Emma James of the Baton Rouge Business Report interviews myself, Mike Patton of Integrity Wealth Management (a pretty good egg from what I know of him) and Professor Kelley Pace of LSU on the subject of Real Estate Investment Trusts (REIT’s.) I think she does a pretty good job on what is in fact a very complex issue at the moment.

On a longer term basis public REITs are reasonably valued, and the very possible collapse in the Commercial Real Estate market will give public REITs with their more flexible capital structures the ability to buy some very attractive property at distressed prices. However, they will likely be under tremendous pressure in the shorter run, and the overall market environment is likely to be unkind as well. Which means we may get a chance to buy them at a much cheaper price down the road, with the opportunity for them to profit from the distressed property market still in front of us. It may seem a bit like dancing on gravestones, but I would welcome it.

Unlike 2006-2008 I am not of a mind to go “short” publicly traded REITs however, as reasonable long term valuations make that potential decline far from a given.

Posted via web from Risk and Return’s Posterous

Folks, don’t fall for it. The stock market may rise or fall in coming months but “money on the sidelines” will not have anything to do with it. Barry resurrects an old John Hussman piece which is one of my favorite dissections of this myth:

I’ve said this before, but it’s important. If Ricky sells his money market shares and buys stocks, then his money market fund has to sell commercial paper to Nicky, whose currency goes to Ricky, who uses it to pay for the stock bought from Mickey. In the end, the currency that Nicky held is now held by Mickey, the commercial paper held by Ricky is now held by Nicky, and the stock held by Mickey is now held by Ricky, and there is exactly as much stock, commercial paper, and currency outstanding as there was before. All that happened is that the owner of each security has changed.

I suggest reading the whole thing, but if ordinary logic doesn’t prove it then maybe actual facts about the behavior of markets will help, also courtesy of Barry:

Notice, when the market was rising so was cash. It didn’t disappear into the stock market and explain the rising market. In fact, during the tech crash it declined along with the market. Before the most recent market crash this argument “cash on the sidelines” was used to argue why the stock market wouldn’t decline. How did that work out?

Amusingly (if somewhat darkly so) Hussman in the piece above wrote in 2006 how the fallacy might mislead us:

There is an important reason for these considerations here. As I’ve noted in recent months, it’s likely that China and Japan will at least stabilize in their willingness to absorb the flood of government liabilities that they’ve been snapping up in recent years. That means that more of these liabilities will be forced into the hands of U.S. investors. As that happens, we’re likely to observe an accumulation of “cash on the sidelines” that might look like a hopeful sign for stocks.

A hopeful sign that left investors holding the bag. Don’t believe it this time or next time.

Technorati Tags investing, investment myths, John Hussman

Look deeper, however, and the government isn’t really quitting its bailouts at all. It is just shifting strategy away from banks and financial services to a new set of quieter bailouts, centered on the housing and real estate markets in general and Fannie Mae and Freddie Mac in particular. In this way, the administration’s actions are meshing with the wishes of House financial services committee Chairman Barney Frank, who said last year, “I want at least two years with President Obama and a solidly Democratic Senate so that we can get the federal government back in the housing business.” Now it is, even to the point that the government is at risk of creating another mortgage bubble. We just have to see if the government can handle it.

The government has to concentrate all of its resources on keeping the housing and real estate markets stable because the government is now the single biggest investor in mortgage-backed securities. It bought more than 80 percent of all the mortgages issued by Fannie and Freddie. What this means is that if homeowners start to fall behind on those mortgages in even bigger numbers than the current 9.24 percent default rate, the government is in deep trouble, starting with the Federal Reserve. The Fed’s own balance sheet—its financial holdings—has ballooned to $2.1 trillion from just $800 billion a year ago. One-third of the Fed’s balance sheet is weighed down with $625 billion of troubled mortgage-backed securities, once floating around the market and now invited to stay in Uncle Sam’s own accounts.

Read the whole thing.

Technorati Tags Barney Frank, Fannie Mae, Federal Reserve, Freddie Mac, housing crisis, Housing Market

From the New York Times: U.S. Job Seekers Exceed Openings by Record Ratio

Hat tip: The Big Picture

Technorati Tags Employment, the economy, unemployment

Inflation from Marketplace on Vimeo.

Technorati Tags banks, deflation, Inflation

However, working that mountain of debt down needs to be done and will be a large drag for years. Hat tip: Clusterstock

Technorati Tags debt, debt crisis, the economy

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

I love it. If they go up the execs get a big payoff. If they don’t, at least they are off the banks books.  Cash is preserved, the balance sheet strengthens.

Technorati Tags Credit Suisse, leveraged loans, management compensation, mortgage securities

HT: James Dailey

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Technorati Tags holiday, Humor, Thanksgiving

If 2008 is half as successful for our tactical asset allocation decisions as was 2007, we should have a very nice year indeed. We still feel an absolute return bias is the proper mindset going forward, and represents the best trade off between risk and return.

We will have a review of our outlook going up Monday.

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.

-GK Chesterton

That by the way, is my favorite quote of all time. Its implications for those investors engaged in various forms of financial engineering are enormous.  Models are useful, until they very much are not.

Technorati Tags financial engineering, Gk Chesterton, quotes

“The best statistical graphic ever drawn“, is how statistician Edward Tufte described this chart in his authoritative work ‘The Visual Display of Quantitative Information’.

The chart, or statistical graphic, is also a map. And a strange one at that. It depicts the advance into (1812) and retreat from (1813) Russia by Napoleon’s Grande Armée, which was decimated by a combination of the Russian winter, the Russian army and its scorched-earth tactics. To my knowledge, this is the origin of the term ’scorched earth’ – the retreating Russians burnt anything that might feed or shelter the French, thereby severely weakening Napoleon’s army.

As a statistical chart, the map unites six different sets of data.
• Geography: rivers, cities and battles are named and placed according to their occurrence on a regular map.
• The army’s course: the path’s flow follows the way in and out that Napoleon followed.
• The army’s direction: indicated by the colour of the path, gold leading into Russia, black leading out of it.
• The number of soldiers remaining: the path gets successively narrower, a plain reminder of the campaigns human toll, as each millimetre represents 10.000 men.
• Temperature: the freezing cold of the Russian winter on the return trip is indicated at the bottom, in the republican measurement of degrees of réaumur (water freezes at 0° réaumur, boils at 80° réaumur).
• Time: in relation to the temperature indicated at the bottom, from right to left, starting 24 October (pluie, i.e. ‘rain’) to 7 December (-27°).

Pause a moment to ponder the horrific human cost represented by this map: Napoleon entered Russia with 442.000 men, took Moscow with only 100.000 men left, wandered around its abandoned ruins for some time and escaped the East’s wintry clutches with barely 10.000 shivering soldiers. Those include 6.000 rejoining the ‘bulk’ of the army from up north. Napoleon never recovered from this blow, and would be decisively beaten at Waterloo under two years later.

Read the whole thing.

Technorati Tags history, maps, Napoleon, Russia

Eli Lehrer informs me that Tide has a high market share even though it is more expensive than most other brands. This source says the market share of Tide is about forty-four percent, with the sum total of all Proctor and Gamble products (Gain and Cheer are two others) accounting for about two-thirds of the market. Is Tide so good? Does Tide really “know fabric best”? I couldn’t name one supposed feature of the product and I’ve been buying detergent my whole life. I couldn’t even tell you what brand I buy. Maybe it is Tide.

Having read the occasional issue of Consumer Reports, I know that Tide consistently is a star. In fact price does seem to matter, and commenter Kip Esquire gives us an insight to the chemical industry and the money they spend on making these products better:

INTERESTINGLY, although Gain is a midtier brand, it draws on some of the chemistry developed for P&G’s premium Tide brand. For example, Grime says the powdered variety of Gain now contains a proprietary, quick-dissolving alcohol sulfate surfactant developed with Shell Chemical and launched in 2002 in Tide. And Gain powder with bleach contains nonanoylbenzene sulfonate, the high-performance peroxygen bleach activator long used in Tide with Bleach.

Likewise, Gain Fabric Enhancer is a new fabric softener that uses diethylester dimethyl ammonium chloride, the same softener active found in P&G’s premium Downy brand.

Of course, P&G reserves some technologies for Tide and for Ariel, its premium European brand. In France, for example, the company recently introduced Ariel Style, which Grime calls the first detergent to offer a fabric shape retention benefit. The technology, called Fiberflex, was developed in partnership with one of P&G’s chemical suppliers.

The business and science behind this I found surprisingly interesting:

Also being introduced in P&G’s flagship brands is a new enzyme combination of pectate lyase and mannanase. Grime says this combination targets the pectins, mannins, and guars that are present in many food stains, either from the food itself or from thickeners used with them. Not only are these substances difficult to remove, they leave residues after washing that can act as “magnets” and attract other stains during wear, he says.

Another premium brand innovation from P&G is an ethoxylated quaternized sulfated amine that the Tide and Ariel franchises are incorporating as a cleaning polymer. According to Grime, this technology improves cleaning performance on two fronts: through improved soil suspension capability and improved removal of outdoor soil stains, a perennial laundry problem.

But then, I’m a geek.

Technorati Tags chemistry, Proctor and Gamble, science, Tide

The company that has the most to gain from buying the New York Times is Google. If it proffered a Murdoch-like, no-auction bid of $4 billion, wouldn’t the Sulzberger family have to accept it? Every single class B shareholder would accept the offer. It’s their only exit. It is also likely that Times employees and retirees would enthusiastically support the deal; it’s their only exit as well. So it would all come down to whether the Sulzberger family (smaller in number and not as far-flung as the fractious Bancroft clan that owned Dow Jones) would accept the deal.

Why Google?

What’s in it for Google? Well, for one thing, it’s cheap. Sell off the New England properties and the real cost is $3 billion. That’s not much money to buy one of the premier brands of the information age. It also comes with some excellent real estate, which further reduces the risk. And happily enough, it will probably get cheaper in the coming months. So the price is definitely right.

Second, Google is embarking on an ambitious mobile platform. It is buying wireless spectrum and will soon introduce Google Mobile. In so doing, it is entering into an arena where the established players have hired (almost) every lobbyist and (almost) every law firm with expertise in telecommunications in Washington, DC and in virtually every state capital. Owning the New York Times would level that playing field in one fell swoop. Owning major media outlets is a strategy that has worked very well for General Electric, Disney, News Corp., Time Warner and others in their dealing with the federal government and with state governments. There’s every reason to believe it would be helpful to Google.

Third, there’s all that content. Google is a company that could actually make money repurposing the cultural and culinary coverage, to pick just two categories, of the New York Times, across both its Internet and mobile platforms. An acquisition of The New York Times would greatly enhance the richness and reach of Google News. And should Google choose to invest in expanded news and cultural coverage, it could greatly enhance the richness and reach of The New York Times.

Finally, a Google acquisition of the New York Times would allow Kleiner Perkins (which would likely be assigned the task of finding new management for the paper) to attract people of great talent to a fascinating and challenging project: the reinvention of a great newspaper across multiple platforms and within a variety of applications. Even if the project failed, the knowledge gained from the undertaking would make Google a better, smarter, more deft information age company.

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Thanks for visiting Risk and Return. Please feel free to contact us with any questions and/or comments. Please note our disclaimer.

Technorati Tags China, education, globalization, video

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man,” but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

This is an old one, which I have read before, but I can’t remember where. Authorship is unknown at this point, hopefully Jonathan Chait won’t lambaste me as he did Bill Buckley.

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Technorati Tags beer, Economics, government, Humor, Taxes, Wealth