I noticed something interesting in the news today. I was reading an article about the housing market, detailing that housing prices nationwide have dropped about 18% in the last year. The news article went on to state that more bad news was expected, as housing prices were expected to drop an additional 15-20% before leveling off at the end of 2009.
Why is it bad news when housing prices drop? Shelter is a basic human need. Housing is a product that we all use, and many of us would like more of. If housing prices fall, than buyers who were priced out of the market can now buy. Other buyers can now afford more house. From this perspective a drop in housing prices is good news.
“Oh, but what about the poor house sellers,” you may say. “Now they aren’t making any money when they sell their property.” Well, when big screen TV’s drop in price by 50% in a year, I don’t hear any boohooing over the fate of the poor TV manufacturers. What I hear is “Now I’m gonna get me a 54” wide screen. In HD. When those linemen hit that quarterback, I’m gonna see his ribs crack! A bigger TV is my right as an American. I heard it says so in the Constitution.”
Anyone who has lived in their house for five years or more isn’t going to be hurt by the drop in housing prices. Anyone looking to buy their first house is going to be helped by the drop in housing prices.
But what about the people losing their houses due to foreclosure? Well, they aren’t losing their houses because prices are dropping. They are losing their houses because they are not paying the mortgage. In many cases, they can’t afford the mortgage because the house was too expensive for their income.
The history of the housing boom over the last six years was people taking on more and more debt to buy ever more expensive houses. They were able to take on this debt because of mortgage products such as “liar’s loans” and negative amortization loans. The current process of price correction is mostly painful to the lenders, who are suffering the losses from loaning more money than people can afford to pay.
Housing prices are going to continue to slide until someone with the median household income can afford the mortgage payments on the median priced house. The faster that happens, the faster the housing sector, and the economy as a whole, will recover.
And that will be good news for everyone.
Monday, July 28, 2008
Sunday, July 20, 2008
Locking the barn door ...
A week ago the Federal Deposit Insurance Corporation (FDIC) took over California based IndyMac Bank. It was reopened on Monday, July 14 as IndyMac Federal Bank. On Monday and Tuesday of last week there was extensive news coverage of depositors lined up at the bank to cash out their accounts. The lines went around the block. Some people had lined up hours before the bank was due to open. They brought lawn chairs.
This behavior was both predictable and inexplicable. Predictable, because humans are prone to panic when they’re threatened with ruin. Losing access to all of your money because your bank locks its’ doors fits my definition of ruin. So it is completely understandable that some of the depositors would act out of fear.
Inexplicable, because there was never any risk that the depositors would lose a nickel due to the bank being closed. None.
Banks are required by law to buy deposit insurance from the Federal government. The more deposits the bank has, the more they pay in premiums. The deposit insurance guarantees that the depositors will get their money back if the bank fails for any reason. So you have to wonder why the people lined up, since they derived no advantage from doing so, but they did lose the opportunity to do something more profitable with their time.
I also wonder why the media coverage didn’t do a better job of pointing out this foolishness.
Federal deposit insurance does have a limit. You are only insured up to $100,000 held in any one bank. If you have multiple accounts at one bank, even if they are joint accounts with someone else, the total insurance coverage is still a total of $100,000. Many of the people interviewed in line at the bank had assets way over the limit with IndyMac Bank. Given how easy it is to keep accounts at several banks, you really have to question what these guys were thinking.
Even in an industrial, post-modern society like ours, the old expression “Don’t keep all your eggs in one basket” still makes sense.
This behavior was both predictable and inexplicable. Predictable, because humans are prone to panic when they’re threatened with ruin. Losing access to all of your money because your bank locks its’ doors fits my definition of ruin. So it is completely understandable that some of the depositors would act out of fear.
Inexplicable, because there was never any risk that the depositors would lose a nickel due to the bank being closed. None.
Banks are required by law to buy deposit insurance from the Federal government. The more deposits the bank has, the more they pay in premiums. The deposit insurance guarantees that the depositors will get their money back if the bank fails for any reason. So you have to wonder why the people lined up, since they derived no advantage from doing so, but they did lose the opportunity to do something more profitable with their time.
I also wonder why the media coverage didn’t do a better job of pointing out this foolishness.
Federal deposit insurance does have a limit. You are only insured up to $100,000 held in any one bank. If you have multiple accounts at one bank, even if they are joint accounts with someone else, the total insurance coverage is still a total of $100,000. Many of the people interviewed in line at the bank had assets way over the limit with IndyMac Bank. Given how easy it is to keep accounts at several banks, you really have to question what these guys were thinking.
Even in an industrial, post-modern society like ours, the old expression “Don’t keep all your eggs in one basket” still makes sense.
Monday, July 14, 2008
Beer Wars II: Winners and Losers
The battle for Anheuser Busch appears to be over. AB accepted a an offer at $75 a share from Belgian brewer InBev. I should say Belgian headquartered brewer InBev, since the brands produced by the company include German Beck’s, English Bass Ale, and a slew of Brazilian and other Latin American beers.
As part of the deal, InBev has promised not to close any of AB’s twelve US breweries, and to keep the US headquarters in St. Louis. These promises, of course, are worthless. InBev will do what it pleases with the US assets once the deal is closed. However, they probably will keep the headquarters in St. Louis and all the breweries open for now. After all, you have to have the headquarters somewhere, and with transport costs rising, keeping production close to your markets makes sense.
As the deal moves to closing, it is possible to make out who some of the winners and losers are going to be. The people least affected by the merger will be Budweiser consumers. InBev will almost certainly make no changes to the AB products.
Winners
Anheuser-Busch Stockholders: These guys are the big winners. Six months ago AB stock was selling for around $45 a share. Now they are getting $70 a share. In cash. None of this business of you get so much cash, and so much InBev stock. The green folding stuff. That’s a 55% return on your investment. Warren Buffett owned around 5% of Anheiser-Busch. The guy looks more like a genius than ever. Banks and real estate are collapsing around our ears, and he sticks in his thumb and pulls out a plumb. Amazing.
Anheuser-Busch competitors: InBev and AB have promised annual savings of $1.5 billion a year. To do that, there are going to be big layoffs (see Losers, below) and a reduction of advertising. Aggressive cost cutting causes turmoil in an organization. As InBev assimilates AB that will be a massive distraction within the AB ranks, at the same time the marketing budget is getting chopped. Look for Anheuser-Busch to loose market share to their rivals.
Losers
InBev stockholders: InBev stock has dropped about 10% from just before they announced their off for Anheuser-Busch to today. InBev is doing the deal to continue growing their earnings. But paying off the $52 billion they are borrowing will reduce their earnings in future years, unless they can find synergies or cost savings. There are not a lot of synergies in this deal. InBev is not going to sell more Michelob in Europe, and Americans are not going to switch to Stella Artois from Miller Lite. Unless the management of Anheuser-Busch was incompetent, the cost savings (read: layoffs) will cause them to lose market share. Somehow I don’t think that Belgians are going to be better at managing the US beer market than Americans. If you want proof, check out the new Stella Artois commercials running on TV. Bottom line, InBev earnings go up in 2008, then stagnate or decline in 2009 onward.
Anheuser-Busch Middle Management: This is where the ax is going to fall. As part of their defense against the takeover, Anheuser-Busch has already announced a plan to cut 10% of the salaried workforce. InBev will use that as a starting point. Adding insult to injury, the career paths of the survivors in headquarters just got cut short, since the top jobs will now be filled by Belgians on what Europeans will consider a hardship tour. The next six to eighteen months will have the staff more focused on spreading rumors, backstabbing, and running for cover than on reading the market and building their brands. The beneficiaries of this bloodletting and attendant confusion will be AB’s competitors (see Winners, above).
St. Louis: As the home of Anheuser-Busch, St. Louis benefited enormously. Not only did AB have a huge payroll, but they were a soft touch for every philanthropic organization in their hometown. Going forward, not only will the payroll be smaller, but approvals on community support will have to be approved in Belgium, and the decision makers in Brussels will be a lot more focused on bringing the money home to support their favorite causes.
There are winners and losers in every deal. One thing that’s not going to change, however, is the beer. Love it or hate it, Budweiser is still going to taste the same this time next year.
As part of the deal, InBev has promised not to close any of AB’s twelve US breweries, and to keep the US headquarters in St. Louis. These promises, of course, are worthless. InBev will do what it pleases with the US assets once the deal is closed. However, they probably will keep the headquarters in St. Louis and all the breweries open for now. After all, you have to have the headquarters somewhere, and with transport costs rising, keeping production close to your markets makes sense.
As the deal moves to closing, it is possible to make out who some of the winners and losers are going to be. The people least affected by the merger will be Budweiser consumers. InBev will almost certainly make no changes to the AB products.
Winners
Anheuser-Busch Stockholders: These guys are the big winners. Six months ago AB stock was selling for around $45 a share. Now they are getting $70 a share. In cash. None of this business of you get so much cash, and so much InBev stock. The green folding stuff. That’s a 55% return on your investment. Warren Buffett owned around 5% of Anheiser-Busch. The guy looks more like a genius than ever. Banks and real estate are collapsing around our ears, and he sticks in his thumb and pulls out a plumb. Amazing.
Anheuser-Busch competitors: InBev and AB have promised annual savings of $1.5 billion a year. To do that, there are going to be big layoffs (see Losers, below) and a reduction of advertising. Aggressive cost cutting causes turmoil in an organization. As InBev assimilates AB that will be a massive distraction within the AB ranks, at the same time the marketing budget is getting chopped. Look for Anheuser-Busch to loose market share to their rivals.
Losers
InBev stockholders: InBev stock has dropped about 10% from just before they announced their off for Anheuser-Busch to today. InBev is doing the deal to continue growing their earnings. But paying off the $52 billion they are borrowing will reduce their earnings in future years, unless they can find synergies or cost savings. There are not a lot of synergies in this deal. InBev is not going to sell more Michelob in Europe, and Americans are not going to switch to Stella Artois from Miller Lite. Unless the management of Anheuser-Busch was incompetent, the cost savings (read: layoffs) will cause them to lose market share. Somehow I don’t think that Belgians are going to be better at managing the US beer market than Americans. If you want proof, check out the new Stella Artois commercials running on TV. Bottom line, InBev earnings go up in 2008, then stagnate or decline in 2009 onward.
Anheuser-Busch Middle Management: This is where the ax is going to fall. As part of their defense against the takeover, Anheuser-Busch has already announced a plan to cut 10% of the salaried workforce. InBev will use that as a starting point. Adding insult to injury, the career paths of the survivors in headquarters just got cut short, since the top jobs will now be filled by Belgians on what Europeans will consider a hardship tour. The next six to eighteen months will have the staff more focused on spreading rumors, backstabbing, and running for cover than on reading the market and building their brands. The beneficiaries of this bloodletting and attendant confusion will be AB’s competitors (see Winners, above).
St. Louis: As the home of Anheuser-Busch, St. Louis benefited enormously. Not only did AB have a huge payroll, but they were a soft touch for every philanthropic organization in their hometown. Going forward, not only will the payroll be smaller, but approvals on community support will have to be approved in Belgium, and the decision makers in Brussels will be a lot more focused on bringing the money home to support their favorite causes.
There are winners and losers in every deal. One thing that’s not going to change, however, is the beer. Love it or hate it, Budweiser is still going to taste the same this time next year.
Tuesday, July 8, 2008
You Can't Make This Stuff Up
The Democratic Party will hold their national convention in the mile high city of Denver this August. As part of the planning for this major event, rules have been issued to govern the suppliers of various items used at the convention.
A big part of the push is to apply strict environmental rules to the activities. Leading the charge is Denver’s mayor, John Hickenlooper, who calls green activities “the new patriotism.” Somehow I wasn’t aware that there was anything wrong with the old patriotism. In charge of the greening of the convention is Andrea Robinson, the first ever Director of Greening. She couldn’t do it alone (it must take a village), so she hired an Official Carbon Advisor.
To test whether the balloons were biodegradable, Ms. Robinson buried some in a compost heap to bake away into fertilizer. The initial results from this test were not promising, so she added more liquid and reburied the balloons. Maybe the biodegradable balloons were only half-baked, only needing more time to become fully baked.
Then there are the fanny packs and baseball caps to be given away to each of the delegates. They are to be made with union labor. Out of organic fabric. Apparently the official merchandiser is having a hard time locating a supplier. According to Bob DeMasse: "We have a union cap or an organic cap. But we don't have a union-organic offering." I suspect that union caps cost twice as much as other suppliers, and organic caps also cost twice as much. Combine the two, and maybe Mr. DeMasse just didn’t want offer items that cost four times the market rate. Or maybe to switch over to organic cloth would have required the union shops to renegotiate their contracts.
The best part is the catering rules. For example, no fried food. Zip, nil, nada. This, of course, makes sense from the viewpoint of the party espousing national health care. After all, is the government is going to pay for your medical care, the government should be able to control what you eat. It’s for your own good.
My personal favorite is the rule that states every meal should include "at least three of the following colors: red, green, yellow, blue/purple, and white." (Garnishes don't count.) I can’t figure out whether this is supposed to be more nutritious, or if it is a way of demonstrating the Democratic Party’s commitment to diversity.
For me, these rules are a taste of what the Democratic Party would enforce on the entire country. If they win enough power in the next election.
A big part of the push is to apply strict environmental rules to the activities. Leading the charge is Denver’s mayor, John Hickenlooper, who calls green activities “the new patriotism.” Somehow I wasn’t aware that there was anything wrong with the old patriotism. In charge of the greening of the convention is Andrea Robinson, the first ever Director of Greening. She couldn’t do it alone (it must take a village), so she hired an Official Carbon Advisor.
To test whether the balloons were biodegradable, Ms. Robinson buried some in a compost heap to bake away into fertilizer. The initial results from this test were not promising, so she added more liquid and reburied the balloons. Maybe the biodegradable balloons were only half-baked, only needing more time to become fully baked.
Then there are the fanny packs and baseball caps to be given away to each of the delegates. They are to be made with union labor. Out of organic fabric. Apparently the official merchandiser is having a hard time locating a supplier. According to Bob DeMasse: "We have a union cap or an organic cap. But we don't have a union-organic offering." I suspect that union caps cost twice as much as other suppliers, and organic caps also cost twice as much. Combine the two, and maybe Mr. DeMasse just didn’t want offer items that cost four times the market rate. Or maybe to switch over to organic cloth would have required the union shops to renegotiate their contracts.
The best part is the catering rules. For example, no fried food. Zip, nil, nada. This, of course, makes sense from the viewpoint of the party espousing national health care. After all, is the government is going to pay for your medical care, the government should be able to control what you eat. It’s for your own good.
My personal favorite is the rule that states every meal should include "at least three of the following colors: red, green, yellow, blue/purple, and white." (Garnishes don't count.) I can’t figure out whether this is supposed to be more nutritious, or if it is a way of demonstrating the Democratic Party’s commitment to diversity.
For me, these rules are a taste of what the Democratic Party would enforce on the entire country. If they win enough power in the next election.
Thursday, July 3, 2008
Too bad we can't burn hot air!
The topic of offshore oil drilling is in the news these days. The Bush administration has proposed opening up areas of the coastal shelf that are under federal jurisdiction to oil exploration. With gasoline prices flirting with $4 a gallon, this was predictable. Equally predictable were the chorus of critics lining up to oppose the administrations proposals.
Their objections range from a concern that offshore rigs will hurt tourism on the beaches to fears about global warning. The folks bringing up the argument about tourism may have a point. But I do wonder: how do they think those tourists are getting to the beach? Rickshaws?
I do want to share my take on some of the other objections to offshore drilling that have been raised.
Offshore drilling won’t lower gas prices, because it will take five to ten years before offshore fields start producing.
This claim is absolutely true, and if your only reason for advocating a return to offshore oil exploration is to cut gas prices right now, you are selling an idea that won’t work. To a large extent, however, the increase in prices is due to increased demand from fast growing emerging markets such as China and India. As those economies grow richer, their demand will only continue to increase, while supply from existing oil fields shrinks. Even if demand (and prices) drop in the near future as conservation efforts take effect, prices will inevitably move higher in the future. So even if offshore drilling doesn’t lower gas prices in 2008, it will keep them from going even higher in 2018.
The oil reserves in offshore fields would only supply enough oil to replace imports for three years.
Actually, it would take ten to twenty years of production to deplete the new offshore oil fields that would be developed if the moratorium on exploration is repealed. This means that a more accurate way of stating this claim is that the reserves in offshore fields would only supply enough oil to replace 30% of imports for ten years. That would be a major boost to any strategy for energy independence for America. It would also do a lot to improve our current trade imbalances, supporting our currency.
We need to work on conservation, not expanding the supply of oil.
The current high gasoline prices seem to be doing a pretty good job of encouraging conservation. Americans are driving about 4% fewer miles than a year ago, and demand for fuel efficient hybrids and other small cars has exploded, while demand for big pickups and SUV’s has collapsed.
Using more oil makes global warming worse.
If we don’t burn oil, then electric utilities are faced with a couple of choices. (A) Burn more coal, or (b) rolling blackouts. Option (c), of course, is build more nuclear power plants, but even if we start today, it will take decades to replace all of our power generation infrastructure. In the meantime, oil fired power plants generate more power with less carbon output than the alternatives. Unless you prefer blackouts.
The attitude of those who oppose offshore oil exploration seems to be that we should not be using petroleum at all. That is not a realistic goal. Play a little thought experiment with me. Assume that one day soon, due to some miracle, it rains Toyota Priuses everywhere. So everyone switches to driving hybrids, all at once. Average fuel efficiency triples overnight. Guess what: every one of those cars still has a gasoline engine. We are still going to need to use oil.
No matter what we do in terms of conservation and developing energy alternatives, we’re going to be using a lot of oil for a long time to come. We can continue to rely more and more on getting that oil from countries where America is disliked, in essence enriching our enemies. Or we can do everything within our power to keep greater independence from foreign sources. Offshore drilling will be only one part of any strategy for maintaining a high energy society. It is, however, a necessary part.
Their objections range from a concern that offshore rigs will hurt tourism on the beaches to fears about global warning. The folks bringing up the argument about tourism may have a point. But I do wonder: how do they think those tourists are getting to the beach? Rickshaws?
I do want to share my take on some of the other objections to offshore drilling that have been raised.
Offshore drilling won’t lower gas prices, because it will take five to ten years before offshore fields start producing.
This claim is absolutely true, and if your only reason for advocating a return to offshore oil exploration is to cut gas prices right now, you are selling an idea that won’t work. To a large extent, however, the increase in prices is due to increased demand from fast growing emerging markets such as China and India. As those economies grow richer, their demand will only continue to increase, while supply from existing oil fields shrinks. Even if demand (and prices) drop in the near future as conservation efforts take effect, prices will inevitably move higher in the future. So even if offshore drilling doesn’t lower gas prices in 2008, it will keep them from going even higher in 2018.
The oil reserves in offshore fields would only supply enough oil to replace imports for three years.
Actually, it would take ten to twenty years of production to deplete the new offshore oil fields that would be developed if the moratorium on exploration is repealed. This means that a more accurate way of stating this claim is that the reserves in offshore fields would only supply enough oil to replace 30% of imports for ten years. That would be a major boost to any strategy for energy independence for America. It would also do a lot to improve our current trade imbalances, supporting our currency.
We need to work on conservation, not expanding the supply of oil.
The current high gasoline prices seem to be doing a pretty good job of encouraging conservation. Americans are driving about 4% fewer miles than a year ago, and demand for fuel efficient hybrids and other small cars has exploded, while demand for big pickups and SUV’s has collapsed.
Using more oil makes global warming worse.
If we don’t burn oil, then electric utilities are faced with a couple of choices. (A) Burn more coal, or (b) rolling blackouts. Option (c), of course, is build more nuclear power plants, but even if we start today, it will take decades to replace all of our power generation infrastructure. In the meantime, oil fired power plants generate more power with less carbon output than the alternatives. Unless you prefer blackouts.
The attitude of those who oppose offshore oil exploration seems to be that we should not be using petroleum at all. That is not a realistic goal. Play a little thought experiment with me. Assume that one day soon, due to some miracle, it rains Toyota Priuses everywhere. So everyone switches to driving hybrids, all at once. Average fuel efficiency triples overnight. Guess what: every one of those cars still has a gasoline engine. We are still going to need to use oil.
No matter what we do in terms of conservation and developing energy alternatives, we’re going to be using a lot of oil for a long time to come. We can continue to rely more and more on getting that oil from countries where America is disliked, in essence enriching our enemies. Or we can do everything within our power to keep greater independence from foreign sources. Offshore drilling will be only one part of any strategy for maintaining a high energy society. It is, however, a necessary part.
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