Thursday, April 30, 2009

Picking on the Wrong Real Estate Guru

Sometimes I get the sense that the editors of the New York Times don't read much of other sections of their own paper. If they did, why would the editors of the NY Times business section have focused on Carleton Sheets (pictured above) as they did in an article earlier this month ("When the Real Estate Game Cost $9.95"), when the Times real estate section published a much more damning article about a different real estate guru (Russ Whitney) two years ago, one that was more relevant to the recent credit and real estate busts? That article, from March 2007, was "Russ Whitney Wants You to be Rich", and I've actually been meaning to mention it for a while, because it's so good. Below are a few of my favorite excerpts from it.

On the cost of the program, and an accidental admission from Whitney:

Those who do call and who attend the first Whitney workshop find that it is mainly a sales event for another workshop. The fraction that agree to pay a few hundred dollars proceed to the second hotel workshop, where they discover yet another sales event, or what sounds from the description of participants like a Holy Ghost revival. A powerful speaker stokes passions until, one by one, about 20 percent of the audience rise from their seats — the number is reliable, according to the company — and consent to pay thousands of dollars each to learn how to get rich through real estate.

In staging some 4,700 free events a year, Whitney Information Network attracts some 280,000 people, of whom 22,000 go on to enroll as students in advanced courses. Last November at the Clarion Hotel in Louisville, Pat Yarbrough, a 56-year-old custodian at the University of Louisville, became one of them. “Fast money,” she explained later, “that’s all I’m interested in.” At the front of the conference room, a nice man had taught her how to raise her credit-card debt limit, she said, and when she made her way with a cane to the back, a nice clerk showed her what she could buy: three-day courses with names like Rehabbing for Profit and Keys to Creative Real Estate Financing. The courses cost $4,995 each, but less if you bought more. Yarbrough chose four, including the Millionaire U Real Estate Training. She had $130,000 in debt, some of it on her seven credit cards, and the clerk helped her to add $18,000 to it.


Whitney Information Network is now a public company [Pink Sheets: RUSS.PK]1 that employs roughly 475 people and that took in about $160 million in revenue in 2005, according to its annual report, all on the promise that anyone might become rich like Whitney, if he will only do as Whitney has done. The difference, though, between Whitney and those who come to WIN is that he bought his first real estate book for just $10, and they pay up to $54,000 a head for the full course package. When I asked if he would have enrolled in his school when he was starting out, Whitney said no. Then he added, “I shouldn’t say that,” and began trying to take it back.

Tips from the Advanced Class ("Millionaire U."):

Pacing before them was Tracie Taylor, a sleek African-American woman in red lipstick and dark business suit [one of Whitney's instructors].


She advised the students to cease identifying with the poor. There are more people making a little than there are making a lot, and those people, she said, need places to live. Expect to become landlords, she told the class. The neighborhoods they should expect to work in — “good cash-flow areas” — are indicated by the presence of laundromats, pawn shops and any boulevard bearing the name Martin Luther King, she told them on a tour of one such neighborhood.


Yarbrough the custodian, meanwhile, sat fanning herself with her notebook, asking for words to be defined, concepts repeated. She said she wasn’t getting much out of the presentations. She was mainly waiting, she admitted, for that lesson on how to buy houses without money.

When the students are ready, the master appears:

On the last day of the course Taylor rather grandly introduced “my mentor, my friend, Mr. Russ Whitney!” Whitney came bounding in carrying a water bottle, as though fresh from his workout.


He was soon strutting before them, saying again that real estate is “the simplest way to make a lot of money” but warning them to be careful out there, because “people don’t always have your best interests in mind.” In fact, he said “in 9 out of 10 cases they don’t.” And that’s why they needed more education — to learn what they could expect.

“We’ve got a lot of classes,” he went on. “You probably think they’re expensive.”

“They are expensive!” Yarbrough called out from the front of the class.

Whitney turned to regard her. Yarbrough stared back at him. He began to insist that his profit margins were reasonable, that he wasn’t gouging anyone, but Yarbrough quickly stopped him. “Let me say,” she replied, “that if we didn’t want to be here, we wouldn’t be here. Nobody twisted our arms.”

Whitney couldn’t help but snort. He said he’d fire the salesman who didn’t twist arms, and everybody had a good laugh.

The image above of Carleton Sheets comes from the New York Times article on him mentioned above.

1It's actually trading for less than its net cash, as of the end of December. I'll be interested to see what its Q1 numbers look like.

How to Suppress Voter Turnout in School Board Elections

Simple: don't hold them at the same time as other elections. New Jersey will have its primary elections in June, including a Republican primary to nominate either former U.S. Attorney Chris Christie or former Bogota Mayor Steve Lonegan to challenge former Goldman Sachs chief and current Governor Jon Corzine for the governorship. Scheduling local school board elections for the same day would have increased turnout. Instead, they were held earlier this month here in Hackensack. According to the Hackensack Chronicle's unofficial results, the city's $85,207,090 school budget was approved by a 880-515 vote: in a city of about 50,000 residents, an $85 million tax and spending decision was made by a ~3% minority of zealous voters. I'm sure that's just the way the city's education establishment prefers it.

Wednesday, April 29, 2009

Becoming Sweden

I'm not a frequent viewer of The Daily Show, but I have to give a little credit where credit is due. By suggesting that if certain liberal policies are enacted we'll be in danger of "turning into Sweden", some conservative commentators floated a big softball over the plate. The Daily Show took a swing at that softball with the video below. This is pretty funny, so let it play first. I'll leave a few more comments below the video.

The Daily Show With Jon StewartM - Th 11p / 10c
The Stockholm Syndrome
Daily Show
Full Episodes
Economic CrisisFirst 100 Days

The conservative pundits warning about Sweden missed two obvious points. The first is that, as the video above shows, Sweden seems like a pretty nice place. Better to invoke the specter of a not-so-nice place when warning of the potential consequences of enacting liberal policies. The second point is that even if our tax burden and our government spending as a share of our economy were as high as Sweden's, that wouldn't make us like Sweden. Sweden is known for (among other things) honest, effective government. As Wolfgang Münchau of the Financial Times has noted, Italians have a tax burden similar to that of the Swedes, but get far less effective government from it. Similarly, invidious comparisons between us and Sweden (e.g., the international education comparisons brought up by The Atlantic when they posted on this Daily Show video) are specious because of the homogeneity of Sweden's population. There is a non-trivial number of Americans of Swedish ancestry; I'd bet they'd do fine in any objective comparison with their cousins in Sweden, if anyone wants to compare apples to apples.

Instead of ominously warning that we're in danger of turning into a pleasant European country if certain liberal policies are enacted, conservatives would be smarter to point out that, regardless of what policies are enacted here, we'll still be Americans, and this will still be America. We need to keep our differences in mind when considering policies: e.g., as we suggested in a recent post, the sort of energy policy that works for a small country that juts out into the North Sea might not work for another country that spans a continent.

Another thought: the bit at the end of the video with the Swedish pop star was a cleverly chosen example of Swedish egalitarianism, but it's worth noting that Sweden has produced its share of extreme wealth as well. For example, the Swede Ingvar Kamprad, the founder of Ikea, is listed as the fifth-richest man on this year's Forbes list of billionaires (Kamprad moved to Switzerland though, presumably at least partly for tax purposes). One nice touch in that video was the inclusion of the ominous theme from Dune. You can hear more of that theme at about 40 seconds into the trailer below:

Destiny Media's CFO on the Company's Dispute with Yangaroo

In the comment thread of a previous post ("A Conversation with the CFO of Destiny Media"), a commenter raised questions about the company's dispute with Yangaroo (TSX Venture: YOO.V). I had asked Fred Vandenberg, Destiny Media's CFO, for an updated statement on the dispute, and today he e-mailed me one. Here it is:

On the Patent Dispute:


The uncertainty and doubt you bring up regarding Yangaroo's Canadian patent and US patent application is a nuisance and it is unfortunate that we have to invest any resources at all in this matter. We are, however, very confident in a successful outcome of the Canadian litigation we initiated. We have gone through extensive legal reviews which appear to support this belief. We believe that our system existed first (this being the most salient reason we could not infringe) but we also believe, and consistent with our counsel’s advice, that we simply do not have the essential features in their patent. Further, to accommodate our global expansion, the Play MPE system expands and evolves over time and while we believe there would be no infringement at any point in time, we believe it would be exceedingly (and more) difficult to find infringement over the breadth of time.

If you come across anything from Yangaroo directly which states, or suggests, that we do infringe, or on what possible basis we do infringe, I would be interested in seeing this.

The MPE system was developed by Destiny in 1999 and we received a US patent granted with a priority date of March 2000. This is also filed with WIPO (world intellectual property organization). This is also cited as prior art in Yangaroo's US patent application. Presumably, the examiner reviewing their application has differentiated our patent from their patent.

Per the points posted on your blog:
a) The patent has not kept us from operating the Play MPE system on a commercial basis in Canada.

b) It appears that Yangaroo may shortly receive a patent in the US. Yangaroo has made our US customers, most notably EMI and Warner (see press release February, aware of this pending US patent. Thus both EMI and Warner Music Group undertook internal and external legal reviews. Destiny had extensive discussions with both counsels. Both, subsequent to their respective legal reviews, chose to sign agreements with Play MPE and both continue to use our system on a commercial basis. We believe they would only do so if they were comfortable that there is no infringement. This is in addition to our agreement with Universal Music Group. (see June 6, 2008 press release by Universal).

[Below] are some links for further information: We had initiated the lawsuit in Canada to establish through the courts that we do not infringe as a direct consequence to threats made by Yangaroo's management to potential customers that were interested in using our MPE system. Yangaroo had threatened certain labels with lawsuits and going so far as to say it was "illegal" to use our system.

[statement of claim:]

Fred Vandenberg also added this in a separate e-mail:

On CEO/CFO Purchases:


You had mentioned that you had noticed Destiny’s CEO and CFO have been buying shares so I checked and over the course of the last two years we (Steve [Vestergaard, Destiny's CEO] at over 330,000 and myself at 130,000) have purchased more than 460,000 shares which represents approximately $290,000 (Cdn currency) in addition to our existing holdings. This is more than a full year’s compensation for the combination of us. In the same time period, Cliff Hunt and John Heaven, Yangaroo’s CFO and CEO respectively, have purchased less than $20,000 (Cdn) of Yangaroo shares representing approximately 5% of their annual salaries.

Special Recession-Buster Offer to Readers of The Hackensack

And everyone else who lives near a participating store: According to Bargainist, tonight is 31-cent scoop night at Baskin Robbins. You have until 10pm (HT: Cheryl).

The image above is from Intracto.

PhotoChannel Update

Last month, PhotoChannel (OTC BB: PNWIF.OB) announced, among other news, that Robert Chisholm had resigned as CFO, and was replaced by Simon Bodymore, formerly, the Company's VP of Finance. At the time, the company announced that Mr. Chisholm had been retained as a consultant to help with the transition, and that Mr. Chisholm was also considering "other long-term opportunities with the Company". Yesterday, the company announced that Mr. Chisholm had joined the company's board of directors.

Reader N.L. asked me to speculate on this. As I mentioned to him via e-mail, I didn't have any speculation to offer, but I do have a few clarifications after speaking with David Bremner in PhotoChannel's investor relations department today. According to Mr. Bremner:

- The plan had long been for Mr. Bodymore to replace Mr. Chisholm at CFO. Initially, the idea had been to do so at the end of the company's fiscal year, last fall, but when the stock market went into (to use the technical investor relations term) the shitter, the company decided to hold off on the change until the annual meeting last month.

- The company had also long planned to add Mr. Chisholm to the board of directors. It couldn't do so last month, because Mr. Chisholm first needed to get approval from his current business partners in an unrelated venture.

- None of the seven board members announced last month has resigned; instead, the company has expanded the number of directors to eight to accommodate Mr. Chisholm.

As always, readers are free to add their own thoughts in the comments below.

Update: Reader N.L. says to expect a business update from PhotoChannel tomorrow.

Tuesday, April 28, 2009

Tilting at Windmills: Peter Huber on Quixotic Efforts to Limit Carbon Emissions

John Mauldin's Outside the Box e-mail newsletter this week ("On Energy Production and U.S. Intelligence Failures") features two essays worth reading, especially the first one ("Bound to Burn") by Peter Huber. A few excerpts from Huber's essay follow.

Cut to the chase. We rich people can't stop the world's 5 billion poor people from burning the couple of trillion tons of cheap carbon that they have within easy reach. We can't even make any durable dent in global emissions -- because emissions from the developing world are growing too fast, because the other 80 percent of humanity desperately needs cheap energy, and because we and they are now part of the same global economy. What we can do, if we're foolish enough, is let carbon worries send our jobs and industries to their shores, making them grow even faster, and their carbon emissions faster still.

We don't control the global supply of carbon.


We no longer control the demand for carbon, either. The 5 billion poor -- the other 80 percent -- are already the main problem, not us. Collectively, they emit 20 percent more greenhouse gas than we do. We burn a lot more carbon individually, but they have a lot more children. Their fecundity has eclipsed our gluttony, and the gap is now widening fast. China, not the United States, is now the planet's largest emitter. Brazil, India, Indonesia, South Africa, and others are in hot pursuit. And these countries have all made it clear that they aren't interested in spending what money they have on low-carb diets. It is idle to argue, as some have done, that global warming can be solved -- decades hence -- at a cost of 1 to 2 percent of the global economy. Eighty percent of the global population hasn't signed on to pay more than 0 percent.


Might we instead manage to give the world something cheaper than carbon? The moon-shot law of economics says yes, of course we can. If we just put our minds to it, it will happen. Atom bomb, moon landing, ultracheap energy -- all it takes is a triumph of political will.

Really? For the very poorest, this would mean beating the price of the free rain forest that they burn down to clear land to plant a subsistence crop. For the slightly less poor, it would mean beating the price of coal used to generate electricity at under 3 cents per kilowatt-hour.


And with one important exception [nuclear power], which we will return to shortly, no carbon-free fuel or technology comes remotely close to being able to do that. Fossil fuels are extremely cheap because geological forces happen to have created large deposits of these dense forms of energy in accessible places. Find a mountain of coal, and you can just shovel gargantuan amounts of energy into the boxcars.

Shoveling wind and sun is much, much harder. Windmills are now 50-story skyscrapers. Yet one windmill generates a piddling 2 to 3 megawatts. A jumbo jet needs 100 megawatts to get off the ground; Google is building 100-megawatt server farms. Meeting New York City's total energy demand would require 13,000 of those skyscrapers spinning at top speed, which would require scattering about 50,000 of them across the state, to make sure that you always hit enough windy spots. To answer the howls of green protest that inevitably greet realistic engineering estimates like these, note that real-world systems must be able to meet peak, not average, demand; that reserve margins are essential; and that converting electric power into liquid or gaseous fuels to power the existing transportation and heating systems would entail substantial losses. What was Mayor Bloomberg thinking when he suggested that he might just tuck windmills into Manhattan? Such thoughts betray a deep ignorance about how difficult it is to get a lot of energy out of sources as thin and dilute as wind and sun.

It's often suggested that technology improvements and mass production will sharply lower the cost of wind and solar. But engineers have pursued these technologies for decades, and while costs of some components have fallen, there is no serious prospect of costs plummeting and performance soaring as they have in our laptops and cell phones. When you replace conventional with renewable energy, everything gets bigger, not smaller -- and bigger costs more, not less. Even if solar cells themselves were free, solar power would remain very expensive because of the huge structures and support systems required to extract large amounts of electricity from a source so weak that it takes hours to deliver a tan.

The second essay in this week's Outside the Box newsletter, "Torture and the U.S. Intelligence Failure", by Stratfor's George Friedman, I won't excerpt from here, as this post is long enough already, but it stands out from some of the more hysterical recent punditry on this subject in its calmly-worded survey of the subject.

The photo above, of Denmark's Middelgrunden offshore windmill farm, comes from As a small, geographically compact country on the windy North Sea, Denmark may be one of the few places where wind energy can fulfill a large percentage of electricity. According to Wikipedia, wind power currently provides 19% of Denmark's electricity (the largest percentage provided by wind power anywhere). Globally, Wikipedia says that wind power fuels 1.5% of electricity use, though this number sounds a little high.

First Trust's First Quarter GDP Estimate

In their Forbes column today ("Brace Yourselves for First-Quarter GDP") Brian S. Wesbury and Robert Stein of First Trust Advisers estimate that Q1 GDP contracted at a 4.2% annual rate (preliminary Q1 GDP data will be released tomorrow). They see the uptick in consumer spending and draw down in inventories in the first quarter as good signs going forward, and predict that GDP will be flat in Q2 and will grow at a 3% annual rate in Q3.

Monday, April 27, 2009

Mark Hulbert Whistles Past the Graveyard

In his column in yesterday's New York Times business section (Strategies: "The Road Back from the '29 Crash Wasn't So Long After All"), Hulbert writes that, although the Dow didn't match its 1929 peak until 1954, investors who bought and held the Dow at its 1929 peak would have been made whole in real terms four and a half years later, thanks to double digit deflation and double digit dividend yields. Of course, today we have a fiat currency and a Federal Reserve committed to fighting deflation, and dividend yields on Dow stocks average in the low single digits, so Hulbert's example doesn't seem terribly apposite.

Our First Visitor from Ulan Bator

Or Ulaanbaatar, in the spelling FEEDJIT uses. The visitor found this blog while searching on the Mongolian version of Google for "the chemical composition of arcoplate". Readers may recall that Arcoplate is Alloy Steel International's proprietary wear plate technology for mining equipment, and that the company last year announced a joint venture with a mining services company in Mongolia. Last October, Alloy Steel's CEO mentioned that the Mongolian joint venture was on hold for at least six months.

The photo above, of what I assume is downtown Ulan Bator/Ulaanbaatar, is from Wikipedia Commons.

John Hussman's Latest: "Money Doesn't Grow on Trees"

From Dr. Hussman's latest market commentary, "Money Doesn't Grow on Trees":

On the BofA/Merrill Lynch deal:

[I]nstead of Merrill Lynch's bondholders taking a loss on their bonds, or swapping their debt for BofA equity, those bondholders will now be made whole for all of the losses that Merrill incurred, with 100% principal and interest, right alongside of the bondholders of BofA that are being protected. That's what these bureaucrats want during their stint in government service, that's how they advise our elected officials, and then their revolving door takes them right back to Wall Street.

On what it would take for the banks to earn their way out of their losses:

[T]he earnings to recover the losses have to come from somewhere, which implies a redistribution away from where they were going before. Really, money doesn't grow on trees. We've got an economy running with outstanding debt of about 350% of GDP. Even a moderate percentage of that as loan losses will represent a significant share of GDP. To reallocate enough funds to fill that hole, we would have to keep deposit rates near zero, and corporate lending rates high, so that financial institutions would earn a persistently wide spread, or “net interest margin.” Over the short-term, that's what's been happening, so ironically, banks are more “profitable” today than they probably will ever be. Unfortunately, that “profitability” is an artifact of a) unsustainably wide net interest margins, and b) a failure to adequately book losses, at the encouragement of government bureaucrats.


In order for U.S. financial institutions to earn their way out of the losses, they will have to accrue and retain an amount on the order of 25% to 35% of GDP. From where will they reallocate that amount?


If banks were able to sustainably charge high interest rates on loans and pay low interest rates on deposits, the earnings of the banks would come at a cost to what would otherwise have been retained: corporate earnings and private savings. Essentially, savers will earn less, and corporate borrowers will pay more. To accrue 25-35% of GDP to cover the debt losses (which is a mainstream estimate, not a worst-case by any means), you would have to persistently depress non-financial corporate profits and personal savings by about 25% for well over a decade.

As Dr. Hussman goes on to reemphasize, this is a high price to pay to provide 100% protection to the bondholders of poorly-run financial institutions.

Sunday, April 26, 2009

The Economics of Blogging

A Wall Street Journal column last week by the Democratic Political consultant Mark Penn, "America's Newest Profession: Bloggers for Hire", alleged that 452,000 Americans made their living by blogging. One professional blogger, Megan McCardle, explained on her Atlantic blog why this estimate was "addled" ("Blogging for Big Bucks"):

The estimates of professional bloggers seem wildly inflated--if you help update the company blog once a week as part of your marketing internship, you are not a paid professional blogger. And the numbers they themselves link to tell a much different tale from the article: most blogs bring in pitiful amounts of money for their owners.

This seems to follow the model of Mark Penn's book: find some bizarre number and mindlessly extrapolate it to an absurd conclusion. Yet I still don't understand why common sense did not keep him from publishing this article. Anecdotal evidence would suggest that almost all of us know many more computer programmers than professional bloggers--this is true of me even though I am a professional blogger, as are half my friends. Or he might have called some professional bloggers, who would have (sorrowfully) told him that no one is making $75K a year off of 100,000 pageviews a month, that being about how much traffic I pulled when I was starting up in 2002. Or, hell, he might have noticed that in the very BLS survey so nicely transformed into a table for his article, there is not entry for "blogger"--but that if you add up every writer, reporter, editor, PR person, technical writer, or "media and communications worker, other", there are only 499,890. Since Penn says that there are 452,000 paid bloggers, this implies that 9 out of every 10 communications workers are professional bloggers.

There may be one guy with some incredible niche--or moronic employer--making a ton of money with a modestely well-trafficked blog. But the plural of "anecdote" is not data.

Believe me, I'd love to think that blogging is a surefire path to riches and job security--but I'm afraid all most people get out of their blogs is the satisfaction of a job well done.

Coincidentally, a few days after reading Megan's post, I discovered the newest blog by Daniel Wahl, The Nearby Pen ("helps you live a happier and more productive life by sharing good art, reviewing good books, and explaining good thoughts") which included a post ("AdSense Pennies Make Dollars") that unintentionally supported Megan's point about the paucity of bloggers who make significant money from their blogs. In his post, Daniel mentioned the revenues he had generated from his three blogs over the last few months:

Not only will I not be making loads of money with Adsense, but at this stage of the game I should not expect to.

So why use Adsense? Quite simply, because--as the title suggests--pennies make dollars. Or to put it differently, a little bit of money adds up, even if little by little. And who knows, perhaps those pennies will grow faster with traffic at each site. In my view, it pays (at least a little) to learn more about how advertising on one's blog works while the blog is growing. I also think it is interesting. Here's the data for my first three months:

January...........4,291 page impressions...........$1.97 earned
February..........4,242 page impressions..........$3.62 earned
March.............4,411 page impressions..........$11.15 earned

This is no knock on Daniel -- I'm sure if I were using Google AdSense my ad revenues would be as low or lower (which is one reason why I never signed up for them) -- but it underlines Megan's point about why Mark Penn's estimates seem dubious. As for Daniel's point that pennies make dollars: sure, but time equals money, and, for most of us, there are much more remunerative uses of our time than blogging. So why do it? I mentioned one reason in my first post: to attract a few commenters I could get feedback from and bounce ideas off of. Another reason is the same reason most callers call talk radio stations, or letter writers write letters to the editor of newspapers: to express opinions. I have gotten a couple of ideas from writing this blog (or, more accurately, from observing the responses to a handful of posts), and one or two of those ideas could lead to a business opportunity down the road, so, in that sense, this blogging might end up being profitable as a form of brainstorming, but that remains to be seen.

How Not to Create Broad-Based Prosperity

I'd been meaning to comment on Matt Miller's op/ed column in last Monday's Financial Times ("Businesses must wake-up and take action") but haven't had a chance until now, so here goes. In his column, Miller, a management consultant and senior fellow at the liberal think tank Center for American Progress, suggests that, in order to keep the metaphorical pitchfork-wielding mobs at bay, business leaders need to,

[W]eigh in now on three subjects on which they have been notably absent: executive pay; the need for an updated “social contract” that fits 21st-century realities; and a strategy to make service jobs that cannot be offshored a path to the middle class.

On the first of those three subjects, Miller is on mostly solid ground; on the second two, not so much. On executive pay, he writes,

It is in the enlightened self-interest of business to acknowledge that it is both wrong and politically unsustainable to have chief executives routinely accumulating entrepreneurial-style wealth without taking entrepreneurial-style risk – or worse, while presiding over shoddy results or the actual demise of their companies.

Tough to argue with that, though I would have added that it's in the interests of society for entrepreneurial-style wealth to go to those who not only take entrepreneurial-style risk, but make entrepreneurial-style contributions (in terms of creating new products or services, creating new jobs, etc.). I'd also disagree with Miller's proposed solution, which relies on self-interested restraint on executive pay by corporate boards and CEOs. I think we'd be better off with more-empowered shareholders. Since mutual fund managers tend to vote their shares in lockstep with corporate boards, one way to strengthen the voice of retail shareholders might be to require mutual funds to aggregate the votes of their retail shareholders on, say, the funds' top 5 or 10 holdings, and then vote their proxies accordingly. Warren Buffett put his finger on the main cause of excessive executive pay in a Berkshire shareholder letter we excerpted in a recent post ("Revisiting Warren Buffett's Criteria for Selecting Corporate Directors"): directors who aren't "owner-oriented" or "truly independent". As Buffett wrote,

[M]any directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in many forms, often range between $150,000 and $250,000 annually, compensation that may approach or even exceed all other income of the “independent” director.

Clearly, a director who gets more money from her director fees than from her day job isn't going to rock the boat on behalf of shareholders to try to rein in executive pay -- why risk losing her high-paying directorship? It's worth noting, though, that this sort of thing is mostly just an issue at the very largest companies. There are thousands of small publicly-traded companies where executive comp isn't excessive, and directors don't face such big conflicts of interest (mainly because director fees are so much lower, and also because fewer directors are selected for non-business reasons).

On to Matt Miller's other two subjects. On the need for a new social contract, he writes,

A visionary business agenda would make sure average workers feel more secure in an era of accelerating change; this is the only way to avoid a backlash against trade and economic dynamism altogether.

A fair point, though Miller seems to have no idea of how to do this. He gestures vaguely in the direction of universal health care, arguing that,

American business must rethink its odd, outsized role in the provision of health coverage, which may have made sense 50 years ago but which today leaves millions of families falling though the cracks...

It's worth noting here, since Miller didn't, that American business's "odd, outsized role" in health coverage was a direct response to a government policy, specifically FDR's wartime wage controls, which led companies to increase forms of non-cash contribution (such as health care coverage) to attract workers in a tight labor market. That said, there's nothing original about wanting to sever the link between employers and health insurance -- Milton Friedman advocated that, as did even John McCain's advisers during the general election campaign.

Miller is most off-base on his third subject, making service jobs that cannot be offshored a path to the middle class. On this, he writes,

[G]rowing numbers of jobs in the US face effective wage caps because they can be done for less, and often better, overseas. Yet in-person service jobs – such as teaching, home health services or hospice care, for example – cannot be offshored. How can the US turn this kind of work into jobs that can sustain a family?

Where to begin with this one? First, teaching is already a job that can sustain a family. Teachers tend to be paid solid, middle class wages with excellent benefits and job security. This is true as well of many skilled jobs in health care, such as nursing, physical therapy, etc. (though it may become less true if we transition to fully-socialized medicine). Second, although these jobs can't be outsourced, they can be performed by immigrant laborers, and in fact are. My guess is that Matt Miller is a smart fellow, but is relatively young and has little life experience related to the health care of senior citizens. Otherwise, he'd know that many nursing home, hospice, and home health care aids are female immigrants from the Caribbean or the Philippines. If Miller knew this, would he advocate restricting immigration? Somehow, I doubt that.

More broadly, the idea that a broad-based prosperity and a strong middle class can be built on teaching, home health care and the like seems daft. These are important jobs, to be sure, but ultimately the private sector has to earn the money to pay the taxes to support public sector jobs such as those of public school teachers. As for home health aids, in the private sector, the salaries of workers ultimately come from the sale of some product or service; a home health care agency that pays its unskilled health aids as if they were registered nurses won't be able to sell its home health care services at a competitive price. This isn't the way to create high-paying blue collar jobs. The way to do that is to facilitate industries that have high enough margins that they can pay their blue collar employees well -- industries such as natural resources and manufacturing.

The problem is that liberal think tanks such as the Center for American Progress -- although they support the goal of a strong middle class in the abstract -- advocate policies that work against this goal in reality. They oppose most manufacturing and natural resource industries out of concerns about carbon and global warming; they advocate policies that will make energy (and thus energy-intensive industries such as manufacturing) more expensive, for similar reasons; they oppose the vocational tracking that would support a strong manufacturing base, out of egalitarian educational ideals; and they support unskilled immigration, which lowers the wages of blue collar workers in industries such as construction.

The photo above, of oil industry worker who I'm sure earns enough to support a family, comes from the Department of Labor, courtesy of Exxon Mobil.

Saturday, April 25, 2009

Run Silent, Run Deep

That is, of course, the title of one of the classic submarine movies1, but it's also a fitting description of the current investor relations tack of Alloy Steel International (OTC BB: AYSI.OB): as the company's stock price has dived, the company has refrained from releasing any information since its last 10-Q. Over the last few weeks, I tried contacting the company's CEO (who has designated himself the investor relations contact) via the company's website and then via his company e-mail address. After no luck, I trying calling him. Alloy Steel's receptionist in Malaga mentioned he was traveling overseas and, assuming he hadn't had a chance to check his company e-mail address, gave me his personal e-mail address and suggested I try him there. Again, no response. This week, after calling the company's headquarters again and learning that the CEO was again traveling overseas, I sent him the following message:

I understand from Melanie in your Malaga office that you are traveling overseas again. Given your heavy travel schedule and extensive responsibilities, I imagine you must have little time to answer questions from investors. Nevertheless, you have designated yourself as the investor relations contact for your company. Have you considered delegating this role to someone who might have the time to respond to an occasional investor e-mail or phone call?

And received the following response:

Dear Dave.
As a result of the market volatility and the short sellers that have been short selling our stock the board has decided to only release information through the normal reporting channels there will be no separate reports to any investor who we have no record of in our share register.

Kind Regards.
Gene Kostecki
CEO Alloy Steel Int.

Sent via BlackBerry® from Vodafone

This response didn't inspire a lot of confidence in the company's current situation. I can understand the reluctance to communicate with an individual shareholder on Reg FD grounds, but if Mr. Kostecki believes that the market's opinion of his company's prospects is unjustly negative, the best way to counter that would be to release information through "normal reporting channels" proving it wrong. For example, if the company picked up a major order recently, or an order in a new market, it could announce that via an 8-K (as it has done in the past). Since Alloy Steel hasn't released any such updates this year, it's rational for market participants to assume that it has no good news to report.

Judging from the CEO's e-mail above, the break-even numbers it reported last quarter, and its high inventory levels over the last two quarters, my guess is that it will post a loss for the quarter that ended on March 31st.

I was going to end this post on a positive note, by including a link to Goldman Sachs chief economist Jim O'Neil's column in the Financial Times Thursday, in which he mentioned he had revised upward his growth estimates for China's economy this year and next. If O'Neil's estimates come to pass, that would be good news going forward for mining companies, and, by extension, for Alloy Steel. Unfortunately, after 20 minutes of trying, I was unable to find a link to O'Neil's column using the Financial Times website's search feature.

1The all time champ of submarine movies is Das Boot, in my opinion.

Thursday, April 23, 2009

"I Blog What I Eat"

I had the pleasure of meeting Matt from I Blog What I Eat last night. I found Matt's blog recently when I was looking for a photo of Bobby Flay's new burger place in Paramus (that's Matt's photo I've borrowed above; my digital camera is on the fritz and I've been procrastinating about getting it fixed) and of the new Whole Foods, which is in the same mall, Bergen Town Center1, in nearby Paramus2. Matt was more impressed with the Bobby Blue Burger than I was, but we both like Five Guys and Danny Meyer's Shake Shack, so there's some overlap in our burger joint preferences.

I was going to use the photos of Bobby's Burger Palace and Whole Foods in a post about local businesses that seem to be doing well during the current recession, but I'll make the point here. Both businesses opened outposts in Paramus within the last month, and both seem to be doing pretty well. Every evening we've been by (usually on our way to Whole Foods), there's been a line out the door of Bobby's Burger Palace. The Whole Foods cafe has been consistently busy as well.

1This mall used to be called the Bergen Mall, and it was the ugly stepchild of malls in Bergen County. Vornado Realty Trust bought it several years ago and spent $171 million renovating it and expanding it.

2I'd remembered reading once that Paramus -- a town of about 25,000 residents -- generated more retail sales than any city in the U.S. aside from Manhattan. Paramus's Wikipedia entry says that, in 2005 Paramus generated more retail sales than any other zip code in the country (which is consistent with what I remembered, since Manhattan has plenty of zip codes, e.g., before the World Trade Center was destroyed, each of the twin towers had its own zip code).

Penny Ante Arbitrage Update II

In previous posts ("Penny Ante Arbitrage" and "Penny Ante Arbitrage Update") I mentioned that I bought 749 shares of Asure Software (Nasdaq Capital Market: ASUR) at between 17 and 18 cents per share in several different accounts, in the hopes of getting them cashed out at 36 cents each after the company's proposed 750-1 reverse split (the first step in the company's plan to go private). Today Asure announced that it has mailed out the proxies for this deal and will be holding a shareholder meeting to vote on it on June 2nd ("Asure Software Provides Update on Plan to Take Company Private"). From the press release:

"The plan to privatize the Company remains on track. Proxies were mailed to Asure shareholders this week and assuming the shareholders approve the proposal, the Company will become private in June 2009. The privatization will enable the Company to save in excess of $1M a year by suspending public reporting. However, we intend to keep remaining shareholders informed and continue an open dialogue as we execute our strategy. These savings, combined with our positive outlook on revenue and other recent expense reductions, will put us on a solid path to build a profitable business in the very near future," commented Richard Snyder, Asure's Chairman and Chief Executive Officer.

Under the terms of the proposed transaction, shareholders owning fewer than 750 shares of the Company's common stock immediately prior to the date the transaction takes effect would be entitled to receive cash of $0.36 per share. Shareholders owning 750 shares or more would continue to hold their shares following the completion of the transaction.

If you own shares of ASUR, don't forget to vote.

Wednesday, April 22, 2009

Happy Earth Day

Hat tip to Dr. Mark Perry's Carpe Diem blog for those graphs. In his post on this, Dr. Perry comments,

Consider that since the first Earth Day in 1970, U.S. population has increased by 50.25%, miles driven has increased by 159% and real GDP has increased 203%; and yet air quality is better than ever.

Tuesday, April 21, 2009

"Mad Ireland"

That was the headline of Megan McCardle's post on her Atlantic blog in response to Paul Krugman's New York Times column today about Ireland, "Erin Go Broke". In his column, Dr. Krugman suggested that Ireland got into trouble (it's economy is projected to contract by as much as 10% this year) because it was too free market oriented, noting that Ireland was ranked #3, behind only Hong Kong and Singapore, on the Heritage Foundation's Index of Economic Freedom. What Krugman didn't mention is that Australia, which was ranked #4 on that Index last year (and is ranked #3, switching places with Ireland, on the 2009 Index of Economic Freedom) is weathering the economic storm much better than Ireland or the United States. Australia is in a recession now, but its economy is projected to contract by less than 1% this year. So perhaps having a free market economy wasn't the proximate cause of Ireland's economic troubles.

Megan's post in response to Krugman's column isn't worth quoting here -- the best part of it was the headline, in response to which I wrote,

Hey, is that an allusion to Auden in the headline (from his poem "In Memory of W.B. Yeats"*)? If so, nice: the sign of a tasteful and expensive education (to borrow Neal Stephenson's phrase).


*I'm thinking of the great line "Mad Ireland hurt you into poetry", which I think of whenever I flip the channels and see Celtic Woman on a local PBS station. I wonder if "Mad Ireland" hurt them into doing their 50-piece Enya covers.

The photo above, of what apparently are the stars of Celtic Woman, is from the Celtic Woman website. Note that the neither the photo nor the name "Celtic Woman" gives a sense of the scope of the enterprise that is Celtic Woman. It appears to be comprised of dozens of Celtic women, along with dozens of Celtic men.

Costco Takes an Interesting Tack in Responding to the Recession

We noticed something new at our local Costco last weekend: USDA Prime steaks. Previously, the butcher section of the Hackensack Costco only carried the lower grade, USDA Choice. We picked up some Prime-grade rib eye steaks for $8.99 per lb. After marinating them in a little red wine (a drinkable $4 dollar bottle of Chilean Shiraz from Costco's liquor store), Worcestershire sauce, olive oil, and steak seasoning, I threw them on the outdoor grill for ten minutes, flipping them once half way through. Cooked medium rare, they were excellent. With a Choice steak, there's usually 10% or 20% of it I don't want to eat and I end up feeding to the dog; with this one, he just got a couple of tiny pieces.

Interesting tack for Costco, going upmarket a little in a recession. It probably makes sense. Last summer, Ruth's Chris offered a special dinner for two for $89, and, today I heard a radio commercial for a similar $90 deal at one of Manhattan's upscale steakhouses, Ben Benson's. Upscale steakhouses are going a little down market, and Costco's going a little upmarket: they're both competing for customers who want prime steaks but don't want to pay prime prices for them.

The image above, of the Prime-grade rib eye steaks, comes from Costco's website. According to the site, these are 1855 Brand steaks, packaged for delivery. The steaks we bought were cut by the in-store butchers and were less expensive.

More on the Strongest and Weakest Banks in America

In a post last August, "The Strongest and Weakest Banks in America" (which, according to Feedjit, still attracts a number of readers), we mentioned the "X-List Report" which ranked the financial strength of banks and thrifts from "A" to "E". Another ranking system of American banks and credit unions, drawn in part from data in bank reports to government regulators, is offered by Bauer Financial. Bauer Financial charges for its detailed reports on each institution, but it lists their star rankings at no charge. Those star rankings range from 5 stars ("superior") to no stars (presumably worse than "troubled", which is Bauer's description for 1 star banks). You can look up a particular bank, or see a ranked list of all banks and credit unions by state here.

Monday, April 20, 2009

Has Greg Mankiw Jumped the Shark?

You be the judge. From his "Economic View" column in the New York Times yesterday, "It May Be Time for the Fed to Go Negative":

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Would your first response to this scenario be to buy a new car? I bet a lot of people would decide instead to buy gold, or to exchange their U.S. dollars for the currency of a country less likely to pick a number out of a hat and invalidate a tenth of its currency.

Later in his column, Mankiw offers a more reasonable way that the Fed could create negative real interest rates, by committing to a certain level of inflation (presumably one higher than the Fed's current 2% target). Is this the best way to spur aggregate demand though? If this is a balance sheet driven recession, as some observers have termed it, and the problem is that many consumers can't service their debts, why not deal with that more directly?

For those whose mortgages are underwater, restructuring them using John Hussman's idea of property appreciation rights might make make sense. That would lower monthly borrowing costs for those mortgagers and enable them to increase their discretionary spending. For mortgagers who aren't currently underwater, the idea of Glenn Hubbard and Christopher Mayer, to use the GSEs to lower mortgage rates down to their historic spread of about 1.6% above 10-year Treasuries might make sense. According to Yahoo! Finance, the average rate on 30-year fixed rate, conforming mortgages today is 4.88%; since 10-year Treasuries currently yield 2.75%, under the Mayer and Hubbard plan mortgage rates might average 4.35%. Refinancing higher-rate mortgages at 4.35% would also lower borrowing costs and enable tens of millions of Americans to increase their discretionary spending.

The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark1 comes from Media Bistro.

1For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".

Saturday, April 18, 2009

"No Easy Workout"

That headline appeared above a photo of gym-goers working out on treadmills and stair masters at the soon-to-be foreclosed on Fayetteville Athletic Club, in a front page article about distressed debt in the business section of yesterday's New York Times. Apparently the business section's online editors don't have the same sense of humor, since the online version of the article eschews the clever pun of that headline and photo. Instead, the online version leads with this headline, "After the Bank Failure Comes the Debt Collector", and the photo above, of Fayetteville Athletic Club owners Robert and Katherine Shoulders.

The article notes that the Shoulderses borrowed $10 million from a local bank to renovate and expand their health club, and when that bank failed, they stopped paying their interest payments. Then Rick Williamson, "a Chicago banker turned junk-loan buyer", swooped in and bought the Shoulderses' loan at an FDIC auction for 34 cents on the dollar, and sued to foreclose on their property. One question raised, but not answered, by the article is why the Shoulderses didn't bid on their own loan at the FDIC auction (or have a friend do so). According to the article, the Shoulderses were willing to pay the FDIC $6 million upfront to forgive their loan -- so why not bid $4 or $5 million at the auction for their own loan (which Williamson bought for $3.4 million)? Williamson might have backed out then, and the Shoulderses wouldn't today be in danger of losing their business.

Also mentioned in the article was Andy Beal, the self-made billionaire and buyer of distressed debt who was the subject of a previous post here ("A Different Kind of Banker"):

The single biggest buyer at these [FDIC] auctions has been Andrew Beal, a banking billionaire from Texas who made his fortune buying distressed debt during the savings and loan crisis.

By the end of February, Mr. Beal had paid more than $200 million to buy $438 million worth of loans, according to agency records. Some of the loans came from the failed Arkansas bank.

Mr. Beal is hardly averse to risk. He is famous for trying (and failing) to build his own space satellite launch company, and for luring some of the world’s best poker players to a series of games, with him as a participant, and betting pots worth $2 million. Mr. Beal, in a telephone interview, said he went to great lengths not to push people out of their businesses, but at times he had no choice.

“Borrowers force us into litigation,” he said. “They don’t want to perform on their loan, they won’t talk to our workout people. What are we supposed to do, send them a vase of roses?”

Friday, April 17, 2009

Ross Douthat on the Tea Parties

From what appears to be Ross Douthat's penultimate post on his Atlantic blog, before his move to the New York Times op/ed page ("The Tea Parties"):

They resemble nothing so much as the anti-war protests during Bush's first term. The claim that they don't have an organizing premise strikes me as obviously wrong: They're anti-bailout, anti-stimulus, anti-deficit, and anti- the tax increases that will eventually be required to pay for the current spending spree, and complaining that they don't also have a ten-point plan for reforming Medicare and Social Security reflects a misunderstanding of the nature of protest marches, I think. The claim that they're hypocritical and partisan is a bit stronger - where were they when Bush was running up the deficit, etc. - but in fairness, many of the organizing figures were anti-TARP from the beginning, and there's something slightly odd about saying that if you didn't take to the streets to protests a $300 billion deficit you aren't allowed to protest a $1 trillion deficit. The numbers matter, surely ...

But they do have all of the weaknesses of the anti-war marches: Their message is intertwined with a sense of disenfranchisement and all kinds of inchoate cultural resentments, they've brought various wacky extremists out of the woodwork (you know, like Glenn Beck), and just as George W. Bush benefited from having opposition to his policies identified with peacenik marchers in Berkeley and Ann Arbor, so Barack Obama probably benefits from having the opposition (such as it is) associated with a bunch of Fox News fans marching through the streets on Tax Day, parroting talk radio tropes and shouting about socialism.

In those two paragraphs we may have the case for Douthat as a New York Times token conservative columnist distilled. In the first paragraph Douthat makes a gesture of standing athwart the spending tsunami and... noting that it's troubling; in the second paragraph he expresses his disdain for the grassroots conservative rabble that has been protesting this same spending tsunami. For good measure, Douthat finishes with a soupçon of hypocrisy in that last sentence, where he parrots the snark of the Washington Insider's David Weigel (see the caption below the third photo), while mocking protesters for "parroting talk radio tropes".

The handy graphic above comes from Douthat's post.

Thursday, April 16, 2009

Goldman Sachs 666

Another Goldman-related item in today's FT is this blog post by Tracy Alloway, "The Devil and", which mentions the existence of an anti-Goldman Sachs website,, run by a fellow named Mike Morgan. Here's Mr. Morgan's disclosure note from his site:

Disclosure: Yes, I am short Goldman Sachs stock. I believe this company is evil and should not exist. We need to begin to break up companies that have as much control over world finances as Goldman Sachs.

Ms. Alloway takes something of a cheeky tone in her post on, but what Mike Morgan is calling for above isn't too far off from what Alloway's FT colleague John Gapper called for in his column on Goldman today1:

More fundamentally, we now know unambiguously that Goldman is a “systemically important financial firm”. In other words, Goldman is too big to fail and would be bailed out by the US government if its balance sheet failed. That privilege should come with weighty conditions.

Note that Goldman’s status is a choice, not a tag it has unwillingly been given. It could avoid this by shrinking itself into an institution like a private equity group or a merchant bank, which can take all the risks it desires because its partners lose everything if it fails.

1The same column we mentioned in the previous post, "John Gapper Brings the Crazy".

"John Gapper Brings the Crazy"

Add the FT's John Gapper to Megan McCardle's crazy contingent1 for questioning the political influence Goldman Sachs wields via its alumni in government. In his column today ("Don’t set Goldman Sachs free, Mr Geithner") Gapper writes:

Goldman wants to escape the burdens of political control while retaining the benefits of public backing. That does not seem like a good deal for the taxpayer.

There are obvious political risks in letting Goldman roam free while other banks remain bound by the troubled asset relief programme (Tarp). It would exacerbate suspicions that Goldman, with its long history of producing Treasury secretaries, gets special treatment. These were not soothed by the decision to pay off all Goldman’s credit default swaps with American International Group, now controlled by the state.

The bigger danger is the long-term precedent it would set. Goldman wants to bolt before Congress or Mr Geithner, who still operates as a one-man band while the nomination process for his senior staff meanders along, has the chance to change fundamentally how it operates.

So far, it has faced mildly irritating limits on how much it can pay staff but nothing on the scale of the 1933 Glass-Steagall Act, which imposed structural reforms on Wall Street after the excesses of the Jazz Age. It would never acknowledge it, but its political campaign is going just fine.


[Goldman CEO Lloyd] Blankfein criticised Wall Street’s past pay practices as “self-serving and greedy” but Goldman is still putting aside 50 per cent of revenues – $4.7bn in the first quarter – for the bonus pool. Inside, it may feel “humbled”, as Mr Blankfein said, but it looks like the same old bank.

The same, that is, except for one thing – Goldman is now backed by the US government. That is why Mr Blankfein wants to repay the Tarp money. Once it has repaid the $10bn, Goldman hopes to go back to paying employees what it wants, buying and selling more or less what it fancies and operating as before.

He is peddling an illusion. Even if Goldman repays the equity, the world has changed irrevocably because it is a government-backed enterprise.

The illustration above accompanied Gapper's column in the FT.

1New readers can see this previous post for an explanation: "David Weidner Brings the Crazy".

Wednesday, April 15, 2009

A Conversation with the CFO of Destiny Media

Fred Vandenberg, the CFO of Destiny Media Technologies (OTC BB: DSNY.OB) returned my call today. Below are some notes from our conversation.

- Vandenberg is confident that the company's revenues will be 30% greater sequentially in its Q3 and that the company will be profitable in Q3. He said the 30% increase estimate was "conservative". Although the company's CEO, Steve Vestergaard, has incorrectly predicted profitability more than once in the past, this is the first time in my conversations with him that the CFO, Fred Vandenberg, has predicted profitability.

- Vandenberg expected expenses to remain inline next quarter.

- He believes Q4 and Q1 2010 will show continued sequential growth in revenues.

- He agrees with Vestergaard's point about seasonality in Play MPE revenues, noting that Destiny's fiscal Q1 (which straddles the calendar year-end) tends to be the busiest for Play MPE revenues, and its Q2 tends to be the weakest, with Q3 and Q4 closer to Q1 in revenue levels. Says seasonality may have been obscured in previous years by minimum charges.

- Deferred to Vestergaard on discussions of Clipstream, but essentially said that, as a small company, they've been focusing more on Play MPE, because that's where they can get imminent profitability.

- I asked about the note in the 10-Q about that the company will need to raise additional funds. Vandenberg suggested that this was there to satisfy the auditors and said that, since the company would be profitable next quarter, it wouldn't need external financing to keep the lights on, but might consider such financing down the road to pay for an expansion, if the money were available at a reasonable price.

- Said that the potential revenue for digital distribution for the company in North America was about $20 million, though Destiny may not approach that target as fast as they had hoped. Wouldn't get too specific here, but it seems that there may be a need to increase adoption within organizations that have signed agreements with Destiny1. Said potential revenue from digital distribution globally ex-North America was another $40 million, and revenue may grow faster internationally2.

- Clarified the issue of sends somewhat. Said Destiny has a sliding scale for sends greater than one song, e.g. "small bundles", "albums", and "boxed sets". I asked which of these 'packages' the average send consisted of and what the charge for that 'package' was. He said he'd try to get back to me with that info; I'll post it on this blog if he does. If, for example, the average 'package' was a small bundle, and Destiny charged $x per small bundle, we'd be better able to estimate Play MPE revenue from the send stats.

In the comment thread of the previous post on Destiny Media ("Destiny Media Technologies: Still Losing Money"), reader J.K. made a good argument for selling the stock:

Closed my position in DSNY today and bought CRY.

I love the DSNY concept.

But I'm not going to hold on to an overpromising, underperforming, money losing penny stock right now. If they become profitable in the near future I may re-enter. Somehow I doubt I'll miss any big move by doing this, should I want to buy back in, but who knows. Also, if the dollar collapses against the loonie due to high commodity prices and Fed dilution, as I anticipate, then it will be even harder for them to become profitable soon.

Based on my conversation with Vandenberg today though, I am inclined to hold DSNY for another quarter.

1I've had some experience with this sort of situation. Several years ago, when I worked as a business development director for a financial internet start-up, I signed firm-wide deals with a number of financial services firms to use my company's service. The first one of these deals I landed was with a firm where the home office had a lot of influence in what was done by its regional employees, and so there was fairly broad adoption. The second of these deals I closed was with a smaller firm in the San Francisco Bay area, where I had known one of the principals from a previous job. Months after closing that deal, not one of this company's hundred plus brokers had used our system. It didn't matter that the benefits of the system were apparent to me and to the firm's principals: the firm's brokers had different ideas. As important, perhaps, this smaller firm didn't have any staff assigned to promote our system internally. In contrast, the first company I signed up did have such a staff and made good use of it. The lesson here is that it's not enough to have a better mousetrap, and it's not even enough, necessarily, for senior executives of a client firm to agree that you have a better mousetrap: the firm's end-users need to be convinced too.

2By way of explanation, Vandenberg mentioned that the adoption of Play MPE is more top-down in some markets. In Sweden, for example, he said that the labels tended to set the standard and the radio stations fell in line.

Investment Advice from Seth Klarman and Cody Lundin

The Atlantic's Jeffrey Goldberg takes a break from the Israel beat to write an article on investing, "Why I Fired My Broker". Nothing earth-shattering here, but Goldberg takes advantage of the great perk of an established journalist and meets with George Soros's son Robert, Bill Ackman, Seth Klarman, and the survivalist Cody Lundin in the process of writing that article. Goldberg ends up being most impressed with Klarman and Lundin. Of Lundin, Goldberg writes,

Lundin himself eats mice and rats he traps at his off-the-grid passive-solar house in the wilderness, because “why waste free protein?”

Lundin is a freak [...] But in the event that the economy crumbles, and civilization with it, I would appoint him my financial adviser. He is my favorite survivalist, the author of a book on getting by in the wilderness and another on urban preparedness, and a teacher of primitive-living skills.

Goldberg writes that Lundin doesn't wish for disaster:

He says he enjoys electricity and indoor plumbing. He tends to think, though, that civilization is a thin film, and that in times of economic distress, it’s smart to be prepared for the day when Safeway runs out of milk. “This isn’t something I hope for. But what if the illusion does really crumble, and we have to move as a society to something else?”

Goldberg goes from interviewing Lundin in Prescott, Arizona, to having lunch with Seth Klarman in Boston:

When I told Seth Klarman, one of the country’s leading value investors, about my visit with Cody Lundin, he said, “It’s always smart to prepare for disaster. In investing, that means holding disaster insurance. In your personal life, it makes sense to have inexpensive disaster protection, so come what may, you’re ready for any eventuality. I like to store some extra bottled water in the basement, but my wife thinks it’s too much clutter. I told her I’d share my water with her anyway.”

Klarman goes on to advise against the use of leverage, argue that the average investor stands little chance competing with professionals such as himself, note that the average investor really can't trust anyone with his money, and offer a familiar test of temperament to decide if one is an investor. An entertaining read, if nothing else.

The image above, of Cody Lundin, comes from

Tuesday, April 14, 2009

A Canadian's Comment on Health Care

Interesting comment from Tom West on a health care post on Megan McCardle's Atlantic blog:

Boy, the more I read, the guiltier I feel about living in Canada. We sort of have the ideal position.

We're large enough that most of us don't see the direct comparison with the American system, (which is nice, but three times the price). America operates as our second tier which is close enough that the rich aren't upset about going there for expensive health-care, but far enough away that the even the moderately well-to-do don't look at it as a serious alternative.

We're insulated enough so that when the doctors say "there's nothing we can do", you can believe it without feeling guilty about not destroying your family's finances to pay for some sliver of hope. We benefit from the American innovations when they're finally brought down to a cost that our bureaucrats consider acceptable1. The doctors don't have to cater to ridiculous demands for unnecessary tests, and have no incentive to give them.

We have a Corolla health-care system as opposed to the American Lexus, but it does a decent job for most of us, and ends up being an element of society that binds most Canadians together rather than becomes a source of resentment and distrust. (Tommy Douglas who introduced our health-care system was recently selected as Greatest Canadian ever by viewing audiences.)

That said, sadly for those few Americans that look at our health-care system as a model, I'm afraid it wouldn't work for you. You'd be missing the one ingredient that helps it work as well as it does... You.

1Tom uses the passive voice here, but Canadian bureaucrats often actively lower drug costs by imposing price controls.

Destiny Media Technologies: Still Losing Money

Destiny Media Technologies (OTC BB: DSNY.OB) filed its 10-Q announced its fiscal second quarter (November 1, 2008 through February 28, 2009) results today: a net loss of $97,882 (or less than one cent per share) on revenues of $467,488. These revenues represent a 30% increase over the same period last year, but a sequential drop of 16% from Destiny Media's fiscal first quarter. In today's press release, Destiny's CEO, Steve Vestergaard said,

"We're expecting our rapid revenue growth to continue as North American label usage continues to expand and new agreements are signed outside of North America. The company expects to show an operating profit based on Q3 revenues which are projected to increase at least 30% over Q2."

In response to this release, reader Albert left the following comment on the previous post:

I looked back at your posts talking about DSNY in light of today's earnings announcement. What management has told you seem clearly not to have materialized in any meaningful way. They are not profitable. Were not in the first quarter as they claimed they would be, are again not profitable in the second quarter. I am beginning to have real doubts about whether they will be any time soon.

I would also like to look at how their clipstream revenue has improved, if at all. Back last july, you said the CFO told you that clipstream revenue would take a big jump in Q1 I believe. If I have time, I would like to see how that has played out.

Any thoughts.

I spoke to Destiny CFO Fred Vandenberg briefly this evening; he didn't have time to talk but said he'd call me back in the morning, at which time I plan to ask him some questions of my own. But here are my initial thoughts response to Albert's comment. In my conversations with him, Fred Vandenberg has generally been conservative, but Destiny Media's CEO, Steve Vestergaard, has clearly over-promised and under-delivered with respect to his predictions of profitability. For example, in this press release on July 14th, 2008, he said,

"We've built a foundation where we can confidently say we expect to be profitable by Q1 (Sept. - Nov.)

And in this press release on September 19th, 2008, he said,

"The company is not seeking external financing and is looking forward to imminent profitability.”

As Albert noted, Destiny hasn't been profitable in either its first or second quarters this fiscal year. In addition, in contrast to Vestergaard's statement last September, the company notes in today's 10-Q that,

The Company will need to raise additional funds to complete its business plan due to its significant working capital deficiency.

Steve Vestergaard has at least been eating some of his own dog food though: Over the last couple of years he has been buying stock in DSNY, most of the time at prices well above current prices.

Albert is also correct in noting that Destiny Media's Clipstream revenues haven't improved as predicted, and that's one of the questions I plan to ask Fred Vandenberg tomorrow (if anyone has other questions they would like me to ask, please feel free to leave them in the comment thread, and I'll try to get them answered if I get them in time). I've been focusing more on the company's Play MPE revenues though. I plan to ask Vandenberg about this as well tomorrow, but, offhand, it seems like the revenues ought to be higher from this.

If you look at the Play MPE Stats, there were about 160,000 "sends" in the last 7 days. That's in the ballpark of the number I saw when I checked this a few weeks ago, about 170,000. A quick back-of-the-envelope bit of arithmetic makes me think that either revenues ought to be higher going forward or that a significant percentage of these sends are internal sends that don't generate revenue for Destiny. Let's say sends average 150,000 per week going forward, so 150,000 x 12 weeks = 1,800,000. Let's say that these sends generate revenue at the lower of the two price points Vandenberg mentioned in our conversation last month ("Destiny Media Update"), $0.50. Assuming no internal sends, that would be $900k in quarterly revenue. Vandenberg did acknowledge in our previous conversation that some of these sends were internal, and he did decline to estimate an average amount revenue per send, but maybe I can get some more clarity on this tomorrow.

Monday, April 13, 2009

Partying Like It's 2009

Apparently, it's not all doom & gloom for "Dr. Doom". Below are a few excerpts from Helaine Olen's profile of him in this month's Portfolio ("The Prime of Nouriel Roubini").

It’s Saturday night. A stream of young fashionistas and other assorted Manhattan scenesters pours into a fashionable Tribeca building. They’re all headed for the loft of a middle-aged economist—a man whose name would hardly have registered with anyone but the most obsessive CNBC watcher a few years ago. A doorman on duty surveys the scene and rolls his eyes. “Another Roubini party,” he mutters.


Bad times have certainly been good for Roubini’s social life. For years, he has been a manic host of everything from small dinner parties to big bashes. The soirees are more crowded of late, attracting everyone from members of the hedge-fund set to a former Miss Ukraine and propelling the bachelor economist onto the tabloid gossip pages. (He has become a New York Post regular, and CNBC often plays disco music when he appears on the air.)

Roubini’s partying side may have remained below the media radar but for his energetic use of Facebook. He kept his profile on the social-networking site open to the general public until a few months ago, something more privacy-minded users typically choose not to do. On his profile, he said he was single and interested in meeting women, and he posted photos of himself hamming it up with females who look two or three decades younger than he is.


“I’m a serious professional economist. I live in New York and have a social life,” Roubini says. “I have book parties and social dinners. And, you know, people will take pictures of you with your friends, and there are some attractive women. It doesn’t mean I go out with them. They’re my friends. I have nothing to hide.” When I send him a thank-you email, I can’t resist adding, “If you ask me, the deep mystery at the center of your life is why you would want to subject your apartment to that sort of abuse.” He quickly wrote back, “I do not subject my apt. to abuse. It is nice to have friends over, and I have a housekeeper that cleans up everything afterward.”

Still, Roubini can’t help himself: After [gossip website] Gawker cheekily noted that both he and dating columnist Julia Allison were going to attend the World Economic Forum in Davos, he made sure to be photographed with her there. Gawker’s dry comment: “Nouriel Roubini partying with intellectual peers.” Roubini’s response to me: “She’s a very smart cookie. Very smart. She can intelligently discuss lots of things.”

The photo above of Roubini and a few of his party guests accompanied the article in Portfolio.

Friday, April 10, 2009

The Undertaxed American Middle Class

In the Forbes column we quoted in the previous post ("Undertaxed America"), Bruce Bartlett referred to OECD data in making his case. Clive Crook referred to OECD data as well in a post on taxes in his Atlantic blog earlier this week ("America's widening fiscal gap"):

Mr Obama intends to squeeze the rich, but the scope for this may be more limited than US liberals would wish. Few Americans seem aware that the US income tax code, as a recent Organisation for Economic Co-operation and Development study showed, is already one of the most progressive.* Even before the rise in top marginal rates promised by Mr Obama, the US income tax collects 45 per cent of its revenues from the highest-income decile. Compare that with Britain at 39 per cent, Canada at 36 per cent, France at 28 per cent, Sweden at 27 per cent and an OECD average of 32 per cent.

This difference is only partly explained by the less-equal US income distribution. The fact that the US has no broadly based national sales tax - value added taxes make Europe's overall tax codes less progressive still - only underlines the point. The US tax system raises comparatively little revenue; what little it raises already comes disproportionately, by international standards, from the rich.

I have previously argued that the US will need a VAT [value added tax]. Even before Mr Obama unveiled his ambitions for healthcare reform, wage subsidies to help the working poor, better education and the rest, the US middle class was seriously undertaxed. The government's promises, on present plans, will be unaffordable. If they are honoured regardless, the only question is which comes first: broadly based tax increases or fiscal collapse.

I have wondered if there might be a simpler way to tax Americans' consumption than to implement a value added tax. Since income taxes in the U.S. are highly progressive, and IRAs and 401(k)s don't offer deductions for payroll taxes, there is little incentive for Americans in lower income quintiles to save instead of consume. For example, according to CBO data, effective income tax rates for Americans in the bottom two income quintiles were negative in 2005 (i.e., these Americans received more in transfer payments than they paid in income taxes). So why not just increase the payroll tax by some amount and then allow workers to deduct up to that entire additional amount if they make an equivalent contribution to an IRA or 401(k)? Those who contribute less than that additional payroll tax amount to their retirement accounts will be paying a de facto consumption tax.

The image above accompanied the Financial Times column from which Clive Crook quoted himself in his Atlantic post.