Year: 2008

At one point yesterday, right around the time counsel for the plaintiff was calling me a liar, the Dow was down 370 points. Our legal system – while better than resolving things with a duel (I’m still reading the Alexander Hamilton biography) – can be so depressing. (The DNC, it will amuse the RNC to know, is being sued for discriminating against gay people.) At some point, if I can find anything constructive or entertaining or cathartic to say about this, I may inflict some of it on you, but my point is actually that there was a lot to feel good about yesterday (not least that I my upgrade came through and I got bumped up to first class! the grilled roast beef sandwich snack was delicious! I count my blessings hourly).

Not the budget, of course. At $3.1 trillion, I learned when I landed, the Republicans propose to increase military spending and cut back funding for health care to the poor and old.

The budget deficit, announced at $400 billion, will of course be higher, both because (if I got the news right) it doesn’t include what will be about $200 billion for the wars and because, as usual, it doesn’t include the money we’ll be borrowing from the Social Security Trust Fund (another $200 billion or so) or what I assume will be the reduced tax revenues a recession could cause.

The Democratic majority will not pass this budget . . . but in round numbers, it sure looks as though the National Debt will be very much in the neighborhood of $10 trillion by the time the White House changes hands, as suggested here at least since March of 2005. About three-fourths of it will have been racked up under just three of our 43 Presidents – Reagan, Bush, and Bush.

This on the watch of the President who told us it was fine to slash taxes on the rich because, first, the cuts he proposed would actually not go primarily to the rich but – ‘by far the vast majority’ to those ‘at the bottom end of the economic ladder’ (now that, it seems to me, was lying) and because, second, we faced budget surpluses as far as the eye could see. Right.

But no, it wasn’t news of the budget that buoyed me, or the election results last night (I am enthusiastically neutral between our two superb Democratic candidates) – it was some greedy old money news.

For starters, thanks to your generous guzzling, Honest Tea – a private company whose product I have touted here shamelessly for almost ten years, since its inception – received an exciting new shareholder: Coca Cola bought 40% of the company, as explained (in case you want to read the Honest Tea story) here.

None of that does you any good, unless you were hoping for more readily available organic iced tea, but our Aldabra warrants were up about 20%, to $2.87 (about a double or more from where we bought them this past summer) on news the Boise Paper acquisition was approved by Aldabra shareholders. The new company will be called Boise, and trading will move in about a month from the American to the New York Stock Exchange under the symbol BZ.

Meanwhile, SYMZ, which had recently gone the other way, from the American Exchange toward the pink sheets and deregistration with the S.E.C., jumped 16% to $13.25, which is still a far cry from the $20-and-change it was a few months ago, but back to double what we paid. Volume was light and I see no news, but it’s still better than most stocks did yesterday.

Lots to be sheepish about, of course. Poor old FMD is barely limping along, for example. How I hope you had the good sense to sell half your FMD at $56 – even though I didn’t have that good sense and in fact suggested that you hold on – because that would mean you’re now playing with house money, and just might do fine. (Otherwise, you’re down about 50%.)

But the oil and gas stocks are doing okay, and the one retailer I can remember suggesting – Wal*Mart – is doing well, no doubt because Wall Street thinks Wal*Mart is the only place most Americans will be able to afford to shop.

For the most part yesterday, my shorts went down and my longs slipped just a little – and did I mention I got bumped up to first class? Hard to beat that.

Sorry about yesterday. My $127 four-star Priceline.com room in Washington is spacious and lovely, with a good-sized flatscreen TV and free wi-fi. But, oh, is that wi-fi sloooow!

And now . . .

THE WINNER IS

Charles! Nominated for a Fashion Group International ‘Rising Star’ award last month – he won. Last week he had a nice mention in the Times. And Sunday, his Fall fashion show played to a packed crowd (we called and had the football game moved back so as not to conflict) . . . as reviewed here by Style.com complete with a slide show of all 47 ‘looks.’

If a picture is worth 1,000 words, I’ve just written a 47,000-word column to make up for yesterday.

Note the $300,000 antique French couch in the background. Actually, Charles painted it – himself – a couple of nights before the show. Note, too, the ‘hoop skirts’ reminiscent of Versailles.

So now you’re wondering, is this like the old Steven Wright line I’m so fond of? (‘The sign said ‘Breakfast Anytime,’ so I ordered French toast during the Renaissance.’)

(Yes that Steven Wright, the one who said he’d ‘kill for a Nobel Peace Prize.’)

And the answer is, no, Steven Wright is not on Charles’s radar screen, so far as I know. Rather, the inspiration for the show was ‘Cake,’ a new ballet about the life of Marie Antoinette he has asked to costume for the American Ballet Theatre’s junior company.

‘I inevitably found myself lost in Eighteenth Century France,’ he told his Boswell (that would be me) – ‘plutocrats, the poor, the stirrings of egalité and calls for CHANGE . . . the silks and chiffons but the need for something practical . . . democratizing beauty . . . fashion for a new age aborning . . . yes, we can . . . ready on day one . . . does the knife loom for our subprime excess?

‘This is what comes of sketching Eighteenth Century French ballet costumes while watching MSNBC.’

And he went on:

‘I was struck by the sheer technology of the period, what had to go into making the old hoop structure showing lightness and wealth . . . that was all about technology. Whale bone, light metal – fantastic when you think about it. Just as astonishing for its time as the amazing fabrics and technology we get to play with today . . . the memory taffetas that evoke grand evenings – but you can sleep in on a plane and smooth out (and practically hose down) . . . the recycled industrial mesh that holds up our pouf – the skirt wraps the body for ease of fit as the silk wraps the mesh to maintain its shape. This mesh also gives lightness and rise to the shoulders of the heather jersey-lined featherweight wool tweed jacket . . . It’s all about the fit . . . it’s all about empowerment . . . it’s all about moving forward mindful of the past.’

I have only the vaguest idea what any of that means, but aren’t the clothes pretty?

NOT SO RICHISTAN

Judy Bailey: ‘I see that by the terms of Richistan my partner and I just make it. We have, by living frugally and modestly, and by having valuable hobbies such as sewing, tile setting, and carpentry, accumulated a nest egg of about $800,000. Adding the value of our house, about $400,000, we are there, even though our income has always been very modest. Most of my working life, I was paid like a clerk, a free-lance editor, or a librarian. But consider my friend Terry, who has been a teacher all his life. I am sure his savings do not enroll him in the ranks of Richistan, but in many ways he is richer than me by far. He is working in a special teaching environment which allows him to make $80,000 per year – more than twice my income – and he need not save a penny of that, for when he retires in a few years, he will have a tidy income guaranteed for life, and including generous health insurance. Meanwhile, my partner and I will have only the income that can be generated by our nest egg, plus Social Security payments based on the low wages we’ve made all these years, and we must go onto the open market for health coverage. So who is richer? . . . Folks who work for the government and in those fewer and fewer industries that have traditional pension plans have a kind of security that the rest of us only dream about. Why is it that they are not included in Richistan? And how do you figure that a nest egg of a million dollars will generate $72,000 between 65 and 95?‘

☞ Several years ago I announced somewhere that it now required $5 million to be a millionaire. Today, it probably requires $10 million or – if we’re talking millionaire (with the kind of italics the word used to deserve) – $25 million.

That said, having a $1 million nest egg to supplement Social Security is still vastly better than what most people will have at 65. (Most people, sadly, will have next to nothing.)

Meanwhile, the $72,000 figure I used is what you could withdraw each year for 30 years if, over those 30 years, you were earning 6% on the funds that remained. (Think of it as the reverse of a 6% $1 million mortgage that would be paid off after 30 years of $72,000 annual payments.) But 6% after inflation in a Roth IRA (say) – while not pie-in-the-sky – is in no way guaranteed. So this was a fairly aggressive illustration designed to encourage people to be frugal and build a nest egg. I wanted to get to a dazzling, but not totally bogus, number to inspire people to save. But the implication of your question is spot on: once you do retire, the frugal thing to do is not to withdraw $72,000 a year from each million you’ve saved up, because you might not be able to earn 6% after inflation – or you might live past 95. And I hope you will.

Bunny Lytle: ‘My understanding is that one can only safely take between 3% to 4 % annualy adjusted for inflation if you don’t want to go broke eventually. (May not be true as brokerage firms are my source.)’

☞ No – I agree, and have always urged people not to assume they will be able to earn more than 3% after-tax-after-inflation.

In the retirement section of my software, may it rest in peace (ohhhhh how I miss the gigantic royalties, ohhhhh how I miss the fun of sending wish-lists to programmers who’d grant them brilliantly, ohhhhh DOS, sweet DOS; but I digress), whenever anyone assumed a higher than 3% return above inflation, they’d get an error message:

It’s no cinch to outpace inflation by even 3% over the long run. You have chosen yields that outpace your inflation assumption by [whatever they entered %]. We hope you’re successful, but if you wish to change your entries, press ESC and do so now.

So the 3% idea is valid.

But remember that if you don’t need the money to last forever, you can take more. A 90-year-old expecting not to live past 108 could (obviously) withdraw a lot more than 3% a year.

DIMES

Andy Krauss: ‘I think more and more, people are considering coins not to be currency but instead just tokens that can be traded for goodies from vending machines or other devices with slots in them. Quarters are great because they’re big, easy to hold, and it only takes 3 or 4 strokes to get a can of root beer. Dimes aren’t so great because of all the work involved in feeding in enough of them to get that nice relaxing soda. Nickels? Forget it. And everyone knows that the only thing pennies are good for is to keep you from getting more of them.’

Eileen Bartlett: ‘For the past five or so years, I have been stooping to pick up change on the streets of Denver. Having lived in Ireland for a year, I tell people who scoff at me (especially my siblings), that refusing the least treasure placed by the fairies could lead to major troubles. At the end of each April, I convert my coins to dollars and place in a sealed envelope with the amount collected written on the outside. I’ve averaged from approximately $9 to $13 each year. When I’m ready to retire, I’m going to buy some little piece of art to show the scoffers that ‘a penny saved is a penny earned.’ ‘

Will Galway: ‘I often still DO pick up dimes, and even pennies. Although their monetary worth is all-but nil, the act of picking them up is an effective stretching exercise, and that stretching comes much cheaper than joining a health club. I think of the coins as being a slight, but amusing, discount on my ‘membership’ in my own personal ‘health club.’ ‘

ALEXANDER HAMILTON

Pat Davies: ‘You are so right about the excellent Alexander Hamilton biography. But you will have to do a LOT of walks to get through it. We listened to it as we drove to Pittsburgh from Minneapolis and home again, (with a stop at Ford’s Presidential Library, which like Pittsburgh, was a pleasant surprise) – and still hadn’t finished it!’

☞ The longer it lasts, the better.

FOR YOUR UNDERWATER CONSIDERATION

Nick Altenbernd: ‘Here‘s another, cheaper, and possibly better swim music player. It works via bone conduction rather than earphones. I’ve heard one only briefly, but it seems to work superbly, with very good fidelity.’

MEET WITHOUT FEET

Several of you did read this, as suggested . . . and had suggestions of your own.

Carl Granados: ‘As to what to eat, cost on environment, cost on health, etc… an awesome book is A Omnivore’s Dilemma which is also available on audio by one of the best readers out there, Scott Brick.’

Mitzi Labant: ‘Prevent and Reverse Heart Disease by Caldwell B. Esselsteyn, Jr., a Cleveland Clinic physician, claims a nutrition-based cure for heart disease: replacing meat, poultry and fish with a plant-based diet.’

Jim Kozma: ‘I pretty much gave up eating meat after reading the September 2006 issue of the Nutrition Action Healthletter. Unfortunately, they don’t have the entire issue online, but they do have the editorial here. (You might also be interested in their suggestions for public policy changes.)

Bill Baumann: ‘While in principle I agree with the notion that eating meat is not a good thing, there are some of us who can mitigate circumstances somewhat. I live on 10 acres in southwest Washington State. I have sufficient pasture land to sustain three beef cows comfortably (supplemented with grass hay that I buy from the neighbor down the road). I typically buy three weaned calves from a farmer friend of mine once every 18 months. They eat on my pasture (and grass hay in the winter) and then 18 months later they are ready for sale. There is a waiting list of folks around here interested in buying a quarter or half a beef every so often. They keep it in their freezers. It’s ‘clean’ (no antibiotics or other artificial stuff), it’s completely grass fed (no grain), it’s lean, and it tastes better than store-bought beef. I also have a 4kW photovoltaic system delivering electricity when the sun shines and a solar water heater that heats all of our water from May until about October. We subscribe to the idea that buying local food is the best option. But I haven’t been able to give up bananas so far!’

Karen Collins: ‘We try to only eat meat and dairy raised on pasture, grass-fed, NOT grain-fed. And because it is more expensive, we eat less animal protein. This is the way to go I think.’

THE REPUBLICAN ‘SURVEY’

Mike da retired mailman: ‘I loved your post about this. I got the same questionnaire from the Republican Party (yes I am one of those registered ones) and I just could not believe how insulting, rude, and off the mark it was. And so I told them when I sent it back without a check. Obviously, whoever prepared the mailing has not been paying attention to the current political drama where the tendencies and direction of ALL (well, all thinking) candidates is to begin new thinking, and new approaches. The public is so tired of the backbiting and back stabbing that goes on in National Politics. And that includes both your party and mine. I sure wish we would get back to civil discourse being conducted with thoughtful respect and intelligent discussions of issues. Maybe if we turn down the volume on nastiness we would all be able to actually think. Well, we can hope, anyway.’

Kevin Clark: ‘You appear shocked, shocked to find that political fundraising questionnaires use partisan wording. Your examples don’t seem more extreme than the Democrat letters I receive but there’s no particular reason you need to give equal time to both sides.’

☞ I considered adding a paragraph to acknowledge that our questionnaires use much the same annoying, simplistic tone. But I don’t think I’ve seen any of ours (send them on to me if you find one) where the premises of our questions are anywhere near as dishonest as the examples I cited last Friday.

It’s one thing for us to say, ‘Do you want us to fight Republican efforts to keep assault weapons available at gun shows?’ – because Republicans HAVE defeated all our repeated efforts to close the gun show loophole and restrict sale of assault weapons.

Quite another for us to make up an egregious Republican position that does not, in fact, exist.

If you can find me one of ours that’s as egregious as the one I excerpted, I’ll be glad to give you equal time.

Kevin continues: ‘On the taxes question it seems to me your complaint is more unfair than the survey. The question doesn’t say, ‘the Democrats’ massive tax hikes on you.’ The fact is that Democrats in general, and you in particular, want to increase taxes. Why shouldn’t a middle class person have an opinion on whether that’s a good idea? And then you go on to say it might mean a $5,000 to $28,500 increase for millionaires. [Wouldn’t it be much more?]’

☞ Sorry, I was not clear. Those are the kinds of contributions rich Dems and Republicans are asked to make ($28,500 is the annual legal limit to the DNC and the RNC). So if this were a mailing going to thousands of major donors asking them for big bucks, the context might be appropriate for a question about tax hikes. But it was going to millions of small donors being asked for small bucks, trying to scare them into thinking Democrats want to raise their taxes when in fact we do not.

Monday: More Richistan

HAIR CLUB FOR MICE

As you may have seen on the Today Show yesterday, or read elsewhere, we may now be just a few years from being able to use stem cells to grow new hair follicles. It already works on mice; there is a large economic incentive to move full speed ahead with human trials.

What this means is that the photo, top left – now about 15 years out of date – will by 2013 or so, with some luck, be about right.

THE FALLING DOLLAR

I went for my five-mile ‘power walk’ Sunday but stopped to ‘stretch’ against a nearby parking meter. This involves putting one’s hands on the top of the meter, planting one’s feet far enough back so that you form a sort of right triangle with the meter and the sidewalk; and, of necessity, burying one’s head between one’s outstretched arms and looking down.

Got the picture?

So there I am looking down at the sidewalk, thinking, ‘I really should stretch more, but it’s so boring and stupid,’ and what do I see but a dime.

Well, even so, it was just a dime, and, doing a little instinctive calculus (sloth divided by greed), I am a little embarrassed to say I did not pick it up. I finished my 30 seconds of stretching (isn’t that enough?), clicked PLAY on my iPhone, and took off briskly through the streets of Eighteenth Century New York listening to Ron Chernow’s wonderful biography of Alexander Hamilton.

That was Sunday.

Yesterday, I went for the same walk, found myself at the same parking meter in the same stance – and the dime was still there.

Do you see what I’m saying? No one else had picked it up, either!

First pennies, then nickels, now dimes – will quarters (I still stoop for quarters) soon be next? What kind of currency have we? This is embarrassing!

THE UNDERWATER iPOD

If you power swim instead of power walk – but how could you? It’s so boring without something to listen to or some way to talk on the phone or read the paper as on a stationary bike – then this device might change your life. (Thanks, Jesse B.)

THE $9,000 MASSAGE

David Poneman: ‘You miss a crucial step in this psychological device you suggest to encourage frugality: Annuitize the annual obligation that comes with a life as a caffeine fiend. TIPS are the only truly prudent investment for retirees in these treacherous times, and they pay about 2%. So in order to support your Starbucks habit, you will need an additional $100,000 in your retirement nest egg to throw off that $2,000 a year.’

☞ An annuity throwing off an inflation-adjusted $2,000 for life would not cost quite $100,000 once you reach retirement age. But you make a good point. Not only does the $4.50 five times a week mocha grande work out to be $2,000 a year (with tip) – which you have to earn $3,000 before taxes to produce. Once your earning years are over, you better have saved up several tens of thousands of dollars just to throw off enough cash to support this one expense.

Jeff Rasmussen: ‘You stated that a $774,000 nest egg equals a $56,000 annual payout, which by my calculations works out to a 7.2% payout; and a $1,000,000 nest egg equals a $78,000 annual payout – 7.8%. Conventional wisdom says take no more than a 4.0% annual payout if you want your nest egg to last 30 years. How are you able to almost double the payout for a 30 year period?’

☞ Good question. I was assuming your remaining principal would continue to grow at 6% after inflation and taxes (inside a Roth IRA, say) even after you had begun withdrawals. Using that assumption, the money lasts 30 years.

To be on the safe side, it’s probably wiser to assume just 3% growth after inflation and taxes, not 6%. But I was trying to make “frugality” appear as attractive as I could (hey, anything to get folks to take their medicine) . . . without falling into the abyss of shameless trickery by (as is often done in these situations) ignoring inflation and taxes.

(‘If you invest $5,000 a year for 40 years at 11%, you will have $2.9 million, which could then provide $333,000 a year for 30 years!’ – which is true if you can earn 11% after taxes and inflation, but you can’t.)

So my example was on the aggressive side (in a good cause) but not, I think, over the edge.

Yesterday, we talked about getting rich, or at least rich-ish. Today, as promised:

RICHISTAN

Here’s a snippet from an interesting story on our ever widening income inequality (thanks, Alan):

Here’s what Richistan looks like:

• Lower Richistan. About 7.5 million households worth between $1 million to $10 million. However, “many Richistanis say that Lower Richistanis don’t even belong in their country. They refer to the Lowers as ‘affluent,’ the ultimate Richistani insult,” Frank writes.

• Middle Richistan. More than two million Americans have a net worth between $10 million and $100 million. This may also include many in Thomas Stanley’s “The Millionaire Mind” published in 2000. Their average net worth was $9.2 million, but inflation may protect them from that snarky “affluent” insult.

• Upper Richistan. Frank says there are “thousands” with $100 million to $1 billion. Sadly, the Uppers recently increased with the firings of several greedy CEOs from Citi, Bear, Merrill and Countrywide.

• Billionaireville. Forbes listed only 13 in 1985. By 2007, more than 400. Since 1995 their wealth has more than doubled to over a trillion. Another source says there are more than 1,000 American billionaires, many under the radar.

☞ It’s great to be rich, if earned honestly, as it generally is. (And thin, if you’re not anorexic, as you’re generally not.) But tell me again why we have skewed the tax code ever so much more favorably, these last seven years, toward the very, very wealthy?

DON’T SELL YOUR AII WARRANTS

They are speculative, to be sure – and I much prefer having bought them at $1.47 and $1.18 this summer than at $2.45 yesterday. But, having sold a few at $3.20 several weeks ago (well, they were in a tax-sheltered account and I couldn’t resist) – I yesterday bought them back. Because the real goal here, if things work out, is not $3.20, but $7-and-change sometime between now and early 2011. Nearly a triple from here.

The warrants give us the right to buy the stock at $7.50 a share through early 2011. If the underlying stock is $7.50 or lower when the warrants expire, they will expire worthless. But the stock closed last night at $9.59, and a recent research report by Ladenburg Thalmann suggested a fairer price might be $13.50. At that price, the warrants would have an intrinsic value of $6 ($13.50 minus $7.50). And if at sometime in the next three years the stock goes even higher, then the company would likely “force conversion” of the warrants, as it is allowed to do once the stock stays above $14.50 for 20 days, limiting our selling price to a little more than $7 (however much above $14.50 minus $7.50).

The warrants will also expire worthless if the underlying company, Aldabra 2, is unable to conclude a successful acquisition. But it seems on the verge of closing its deal to acquire the paper products division of Boise Cascade.

So could Ladenburg be on target in its assessment? Haven’t they heard of the looming global recession?

While anything is possible, one knowledgeable observer (with a strong vested interest, so beware wishful thinking) suggests the Ladenburg $13.50 valuation may actually be low:

* For 2008, Ladenburg has assumed an EBITDA of $336 million which was based on RISI’s May 2007 price projections for various paper grades. Subsequently, in December, RISI updated these price projections. If these hold true, Aldabra’s 2008 EBITDA would be meaningfully higher. It’s important to note that all the UFS (uncoated free sheet paper) producers just announced a $60/ton price increase which (if fully implemented) will result in prices being even higher than RISI’s most recent forecast. This company has the potential to be a monster free cash flow generator.

* On a 2008 EV/EBITDA basis and assuming the old 2008 EBITDA projection of $336 million, Aldabra is trading with a multiple of just 5.6x compared to the mean of Ladenburg’s comparables at 8.6x. And Aldabra’s multiple should be further reduced by an additional $150 million in net present value of future tax savings due to the step-up in asset values as a result of the acquisition. This should reduce the multiple by an additional 0.4-0.5x (i.e., to 5.2x or so) compared to comparable paper companies.

* One of the primary risks highlighted in the report is deal financing. However, Aldabra has already received a commitment from Goldman and Lehman to underwrite $908 million of bank financing required to close the Boise paper acquisition.

* The report mentions the OfficeMax contract as a material risk, but misses two major points: 1) the contract runs through 2012 (and then, if not renewed, peters out over 4 years); 2) OfficeMax isn’t an end-user, which means that Boise would simply sell to those who are in some other way. The industry is running at 95+% of capacity, so end-users will get Boise paper one way or another.

* Finally, Ladenburg writes quite a bit about Boise’s newsprint exposure. But newsprint is approximately 8% of Boise’s business and contributed approximately 1% to trailing EBITDA. With the recently announced price increases by Abitibi Paper, it’s actually a business with upside.

All this said, a monster recession could obviously weaken the demand for paper, pricing, earnings, capacity utilization, and all the rest. So this is truly a speculation, and you could truly lose every penny.

LEARNING DUTCH

Keith Larson: “That HEMA page is a cute, fast-paced version of a very slow-paced art film by two Swiss artists. It’s called The Way Things Go (Der Lauf der Dinge), and there’s a Wikipedia page for the film here.”

THE FLORIDA PRIMARY

Oh, please, PLEASE let it be a tie (or close to a tie), so it won’t actually matter that Florida’s delegates don’t count.