Dan on May 13th, 2013

We took another big step towards the loss of  independent journalism with the story of the government seizing the phone records of the Associated Press.

http://bigstory.ap.org/article/govt-obtains-wide-ap-phone-records-probe

This breaks  new ground in  so many ways:

1.  I don’t recall the government being so blatant about seizing phone records of any organization, let alone the mainstream press.  The government didn’t even pretend to have a good reason to do this – “In the letter notifying the AP, which was received Friday, the Justice Department offered no explanation for the seizure, according to Pruitt’s letter and attorneys for the AP.”

2..  No wonder there is no investigative journalism. Once a story is published that is critical of the government, the government can go through your phone records and find out who your sources are.  As the ACLU stated: “..the use of subpoenas for a broad swath of records has a chilling effect both on journalists and whistleblowers who want to reveal government wrongdoing.”

3.  This is essentially domestic spying by the CIA.  The government’s concern was about sources the AP had regarding foreign terrorism.  The justice department was just acting under the instructions of the CIA to collect this information domestically.

The huge terror plot that caused the government to infringe on freedom of the press?  Another purported airline bomber.   However, the letter sent to AP notifying them of the records seizure was sent after the government had thwarted the plot, and had the bomb in custody.   There was no threat outstanding at the time of the records seizure.

Its clear the current administration is no different than the Bush administration when it comes to abolishing freedom under the guise of preventing  terror.   At least now we know that there is one news organization that is not yet in bed with the government – though it may not matter since no news organization will be able to investigate government wrongdoing in the future.

 

Dan on May 6th, 2013

Asset Allocation has always been a puzzle for me.  All the financial advice says your asset allocation depends on your risk tolerence and age, but thats about it.  I stumbled across this paper which gives some ideas on how to determine what a good target allocation would be based on your opinion of future inflation.

http://realestate.wharton.upenn.edu/research/papers/full/716.pdf

Now this paper is pretty heavy reading – lots of numbers and ration and analysis.  So I will preview my favorite chart in the article:

assetallocation

 

The gist of this is, as your inflation expectation increases, the article suggests you should increase your investment in equity REITs, as they have the best ability to increase prices along with inflation.  This article was published in 2011, so it doesn’t factor in the huge runup REITs have seen.   I would also of liked to have seen commodities split out in a more granular way – perhaps comparing oil vs copper vs farm products, but it is an interesting alternative way to consider asset allocation.

If this is a topic of interest, this article is definitely worth a look.

 

 

 

 

 

 

 

 

 

Dan on April 20th, 2013

The legal and media spectacle that followed the senseless terrorist bombing at the Boston marathon has me worried for the future.  Not because of the the terrorists themselves, but because of the reaction of the American media and the American leadership to the terrorist acts against our society.  A great article worth a quick read:

http://www.jpost.com/Features/Front-Lines/What-message-is-US-sending-with-a-Boston-lockdown-310424

Now that a suspect has been caught, the mob mentality is taking over our justice system.  First off, the suspect is denied his Miranda rights.  A great point made by this author as to why we should care about this.  

The next thing to watch will be to see if the suspect is denied habeas corpus  and detained indefinitely.  Apparently, according to this article,  the National Defense Authorization Act of 2013, there is a provision that claims to ensure that “any person inside the United States” is allowed their constitutional rights, including habeas corpus. Thus it seems if they continue to treat this suspect outside of the normal rule of law, they would need to send him offshore to Guantanamo Bay.   Senator Lindsey Graham has already stated a desire to treat the suspect as an enemy combatant for intelligence gathering purposes, though the Obama administration has said that is unlikely.   Should this suspect be sent to Guantanamo Bay to be questioned, that would set a strong and disturbing precedent for the treatment of  any american citizen accused of a crime.

I don’t want the lingering result of this terrorist act to be  the canonization of  lynch law.  If we don’t provide the suspect his civil rights, the terrorists will have won the battle.

 

 

 

Dan on April 6th, 2013

The NBA has a very interesting strategy for getting what it wants. Seattle went through this when the Oklahomans came to town and bought the Seattle Supersonics, and the ownership told Seattle they had better build a stadium or else. Now the Sacramento Kings ownership, with the support of the NBA, is threatening the same thing to Sacramento.

If you recall in the Seattle case, when local owner Howard Schultz owned the team, he said he may have to move the team if he didn’t get a new stadium. Since he was a local owner,  his threat was not credible enough to local leaders – and he got nowhere. So the NBA steps in, facilitates a deal with the Oklahomans  to provide more muscle behind the threat to build a stadium or they will leave.  Seattle politicians declined and the team moved to Oklahoma to play in the brand new publicly funded arena.

This is playing out again with a slight variation – the Seattle billionaires trying to join this game got the local politicians to agree to help build a new stadium in Seattle, and then they went shopping for team that didn’t have a new stadium.  This time, it played out a little differently – as  in this case, Sacramento caved and the Kings got a deal to get an arena.   Here is the deal Sacromento agreed to:

The city will put $258 million in value into the deal, mainly by bonding against its downtown parking garage future revenues, and by selling several downtown parcels to developers. The development team will put $190 million into the deal.

So if this deal stands, the owners and the league will get more luxury boxes, and more income will flow into the NBA. Sounds like everybody will live happily ever after, except for perhaps the Sacramento taxpayer.

So now what is the  Seattle ownership contingent to do.  It’s possible the NBA will expand by two teams and Seattle would get an expansion team.  Even though I think the NBA is too weak right now to expand the league, in this era of zero interest rates and asset bubbles all over the place, there are likely lots of billionaires that would through money into this profitable arm twisting game.  And I am sure the NBA owners would welcome hundreds of millions of dollars to allow adding two more members of the club.

However, my prediction is that the Sacramento Kings will stay put in Sacramento, and the NBA will work with the Seattle contingent will go to the next town that the NBA has determined needs a new stadium or new lease agreement, and the arm twisting will begin anew.

Eventually some city will say no – and Seattle will get its team.

 

 

 

Dan on March 29th, 2013

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Dan on March 25th, 2013

It struck me as kind of odd when I read the article about the National Coalition president Mouaz al-Khatib quitting due to frustration.   I pulled these quotes from a great summary of the event:

He said his resignation means he can now “work with freedom that is not available inside the official institutions.”

He also blamed world powers for providing what he deemed insufficient support for the rebel cause, and complained that many “international and regional parties” have insisted on pushing the opposition toward dialogue with the regime.

Really?  Sounds like this Syrian Rebel group must be a bureaucratic mess from the sounds of it.  Too many special interests perhaps?  And he is complaining about pressure for diplomacy with the Assad regime?  Please tell us more – all we hear is saber rattling from all the third parties.

After looking this further –  I think Mr al-Khatib ‘is pursuing other opportunities’ – he got fired.  Sounds like he wasn’t following the rules put down by all the foreign countries behind this revolution.   And who was waiting in the wings to take the reins?   Would you believe a US educated Texas businessman born in Syria but has lived in the US since 1980?  Ghassan Hitto has replaced al-Khatib. He was elected Prime Minister on March 18th, and on the 23rd Mouaz al-Khatib ‘quit’.  Hitto’s primary qualifications?

Hitto’s profile has recently risen to prominence via a series of public service and fundraising initiatives, such as the Walk for Children of Syria Day.

This article gives a great summary of  Mr Hitto’s backgrount - http://rt.com/news/syrian-opposition-prime-minister-458/.  This was the most qualified candidate?  Sounds like its not what you know, but who you know.  Interestingly, the rebels are rejecting the appointment of Hitto, further highlighting the oddity of this situation.   Hopefully the rebels will provide us some information on who was behind Hitto’s miraculous rise to power.

It will be interesting to find out who is pulling the strings behind all this – I long for the day where we will get some investigative journalism into this worldwide political involvement with what in theory is a civil war.

Dan on March 18th, 2013

Check out this article on these ‘Hackers’ who just got 3 years of prison and is to pay  $73,000 in restitution:

http://www.wired.com/threatlevel/2013/03/att-hacker-gets-3-years/

This was not a hack – Andrew Aurernheimer and his colleague stumbled across a huge security whole that AT&T exposed.  It is unbelievable that a company the size of AT&T would expose this information.

Here is the ‘hack’ that was perpetrated – he  noticed that if you take an AT&T URL and increment the querystring variable, you can pull another users information.  For instance, lets say you log into your AT&T account, and you see a URL like ‘http://www.att.com/default.aspx?ICCID=1234 which shows your profile information.  Then if you go to your browser URL, and change the URL to http://www.att.com/default.aspx?ICCID=1235, you see someone else’s profile information – that is a hack?  Then you spend 15 minutes writing a script which loops through and generates urls with the ICCID incremented, and parse the webpage information into a database.

Ethical? Probably not.  But if you want to expose AT&T as treating customer information carelessly you could be considered a  whistle blower.    These guys did not profit off this information – they sent the data to the editors of a popular website (Gawker.com) to embarrass AT&T.  Arguably, if you tried to sue AT&T for breach custodial conduct of your information, their lawyers would probably argue there were no damages since no harm was done to you.

However the federal government is able to get a 3 year conviction.  Oh.. coincidentally…. Andrew Aurernheimer  is an internet activist in the vein of Aaron Schwarz - http://en.wikipedia.org/wiki/Andrew_Auernheimer.

The government crackdown on behalf of corporate America continues.   As a commenter states in the article comments:  “In America, if you want your rights protected, you had best incorporate first.”.

 

 

Dan on March 18th, 2013

Check out my latest article at Seeking Alpha:

3 Reasons Coinstar May Surprise On The Upside

 

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Dan on March 12th, 2013

Esterline Technologies (ESL) has always been an interesting company to me – a collection of 10 plus semi-autonomous companies focused on aerospace and defense. Since their first quarter earnings report was released on February 28th, the stock has outperformed the S&P 500 (up 5.5% VS 2.5% for the S&P 500), which caused me to dig a little deeper into the earnings report to see if I could find a reason.

First, here is an overview of some key metrics for Esterline over the last few years:

Esterline

Annual revenue growth is still positive, at a relatively healthy 8.9%. While the revenue growth is slowing faster than I would prefer, at this point I will chalk it up to macro factors rather than to management issues. However this will be a metric to watch closely in future earnings releases.

Trailing 12 month after tax margin has been relatively flat (barring the exception of the impairment charge Racal Acoustics Defense in third quarter 2012), so no big concerns there. However Inventories were up 5% from recent quarters – this is somewhat cautionary as it could indicate future write-downs impacting margins.

Perhaps the outperformance of the stock after the earnings release can be attributed to the new markets Esterline is exploring. With the slowing defense spending, Esterline has announced they have some opportunities in high-speed rail, nuclear power, and gaming initiatives. This must be the catalyst for growth that investors are anticipating, though it seems awfully early to be pricing these opportunities into the stock.

Note what this recent price increase has done to the stocks earnings yield. When I compare Esterline to another defense related company of approximately the same size, Flir Systems, Inc (FLIR), you notice the valuation for Esterline is not as attractive as it once was:

ESL vs FLIR

While Flir is not a pure comp to Esterline, this chart does indicate that much of the good news is priced into Esterline.

Conclusion

This quarters earnings report does have reasons for optimism, but I believe the stock may be over anticipating future catalysts for growth. Given the unanticipated US Government sequester (admittedly unanticipated by management), keep an eye on the annual revenue growth. Also keep an eye on the new market opportunities mentioned. Due to Esterline distributed organizational structure, they may be able to move quickly to gain traction. But I would need to see more proof first.

To see the full first quarter earnings report, click here.

Dan on March 2nd, 2013

A few months ago I joined Amazon Prime, so for $75 it give me free 2 day shipping on most items.  The thing that amazes me the most is how much that it has increased my spending on Amazon- or conversely how much it has shifted me from buying stuff from brick and mortar stores.  It is cutting probably almost half of my purchases from Home Improvement stores, drugstores, etc.  It is so much more efficient than driving  to the store, finding the item in the store (or having to go to a different store) and then getting home and realizing I forgot something..

This article got me wondering further about where all the worlds low skilled labor would make a living in the coming years:

http://www.businessinsider.com/50-percent-unemployment-robot-economy-2013-1

And back to Amazon for a moment – even they are working to automate as much as possible:

http://www.businessweek.com/articles/2012-11-30/amazons-robotic-future-a-work-in-progress

I realize that for hundreds of years people have had this worry about technological advancements, but I am hard pressed to think of a low skilled job sector that is not faced with competition from automation.   So for young, low skilled, or under educated people, where do they get their start?  I have to think retail jobs and even warehouse jobs are or will be on the decline,  and for low skilled manufacturing you are competing with the rest of the world.

Here is a chart I put together from data from the Bureau of Labor Statistics of historical unemployment by age group:

unemployment

 Is it a coincidence that the unemployment rate gap for those under 24 has increased in the last few years?  And this appears to be a global phenonenom – Spains youth  unemployment rate  is over 50%:

http://www.bbc.co.uk/news/business-21180371

So maybe we are in the early stagest of an economic evolution – or revolution.  It will be interesting to watch Spain and the rest of the eurozone deal with this unemployment problem, because we will likely be dealing with the same problems soon.