent on the Service: $20,634.98 (120 months @ $150 each month growing every 12 months by inflation at 3%).
  • Amount of investment gain lost: $25,979.83 (at 12.2%)
  • Total cost of service: $57,124.39
  • Present value of the total cost: $42,124.90
  • Number of days: 3,650

    Total daily cost: $11.54


    20 year timespan:

  • Amount Spent on the TVs: $20,601.81 (5 purchases @ $3,000 each growing w/inflation at 3%)
  • Amount Spent on the Service: $48,274.74 (240 months @ $150 each month growing every 12 months by inflation at 3%)
  • Amount of investment gain lost: $175,784.64 (at 12.2%)
  • Total cost of service: $ 244,661.19
  • Present value of the total cost: $133,045.37
  • Number of days: 7,300

    Total daily cost: $18.22


    30 year timespan:

  • Amount Spent on the TVs: $34,164.93 (7 purchases @ $3,000 each growing w/inflation at 3%)
  • Amount Spent on the Service: $84,338.36 (360 months @ $150 each month growing every 12 months by inflation at 3%)
  • Amount of investment gain lost: $739,161.24 (at 12.2%)
  • Total cost of service: $857,664.53
  • Present value of the total cost: $343,929.54
  • Number of days: 10,950

    Total daily cost: $31.41

    As you can see, if you take into account the gain you would have had if you had invested the money instead of wasting it on television, you can see that over the long term it's a TREMENDOUSLY expensive hobby.

    You can apply the same logic to just about any long term recurring expense. Cell phone contracts, gym memberships, magazine subscriptions, etc. Obviously, there's more to life than saving and investing - but you can't have a negative savings rate forever!

  •