Change in Operations

To my readers : I had to make a change in comment moderation due to a comment being placed which could have redirected readers to a website with questionable content. Sorry, but there are skunks in every woodpile, I suppose.

Calling All Lollipops?

My famous pessimism (OK, infamous, if you will) with regard to things economic when they just don't make sense got a jolt today with a FOX News article The Dow's up but trades are scarce, worrying bulls which pointed out that the DJIA has been rising while the trading volume has been declining. So I jumped into Yahoo! and pulled a graph:



Yup. The prices are up about 70% from last year, while the number of trades is down about 25%. You would think that if the market is recovering and prices are rising, there would be an increase in the number of players trying to expand their holdings.

Do you smell something burning?

A few commenters on the article want to pin the scam (yes, I do think there is an attempt being made to create a sucker rally) on the Administration, but I hesitate to go that far. Invoking Occam, I would tend to say that some of the major banks and fund managers are behind this phenomenon, hoping to draw broad enough support in the market to allow them to dump their more toxic assets on the unwary.

The NYSE volume today was 4,511,569,000, of which 995,307,699 shares (22%) were Citibank (662,164,923), Ambac Financial (195,367,197), and Bank of America (134,825,884) -- the top 3 issues traded. This makes me deeply suspicious when almost 1/4 of the trades involved stocks which have negative P/E ratios and which are anticipated to pay no dividends. Remember that someone has to sell in order for someone else to buy, and it is the selling that first makes the buying possible; who is dumping these stocks? (I won't bother myself with who might be stupid enough to be buying them.)

Open letter to Tim Crawford

The following email was sent to the listed recipients. It seems that failure to listen to constituents is not a unique feature of the Beltway Gang.

March 20, 2010
Open letter to Tim Crawford,
Summit County Council District 7

Dear Tim,

As a fellow campaigner in the past for addressing problems of representation in local government, I am appealing for your attention in the matter of the hostility that exists between the government of Summit County and the Barberton-Norton Mosquito Abatement District.

As you are probably aware, the Barberton-Norton Mosquito Abatement District (MAD), organized under Chapter 6115 of the Ohio Revised Code, came into existence after the Barberton City Health Department (BCHD) ended its long-standing mosquito control program. Nuisance control of mosquitoes is not a mandated function of health districts, and the regular spraying for mosquitoes was considered a luxury that could not be maintained under the BCHD's limited budget.

Both the Barberton and Norton City Councils were approached with the idea of forming a special sanitary district to reduce the population of biting arthropods under Chapter 6115. When neither council took action to form such a district, citizens from both communities circulated petitions and presented them to the Summit County Common Pleas Court as required by the statute. The Court agreed that formation of the special sanitary district would "be conducive to the public health, safety, comfort, convenience, or welfare" of the affected communities, and ordered that the Barberton-Norton Mosquito Abatement District be established.

There have been complaints by certain disaffected persons that the organization and operation of the MAD, with assessments levied by the Board of Directors (BOD), is an example of "taxation without representation". Such an accusation is no more true than one which would state that levies by the State Legislature are also "taxation without representation". This is so because the landowners in the district are represented by the BOD, who are appointed by their elected officials. Those Directors are required to be residents of the MAD, and can be contacted by any landowner; the meetings of the MAD Board of Directors are also open public meetings at which the public can address the Board directly with its concerns.

At the request of residents in surrounding areas, the MAD undertook efforts to expand. This expansion was opposed by the Summit County Health District (SCHD), which took the position that the activities of the MAD were an unnecessary duplication of the sporadic spraying done by the SCHD. In fact, the activities of the MAD are directed at nuisance control for the comfort and convenience of the residents; possible control of arthropod-vectored diseases are a secondary benefit from the standpoint of the MAD. The SCHD mosquito control program is oriented toward preventing outbreaks of arthropod-vectored diseases; the "comfort and convenience" of the residents is not emphasized by their program.

Despite the different goals of these two entities, SCHD has actively and aggressively worked to eliminate the MAD. In the summer of 2009, the MAD sent out a survey to the landowners of Norton, and nearly a thousand of the recipients replied (22%) with postcards to Norton City Council, the vast majority of which were supportive of the MAD. They did not want their mosquito abatement program to end.

As mentioned above, the landowners of Barberton and Norton are represented by the BOD. The political subdivisions in which the MAD is located (Barberton, BCHD, Norton, Summit County Executive, SCHD) are represented by the District Advisory Council (DAC). The Summit County Executive had a representative on the DAC from the beginning, and upon the City of Norton ending its agreement with the BCHD and contracting with the SCHD, the SCHD was entitled to choose a DAC member.

It is my concern that neither of the DAC members representing Summit County are residents of the MAD. This situation, coupled with the antagonism of the SCHD toward the MAD, is a recipe for mischief. The citizens of Barberton and Norton are looking to you, our representative on the Summit County Council, and a resident of Norton who benefits from the work of the MAD, to protect our right to enjoy our property comfortably.

Thanks for listening to an old Norton Neighbor.

--Jim Hrubik

cc: Dave Koontz, Mike Zita, Scott Pelot, Todd Bergstrom, Don Nicolard, Bill Mowery, Ken Braman, Brenda Hlas, Bob Genet, Kevin Coughlin, Tom Sawyer, Brian G. Williams, John Otterman, various Internet sites.

Repeal 17 : Restore I-3
-------------------------------
http://www.linkedin.com/pub/james-c-hrubik-sr/12/7a4/a58

The MAD website is Barberton-Norton Mosquito Abatement District

Angry messages can be sent to:

• Tim Crawford, Summit County Council, District 7


• Bob Genet, Mayor of Barberton


• Dave Koontz, Mayor of Norton


• Todd Bergstrom, Norton Ward 1


• Don Nicolard, Norton Ward 2


• Bill Mowery, Norton Ward 3


• Ken Braman, Norton Ward 4


• Mike Zita, Norton At-Large


• Scott Pelot, Norton At-Large


• Brenda Hlas, Norton At-Large

Let them know how you feel about spending City tax dollars to oppose the Mosquito Abatement District.

The Peter Principle is for Real

Hmmm.

The head of the UN Framework Convention on Climate Change, Yvo De Boer, is resigning that position to go to work for KPMG.

KPMG. The company that was auditor for New Century Financial.

You remember New Century? They went bankrupt because of their practices with respect to subprime mortgage lending. Then the bankruptcy court examiner accused KPMG of helping hide the accounting irregularities. To quote directly from Final Report of Michael J. Missal, Bankruptcy Court Examiner in re: United States Bankruptcy Court for the District Delaware, Chapter 11, Case No. 07-10416(KJC),

"The increasingly risky nature of New Century's loan originations created a ticking time bomb that detonated in 2007. Subprime loans can be appropriate for a large number of borrowers. New Century, however, layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers. For example, more than 70% of the loans originated by the Company had low initial 'teaser rates' that were highly likely to increase significantly over time. A senior New Century officer noted in 2004 that borrowers would experience 'sticker shock' after the teaser rates expired. More than 40% of the loans originated by New Century were underwritten on a stated income basis. These loans are sometimes referred to as 'liars' loans' because borrowers are not required to provide verification of claimed income, leading a New Century employee to tell certain members of Senior Management in 2004 that 'we are unable to actually determine the borrowers' ability to afford a loan.' Another common loan product offered by New Century that had a high degree of risk was the '80/20' loan, which involved two separate loans for the same transaction: a first lien mortgage loan with an 80% loan to value ratio and a second lien loan with a 20% loan to value ratio, resulting in a combined financing of 100% of the value of the mortgaged property. One Senior Officer of New Century noted in early 2006 that the performance of these 80/20 loans in 2005 was 'horrendous.'"

"The Examiner has completed his investigation and files this Final Report, The Examiner recognizes that the subprime mortgage market collapsed with great speed and unprecedented severity, resulting in all of the largest subprime lenders either ceasing operations or being absorbed by larger financial institutions. Taking these events into consideration and attempting to avoid inappropriate hindsight, the Examiner concludes that New Century engaged in a number of significant improper and imprudent practices related to its loan originations, operations, accounting and financial reporting processes. KPMG contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the Company's departures from applicable accounting standards."

"KPMG contributed to these failings in critical ways. Among other inadequacies, KPMG failed to question or test certain important assumptions in a rigorous manner. The KPMG management team acquiesced in New Century's departures from prescribed accounting methodologies and often resisted or ignored valid recommendations from specialists within KPMG. At times, the engagement team acted more as advocates for New Century, even when its practices were questioned by KPMG specialists who had greater knowledge of relevant accounting guidelines and industry practice. When one KPMG specialist persisted in objecting to a particular accounting practice on the eve of the Company's 2005 Form 10-K filing -- an objection that was well-founded and later led to a change in the Company's practice -- the lead KPMG engagement partner told him in an email: 'I am very disappointed we are still discussing this. As far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off.'"

Somehow that last paragraph seems like it could fit the whole Climategate fiasco with just a minor tweaking. According to Fox News, "De Boer's resignation comes in the wake of the continuing Climate-gate scandal -- a story that began with the leak of stolen e-mails from top climate scientists and led to revelations of sloppy science, efforts to suppress dissenting opinions and ultimately flaws in the U.N.'s top climate policy document. "

The article concludes with, "De Boer said he will be a consultant on climate and sustainability issues for KPMG, a global accounting firm, and will be associated with several universities."

Fitting.

By the way -- those 80/20 loans that were made in 2007 and 2008 (and there were quite a few of them) -- are now resetting. Look for foreclosures to jump again toward mid-2010.

How much is a dollar worth if ...

As I write this (January 31, 2010), the media are reporting that the special inspector general at the Treasury Department, Neil Barofsky, who has been assigned to monitor the Troubled Asset Relief Program (TARP, aka The Bank Bailout), has today warned Congress that the problems within the financial system that created the market collapse are worse now than before the TARP began.

Part of the reason for the alarm is the fact that the government has been borrowing to prop up the housing market, and, with the collusion of the Federal Reserve, has been holding interest rates at artificially low levels. A point will soon be reached at which the borrowing will have to cease, since the foreign lenders will realize that the risk levels have risen, and the subsidization will end. This will initiate another collapse in housing prices.

I have a question : How much is a dollar worth if it doesn't cost anything to borrow it?

We can see that government intervention in the marketplace is rapidly leading the United States to bankruptcy. Rather than trying to expand spending, Congress needs to concentrate on how to best avoid foreclosure by the nation's creditors.

If anyone thinks that the Chinese government (our major creditor) will simply roll over and forgive our debt, they need to study the tactics of the Tongs. The future of our country looks bleak, not because the people lack the willingness to work and pay their debts, but because the Congress has used the nation's credit card and gone over the limit.

The spending on bailouts, foreign aid, and domestic programs must stop.

Calling Sancho Panza...

On January 22, 2010, the Akron Beacon Journal ran a story put together by staff writer Marilyn Miller which told of the request by a local man, Michael Karder, for government help to build wind turbines. In the article there is an implication -- "some companies inherit patents that create walls that stop new people from promoting their products" -- that his business cannot gain traction because someone else owns the technology.

Just a bit over a week earlier (January 13), Beacon staff writer Bob Downing wrote a column about Karder's agreement with a European firm to assemble and market its wind turbines in the US. The windmill parts would come from China, the generators from Korea, and the assembly would be done in the Akron area. The major drawback, he claimed, was lack of financing, which he blamed on a tight credit market.

All he needs is $60,000,000 to build the plant. (Ever hear the Kingston Trio song, "Tijuana Jail"?) The January 13 story states that there are 7 competing factories in the United States, with several more under construction and which are to open soon. Ultimately, he anticipates producing 600 wind turbines per year, with installation of about 1,700 of them offshore in Lake Erie.

The articles paint glowing pictures of a future filled with new jobs for the Akron area, but as is typical of such populist fodder, they are light on details. Let's explore some rabbit trails.

At 600 per year, and a reasonable lifespan for the project of 30 years (we will not at this point go into the details of why businesses are allowed to depreciate their assets, but suffice it to say that most of the time, when a factory is sold, it requires extensive renovations and modifications before the new owner can use it), the lifetime output of the factory can be anticipated to be about 18,000 windmills. One tenth of them are to go in Lake Erie, if various governments approve. Of course, Mr. Karder expects that he will also be able to manufacture parts for smaller wind turbines for the home electric generation market. Realistically, though, one would think the market for such turbines is limited, not because people don't want to try them out, but because of the layer of restrictions that exist now and will exist into the future. Try going to your local building department with a request to put one in your back yard and you will get a quick lesson in local government.

Mr. Karder would like to borrow $60 million. For the sale of argument, let us say that he is allowed by a generous lender to amortize and pay off the loan over 30 years, like a home loan. Let us also assume that he would be able to borrow the money at 4% (current large portfolio 30 year commercial mortgages amortized at 30 years are at about 8.25%, but we will assume a green investor...). The total cost of the factory would then be about $103 million (and if he actually has to pay the market rate, $162 million).

One other thing : Mr. Karder has purchased the patent rights for the wind turbines designed by his European partner -- "I have patent rights in North America, primarily the Great Lakes area." Does that mean that someone else owns the distribution rights in other parts of the country, and he is limited to the Great Lakes region? If so, his market is truly limited.

If Mr. Karder's factory can actually produce the large turbines he envisions (2.5mW and up), he will face competition which ranges in price from $1 million to $2 million per mW installed. If he cannot successfully break into that market, and instead has to compete in the residential or small commercial market with the 100kW-900kW machines he plans to begin with, he will be competing at about $1,000 - $2,000 per kW installed.

[It can be argued that the return on a wind turbine currently is somewhat better than break-even, with generation running in the neighborhood of $0.10/kW, and my current electric bill at just over $0.11/kW delivered. At that price, with an average annual consumption of 9800kW, I could save $98/year by buying a $25,000 wind turbine (I could probably get by with 25kW/day, but then I don't have an all-electric home). Some people prefer to concentrate on how much they will save regardless how much they spend.]

There are some other factors which will also come into play -- the NIMBY factor (why don't the Kennedy's want a nice, clean, green windfarm blocking their view of Cape Cod?), licensing and zoning restrictions, air rights (if my windmill blocks your windmill and devalues your property, can you sue me?), and so on.

The articles do not mention these things. They simply bring to the fore the fact that an entrepreneur wants the government to step in and help him set up a business. The POTUS, as reported by Ms. Miller, blamed the banks and the patent laws.

What would really be helpful would be an explanation, by a banker, of the reasons why Mr. Karder, with $60,000 down, cannot get a $60,000,000 loan to build his factory. Is it that the bankers have examined the costs and determined that the risk is too great? Is that why he needs Federal dollars?

For my part, I'd go nuclear. Our Navy has had nuclear powered ships cruising the globe for a half-century now, and each ship's power plant can easily provide enough electricity for a small city. At Las Alamos, the Hyperion Power Module was developed and will soon be deployed in Third-World communities around the world. Why Third-World? I will let you guess why Americans will not get the benefit of American technology.

A year ago, I posted in another place,

Hyperion Fast Facts

• Small -1.5 meters across, approx size of a residential “hot tub”
  
• Produces 70 MWt or 25 MWe, enough to power 20,000 average American homes or the equivalent
  
• Buried underground out of sight and harm’s way
  
• Transportable by train, ship, truck
  
• Sealed module, never opened on site
  
• Enough power for 5+ years
  
• After 5 years, removed & refueled at original factory
  
• Uniquely safe, self-moderating using a natural chemical reaction discovered 50 years ago
  
• No mechanical parts in the core to malfunction
  
• Water not used as coolant; cannot go “supercritical” or get too hot
  
• No greenhouse gases or global warming emissions
  
• Think: Large Battery!

Think nuclear. (Nucular in some parts of the country.)

I would be willing to bet that any American city, or even a savvy investor, who wanted to borrow $60,000,000 to set up two power plants that would power 40,000 homes for $300/year would find a lender. Crunch the numbers. Reporters don't seem to know how to use calculators.

Steady As She Goes

While there has been some expectation that the Federal Reserve would have to begin raising interest rates to prevent inflation, the comments today by Ben Bernanke throw some cold water on that idea :

"Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining. Also at issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate. Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year--sufficient to bring down the unemployment rate, but at a pace slower than we would like.

A number of factors support the view that the recovery will continue next year. Importantly, financial conditions continue to improve: Corporations are having relatively little difficulty raising funds in the bond and stock markets, stock prices and other asset values have recovered significantly from their lows, and a variety of indicators suggest that fears of systemic collapse have receded substantially. Monetary and fiscal policies are supportive. And I have already mentioned what appear to be improving conditions in housing, consumer expenditure, business investment, and global economic activity.

On the other hand, the economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate. Despite the general improvement in financial conditions, credit remains tight for many borrowers, particularly bank-dependent borrowers such as households and small businesses. And the job market, though no longer contracting at the pace we saw in 2008 and earlier this year, remains weak. Household spending is unlikely to grow rapidly when people remain worried about job security and have limited access to credit. " Ben S. Bernanke, December 7, 2009.

Several weeks ago the Federal Open Market Committee issued the following 3rd quarter statement :

"Investor sentiment toward the banking sector appeared to deteriorate over the intermeeting period. Bank share prices fell, with equity prices for large banks declining more than those for regional and smaller banks. Credit default swap spreads for large bank holding companies were about flat, but they widened for regional and smaller banking organizations. Market participants reportedly remained concerned about the earnings prospects for banks in an environment of weak economic activity and rising loan losses.

Debt of the private domestic nonfinancial sector appeared to have declined again in the third quarter, as estimates suggested that household debt edged down and nonfinancial business debt decreased. Consumer credit contracted for the seventh consecutive month in August, reflecting declines in both revolving and nonrevolving credit; issuance of consumer credit asset-backed securities also fell."

"The recovery appeared to be continuing and was expected to gradually strengthen over time. Still, most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve's objectives. Based on this outlook, members decided to maintain the federal funds target range at 0 to 1/4 percent and to continue to state their expectation that economic conditions were likely to warrant exceptionally low rates for an extended period. Low levels of resource utilization, subdued inflation trends, and stable inflation expectations were among the important factors underlying their expectation for monetary policy, and members agreed that policy communications would be enhanced by citing these conditions in the policy statement. Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks."

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period." FOMC Minutes, November 3-4, 2009.

The information presented by the Fed seems to be that (1) interest rates will remain low for the foreseeable future, (2) despite the addition of significant amounts of cash (stimulus money) into the banking system, banks are still reluctant to loan the money, and (3) there is an "underutilization" of available financial resources. I believe the Fed is well aware of the danger to the banking system that is posed by these conditions.

Money is a tool of commerce, and like any other tool, is also a commodity. It is necessary to provide a conduit for exchange of goods and services. The value of those goods and services are subject to relative supply and demand. Rapid communications, enhanced transportation facilities, and better education have opened the way for competition in US domestic markets for goods and services produced in developing countries. Workers in those countries are likely to have lower demands for wages and benefits, and production in the marketplace shifts toward lowest cost and highest profit.

Consumption of goods and services in the US has changed. Prior to the financial market collapse, most American economic activity was undergirded by credit extended, to a large degree, on real estate, in markets which had been overdeveloped. The housing supply in the United States still exceeds demand; this is the reason for the decline in real estate prices and the large numbers of vacant dwellings that can be found in every major American city. To give an example, Census 1990 tables show that Summit County, OH had a 1990 population of about 515,000 with 211,500 housing units. The 2006-2008 projection tables indicate a population of 543,600 (up 5.6%) with 242,700 housing units (up 14.8%). Housing unit growth outstripped population growth in the county by nearly 3:1 over a decade and a half. When the smoke cleared, there were 8% fewer people per house in 2006-2008 than in 1990. Despite the increase in supply, predominant prices had risen from $60-75K to $100-150K in that time period. While this appears to fly in the face of the law of supply and demand, the underlying cause of the anomaly was the availability of easy credit and lax underwriting guidelines, coupled with a change in behavior whereby homeowners borrowed against anticipated future increases in home value in order to subsidize lifestyles that were beyond the means of their ordinary incomes.

Mr. Bernanke's concern about underutilization of the available financial resources is valid. It needs to be recognized, though, that no matter how one might want to demonize the bankers for not making credit more readily available to consumers when the rates are so low and the cash is so plentiful, they are being prudent. In fact, considering the current excessive overcompensation of American workers (by developing world standards), they are also being prudent in not lending to commercial enterprises to stimulate production, since the market for overpriced American goods is shrinking (and this despite the contraction in our balance of payments ratios).

The Fed's concern with respect to their policy possibly leading to "excessive risk-taking in financial markets" is valid. Supply and demand drives lending as well as buying (alas, how many times people have been warned that when they mortgage their home, they are selling it to the lender for the term of the mortgage!) and a shortage of mortgage funds in the conventional market always seems to bring out the unconventional lenders with a correspondingly higher interest rate to compensate for the increased risk. While the "official" interest rates promulgated by the Fed may be low, desperate borrowers may be willing to pay a premium for the use of money provided by unconventional lenders willing to gamble, a situation which could lead to an even more serious economic, or possibly even social, collapse further down the road.

Another serious consequence has to do with the nature of the banking business itself. Banks do not make money on deposits, they make money on loans. The wild profitability of banks during the period 2001-2005 was related to their profligate lending practices. If they do not lend money, they make no profit, and investors shun unproductive assets. The banks themselves may raise interest rates -- this is seen already in the credit card industry -- and once again expose themselves to inordinate risk-taking. Or, they may be replaced by other institutions. I would be willing to guess that in some parts of the country Islamic banks are starting to take up the slack. When reinforced by the power of money, Sharia Law puts on a very attractive face. But be aware; the situation in Dubai is instructive. There is a reason why slavery and debtors' prisons still exist in lands that utilize that type of economic structure.