Archive for 2008

• More on Efficient Markets
  Eddy Elfenbein, March 3rd, 2008 at 2:54 pm

  People spend more time on buying a toaster than on buying a house.
  Of course, they’re really nice toasters.

• The Bubblephobes
  Eddy Elfenbein, March 3rd, 2008 at 2:32 pm

  Robert Shiller writes in yesterday’s NYT about the collective failure to see the housing bubble. Obviously, some folks will insist that they saw everything coming, and it was perfectly predictable.
  One of the problems I have with this idea, and I’ve mention this before with Shiller’s other work, is the curious idea that a bubble is somehow a problem that needs to be fixed.
  Just because prices go up very rapidly doesn’t mean something is a bubble. Oddly, the only time we can be certain that it’s a bubble is when the air deflates and the asset prices go down. In other words, to the bubble-phobes, the problem isn’t the bubble, it’s the downside, and we only know what after the fact.
  How can we be sure it’s a bubble when an asset inflates? In the 1950s, stock prices soared and they never really came back down. The phrase “permanently high plateau” hasn’t had a good record since the 1920s, but I think that’s an accurate description of what happened in the 1950s.
  Is gold a bubble right now? What about oil? Or the euro? Or could it be that we’re simply adjusting to a new era of commodity prices? I don’t know and for now, I’m happy to consider these open questions. I will note, however, that adjusted for inflation, commodity prices have historically plunged.
  For me, the best definition of a bubble is a price that’s going up because it’s going up. The certainly happened with tech stocks in the 1990s. But I’d rather not have Alan Greenspan tell me what the prices of tech stocks ought to be.
  There’s also the counter argument that bubbles aren’t merely not bad, but actively good. In his book, Pop!: Why Bubbles Are Great For The Economy, Daniel Gross writes how bubbles and their ugly aftermath have often helped lay the ground work for future prosperity. A bubble creates enormous excess capacity which can later be used to bring down the cost of apply a new technology.
  Shiller writes, “The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world.” Actually, the collapsing house of cards is the recognition of the bubble. After all, the bubble could have gone for another three years. Perhaps free enterprise spot it early and cut it off. Hooray for markets!

• Oil Hits Inflation-Adjusted High
  Eddy Elfenbein, March 3rd, 2008 at 1:00 pm

  The WSJ reports that oil is at an all-time high even after adjusting for inflation.

  Crude-oil futures have topped the inflation-adjusted high set in April 1980, as the dollar’s descent continues to send investors into the commodities markets.
  Light, sweet crude for April delivery traded as high as $103.95 a barrel on the New York Mercantile Exchange, topping a 1980 trade of $103.76 in 2008 dollars. The April contract recently traded at $103.59. Brent crude on the ICE futures exchange was trading up $1.72 at $101.82.
  The 1980 record predates the creation of the crude futures market on Nymex, and represents a deal on the cash market.
  Oil began to take off Monday morning after the U.S. dollar fell from a stable position overnight against the euro. Shortly after 9 a.m. EST, the dollar hit a new low, and oil began to rise rapidly. A fresh record for crude in real dollars came minutes later, and deals above the 1980 high were completed at about 9:55 a.m. EST.
  “It doesn’t look like it’s going to come down anytime soon,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

• Buffett on the Dream Business
  Eddy Elfenbein, March 3rd, 2008 at 10:50 am

  More from the Chairman’s Letter (page 8):

  Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.
  At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.
  We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.
  Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)
  There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.
  A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

  (Hat Tip: Climateer Investing)

• Yes, Virginia…I mean No, Virginia…I mean…
  Eddy Elfenbein, March 3rd, 2008 at 10:40 am

  From page 18 of Buffett’s Chairman’s Letter:

  (Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.)

  From Megan McArdle’s Asymmetrical Information:

  Yes, Virginia, markets are efficient.

• Buffett’s Letter
  Eddy Elfenbein, March 1st, 2008 at 12:09 am

  Here’s the yearly Chairman’s Letter to Berkshire shareholders. It’s always worth a read.
  Here are the letters going back 30 years.

• A Look at Government Spending
  Eddy Elfenbein, February 29th, 2008 at 11:52 pm

  Each year, the Congressional Budget Office releases its report on the federal budget which also includes historical stats. What I find interesting is that over the past 30 year, non-defense spending by the federal government, as a percent of GDP, hasn’t varied that much.
  I don’t mean to say that it hasn’t varied at all—it certainly has. But the stats are much more stable than you would think if you went by political rhetoric.
  Since 1976, the amount of federal spending, except for defense, has averaged about one-sixth of GDP. The numbers haven’t strayed too far from the average. About two-thirds of the time, spending has been between 15.9% and 17.1%.
  
  I think it’s worth considering that if we had repealed all the laws regarding our budget process, and instead applied very strict mechanistic rules, the outcome would have been surprisingly similar.
  Interestingly, the amount of federal debt held by the public as a percent of GDP has declined slightly over the past two year.
  
  Here’s the data.

• After Hours: Mississippi John Hurt
  Eddy Elfenbein, February 29th, 2008 at 6:04 pm

• Proxy Battle at the NYT
  Eddy Elfenbein, February 29th, 2008 at 1:27 pm

  Get ready folks. Looks like there’s some ol fashioned proxy wrastlin’ brewing down yonder at the NYT:

  A dissident investor stepped up pressure on The New York Times Co. Friday, formally proposing its own slate of four directors and saying the company needs to take more drastic action to compete online.
  Harbinger Capital, an investment firm that now owns about 19 percent of the company, filed its own proxy statement with the Securities and Exchange Commission listing its nominees for directors to be elected at the Times’ annual meeting April 22.
  The Times has already filed its own full slate of director nominees, but has said it was still considering whether to accept Harbinger’s candidates.
  Times spokeswoman Catherine Mathis said the company’s board was interviewing the Harbinger nominees. She declined to comment further on their proxy filing.
  The looming proxy battle comes as the Times and other U.S. newspapers are facing huge challenges in adapting to the steady migration of readers and advertising dollars to the Internet. An economic slowdown coupled with a deep slump in the housing market is worsening the situation.

  Good for them; we need to see more of this. The stock is about were it was 11 years ago.

• Natural Born Presidents
  Eddy Elfenbein, February 29th, 2008 at 11:07 am

  One of the sillier parts of our Constitution is that only natural born citizens can become president. The New York Times reports that this could raise questions for John McCain, who was born in the Panama Canal Zone (McCain’s father and grandfather were Admirals).
  Most experts agree that as a legal challenge, this issue won’t go very far. One lawyer said that if she were on the Supreme Court, she’d rule in McCain’s favor, “But it is certainly not a frivolous issue.”
  Interestingly, Barack Obama was to an American mother and a Kenyan father. Again, there’s no doubt that he’s an American citizen. He was born in Hawaii on August 4, 1961, so this could be the first election were the two major candidates were not born in the continental U.S.
  That’s less than two years after Hawaii was granted statehood. So if he was just slightly older, then we’d have the first election were the two major candidates weren’t born on American soil.