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Posted by Eddy Elfenbein on April 16th, 2008 at 10:55 am

From The Inquirer:

Women give out passwords for chocolate

The Education of Warren Buffett
Posted by Eddy Elfenbein on April 16th, 2008 at 10:29 am

Here’s an interesting article looking at why Warren Buffett has quietly walked away from the coal business. The article contains this tidbit:

A final clue to Buffett’s change of direction on coal comes from looking at his history on other controversial issues, especially his decision in the early 1990s to revise his investment policies regarding tobacco. In 1987, Buffett told John Gutfreund of Salomon, “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”
By 1994, however, Buffett was ready to drop his tolerance of tobacco lucre, telling Berkshire Hathaway’s annual meeting that tobacco investments are “fraught with questions that relate to societal attitudes and those of the present administration … I would not like to have a significant percentage of my net worth invested in tobacco businesses.”
The upshot: Buffett keeps his finger in the wind and reacts quickly when he feels society shift. For this reason, his reversal on coal, though it may have been largely forced upon him, is significant nevertheless. As usual, Buffett has made the “smart move” a bit faster than some of his colleagues. Let’s hope they take note and follow his lead.

Not Getting Predictions Market
Posted by Eddy Elfenbein on April 16th, 2008 at 9:46 am

James Ledbetter at Slate brings up one of my pet peeves today. He’s about the 600th writer to ask why are predictions markets so often wrong.
The answer is simple: They’re not predictions markets, they’re really odds-setting markets. Just because the event with the highest odds didn’t come to pass, doesn’t mean that the market is somehow wrong.
The Giants beat the point spread in the Super Bowl. Did Vegas fail? No, it’s called an upset.
Nearly four years ago, Google went public at $85. Did the stock market get it wrong? Of course not, Google proved its worth to shareholders over time. Over the last six months, the reverse is happening. The markets adjust.
As I’ve said many times, I don’t take these markets too seriously. They’re for fun and most of the standard complaints are accurate (too small, too partisan).
Another aspect that people must understand about these markets is that they’re futures markets. This means there’s a very large dispersion of returns. In other words, you get all or nothing. That’s a little different from your standard stock market. As a result, these markets can be far more volatile than what you may normally be used to.
By the way, John McCain’s contract to win the GOP nomination is going for 94.1/94.3. Hmmm. That could be a good money market substitute until the convention this summer.

Nominal GDP Growth
Posted by Eddy Elfenbein on April 16th, 2008 at 9:36 am

Continuing on yesterday’s post about debt levels and interest rates, I wanted to look at nominal (meaning, not adjusted for inflation) GDP growth. Here’s how it looks on a trailing 12-month basis going back to 1986:

These are, of course, the government’s numbers, so use at your own risk. But you can clearly see where the recessions are, and I expect that for the immediate future, the line will droop down.
What I find interesting is that long-term Treasury yields have still trended below GDP growth. Will all those foreigners dump their Treasuries? I doubt it, but if they do, it’s not because we’re unable to pay them back.

Herb Greenberg Leaving MarketWatch
Posted by Eddy Elfenbein on April 15th, 2008 at 3:40 pm

Herb Greenberg, one of my favorite reporters, is leaving MarketWatch:

Just a bit of housekeeping – actually, house cleaning!
On May 1, I’m leaving MarketWatch, Dow Jones and traditional journalism to start an independent research firm with my friend, Debbie Meritz, an analyst/accountant who has been a very good source of ideas in the past.
I’ve devoted my career to journalism, starting in elementary school by delivering copies of the Miami News from my bicycle, to my first job out of college in 1974 as the first business reporter for the Boca Raton News.
I’ve since been part of the evolution of modern business journalism, working from beat reporter to correspondent to columnist to blogger.
When Debbie and I first started talking about the idea of setting up a research firm, it seemed like the next logicial step, just as it did when I left traditional print journalism 10 years ago to join the fledging online world.
Change is never easy, especially leaving a place as great as MarketWatch, which has been my home for the past four years. But change is also exciting and I’m looking forward to the next adventure.
Until then… you’re stuck with me for a few more weeks.
The beat goes on…

I’m sad to see you go, but best of luck in your new business.

Erosion of Support for Free Markets
Posted by Eddy Elfenbein on April 15th, 2008 at 3:19 pm

From World Public Opinion:

Majorities in most countries continue to support the free market system, but over the last two years support has eroded in 10 of 18 countries regularly polled by GlobeScan. In several countries this drop in support has been quite sharp.
The latest polling was completed before the current stock market volatility that began earlier this year.
Back in 2005 only one country polled–France–had more citizens disagreeing than agreeing with the statement that “the free enterprise system and free market economy is the best system on which to base the future of the world.”
Displacing France as the least supportive of the free market system today is Turkey where approval of the free market system has plunged from 47 percent in 2005 to 34 percent now, while opposition has risen from 36 to 41 percent.
Support for free markets has also dropped 15 points in South Korea since 2005, though a majority (55%) continue to be supportive. Opposition there has jumped 20 points from 19 to 39 percent.
Support among Chileans is also down 14 points since 2003 when Chileans were last polled on this question.
Support in other countries is down by more modest though significant numbers: China (down 9 points), Britain (7 points), Brazil (7 points), Mexico (6 points), and Kenya (6 points).
The one country to show upward movement in agreement with the free market system is France–up five points. However, more continue to disagree (45%) than agree (41%).
The GlobeScan poll of 9,357 people worldwide also found that large numbers continue to look to their government to take a strong hand in regulating the market. In 17 of the 18 countries a majority (15 countries) or a plurality (two countries) agreed that “the free enterprise system and the free market system work best in society’s interest when accompanied by strong government regulation.”
Interestingly, supporters of the free market show more enthusiasm for a strongly regulated free market system than critics. Among those who agree that the free market system is the best system, three-quarters also agree that it works best with strong government regulation.
Those who are not enthusiastic about the free market system are divided as to whether it works best with government regulation.
At the same time agreement with this proposition, while still averaging 62 percent across all countries polled, is down in ten countries. This appears to be related to the drop in confidence in the free market system. Among the ten countries for which there was a drop in agreement with the proposition that the free market system works best with strong regulation, six of them also had a significant drop in support for the free market system, and only one had an increase.
Interestingly, three countries that in 2005 were among the four highest in support for the free market system–China, the Philippines, and South Korea–showed substantial increases in agreement with the idea that the market works best with regulation.
The results come from a private multi-client poll conducted by international polling firm GlobeScan between May 29 and August 10, 2007. GlobeScan’s paying clients had exclusive use of the poll’s findings until today’s first-time public release. The Program on International Policy Attitudes (PIPA) at the University of Maryland assisted GlobeScan with the analysis and interpretation of these findings.
GlobeScan president Doug Miller says, “The results suggest that the free enterprise system was already beginning to lose the unquestioned trust of citizens before the current banking meltdown. It underscores the importance of re-building trust sooner rather than later.”
Steven Kull comments, “It appears that as people have doubts about the ability of government to regulate the free market, confidence in the market diminishes.”
A total of 9,357 citizens in Brazil, Canada, Chile, China, France, Germany, Great Britain, India, Indonesia, Italy, Kenya, Mexico, Nigeria, the Philippines, Russia, South Korea, Turkey, and the United States were interviewed face-to-face or by telephone. Polling was conducted by GlobeScan and its research partners in each country. In eight of the 18 countries, the sample was limited to major urban areas. As the questions were asked to half samples in each country, the margin of error per country ranges from +/-3.3 to 5.0 percent.

Here’s a PDF of the report.

Could the U.S. Lose it AAA Rating?
Posted by Eddy Elfenbein on April 15th, 2008 at 2:11 pm

B-Riz notes a WSJ story on the possibility of the U.S. government losing its triple-A rating. Barry, rightly, thinks S&P isn’t brave enough (though he alluded to their “stones”).
To me, it’s a hugely frivolous issue. U.S. Treasuries receive a credit rating every day. It’s better known as the price. I don’t see how some rating from a questionable firm could possibly have an impact greater than price movements. If anything, a downgrade would merely confirm what the market is already saying.
There’s also the fact that the government owns the printing press, so they’ll get those dollars to bondholders one way or another.
I would go as far as saying it’s safe to look past all forms of debt measurements and ratios, and concentrate on Treasury yields. Is the debt too high? Depends, what are T-bonds yielding? If their yields are going up, then yes. If not, then I’m not concerned.
There are lots of good reasons for lower debt. But long-term nominal GDP growth can easily top current yields.

Happy Tax Day
Posted by Eddy Elfenbein on April 15th, 2008 at 1:34 pm

Just a quick reminder for those of you who waited to the last minute, you can head on over to Dunkin Donuts for a free doughnut today (with coffee purchase).

Now about taxes, Megan McArdle reposts her clear-the-decks tax plan.

1) Get rid of all our poverty programs, except those aimed at the disabled, and temporary unemployment assistance, and institute the negative income tax. That is to say, the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.

2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It’s time to stop pretending it’s a pension system, when there are no assets in the “trust fund.”

3) Eliminate the corporate income tax

4) Eliminate the special treatment for capital gains. All income should be taxed at the same level, regardless of its source.

5) Eliminate all deductions. Period, end of statement. No mortgage, student, child, etc. All causes are equally worthy in the eyes of the person who possesses the deduction; it is a waste of our time as a nation to sit around arguing about who deserves what.

6) Just say no to the Value Added Tax. In theory, it’s a good tax. In practice, because it is extremely hard to tell what proportion of the price of anything represents the tax, it removes the good and natural pressure upon tax rates.

7) Get rid of the estate tax, and tax the capital gains on whatever is sold.

I’m on board. Of course, getting rid of the mortgage deduction is about as likely as…let’s just say it ain’t gonna happen anytime soon.

Johnson & Johnson’s Earnings
Posted by Eddy Elfenbein on April 15th, 2008 at 1:16 pm

A small bit of evidence against a broad-based slowdown came today with Johnson & Johnson’s (JNJ) earnings. For the first quarter, the company earned $1.26 a share, which beat the Street’s estimates by six cents a share.
The company said it expects 2008 EPS of $4.40 to $4.45. That’s a penny a share higher on both the high and low ends. I’m not sure if that qualifies as “guiding higher,” but there you are.
Bear in mind that JNJ isn’t 100% health care. The company also has many consumer products (like Listerine). Drug sales only increased by 3.3%, and it you don’t count currency gains, they actually fell a bit. MarketWatch reports:

J&J said that lower sales of the company’s anemia drug Procrit contributed to the slump. Sales of Procrit have been under pressure in recent quarters due to the imposition of tightened prescribing restrictions by the Food and Drug Administration and tougher reimbursement standards by Medicare. Amgen Inc. (AMGN) markets a similar product under the name Epogen.
J&J said worldwide Procrit sales fell 27% operationally to $629 million for the quarter. The sharpest decline was seen in the U.S., where Procrit sales tumbled 37% operationally to $334 million.
J&J’s top-selling drug, Risperdal, also saw signs of sales erosion, due largely to the advent of generic competition. Worldwide sales of the antipsychotic slid 9% operationally to $809 million. This was offset to some degree by sales of a newer formulation of the drug, Risperdal Consta, which grew 10% operationally to $309 million.

So is JNJ a good buy. Two years ago, I said the stock was cheap. At the time, JNJ was going for $57, and today it’s over $65. For an investor with a long-term horizon, I’d say JNJ is a still a good buy. However, it would be a better buy under $60. This is still a nervous market (over $3.5 trillion in cash) and I think JNJ could hit in the next few months.

WR Berkley Now Trading Under New Symbol
Posted by Eddy Elfenbein on April 15th, 2008 at 10:48 am

Some Buy List housekeeping. WR Berkley is now trading under WRB instead of of BER, which makes a lot more sense.