How Cheap is the Market? (corrected)

I have run a few models suggesting decent long-term returns, and might chose to share those results at some point, but in the meanwhile, I thought some perspectives on valuation and expected long-term returns in the stock market.

Much of the gyrations on Wall Street deal with predicting what's happening now or next year, whereas the true driver of long-term returns is valuation and long-term earnings growth. The problem is Wall Street values the market on a multiple of recent earnings, which are highly volatile. Take a look at the chart below:


The blue thin line and thick trendline are the trailing 12 month (TTM) earnings for companies that make up the S&P 500 index. The problem with the traditional way of valuing the market using a multiplier of TTM earnings (or worse, some future year's earnings) is that it indicates that the market is worth 46% less now that it was a few years months ago. Indeed, that's consistent with the sell-off we see in the market, but for a long-term investor, is a whole bunch of bull!!

The pink line and red trendline represent a 10-year moving average of the TTM earnings. Essentially you are smoothing historical earnings to make long-term decisions while smoothing cyclical variability. Voila, it's fairly smooth. For a long-term investor, the market value hasn't changed in the last few years months - only the price.

So what does it all mean? The next chart is the S&P 500 price history, and the trend of 12, 16 and 25 times the 10-year earnings average. Think of this as a low, median and high value. I have been working on charts since 1910, but I need to verify a few things, so I'll only present the last almost 15 years.


Notice that the big crash in 2000-01 did not make the market cheap. It just took the market from ridiculously overvalued to expensive. And that explains why we have had mediocre returns since that time. In contrast, valuations today appear to present a much rosier picture in the long-term.

That "in the long-term" is the key piece! Short-term, prices could ... heck, almost certainly will fall more. As I write this, the markets are in a 3-day rally, but I expect any rally will fizzle. How low could markets go? I don't know that there is a clear answer in the data.

I would normally be tempted to answer down to the level of 14x 10-year earnings. That would suggest about 630 - quite a haircut more! But given the low level of interest rates and poor outlook for sovereign debt, I'd imagine that level seems low. I intuitively think 16x earnings is a bit high for a market bottom, and my guess is that the market will probably end up bouncing between 750-800 before a gradual rebound.

But we don't know. And at present levels, we can reasonably expect a decent return. How much? Earnings have historically grown about 6% a year. The dividend yield is about 3.2%. If we assume no multiplier change, that's still over 9% a year - a lot better than treasuries or CDs!

Shocking Compilation of the Day: Foreclosure Sales

A compilation of some shocking numbers I've come across in the last few days:

Over a third of all home sales currently are foreclosed properties! Translation: Any increase in home sales ("we have a bottom") is because of the glut of cheap homes.

23% of all homeowners with a mortgage owe more on their mortgage than their house is worth. Translation: Holy Shit!!

A foreclosure near your home depresses the value of your home from somewhere between $5,000 to over $20,000, depending on who did the study! Translation: This foreclosure thing does affect you, at least in the short-term.

Story of the Day: Fart Research!!

So evidentally the foul odor in farts has an important physiological role in controlling blood pressure. Oh dear! Please don't take this as an invitation to share. If you must regulate your BP, please find the restroom nearest you!!

There are No Tax Benefits to Owning a House for Most People!!

I was having tea with this elderly British couple from Canada today, and in between a spirited political discussion, the topic of home ownership came up. I was fascinated to learn that home ownership in Canada was a very different beast! Buyers are typically required to put 25% down (compared with actually getting cash here in the US), and most families pay their loans off in 10-15 years. This couple in fact paid their Canadian house in 6 years!! That's a stunning difference from the US.

The big difference is that there is no tax deduction for mortgage interest in Canada. That of course, is much touted for being a reason to buy a house. Save on the taxes. But that is a totally bogus reason for many homeowners.

Let's run the numbers. Using this calculator, I estimate my tax savings on a mortgage of $200,000 is just a bit over $5,000. Wow! Except that the standard deduction for 2008 is $5,450 for singles, $10,900 for couples filing jointly. Which means, you'd still elect to use the standard deduction, unless you have substantial other deductions.

And mind you, those tax savings were only for the first year - they diminish every year as more of your mortgage goes towards principal. Oh, and don't forget property taxes which can take a bit out of your wallet.

There might be many reasons to buy a house, but saving on taxes isn't one of them ...

Quote of the Day: Joe the Plumber

Joe "the Plumber" Wurzelbacher, the man in the spotlight during the third presidential debate had this to say to ABC News:

You know, me or -- you know, Bill Gates, I don't care who you are. If you worked for it, if it was your idea, and you implemented it, it's not right for someone to decide you made too much."

Here is the whole story.

Hold On!

Right when I started to get optimistic on stock market prospects, we have a fast and furious rally. The Dow ended up 11%, the S&P 11.5%, the DAX over 11%. And at the time of this writing, the Nikkei is up over 12%, and much of Asia is up over 5%. Oh well! The market might be getting ahead of itself. After all, much of the pain is yet to hit Main Street, and it's likely that when this fact sinks in, markets will fall again. It's likely we will see some weakness during which to enter the market.

Breathe Breathe ...

With the market turmoil, you may have no doubt lost a few months (years?) of your life fretting about your returns. I consider myself a value investor, who is supposed to live for times like this when assets can be purchased at a bargain, but for all that, I've had some heartburn as I've lost as much as 60% on some aggressive mutual funds, and close to 40% on an actively managed (by me) portfolio. But it is a good time to step back and take a look at the bigger picture.

I ran some computer models yesterday, and the risk/return profile has improved considerably due to the recent decline. I hesitate to provide too much information here, because much of it requires qualifiers. I have considered writing a newsletter of sorts, and even wondered if there might be a market for me to sell it at some nominal cost, not as a get-rich scheme, but to incentivize me to develop these ideas further. (Would you buy such a newsletter that focuses on the true investors, and doesn't spit out the same cliches that every mutual fund company does?)

But without getting into specifics, the expected returns from stock investing have moved from "not too much better than savings" a year ago, to offering decent (although not get rich quick) returns. We have no idea what stocks will do from here on - they could fall 5%, 10%, 50%. But that's the wrong question to ask for most investors.

It is also the first time in a while that one of my models suggests a 100% stock stake in my 401k. What? I was not 100% stocks before, even though I have over 30 years to retire? Ah, that's where the conventional advice doled out fails small investors. But that's a story for another day (or a newsletter?)

Now is a time to be a net buyer. I personally will be looking to deploy my (unfortunately very limited) funds in the next 2-3 months. In my own 401k, I have eliminated my future bond allocations and readjusted my allocation to be more aggressive.

Zogby Poll Mechanics

If you are a politics buff like me, or get your news from the Drudge Report, you probably closely follow the Zogby tracking poll, along with other such polls (the Gallup is the one featured most often). But today I saw a sentence in your release that made me say Whoa!!

The telephone tracking poll shows neither candidate with a clear advantage in the national horserace

What are the magic words? Telephone tracking poll. News flash! Telephone tracking polls don't work! One, you only select voters with phones, bias the samples for people who stay at home during the day or answer the phone ... it's very poor science! And polling is a science!


In this season of statistics, I'd like to recommend one of the best books you can read. The 1954 classic, How to Lie with Statistics is a fantastic guide for the layperson on ways companies and politicians distort statistics to make their case. And no, you don't have to be math-savvy to understand the book! In fact, the telephone poll analysis was something I read in that book years ago.

Liquidity ok, but What About Capital?

The folks at First Pacific Advisors (FPA Funds) have a brilliant new commentary (actually a week and a half old) that's a must read. They point out, much as John Hussman and others have, that the bailout does nothing to address the capital needs of banks. Unless the government overpays for distressed assets, the bailout plan will have them traded, but in some cases, may even cause banks to fail to meet capital requirements after the asset sale, causing more bank failures.

An interesting factoid: corporate America has more than $600 billion cash on its books. Allowing companies like Wal-Mart into the banking business would allow that cash to come to the rescue of our financial system.

Read the whole article!

PS: One of my favorite mutual funds, one that I own personally is the FPA Crescent Fund (ticker: FPACX). If you have some money to put away, even as little as $100 a month, I encourage you to consider this fine conservative fund which has only lost money one year since 1995!!

BW Asia Stories Galore

Wow, I've never found so many stories on BusinessWeek's Asia Insider to be quite so interesting! At a time when the US and Europe are experiencing a serious cash crunch, it seems Asia is swimming in cash. That means we could see Asian companies invest more in the US, and that includes major investments by the Indians, including, fascinatingly, in old-world industries like steel (whoever said the US steel industry was dead?)

And now the big topic of discussion is if China can save the world. The Chinese economy is slowing, property prices are falling, stocks are down 60% and more bad news. But GDP is still expected to grow at over 7%, so that holds hope of a robust Chinese economy preventing a global slowdown?

An Obvious Conflict of Interest

I like Gwen Ifill. I think she's a sharp, smart journo, and I have felt that if CBS truly wanted to get a solid woman anchor, they should have picked her rather than Katie Couric. Having said that, I was shocked to learn of her latest conflict of interest when it comes to moderating the VP debates - she's writing a book on Obama to be released on inaugration day. That means an Obama victory could make a difference of a half million dollars or more!!

I don't think Ifill will be biased, but the appearance of conflict has potentially polluted what should be an interesting debate.

Goodbye Bailout!

Ok, so the bailout isn't truely dead. In fact, it's a given some version will pass. And maybe something needs to be done. It's just this version was phenomenally vague in its specifics, and looked like it could dramatically alter the nature of American capitalism. Oh yeah, and raise the national debt while we are at it.

My objection isn't simply an economic one, although that is a valid point. The brilliant John Hussman wrote a wonderful piece titled You Can't Rescue the Financial System if You Can't Read a Balance Sheet, explaining why this does little to improve bank balance sheets and the likelihood they will fail.

My objection isn't even centrally the price tag, although $700 billion is enough to make you gasp for air. That works out to $5,072 per taxpayer in the US to buy distressed assets and flip them.

What I really dislike is that Uncle Sam would actually own the debt and potentially the stock of American companies. YUCK! For how long? What would the process be to unload these investments? As someone in most developing countries will attest, once the feds take a stake, privatization is not simple. That means we could see a landscape where we have companies with substantial governmental ownership in the US of A!

When the government maintains ownership, even if it is a modest minority stake, how does that influence government policy? As anyone with concerns about US beef will attest, the dual role of the US Dept of Agriculture in regulating and marketing beef often raises questions about the regulatory environment. On the other hand, government ownership could result in politicians trying to twist arms of the corporate leaders for political gains.

And how does the process of government divesture work? If the government sells, would it be perceived as a vote of no-confidence? What might be the rumblings of that? The government is no ordinary trader.

The stock markets have to fall. Earnings have been inflated by artificial methods and will have to normalize. But to save the taxpayer some, the Feds would do better to put a temporary hold on the 'mark-to-market' accounting rule, so they can look into other methods of valuation. 'Mark-to-model' was always bad, especially if there was no regulatory control of the model, but this mark-to-market nonsense is just as bad. Just because someone claims your house is worth $100,000 doesn't mean it is! There is a cash flow stream that has a value - maybe the accounting boards just need to firm up the assumptions used in their DCF model.

Meanwhile I won't hold my breath that another phenomenally bad bill doesn't emerge. All I hope is that the House Republicans managed to prevent the socialization of America! (Senate Repubs, way to show spine!)

Villain of the Day: The SEC?

A lot has been made of John McCain's statement that SEC chairman Cox should be fired. I thought it was a silly demand - after all, a lot of what happened is not Cox's fault. Until I saw this, from the Maudlin newsletter:

It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number. For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.

Hmmm.

Chart of the Day: Commercial Paper

From John Maudlin, here's why the panic - the commercial paper market is what runs the economy!

Quote of the Day: Mark to Market

If you don't follow these things, a lot of the present financial crisis comes from a change in accounting rules! Seriously! The FASB changed from a "mark-to-model" approach, where companies could value financial instruments such as mortgage-backed securities using a computer model based on default rates, to "mark-to-market", which is the price you'd get in the open market, based on the last sale of that asset. John Maudlin writes:

The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion's share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis?

Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor's price impair my income?

Quote of the Day: Stanford at the Olympics

From a newsletter by Ajit Dayal, Quantum Funds:

An interesting statistic: students (former and existing) of Stanford University in USA won 25 Olympic medals in China, of which 8 were gold, 13 were silver, and 4 were bronze. If Stanford were an independent country, it would have ranked as the 9th in terms of gold medals won and 11th in terms of total Olympic medals won.

Quote of the Day: Leveraged Lehman

John Hussman of the Hussman Funds writes:

Last week, Lehman reported $600 billion in assets, on less than $20 billion of common shareholder equity. ... Put another way, a markdown in the value of Lehman's assets by just over 3% would wipe out that reported shareholder equity. One would need to have a great deal of faith in that asset valuation to be willing to buy the company out at any price, since an outright buyer would have to agree to pay off Lehman's bondholders (in excess of $100 billion).

Wow, think homeowner with a $300,000 house, but his equity in the house is only $10,000, and with the house, and credit card and other debts of $50,000. Hmm, so turns out our most esteemed financial firms are no different from the lay homeowner?

Chart of the Day: Real Estate Predictions

Predictions by John Burns of John Burns Real Estate Consulting, reported by the always brilliant John Maudlin.

ANWR Oil Reserves

Some numbers to mull on ...

Mean estimate of ANWR Area 1002 Technically Recoverable Oil
7.7 billion barrels**

US proven oil reserves
21.8 billion barrels

**This estimate is only for the federally controlled area, and was done when oil was at $20/bl. Given that oil is more than 5 times that number, ANWR could have substantially larger oil reserves.

RNC: Day Two Impressions

I only watched the RNC from about 9 or so. And I must say, it was quite a view. The one thing the GOP does better than the Dems is stay on schedule. Especially this year in a truncated convention where time was critical.

The video tribute to Michael Mansoor literally had me in tears. At a time of so much selfishness and cynicism, here was a young man who leaped on a grenade to protect his fellow soldiers. That, and the tribute to the veterans of different wars, set the evening in a really good way for me.

The Dems lost steam too often with breaks. Not the Republicans. Immediately after the tribute was what I thought was a pretty good speech by First Lady Laura Bush. There's something pretty awesome about her - she has so much grace and class! And she went to point out the stats the media have not bothered to point out - especially the highest ever minority performance on achievement tests, and what I think should be the legacy of the Bush administration - increasing the number of Africans receiving antiretrovirals from 50,000 to about 2 million.

President Bush was decent - he had a few good lines, but I don't know if it was the fact that he was speaking by satellite, or what, but he's been better at public speaking. But it was short, and kept the momentum going into the video tribute of Reagan.

The Reagan piece was ok. Seriously, how do you ever make a vid on Reagan and not include the famous "Tear Down these Walls" speech? But there were moments when it was touching.

Fred Thompson was the best speaker of the evening. Talk about knocking it out of the park. Best line was talking about hope ... the hope that McCain had as a POW, that is the true hope. His re-telling of the McCain story was incredibly moving, and for someone like me who has already heard it, I still found myself tearing up.

Joe Lieberman was decent, but entertaining if only because I was surprised how aggressive he was. I won't expect to see calls for his censure within his causus, but it truly motivated the folks at the convention center, and the base in general to see the former VP pick of the Dems come over.

Overall, I thought it was a pretty good night. I think the GOP candidates have less of a need to be specific since they are running on an experience platform. And their experiences have been of surviving torture, reforming government ... not how their candidate met his wife, and asked her out!!

I'm real excited about the Palin speech tonight. The more I see her old interviews, the more I like her. She's been viciously attacked by the jerks like the DailyKos and the far left, but that's a post for another time.

Require Women to be Paid As Much As Men?

John McCain opposed a law legislating equal pay for women as their male counterparts. Ditto Sarah Palin. What is with American conservatism? Is this an instance of GOP bigotry liberals love to complain about.

Women get paid less than men for a variety of reasons, and discrimination is an important, although not only, factor. Studies have routinely showed that women who demand raises, for example, are perceived in a less favorable light than male counterparts. And no unbiased observer can deny the existence of old-boy networks.

The challenge with legislating equal pay for equal work comes down to what constitutes equal work. The whole idea comes from a manufacturing age, when equal work simply could be construed to be equal number of hours, and job functions. However, the age we live in does not lend itself to such analysis.

As an environmental consultant, I make a lot more than some of my peers. And a lot less than some others. Is it because I'm brown? A foreigner? Good looking? Ugly? Or just plain because I'm smarter/dumber or more/less hard-working than my peers? How is a law going to distinguish discrimination from true performance-based pay?

The Palin Alternative

For someone as opinionated as me, I've had a hard time figuring out where I come out on presidential contender John McCain's choice of Alaska Governor Sarah Palin for the second spot. It's one of those improbable hail mary's that you can never judge when the ball's in the air. Nevertheless, if only for my friend S., I will try ...

My first instincts were that this was a weak choice. Yes, Palin's a woman, and in a change election, an outsider helps. I believe it was Newt Gingrich who pointed out that McCain picking an old white guy might be suicide at a time people wanted to be exploring the possibilities of racial and gender transformations. But her resume is thin, with just 20 months as governor, and a mayor of a small town before that.

The case against Palin has been fairly well laid out in the MSM. It takes out the experience argument, even more important because that was McCain's selling point, and a 72-year old man with questionable health. It's unlikely substantial number of Hillary Democrats will defect, given Palin's opposition to reproductive rights, and especially after a fairly rousing call for unity by Hill and Bill at the convention.

Just don't be too quick to write Palin off. First, I think the "woman" angle has been oversold, and another important aspect largely ignored. She's blue-collar as they come. While McCain's alternatives are right white men, Palin comes from a much more modest background than even Obama. Todd and Sarah Palin had to elope because they couldn't afford a marriage. Todd was a commercial fisherman, and works on an oil rig. Member of United Steelworkers. (Who'd have thought the GOP would have a leader with union roots!) She worked on the PTA, slogged those nasty city council meetings.

She's a proven reformer. She took on corruption in the oil and gas business. Knocked out powerful Republicans who misused the public trust. In a party tainted by scandal, that's a powerful image for a leader. And she's passionate about wasteful spending. She killed the infamous "Bridge to Nowhere" and auctioned the governor's plane on eBay!

She's invigorated conservatives. In the day her nomination was announced, the McCain campaign received six times it's previous daily fundraising record! And it allows McCain to be truely maverick without having to look over his shoulder.

The talk of her lack of experience is valid. But she does have more executive experience than McCain, Obama and Biden combined. The reality is senators do not have to make particularly tough individual decisions, and sail under the radar by largely agreeing with the party line. Palin, by taking on the Republican establishment, could be the real change candidate.

Of course, like everything else, the challenge is selling this line. This is why Mitt Romney is not the VP candidate. In an economy that will stink for a while, Romney knows more about the complex world of global finance than the three contestant senators. But selling a rich white Mormon with a genuine insincerity might have been more than the McCain ad gurus could manage.

So Palin could be an interesting choice. She certainly could fail spectacularly, but I think McCain made the right choice. The reality is that with more Dems than Republicans, a conventional candidate would have sounded the deathknell for McCain. The challenge now is marketing Palin as an evangelical to the social right, but at the same time, as a reform-minded bureaucrat to the rest of us.

DNC: Day Two Speeches

I need to go to bed, so this will be short ...

Good speech by Hillary - just what the base was looking for. Paint the distinction between the parties' philosophy, attack Bush-McCain, talk about the favorite Democratic talking points. Oh, and while you're at it, get maximal publicity for yourself - anyone notice how she walked around the podium after she finished for maximal exposure. Best line: "Did you do it just for me, or for that woman who has cancer, ..."

I thought the best speech of the night was Mark Warner. He reminds me why I would have supported the Democrats if he ran for President. He's a centrist, and rather than focus on the liberal bashing of American corporations, he focuses on building creating the right environment for new businesses. Best line: None I can think of now, but his story about Lebanon, VA was fantastic!

Kathleen Sebelius of Kansas was bland! Thank heavens for the Dems she wasn't pick as the Veep candidate. She had a few good punch lines, but her delivery was flat, and she didn't seem particularly passionate (I must confess I heard her on the radio, which in some ways in a great way to judge speakers). Best line: "McCain is for some renewable enery - renewing Bush's failed energy policies"

Bob Casey, Jr did well as did the Montana Governor. A former secretary of energy, Frederico Pena was good in presenting Denver as a model of green energy for the country. But there's still too much time between the good speeches, and it's been a challenge to try to keep watching ... like the Oscars without the awards or the celebrities!!

Pelosi Alert!

The WSJ quotes Madame Speaker on natural gas:

I believe in natural gas as a clean, cheap alternative to fossil fuels... [Natural gas] is cheap, abundant and clean compared to fossil fuels.

Can someone tell Ms. Pelosi that nat gas is a fossil fuel?

DNC: Green Hotel Plan Flops!

The New York Sun reports:

The Democrats have embarked on a highly visible effort to make their convention the "greenest" ever, focusing on everything from expanded recycling to more creative programs like encouraging Denver restaurants to offer "lean 'n' green" meals made with healthful, organic, and locally sourced ingredients. But not all of their environmentally friendly initiatives have gone as planned. Take the hotel card keys, for example. Instead of the traditional plastic cards, the Sheraton in downtown handed guests Visa-sponsored swipe cards "made from sustainably-harvested wood." The plan lasted all of a few hours. By Saturday night, enough guests had reported problems getting into their rooms with the wooden cards that the front desk clerks had abandoned them and switched back to the plastic cards. A clerk said they were now handing out one of each and suggested that the wooden one could kept as a souvenir.

DNC: Carville's Take

On CNN, James Carville looks just as frustrated as me ...

If this party has a message, I sure haven't heard it.

Yawn! Yawn! I'm no Democrat, but I am always engaged by good political discourse ... but this is a real snoozefest!!

DNC: Teddy Kennedy

It was quite something to see a 76-year old veteran pol recovering from cancer come up and give a speech with as much vigor as he did. Although it's more hope, hope ... at this rate, I'm not going to be able to survive the next few days of TV watching!

Meanwhile, Drudge reports that NYT will cite sources that the Kennedy tribute was to take the focus off the Clintons. Interesting!

DNC: Yawn So Far

So far I haven't been impressed with the convention. From what I've seen, there's been a ridiculous amount of dead time, and not that much in between to get you fired up. Jesse Jackson, Jr seems to be wanting to ape Obama, coming out with one of those speeches where you want to grab him and say, what the heck do you want to do on any of the issues!! David Gergen correctly pointed about that the first 2 hours have been breathtakingly short on specifics!

I'm a little shocked by the nonsensical hero worship, including Caroline Kennedy talking about Ted Kennedy being inspired by Obama! Ted Kennedy is a liberal icon who has achieved so much in life, and the notion that he would be inspired by an amateur like Barack is ... well, ludicrous!

Back to Blogging!

After a long hiatus, and for the first time since my move, I'm back to blogging. Been meaning to do this for a while, and what better time than during the Democratic National Convention!! I'll be blogging live through what I watch of the conventions, although I don't know that I'll spend all my evenings watching the bland infomercials both parties put on.

Worry about the Credit Crisis ... Worry a Lot!

More troubling signs that the credit crisis is far from over. I first heard this on Bloomberg (ah, I wish I had cable like my cousin) - the Port Authority of New Jersey had its interest rates jump from 4% to 20%. Gov. Spitzer was testifying before Congress about this issue. The problem is the concerns over monoline insurers.

First, some background. The monoline insurer business works like this. The Widget Co doesn't have the financial strength to get a decent interest rate on its debt, so it approaches a monoline, say AMBAC, and essentially buys insurance wherein the insurer, with its solid credit rating, serves as collateral in the event Widget Co defaults on its debt. The Widget Co then essentially gets the same credit rating as the insurer.

Monolines used to only insure municipal agency debt, but in the last few years took on more mortgage related debt (ah, there's the good ol' real estate market again). With the meltdown in subprime markets, the financial strength of the monolines come into question. What good is insurance if you think the insurance company may go belly up?

As the graphic presented here from the NY Times shows, the CDS (credit default swaps) market is HUGE, bigger than even the stock market.




John Maudlin discusses this scary scenario:

But what if the above-mentioned monolines are downgraded to junk, as was [ACA Capital] when it could not raise capital? As the downgrades on various mortgage assets and the CDOs continue to increase, the ability of the monolines to deal with the problems is going to come under increasing question. The losses at major banks could be much worse than $122 billion if they are downgraded to the same junk level that ACA was.

I have read somewhere else that in addition to the $250 billion written down in 2007 for subprime, banks and financial firms may write down another $250 billion in CDS. Wow! But that's not the start of it. What if you have your port authority paying 20% on its debt? That's not a recipe for keeping things cheap...

NYT Becomes the New SwiftBoaters

While I disagree with a lot of the New York Times puts out, I have always thought they were a quality paper. Unfortunately, their credibility has taken a big hit with the latest hit job on presumptive Republican nominee, John McCain. Devoid of the normal journalistic standards you'd expect of a top newspaper, it largely cites anonymous sources and is incredibly skimpy on details for an investigative piece.

As the New Republic documents, editor Bill Keller appears to have shared the concerns over the piece. But in the end, he seems to have rolled over and given it the green light. What makes the piece even more suspicious is that others, including Fox's Carl Cameron found nothing in the story when he investigated it last fall. Given Fox's expected bias against McCain, one might imagine the decision not to pursue the story was indicative of the lack of weight.

McCain's lawyer, Bob Bennett points out that he provided the NYT a list of times when McCain voted in opposition to the interests of Iseman's clients, but the paper left that fact out of its piece. What a surprise!

Scary Chart of the Day: Phoenix Real Estate

Courtesy of a very nifty graphing tool at National City, here's an example of the craziness of the speculative real estate boom that occurred in so many places. As someone who loved his time in Phoenix partly because of reasonable real estate prices, all I can do is shake my head ...

Housing Meltdown?

Businessweek recently carried a very negative story on the housing meltdown. A meltdown? If that seems extreme, the authors don't think so. Even for a housing bear like me, some of the predictions and information in the story were surprising and deeply troubling.

Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms... Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Even more troubling was this excerpt:

For another bearish view, there's what economists refer to as the Mankiw paper. In 1989, long before working in the White House as chief economic adviser or writing his best-selling textbook, Principles of Economics, Harvard University economist N. Gregory Mankiw co-wrote a paper that was startlingly negative on housing. He and David N. Weil predicted that home prices would decline by 47% after inflation over the next 20 years, based on a shrinking pool of potential first-time buyers and an expectation that baby boomers as a group would spend less on housing as they grew older. It could be that Mankiw and Weil were not so much wrong as premature.

Ouch! Not looking good for real estate outlook! True, in recent years, the easy availability of credit would support greater leveraging of household budgets (in contrast, in the 20s and 30s, most houses put something like 50% down!), but if the credit crisis is more than short-term, then we just may see this Mankiw prediction come good after all!

Earmarks Galore!

Courtesy of Taxpayers for Common Sense, we now know just how much pork each member of Congress took home.

Presidential Candidates
Hillary Clinton $342,403,455
Barack Obama $ 91,421,220
John McCain $ 0

Prominent Congressman (no party bias - just the ones I'm familiar with)
John Murtha $176,397,200
Steny Hoyer $139,128,759
Nancy Pelosi $ 94,332,500
Paul Sarbanes $ 71,045,900

Prominent Senators
Dick Durbin $335,181,200
Chuck Grassley $323,628,520
Trent Lott $311,013,500
Chuck Schumer $309,691,055
Harry Reid $305,289,470
Diane Feinstein $295,872,430
Russ Feingold $ 0
Claire McCaskill $ 0

So much for all the talk about eliminating pork in Washington!

Quote of the Day: The Mac on the O

Republican presidential candidate John McCain on his likely Democratic counterpart Barack Obama:

To encourage a country with only rhetoric rather than sound and proven ideas that trust in the strength and courage of free people is not a promise of hope. It is a platitude.

Green Tip of the Day: Kill Vampire Electricity

Bankrate.com reports:

Many appliances use electricity even when they're turned off. It's called a phantom load, or vampire electricity, and as much as 75 percent of the electricity used by home electronics and small appliances is used while they're turned off. The Ohio Consumers Council estimates that it costs consumers $40 to $100 a year.

So Much for Obama Girl

So I just watched on CNN that Obama Girl, the woman who made it big with her YouTube hit professing her crush on Barack, did not vote. Why? She claimed she was too sick to drive across the bridge to vote in Jersey. Not sick enough though to attend an election watching party that night.

How typical! Obama has to worry about the young people flocking to his campaign - how many are the serious political activists who dot campuses, and how many are just ditsy sorostitutes embracing the next big fad?

Why Huck Won't Be Veep

I've always thought the notion of Mike Huckabee running with McCain as a vice-president was a little foolish. Sure, Huck brings evangelicals and the South, but it takes more than cold electoral calculus to make a good ticket. For one, few candidates like assistants who can take attention from them, and Huck sure can. But also, Huckabee brings very little in terms of qualifications or experience, and one could argue that McCain needs a policy wonk. More confirmation from this story on Politico:

In 2005, he sat down with Stephen Moore of the Wall Street Journal, and said: "I'm going to be honest; I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated." On the campaign trail, he's also suggested he'd look for a vice presidential running mate with strong economic credentials to balance weaknesses of his own.

If not for the baggage from his run, Mitt Romney would be the ideal man to do that. Of course, Mitt would blow the center McCain strives for, and also is more charismatic than the Mac, so you can rule him out.

What Mac needs ... hold your horror ... is a Dick Cheney type veep. Policy wonk, no political ambitions. Ok, maybe not someone quite so polarizing ...

Bye Bye Mitt!

Mitt Romney has left the building. Goodbye! It's sad to see a candidate that could have been something stumble. I didn't support him ... in many ways, I thought he was like that other man from his state that ran for President - John Kerry. Both were brilliant enough to be president, but both had serious credibility issues. People trusted Bush and McCain, even if they didn't really have the best resume.

In the end, Mitt made a calculated gamble. Here was a man who had created phenomenally successful businesses, resurrected a broken Olympics, and introduced universal health care as governor. What better qualifications could you expect in a presidential candidate? But he chose to steer from the data-driven non-ideologue that is his strength to what he perceived to be what the Republican party was looking for. But this isn't 2000 and people aren't looking for another George Bush.

To be fair, maybe his campaign was doomed anyway. In this time of economic angst, I don't know if any candidate could run with a claim of running businesses. Populism is in the air, as you can tell from Huckabee's strong showing in a party that worships the free market. But by running a more sincere campaign, Romney could have managed to get on as a veep, something that simply can't happen now!

Vid of the Day: Jon Stewart on HRC's Hallmark Special

Watch to the end - it's pretty funny how it ends!

Real Estate Stinks!

I woke up way too early on a Sunday morning, and since all the buzz in India and back stateside has been on the real estate market, I was curious what the historical returns on residential real estate have been. While no data exists in India, I found a study for the US, from which I reproduce this graphic on nominal and real (i.e. inflation-adjusted) returns. Nothing to write home about.


Source

To be fair, this study does not appear to factor in rent savings, which could be substantial. My own experience with online calculators is that there is a huge disparity based on assumptions, so do your homework. Nevertheless, it is useful to consider that home price inflation has only barely beat inflation in much of the US, a far cry from the 10-20% annual returns we have seen recently.

Click! Streets of Chennai, India

With my new camera, I'm hoping to take a lot more random pictures, and since I'm on vacation in my hometown of Chennai, India, here are some of the clicks I took today.





What easement? This is Chennai - all that separates traffic from construction is an asbestos sheet. The construction BTW is for the Kathipara junction, which will be Madras' first junction with multiple roads crossing over in different directions!




Since no one seems to follow the lanes, it looks like in some cases, the transportation dept just did away with the wasted paint. Incidentally, this is remarkly unchaotic for Chennai - I need to take a picture of a real Chennai street!

Seatbelt anyone?

That's a view of the Olympia Tech Park, which I'm told is the largest building in the world to get the LEED gold certification. I need to go and visit this. I read online that only 12% of the property is built up, with 88% designated for extensive landscaping in process. That would be stunning in an area where land prices are at about Rs 4-5 million a ground (~ $2 million/acre!!) and have gone up 50% in the last year!

Click! Views from my car on VA-24

As I drove back to Virginia from a trip I had taken, I found myself in a simply incredible fog and snow storm. Here are some pictures from the car. I took this pictures as I drove - don't try this in your car!

Did You Know: "Magic Bullet" theory of JFK assassination

I'm watching PBS as I work, watching a show called Oswald's Ghost, and I was surprised to learn that the person who first proposed the theory that was later derided as the "magic bullet" theory was the Ranking Member of the US Senate, Sen. Arlen Specter (R-PA). If you don't know what the "magic bullet" theory, you have to watch Oliver Stone's brilliant movie, JFK, starring Kevin Costner and Tommy Lee Jones.

Zinger of the Day: Pandering to the Latinos

Ruben Navarrette Jr. rants about politicians attempting to pander to Latinos and use silly generalizations assuming the Hispanic community is one mass. Here's a dig at Hillary:

Hillary Clinton got off to a rocky start. While chatting with Hispanic voters in a Mexican restaurant in Las Vegas, Nevada, last week, she stretched for an analogy to explain how all Americans are connected and their problems interconnected despite the fact that "we treat them as though one is guacamole and one is chips."

Aiy caramba! Quick rule of thumb: The nation's 46 million Hispanics are a proud people who have accomplished a great deal, have fought and died for this country in every military conflict dating back to the Civil War, and who embody the American Dream. If you're a politician who is trying to relate to them -- but your own knowledge of the group doesn't extend beyond whatever is on the No. 3 combination plate -- you want to be careful not to be so tone deaf that you wind up insulting them.

US Downgrade?

In the midst of much populism on one end and paranoia on the other end of the presidential campaign, few people paid attention to a cataclysmic headline: Moody's argues that rising debt obligations could lead to the United States having its credit rating cut from AAA. Now, while some of this is saber-rattling, the fact that a rating agency would even dare to talk about it is pretty phenomenal, and reflects the huge entitlement obligations (Social Security, Medicare, etc) that is promised by the US Federal govt. I have previously reported on some amazing slides from the Comptroller General showing just how large this obligation is. Debt is $411,000 per household, with entitlement spending expected to outpace GDP growth several times over. This clearly isn't sustainable! And yet, few presidential candidates are talking about it in more than generalities. Contrast the $46 trillion debt burden with spending by most agencies, and you realize the big threat isn't spending too much money on the Environmental Protection Agency, it's running with a social contract that isn't viable any more!

Talking on a Cell Phone as Bad as Drunk Driving?

Stunning research at the University of Utah driving under the influence of a cell phone is just as bad as doing so under the influence of alcohol. Participants drove simulator cars while sober, drunk and distracted and their performance in each test case was considered, and it was found that they were actually more likely to crash the car when distracted by a cell phone call than when drunk with a blood alcohol level of 0.08 (the legal limit for a DUI).

Interestingly also, they found no difference in driving behavior when using a handheld cell phone or a handsfree device! Cell phone users were over 5 times more likely to get in accidents than undistracted drivers. And they found cell phone users may also cause traffic backups due to their slow speed and poor lane changing patterns.

Wow, time to think of hanging up that phone! I don't talk a lot on the road, except when I take long trips on the interstate, but that's partly because I've been living in a university town. As I look to move and work, that might change, and suddenly the productivity drain seems a shame.

Picture of the Day: China Pollution

From the Switchboard, a blog by the National Resource Defense Council, comes this picture of pollution in Beijing. Eric Young wonders if the marathon during the Olympics will have to be moved out in the country.

Say No to Plastic Bags

I never thought I'd be applauding China for being the vanguard of environmental progress, but here goes: the China has banned free plastic bags at grocery stores. The even bigger surprise? Merchants and customers alike are all for it! Way to go!!

The Indian Expert on the Hoods

Columbia university sociologist Sudhir Venkatesh's work formed a chapter in the book, Freakanomics. Now he's got his own book, Gang Leader for a Day. While I haven't read the book, this interview reminds me how interesting his work is. Think: if drug dealers are so successful, how is it that most live with their mother?

As I read the interview, it is sad to see how much we miss with a merely criminal view of gangs, ignoring the social causes.

An excerpt:

There is significant exposure to lead and asbestos and extremely poor nutrition. One of the most jaw-dropping experiences I continue to have is to walk into a grocery store in the inner city. There's a lack of fresh food, decent food.

And another:

It's depressing to see the cycle of failure and the reproduction of poverty. The typical story goes like this: Job is going well, then their kid gets sick. They start missing work, then they get fired. It just makes you want to scream. We're talking about the folks who are trying to help themselves, and they can't do it. That's another kind of sadness.

Brooks on Obama and McCain

David Brooks contrasts the two candidates appealing to independents - John McCain and Barack Obama. I particularly liked this quote:

In policy terms, [Obama] is an orthodox liberal. He never tells audiences anything that might make them uncomfortable. In the Senate, he didn’t join the Gang of 14, which created a bipartisan consensus on judges, because it would have meant deviating from liberal orthodoxy and coming to the center. How do you build a trans-partisan coalition when every single policy you propose is reliably on the left?

This is one of the things I love about McCain:

McCain’s campaign events are unpredictable. At Obama events, the candidate gives a moving speech while the crowd rises deliriously as one. McCain holds town meetings. People challenge him, sometimes angrily. And if they oppose him, McCain will come back to them two or three times so that there can be an honest exchange of views. Some politicians try to persuade their audience that they agree with them. McCain welcomes disagreement and talks about it.

Cricket Vid: Oh What a Mash!

I never thought I'd be blogging about cricket the night after the New Hampshire primaries, but some horrendous screw-ups in a recent Test match have got me quite riled up. Thanks to Web 2.0, even an Indian living in the US can now pull up a neat documented collection of the incompetence of the umpiring!