Finance and the Market
On Other Things Perishable in case anyone needs a reminder that
food is not the only thing perishable… just take a look at the news
that Acer will be acquiring Gateway. Gateway shares peaked at $84 in
November 1999 and then began a more than seven-year slide in value.
Earlier this month, the stock bottomed out at $1.13 a share. Gateway
shares jumped 50% on the takeover news Monday, closing at $1.82. Fruit
must be eaten while ripe. 8/29/2007
Subprime Crisis Affects Us All shares a humorous U.K. video take on the subprime mortgage crisis which
perfectly captures the absurdity of the situation. The government is desperately trying to do something, but
the situation is constraining. The dollar is weak, commodity prices are high… if the Fed tries to lower
interest rates enough to save all these institutions, we can expect inflation to zoom. Many of the government
proposals are going to make the problem worse. Many other plans are outright catastrophes. Long term, there
are a few steps we could take that reduce the likelihood of such a crisis happening again. 12/14/2007
A Tip About TIPS explains the term TIPS refers to Treasury-Inflation Protected Securities, basically,
Treasury bonds where the principal amount of the bond fluctuates with the consumer price index. Many people
find them complex — although they really are not. What is interesting about
this article is that the author, Brett Arends, ridicules them as an investment in the current interest
rate environment. He goes on to call the investment absurd. We think that Mr. Arends is missing the point
entirely. The fact that the market is driving the yields so low on inflation-protected bonds is a clear
indication that the market — the collective wisdom of people investing money — is expecting very high
inflation. 2/22/2008
Lessons For Everyone From Bear Stearns observes that the collapse of Bear Stearns there will be many
questions to be addressed. One valuable one is for all business people to understand how such a dramatic
collapse could occur. Jamie Dimon, CEO of JP Morgan Chase said of Bear’s downfall: “No one on Wall Street
could have anticipated this,” but it is not true. What happened was unpredictable as to timing but highly
predictable as to likelihood. There are two timeless business lessons that the collapse of Bear Stearns should
remind all business people of: leverage is a two-edged sword and borrowing short and lending or investing long
is a big problem. 3/25/2008
More To Bear Stearns/JP Morgan Deal Than Meets The Eye recalls how our piece,
Lessons For Everyone From Bear Stearns, pointed out that in Bear’s collapse, there were lessons for all
businesspeople regarding leverage. A sharp young academic at NYU’s Stern School of Business gave us an
insight, in a piece entitled,
Rescue for Bear or Bailout for JP Morgan, that we hadn’t seen before as an explanation to help us better
understand the Bear Stearns/JP Morgan deal. The information is not publicly available to test this thesis, but
that doesn’t mean it is wrong, and it is a useful reminder that we often have no choice but to operate but in
a state of ignorance. 4/11/2008
Perishable Thoughts — Lessons From Bernard Baruch thinks that with the Dow Jones Industrial Average down over 500 points on Monday, we
thought it appropriate to contemplate the words of noted financier Bernard Mannes Baruch, who was not only a
financial wizard, becoming a millionaire on Wall Street before 30, but also a prominent counselor to
Presidents, from Wilson to Kennedy. Yet we elected to highlight Baruch’s quote about information because the
truth is that there is plenty of money out there. What has been missing is good information to allow
legitimate business decisions. 9/16/2008
AIG Bailout Gives Short-term Relief Many Dangers Long-term sees the Fed’s decision to lend $85 billion to
AIG in exchange for an ownership stake as basically putting the company into bankruptcy, but in an orderly way
so that its obligations will be honored and its assets do not have to be sold at fire-sale prices. The bail
out was a bad idea. The government is either wrong about the consequences of an AIG failure or it got
snookered by Wall Street. Although the bailout is structured — as was the Bear Stearns bailout – to reduce
moral hazard for owners — it increases the likelihood of future reckless behavior. In addition, by not
compelling the sale of assets, the Treasury’s bailout avoids a speedy reckoning. 9/18/2008
Perishable Thoughts — Youth, Experience And The Subprime Crisis extends a hat tip to Richard A. Aust of
LiquidPress Company in Lake Forest, California. He sent along one of his favorite quotes from Dee Hock,
founder and former CEO of VISA Credit Card Corporation, which focuses on how to hire great people. We give our
own opinions on great people, and in the context of the current financial crisis, illuminate one of the
eternal tensions in society: A tension between the energy of youth, with its blindness to the possibility of
loss, and the restraining influence of the aged, with memories of a lifetime of experience in which they have
seen loss. 9/18/2008
Government Bailout Requires Deeper Analysis examines how the government’s plan to “fix” the financial
crisis is built on an incorrect premise and probably won’t work, it is either unnecessary or immoral. In a
sense, it is just a pay-off to powerful political interests. Our opposition has little to do with ideological
purity or an opposition to government intervention in the markets. Here we explain our six concerns. Once we
get beyond critique of this particular proposal and things the government is doing now, we can start thinking
about broader changes that would make it less likely that we would have such problems in the future. We think
these five points would be a good start. 9/26/2008
Perishable Thoughts thanks Tim York, President of
Markon Cooperative, who sent a quote perfect for reflecting on a financial meltdown. There is no question
that one learns more from failure than success and, as the quote implies, success can be positively dangerous.
Few things worse can happen to a young man than to win a lot of money the first time he goes to a racetrack or
a casino. Indeed the arrogance of the “Masters
of the Universe” played a big role in the actions leading to the credit crisis. Yet in our current
situation, we are not so sure we would accept chalking it up to hubris born of success; in many cases it
strikes us as a function of the way people were paid. 9/26/2008
Pundit’s Six-Point Proposal To Fix Financial Failures shared a response from Robert Salomon, a professor
at NYU’s Stern School of Business in regard to our recent piece
Government Bailout Requires Deeper Analysis. Robert writes that doing nothing in response to this crisis
“will result in financial Armageddon.” The situation is serious, but we think that allowing one person,
without any real supervision, to allocate $700 billion is a recipe for corruption. We also think that it won’t
solve the problem. We need to act quickly and any rational system for valuing and acquiring assets on this
scale will take months to set up. So we would propose the following. 10/1/2008
McCain And Obama Make A Proposal — The Intellectual Bankruptcy Of Our Politics May Be A Bigger Problem Than
The Financial Insolvency Of Wall Street. interprets raising the cap on federally insured bank deposits to
$250,000 from $100,000 as good politics — a way to get support from people with over $100,000 in the bank —
but it is horrible policy. On the one hand, that is way too much insurance for the government to give to
people who are chasing yield. On the other hand, it is a wildly insufficient amount when it comes to stopping
bank panics. The McCain and Obama proposals provide too much incentive to speculate on getting the best yield
— without providing businesses and citizens the assurance that their checking account balances are completely
safe. 10/1/2008
Perishable Thoughts comments that there is much evidence that the financial crisis and the general
tightening of the credit markets has seeped into the general economy. Things are not looking good. But at
times like this is when we can really appreciate being in the food business. This all came to mind because we
have been traveling extensively and one of our stops was Washington, DC. We stayed at the Mayflower and
turned to the Guest Services Directory to check out what restaurants the hotel had. We were greeted with a
quote that seemed apropos for a moment when the need of people to eat was quite literally, our industry’s
“bread & butter” in this uncertain economy. 10/7/2008
Laws Encourage Imprudent Behavior On Wall Street references a New York Times piece entitled,
The Road to Lehman’s Failure Was Littered With Lost Chances. As we read it, we realized that our current
laws may be combining with compensation practices to put the interests of executives and board members out of
alignment with the public interest. Why do we say this? The focus in both law and compensation practice has
been to ally the interests of executives with those of shareholders. What we have learned in this financial
crisis is that, in many cases, the public interest is not so concerned with avoiding the losses that
individual shareholders might suffer if their shares are diluted, but it seems heavily focused on avoiding the
panic that accompanies corporate collapse, especially of financial institutions. 10/14/2008
Perishable Thoughts – Something For Nothing asks with all the
focus on bailouts by the federal government and, in fact, governments
around the world, one question worth asking is when the government
gives money to “bail out” an institution, where does that money come
from? A wry thought on this subject is provided by Rick Eastes,
Director of Special Projects for Ballantine Produce Company. We think
that the issue of bailouts tends to be thought of in two steps. First,
the focus is on the immediate problem and the “solution” the bailout
will provide. That the bailout must be paid for either by individuals
— perhaps in the form of higher taxes or, collectively, perhaps
through an inflation of the currency, is thought of only later.
10/14/2008
Perishable Thoughts – Stock-Market Fundamentals imparts investing
wisdom from stock market authorities Benjamin Graham and David Dodd.
The problem is that the prerequisite for Graham & Dodd’s advice is
having money one doesn’t need. One of the things that has happened is
that many people have come to believe they should be able to make a
living off their investments. Today there are plenty of twenty-somethings
who set out to make a living day-trading, but with inadequate capital
to make a living, they try to use leverage. This is significant
because our quote becomes irrelevant if one is on margin. The key is
to put oneself in a position so that the gyrations of the market don’t
matter. Then one can invest by identifying opportunities and waiting
for the world to see them as well. 10/15/2008
Bolstered By ‘Too-Big-to-Fail’ Theory, GM/Chrysler-Merger Plan Is To
Make Two Losers Into A Winner asks if you’ve wondered why General
Motors and Chrysler may merge? So what could be the point? How can
combining these two losers make a winner? How about this as a theory:
GM wants to bulk up. GM has a 24% share of the US auto market,
Chrysler 11%. Combine them and you have over a third of the market.
What is the lesson of the last few weeks? Be “too big to fail”!!! The
word on the street is that GM President Frederick Henderson has been
pushing the deal. Perhaps he is thinking he can become so big so that
if GM threatens bankruptcy the government will feel it has to lend it
money until the business cycle turns. 10/16/2008
Lost Incentives For Home Buying reports many commentators say
individuals who imprudently bought houses with mortgages they could
not afford to pay deserve a share of the blame, we think the situation
is a little more complex. These consumers were not irrational; the old
model of a substantial down payment no longer worked because home
prices rose faster than families could save. Now the psychology has
shifted. Instead of rushing to buy a house because they won’t be able
to afford it next year, people feel they can wait. People currently
have no reason to borrow money. We are not urging any of the following
as a policy prescription, but the only policy changes available to
increase the demand for housing would most likely come in one of these
three areas. 10/16/2008
Perishable
Thoughts – Reacting To Adversity contemplates how whether one is
sold out by his stock broker because he was on margin, loses one’s
house because he couldn’t make the interest rate reset or comes out on
the wrong side of a produce speculation, one question worth pondering
is how one ought to react to adversity. In our recent financial
calamity, many took risks and now they have turned out badly. Yet the
risks were not so dramatic as those taken by the author of this
Perishable Thought, Robert Falcon Scott, and the members of his
expedition. And the consequences of losing are not as great.
10/16/2008
Bailout Analysis Ahead Of The Times thought we would give a
two-minute shout out recapping some of our breaking coverage of the
financial crisis to point out some of the really incredible value
we’ve been delivering on the Pundit, and with all this value being
delivered, if we bump into each other at PMA, or if you come by our
booth # 515 to say hello, we don’t want to hear that you are not
getting value for your subscription price. Oh wait, other publications
charge hundreds of dollars for subscription. The Perishable Pundit? We
don’t charge at all. What a value indeed. 10/23/2008
Will It Work? is the question many ask as they look at shrinking
401-K statements and read headlines with both President and
President-elect declaring their plans to stabilize the economy. Here
we showcase appearances by Peter Schiff, who heads up Euro Pacific
Capital, and has been as accurate as anybody in predicting what would
happen to the stock market and to the broader economy. His diagnosis —
that we need to have a deep recession, allow companies and people to
go bankrupt so we can liquidate their debts — is surely harsh, but
that doesn’t mean he is wrong. Schiff is really saying that all our
efforts to stimulate demand are on the wrong side of the equation. We
should instead focus on the production side. Aye but here is the rub:
Stimulation of production is just as flawed as stimulation of
consumption if the production is not valued. 12/3/2008
Return To Prudent Lending observes that as our economic woes
continue, many are making the mistake of seeing the restriction of
credit as an anomaly… as a symptom of the credit crisis… as something
that if markets were functioning normally would not happen. Perhaps,
however, it is the loose credit standards of recent years that should
be viewed as an anomaly. What now seems horribly strict is really just
a return to prudent lending standards. In fact what is really
happening is that the distinction between equity and debt is being
reestablished. So now what? Does the economy just stop? Not at all. We
stop hiding risk or pretending it doesn’t exist. 12/9/2008
So Much For Regulation: SEC Misses A Big One...Why Think FDA Will Do
Better? explores how when it comes to those who see increased
government regulation as some kind of panacea for food safety
problems, the case of Bernard L. Madoff offers instruction. This
example of S.E.C. negligence goes all the way back to the Clinton
administration. It may speak to an inherent limitation of federal
regulation: It encourages passivity by others in the chain. We don’t
know why the S.E.C. didn’t aggressively follow up on “credible
accusations”. What these lapses add up to is a certainty that wishes
don’t make things so and that simply charging a regulatory body with
keeping food safe is no more likely to make it so than charging the
S.E.C. with keeping accounts safe made that so. 12/18/2008
Perishable Thoughts – Courage To Bet On Your Ideas saw that the
Times of London ran a piece, titled, “Fed Throws Out the Rulebook”,
which pointed out the unprecedented nature of the actions by the
Federal Reserve Board, in one section saying “Mr. Bernanke has
launched the US on an uncharted path of what economists call
“quantitative easing”, emergency measures to stimulate an economy in
the clutches of deflationary collapse.” Well Mr. Bernanke certainly
has confidence in his convictions, which brought to mind this fairly
shop-worn quote from a pop-psychology classic. We can praise Ben
Bernanke for acting boldly but, really, the open question is not is he
bold or timid but, rather, is he correct? 12/18/2008
If Men Were Angels received a thoughtful letter just in time for
this holiday edition of the Pundit in response to our recent piece,
So Much For Regulation: SEC Misses A Big One…Why Think FDA Will Do
Better?, from John Shelford of Shelford Consulting. We read John’s
letter on morality and human virtue as posing four questions for us,
grand questions, and indeed, at Christmas time, a religious holiday
that has been adopted as a secular one as well, these questions are
apropos. Let us try and wrestle with them one by one. 12/25/2008
Perishable Thoughts — Keeping Things ‘In Perspective’ For 2009
relates how The Wall Street Journal recently ran a non-fiction
potboiler entitled, “The Weekend That Wall Street Died.” The article
is the story of the ending, perhaps forever, of the freewheeling,
lightly regulated culture of Wall Street investment banking. In a
sidebar to the print edition of the story, The Wall Street Journal
featured quotes from different investment bankers at different phases
in the crisis. We’ve selected one of these quotes as our first
Perishable Thought of 2009 because it strikes us as not only almost
precisely correct but as a kind of wisdom that we can all take from
this “annus horriblus.” 1/7/2009
Perishable Thoughts – A Time No More For Ostentatious Spending?
poses the question, now that we live in the midst of a recession, what
is the effect of such events on human happiness? One of the effects of
so many people losing so much so quickly is a cultural shift in which
ostentation is out of fashion. Retailers such as Whole Foods, Nieman
Marcus and Saks Fifth Avenue have suffered, and this is popularly
assumed to be a matter of affordability. Perhaps. Perhaps, though,
there is more to it. Maybe there was a time when showing one could
afford such stores added prestige, while today, showing you can afford
such things makes you a boor. Perhaps simple is the new upscale. Our
Perishable Thought for today exposes the paradox of human contentment.
1/22/2009
Perishable Thoughts – Shovel-Ready recalls that when he appeared
on Meet the Press on December 7, 2008 President-elect used a phrase
that has become the very centerpiece of the American political debate
over the President’s proposed stimulus package. The phrase he used?
“Shovel-ready”. The phrase “shovel-ready” is absolutely crucial to
President Obama’s stimulus package. The unfortunate truth is that the
stimulative effects of “shovel-ready” projects are probably near zero.
1/28/2009
Advice For Republicans: Seize The High Ground debate over President Obama’s stimulus proposal is gaining
traction as people come to see it as a grab-bag of special-interest projects the Democrats are trying to push
through without scrutiny. Now is the moment for the Republicans to seize the high ground by insisting upon
“interest-neutral” principles like good government rules, or adopting substantive standards by which the
stimulus bill could merit their votes. This stimulus bill may yet persuade Americans that an effective
government — a government that works — is one that can achieve intended aims. Yet a government — or a bill —
that attempts to do everything from stimulate the economy to promote alternative energy to increase college
aid and expand access to the Internet will do none of these things well. By insisting on policies narrowly
tailored to achieve intended aims — in this case stimulate the economy to get us out of a recession —
Republicans will actually be the party of strong government, defined as a government capable of achieving its
intended goals. 2/6/2009
Pundit’s Mailbag – More Credit For Banks, More Debt For Families considers that, as the industry and the
nation mull over the matter of a giant national stimulus program, we might do well to turn to the wisdom of
Joe McGuire. By day Joe is a mild-mannered V.P. of Sales at Rosemont Farms. By night he is obviously a student
of classical economics, as is evidenced by this letter he submitted to us at the peak of the
financial crisis. There are many details of the stimulus bill that are debatable. Is it large enough? Is
it too large? Will the money be spent too slowly? Will it be spent in areas of the economy with spare
capacity? One could go on and on. The key question though is whether, even getting the details right, is
“stimulus” what we actually need? Or as Joe puts it, “It strikes me as odd that some think we can cure the
problem of excessive credit with more credit.” 2/6/2009
Perishable Thoughts – Winners Are Those Who Dare thanks Scott
Danner, Chief Operating Officer of Liberty Fruit Co., Kansas City,
Kansas, who has been among the more prolific contributors to the
Pundit in general, and this Perishable Thoughts section in particular.
We are not certain that there is some preponderance of evidence that
those who dare tend to win. Many who dare probably lose. We are
certain, however, that almost all the winners are those who dared. In
this sense it may be analogous to investing. If you concentrate your
investments, you are at great risk. Most people who select one single
stock to own do not become rich; they go broke. 3/6/2009
Pundit’s Plan For Solving The Banking Crisis showcases a spoof
that ran on Saturday Night Live making fun of the government’s
flailing around in an attempt to find an approach that would solve the
banking crisis. In it, the comedic clip portrays Secretary of the
Treasury Timothy Geithner unveiling a new plan to set aside $420
Billion. This time the money won’t go for more bailouts… no, instead,
the $420 billion will “go to the first individual who comes up with a
workable plan to solve the banking crisis.” Well, we couldn’t let a
challenge like that go to waste, so we wrote up the solution. The
Weekly Standard, a high-powered political magazine based in DC, picked
up our bait: How
to Detoxify the Banks. 3/27/2009
Pundit’s Mailbag — Financial Shake-Ups And South Pacific received a nice note and a reading
recommendation: “The Ascent of Money: A Financial History of the World” by Niall Ferguson, from James L.
Novak, Extension Economist and Professor at Auburn University. We haven’t read Professor Ferguson’s new book,
but the comments Professor Novak makes reminds us of two things. First, there is a hint of some of the work of
Columbia University’s Joseph E. Stiglitz, a Nobel Prize-winning economist whose work has revolved around
“Information Economics.” Second, Professor Novak’s comment about “shaking up the world order” reminds us of a
scene from the Rodgers and Hammerstein musical South Pacific, based on James A. Michener’s Tales of the South
Pacific. 5/20/2009
Laying Groundwork During The Recession remembers over a year ago we ran, Tesco Uses Poor Economy As Excuse For Fresh & Easy Pullback, and followed up with, What Will Be The Fate of Fresh & Easy. Bill Gerlach, Research and Development Director with Melissa’s, responded to say no business would be open to expansion in a recession, and his point rings true. We are not Tesco, yet as this year closes, we thought it appropriate to share precisely how the Pundit elected to conduct business this recession year. When Bill Gerlach asked us: “Jim, would YOU seriously expand ANY business in this economic climate?” our answer was enthusiastically yes. Today’s Pundit will include several pieces that tell you what we did with this recession. 12/18/2009
Warning To Family Businesses: Death Tax Rears Its Ugly Head One Year From Now reports that the estate tax has expired. Barring a change in the law it will come back on January 1, 2011. United Fresh is involved in an ag coalition calling for an exemption for family farms. This is an attempt to address an undesirable side effect of the tax, families may have to sell their farm to pay the tax. It is, however, nothing but special interest politicking as there is no reason why a family should have to sell their produce wholesaling business, to pay the tax any more than they should have to sell their farm. The estate tax is a foolish tax. We wrote about it almost a decade ago here, and the basic points remain the same. 1/5/2010
Cash Or Credit? Which Is More Expensive? remarks on a piece in The New York Times titled, “The Damage of Card Awards”, which posits that the “Fees that merchants build to cover rewards programs lead to higher prices, which are passed on to poorer customers.” The specific issue of credit card rewards is trivial. More broadly the whole issue of complaining about the cost of credit card fees is really an example of how hard it is to change our perspectives in business. 1/18/2010
Pundit’s Mailbag — Produce Industry Not Immune To Credit Card Fraud received this note regarding our piece, Cash Or Credit? Which Is More Expensive?, from John F. King, Owner of King Orchards, who writes expressing his frustration over variable rate credit card fees. It is not too difficult a problem. If one can, one simply assumes the highest costs and prices on that assumption — if someone uses a card that costs the merchant less, you make a tad more profit. Alternatively one can use the average cost paid for credit card fees over the course of the year — some sales are more profitable and some less, but they all average out. As far as the issue of third parties making deductions from a merchant account, there is something odd here. 1/28/2010
The Professor And The Entrepreneur: Alan S. Blinder vs Jim Prevor On The Nature
Of Job Creation takes on Alan S. Blinder, a professor at Princeton and a
former vice chairman of the Federal Reserve Board. His opinion influences many,
and he is a highly intelligent man, but he lacks any real understanding of what
moves entrepreneurs and what promotes entrepreneurialism. So when he wrote a
column for The Wall Street Journal, we couldn’t let his financial analysis stand
unanswered. We wrote a piece titled
Professor Blinder Shows a Blindness to the Entrepreneurial Spirit, for The
Weekly Standard. Here are some excerpts. 8/10/2010
Did LeBron James Offer A Lesson To Michelle Obama On How We Should Approach Food
Deserts? wrote a piece in The Weekly Standard in which the thesis stated
that LeBron James brought to the fore the way tax policy influences behavior. We
then pointed out that politicians typically obscure this cost by cutting special
breaks for high profile cases — but politicians don’t know how to do such a
thing for an individual. We went on to question whether the First Lady’s current
focus on food deserts, which involves subsidizing individual retailers, didn’t
obscure the need for society to deal with public policy issues, such as security
in inner cities. Here is an excerpt. 8/10/2010
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