June 2013 – Page 2 – The Aleph Blog

Book Review: Investing in Municipal Bonds

Posted on 16 June 2013 by David Merkel

In my life, I have been a mortgage bond manager, and a corporate bond manager.? I have enough overall experience that I have played in most bond and loan categories, including municipal bonds.

Municipal bonds are one place where the competition level is low, and additional knowledge can pay off.? This is particularly true in an era where municipal bond insurance is less prevalent, and as such credit analysis has more value.

This book gives you the basics on municipal bonds.? The most basic idea is economic necessity.? Who will be harmed if the municipality in question can’t perform?? If the the answer is “few,” that might not be a good municipal bond to buy, unless there are significant covenants requiring a municipality to raise taxes to pay for the debt service.

Municipal bonds are an unusual market because there are many issuers, purposes, and bond styles.? The dominant non-taxable bonds are only bought by Americans, and sometimes only by those in a given state.

Municipal bonds are also different because most of the bonds issued have long maturity dates.? Municipalities want predictability in borrowing costs; they also match the borrowing term to the length of what is funded, which is typically long.

The book will take you through:

Bond types
Covenants
Types of bonds that are more risky
How bonds pay off
Taxation of bonds
The ugliness of trading municipal bonds
The challenge of analyzing municipal economies
Basic yield calculations
Portfolio management
Derivatives — though that was more of an issue in the past

I would highlight one big issue here.? Most small municipal issues rarely trade.? Assembling your own portfolio of municipal bonds is a tough proposition.? Flexibility is required to assemble your own ladder of municipal bonds.

Quibbles

None.? Good book.

Who would benefit from this book: If you are willing to put in the time to analyze what municipal bonds are worthy to be bought, this book will help you.? If you want to, you can buy it here: INVESTING IN MUNICIPAL BONDS: How to Balance Risk and Reward for Success in Today?s Bond Market.

Full disclosure: The publisher sent me a copy of the book for free.

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.

Book Review: Quantitative Value

Posted on 15 June 2013 by David Merkel

This is a book that gets everything right in broad, but is too insistent on the details.? How should you approach value investing from a purely quantitative standpoint?? Easy:

Screen out stocks that have relatively high accruals
Avoid companies that may go bankrupt
Margin of safety: choose companies with strong balance sheets and profits
Look for long-term strength in profits.
Buy them cheap.
Buy when informed investors are buying.

But here’s the problem.? Like the book What Works on Wall Street, Quantitative Value suffers from over-optimization.? You pass through the data too many times, and you show great returns from the past, should someone have done it that way.? But how much of the result is signal, and how much is an accident?

The broad principles are unavoidably true.? Even the measure of quality, Gross Profits as a fraction of Assets, was new to me, but when I read it, I realized that it was a proxy for having a moat, a sustainable competitive advantage.? I added it to my screening framework.

With all of that said, I have simple advice to the readers.? Follow the broad outlines of what the book teaches, but don’t follow it in detail.? It is good to own companies that are sound, cheap, and improving.

I would also add this: use quantitative screening and scoring as a first step.? I often note that companies that score well in my screens have accounting issues.? So, be wary, and realize that value investing primarily means having a margin of safety. I.e., you won’t lose much if you are wrong.? Purely quantitative value investing can be improved through company and industry knowledge.

Quibbles

Already expressed.

Who would benefit from this book: Amateur value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.? If you want to, you can buy it here: Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

Full disclosure: The publisher sent me a copy of the book for free.

Sorted Weekly Tweets

Posted on 15 June 2013 by David Merkel

Data Privacy

Many in Media Claim Bradley Manning’s Leaks Had Little Value?Here’s Why They’re So Wrong | The Nation stks.co/jZXy Who knew? $$
Congress grills intelligence officials on data-gathering practices stks.co/qGqB Issue doesn’t divide neatly by political party $$
Noonan: Privacy Isn’t All We’re Losing stks.co/hZsF “…you can’t give up your own liberty and your own freedom.” $$
US Agencies Said to Swap Data With Thousands of Firms stks.co/gZcv Not paranoid? That doesn’t mean they aren’t coming 2get u $$
How Rand Paul Can Take On the NSA stks.co/pGjI We need to rethink the conditions under which the govt may do surveillance on us $$
Pardon Edward Snowden wh.gov/liZnR I support this petition at whitehouse.gov $$
US Relies on Spies for Hire to Sift Deluge of Intelligence stks.co/aXgm I have many friends involved in this; they keep quiet $$
Booz Allen Grew Rich on Government Contracts stks.co/qGMz Thus all the radio advertisements you hear if you live near DC $$
Edward Snowden: the whistleblower behind the NSA surveillance revelations stks.co/pGCi Rare person who put US ahead of self $$

Rest of the World

Korean Tiger Moms Scrimp for Tutors in Blow to Spending stks.co/bY3b The solution is home schooling, should it b legal in SK $$
Italian showdown with Germany over euro looms closer stks.co/bXwF A halt2fiscal & monetary contraction, or full-blown reflation $$
Southern Europeans Flee to Germany: OECD stks.co/tGdg If the jobs won’t come to the people, the people will go to the jobs $$
On Iran?s Inflation Bogey stks.co/gZQP Iran’s inflation rate may be over 100%/year $$
What Abenomics tells us about the great bond market asset bubble stks.co/jZFc Japan is a bug in search of a windshield $$
Consumer Price Inflation Slows in China stks.co/gYzR & so does the rest of China’s economy, rebalancing will b painful $$
Denmark Seeks to Pass Too-Big-to-Fail Bank Laws in Parts stks.co/jYj7 SIx large financial companies will require more capital $$

Companies & Industries

Surge in US oil-by-rail suffers first slowdown as spreads slim stks.co/qGqK Start of a new trend, or just a blip? $$ #blip #trend
Lampert Uses $393M in AutoNation for Redemptions stks.co/gZcw Future historians will wonder why Lampert received attention $$
Comcast Is Turning Homes Into Public Wi-Fi Hotspots stks.co/sGaQ Gateway transmits 2signals; separate SSIDs 1 public, 1 private $$
Berkshire to Provide More Insurance Cost Details stks.co/bXuO All of this data is already freely available, ask4statutory files $$
Cisco plans to double the speed of the Internet stks.co/iZXI | FD:+ $CSCO Fascinating new technology will increase net capacity $$
Freeport Declares Force Majeure on Grasberg Copper Shipments stks.co/gZTc Rare 2c Force Majeure invoked; reveals supply issues $$
Insurers Inflating Books, New York Regulator Says stks.co/iZTl My response: stks.co/fZQE How do I contact DealBook? $$
Insurers Inflating Books, New York Regulator Says stks.co/sGPY Life insurers do this 2 strip out extra conservatism in reserves $$
A Rising Star Emerges at Berkshire stks.co/pGYd Bright lady Tract Britt takes over David Sokol’s old role @ Berky $$ FD: + $BRK.B
Anglo American Miner Slogs Ahead in Brazil stks.co/rG6r Rare people walk away from bad sunk costs; no walking away here $$ $AAUKY
Google to buy Waze for $1.3B stks.co/aXV7 Improves $GOOG ‘s maps capability, while denying the same asset to $AAPL & $FB $$

Market Impact

Price Benchmarks Said to Be Rigged in the Foreign Exchange Market stks.co/sGjl Should not b surprised; humans try2rig markets $$
Regulators Question Banks on Business Lending Risks stks.co/fZV2 Perhaps regulators r being more active this credit cycle $$
US Banks Margin Under Tremendous Pressure stks.co/rGeA Few safe places to lend at any significant spread over funding costs $$
Banks Get Reprieve on New Swaps Rule stks.co/jZPA Get 2 more years 2 place derivatives in special subsidiary 4 close regulation $$
The trick to bank profits stks.co/tGZB Sadly, reserves r not forward-looking but suffer from driving via the rearview mirror $$
Wrong: Interest Rates are Headed Higher. Are You Ready? stks.co/eXy4 This is a consensus view; global economy is weakening $$
Earnings Roundup: Second-quarter Earnings Guidance Among the Most Negative on Record stks.co/jZFb Could mean positive surprises $$
Fear of Missing Out Sparks Covenant Light Lending; ‘Return of the Silly Season’ stks.co/pGYc Credit cycle boom is getting late $$
These CDO Names Don’t Cry ‘Wolf’ stks.co/hZCu Doesn’t matter *what* you call them, CDOs lever up credit risk til next bear mkt $$
Intelligent Investor: What?s Eating Munis? stks.co/iYsP @jasonzweigwsj tells us 2 beware getting gouged on muni bond trading $$
Hulbert on Investing: Why ‘Boring’ Stocks Beat ‘Exciting’ Ones stks.co/dXCa Long-term, low vol has been a winner. Short-term?? $$

Monetary Policy

Fed Likely to Push Back on Market Expectations of Rate Increase stks.co/tGmK Gives the Fed 2much credit; they don’t have a clue $$
The Fed’s other trillion dollar problem stks.co/pGjZ Will b challenging 2 lower the amount of excess deposits @ the Fed $$
The Trapdoors at the Fed?s Exit by Nouriel Roubini stks.co/cXNh Will b difficult 4 Fed 2 remove policy accommodation $$

US Politics & Policy

White House Aims to Loosen Grip on Government-Held Wireless Spectrum stks.co/hZsO As it should b, govt has 2much spectrum $$
Camp Warns Against Cap on Charitable Break in Tax Rewrite stks.co/cXsG Private charity can do things govt can’t &more effective $$
FCC hopes to avoid ‘end of world’ for cell phones stks.co/cXrm Allocation of more bandwidth 2 mobile data would help $$
Urgency on debt issue fades, but underlying danger remains stks.co/qGAq W/deficit declining, the need to agree declines as well $$

Other

Larry Ellison’s Fantasy Island stks.co/iZhG Lanai benefits from the benevolent dictatorship of Larry Ellison $$
Blimps Morph Into Cargo Haulers as Maker Sees Revolution stks.co/fZdT Engineered concept of variable buoyancy; goes up/down $$
Hire Economics: Why Applying to Jobs Is a Waste of Time stks.co/aXwB Networking is more important than job boards, etc. $$
Drinking Water Runs Low as Drought Drags On stks.co/gYoc Weather isn’t fully random; correlated in short-run, thus droughts $$

Comments, Replies & Retweets

@dpinsen Pipelines – high fixed, low variable costs. Railcars – high variable, low fixed costs. Getting pipelines over mountains is tough
@Undertherock3 I’m a skeptic on $GNW. I don’t trust their reserving, underwriting, etc. Low ROE justifies the low P/B.
@Undertherock3 Are you talking about Genworth? $GNW
@AlephBlog The best is “there is no way to get rich quick (eg Kyosaki). Snake oil salesman will always exist, learn to identify them & avoid
“This deal will get done after it is sweetened a little” ? Merkel disq.us/8die83 $$ $DOLE DeJa Vu: Murdock Wants to Go Private Again

Book Review: Value Investing: From Graham to Buffett and Beyond

Posted on 14 June 2013 by David Merkel

Several months ago, I was walking in my bedroom, and in a stack of books that we frequently give as gifts, I saw the book Value Investing: From Graham to Buffett and Beyond.? I said to myself, where did this come from?? I looked at it, and realized that hadn’t read it.? I looked at the copyright date, and realized that 2001 is a relatively old book.

So I read the first chapter, decided it was good stuff, and added it to the reading pile.? As some might know, I am a value investor, and recently I wrote an article called ?Value Investing Flavors.?? In it, I took a broad view of value investing, because there are many common principles to value investing employed by all, but many variations on implementation. [Note to those reading at Amazon; they don?t me post links, but if you Google ?Aleph From Graham to Buffett and Beyond? you will find it.]

The book begins with unified principles of value investing: margin of safety, buy ing an asset cheap, etc., but moves on to different ways to implement value investing, depending on the types of companiesthe investor wants to analyze.

There are three ways to do the analysis for value investing:

Re-estimate the fair value of the assets and liabilities on the balance sheet.? This applies best to companies where converting resources to a better use would be compelling.
Estimate the normalized earnings power of a slow growing company.
For a company with a moat, a sustainable competitive advantage, conservatively estimate the path of growing earnings.

I listed the three of them in the order of increasing aggressiveness of analysis, and the amount of work that would need to be done to be assured that there is an opportunity.

After this, the book writes about eight notable value investors, who come from the various camps inside value investing, and puts more flesh on the bones as to the implementation of each method.? I immediately recognized the names of 6 of the 8 value investors.

But what I found most useful were the insights of the investors that would buy small companies.? You can buy ugly situations that are misunderstood, and wait for management to turn the ship around.

This book was a good balance between theory and practice.? I enjoyed this book.? I think most amateurs wanting to learn about value investing would benefit from it.

Quibbles

None.

Who would benefit from this book: Amateur value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.? If you want to, you can buy it here: Value Investing: From Graham to Buffett and Beyond (Wiley Finance).

Full disclosure: I have no idea where I got this book.

On Captive Insurers

Posted on 13 June 2013 by David Merkel

Sometimes, when I see an insurance article that could be big, relevant, and tough to explain, I say to myself, “Dave, you’re going to have to write about that.”? But now, I get requests via email to write about it.

So tonight I write about the New York Department of Insurance’s attempt to rein in captive insurers.? [Long report here.]? My first question to the department would be: “What took you so long?? These issues have been known for years.”

I write this as one that in general admires the New York Department of Insurance.? They are the toughest regulator of insurance in the US.? If I could have my way, I would replace the Federal Insurance Office (?FIO?) with the?New York Department of Insurance, and let New York regulate the country.? But that can’t happen.? Insurance is regulated by the states.? As a result, if some states are liberal with respect to reserving practices, companies can set up reinsurers there, and shed reserves to a state that allow the reserves to be lower.

Now, why does this happen with respect to life insurance, and not other insurance?? There are complexities in the regulatory [“statutory”] reserving where the statutory reserving does its estimates such that every advantage a policyholder has versus an insurer gets used against the insurer.? That makes the reserve high.? But on average, policyholders aren’t that smart; the reserves should be lower.? Should they be as low as the GAAP reserve, which is supposed to be conservative and realistic?? That seems to be the goal of many insurers.

Life insurance is long in duration, which means small differences in assumptions can make relatively large differences in the reserves.? That’s why you only see it in life insurance.? This happens with long-dated term insurance, universal life, and any product that guarantees that are not core to the product, and are hard to calculate reserves as a result.

But what about mutual versus stock companies?? First, let’s take a step back.? Why does statutory accounting matter?? It matters because it affects the ability of regulated insurance companies to dividend money to their holding companies.? The lower statutory reserves are, and the lower risk-based capital requirements are, the more that can be dividended, and the greater the flexibility of the enterprise.

Mutual life companies typically have more capital than they need, and they do not have a claimant on the excess (unless it is management, and that is quiet, slow, through the pension plan, the hidden plans, etc. Shh.)

Stock Life companies have to optimize their capital to compete against everyone else.? Sorry, but that is the way it is.? Let’s move to the recommendations of the NY Insurance Department:

Given the troubling findings uncovered during its investigation, DFS [Department of Financial Services] is taking immediate action and making several recommendations to address the potential risks and lack of transparency surrounding shadow insurance:

Through its authority under New York Insurance Law, DFS will require detailed disclosure of shadow insurance transactions by New York-based insurers and their affiliates.
In the interest of national uniformity, the National Association of Insurance Commissioners (?NAIC?) should develop enhanced disclosure requirements for shadow insurance across the country.
The Federal Insurance Office (?FIO?), Office of Financial Research (?OFR?), the NAIC, and other state insurance commissioners should conduct similar investigations to document a more complete picture of the full extent of shadow insurance written nationwide.
State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete and a fuller picture emerges.

Number 1 is a given.? New York can do that on its own.? New York could unilaterally refuse to give reserve credit to any reinsurance agreement they think is not creditworthy.? But that comes with a cost: native New York insurers might leave, and leave behind a small New York only “pup” insurer.? (Imagine Metlife decamping to New Jersey, and AXA’s American subsidiary also.)? That’s what most insurers do, because New York is a tough state for insurance.? If the size of the New York insurance industry shrinks, so will the New York Insurance Department.

Number 2 is not a given.? There are a number of states that benefit from looser regulation.? The NAIC only advises & proposes; it does not create law.

Number 3 could be done, but will they do it?? There are many other issues that press.? The states that benefit from captive insurers will not want to cooperate.

And for the same reasons as 2 & 3, 4 will not likely succeed.? Not everyone has the same incentives here.? New York is engaging in bluster.

What Would I Do?

I would take the risk, and disallow reserve credits from companies in locales that don’t regulate insurance well.
I would disallow the use of surplus notes for stock companies.? With stock companies, it is just a hidden form of leverage.
I would eliminate all surplus relief from reinsurance treaties that do not rely on “diversifiable risks.”? If it is merely shifting a nondiversifiable risk, offer no reserve credit.? The company should bear that itself.

Insurance CEOs can be glad I am not their regulator; they would have a tough time under me.? There is nothing that they know that I don’t.? That said, the New York Department of Insurance will have a a hard time making their ideas work, unless all the states agree with them, and that is not likely.

Book Review: Pound Foolish

Posted on 13 June 2013 by David Merkel

To my readers: if you like this review, please vote it up here at Amazon.? Thanks a lot.

Personal finance has issues.? This is because there are many things that are true on average that will not always prove true in the short run.? Here are some examples:

Those that save more and spend less for personal needs will usually do better in the long run than those that spend a higher proportion of their income.
Those that take moderate risks in investing tend to beat both those that take low risks, and those that take high risks.? But over short periods of time, who can tell?
Over the long run “buy and hold” tends to work.? In the short run, who can tell?
Good investing is boring.? It is not entertaining.? An average person looking at the portfolio that I own for my clients would only recognize 10 of the 36 companies that I hold.? The best stocks are those of neglected companies that do their boring business and make money quietly.
In general, it is wise to have as little debt as possible.? When you do have debt, pay it off rapidly, or make sure that the debt is non-recourse (the asset purchased collateralizes the loan in full.
In general, it is honorable to pay your debts in full.? Occasionally, some life event happens that makes it impossible.? That is what the bankruptcy code is for.? When bad providence is overwhelming, take the hit, declare bankruptcy, and battle back from there.? In the Bible, debt-slavery was limited to seven years — why should the loan sharks get more of your life than that?
Financial education, as well as education in general, is no panacea.? As one of my brighter friends at RealMoney, Howard Simons,? used to say (something like), “On Wall Street, to those that are expert, we give them super-advanced tools that they can use to destroy themselves.”? There is almost never a level playing field in investing, unless you do all of the work yourself.
Risk control is the key to investing, and women do better at that than most men.? I liken it to chefs.? Most of the best chefs are men, but women beat men on average in cooking.? (An aside: cooking is my hobby.? My wife likes my cooking.)
There is no way to get rich quick.? Ignore seminars that tell you that it is possible, like “Rich Dad.”
Peter Lynch popularized “buy what you know,” but he was far brighter than that and a real detail person.? Many people moved to residential real estate post-2002, but did not realize that if prices get high relative to rents, that prices can fall.? They bought what they thought they knew, and lost.
After the market declines of 2000-2003 and 2008-2009, many people swore off the stock market at the wrong time.? The uneducated buy and sell in response to fear and greed.? Buy and hold is better than that, always, and that is one reason to employ a professional that does not get shaken by market moves, good or bad.? (It took 5-10 years to develop ice-water in my veins.)
It is always good to be skeptical of those that talk to you about finance, even me.? Particularly be skeptical of those that will buy you a nice meal with the aim of getting your business.? There are many strategies to get you to say “yes.”? If you dare, read marketing books, they will help you develop sales resistance.
Defined benefit pension plans are better for workers than defined contribution plans like the 401(k), but they cost a lot, lot, lot more.? That’s why they don’t exist today.
Most people, if left to themselves, will not plan for the future.? That is why there are commissioned salesmen (brokers/insurance) to sell them products inferior to what they would get if they planned for themselves.

That took more words than I expected. Before I go on, I want to say that I liked that book a lot with some reservations.

Let me now go to the book, and tell you what I liked and what I did not.

What I Liked

The book is honest, it flags all of the problems in personal finance.? Some of those problems are unavoidable, because returns in the market are lumpy, as opposed to the smooth projections of the financial planner.
It explains why defined benefit plans are better for average people, because they are not investors, they are budgeters at best, and need to receive a steady income in retirement.
She explains the ways that salesmen try to make you buy what you shouldn’t.
She understands that most investment advice is shallow, and wrong.
Expense and debt control aren’t everything.? That said, they are good things.
She recognized that women are better risk managers than men.? (Men are too certain of themselves; I have rules for myself that tie my hands so that I do not act on fear or greed.)
She gets that real estate is an expense, and not an investment.
Financial celebrities are often wrong.
She understands that the financial industry has many tendrils into academia & politics, to spread a message favorable to itself.

What I Did Not Like

It may be that most people in financial trouble have had notable accidents happen to them, but that does not invalidate the idea that being careful with your spending and sparing on debt are wise ideas.? Aside from that, people need to insure themselves properly, and be prepared for layoffs — have transferable skills that can work in multiple industries; be a continual learner.? Also, be aware of the finances of your company.? If you think it is in trouble, look for work before you are laid off.
She doesn’t get how expensive it would be to create defined benefit plans in place of defined contribution plans.? The costs are what led corporations to terminate the plans.
She doesn’t get that there are many people who will not take prudent actions for the future.? That is what commissioned salesmen are for.? They get the imprudent to do something good for them selves that they would not ordinarily do.
Talking about money is not enough.? With most people it is a mere sharing of ignorance, and not much better than what you get from other sources.? You *can* get educated about money, but it takes time, effort, and diligence.? Who is willing to do that?

Summary

She is long on critique, and short on real ideas to improve the situation.? The critique will help you know what to avoid.? But when you are done with this book, you will have no positive plan for what you should do.? If you want to, you can buy it here: Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.

Full disclosure: I borrowed the book from my local library.

One Small Victory versus Stock Promotion

Posted on 11 June 2013 by David Merkel

Okay, here’s the promoted stock scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 6/11/13	Decline	Annualized	Splits
GTXO	5/27/2008	2.45	0.011	-99.6%	-65.8%
BONZ	10/22/2009	0.35	0.004	-98.9%	-71.2%
BONU	10/22/2009	0.89	0.010	-98.9%	-71.2%
UTOG	3/30/2011	1.55	0.004	-99.7%	-93.3%
OBJE	4/29/2011	116.00	0.554	-99.5%	-92.0%	1:40
LSTG	10/5/2011	1.12	0.031	-97.2%	-88.1%
AERN	10/5/2011	0.0770	0.0002	-99.7%	-97.1%
IRYS	3/15/2012	0.261	0.003	-98.9%	-97.4%
NVMN	3/22/2012	1.47	0.080	-94.6%	-90.8%
STVF	3/28/2012	3.24	0.390	-88.0%	-82.8%
CRCL	5/1/2012	2.22	0.059	-97.3%	-96.2%
ORYN	5/30/2012	0.93	0.175	-81.2%	-80.2%
BRFH	5/30/2012	1.16	0.300	-74.1%	-73.0%
LUXR	6/12/2012	1.59	0.023	-98.6%	-98.6%
IMSC	7/9/2012	1.5	1.066	-28.9%	-30.9%
DIDG	7/18/2012	0.65	0.070	-89.2%	-91.6%
GRPH	11/30/2012	0.8715	0.180	-79.3%	-94.9%
IMNG	12/4/2012	0.76	0.180	-76.3%	-93.8%
ECAU	1/24/2013	1.42	0.420	-70.4%	-96.0%
DPHS	6/3/2013	0.59	0.107	-81.8%	-100.0%

	6/11/2013		Median	-95.9%	-91.8%

Dephasium has fallen almost 82% in 6 days.? It is a definite over-achiever in losing money.

I promise this is not going to become an “all promoted stocks, all the time” blog.? I limit it to when I receive promotions.? I got another one today, this time to my e-mail.? The future loser is Norstra [NORX].? You can see a promotion like the one I saw here.

Here are the bullet points:

Never had a penny of revenue.
Consistent losses every year.
Only stays afloat by selling stock.
Auditors don’t think they are a going concern.
If management has been selling shares to get cash at $0.001, why is the stock trading near $1?

It is highly likely that this company will do badly, as have other promoted stocks that I have written about.? But here’s the fun part — I wrote to the guy whose organization sent out the promotional e-mail.? He didn’t know that they were doing that; he was concerned for the reputation of his organization, and he is putting a halt to advertising stock promotions.

And so, Aleph Blog happily takes a small victory lap.? Promoted stocks are bad enough, but when reputable firms aid them, it is far worse.

Polar Petroleum, Frozen

Posted on 10 June 2013 by David Merkel

I’m not going to run the promoted stock scoreboard again so soon, but let it be known that Dephasium has fallen ~75% in the 5 days since I wrote about it.? Put on your peril-sensitive sunglasses, here is the chart:

Yes, my article was written at the peak.? In this case the “dump” was rather violent.

But why I am I writing about promoted stocks this evening?? This morning in my e-mail, I received this [note: after a little time, this link won’t work].

But who sent it to me?? The Washington Times.? After receiving it, I sent someone in their web area this letter:

YYY,

I don?t know if you handle this aspect of Washington Times advertising, but today I received a promoted stock ad for a fraudulent company from the Washington Times via e-mail.

The company?s name is Polar Petroleum [OTCBB: POLR], a company which:

Has never earned a penny of revenue.

Was a ?technology company? until last year, ?Post Data.? From its last 10K: ?The Company intends to market a service of decommissioning electronic data storage devices, making them inoperable and thereby making the electronic data contained therein or on permanently un-recoverable.?

Is likely being used by the promoters to do a ?pump and dump,? where affiliates do a series of transactions that inflate the price of the thinly traded stock, and use this promotion to dupe people into buying out their shares at inflated prices, leaving them holding stock of a worthless company.? The net worth of the company is $0.005/share ? It trades near $5 thanks to the pump.

It?s dishonest for the Washington Times to participate in crud like this.? Why is the Times selling its reputation for a bunch of promoted stock scammers?

Sincerely,

David

PS ? I have written about this extensively.? Here is a sample:

http://alephblog.com/2013/06/03/another-lousy-promoted-stock/

To have a reputable newspaper convey the garbage that the promoters put forth is new, and worrisome.

But about the same time that I hit the “Send” button, the SEC took action.? They suspended trading in POLR.? They justified it here.? Good work, SEC!? (Can’t remember the last time I said that.)? And if you want to see the reactions of those that follow promoted stocks regarding POLR, you can see it here.

Though the loser promoting this garbage said it would go to $27, I’ll give you a different prediction: it will go to less than fifty cents within a year.? Given the actions of the SEC, it could easily go there on June 24th, when trading reopens.

Here is my advice to the SEC: maybe you could create a unit that follows promoted stock fraud, and do exactly what you have done with POLR to every promoted stock scam.? It would eliminate a significant area of fraud in our equity markets.

Book Review: It’s All About Who You Hire, How They Lead…

Posted on 8 June 20138 June 2013 by David Merkel

When it comes to business books, I occasionally get skittish.? It’s just the same old stuff over and over, so I often refuse to review such books.? This book was a rare gem for me; it even made me wish that I had worked for the author.

There are two classic models for maximizing value in enterprises: 1) low cost, high volume, and 2) high quality, reasonable cost.? My Dad ran a business that was the latter, and on a far larger level, so did Morton Mandel.

Customer service was what he focused on, and listened to customers in order to see what problems they might have that his firm might solve.? More, he created a culture that would focus on the customer.? That required hiring good businessmen — men who could run almost any business, once they understood the industry.

Such men could do people management, project management, financial management, and have a strong ethical slant.? You are managing for the long-run, not the short run.? You do not want management that cuts corners.

When I was 17-18 years old, I was the student representative to the School Board from my high school for two years.? In the meeting room,? there was a prominent painting by some student that had the bold title “What’s best for the Kids?”? So it was for managers in Mandel’s company — “What’s best for our Customers?”? Such an attitude, inculcated through the organization created extreme customer loyalty, employee loyalty, and significant profits.

From my own work in the insurance industry, I have experienced many cultures.? I can smell a bad management team and culture a mile away.? I invest in the best cultures that I can find in the insurance industry.? In any industry, when I find companies that I think do it right, treating all stakeholders well, I am quick to buy the stock, and slow to let it go.

To give an example, in 1994, I did a deep study of the trucking industry, and I came away with one firm that did it all right — a strong focus on safety, good incentives for drivers and terminals.? I bought, the stock doubled in a year, and was bought out by a private equity group.? Ethics in business pay off.? Good service to others will receive its reward.? And so it was for Morton Mandel.? Superior customer service led to loyalty of customers and good margins.

Mandel was also smart about acquisitions.? He would buy small companies with desirable characteristics, and then improve their management team and grow them organically.? He never bet the company.

Did he ever make mistakes?? Yes, and he made a big one when he mis-estimated a guy to whom he sold his firm.? He thought the guy would preserve the culture of the firm, and it was anything but that.? Within a year, the combined firm was suffering, there was a boardroom coup, and Morton Mandel, far from retiring, was back as CEO repairing the damaged firm.

He was big on standardizing best practices, so that everyone in the firm would know the best way to serve customers.? Also, he was big with charitable enterprises, and realized that most of the principles that applied to for-profit companies applied to non-profits.

The main idea is this: if you focus on doing quality work for your customers, and charging an appropriate price for it, you will prosper.? Would that more companies would do it.

Quibbles

None

Postscript

I forgot one thing — his close relationship with Peter Drucker, my favorite expert on management.? The two were close to a degree where Drucker would give Mandel advice he would not give others, but only because Mandel was capable of receiving it.? Drucker thought Mandel was one of the top managers in America.? That in its own right should recommend this book to you.

Who would benefit from this book:? Anyone would benefit from this book, it is that good.? If you want to, you can buy it here: It’s All About Who You Hire, How They Lead…and Other Essential Advice from a Self-Made Leader.

Full disclosure: I received a free copy from the publisher.

Sorted Weekly Tweets

Posted on 8 June 2013 by David Merkel

Market Impact

Old-School Stock Picker Weitz Struggles With Index Craze?stks.co/gYnx?Weitz has a really good long term track record, good guy $$
High-Yield Companies Cash In on Dividend Deals?stks.co/cXCJ?W/the rise in interest rates, junk corporations move 2 refinance $$
IRS Reconsiders What Qualifies for REIT Status?stks.co/jYiU?There should b1 tax law for all things like corporations in the US $$
New Revenue Recognition Rules Arriving Soon?stks.co/rFvA?I’m afraid the new rules will b less clear than current GAAP rules $$
How the Robots Lost: High-Frequency Trading’s Rise & Fall?stks.co/gYk9?Every investment strategy has a capacity limit, even HFT $$
Sam Zell says sell?stks.co/rFr3?1 month old; he also thinks that efforts by corporations 2 manage single family homes will fail $$
Banks will take hit on mortgage refi buststks.co/pFwq?This may true 4 whole industry, but some banks will profit via MSRs, ALM $$
FASB?s Seidman: Americans Prefer Rules to Principles?stks.co/pFpb?We should stick w/GAAP & ditch IFRS convergence. We know GAAP $$
IFRS Makes Progress Around the Worldstks.co/tFir?Incomparable Financial Reporting Standards r less converged than many realize $$
401(k)s Are Doing Great Except For A Few?stks.co/eX9U?Fine,except 401(k) users don’t put enough away 2 care 4 their retirements $$
Why Low Volatility Is Losing Its Alphastks.co/cX0J?Any strategy can be overfished. Monoculture rarely leads to good results $$
“Any strategy can be overfished. Monoculture is a recipe for disaster. How many analogies do I?” ? David_Merkeldisq.us/8dev71?$$
Money-market fix is a flawed compromise?stks.co/dWtx?My proposal was cleaner and far better:?stks.co/dWty$$
Bet on CDOs Returns to Wall Streetstks.co/bWy4?Synthetic CDOs take the field again, just in time to fleece anxious yield hogs $$
Bruce Berkowitz Places Bet on Fannie, Freddie?stks.co/jYCL?A lot of this rides on political future of F&F, w/Berkowitz unsure $$
Don?t Sell Your Soul for Yield, Pimco?s Simon Says?stks.co/qFRi?He retires @ 52 2pursue philanthrophy & fun; bond risks high $$
Rise in US Bond Yields Jolts High-Dividend Stocks?stks.co/qFIa?If they r used as bond substitutes, will trade more like bonds $$
Brokerage firms debate value of Certified Financial Planner title?stks.co/dWU1Interesting 2c firms asking CFPs to decertify $$
The 100% Stock Solution?stks.co/sEyrOnly the stoutest souls should try this; best time to start is after a meltdown, if u can $$
The Intelligent Investor: How Funky Is Your 401(k)? by?@jasonzweigwsj stks.co/dWKf?Unusual bond funds not recommended 4 novices $$
Why Hedge Funds Aren’t Worth the Money?stks.co/iXxM?Double-alpha & leverage r great in theory; in practice they don’t work well $$
‘?@Matthew_C_Klein?@felixsalmon?But I disagree:?blogs.reuters.com/felix-salmon/2??Cov-lite loans r a sign of general credit degradation $$
Interesting argument by?@felixsalmonthat cov-lite bonds are good because they give borrowers greater flexibility:blogs.reuters.com/felix-salmon/2?

US Politics

The NSA Doppelganger?stks.co/jYiY?Govt has been collecting records on every phone call made in the US ever since Patriot Act $$
Will New Health Insurance Be Too Expensive 4 America’s Lowest-Paid?stks.co/rFvF?Law of unintended consequences teaches $$ lessons
Trading Dollar Bill for Coin Big Savings, No Small Change?stks.co/iYrY?This could makes sense if we eliminate the penny as well $$
Fed Hurdle of 4 Straight 200,000 Payrolls Sets Bernanke View?stks.co/iYrW?I don’t think the Fed has a coherent policy response $$
An Insider’s Guide to Obama’s Summit With China’s Xi?stks.co/sFp7?Makes me think that nothing much will come out of this summit $$
Start Your Engines: NatGas Revs for Transportation?stks.co/hYwm?This is more complex than it looks b/c liquification low temps $$
Obama’s Civil-Liberties Record Questioned?stks.co/qFu9?Obama is not a change agent; he is merely Bush-plus & we r the losers $$
US declassifies phone program details after uproar?stks.co/hYwd?Terrorism is an unlikely threat – doesn’t justify the snooping $$
Alan Greenspan’s Epic Incompetence: Another Shoe Drops?stks.co/jYXF?This piece provided the link 4 the last tweet $$#greenspan
How Elite Economic Hucksters Drive America?s Biggest Fraud Epidemicsstks.co/eXA3?Of course fraud should b a crime, it’s theft $$
NSA seizes phone records of Verizon customers?stks.co/jYXC?Shouldn’t a warrant b required 4 such indiscriminate investigation? $$
Jefferson County, AL, Reaches Bankruptcy Deal?stks.co/gYbR?$JPMloses most, then taxpayers. “gross incompetence, waste, graft” $$
Debt Deal in Alabama Will Cost JPMorgan?stks.co/aX7U?Sewer rates rise. Everyone loses except the speculators who bot debt cheap $$
Warplanes to Tankers Delayed by Contested US Contracts?stks.co/gYUYLosers contesting contracts is now normal & slows things $$
FHA Losses Could Hit $115 Billion in Extreme Scenario?stks.co/gYLJ?4 political reasons, FHA guaranteed lousy loans, losses come $$
Jefferson County Paves Way for Bankruptcy Exit?stks.co/cWky?The biggest losers r taxpayers, but then they elected the schmoes $$
Mistake:?$AIG,?$PRU,?$GE?Named Systemically Important by Panelstks.co/jYCN?Focus should b: financing long assets w/short loans $$
The Real Scandal at the IRS?stks.co/sFMf“…larger threat of abusive behavior by a fearsomely powerful government agency.” $$
ObamaCare Bait and Switchstks.co/jYCG?Obamacare was never meant 2 make healthcare affordable 2all, only 2 those w/o insurance $$
It really annoys me, because the key of financial safety is asset/liability mgmt & all of new regulations do not tighten this up $$
Risk that the Feds should care about is the toxic mix of illiquid assets funded by liquid liabilities; long liability structures r safe $$
Feds close to picking ?risky? non-banksstks.co/iY88?Really looks like the Feds r going2goof again & call non-risky firms risky $$
Overstated: Risk-Averse Culture Infects US Workers, Entrepreneursstks.co/eWev?Generally moderate risk-taking leads2best result $$
Little Cause for Inflation Worriesstks.co/jXms?Far better 2 use median or trimmed mean CPI, than the more doctored core PCE $$

Europe

France demands emergency EU summit over China’s wine tax threat?stks.co/dX8ATrade wars have 2 start somewhere, however small $$
Moody?s Casts Doubt Over Nordic Havens Amid Housing Risksstks.co/bXCh?Rest of world adopts bad monetary policy of US, EZ&Japan $$
Central Banks Put More Scandinavian Currencies in Reserve?stks.co/jY4tEnables the Nordic countries to import asset inflation $$
Swiss Seen Passing US Bank-Tax Law to Avoid Worse Fate?stks.co/qFJY?Most compromises r better than seeing many banks die $$

Companies & Industries

Tyson CEO Says Smithfield Deal Could Aid Pork Exports?stks.co/iYnc?Many Chinese might like 2 buy high quality American food $$
$COST?CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World?stks.co/gYk1?Investing in workers vs cheap workers $$
Wells Fargo Will Benefit From Interest-Rate Increase, Sloan Says?stks.co/eX42Could just b brave words, few give up income $$
Fannie Shares Seen as Worthless Surging in Disconnect?stks.co/dWtw?The politics of the situation r in flux; no margin of safety $$
Goldman Wants You to Forget About Too Big to Fail?stks.co/gYUx?There is a subsidy to the big banks, not as large as some think $$
Like Berkshire, Markel thrives on buy&hold?stks.co/rFbN?Thomas Gayner, like Buffett is a compounder w/underwriting float $$?$MKL
Alcoa Junk Downgrade Is Rare Trauma for Dow Stocks?stks.co/iYYW?Time2 modernize & create News Corp Indexstks.co/gYUZ?$$
Whale of a Trade Revealed at Biggest US Bank With Best Control?stks.co/iYYVLong but definitive article on?$JPM?credit trade $$
Scor to Buy Generali Reinsurance Unit for $750 Million?stks.co/tFMQ?How do u say “Scottish Re” in French? “Scor”?$RGA$$?#spitspit
Apple Saves $724 Million With Well-Timed Sale?stks.co/qFCo?20-20 hindsight, but?$AAPL?timed their debt sale well $$
Kinder Morgan Cancels $2 Billion Pipeline Plan?stks.co/iY7O?Sending crude via rail costs same & does not require LT contract $$

Asia

Hedge Funds in Japan Ride Small-Cap Rally on Abenomics Boost?stks.co/eX41Be wary here, because there is no clear macro path $$
The Wonk With the Ear of Chinese President Xi Jinping?stks.co/qFfh?A modernizer who wants the Communist Party 2 keep control $$
Topix Profits Percentage Increase Tripling World Even in $400 Billion Wipeout?stks.co/qFUz?Wait. Weak yen also has bad effects $$
Poultry-Plant Fire in China Kills Dozensstks.co/jXzF?Sad, but it is common 4 firms that hire low wage workers 2 cut corners $$
Muddy Waters to Jupiter Seek Profit as Risk Rises?stks.co/eWeV?Convoluted financial systems can’t handle as much debt b4 crisis $$
Heard on the Street: Let Me Not See Old Age in China?stks.co/qFCr?Elderly poor who live away from the coasts suffer in China $$

Other

Co-hosts of radio show ‘The Pursuit of Happiness’ commit suicide togetherstks.co/sFhK?Happiness pursued as its own end fails $$
Harvard Humanities Fall From Favor Among College Students?stks.co/rFgfThere is no one more unrealistic than a humanities prof $$
To Catch a Thief: Banks Try Using Big Data?stks.co/jYPf?The banks try 2 detect correlated behavior among fraudsters & succeed $$
How Retirees Pay Zero Taxesstks.co/eX3v?If you r older & have little wage income there r often ways 2 reduce your taxes $$
Bermuda With Ireland Targets of Tax Vigilantes, Minister Says?stks.co/hYTPThey were really surprised when NATO blockaded them $$
Marriage Advice: Sharing a Hobby Is Good for Your Relationship?stks.co/tFMwOur hobby is raising kids, will have2find a new one $$
Meredith Whitney?s ?Great Migration?stks.co/fYHh?Disliked by genuine muni experts?@catelong?&Joe Mysakstks.co/gYGr?$$
Government 2 Hold Back Growth for Years?stks.co/qFJ0?Balancing the budget may have far less drag than most suppose, lowers risk $$
Vatican says Pope Francis got it wrong, atheists do go to hell?stks.co/iY8I?Adults @ Vatican correct Pope’s wishful thinking $$
Wrong: Smartest Decision Ever Made by Bill Gates, Warren Buffett?stks.co/rFAj?If u raise your children right, they can handle $$
Behind the ‘Internet of Things’ Is Android?and It’s Everywhere?stks.co/tF9hAmazing how 1can change the world on lo profit mgns $$

Finance

Has BIS Found the Solution to Too Big to Fail??stks.co/fYcY?Has issues, but much better than what was done in 2008. Worth a try $$
The rise of the real collateral ?mining? business?stks.co/bX4T?Overproduction of commodities feeds the shadow banking system $$
What is the opposite of helicopter money??stks.co/eX43?Negative interest rates suck liquidity, as people seek stores of value $$
World Chasing U.S. Yield With 25% Deal Jump: Real Estate?stks.co/hYUF?Enough inventory 2 pick from & seems 2b recovering $$
A World Awash in Credit with Much Work to Do?stks.co/gYHW?Increasingly hard to find safe yield; EM still seems promising,but… $$
i’d like to see: zip code level correlation between house price growth from 2011 to 2013 against absentee purchase share during same period.
Hedge Funds Boost Gold Bull Bets Most in Two Months?stks.co/jY4r?Makes me a little edgy for gold prices $$
Mortgage Investors Get Blindsidedstks.co/pFMV?Bonds Backed by Subprime Loans Had $1B Previously Undisclosed Losses $$?#surprise
Emerging-Market FX Gets Ugly. Very Ugly.?stks.co/qF1e?Yeah, I feel it, just look at the chart in?$EDD?of which I am long $$

FWIW

My week on twitter: 51 retweets received, 58 new followers, 34 mentions. Via:20ft.net/p