Tuesday, August 27, 2013

Pensions, Psychology and Leadership


  Among the many things I have learned in my career this fact truly stands out. Psychology matters. It is the swing in psychology that gets people into the biggest trouble. This is true whether referring  to investors whose behavior I have witnessed for nearly 40 years, or the politics and politicians of the 4 States I have observed in my adult life. The professionals, the public and the media focus on  hot topics and are caught up in emotions en masse and invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and overly enthusiastic, and when times are troubled, people become fearful and reticent. They stick their heads in the sand. That’s just the wrong thing to do. It’s important to control fear and greed.
Another mistake that people often make is that they compare themselves with others who are making more money than they are and either conclude that they should emulate the others’ actions by taking risk or seek to “even” the playing field through envious actions. This is the source of the herd behaviour that so often gets them into trouble. We're all human and so we’re subject to these influences, but we mustn't succumb. In my world .This is why the best investors are quite cold-blooded in their professional activities. I believe similarly that  the best politicians solve problems through courageous action not from polling and running ideas of a flag pole.. Rhode Island and the United States have some very obvious problems currently being uniformly ignored by the elected leaders of today.
     In Rhode Island so many towns and cities are on the verge of insolvency, that its truly frightening. But it seems this is  just too hard for our leaders to tackle. No one seems willing to do the right thing. Kicking the can is no longer working and the idea “du Jour” is to adjust way too little, far  too late. Just 10 years ago town finances seemed  ok and the crash of 2000 happened. This should have been a wake up call, but towns just kept on making promises oblivious to the fact that health care obligations were and are unfunded and rapidly exploding. Their greed was in full bloom until 2008 when towns were exposed. Some by town criers and some by the toothless Auditor Generals reports. Willful ignorance on the part of elected leaders and voters, as well as beneficiaries continued unabated and have lead to the toxic mix that now stands before us. Recently our best real effort for reform , such as it is, was the Towns and Cities Pension Crisis Commission. Their task, as set out by legislation and by the leadership from Gina Raimondo and Rosemary Beth Galoogly has been to identify those cities that are in “crisis” or near death.(under 60% funded) This modest task only addresses liabilities arising from pensions, not health care. The result of this effort has been revealing and somewhat helpful. Yet nothing “real” is being accomplished and even the modest goals they have set out, now appear to be completely unattainable. The last two meetings of this group have been cancelled without explanation. Have we now as a State shifted the moral burden from where it should be? On the voters and the taxpayers ? Have we now  let elected leaders off the hook for lying about finances? I fear this commission is yet another delay tactic. The time has come to face facts.
 In the investment world we can infer psychology from investor behaviour, and that allows us to get an understanding of how risky the market is, even though the direction in which it will head can never be known for certain. Yet Rhode Islanders have deluded themselves into believing that they can guarantee salaries many years in the future as well as health care costs.   I know we can not and by now you should also know they can not. But more importantly ,why do we do this for 12% of our population, guarantee millions? and let the rest figure it out on their own? The reason lies in the psychology of uninformed town leaders and politicians for the last 50 years. In the early 1970”s they were influenced by union advances in the Northeast and within the first  20 years of the programs ,  no problems existed. The dual tailwinds of favorable demographics and inflation made promises appear easy to achieve.   Soon retirees of all stripes realized inflation was a killer. So within the construct of politics politicians handed out promises for votes .They handed out our promise to 12% of the elite government workers.  And so on. But now, the game is over. Inequities exist of laughable proportions. It makes little sense for a middle school librarian to receive a million dollar annuity when masters and PHD librarians that are not publicly financed  have retirements of roughly $50,000 total. Should Janitors have retirements guaranteed by you in the hundreds of thousands? While the hard working private sector worker has no such guarantee? Why are we doing this and why isn’t anyone addressing this?

     I believe the answer to such lack of leadership  is obvious. Voters do not reward politicians for telling the truth. (witness the results of Doherty vs Cicilline). A real leader would be courageous and  would suggest immediate  action.

                                  MY Plan for real results

·          Eliminate town run Defined Benefit Plans for new hires.
·         Create Defined Contribution plans or hybrid plans fair to the active employees.
·         Do not haircut anyone who is more than 10 years retired or earns less than 35000 a year.
·         We should haircut all those who earn more than 35,000 but not by much maybe 10 % per year.
·          Freeze all colas for 10 years.
·          Then tax residents ( 15% to 20% of current UAAL) in a  big chunk in  2014 for allowing this tragedy to continue and for continually voting in incompetent or cheating politicians.
·         Fire every town manager who was in charge for the whole period during the explosion in liabilities over the last 15 years.
·          Mandate every Town Council pay Annual Required Contributions going forward  before any raises are allowed or they are subject to recall.

            Remember the following  advice so that we can make this mess less likely for our children and grandchildren. Mass emotion is very predictable and there are those individuals  who are unscrupulous enough to take regularly advantage of it. Too little skepticism by voters  and too much eagerness by leaders  in an up-economy – just like too much resistance and pessimism in a down-economy – can lead to  very bad investment results.
            Warren Buffett once said, "The less prudence with which others (government) conduct their affairs, the greater the prudence with which we must conduct our own affairs." Let all of us handle our own retirements and don’t obligate us to guarantee others.

 Do the right thing fix this…now ..

Thursday, August 8, 2013

Projo melting away? ..Sheldon ,Chafee could buy the whole thing

       Newspaper companies are changing hands left and right these days at prices well below what they traded for 10 years ago. The Boston Globe was sold for $ 70,000,000 to John Henry after being purchased for over $1 Billion a decade back. Jeff Bezos ,of Amazon fame, purchased the venerable Washington Post for  $250 million dollars. So naturally it got me to thinking about the plight of the Providence Journal which is quite literally the  Ocean States paper as well as Providence's paper.
      The answer is not much. I used available public information and back of the envelope metrics that are used in the investment banking arena to produce the following table.

                              PROJO Value July 2013
Metrics  recent multiples Projo data  Valuation
Ebitda 3.5 $3,675,000 $12,862,500
Per Subscriber $294 78000 $22,932,000
Revenues 0.32 $85,000,000 $27,200,000
Using Boston Globe Multiples
Ebitda  4.2 $3,675,000 $15,435,000
Per Subscriber $285 78000 $22,230,000
Revenues 0.21 $85,000,000 $17,850,000

     So my back of the envelope calculation values the Newspaper at somewhere around $20 million dollars which is a very far cry from the implied $500 million price tag in 1997. Additionally I haven't been able to reconcile the pension obligations a new owner would have to take on or added the real estate value of the Main Building in Providence (approx 8 million) or the remaining parking lots they haven't sold yet ($5-10 million).

                    Projo 1997 value $500 million 

      NOW !

                  Projo 2013 Value $ 20 million

maybe Taylor swift wants it?

Wednesday, August 7, 2013

Seeing the forest through the trees: a traders view of Charlie Munger and hydrocarbons

     Years ago in the mid  1990's I was managing some derivative  traders on the American Stock Exchange and monitoring their risk . I those days there was an advantage to physical proximity to the Specialist and order flow that arrived ata certain physical spot every day. Traders stood in pits. Just like in any walk of life they often chatted even though they were most likely competitors and discussed all kinds of things usually having to do with the companies traded in their pit.
    Traders are a very different type of person. Usually self confident and independent thinkers and well educated either in the games world or at Universities..The majority of our traders were trained by us and recruited from Wharton, Columbia , Chicago and NYU. My current partner was MIT. I was lowly UConn. only a few of the traders we had did not excel at games playing and loved to think several moves ahead. Whether it was our Bridge players, Backgammon, poker or chess these games players love to figure things out. It was their strength and also their weakness.
     You see sometimes these traders , more than sometimes in fact, they got side tracked with
over-thinking a situation. A recent article in Seeking Alpha reminded me of an incident in American Airlines where I had financed a trader.


      There aren't many people smarter than Charlie Munger  so when he goes on a rant like he did recently and he clearly has a different than consensus viewpoint, its definitely worth the time to try to understand his thought process. This was exactly the kind of article that appeared in the mid 1990's and was being discussed among the half dozen or so regulars in the AMR pit. The discussion was so lively that the traders had decided and apparently they weren't alone, that oil prices could have a dramatic impact on American Airlines profitability. In this particular case concern was if oil is up then  AMR  would go down. For many reasons this was a more tenuous relationship than the traders believed.These guys were skilled in identifying "mispriced options" and  not so skilled in being securities analysts. But they were all so bright they quickly grasped many concepts and soon could repeat leading analysts research opinions verbatim. This,as would often happen on the floor, morphed into group analysis and group think.
     One morning my trader came to me worried about the exposure he had being:" net short some puts" in AMR and it was his opinion that middle east tensions could cause oil prices to rise and anyway the trend in oil prices was clearly up in his opinion. It turns out the whole crowd felt that way. But I was amazed to find out that not even a single trader in that crowd had thought to buy oil as a hedge,. They had each developed theories and interrelationships having to do with other airlines or Gold or AMR weighting in indices , all of which were ok and reasonable, but it stuck me that some of the smartest people i knew couldn't see the easiest path and the simplest hedge. The one thing they could come to complete consensus on was that oil was going higher yet none of them bought oil.From the article above I got the impression that all i needed to do was buy oil with my dollars, because over the long term the dollar value of oil is going up.The Author and Mr Munger are both quite smart but I wonder if they actually own oil? and if not what do they think is better?

Tuesday, August 6, 2013

Will personal wealth tax be imposed before the current U.S. tax code is simplified? YES

The most obvious way to promote growth and investment in our economy is simplification of the US tax code. Nearly everyone says the 70000 page code  a nightmare but the problem is that tax code exemptions are  the currency of lobbyists and politicians so unless voters focus on voting for Representatives looking to end the IRS and the tax code we should expect very marginal changes.This would be only  to save face and will be quickly followed by even more taxes so those folks in Washington can advance their power base. This acts to increase the federal governments  control over individuals in the United States.
    You can always look to Europe for really bad ideas like" VAT" taxes or national health care or public pensions but most of us assumed that there was no way Americans would allow their personal assets already taxed to be taxed again as "wealth " taxes.
    But wealth taxes are coming, and the idea fits perfectly into the elitists concept that both Washington DC elected officials and un-elected bureaucrats would be much  more  productive with your money.  This mindset believes that every dollar of "wealth tax" collected would be   available to invest in new factories, new technologies, and all the other  fabulous progressive projects. But the sad truth is just like all taxes, the money goes into the hands of un-elected bureaucrats who think they know better than you do what to do with your hard-earned dollars.

    So why do i think this is coming soon? Because I have learned over that last 5 years that it is the unscheduled ,offcamera or spontaneous remarks have revealed this Presidents agenda far more clearly than his  planned addresses like State of the Union. His real character believes in "stepping on the throat of business", redistributing wealth as the candidate famously said to Joe the plumber,30% taxes above a million income. It   thrilled him to no end when Warren  Buffett agreed. But wealth taxes? Come on he wouldn't do that.
     Think again and think seriously.Several countries have already  imposed wealth taxes outright. This  philosophy believes that even though the wealth has already been taxed once or twice at rates higher than the rest of the population its now time to simply take it before they die rather than wait for the death of savers and take it in estate taxes. 

    Is the lesson to spend everything I have before I die and come with my hand out to the government for my retirement? Exactly how will that work? So far the government has relied on the  voluntary collection of taxes. In Europe this devolved quickly into  corruption and black markets . People lied, bribed and hid wealth. tax collector became rich and Governments collected less.This is  not ancient history this is today in Greece ,Cyprus and France etc. .

          We have already been experiencing confiscation in the subtle form of "financial repression" and  ZIRP ..(zero interest rate policy) have already redistributed massive amounts of wealth from real savers to in debt borrowers  in order to bail out Wall Street and other crony capitalist friends of the modern Democrat. The next step is to overtly tax wealth at 1.5%  above some threshold.  If you have managed to work and save expect your friendly IRS to start accumulating data on what you own and your net worth. That will be the sign you have about 6 months left before implementation. I cant think of a more communist or collective strategy than confiscating and redistributing the wealth of others . There was a time when Americans would have fought and died to protect their own earned personal property and yes, that includes savings. That time may come again.