Our CEO July 17, 2002February 21, 2017 Barry Molefsky: ‘You praised Arthur Levitt for being a good SEC chairman, but it was on his watch that all the shenanigans took place. Pitt has only been SEC chairman for 11 months.’ ☞ I think if you do a Google search you will find an awful lot of positive comment on Levitt. He was very active – and effective – in pressing for reforms that helped the small investor. One key area where he tried, but was blocked by powerful interests (some of them represented by Harvey Pitt), was in trying to end the conflicts-of-interest he saw in the accounting profession. YOU THINK I’M ACERBIC – HOW ABOUT MAUREEN DOWD? Last week, Maureen asked . . . ‘Can a Bush – born on third base but thinking he hit a triple – ever really understand the problems of the guys in the bleachers?’ It comes from this biting column. We have certainly had wealthy Presidents who identified with the masses – look at FDR. But this President told us from Day One that a tax cut for the top 1% was overwhelmingly his first priority, even if it meant going back into deficit, nixing a robust prescription drug benefit, letting schools crumble, or anything else. (Of course, he didn’t phrase it with quite that spin or I think he would not have been elected.) He is totally entitled to see the plight of the best off as the nation’s top budget priority. But the rest of us are entitled to be horrified. The other profoundly frustrating thing is the way the press is only now getting around to vetting candidate Bush’s claims and background. Just how accomplished an executive was he? (“Hold on!” you may object – I know many of you do – “why are the President’s business dealings relevant?” That’s the question Paul Krugman explored yesterday.) Tomorrow: Dick Davis #26-#28
Now, Harvey July 16, 2002February 21, 2017 I was interested to hear Harvey Pitt on ‘Meet the Press’ Sunday. I don’t profess to be a Harvey Pitt expert, but I do have two data points to offer. The first comes from Susan Strausberg, CEO of Edgar Online, one of the main private sources for S.E.C. data. (You can get info direct from the S.E.C., but you get it friendlier from these private sites.) She says Pitt has been terrific on corporate disclosure issues – making information available to the marketplace promptly. This is good. The second involves this snippet from ‘Meet the Press’: RUSSERT: ‘…Why would the chairman of the SEC, the man in charge of being tough in overseeing the securities industry, meet with people who had claims, investigations ongoing before the SEC?” PITT: “Tim, we meet with a lot of people. We meet with the folks from the Consumer Federation of America. We meet with representatives of many investment groups. The chairman of the SEC has to know what’s going on in the real world.” Well, I happened to be speaking with the head of the Consumer Federation of America the next day – yesterday – and asked him about this. He half laughed, half moaned, and said that, well, yes, Mr. Pitt had come to their conference and given a speech – but that was it. If this is his idea of how to listen to real-world concerns, or his idea of how to persuade us that the S.E.C. has weighed the input of consumer advocates, he may need to refine his technique. Senators Sarbanes and McCain followed Pitt. Both were good. Interestingly, the Republican, John McCain, has called for Pitt’s resignation, while Paul Sarbanes, the Democrat, takes a more nuanced view: SARBANES: Well, I think it’s clear from his comments he’s not going to resign. The president is supporting him. To get a new chairman would take us months. I think the test of Pitt is going to be on what he does, and he has to sort of get with the program. . . . The real question with Harvey Pitt—Harvey Pitt was the youngest general counsel in SEC history when he went to work there right out of law school. So he’s an extremely able and competent person. The question is, is whether the Harvey Pitt who was the youngest general counsel of the SEC is now going to manifest himself, or whether we’re going to have a Harvey Pitt, who, in private practice for many years, represented the accounting interests and many other companies that are impacted by SEC action. And there’s a mixed bag of that. I mean, he’s done some very strong, positive things. He’s been slow to pick up on other things, but I think he needs to move with the program. Arthur Levitt was such a good SEC chairman. Too bad his proposed accounting reforms were blocked so effectively by folks representing the accounting industry – like Harvey Pitt. And speaking of talent, Robert Rubin and Larry Summers were such good Treasury Secretaries. Their counsel was to be conservative with the projected surpluses and use them, largely, if they materialized, to “Save Social Security first” – i.e., pay down debt. Too bad we are now back to deficits as far as the eye can see, borrowing ever more from our kids’ and grandkids’ future, as we did so massively under Reagan/Bush. ARE YOU PAYING TOO MUCH FOR LONG DISTANCE? Gregory Lawton: “AB Tolls.com and its companion site Tollchaser.com compare the rate plans of long distance telephone carriers. After doing a little shopping using ABTolls, I realized that MCI was a very high cost carrier, and changed to a different long distance carrier. I also picked out a calling card program for personal use away from home, and immediately saved 17 cents per minute over Verizon’s calling card. I’m now saving $30 to $40 per month on long distance charges, and I didn’t even pick the plan with the lowest rates. Note: the site operators have an interest in some of the plans mentioned on the site – their ownership is fully disclosed.”
Good News Would Be Bad News – If There Were Some July 15, 2002January 25, 2017 AN IMPORTANT THING TO KNOW ABOUT THE MARKET In a bull market, bad news is ignored or interpreted as good news somehow. (‘They lost $400 million? Good to know they’ve got that behind them – should make earnings comparisons next year look really sweet.’) In a bear market, good news is ignored or reinterpreted as bad news. (‘The economy could eventually pick up? Yes, well, I suppose it could – but you know what that’s likely to mean, especially with a falling dollar, don’t you? Higher interest rates. Uh, oh.’) To a larger extent than anyone would like, markets just have to run their psychological courses. And they will. Yes, some huge external factor could change psychology. If we read tomorrow that Saddam had been overthrown and that there was rejoicing throughout Iraq . . . and that – in a very big week for news – a secret peace plan had been accepted by the leaders of Israel and all the Arab states, including a new Palestinian state . . . I have to think psychology would change overnight, very possibly for the long-term, not just a few weeks. But ordinarily, I think, good news is just the catalyst to trigger a change in investor psychology that was ready to happen anyway. Greed was all but ready to overtake fear – and this news just pushed it over the edge. Or vice versa. Is it my imagination, or has there not been a lot of good news lately to test this theory? (Dept of ‘Thank God our long national nightmare of peace and prosperity is over’: The Bush administration said Friday the federal government would post a deficit of $165 billion this fiscal year, a 56% increase over earlier projections.) PLEASE STEP OUT OF THE LINE A Security Guard (who read Friday’s thoughts on airport security): ‘There are three reasons we Security Goons pat you down without profiling: ‘1. Because if there is a random selection, we can’t take the easy way out and skip the irates, or the fun way and pick the pretty (and litigious) women, or the ones that annoy us by making pro/anti Republican political remarks, or are the wrong skin color, or are wearing expensive suits that we can’t afford on our miserable guard salary. ‘2. Because the profiled group will cooperate if it is not singled out. They do not feel personally put upon, since they know they are 99.99% conservative, god fearing, family making, sensible people. This makes it easier for us when we do pat them down. Hey, if even Al Gore doesn’t make a fuss about being felt up, then they can cooperate just like all the other good Americans. ‘3. Because considering the way the economy is behaving, and the likely precedents from the past, we may soon prefer to pat down the people that used to have several million dollars in IRA/equity/trustfunds/etc. They are the ones who will soon be feeling ready to end it all and take a few hundred people with them.’ ☞ Good points. But I can’t wait for the retinal scanners. AMAZON MAKES GOOD ‘I was the one who suggested the Amazon NextCard last year (and was immediately taken to task by a reader that had a bad experience with NextCard). Over the last year I have pulled in more than $700 in Amazon gift certificate credits, in large part through savings bond purchases. Much as I regret the failure of Nextbank and the loss of my card it was a good ride while it lasted. The reader who was lamenting the loss of his points has me puzzled. We have known that Nextbank was in receivership since February and that this program was going to end. And he didn’t cash in his points as soon as he earned them? Furthermore, Amazon has said that they will honor the points earned as stated here. I’d rather you didn’t print this with my name attached.’ THIS DOES NOT BODE WELL FOR INVESTORS Did you see Paul Krugman Friday?
Dick Davis: Why Markets Go to Extremes July 12, 2002February 21, 2017 AUTHOR’S QUERY Any of you go through personal bankruptcy? How did it go? On balance, are you glad you did it? Have you got any tips for those considering it? I would appreciate any stories you care to tell. CREDIT CARDS Mary Ann Campbell: ‘Recently, one of your readers recommended a site for credit card offers. I want to recommend the best site I’ve seen for useful credit card information and education: cardratings.com. The site offers 8,250 consumer reviews of over 750 credit cards…the most available I’ve seen. Also, their message board is answered by very sensible and knowledgeable responders. Full disclosure, I admire the site’s creator. His name is Curtis Arnold. He is a young man who accumulated over $40,000 in credit card debt while in college and graduate school. He created the website out of extreme anxiety just knowing others had to share his level of despair and frustration. Sure enough, it became a hit. Banner ads allowed him to pay off ALL his debt. He volunteers to speak to my college classes and several others around the state. Curtis warns college students to NOT sell their financial soul for a free Frisbee or T-shirt. His personal story gets their attention. His website gives them assistance.’ Joe Cherner: ‘Last year, one of your readers suggested getting a Nextcard/Amazon credit card. Great reward program! $20 amazon.com reward for every $1,000 purchased with credit card. I racked up the reward points! Yesterday, I went to redeem my reward points. The bank FAILED. Out of business. Amazon says too bad. I lose all my points!’ ☞ Actually, Amazon is going to honor your reward points. But this also makes me think of MBNA, which has been offering people 0% interest for six months – in my super-fortunate case, on a $100,000 cash advance. That’s like a $2,000 gift, and one that I’d get to keep even if MBNA went broke. Yesterday they announced they had added 6.3 million new credit card accounts in the first six months of the year – mine was one of them – and I have to imagine that they gave away a lot of free money to do it. In my own case, it’s likely I will just cancel the card once the 0% interest ends in January, and I have to wonder how many others there will be like me. If you happen to own MBNA stock (symbol KRB), this could be a concern. LES CIGARETTES Joe is the guy who’s brought the tobacco industry to its knees. Well, OK, one of the guys. But surely one of the most annoying. (I am annoying as well, so I mean no disrespect.) He forwarded me this amusing AP story. Hard to imagine 500,000 French folks failed to intuit the gimmick and called . . . but apparently they did: French Smokefree TV Ad The Associated Press PARIS (AP) – TV viewers were alarmed. A commonly consumed product, they were warned in an ad, had been found to contain frightening toxic substances. Not surprisingly, half-a-million people called the toll-free number for information, jamming the line. The unnamed product was the cigarette, and the health institute that dreamed up the ad said it was a big success. “Traces of cyanuric acid, mercury, acetone and ammonia have been found in a product regularly consumed,” read the ad. The toll-free number was flooded by callers. At one point Sunday night, some 460,000 people called at about the same time . . . Tobacco is the leading cause of avoidable deaths in France as it is in the U.S. To send one of Joe’s EZ-letters in support of a smokefree issue, click here. JUST DON’T EXPECT TO GET YOUR SECOND LIGHTER PAST SECURITY Yesterday, one of you told of having your second butane lighter confiscated at airport security – it was fine to take one on (see Wednesday‘s column), very possibly thanks to the tobacco industry, always concerned for our well-being, and its influence on the current administration. Well, Walter Williams recently went to town on the stupidity of searching Al Gore at the airport. It’s a funny piece, and quotes some senators who said, yes, they felt he (and they) should be subject to search like anybody else. Williams point was that of course their airport screening should target certain groups; of course it should not be random. I disagree with Williams. Yes, of course, searching Al Gore does nothing to make us safer. But there is another, subsidiary issue that should not be ignored. It seems to me that 75% or 80% of the searches should be of the suspect types, but that, yes, it may be worth patting down the other 20% or 25%, even U.S. senators and Al Gore – nay, especially senators and Al Gore – to give the profiled groups at least the sense that we recognize the awkwardness of this. It is a way to show that we are willing to share at least a little of the frustration they must feel. In reality, this may mean we search 100% of the Arabs and crazed-looking Brits and only 3% of the white businessmen. But it still shows we don’t feel good about profiling, even though, in a situation like airport screening for terrorists, we obviously need to do it. DICK DAVIS #25 Regular readers will know I’ve been irregularly parceling out Dick Davis’s words of wisdom from a speech he gave this past winter. You like his comments so much, I fear running out. After this one, there will be only 10 to go. In light of yesterday‘s column, this one is particularly apt: Item 25: Why Markets Go To Extremes Both the market and individual stocks go to extremes. They go higher or lower than they should based on fundamentals, because human emotions such as fear and greed are not bound by reason. The ‘greater fool’ theory allows the rubber band to stretch further and further. That theory says in effect, ‘I know it’s crazy to buy at these prices but the fever is contagious and I’ll be able to sell my stock at an even higher price to someone who is a greater fool than I am’. The ‘pros’ also contribute to the mania. Mutual fund managers are highly competitive and have a dread of falling behind. They may reason that stocks are overvalued, but more powerful is their emotion – namely, fear of missing the rally and worry about their own job security. Both bull and bear market extremes are easy to recognize. But how far they will go or how long they will last is unknowable. AUTHOR’S QUERY Don’t forget: I would appreciate any bankruptcy stories or tips you can share. Have a great week-end. Use sun screen.
Thoughts on the Market July 11, 2002February 21, 2017 But first . . . NEW MEANING TO THE TERM ‘DOUBLE HOMICIDE’ Gennaro Nunziato: ‘As I was passing through the security check at Newark airport two weeks ago, carrying two disposable lighters, I was told that only one lighter would be allowed; the second was confiscated. Not quite sure why one lighter would be allowed but two wouldn’t, but there does seem to be some sort of half-baked regulation in place.’ ☞ Just one lighter? Well, THAT’s standing up to the tobacco lobby! HERE’S HOW COME Chris H: ‘How come you’re not so tough on DNC Chair Terry McAuliffe’s path to riches as you are on Bush and Cheney???’ ☞ Because he’s not President? Because he’s not Vice President? Because no one has accused him of possible insider trading or accounting manipulation? Because he wasn’t on the Global Crossing board and he wasn’t its CEO (as Bush was on Harken’s board and three-man audit committee and Cheney was Halliburton’s CEO)? And now . . . WELL, SO IS THIS THE BOTTOM? Brian Williams – a smart guy – put it this way as he led off last night’s NBC Nightly News: ‘It hasn’t been this bad since 1997.’ Or at least I thought that’s what he said. And to a normal student of the English language, that would suggest it was pretty darn bad in 1997. No? But actually the Dow – which finished down 3% yesterday to close at 8813 – was under 8000 for much of 1997. Far from people feeling rotten about the market in 1997, they were thrilled. It had been more or less shooting straight up for years. If you go back to 1997, you will not find that people thought the market was low, you will find that people thought the market was high! Two people thought it was so high, in fact, that one of them – Alan Greenspan, chairman of the Fed (the other one being Bob Rubin, Secretary of the Treasury) – had given a speech the previous December, when the Dow was 6500 and the NASDAQ was 1250, floating the phrase ‘irrational exuberance,’ and hoping somehow to moderate what had been an amazing, perhaps unsustainable multi-year climb. Now, in thinking back on it, maybe what Brian Williams said, or at least meant, was that there hadn’t been a point drop in the Dow this bad since 1997. I’m not sure, and it doesn’t matter, and you’re not paying me enough to get me to look it up. The point is, everyone’s talking about the trillions of dollars that have been ‘lost’ in the stock market as if they were ever really ours. Not to minimize the seriousness of the situation or the pain. But relatively few people had all their money safely in the bank waiting for the peak of the market and then, at the peak, put it all into dot-coms. Some did. The least sophisticated investor usually gets in at the very top, or close to it, and out at the bottom. But I know someone who bought 24,000 shares of Erickson at $1.67 in 1994 (adjusted for splits) and sold a third of it in 1998 for $8 a share. Then held as it peaked around $25, and holds it even today as it has fallen all the way back to $1.62. Has that person lost a fortune? Been the victim of cruel market forces? Well, in one sense. But just how bad an eight years was it? He more than quadrupled his money on a third of the stock, about broke even on the rest. That’s a little different from having put your all into ERICY at $25 and then seeing it fall to $1.62. In any event, the question is not how far ERICY and 5000 others have fallen, but whether it’s worth more or less than $1.62 today. And I don’t have an answer. But I know this much: it’s likely to be a lot closer to its true value at $1.62 today (or at $1.67 in 1994) that it was at $25 the Spring of 2000. It was irrational exuberance! It was a bubble. We will not see the likes of it again, on such a wide scale, for 30 years. Are things terrible now that the Dow is only 10% or 12% higher than it was in the summer of 1998? The answer is that most of the big U.S. stocks still sell at historically very high multiples of their earnings. And that even if today’s prices are ‘fair,’ what normally happens – I can’t say it will happen this time and hope it doesn’t – is that just as stocks rise way above their sensible price levels in eBULLient markets, so do they generally fall way beneath their fair value in unBEARable markets. ‘Fair value’ is a very squishy number, based on all kinds of unknowable assumptions, and it varies greatly with the overall level of interest rates (and expected interest rates). So I’m not saying I know what it is. But like many people, I can sense the extremes. Most stocks today are no longer wildly overpriced (very significantly overpriced in many cases, no doubt, but rarely wildly overpriced) . . . but neither are many of them wild bargains (significant bargains, perhaps, in some cases, but not wild bargains). I looked back at some of the columns I had written in this space in 1997, to remind myself of the mindset at the time, and of course most of the columns I found were about ostrich meat or some other damn fool thing no one wanted to read about then and I surely didn’t want to read about now. But I did come across a column from October 17, 1997, called ‘Scary Expectations.’ A study had found that investors expected to see their stocks appreciate 34% a year in the decade ahead. The first thing to say [I wrote] is that there will almost surely be a tremendous number of disappointed investors ten years from now. No way is the Dow headed for 149,000 in ten years (today’s level compounded at 34%). The second thing to say is — AEIEIEIEIE! Which may be misspelled, but is roughly what the cavalry used to say when they spotted twenty thousand Indians coming over the ridge. Another applicable phrase might be: irrational exuberance. This is not to say there will be a crash, or that our outlook in America is not bright. But one sure sign the market is not poised for unprecedented appreciation over the next decade is that so many people apparently believe it is. I was at least temporarily wrong then – the NASDAQ, especially, just catapulted higher and higher (which is why it has fallen further and further) – and I may surely be wrong now. Yesterday’s close may have been the bottom. I strongly doubt it – but I have not sold all my stocks, and you shouldn’t sell all yours either, if you’re in it for the long haul. Indeed, if you are fortunate enough to be in your twenties or thirties, putting something into stocks every month, you should rejoice if and as the market drops lower. The shares you buy will be ‘on sale!’ Good news! The further good news, as my pal the estimable Less Antman points out, is that with the S&P 500 now at 920, it is significantly undervalued according to the Greenspan model that produced the original “irrational exuberance” comment. Instead of 920, it should be at 1215 ($56 estimated earnings divided by the 4.61% 10-year T-note yield equals 1215). And, says Less, with pessimism so high, it seems logical to believe that we ARE close to a bottom. Even if we’re not, he argues, the risk of being out of the market, if you’re a long-term investor, is too great. I am older than Less; I lived through a long bear market that he missed – a market in which one could not possibly imagine it’s going any lower, as day after day it did (the exact mirror of the late-Nineties bull market). What’s more, it’s hard to picture how the war on terrorism, with all the uncertainty (and drain on productivity) it entails, could be quickly or definitively won – unlike the Gulf war. Not to mention some of our other problems. It’s a lot easier to imagine inflation and interest rates rising from here than falling. What would that do to the 4.61% divisor in the Greenspan model? It’s a lot harder to see how companies will make their investors juicy profits when the Internet makes comparison shopping so easy, and price competition so brutal. So don’t throw caution to the wind and – as one of you proposed to me in an e-mail last night – begin investing with borrowed money, on margin. You might win, but I don’t believe it’s wise to take the risk. If you’re in it for the long haul, ‘stay the course’ with at least a significant chunk of your stock-market money. Take tax losses if they would be helpful, but put most or all of that money back to work in different stocks or funds. Consider putting some of your money into foreign markets or international funds, if you haven’t already, to help spread the risk and because some of those markets may offer better value (could it be Japan’s turn again for a while?). But hang in there and average down. The more universal the despair and disillusionment, the less reason to sell. The problem, a group of market sages on my living room couch a month ago for PBS agreed (did you see us on the News Hour? Adam Smith, Jim Grant, Carol Loomis, Allan Sloan, and My Three Chins?) is that this appears to be a most unusual duck – namely, an ‘overvalued bear market.’ Stocks are not supposed to be overvalued in a bear market . . . but by many traditional measures they still are. ‘The inevitable direction of the market is up as long as capitalism survives as a system,’ Less fires back. (He wasn’t on the couch; he’s not old enough to be a sage.) ‘If it doesn’t survive, no investment is safe, nor is society. A globally diversified investor who wants to play it safe with his or her long-term money belongs in equities. And the last time I checked, the Market Timers Hall of Fame is STILL an empty room.’ He was saying much the same thing two years ago when the market was much higher. But I’m more inclined to reprint the comment today, with the NASDAQ off by 75%.
Is That a Bic in Your Pocket, Or Are You Just Trying to Blow Up the Plane? July 10, 2002February 21, 2017 Sean O’Donnell: ‘Bush’s stock trading in Harken is, of course, a very legitimate story, but is only of secondary importance relative to the main issue – the collapse of corporate governance. There is a real fear that (given our Clinton experience) chasing the President can so consume the media that it forgets other issues. It would be a tragedy if this rare opportunity to take real action and remedy some of the most glaring problems in corporate governance is lost because the media start losing interest in the story because they can play ‘catch the president.’ So – the Bush story is a good story, but it should get second billing.’ ☞ I completely agree. And I would also like to say that I will be delighted if it turns out that President Bush did nothing wrong with Harken . . . that he was unaware of the Aloha deal, that he was not trading on inside information when he sold his stock, that he was not intentionally 34 weeks late in reporting the transaction. It seems that the US News report I was relying on in reaching some of my conclusions Monday was misleading. It said Bush sold his stock ‘just one week’ before Harken posted its rotten earnings. What it should have said is that he sold just one week before the close of the quarter for which, two months later, rotten earnings would be posted. While this doesn’t exonerate Bush – or justify his having said he was exonerated – it does make the case against him, in my mind, less open and shut. So let’s release the S.E.C. file on this matter, have a couple of crack investigative journalists root around for a while, and then move on to the next thing. I’m not looking for a multi-year $40 million investigation. But neither should anyone feel that Harken’s accounting was justifiable when it clearly was not (and W. was on the three-man audit committee!); or that Bush was exonerated when thus far, he hasn’t been; or that his sale was unobjectionable if it violated insider trading regulations; or that the 34-week delay in filing was innocent if it was intentional. Where are Woodward and Bernstein when we need them? Is a ’60 Minutes’ team at work on this? TOBACCO A story in the Metro section of yesterday’s New York Times marveled at ‘How a Popular State Bill to Restrict Smoking in Restaurants Faltered.’ No one seemed quite sure how it happened – even 76% of the restaurant owners favored the bill – but the article concluded it may have had something to do with the money Philip Morris pumped into the state’s legislative process, $117,500 to Republicans in 2001 and $11,000 to Democrats. (Note the ratio.) And then you had this from Michael Moore, author of Stupid White Men, alleging that matches and butane lighters are OK to take aboard airplanes – have remained so even after Richard Reid tried to blow up his shoe and his fellow passengers – because of the clout of the tobacco industry within the Bush administration: I was sure after this freakish incident [writes Moore] that the lighters and matches would surely be banned. But, as my book tour began in February, there they were, the passengers with their Bic lighters and their books of matches. I asked one security person after another why these people were allowed to bring devices which could start a fire on board the plane, especially after the Reid incident. No one, not a single person in authority or holding an unloaded automatic weapon, could or would give me answer. My simple question was this: If all smoking is prohibited on all flights, then why does ANYONE need their lighters and matches at 30,000 feet — while I am up there with them?! And why is the one device that has been used to try and blow up a plane since 9-11 NOT on the banned list? No one has used toenail clippers to kill anyone on Jet Blue . . . BUT SOME FRUITCAKE DID USE A BUTANE LIGHTER TO TRY AND KILL 200 PEOPLE ON AMERICAN AIRLINES FLIGHT #63. And this did nothing to force the Bush Administration to do something about it. I began asking this question in front of audiences on my book tour. And it was on a dark and rainy night in Arlington, Virginia, at the Ollsson’s Bookstore a couple miles from the Pentagon that I got my answer. After asking my Bic lighter question in my talk to the audience, I sat down to sign the books for the people in line. A young man walks up to the table, introduces himself, and lowering his voice so no one can hear, tells me the following: “I work on the Hill. The butane lighters were on the original list prepared by the FAA and sent to the White House for approval. The tobacco industry lobbied the Bush administration to have the lighters and matches removed from the banned list. Their customers (addicts) naturally are desperate to light up as soon as they land, and why should they be punished just so the skies can be safe?’ The lighters and matches were removed from the forbidden list. I am not a great Michael Moore fan. I almost am – he’s wonderfully talented and funny, and his passion and energy are admirable. But unlike Dave Barry, whose exaggerations and flights of fancy are so wonderfully wild that only the dimmest wit could miss them, my sense is that Michael Moore strays from fairness in ways that the average reader could easily miss. So maybe he’s done that in the passage above. But what’s scary to me about the Bush administration and the long-time influence of the tobacco industry on the Republican Party (with a few tobacco-state Democrats thrown in) is that this story has the ring of truth. Wouldn’t you be curious to know for sure? Tomorrow: Back to Money!
Pray All You Want July 9, 2002February 21, 2017 Russell Turpin: ‘You quote J. R. Pitts as writing, ‘We won WWII when children could pray in schools. We lost Vietnam when they couldn’t.’ You write, ‘Religion should be private.’ ‘And you’re both wrong. No one — not the ACLU, not the most ardent atheist — is trying to kick religion out of the public square. Jerry Falwell has every right to blast his uninformed opinions over the airwaves. The notion that the government is trying to restrict religion to the home and church is simply false. It is a myth that children are not allowed to pray at school. They may pray at recess. They may pray with schoolmates over lunch. They may pray between classes. And they may pray silently when the teacher hands out a test. The Supreme Court decrees only that the SCHOOL must not sanction those prayers. And that is a very different issue from students praying. The goal is NOT to silence the public voices of the religious, but rather to keep the government, and its schools, from sanctioning religion. ‘This distinction is very important. It is crucial to understanding the court decisions. And the religious right is trying to deceive the public about the issue. Thus, we hear all the time that children are not allowed to pray in school. That’s false. The children ARE allowed to pray, though they can’t turn that prayer into a school activity or disrupt school activities with it. It is the public school that is restrained. And that’s how it should be.’ ☞ Good point. Not that everyone agrees about the separation of church and state. Did you see yesterday’s New York Times? Sean Wilentz has an op-ed in which he quotes Justice Scalia’s January speech to the University of Chicago Divinity School. (The full speech appeared in the May issue of First Things.) The op-ed is entitled, From Justice Scalia, a Chilling Vision of Religion’s Authority in America. The point is made that Justice Scalia is not comfortable with the way democracy tends to take God out of government. Argues Justice Scalia (in his private capacity, not speaking as a Justice), ‘The reaction of people of faith to this tendency of democracy to obscure the divine authority behind government should not be resignation to it, but the resolution to combat it as effectively as possible.’ Fight the separation of church and state, insofar as you can. This is instructive, because (a) Justice Clarence Thomas almost always votes with Justice Scalia (and anointed John Ashcroft with oil upon his appointment as Attorney General); and (b) George W. Bush, when he was running for the presidency, specifically cited Scalia and Thomas – and only those two – as Justices he particularly admired. Those who agree with John Ashcroft’s statement at Bob Jones University that ‘we have no king but Jesus’ – or who take heart when they hear House Majority Whip Tom DeLay saying that God is using him to promote “a biblical worldview” in American politics – or who cheered last month’s official pronouncement by the Texas Republican Party that America is a Christian nation founded in Biblical principles – will be pleased to know that Justice Scalia feels as he does. Those who worry that religious zeal has led to much of the bloodshed and oppression of human history – or who note that the founders were not deeply religious – may be less enthusiastic.
How About It? July 8, 2002February 21, 2017 HOW ABOUT A STATUE? Last week Brooks Hilliard wrote: ‘We won WWII before ‘under God’ was added to the Pledge of Allegiance and lost Vietnam afterwards.’ J.R. Pitts responds: ‘We won WWII when children could pray in schools. We lost Vietnam when they couldn’t.’ ☞ The author of the pledge, in 1892, as historian Arthur Schlessinger, Jr. tells us, was a former Baptist minister by the name of Francis Bellamy. He saw no need to add God to the pledge, and neither should Congress have in 1954. (I would also not like to see Congress mandate a statue of God beside the Capitol, or a painting praising God in every classroom where the pledge is recited. Religion should be private – and optional. That makes it all the more special for those who choose it.) Was the Ninth Circuit correct in its ruling? I believe it was. Should we get all upset when the Supreme Court presumably overturns it? Nah. It’s just not that big a deal. HOW ABOUT AN INVESTIGATION? Martha’s in some hot water for selling about $228,000 worth of ImClone stock, allegedly on the basis of inside information. It’s the story that won’t go away. She’s not just nobody, after all – she’s Martha Stewart! Well, thus far, George W.’s not in much hot water for selling $828,000 worth of Harken Oil stock on what would also appear to have been the basis of inside information. It’s the story that won’t make Page One. And yet he’s not nobody, either – he’s President of the United States! I think the story may finally be gaining traction, as it should. Not because any of us want to start talking about impeachment again – been there, done that (and this hardly qualifies as treason) – but because insider trading undermines public confidence in our capital markets. George W. got a complete pass on this as a candidate for president, because, as he told reporters, this had all been hashed out before and he had been exonerated. (Not sure if he wagged his finger when he said that, but he said it.) Well, but no, it turns out he was not exonerated. Here are some things to know about the case: 1. W. was clearly an insider – he was on Harken’s Board of Directors! He was on Harken’s three-man Audit Committee! He was on a special ‘restructuring’ committee! As U.S. News reported in 1992: “Bush sold [his entire] $828,560 worth of Harken stock just one week before the company posted unusually poor quarterly earnings and Harken stock plunged sharply. Shares lost more than 60% of their value over 6 months. When Bush sold his shares, he was a member of a company committee studying the effect of Harken’s restructuring, a move to appease anxious creditors. According to documents on file with the Securities and Exchange Commission, his position on the Harken committee gave Bush detailed knowledge of the company’s deteriorating financial condition. The SEC received word of Bush’s trade eight month’s late. Bush has said he filed the notice but that it was lost. “ 2. According to Paul Krugman in the Times yesterday, ‘another member of both committees, E. Stuart Watson, assured reporters that he and Mr. Bush were constantly made aware of the company’s finances.’ If so, Mr. Bush clearly knew inside information about the impending bad news that the public did not know when he sold his stock. Trading on inside information, especially by a company officer, is considered a fairly serious white-collar crime. 3. But it gets worse. Apparently, according to Krugman, Harken kept its stock up ‘just long enough for Mr. Bush to sell most of his stake at a large profit – with an accounting trick identical to one of the main ploys used by Enron a decade later. (Yes, Arthur Andersen was the accountant.)’ The trick involved setting up a seemingly independent entity to buy a Harken subsidiary for a much-inflated price, thereby to boost Harken’s reported profits (or in this case, reduce its reported losses). And where did the money come from to make that purchase? It was borrowed from Harken itself. Accounting fraud, if that’s what this was, is considered a fairly serious white-collar crime. Any director who was aware of it, I would think, would bear some complicity. 4. Mr. Bush neglected to report this insider trade to the SEC as required by law until something like 34 weeks past the deadline (at first saying he had filed but that it had gotten lost at the SEC, later saying, well, no, it was his lawyer’s fault). Perhaps if this had been just one of dozens of small sales Mr. Bush had made his failure to report it could have been just something that, well, got lost in the shuffle – a more or less trivial transaction that he might not have given two thoughts about. But if I’ve been reading the press reports right, this sale was the largest score of his life up to that time. So failure to report the highly suspect insider sale properly may not be all that trivial and was perhaps even intentional. 5. Matt Miller’s July 3rd column argues for the legitimacy of our looking into all of this. Among other things, it recaps some tidbits from a long February, 2000, Harper’s article by Joe Conason. It seems that, yes, the SEC looked into the Harken matter, but that, no, Mr. Bush wasn’t exonerated. Rather, the investigation was simply dropped. According to Conason, says Miller, the ‘investigation’ (Miller puts ‘investigation’ in what an early editor of mine used to refer to as ‘snicker quotes’) was conducted ‘by an SEC headed by a pal of Bush’s father whom dad appointed to his job.’ And the SEC’s general counsel at the time was none other than the Texas attorney who had handled the sale of the Texas Rangers for W. and his partners in 1989. Concludes Miller: ‘In the third world, given such circumstances, we’d say the fix was in. Anyone for an independent look this time?’ I am. And I will listen with interest to the President’s speech, scheduled for tomorrow, in which he is expected to come down hard on those who abuse the public markets for their own financial gain. I wonder if he will call for an investigation of Halliburton’s suspect accounting during the Cheney reign, too.
Who You Callin’ Rich? July 5, 2002February 21, 2017 James Maloney: ‘You obviously have a different definition for rich than I. Your friends paid $980K for a fixer upper five years ago in NYC AND they live in LA. We should all be so comfortable.’ Bill Walker: ‘Earth to Andy – anyone who can purchase a $980,000 home plus sink another $500,000 into it for renovations (even today, let alone in 1997), is not just successful, they are RICH.’ ☞ You’re absolutely right. It was late at night. I should have said they are not ‘independently wealthy.’ Or ‘super rich.’ They have to work to meet their mortgage and save up for retirement. Really rich people don’t have to worry about stuff like that. I went back and changed the column archive. Of course, you could argue they are nuts – they wouldn’t have to work to meet the mortgage and save for retirement if they lived someplace cheaper. They should sell the place and set aside that extra $3 million I talked about so they would be independently wealthy. (Albeit modestly so.) That was the point of my column. Financially speaking, that would clearly be best. But life is not a business; they love where they live; and they don’t feel as if they’re spending $25,000 a month for their terrace, because it’s merely an opportunity cost, not a bill that comes in the mail. Hope you had a great Fourth.
Well? IS There a Real Estate Bubble? July 3, 2002February 21, 2017 DOES VALUE MATTER? Max Peterson: ‘As Warren Buffett says (the quote may have originated with Ben Graham; I don’t recall), Price is what you pay, value is what you get. Longer term, there’s no question that value matters.’ ☞ Exactly. UNDER GOD Brooks Hilliard: ‘We won WWII before ‘under God’ was added to the pledge and lost Vietnam afterwards. The Brudnoy column was good … I believe in God and have no objection to the inclusion (BTW, there is no comma before the phrase in the pledge, it’s “one nation under God”). But I do feel left out (and a bit offended) when I hear invocations ending with ‘in Jesus’ name we pray’ and the like, so I can understand the objection to this phrase by nonbelievers. In sum, I’d be no less happy, patriotic or religious if we kept our references to God and country separate.’ IS THERE A REAL ESTATE BUBBLE? I still don’t want to talk about the real estate bubble, because this is a time to celebrate. HAPPY BIRTHDAY, AMERICA! But I’ll write about it anyway, because I promised. Let me start with Manhattan apartments, reminding you that every market – indeed every neighborhood and sometimes every block – is different. Charles and I have friends – very successful but not super-rich – who bought an 1800-square foot two-bedroom apartment on Central Park West, in a great building, for $980,000 in 1997. The really neat thing about it is a terrific terrace overlooking the Park. Not one of those little cookie-cutter kind of slabs beneath the identical one above, but, rather, a true terrace with room for plants and furniture and nothing above, because it comes at a floor where the building sets back. It’s really a lovely apartment, although it was in pretty rough shape when they bought it. They put about $500,000 into fixing it up. (I gasp at the thought, clawing for air, but leave that aside.) Total investment: a shade under $1.5 million. Here we are five years later and they believe it would fetch about $6.5 million. That represents a 34% compounded annual return. Much, much higher, of course, if you base the calculation not on their $1.5 million cost but on the perhaps $750,000 in cash they invested (with the rest, their mortgage). ‘Sell!’ I advised, knowing that they wouldn’t. But if they had, and if they had spent $800,000 of the proceeds on something nice in LA (where they also live) – and maybe $7,000 a month to rent a little something in New York (surely you can get a little something in New York for $7,000 a month) – they would have been left with perhaps, very roughly, $3 million after tax and paying off their mortgage. Even today, $3 million ain’t hay. Of course, if New York real estate prices keep rising, or even hold their own, it would be nuts to trigger a large tax bill and go to all the trouble of moving, unless they wanted to retire to Maine or something, which they don’t. But can these prices hold? My own guess – and I am generally wrong, which is something to take into account in assessing my advice – is that they can’t. At some point the shock of the stock market collapse and the Wall Street lay-offs and the looming $6 billion New York City deficit have got to begin to reverse the cycle. Not to mention the possibility of higher interest rates if things like a falling dollar were to rekindle a bit of inflation. (A falling dollar makes the things we import more expensive.) Because that’s just it: real estate prices are cyclical. I agree that ‘bubble’ is too strong a term for what’s going on in American real estate (and I’m speaking here mainly of residential real estate, where I at least have a tiny bit of anecdotal experience). I don’t see home prices dropping 95% the way hundreds of NASDAQ tech stock prices have. But ‘peak of the cycle’ might not be too strong. Might my friends’ apartment ever fetch ‘just’ $3 million – or even the mere $1.5 million they’ve put into it? I can conceive of circumstances where this would be the case . . . and that would be a huge drop in price in percentage terms, if not a full 95%. What, rationally, could account for a 34% compounded annual increase in value of prime New York apartments (or this one, anyway)? I would argue: nothing. Which is why some might call it a bubble. I get The Van Eck-Tillman Real Estate And Bank Letter, billed as ‘Adrian Van Eck’s Confidential Letter On The One-Half of U.S. Wealth in Real Estate’ ($90 a year, call 800-219-1333). From its June 6 letter: From coast to coast, the American real estate bubble has been puffing up ever more dangerously in the past 30 days. My gosh, when I think about the several boom-and-bust cycles I have observed and reported on in the past 40 years, I wonder just how high this one can go and how much longer it can last before it begins to come apart. When it will end is still hidden from us mortals. But the fact that it will end and end badly cannot be in doubt or dispute. Let’s say my friends had to move for some reason – job related, or health related – and they had to sell their apartment a year or two from now. Meanwhile, interest rates had risen (it’s possible they one day will), New York taxes had risen to compensate for the weaker economy (or services had declined to compensate for the lowered tax revenue) and, given the ever increasing ease of telecommutation and such, demand for Manhattan living had become less frenzied. So you go to buy the apartment for $6.5 million, and the building requires 50% in cash – there’s $3.25 million you could have put into AOL stock (say) at one-fifth what it had been selling for two years earlier, but you decide to put it into this nice apartment instead – the terrace makes it all worthwhile – and you take out a $3.25 million mortgage at 8%, say, to finance the rest. (Remember, in this scenario, interest rates have come back a bit.) That’s a $25,000 a month mortgage, and it would sit on top of the building’s own monthly common charges. Would a nice young couple like the one who had managed to buy it in 1997 for $980,000, be able to buy it for $6.5 million and make a $25,000 monthly mortgage payment? I just don’t see it. Our own apartment, similar but no terrace (oh, what I would give for that terrace – though not $5 million) was purchased in 1977 for $41,000. That was $11,000 in cash plus a $30,000 mortgage. The city was in big financial trouble (Ford to New York: Drop Dead!) and the economy was rotten. Today it’s supposedly worth $1.5 million, maybe more. So basically, my friends have what I have, plus a $5 million terrace and a view. The extra carrying cost / opportunity cost of that terrace might be $25,000 a month. Would you pay $25,000 a month for a terrace and a view? I’m not being rigorous in this analysis, but I think the broad strokes suffice to give a general idea of my concern. It’s true that under the current administration even more than the past one, the stratum of society that can even contemplate $6 million apartments is getting special consideration and huge tax breaks. So that could be reason to expect the gap in pricing between rich-folks’ home prices and most-folks’ home prices to widen sharply. That could account for some of what’s happened. Plus, of course, smart money was exiting the stock market, looking for a place to go, as the market began to crash . . . and fearful and disgusted money, that had waited too long to sell, was next in line to exit the market and look for a place to go. And that place, for a lot of folks, has been real estate. It’s just that when everyone has finally concluded that something is the right thing to do, the right place to be, it’s been bid up so high in price it’s become the wrong thing, the wrong place. For much of my career I have been known as ‘The Super-Bull’ [writes Van Eck in his letter]. But reality is a powerful force and for the moment it tells me that the wide-eyed optimists are heading into an ambush. I remember slightly older colleagues at National Student Marketing Corporation (whose stock had gone from 6 to 140 in under two years) buying Manhattan townhouses in 1969 with money borrowed against the value of their stock options, only to see their loans called as the stock fell back to 6 and their options became worthless . . . and then see the real estate market tank as others caught in the hangover of the Go-Go years (the late 1960s) had to sell, too. I’m not saying history will repeat itself in exactly the same way – it never does. What’s more, New York is a phenomenal city, and America is a phenomenal country. Never bet against either. But now that we’re thought of as a terrorist target, will our real estate values be enhanced? Or will they be, for a while perhaps, on the margin, diminished. Now let’s switch from rich people’s housing to the real world. What of ‘normal people’s’ real estate? The $120,000 homes and the $300,000 homes? I doubt the damage to ‘normal’ housing prices, if we have any damage at all, will be nearly as severe as at the high end – but it could hurt nonetheless. What if interest rates went up, both for new buyers and for those with adjustable rate loans? What if delinquency rates and foreclosures rose, as people were laid off and/or faced higher monthly payments than they could afford? Foreclosures are a good opportunity for buyers, but depress the market for sellers. And higher interest rates are good for neither buyer nor seller. Will the great influx of illegal and legal immigrants add as much demand to the basic housing market as it has in the past? Or will we be restraining this flow of new potential buyers and renters for a while? Will rising interest rates price more new buyers out of the market and put more existing homeowners, hanging on by a thread, out on the streets? Will the banks that were accepting 3% down payments now require more, further crimping the supply of first-time buyers entering the system? I bought a 3,000-foot condo in a luxury Miami building directly on the Bay in 1993. Three bedrooms, four baths. I bought it from a bank that had loaned $250,000 against it, only to see the owner default. Years had passed. Did I want to make an offer, my real estate agent asked? No, I said – I already had a place to live; and as a rental, it couldn’t possibly carry itself. ‘Aw, c’mon – make an offer!’ she said. (We had become good friends by this point, as I had bought several investment properties from her.) ‘OK — $79,000,’ I said. She recoiled before getting the joke – obviously I was joking – and reminded me that the bank, on the hook for $250,000 plus years of carrying costs, had just a few weeks earlier rejected a nearly-as-preposterous offer of $105,000. But I held firm at $79,000 and that’s where the deal was done. The bank had had enough. Sure it was worth more – sort of. But if no one wanted to pay more right then – and no one did – that’s what the bank would have to take if it wanted to sell. I’ve rented it for most of the last 9 years, barely breaking even, if that, and this past fall was offered $325,000. It seemed to be worth more like $375,000 (a lot had changed, as Miami had become hot again, interest rates had plunged, the neighborhood had begun to recover a bit), so I said no, expecting them to come back at $340,000 or something. They did not. It’s sat empty now since last fall awaiting a better offer. Might I someday, years from now, just give up and sell it to some kid for $79,000? Real estate moves in cycles. For basic, utilitarian housing, as I say – for a lot of reasons – the cycles should not be wildly wide . . . and each successive cycle might reasonably be expected, on average if not in every neighborhood, to form a significantly higher plateau and bottom than the last. The Fed and the lending institutions and anyone else who has a hand on the rudder of the economy have a huge interest in not seeing the average homeowner foreclosed upon or the housing industry, with all its corollaries, grind to a halt. But my guess would be that Van Eck’s instincts are pretty good: My 40 years in Real Estate tells me that we are now living through a pretty standard final stage of a Housing Boom [he writes in that June 6 letter]. If so, it may not be great for the profits, or possibly the stocks, of homebuilders and mortgage lenders and furniture makers. And this might not be the time to rush to buy a second home. Grab a terrific deal if you love it, but maybe not get into a bidding war. Something equally wonderful, and a lot cheaper, could come along a few months from now. Don’t buy a place you might have to sell when you move, in a couple of years, and assume that the selling costs – which can easily approach 10% — will be covered by the price appreciation you will realize over those two years. Depending on the location and situation, two years from now you might be lucky to get what you paid. Or you might find it all but impossible to sell at any reasonable price, for a while. Yes, interest rates are low. Grabbing a low fixed rate now on a home you plan to keep forever could be wiser than waiting a while to pay less for such a home but at a significantly higher interest rate. And, yes, life is not a business, and your primary residence is clearly a different sort of decision from a discretionary second home, let alone a bunch of investment properties. I just think it’s sensible to consider the risks more seriously than a lot of people seem to be considering them today. Much the way they were buying stocks a couple of years ago. All that said, let’s not miss the big picture: We are so fortunate to live here, at whatever price next year’s appraiser values our home. HAPPY BIRTHDAY, AMERICA!