There are some classic lines in retrospect in this one…
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Bernie Madoff Interview From 2001
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Peter Bernstien on Risk
from Jan. 2008
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Nassim Nicholas Taleb Interview
Good stuff..
The scholar, trader, and author Nassim Nicholas Taleb brings a decidedly contrarian view to the world of finance, statistics, and risk. In 2007, he published The Black Swan: The Impact of the Highly Improbable, which argues that we should never ignore the possibility or importance of rare, unpredictable events. In this interview with the Quarterly, he looks at the current financial crisis through the lens of his Black Swan thinking.
The Quarterly: For people who haven’t read The Black Swan, can you quickly summarize what they should know to understand your point of view on recent events in global financial markets?
Nassim Nicholas Taleb: Before Europeans discovered Australia, we had no reason to believe that swans could be any other color but white. But they discovered Australia, saw black swans, and revised their beliefs. My idea in The Black Swan is to make people think of the unknown and of the potency of the unknown, particularly a certain class of events that you can’t imagine but can cost you a lot: rare but high-impact events.
So my black swan doesn’t have feathers. My black swan is an event with three properties. Number one, its probability is low and based on past knowledge. Two, although its probability is low, when it happens it has a massive impact. And three, people don’t see it coming before the fact, but after the fact, everybody saw it coming. So it’s prospectively unpredictable but retrospectively predictable.
Now that we’re in this financial crisis, for example, everybody saw it coming. But did they own bank stocks? Yes, they did. In other words, they say that they saw it coming because they had some thoughts in the shower about this possibility—not because they truly took measures to protect themselves from it.
Now, a black swan can be a negative event like a banking crisis. It also can be positive: inventing new technology, making new discoveries, meeting your mate, writing a best seller, or developing a cure for cancer, baldness, or bad breath. In The Black Swan, I say that in the historical and socioeconomic domain, black swans are everything. If you ignore black swans, you’ve got nothing. And I showed that the computer, the Internet, and the laser—three recent technological black swans—came out of nowhere. We didn’t know what they were, and when we had them right before our eyes we didn’t know what to do with them. The Internet was not built as something to help people communicate in chat rooms; it was a military application and it evolved.
So these things have a life of their own. You cannot predict a black swan. We also have some psychological blindness to black swans. We don’t understand them, because, genetically, we did not evolve in an environment where there were a lot of black swans. It’s not part of our intuition.
The Quarterly: Say a little more about the relationship between black swans and the global financial crisis.
Nassim Nicholas Taleb: I warned in The Black Swan against some classes of risk people don’t understand and against the tools used by risk managers—tools that could not fully capture the properties of the world in which we live. The financial crisis took place because people took a lot of hidden risks, which meant that a small blip could have massive consequences.
In fact, I tried in The Black Swan to turn a lot of black swans white! That’s why I kept going on and on against financial theories, financial-risk managers, and people who do quantitative finance. I warned that they were dangerous to society.
The Quarterly: You question many of the underpinnings of modern financial theory. If you were the dean of a business school, how would you overhaul the curriculum?
Nassim Nicholas Taleb: I would tell people to learn more accounting, more computer science, more business history, more financial history. And I would ban portfolio theory immediately. It’s what caused the problems. Frankly, anything in finance that has equations is suspicious. I would also ban the use of statistics because unless you know statistics very, very well, it’s a dangerous, double-edged sword. And I would ban linear regression. All these things don’t work.
The Quarterly: What are your concerns with statistics and portfolio theory?
Nassim Nicholas Taleb: The field of statistics is based on something called the law of large numbers: as you increase your sample size, no single observation is going to hurt you. Sometimes that works. But the rules are based on classes of distribution that don’t always hold in our world.
All statistics come from games. But our world doesn’t resemble games. We don’t have dice that can deliver. Instead of dice with one through six, the real world can have one through five—and then a trillion. The real world can do that. In the 1920s, the German mark went from three marks to a dollar to three trillion to a dollar in no time.
That’s why portfolio theory simply doesn’t work. It uses metrics like variance to describe risk, while most real risk comes from a single observation, so variance is a volatility that doesn’t really describe the risk. It’s very foolish to use variance.
The Quarterly: Does your thinking inform the debate over the efficient market hypothesis?
Nassim Nicholas Taleb: I have no idea. I don’t know if markets are efficient or inefficient. I don’t know if we’ll ever know. And I don’t know if it’s relevant.
The Quarterly: What does all this mean for managers at nonfinancial companies? What should they be doing differently?
Nassim Nicholas Taleb: I recommend two things. Number one, take the maximum amount of risk and other forms of exposure to positive black swans when this costs you very little if you’re wrong and earns you a lot if you’re right. Number two, minimize your exposure to negative black swans.
This is exactly the opposite of what the banks did. They had no real upside and a lot of downside—or, to be more precise, they got a little bit of cash flow to have all the downside. I recommend the opposite. Be hyperconservative when it comes to downside risk, hyperaggressive when it comes to opportunities that cost you very little. Most people have the wrong instinct. They do the opposite.
The Quarterly: What would your ideas look like in practice for, say, a manufacturer?
Nassim Nicholas Taleb: If risk doesn’t cost you a lot, take all the risk you can. That’s how economic growth is generated. Don’t fear being aggressive if that only costs you a little. Do more trial and error. Learn to fail with pride, comfort, and pleasure.
But try to have less downside exposure by building more slack into your system through redundancy, more insurance, more cash, and less leverage. Imagine a shock. What will happen if there’s a shock? How many months could you keep operating?
The problem is, Wall Street penalizes companies that have more of this kind of insurance, because they are going to lag behind companies that don’t take on the expense. I see this in my investment business. But you know what? The people who insured against catastrophes are still standing today. The other people are bust. So don’t fear overinsurance for your downside, even if you lag behind as a result.
The Quarterly: You’re a critic of scenario planning. Is there a way to do it effectively?
Nassim Nicholas Taleb: I don’t like scenario planning, because people don’t think out of the box. So scenario planning may focus on four, five, or six scenarios that you can envision, at the expense of others you can’t. Instead of looking at scenarios and forecasts, you should be looking to see how fragile your portfolio is. How vulnerable are you to model error? How vulnerable is your cash flow to changes in any parameter of your calculations? My idea is to base your navigation on fragility.
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Fed Adopts New Rules for Credit Cards
Should help……
The Federal Reserve Board on Thursday approved final rules that would better protect credit card users by prohibiting certain unfair acts or practices and improving the disclosures consumers receive in connection with credit card accounts and other revolving credit plans.
The final rules prohibiting certain credit card practices were adopted under the Federal Trade Commission Act, and are being issued concurrently with substantially similar final rules by the Office of Thrift Supervision and the National Credit Union Administration. Among other things, the rules will:
Protect consumers from unexpected interest charges, including increases in the rate during the first year after account opening and increases in the rate charged on pre-existing credit card balances.
Forbid banks from imposing interest charges using the “two-cycle” billing method.
Require that consumers receive a reasonable amount of time to make their credit card payments.
Prohibit the use of payment allocation methods that unfairly maximize interest charges.
Address subprime credit cards by limiting the fees that reduce the amount of available credit.
In finalizing the rules on unfair credit card practices, the Board carefully considered information obtained through consumer testing and more than 60,000 comment letters received during the comment period.
“The revised rules represent the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts,” said Federal Reserve Chairman Ben S. Bernanke. “These protections will allow consumers to access credit on terms that are fair and more easily understood.”
The Board is also adopting final rules to revise the disclosures consumers receive in connection with credit card accounts and other revolving credit plans to ensure that information is provided in a timely manner and in a form that is readily understandable. These rules amend Regulation Z (Truth in Lending) and conclude a comprehensive review of the open-end credit rules. The final rules under Regulation Z require changes to the format, timing, and content requirements for credit card applications and solicitations and for the disclosures that consumers receive throughout the life of an open-end account. Many of the changes reflect the result of consumer testing conducted on behalf of the Board during its review.
“Our intent is to increase transparency and fairness in how credit card and deposit accounts operate, thereby enhancing competition and empowering consumers to better manage their accounts and avoid unnecessary costs,” said Federal Reserve Governor Randall S. Kroszner. “The rules represent a significant step forward in consumer protection. By ensuring fairness and making credit terms easier to understand, these safeguards should allow more consumers to benefit from using credit.”
Both of the final rules addressing credit card accounts take effect on July 1, 2010.
The Board is separately proposing rules to protect consumers that use overdraft services offered by their bank. The rule solicits public comment on proposed amendments to Regulation E (Electronic Fund Transfers) intended to provide consumers a choice regarding their institution’s payment of overdrafts for automated teller machine withdrawals and one-time debit card transactions. The Board is proposing two alternative approaches to providing consumer choice, including a proposed requirement that would require institutions to obtain consumers’ affirmative consent (or opt-in) before any overdraft fees or charges may be imposed on consumers’ accounts. The comment period for the Regulation E proposal ends 60 days after publication in the Federal Register.
In a related move, the Board is adopting final amendments to Regulation DD (Truth in Savings) to address depository institutions’ disclosure practices related to overd
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Buying Oil Again $$
So, took the plung again today.
With OPEC cutting production (yeah, I know, they cheat on the cuts, but there will be cuts) and more importantly, US projects are being put on hold. Crude oil under $40 just is not right based on the fundamentals.
Here are some recent thoughts on it from early December.
Not long after that, 60 minutes did this piece on Oil
Watch CBS Videos Online
Here is the thing. Watch this 2005 CNBC oil special. Note the Saudi’s are today saying what they said then, yet supply, has not significantly increased since then.
Finally a week after I began going down this road again, I read this
Today crude dipped below $40 a barrel and I decided it was time. I did a combination of the PowerShares DB Oil Fund (ETF) (NYSE:DBO) and PowerShares DB Crude Oil Double Long ETN (NYSE:DXO).
From Jan 2007 to April 2008 we rode USO from $47 to $106. I’m expecting similar results this time and by using more efficient ETF’s ought to get better results (neither the DBO, nor DXO existed in Jan. 2007).
The wild card here is the dollar. It is far weaker now than it was in Jan. 2007 and even in April 2008. One also has to consider the Fed and Treasury are running the printing presses flat out for the dollar and that is flooding supply. Further deterioration of the dollar (it is going to happen) will add upward price pressure to oil that has nothing to do with supply /demand.
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Check this out…was just emailed to me..
This is stunning… it lays out what just happened…
Page Two: “Madoff securities is the world’s largest Ponzi scheme…”
WOW..
November 2005 Report to SEC about Madoff Being A Poniz Scheme
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Thursday’s Links
Global warming, Cheap oil, Zero, 5.4%
– The Myth
– Great yield
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This is fantastic stuff. Just got off the SEC Conference call.
So, the SEC is going to require companies to begin reporting results in interactive data. So what you say? Look what it enables us to do. Go to http://viewerprototype1.com/viewer and select those companies who are voluntarily participating.
From there you can download the statements you wish to an xls file (Excel) and for those on Google Docs, you can upload the file to Good spreadsheet and then embed it into a blog post like below.
Here is GE’s (GE) recent 8-K income statement
This is not even to mention that you can easily now save it for easy access on your computer.
There are dozen of other uses for folks far more tech savvy than me but in my corner of the world this is really great stuff..
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WWGB or "What Would Graham Buy"?
According the Bloomberg, Jim grant says:
Pfizer Inc. (PFE) and Tiffany & Co. (TIF) are among eight stocks that Benjamin Graham, the father of value investing and Warren Buffett’s mentor, would buy, Grant’s Interest Rate Observer said.
Cooper Industries Inc. (CBE), Nucor Corp. (NUE), Cintas Corp. (CTAS), Archer Daniels Midland Co. (ADM), Molex Inc. (MOLX) and RadioShack Corp. (RSK) also meet the seven criteria Graham presented in 1973 for stocks that a “defensive investors might buy with confidence,” according to the latest issue of Grant’s, which was released today.
“That there are as many as eight is a notable fact,” the newsletter said. “In March 2003, near what would prove to be the bottom of the post-Nasdaq washout, Grant’s could identify only two that met the grade.”
Graham favored companies that have “adequate size;” current assets that exceed liabilities by two times; 10 straight years of profit; 20 years of uninterrupted dividends; 10 years of earnings growth exceeding 33 percent; a price-to-earnings ratio of less than 15; and a price-to-book ratio that’s less than 1.5, according to Grant’s, an investment newsletter founded by James Grant in 1983.
“Security Analysis,” published in 1934, provided a road map for value investors including Buffett, the chairman of Berkshire Hathaway Inc.
An equal-weighted index of the eight companies Grant’s identified has surged 32 percent since Nov. 20, the day the Standard & Poor’s 500 Index dropped to an 11-year low.
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Fleckenstien on Fed Cut
For those who spent yesterday in a fox hole, the Fed made money free yesteday
Bill Flekenstien, who called the housing bust said of it:
For any doubters out there, the last paragraph of the communique read: “The Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities . . . and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.” Furthermore, “the Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.” My friend Jim Grant said that paragraph should have had the subhead: “Gold $36,000.”
In other words, the Fed went for it — corroborating the view that many of us have held for some time: that when push came to shove, they would let nothing stand in the way of printing any amount of money and monetizing anything required to fend off the ill effects of the unwinding bubble. Of course, there’s an unwritten sequel to this story: The Fed will never get around to taking any of that liquidity back out. Thus, whenever the economy stabilizes, at whatever level, the rate of inflation seen shortly thereafter will be quite substantial, I would guess.
Mr. Fleckenstien is right, we are in for some giant inflation. There is no such thing as a free lunch and no such things as free money. You’ll pay for both eventually and hyper-inflation will be the price of this free money….
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This is a god one:
While other money managers scrambled to survive the financial market meltdown, value investor extraordinaire Seth Klarman (MBA ’82), president of The Baupost Group in Boston, cautiously pursued buying opportunities. After sitting patiently on the sidelines with a mountain of cash — 40 to 50 percent of Baupost’s $14 billion–plus in assets — for several years, the firm’s recent investments have cut its cash stash in half. Distress selling, it seems, breeds the kind of bargains Klarman lives for.
Fresh out of HBS, Klarman didn’t hesitate when Adjunct Professor Bill Poorvu recruited him to help manage a $27 million pool of capital in the newly formed Baupost. While the starting salary was an underwhelming $35K, it turned out to be the opportunity of a lifetime. In 26 years, Baupost has racked up an enviable 20 percent annual compound rate of return, earning Klarman entry into the Alpha magazine Hedge Fund Hall of Fame. The firm has grown from 3 to 100 employees.
A consummate team player, Klarman rarely uses his private office, choosing instead to sit at the trading desk where he works closely with analysts on investment decisions. But work isn’t all-consuming. He makes time for family and outside pursuits. As his three children grew, he coached his daughters’ soccer teams and attended his son’s recitals. And he is deeply committed to a number of philanthropic causes. Klarman recently took time to discuss investing, the credit crisis, and his approach to philanthropy.
When you started with Baupost at age 25, did you already consider yourself a value investor?
Yes. After my junior year in college and right after graduating, I worked for Mutual Shares Corporation, which was run by a wonderful gentleman named Max Heine. I learned a huge amount about value investing. It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.Did you ever waver in your investment style?
Never once.What gave you the resolve to say no to all the other investment approaches?
There are several answers. First, value investing is intellectually elegant. You’re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase highfliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it’s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock.Do you set an annual return target?
We think it’s madness to target a return. Return lies in some relationship to risk, albeit there are moments when it’s out of whack, when you can make a high return with very limited risk. My view is that you can target risk versus return. So you can say, I’ll take the very safe 6 percent, I’ll take the somewhat risky 12, or I’ll take the enormously risky 20, knowing that 20 might actually be minus 20 by the time the actual results are known. We just don’t think targeting a return is smart.You are lead editor of the new edition of Security Analysis, the bible of value investing by Benjamin Graham and David Dodd, first published in 1934. Is their advice still relevant 75 years later?
At no time since 1934 has it been so relevant given the financial turmoil and distress in the world and the possibility that we could be reliving some sort of serious economic downturn. What’s wonderful about Graham and Dodd is that their advice is timeless. And it is not just about investing; it’s also about thinking about investing. It basically teaches you the questions that you should ask, and it makes endless references to the foibles of human nature in the markets.Given the recent credit market meltdown, have we made much progress in figuring out how to avoid the pitfalls pointed out by Graham and Dodd?
No. What happens is that people always want to believe that this time is different, that there’s something new under the sun, and that through their own ingenuity they can wish away risk. The idea that risk premiums would go to zero, that we’re somehow overcoming human nature, is absurd. The whole reason that our capitalist system works the way it does is because there are cycles, and the cycles self-correct. With too much excess, eventually you get a downturn.So the explosion in securitized assets was a ticking time bomb?
It’s not amazing that securitized products were created. There are huge financial incentives for the people involved. What’s amazing is that anybody actually bought them. That’s because they’re created with a one-dimensional idea of what the economy and the world are going to do. If you have nothing but good times, then securitization makes tremendous sense. But securitization, for all of the commingling and diversification it gives you, also gives you a lack of transparency. So if you have an environment like the one we have now, the assets that have been securitized actually make you worse off than if they were just held as whole loans.The unanswered question is how did the smartest people in the world who run the major Wall Street firms not understand that these products were toxic and end up getting caught with them on their books?
As Fed chairman, did Alan Greenspan have a hand in creating the current credit market crisis?
Until recently, Greenspan seemed unaware of his role in influencing markets. As Fed chairman, when he advised people not very many years ago to take out variable rate mortgages, he aided and abetted the housing market excesses. When he said there was irrational exuberance in the market [in 1996], he was basically right. But then he didn’t act even though he had plenty of levers he could have pulled that didn’t have to do with changing interest rates. He could have raised margin requirements, for example. But instead, he came up with the ridiculously lame idea that bubbles need to be allowed to run and that the Fed can clean up the mess afterward, which only had the effect of inflating subsequent bubbles, most notably the housing bubble that came as a result of the easy money. So he’s just been unaware of the impact of his encouragement, and his inaction got us into the terrible mess we’re in today. It’s not all his fault, but I hold him largely responsible for it.How have Ben Bernanke and Henry Paulson (MBA ’70) done in managing the financial crisis?
They have been dealt an unimaginably bad hand. If any of us were in their shoes, we would be doing similar things, although it is reasonable to assume that part of the problem we are facing today is a result of previous government actions, and today’s government actions will give rise to future problems as well.The lesson should be that we need to get to a point where we don’t need to intervene in the future, because we realize that intervention also delivers incredibly dangerous messages and creates a giant moral hazard. Bernanke and Paulson have to realize that if we’re going to intervene when things are bad, we’re also going to intervene when things are good and take away the punch bowl before the party gets too far along. One-sided intervention is even more dangerous. It will create an ever bigger bunch of excesses that will require an even bigger bailout next time.
Was the $700 billion federal rescue package, sold as a plan to buy toxic mortgage-backed securities from banks, the right way to go?
Defining the problem you are trying to solve is critical in knowing whether this plan will solve it. The bailout does almost nothing to solve the specific problem of declining housing prices. If the government really wants to tackle that problem, making capital available so that banks can make safe loans is crucial. Injecting $250 billion into the nation’s banks is a big step in that direction.How do you approach philanthropy?
I’m a big believer in giving back. We all have an obligation to leave things better than where we found them.I have more than I’ll ever need, and more than my family will ever need. I’m only working now for philanthropy. So everything I do is about giving back. In fact, one of the things we did at Baupost when we recently took on some additional clients was to accept only educational endowments and foundations. We figured we would further benefit the world by helping these organizations rather than individuals. That decision was very important for me and for all the firm’s partners.
Also, given the extremely difficult financial environment we are in, I expect charities will be greatly affected. That’s why it’s incumbent on those who can to step up and help fill the void.
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Wednesday’s links
Fraud, Videos
– Please explain this to me… “2008 is on pace to be a slightly cooler year in a steadily rising temperature trend line. Experts say it’s thanks to a La Nina weather variation. While skeptics are already using it as evidence of some kind of cooling trend, it actually illustrates how fast the world is warming”
– Just passed 200,000 views on my video channel\, is that good?
–
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Not as crazy as it may sound….
Harley-Davidson, Inc. (NYSE:HOG) announced today that President and Chief Executive Officer James L. Ziemer has informed the Board of Directors that he intends to retire in 2009, capping a 40-year career with the Company. The Board of Directors has formed a search committee to review both internal and external candidates. Ziemer will remain in his current role until a new CEO is in place.
“Jim Ziemer has dedicated his entire professional career to Harley-Davidson and has been a great advocate for the Company,” commented Board Chairman Jeffrey L. Bleustein. “All of us who have worked with Jim throughout the years have benefited from his leadership, his selfless commitment to the Company and his contributions to making the brand one of the most admired and successful brands in the world. As an avid and lifelong motorcyclist, Jim also exemplifies the great legacy and spirit of Harley-Davidson.”
Ziemer is a native Milwaukeean who grew up in the neighborhood next to Harley-Davidson’s original Milwaukee factory location on the city’s west side. He started with the Company in 1969 as a freight elevator operator while attending the University of Wisconsin-Milwaukee. Upon earning his undergraduate degree in accounting at UWM, he joined the accounting department where he spent the majority of his career. He was named the Company’s Chief Financial Officer in 1990. In 2005, he was named President and Chief Executive Officer of Harley-Davidson, Inc. Ziemer also serves on the Board of Directors of Textron, Inc.
“Working at Harley-Davidson has been an honor and privilege and has fulfilled a life-long dream for me,” said Ziemer. “I am extremely proud of what our outstanding team of employees and dealers has accomplished together. There is always new and exciting work to be done on Harley-Davidson’s epic journey, and I have great confidence that the powerful combination of our employees, customers and dealers around the world and their passion will continue to fuel the strength of the brand. I am delighted to be able to spend more time with my family and am enthusiastic about the Company’s tremendous opportunities and its prospects for success in the years to come.”
Why maybe the “Car Czar”? Unlike the US auto makers like Ford (F) and GM (GM), Harley Davidson has had a very successful labor union relationship. That is not to say it has been all roses, union relationships never are, but it is to say that both side have profited handsomely from the arrangement, unlike the auto manufacturers.
That fact alone makes Ziemer the perfect person for the post. He will have little patience for management that turns out inferior products (and way too many lines of them) and the same intolerance for labor unions that want to enrich membership at the expense of shareholders and the company’s viability.
Because of his success at Harley Davidson, either side would be hard pressed to object to his appointment unlike GE’s (GE) former CEO Jack Welch, who’s name has been tossed in the ring but would face strong union objections because of his stance on them. Personally I think Welch would be great but realities just will not allow it.
Disclosure (“none” means no position):Long HOG, GE, none
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Selling Altria…..It’s Been Great..
No, it has nothing to do with any “moral objection” to selling cigarettes. I fear the legal landscape is bout to change in a very negative way..
First, Altria said yesterday:
In a 5-4 decision, the Supreme Court today ruled that a lawsuit involving “lights” cigarettes brought under the Maine Unfair Trade Practices Act was not barred by federal law.
“While we had hoped for a dismissal based upon federal preemption, it is important to note that the Supreme Court made no finding of liability. We continue to view these cases as manageable, and the company will assert many of the strong defenses used successfully in the past to defend against this very type of case,” said Murray Garnick, Altria Client Services senior vice president and associate general counsel, speaking on behalf of Philip Morris USA.
The Court said that the plaintiffs “still must prove that [the companies’] use of ‘lights’ and ‘lowered tar’ descriptors in fact violated the state deceptive practices statute.”
Today’s decision came in Altria Group, Inc. v. Good.
The decision is a horrible one in that it now opens all businesses to suits that would have ordinarily been funneled to Federal Court to State Court where we all know nothing good can happen. At a time when the US is fighting to house its share of international business, increasing litigation costs is not the way to go. But, that is for another post.
Altria. It has been a wonderful investment bought back in 2000 for a now adjusted $4 a share it has produced shares of Kraft (KFT), sold, and Phillip Morris International (PM), still held. It has also produce thousands of dollars in dividends over the years. I will hold PMI as it yields 5%, has great growth prospects and little ligation risk.
But, I fear things are going to take a turn for the worse here domestically and with already owning shares of the international tobacco operations, it is time to exit. Will the upcoming purchase is UST (UST) help earnings? Yes. Will it offset the upcoming deluge of lawsuits against the company? Not so sure. Having Tom Daschle at HHS is also a bad omen. Whatever grand plans he has for universal health care will undoubtedly be funded in part on the back of cigarette companies through litigation or its customers through oppressive taxes.
The irony of the tax argument is that it is a “negative” not “progressive” tax. We know the less education a person has, the more likely they are to smoke. We also know that those with less education tend to be lower income earners. It this case, raising taxes to these addicts decreases their disposable income to fund grand ideas of health care for all. Nice…”soak the poor”
This is also a result of better opportunities for the funds. Do I think the price of Altria (MO) will double in the next 12-18 months? No. I have a high degree of confidence the price of oil will though. I am buying that through the DBO (DBO) and DXO (DXO) ETF’s.
Disclosure (“none” means no position):Long PM, DBO, DXO, none
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Borders To Try Alternate Model
This does make sense…
Borders Group Inc. has agreed to accept books from HarperStudio on a nonreturnable basis, departing from a decades-old publishing tradition.
Under the terms of the deal, the nation’s second-largest bookstore chain by revenue will get a deeper discount on initial orders of books published by the new imprint of News Corp.’s HarperCollins Publishers — 58% to 63% off the cover price, instead of the usual 48%. In exchange, Borders won’t return any unsold books to HarperStudio, instead probably discounting them in the store. (News Corp. owns The Wall Street Journal.)
“The idea of taking inventory and then shipping it back isn’t a good idea for anybody. We’re open to all publishers to discuss alternatives to the traditional return model,” said Robert Gruen, executive vice president of merchandising and marketing at Borders, of Ann Arbor, Mich.
Under standard industry practice dating to the 1930s, retailers can send back whatever new titles don’t sell for full credit, with publishers paying for shipping. This has created a mass of titles that are trucked from one warehouse to another until they eventually are sent back to the bookstore chains, where they are sold for a significant discount to the list price.
People in the industry estimate that between 30% and 40% of all consumer adult titles are eventually returned to their publishers.
“Returns have never made sense in our business, and with the recent economic downturn, publishers and booksellers are more open than before to experimenting with models that might decrease waste and increase profit,” said Robert Miller, president and publisher of HarperStudio. When he started the imprint earlier this year, Mr. Miller said he intended to shake up traditional book-publishing economics.
Pro’s are that the new arrangement instantly increases margins or, should Borders elect not to go that route, they are now able to become more competitive on prices to the consumer without pressuring current ones. The key to making it work is inventory. It now become more important than ever to maintain proper levels to maximize sales of new titles at higher prices.
Borders this year has shown that it is able to do that and having control of the website from Amazon (AMZN) does give them a far more profitable clearing house for unsold titles.
This is a very good move, what needs to happen next is clarity on the “alternative financing arrangement with Bill Ackman and Pershing.
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