I’m sure I will make it past this snag, but it is certainly annoying.  I’m going to be delayed a few more days in setting up due to a takeover that happened over a decade ago, and snags in the Automated Customer Account Transfer [ACAT] system.

I’m glad that I have to transfer my accounts to Interactive Brokers ahead of my clients.  It is making me more aware of the troubles they may go through, that I can help them.  So, in mid-December, I submitted a full transfer, which Fidelity complied with, and Interactive Brokers rejected.

I contacted IB, and they said that they could not accept one security, a legacy security in my account entitled, “ESCROW RISCORP INC CONTINGENT VALUE RTS,” ticker RISOR.PK, CUSIP 767597982.  What, you ask, is this sorry excuse for a security?

Well, back eleven years ago, I was doing small deal arbitrage, at which I did poorly.  Riscorp was taken private by its controlling shareholder, but there was an outstanding lawsuit against Zenith Insurance Company and Arthur Andersen LLP.  From the SC 13E3:

Each share of Class A Common Stock issued and outstanding immediately prior to the Effective Date was converted, as of the Effective Date, into the right to receive $3.075 per share, less any required withholding taxes, plus a contingent right to receive an additional pro rata cash amount if RISCORP recovers any amounts in connection with the litigation currently pending against Zenith Insurance Company and Arthur Andersen LLP.

That’s how the rights got created.  But there was no one with a concentrated interest to follow the lawsuit, and over time, the “security” lost its transfer agent — I am not sure how.  There have been a lot of insolvencies and mergers in financial firms, and many things slip between the cracks.  As it is now, the securities are non-transferable.

So, I requested a partial transfer of assets — everything except the Riscorp Contingent Rights.  This time Fidelity rejected the ACAT, initially for reasons I could not fathom.

I had been researching the rights, and contacted Zenith Insurance, now a part of Fairfax Financial Holdings, to see if the case had been resolved.  Truth, there had been several cases, and it took two tries, but a lawyer at Zenith pointed me to a resolution of the case. (What a good guy.  Zenith did not have to help.  And Arthur Andersen was dead.)

He pointed me to this 10-K, page 26:

On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997 (the “Asset Purchase Agreement”) between Zenith Insurance and RISCORP, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP related to RISCORP’s workers’ compensation business (the “RISCORP Acquisition”). On January 13, 2000, RISCORP filed a complaint against Zenith Insurance and another defendant in the Superior Court of Fulton County in the State of Georgia. RISCORP’s lawsuit sought a declaration that would have had the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. On September 4, 2002, by stipulation, the litigation filed by RISCORP was dismissed with prejudice and with no liability to Zenith.

Okay, so the rights are worthless, and should be canceled.  So I called Depository Trust & Clearing Corporation [DTC], and asked them to do so.  They told me that I could not ask that, but that I had to go through Fidelity.

Next call, Fidelity.  It took some wrangling (one hour), but with the help of their Private Client Group, they managed to get the attention of their group that dealt with DTC, and get them to submit what I had learned.  They said they would have an answer for me in 48 business hours.  That will be on the day the market opens in January.

But on a parallel track, I called Fidelity again to see why they had not processed my partial transfer.  They said that in one case, Interactive Brokers had not asked for the cash, ans in the other case, if I had asked for cash less the $50 termination fee, it would have processed.  So, today (try #3) I submitted another request for a partial transfer, minus $50/account.

So, I should be ready to go sometime next week, given the ridiculous 3-day settlement period.  Fascinating that one worthless piece of paper would delay my startup,  but it did.

When I started this, I expected that the roadblocks would be the Maryland Division of Securities, or my E&O insurer.  That a worthless security would hold me back is fascinating.

But I will use the time for good.  I want my initial investors to benefit from my current insights, so I will take the extra time to set up the trades for the current rebalancing, so that they can benefit from that.

I look forward to the challenges here in the coming year, and wish all a Happy New Year!

I’m going to be on the C4 Show today on WBAL, Baltimore’s main news-talk station, talking about business, investment, and economics.  I’ll be on with a guest host for the hour @ 1 PM Eastern Time.  If you want to listen live, you can click here, and then click on the “listen live” button on the middle top of the webpage.  A popup will emerge; I’m listening as I write.

I would like to mention that Aleph Blog Lunch went well.  I had seven guests:

  • A former boss, who is a bond manager
  • A former colleague, who works for an accounting firm
  • Ed Harrison, of the excellent blog Credit Writedowns
  • A well-regarded local hedge fund manager
  • Another fellow who works for an RIA.
  • And two more retail investors

I came  prepared to give a short talk, but when I saw the conversation was going so well, I abandoned it because it was an interesting gathering of people, of whom few knew each other.  So, after 90 minutes, we wished each other a Happy New Year, and disbanded.  The hedge fund manager and I tossed out a few investment ideas as we left.

I did give guests a handout, the opening of which stemmed from a question from a well-known finance writer: Seeing anything interesting out your way?  I reproduce my answer here:

The big six problems are still out there

1) China forcing exports / overbuilding capacity, along with much of the emerging markets

2) China, emerging markets, OPEC swallowing down a lot of developed country debt, especially that of  the US…

3) Eurozone is broken and will either centralize or fall apart

4) Demographic eclipse in the West, extending to some emerging markets as well… China, Turkey, Mexico… world population will likely peak sooner than many experts predict… with negative effects on systems that require younger people to take care of older people.  US will fare better than most.

5) State budgets are hopelessly broken, mainly due to underfunding of benefit plans because the pension accounting and funding rules gave lousy guidance on how much to contribute.  Cash costs only go up from here until 2040.

6) General overleverage leads to punk aggregate demand, and governments are still attempting “hair of the dog” and “beggar thy neighbor” strategies.

Aside from that, things are great.  😉  If I had to pick out one anomaly here — it’s that implied option volatility is so low, which leaves debt spreads low as well, which is probably due to QE for now.


And then I attached printed versions of the following old articles of mine to illustrate some of those points:

Anyway, it was a great time, and I look forward to having a great time on the C4 show today.  If you can listen in at 1 PM Eastern, please do.

Happy New Year to all readers!  May the Lord Jesus Christ bless you in the coming year.

This is not a normal book for me.  I am not a natural marketer by any means.  I have read a lot of marketing books in my time, but I am not a natural marketer.  I am reluctant to put myself forward, and boast.

But marketing does not have to be that way.  What if you could maintain and attract clients by giving them consistent attention, contacting them once a month and being a friend to them?  Now, granted, you have to give them good service, but what a lot of people are looking for is someone that they trust, who is out for their best interests.

You don’t have to be the best.  Show clients that you care, and give them high quality service as a wealth manager, and the question of the best returns goes out the window.  Just don’t blow it and lose a lot of money in the process.

As I read this as an investment advisor, I realized this book was best suited for wealth managers, but I concluded that the main lesson was show your largest clients personal care; their trust in you will grow, and they will stick with you unless you really blow it.

Indeed, one hallmark in the book is taking a lower-risk approach with client assets — most wealth managements clients are not looking for their manager to hit the cover off the ball, they just want him to reliably hit singles over time.

What I take away from this as an asset manager is to take moderate risks that are prudent for clients, and keep in touch with clients.  Show them that you care about them, and business becomes more sticky.  Also, if you can do it, ask your clients for referrals.  Remember, the best advertising is via word of mouth.

I write this as one growing an asset management business.  For me what would work well is to sub-advise wealth managers because I am good at beating the equity market, but I will continue to manage the assets of small investors for best return.


As with most marketing books there is the usual amount of boasting.  This one is better, in that these people have been tested and now have stable practices.  Still, you have to endure the jargon…

Who would benefit from this book:

All young wealth managers would benefit from this book.  Beyond that, I think most small investment advisors could learn from this book.  Caring about your clients is a core value to any business, but often gets forgotten in investing.

If you want to, you can buy it here: The Million-Dollar Financial Advisor.

Full disclosure: I bought this book.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

I spend a certain amount of time musing about nested problems — problems where there are a wide number of feedback loops, some amplifying, some dampening.

The big wonder is watching the non-commodity developed markets run hyperloose monetary policies with current account deficits for the most part, while emerging markets run tight monetary policies with (for the most part) current account surpluses.

The simple solution is to let currencies adjust the situation, but that solution is resisted by producers in emerging markets,who gain a disproportionate advantage over consumers in their own country by keeping the currency cheap.  And, the exporters have a concentrated economic interest to keep the currency cheap.  Consumers who might like a more expensive currency have no way of concentrating their arguments versus the exporters.

The natural pressure is for currencies to realign, but the cabals of emerging country exporters and central banks can resist it for a time.  Only for a time.  Much as those inflating the real estate bubble thought it would never end, the same is true for those that manipulate currencies.  It will come to an end, the only question is when?

And when it happens, will it be violent?  Governments, even as a group, do not have absolute control.  The legacy of failed currency interventions weighs in favor of markets, and against governments once crises happen.

How can developed country governments have steep positive yield curves, when emerging markets have inverted curves, and there is no effect/change?  The change will come, and I think that is in the next two years.

The Aftermath

This will feed the necessary change where relative advantage to export/import goes away, and where the value of accumulated debts from developed nations declines to reflect what can truly fund.  Also, developed nation investments in the emerging nations will prove to have value in supporting the changes, though the effects will be unevenly distributed.  Investments in emerging market non-exporters/importers will do best, as will those of developed market exporters.

Do I know this will happen? No.  But that is the way the pressure is currently going now.  Governments and Central Banks can resist pressure for a long time in the short run, usually at a cost of increasing the pressure in the long run.  In the long run, the differential effects of cultural choices are realized through the power of markets.

To me, that means a relative decrease in living standards in the developed world, and a relative increase in the emerging markets.  This is consistent with my views in my controversial piece on Comparable Worth.  No one likes that piece, not even me.

But what I would highlight here to investors is what is truly scarce.  Unskilled labor is not scarce, skilled labor is scarce.  Good ideas are scarce.  They always are.  Paper capital is not scarce.  Real capital, that which makes labor more efficient is scarce.  Resources are scarce, including energy.  Investors, aim at scarcity, and the rise in prices will aim more paper capital to solve human problems.


I am not trying to posit one single track for which economic change will occur, but more of a baseline scenario.  All sorts of things can upset this, including war, plague, etc.  A scenario like this allows for more rational investment, assuming realignment takes place, no matter how it takes place.

Every 100 posts, I take a step back, and think about where we have been.  My, I have been a busy bee.  And I have blogged more than usual over the last three months.

In the recent past, I have completed my “Flavors of Insurance” series.  I also wrote a series on investment modeling.  And I wrote a complete series on my eight portfolio rules.  I have created a book review database that I will continually update.  And in this time I have given two talks, one to the Society of Actuaries at their Annual Meeting, and one to the CFA Society of Denver, together with the Leeds School of Business at the University of Colorado.  Add to that my two award winning articles that I mentioned yesterday.  And this is in the midst of this, I have written more than ever.

Now as an aside, do you know who I am happy for?  Trader Mark.  I am glad that he has gotten enough subscriptions that he can start his mutual fund after the SEC okays it..  He seems to be a bright guy, and I wish him all the best.  He has more than $10 million of commitments.  Good for him, and I hope it grows from there.

As for me, by the end of January 2011, I have no idea how much I might be managing, it could be as small as $3 million, or over$10 million.  Many people have indicated interest, but the test is how many commit.  I won’t be disappointed if I hit the low end of the range, but I would not be surprised if I hit the top of the range, or exceed it.

What I am Doing

Because of many questions from readers, I want to give a brief description of what I am doing.  There is some confusion over what I do, because I have been a bond manager, and a lot of my investing is informed by conditions in the bond market.  I follow a lot of markets, because they are related, and knowledge of the whole sharpens understanding of particular markets.

But I invest in stocks.  Mostly stocks in the US, with a value orientation.  I rotate industries, as I have often written about.  I run a concentrated portfolio of 30-40 stocks.  I adapt to market environments.  Markets are very difficult to time, but if you are in stocks that have a margin of safety, a cheap valuation, and the industry is experiencing an increase in pricing power, it is hard not to earn good returns over time.  The rest is summarized in my eight rules.

The ideal here is to give investors a clone of my portfolio through separately managed accounts.  Each account has its own portfolio, which can then be be managed for tax purposes, unlike a mutual fund.

I am offering taxable accounts, IRAs, and other tax-deferred accounts.  I am not afraid of being called a fiduciary under ERISA standards, because I manage all money to those standards.

I am also offering market-neutral management of assets for taxable accounts, at no more cost than long only.  And, my fees are not high — 1% on assets between $100,000 (minimum size) and $1,000,000, 0.5% on assets over $1,000,000.

As it stands, next week I am going to start inviting those that have already contacted me to open an account at Interactive Brokers, and will send them a package of other materials via e-mail to complete the deal.  After that, I manage their money on a discretionary basis, mirroring my own trades.  I get the same execution levels as my clients.  We all trade together.  I will eat my own cooking, and at minimum 50% of my liquid assets will be invested in my strategies. At present, it is 80%+.

Aside from that, I have minimized the cost of trading by using Interactive Brokers.  Particularly for smaller accounts, it is the best solution.  Using Interactive Brokers means investors get cheap trades, while I pay fees to access market data.  Those costs get paid by investors through higher commissions in many other situations.  I bear those costs here, and I do not take soft dollars.

I start my investment management practice in early January.  I am really encouraged by this, and look forward to serving my clients.

What Remains

These are the few things I need to get done before I start:

  1. Compliance Strategy, Including Web Compliance Strategy, CFA Document Retention
  2. Procedures for suitability – CFA notes on such to guide
  3. Investment Policy Statement

I have the data together for most of these, though I have a question for those that manage equity money for clients through separate accounts.  What do you do on suitability?

What I need to get done will get done next week, and I will start taking client assets in 2011.  I thought of doing this in 1996 and 2003, but did not do it because I did not have enough assets of my own to buffer me if it did not work.  Now I can do it, and last for many years.

Those who inquire of me can see my 10-year track record.  I’ve done well, but that does not mean that I will do well in the future.  But I will do my best for clients.

The Blog

There are some that worry that I will stop blogging.  That is not my plan.  If I could write at RealMoney while working for a hedge fund, I can blog under the same rules with separate accounts.

But some things will change.  I will delete my portfolio at Stockpickr.  Only clients will know my full portfolio.

I don’t have any public stock positions other than what is in my portfolio.

Aside from the market-neutral accounts, there are no derivatives.  And I will let client know whether I am market neutral or long only, or a percentage thereof, before I do it.  Right now I am long only.

I will not write as much about portfolio management, at least on a detailed basis.  I will provide more detailed information on portfolio management issues to clients.


One thing I have strongly believed since starting my blog — my readers have alternative uses of their time.  I thank them for taking time to read me.  I am humbled by the large reception I have received over the  years, and thank those that take their precious time to read me.

Soli Deo Gloria

I don’t always toot my horn, at least not in real time.  Over the last four months, I won two awards.  I received third place in the Society of Actuaries contest on risk control at the US Government for my piece, Who Dares Oppose a Boom?

The $100 prize is not worth as much as placing among the best.  Personally, I think the actuarial profession has a lot to teach the US Government.  If nothing else, we have to think long-term, and be conservative in the economic sense.

But I won first prize with the Baltimore CFA Society for my piece “A Portrait of Maryland’s Public Companies.”  What’s that you say, you have never seen that at the blog?  True enough, and I encourage you to read the other good essays in the 2011 Baltimore Business Review.

This essay derives from the same data that I used to do my incomplete miniseries The Economic Geography of Publicly-Traded Companies in the United States by Sector, and part two.

Anyway, here is my essay, with my graphs.

A Portrait of Maryland’s Public Companies

In studying where publicly-traded are located, the unevenness of their distribution is striking.  Why does a certain firm choose to headquarter in a specific place, and not another?  Why do industries tend to cluster in certain cities, counties, and states?  Does it happen because of public policy choices, or by historical accidents?  It turns out that both are involved, and I will explan why, using Maryland as my example.

When you think of states whose publicly-traded financial firms dominate their economy, one might think of New York, Connecticut, Massachusetts, or North Carolina.  But what if you heard that among publicly traded companies, the dominant sector of industry in Maryland was financials?  Surprised me too.  Consider this graph:


Source: Bloomberg, calculations by the author

As sectors go, Maryland is pretty normal with respect to Communications, Consumer Cyclicals, Consumer Noncyclicals, Diversified, and Utilities.  It is higher than the US average in Financial and Industrial companies, and lower than the US in Basic Materials, Energy, and Technology companies.

But even with those differences, the mix of sectors for Maryland is pretty ordinary.  Maryland is the fourth most similar compared to the rest the states and DC, as measured by the sum of squared differences of the state sector weights versus the US average sector weights.  Most states lack representation in 4 or more sectors; Maryland has companies in 8 out of 10 sectors, with weights near the US average.


Source: Bloomberg, calculations by the author

Public Companies in Maryland by County

Variation in the sector mix of publicly traded businesses is across states is the rule.  But it is also true within states.  Start by considering in what Maryland counties the publicly-traded companies reside.


Sources: Bloomberg, Google Maps, calculations by the author

I was surprised by the amount of companies residing in Montgomery County.  Their lead over other Maryland counties is still substantial when considered as a proportion of population, or county GDP.



Sources: Bloomberg, Google Maps, Census Bureau, calculations by the author

The “Market Capitalization/GDP” table is just another example of how size matters in business.  In general, populous areas, and areas with high GDP per capita tend to have more public corporations.  But none of this fully explains why Montgomery County has more public companies than the rest of Maryland.  Before I try to answer that, let me run through some more details on the sector mix of the publicly traded companies for the major counties.

Montgomery Industry Detail


Source: Bloomberg, calculations by the author

Montgomery County’s business areas are concentrated in these places (percentage of Maryland market capitalization): Bethesda (44.3%), Rockville (11.2%), and Silver Spring (10.1%).  Business is diverse by sector, with Financial and Industrial companies leading the way.  Many of the financial companies are real estate investment trusts, with the two largest being Host Hotels & Resorts, and Federal Realty Investment Trust.  There is one major industrial company, and given the proximity to DC, it is none other than Lockheed Martin, the defense giant.

In Consumer Noncyclicals, almost all of the companies are in healthcare, with a concentration in biotechnology.  The three largest companies are Human Genome Sciences (Biotech), Coventry Health Care (HMO), and United Therapeutics (Biotech).  There are two major hotels that comprise almost the entire Consumer Cyclicals sector: Marriott International, and Choice Hotels.  Finally, in the Communications sector most of the market capitalization comes from Discovery Communications, producer of the eponymous Discovery Channel, and other cable TV content.

Baltimore City Industry Detail


Source: Bloomberg, calculations by the author

Asset management contributes most of the public market capitalization for companies in Baltimore City, led by T. Rowe Price and Legg Mason. T. Rowe Price has roughly half of the total public market capitalization in Baltimore City.  Baltimore City has the only publicly traded utility domiciled in Maryland, Constellation Energy, the parent company of Baltimore Gas and Electric.  Finally, the company in the Consumer Cyclicals sector is Under Armour, which was started by two University of Maryland athletes.

Howard County Industry Detail


Source: Bloomberg, calculations by the author

When one talks of publicly traded businesses in Howard County, they are largely found in just one city, Columbia.  In the technology sector, they have one large company, Micros Systems, which makes hotel, restaurant and specialty retail information systems.  It has one large financial company, Corporate Office Properties Trust, which is a REIT.  Maryland’s only basic materials company is the specialty chemicals maker W.R. Grace, which not only survived asbestos-related claims, but grew profitably during the ordeal, rewarding patient shareholders.  In consumer non-cyclical, there is the well-known radio/media information company, Arbitron, and a biotech company, Martek Biosciences, which uses microbes to produce nutritional products.  In the communications sector, there is Sourcefire, a cybersecurity firm.  Given all of the security firms employed by the US Government in the area, it is no surprise to find a public company among them.

Baltimore County Industry Detail


Source: Bloomberg, calculations by the author

In Consumer Noncyclicals, Baltimore County has McCormick located in Sparks, a place otherwise obscure, about eight miles north of Towson.  There is also Medifast in Owings Mills, which makes weight-loss supplements.  The Financial company is Omega Healthcare, which is a healthcare REIT in Hunt Valley, wherein also resides the television broadcaster Sinclair Broadcasting.

Other Counties

  • In Anne Arundel County there is Ciena, the networking hardware and software company in the Communications sector, in Linthicum.
  • In Carroll County the Consumer Cyclical company Jos. A Bank, which makes fine clothing for men, resides in Hampstead, which is 9 miles east of Westminster.
  • In Prince George’s County there is one Communications sector company, Vocus, a public relations software company in Lanham, and three tiny financials.
  • In the remaining counties there are only financials thereafter: 10 small banks and S&Ls spread across the remaining 7 counties, with less market cap in aggregate than Prince George’s county.

Why does Montgomery County Dominate Publicly-Traded Market Capitalization in Maryland?

Why does Montgomery County, which does not have that much more population than Prince George’s County or Baltimore City, have more publicly traded businesses?  Why does Montgomery County have a disproportionately higher amount of publicly traded businesses than Baltimore County or Prince George’s County, which are the next highest in county GDP?

One potential answer is that Montgomery County has a superior business culture.  They have very educated people in their county, and they are near to DC, which employs a lot of technically skilled people.  The more demanding companies/jobs are on the northwest side of DC, not the northeast side.

After reviewing the county websites, I concluded that relative to Prince George’s County and Baltimore City, Montgomery County has made more of a concerted effort to attract business by offering tax and other incentives. Baltimore City and Prince George’s County have focused more on making business fair for minorities and small businesses.  Let the County Executives take note: in this day and age, if a county doesn’t create a friendly environment for larger publicly traded companies, they will go elsewhere.

Why does Maryland have the Mix of Publicly-Traded Businesses that it does?

Maryland has always been a favored home for REITs.  That dates back to 1963, when Maryland was the first state to pass a law for REITs, which afforded them substantial governance protections versus a Delaware C corporation.  A plurality of REITs organized in Maryland, and a surprising number of REITs domicile in Maryland.  By number, Maryland has 6.5% of all of the publicly traded REITs in the US, and by Market Cap, Maryland has 7.8%. So it should be no surprise that the financial sector in Maryland has a lot of REITs.  (For comparison purposes, remember that Maryland has 1.1% of the publicly traded market capitalization, and 1.9% of the GDP of the US.)

Let the politicians take note here.  Being business-friendly with REITs has helped Maryland, particularly Montgomery County [NHO4] .  It would help the economy of Maryland to be business-friendly to other industries, because not all of the state is next to DC, where the growth of government supports the economy.

Most of the financial sector after REITs in Maryland is asset managers, of which there are two well known companies, T. Rowe Price and Legg Mason, which grew up on opposite sides of Light Street in Baltimore City. Though the growth of T. Rowe Price has been greater, both firms have been well-run, and grown dramatically over the past 40 years.  Call it a historical accident that both firms grew up in Baltimore.

That summarizes Financials. If I had looked at Baltimore 15 years ago, for banks I would have listed Mercantile Bankshares, First Bank of Maryland, or Provident Bank of Maryland.  I would have mentioned USF&G among insurers.  But in an era of increasing financial concentration, and misregulation that does not penalize size, many locations lose their hometown businesses to larger companies through mergers and acquisitions.  Once an industry loses a foothold in an area, the jobs in that industry tend to travel to areas that have a greater concentration of the industry.  Let policymakers take note: it is difficult to rebuild a base of jobs in a given industry as companies leave.  Thus, design policy to make it attractive for acquirers to move to your state, rather than remove businesses from your state.

With Hotels, J. Willard Marriott came to DC in 1927, and began what would be a thriving business.  Out of that sprang Marriott International and the REIT Host Hotels and Resorts.  Choice Hotels has been in Maryland since its beginnings back in 1939.  But when there is a concentration of firms in an industry geographically, it attracts smaller players who benefit from the pool of talent locally, which helps explain why there are three more Hotel REITs in Maryland, namely, LaSalle, Diamondrock and Pebblebrook.  68% of the Market Cap of Hotel REITs is based in Maryland, with four of the top six firms nationally.

The same argument can be applied to Biotech.  Many early biotech companies began in Maryland, such as Human Genome Sciences, and Medimmune, which is now a subsidiary of Astra-Zeneca.  Part of the reason for that early location is that the National Institutes of Health and Johns Hopkins helped to seed that pool of talent.  Now the broader pool of talent attracts other private and public biotechnology companies.  Maryland ranks fourth behind California, Massachusetts and New Jersey in the Market Cap of publicly traded companies.

Constellation Energy is the only Maryland-domiciled utility.  Formerly constrained by geography and state regulations, the Utility industry is becoming more of a regional affair.  Constellation was almost acquired by Berkshire Hathaway; who knows how long it will remain a Maryland-domiciled firm?

In Industrials, Lockheed Martin is a dominant company in defense.  After the Lockheed merger with Martin Marietta, it moved to Bethesda, probably because their largest customer, the US Government, was nearby in DC.  Call it a historical accident that Martin Marietta was based in Bethesda, but Maryland benefits from that accident, much as it got hurt by Black and Decker being bought by Stanley Works.

Two firms that can be traced to their founders regional ties are Discovery Communications and McCormick.  The founders both were Maryland residents, and started the firms here.  (Note: McCormick moved to Maine for twelve years 1903-1915, and then returned to Baltimore.)

Parting Thoughts

Maryland’s pro-business policies with respect to REITs have benefited the state, and Montgomery County particularly. Maryland could do better with other industries in attracting and retaining corporations.  It would not be difficult to see the few remaining large public financial companies in Maryland move elsewhere if they were acquired.  After all, financial work can be done anywhere, and acquisitions in that sector are frequent.  The loss of jobs and diminution of the talent pool would prove to be a drag on state tax revenues, and on the revenues of Baltimore City particularly.  Policymakers should actively consider what they can do to make Maryland a preferred habitat for businesses to dwell in.

Pro-business policies can attract and retain firms in a state, but a lot of what causes firms to be there is the historical accident that the founder started it there, and the costs of moving keep it there until it dies, pays the cost of moving, or is acquired.

Longer-lasting sets of firms in an industry can be a magnet for further development of companies in that industry, given the depth of the talent pool.  This is a subset of why businesses reside in a given area, in that the culture of the area supports business through both government policy and talent.  For those reasons, Montgomery County has the lion’s share of publicly traded businesses in Maryland.

Since the mid-1980s, when a number of cranks argued that the balance sheet of the US needed to be laid bare, including off balance sheet items like Social Security and Medicare, there came a statutory requirement that there would be a Financial Report of the US Government.

Here is fiscal 2010’s report.  Page with more options here.

Now let me give you my summary of the 2010 report.

Note the large drops in net liability for Medicare parts A & B.  This is the effect of the “Affordable Care Act.” (My, what an Orwellian name.)  Yes, Obamacare, in order to get the bill passed, said that there would be reductions made to reimbursements for Medicare.

The benefits from Medicare are statutory, and are not rights, per se.  Yet there are human needs that prompt the estimates, at least on average.

That is why I don’t think that the 2010 report is accurate, and they agree with me in their verbiage:

The extent to which actual future Part A and Part B costs exceed the projected current-law amounts due to changes to the productivity adjustments and physician payments depends on both the specific changes that might be legislated and on whether Congress would pass further provisions to help offset such costs. As noted, these examples only reflect hypothetical changes to provider payment rates.

It is likely that in the coming years Congress will consider, and pass, numerous other legislative proposals affecting Medicare. Many of these will likely be designed to reduce costs in an effort to make the program more affordable. In practice, it is not possible to anticipate what actions Congress might take, either in the near term or over longer periods.

The Medicare Board of Trustees, in their annual report to Congress, references an alternative scenario to illustrate the potential understatement of costs under current law. This alternative scenario assumes that the productivity adjustments are gradually phased out over the 15 years starting in 2020 and that the physician fee reductions are overridden. These examples were developed by management for illustrative purposes only; the calculations have not been audited; and the examples do not attempt to portray likely or recommended future outcomes. Thus, the illustrations are useful only as general indicators of the substantial impacts that could result from future legislation affecting the productivity adjustments and physician payments under Medicare and of the broad range of uncertainty associated with such impacts. The table below contains a comparison of the Medicare 75-year present values of income and expenditures under current law with those under the alternative scenario illustration.

ObamaCare assumes/demands that it can pass through cost reductions to Medicare recipients.  The difficulty is whether doctors and other healthcare providers will accept reduced payments.  What is a reduction in payment may become a reduction in service.  Who cares if you have Medicare, if few doctors are willing to accept it?

Public Statement

I would be much happier if we placed healthcare to be an ordinary matter, not something where the government intervenes to assure coverage.  When Medicare was created in the ’60s, the costs of assuring coverage was low, but the government did not accrue the assets to pay for the future coverage.  Then again, neither did the budding health insurance business, which relied on estimates of uninsured health care usage to price products, and was surprised to find that usage rises when one is insured.  (Just as many health insurers in the present day underpriced high deductible policies for HSAs, assuming that utilization would go down a lot.  Instead, it went down a little.

Today, we face a shortfall in most municipalities, where there is not enough to pay benefits, absent an increase in taxes from the municipalities.  The taxes will be a continuing burden for municipalities.

Beyond Municipalities

The government can assume that there will be less cost from Medicare.  That bogus concept allowed the “Affordable Care Act” to pass.  But will Congress have the guts to stand behind their actions when oldsters complain?  I doubt it, so I think costs will be considerably higher here.

How much higher?  Well, deep in the report on pages 129-131 they suggest an alternative scenario:

This alternative scenario assumes that the productivity adjustments are gradually phased out over the 15 years starting in 2020 and that the physician fee reductions are overridden.

The result is a $12.3 trillion increase in the net present value.  Now it would have been nice, and the actuaries could have done it, if they would have broken out separately:

  • The effect of the productivity phase-out
  • The effect of overriding the physician fee reductions.
  • And even, just showing what the difference would have been if they had run the calculation using last year’s assumptions.

That last one is the key omission.  As it is, I can’t tell but can only guess at how much higher the liabilities of the government are, going from 2009 to 2010.  Compared to using the 2009 assumptions, the 2010 liability figure is understated by $12.3 trillion minimum.  My guess on the 2010 liability has the present value of expenses for Medicare parts A & B running ahead at 7% from 2009 to 2010, which is similar to many prior years in the recent decade, if not on the low side.

To see the total liabilities rise by $4.5 trillion in fiscal 2010 isn’t unreasonable, when one sees that the net debt has gone up by $2.0 trillion, and add in the natural drift of underfunded entitlement plans in a slow economy, where unemployment is high.  Not counted in the estimate is the payroll tax holiday, which is a ridiculous policy because employers do not respond to temporary measures, and Social Security is already in bad shape.

So, there is little reason for cheer in this financial report.  In closing, here are a few charts using my estimate for 2010:

Net Liabilities


Until next time, fare well, good readers.

Before I start this evening, the Aleph Blog Lunch scheduled for 12/29 will start at Noon, not 1PM.


Though the US equity market seems short-term overbought, I want to poke at an area of the investment space that is more bearish than me.  Though I admit there are many problems in the world today, investment is still a question of buying assets that will deliver the greatest amount of purchasing power over time.

And though I don’t think the equity premium is high on average, I certainly prefer stocks to bonds here.  Cash is another matter — I could see both stocks and bonds decline over the next year, though that is not my default scenario.  Commodities are tougher, and I don’t have a strong opinion.

But I could be wrong in a wide number of ways.  If one looked at my personal asset allocation, it would look something like this:

  • House 15%
  • Private equity/debt 12% (I’m an angel on the side?  Well, sort of.  I help close friends.  The debt was in my opinion junk grade, and now investment grade.)
  • Cash 10%
  • TIPS 3%
  • Public equities 60%

That doesn’t look so bearish.  Part of my operating philosophy is that over time, things do tend to go right, but not all of the time.  Great Depressions are normal events, not abnormal events.  They occur because we have a debt-fueled expansion in some major asset that is a temporarily virtuous cycle, until players begin relying on capital gains to keep their position financed.  That doesn’t happen, and the asset bubble begins to unwind leading to debt problems.

At present, we are part way through the debt crisis.  The banks aren’t in great shape yet; I still think that their assets may be overstated on their balance sheets.  It remains to be seen whether the banking crisis will turn into  a sovereign crisis.  In the Eurozone, it may be worse.  The mechanisms they are trying to set up are trying to defuse the risks of Eur0fringe credits to Eurocore banks.  Cheaper for Eurocore governments to discourage lending to the Eurofringe, much as that cuts against the concept of a common market.

The debt crisis is not over; it is morphing into a sovereign crisis, aid by the growing unfunded liabilities from government pensions and healthcare.


At present I see professionals bullish on stocks, and bearish on bonds.  They are expecting that GDP growth will pick up, and inflation be moderate.

I think stagflation is a real possibility, with inflation and unemployment rising. That would be bearish for bonds, and less so for stocks.

But back to my original point. I don’t have simply one estimate of where things are going, I have many estimates, and it is quite possible that things go right.  Governments and policy makers have an interest in making sure things go right, so it is not airy fairy to presume that the present condition will continue, even if real growth slows.

A great trouble with a dynamic economy is that it is not possible to compare eras, because the underlying structures of each era changes.

And so at present I muddle in the middle, investing on the low side of bullishness.


I know this is late notice, but I wanted to try to have a lunch with local readers last year.  This year, I will do it.  The date is 12/29/2010, and the restaurant is The Mongolian Grill of Columbia.  We will do it on 12/29 at 1:00 PM.

Please e-mail me if you intend on coming.  If I get a small number (<10), I will pay for the whole thing.  If a large number, I will subsidize.  I will have a presentation for those who come, and it will not be about my business, at least not in any direct sense.

I look forward to seeing those who will come.

UPDATE 12/24

Time change — we are meeting at Noon.  So far, ten attendees.

I often have to deal with practical “small institution” problems, because of the church I belong to.  Here are two of them:

1) The pastors have a defined contribution plan.  There are two questions.  Are the funds the best that we can get?  Are the asset allocation options that draw from those funds properly calculated? (Two-thirds of the pastors use those.)

For the first question, we have a board member who works for a major fund consultant.  He will easily be able to answer the question.  As for the second question, I have analyzed how the offered funds have done over the last 20 years.  Those allocations have done well in the past.  The problem is, when did the consultant do the look backwards and set the percentages?

The tendency is that once the percentages are set, future performance tends to decline.  Select managers who have done better than they normally would, and watch them regress to the mean, or worse.

My view is select managers that have done well for reasons that are not common to the environment that they were in.  There are often trends that benefit certain managers, then once the trend goes, they are gone as well.  But who did well in spite of the trend?  Those are managers to look at.

2) Recently, four members of my congregation came to me and said, “Here’s the list of managers in my401(k), who should I invest with?”  and “Here’s the portfolio my husband left me (after death), what should I do?  I can never turn down a friend, and particularly not a widow.

This was interesting.  As I looked into the mutual funds, I relied less and less on the performance statistics, and Morningstar stars, but looked at the actual portfolios in concert with performance, and decided that those with unusual portfolios with reasonably good performance were better choices.  Why?  They aren’t following the market.

Today, I ran into a name for that concept: Active Share.  How much does a manager vary from the index?  If you’re going to be an active manager, you ought to vary from the index quite a bit.  That is what you should be paid to do.

“But wait,” says the fund marketer, “Beating the index is the best, but missing the index is the worst.  We survive best with performance that is out of the fourth quartile.  So hug the index as you make modest bets against the index.”

Those are the portfolios I want to avoid.  An article in the WSJ concurs.  Don’t pay active fees for index-like performance.

I feel that way about my own investing.  If I am not looking at stocks that are less considered than most, then what am I getting paid for?  I would rather fail unconventionally than succeed conventionally.

And yet I know that managers that have high active shares, though they may do well on average, get excluded by fund management consultants, because they are too unpredictable.

Look, I am trying to make money for clients.  Consultants are a necessary evil in that process.   Clients would be better off without consultants, but that will never happen, because clients want to stay out of the fourth quartile.

My active share is large, and I have done well.  Does that mean that a lot of people will invest with me?  Probably not, because they are not willing to endure an odd portfolio that isn’t mainstream.  Well, that is their loss.