Central Banking

• Been using FRED since it was a bulletin board in 1991. Great job, FRED team! http://t.co/kksvwllM Mar 24, 2012
• The Villain http://t.co/yYReRb4r On Bernanke, the man who expanded the power of the Fed far beyond constitutional limits, if there r any $$ Mar 24, 2012
• Bernanke Sees Need for Higher Household Spending to Fuel Growth http://t.co/3LQUTGji Yes Ben, we will spend more while we are inverted $$ Mar 24, 2012
• Fed’s Evans Calls for Stronger Commitment to Low Rates http://t.co/vSKfU36q Read paper; don’t buy it. ARIMA, no out of sample tests $$ Mar 24, 2012
• Bernanke Says Low Rates Didn’t Fuel Bubble http://t.co/XlF50zKV Perhaps Bernanke can’t remember minor crisis; RMBS extension mid-2003 $$ Mar 24, 2012
• That crisis created a very sharp move up in rates http://t.co/jfNAVN3o $$ Mar 24, 2012
• Bernanke: the man, the legacy and the law http://t.co/zA7OeFc4 “courts have shied away from developing jurisprudence on monetary policy.” $$ Mar 24, 2012
• @fatdaz It is my firm belief that no economic entity can dominate entirely; central banks have been destroyed b4; will happen again $$ Mar 24, 2012
• Masters of the Universe Start to Challenge Ben Bernanke http://t.co/31Pr1yrQ Markets are more powerful than Central Banks, watch out Fed! Mar 23, 2012
• European Banks Would Have Passed Fed’s Stress Test http://t.co/z5bCBeYy Ultimate insult 4 stringency of Fed’s stress tests $$ #devildetails Mar 20, 2012
• Bernanke Stands to Gain Capital-Market Experts With Nominees http://t.co/oX8xOdEU We need some people that doubt neoclassical economics $$ Mar 20, 2012
• Bernanke Returns to Academic Roots to Justify Fed’s Existence http://t.co/ORfma5sE Safe audiences let him talk publicly w/little risk $$ Mar 20, 2012
• Federal Reserve Stress Tests Make Us All Muppets http://t.co/CQu827KD Ignores E-Zone contagion, increase in int rate volatility, etc $$ Mar 19, 2012
• Bernanke: “I Want to Bring Back Irrational Exuberance” http://t.co/p0qlQwXe @brucekrasting on overheating in some debt asset classes $$ Mar 19, 2012

China

• Ai Weiwei: “You’re There but You’re Not Existing” http://t.co/d7mLxHXm RARE interview w/Ai Weiwei, describing his detention in China $$ Mar 24, 2012
• China’s stock-market supervision suffering http://t.co/QEBPC5ya “Understaffed securities regulator, weak legal system cited” $$ #nosurprise Mar 21, 2012
• @Roy_Cam They can’t make money b/c of overcapacity; China invested too much in steel & global growth stinks. US exports of steel r rising $$ Mar 20, 2012
• @Roy_Cam We only import 30% of steel used in US, 4% of which comes from China = 1.2% of steel used is from China http://t.co/FTWt80oa $$ Mar 20, 2012
• @Roy_Cam You are right there, and that’s one reason why profitability is declining in steel industry globally. $$ Mar 20, 2012
• China to increase fuel prices 6-7% http://t.co/dBwrepDj Pump prices at record highs; biggest rise since June 2009 #ouch $$ Mar 20, 2012
• Sad Industry Mantra: Make Steel, Lose Money http://t.co/Pu9e6qFj Insanity; doing same thing, expecting different results. Future bailout $$ Mar 20, 2012
• The State-Owned Enterprises of China http://t.co/55nvgUMs I think a “big bang” would work, but the Communist Party would never do it $$ #Mao Mar 20, 2012
• Chinese property *alert* http://t.co/eklWzXkU Property sales value contracted 20% year on year in the two months ending in February. $$ Mar 20, 2012
• China’s new home prices “no longer rising” http://t.co/UL4T3yzQ The Chinese Gov’t always gets what it wants, until it gets too much of it $$ Mar 19, 2012
• Chinese Companies Forced to Falsify Data, Government Says http://t.co/tH0MUiYn AN example of why I don’t trust Chinese economic data. $$ Mar 18, 2012
• @Xiphos_Trading Don’t know if there will be a crash or not, but there has been a lot of malinvestment in China, like Late 80s Japan $$ Mar 18, 2012

Europe

• Those Catchy Spanish (Yield) Curves http://t.co/qoGmGl7E Yields backing up in the Spanish bond market; this could be the next crisis $$ Mar 24, 2012
• Euro-Zone Banks Get Show of Faith http://t.co/ZWqd8Df5 US MMFs begin adding back yieldy E-zone bank CP $$ #wedontlearnwereallydontlearn Mar 24, 2012
• On second thought, hold off moving that business to Ireland http://t.co/Bdu6ezon Ireland heading into recession; possibility of default? $$ Mar 23, 2012
• @Mapsofworld Gun to the head, I think it fails entirely, but that opinion is not held with high probability $$ Mar 22, 2012
• @Mapsofworld If the E-zone doesn’t move 2a full fiscal union, the Euro will either fail entirely, or become the currency of a smaller group Mar 22, 2012
• The Safe Haven of the Nordic Currencies Is No More http://t.co/FquH5ZWW It’s a little early to get categorical about this $$ Mar 21, 2012
• A Wall St. Firm Advises Greece, With Discretion http://t.co/Y12GeNZq $BLK is one powerful firm that many govts in crisis turn 2 4 help $$ Mar 21, 2012
• Swiss Secrecy Besieged Makes Banks Fret World Money Lure Fading http://t.co/qV197Px1 What good r Swiss banks if no secrecy, tax evasion $$ Mar 20, 2012
• Germany on a Different Track http://t.co/Gl3BNXBA While Much of EZone Deals W/Busts, Property Prices r Rising in Berlin, Hamburg, Munich Mar 20, 2012

Rest of the World

• Israel Billionaires Put Own Interest Ahead of Holders http://t.co/QSTpBn6E What’s mine is mine; what’s yours is negotiable $$ Mar 24, 2012
• Late Shah’s Son Selected As Iran’s Person Of The Year http://t.co/phWmAFRQ This is VOA so take it w/a grain of salt; still funny 2thinkabout Mar 24, 2012
• Latin American Nations in Worse Shape for Crisis, IDB Says http://t.co/zlZvDJi4 “result of lower budget surpluses b4 interest payments” $$ Mar 20, 2012
• What is the real rate of interest telling us? http://t.co/Vbk13I02 Excess capacity in devel world post bubble pop, send cap 2 emerg mkts Mar 20, 2012

Insurance

• @CflGator Life companies should be simple, but product design exploded to the point where reserving can’t keep up; I own only 1 life co. Mar 24, 2012
• @CflGator Variable & Universal life products have secondary gtee issues; there r a variety of long dated term products w/rsv issues $$ Mar 24, 2012
• @CflGator and P&C insurance — life insurance is capital intensive; they are sticking with their simplest biz, aside from long-tail P&C $$ Mar 24, 2012
• @CflGator It really depends; they wrote a lot of complex life products. On the bright side, a company in runoff is a cash cow. $$ Mar 24, 2012
• @CflGator That’s the tough Q. $HIG offered significant secondary guarantees when they were the #1 annuity writer. May not b prop reserved $$ Mar 21, 2012
• Hartford Shares Jump On Split, Analysts Like It Too http://t.co/APFbv4UA Not so fast on $HIG; regulators must approve a split; c my cmmt Mar 21, 2012
• Should Hartford’s Annuity Holders Be Worried? http://t.co/HfuZO3QO Probably not; small annuitants have protection from guaranty funds $$ Mar 21, 2012
• Annuity Case Chills Insurance Agents http://t.co/rHkg68Lw I’m always skeptical of products w/high commissions & surrender charges $$ Mar 19, 2012

Fixed Income

• Why Fixed Income Funds May Fall Short http://t.co/cHmF3hOj On the difficulties of combating tracking error in fixed income ETFs. $$ Mar 24, 2012
• Top Junk Pummels Treasuries for Safest Profits http://t.co/E5vl2qHB That’s the rearview mirror; will be harder to squeeze more returns out Mar 21, 2012
• The differentiation of Agency MBS risk profiles http://t.co/IJN2mbCm Interesting to see long avg life on high coupon underwater mortgages $$ Mar 21, 2012
• Bond Bear Market Yet to Roar http://t.co/oNENX9jc The selloff has been piddling so far, has not affected equities, & it may reverse $$ Mar 21, 2012
• Do High Yield Bonds Know Something Stocks Don’t? http://t.co/986Evuok Equities & Inv Grade corps outperforming HY Corps- call provisions? $$ Mar 19, 2012
• RE: @thearmotrader Thanks, you did the post that I wanted to do.  Now I just have to point to it. http://t.co/Ru22nvom Mar 19, 2012

Exchange Traded Products

• “@HerbGreenberg mentions that once the creation/redemption mechanism “breaks” (my word, not his), that the ETF/ETN sh… http://t.co/jxK0bZfX Mar 23, 2012
• RE: Not likely, but maybe.  If they were forced to see that they were getting a negative (or very low positive) yield… http://t.co/nnxLt2oj Mar 23, 2012
• Exchange-Traded Notes Are Worse Than You Think http://t.co/FAO4IS3H Path-dependent fees, shadow NAVs, high fees, tracking error, credit risk Mar 21, 2012
• Who Uses Leveraged and Inverse ETFs Anyway? http://t.co/cYpkVMr5 Retail owns 80%+. Normal ETFs r mostly held by institutions $$ Mar 21, 2012
• Know Your Client – Leveraged ETF Version http://t.co/gqPtiZtF Doesn’t matter if leverage is internal or external, client needs come first $$ Mar 21, 2012
• Money Managers Serving Clients First, Ego Second http://t.co/gY9bd1iR Using the investment vehicles of competing firms — a good thing $$ Mar 21, 2012
• RE: @finadd “Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by t… http://t.co/cn5TM1cR Mar 20, 2012
• @amy_calistri at the levels implied by the CEF pricing at some funds, it would shave the yield 3% $DHF $MAV $HIX, 5% $PHT, 12% $PHK $$ Mar 19, 2012
• @amy_calistri Right. I watch the premiums on credit-sensitive CEFs as a measure of frothiness. If the underlying at some HY CEFs were bot + Mar 19, 2012
• Anybody know what was up with $EFT today? Floating-rate loan CEF up 4%+, Closed near par last Friday… odd. $$ Mar 19, 2012
• ‘Junk’ ETFs: Tread Lightly http://t.co/lXftKjwB Check the Price vs the NAV before you buy; also, if w/ds start, index bonds will get hit Mar 19, 2012

Individual Equities

• Leon Black’s Bid Gets No Respect as Great Wolf Surges http://t.co/kqS6pNyU Used 2call this stock “little dog;” badly managed frm beginning Mar 24, 2012
• @merrillmatter Bezos is scary-smart. I don’t own $AMZN either $$ Mar 21, 2012
• Just watched it. Wow, very impressive RT @merrillmatter: Skynet shall be renamed SkyBezos — Order Fetch http://t.co/6l9R9bHn $$ Mar 21, 2012
• +1, ugh RT @abnormalreturns: [post] America officially ran out of good corporate names today. http://t.co/lLGEmeAB $ABT $KFT $AAPL $NKE $MCD Mar 21, 2012
• You’re on a roll today @merrillmatter: @AlephBlog soon our robot overlords will deliver our bread and circuses to us in the Bezos Colosseum Mar 21, 2012
• No RT @merrillmatter: @AlephBlog I want to start a consultancy that veto’s stupid company names. Would your anti-consultancy veto that? Mar 21, 2012
• Amazon Wrings Profit From Fulfillment as Spending Soars http://t.co/McHUqMhe Tough work 4 laborers, though. $AMZN pushes pretty hard $$ Mar 21, 2012
• Kraft to Be Renamed Mondelez After Grocery Unit Is Spun Off http://t.co/GONE6x47 Pronounced “Mohn-dah-LEEZ.” Sigh, who got paid 4 this? $$ Mar 21, 2012
• The 400% Man’s New Big Bet http://t.co/33rHut9y Implicitly a bet that $BRKa will always be able to buy back stock @ 1.1x book value $$ Mar 21, 2012
• In a Major Restructuring, $HPQ To Combine Printer and PC Groups http://t.co/Aj3zaKaY FD: +HPQ; seems like a marginal idea, maybe works $$ Mar 20, 2012
• Why $HPQ Really Needs A CEO Succession Plan http://t.co/hkPDVkAy Good cultures should promote from within; HP used to have that $$ FD: +HPQ Mar 20, 2012
• Buffett Message Is ‘Do as I Say, Not as I Do’ http://t.co/Gcblc8oZ Alice Schroeder very acidic on Buffett; half right & half wrong $$ Mar 20, 2012
• $AAPL to Pay Dividend, Buy Back Stock to Return Some of Cash http://t.co/uxf6jEBP About time, if there aren’t opps 2use the $$ Mar 19, 2012

Money Market Funds

• @MarcHochstein Thanks, I found the CFA Institutes comment today, and their view is similar 2 mine in some ways: http://t.co/8yPLcXfX $$ Mar 22, 2012
• @MarcHochstein investment restrictions moved back to 2008 norms. The ability 2 have credit events frees MMFs to pursue best advantage $$ Mar 21, 2012
• @MarcHochstein My idea will work 4 MMFs using inv policies prior 2 2008. The MMF folks aren’t earning $$ now, but they could with + Mar 21, 2012
• @MarcHochstein After reading this: http://t.co/aUoaN4kb Ask them, what if you traded Merkel’s idea 4 a loosening of investment rules? $$ Mar 21, 2012
• @MarcHochstein 1 more thing; if they have any sympathy toward my idea, I live near DC & would be willing to testify to the SEC $$ Mar 20, 2012
• @MarcHochstein Does that help? I still think my proposal, one of the few compromise proposals out there would work best of all. Mar 20, 2012
• @MarcHochstein Having been a life actuary, most regulatory progress happens when actuaries talk w/smarter regulators & forge compromise Mar 20, 2012
• @MarcHochstein Does that help? MMFs are just saying “We r fine, nothing needs 2b done.” 2me that strategy prob loses. Mar 20, 2012
• @MarcHochstein Would ask them if they have any way of stopping MMF runs on a private basis; this is the SEC goal; solve that, they leave Mar 20, 2012
• @MarcHochstein More humbly, I would ask them if they really think they can beat the SEC. SEC’s proposal is horrible, but saying “no” loses Mar 20, 2012
• @MarcHochstein Not so humbly, I would ask that u show them my proposal that I sent to the SEC, & ask them to back it http://t.co/vuNL8tQE Mar 20, 2012

Market Dynamics

• The Easy Money’s Been Made, Four Reasons for Caution http://t.co/9kAXqEU4 E-zone calm, risk tolerance+ , VIX low, FOMC may move soon Mar 24, 2012
• …and then all of a sudden, THE BULLS WENT BERZERK! http://t.co/bJKCVJha Lots of bullishness out there, though Howard Marks thought otherwise Mar 21, 2012
• @byrneseyeview That’s true, & I did a presentation on that. One more complicating factor were financials, which looked cheap but weren’t $$ Mar 21, 2012
• @byrneseyeview Found it. Here: http://t.co/YupRW6yD It’s on a number of topics; it was well-received $$ Mar 21, 2012
• Contra: The Biggest Bubble You’ve Never Heard Of http://t.co/0tzkPyiA Value can’t b a bubble. Growth can b a bubble. Growth & ROE meanrevert Mar 21, 2012
• Is this time really different? http://t.co/eePs0aIV It’s never different. It’s always different. Profit margins will mean-revert; Q is when Mar 21, 2012
• Biggs boosts bullish bets on stocks to 90% net long http://t.co/5fYQDhUC Won’t be the first 2 say this, but makes me doubt the rally $$ Mar 21, 2012
• The Ax is Back http://t.co/B1j3f7nH @reformedbroker Reduced profits on Wall Street translates into reduced perks, bonuses & jobs $$ Mar 21, 2012
• Public Companies: The End Is Near http://t.co/KejHwYDu There r still advantages 2being publicly traded, but has eroded since Sarbox, etc $$ Mar 20, 2012
• S&P 500 Rises to Four-Year High as Apple Plans Dividend http://t.co/RnBf9yEw $AAPL raises the div yld on the S&P 500 by 0.08%. Big! $$ Mar 19, 2012
• Shares and shibboleths http://t.co/CspyJCNX The equity premium over a diversified portfolio of investment grade bonds is ~1%/yr IMO $$ Mar 19, 2012
• Hubble, Bubble, Index Trouble http://t.co/2q3CPx4g Been saying this for years, indexing changes market dynamics, what happens @ reversal? $$ Mar 18, 2012

Politics

• Why Are Your Neighbors Just Like You? http://t.co/0lcPOuLZ On the demise of really knowing your neighbors; we try 2 reach out; few others do Mar 24, 2012
• @traderscrucible @interfluidity My blog (& Steve’s) have always had a strong public policy emphasis. Dreaming, but we suggest better policy. Mar 23, 2012
• Agent Based Models http://t.co/0etJ20fL “Why not keep it simple, and just say, you pay an asset tax for every dollar over $100B?” $$ Mar 23, 2012
• The Warren Buffett Chain Letter http://t.co/31FFSrmm Draconian adjustments. What Buffett did & didn’t say. 3% deficit ejects Congress $$ Mar 21, 2012
• Migration of sovereign debt from private hands to public institutions http://t.co/rQbDTXg3 &the debt sits til liquidity is needed -> crisis! Mar 21, 2012
• To Stay On Top, The US Must Invest In Research Universities http://t.co/P4kyUqY0 FD: + $INTC; do it w/yr own $$ not taxes; c my comment Mar 20, 2012
• RT @BarbarianCap: “cnbc: California Cities Scrambling to Avoid Becoming Insolvent” > the die was cast years ago; clowns, path depende … Mar 20, 2012
• Stopping the National Debt: A Movement Led By a Cowboy, a Colonel, & a Citizens’ Cavalry http://t.co/frqAXCpy Natl Debt Relief Amendment Mar 20, 2012
• Who is REALLY paying in the $25bil TBTF mortgage settlement http://t.co/T2h1B5CO $5B from banks, rest MBS holders eg pension plans, insurers Mar 19, 2012
• The JOBS Act: Plutocracy in Action http://t.co/Fjo3Ppet Another article on the previous topic; don’t downgrade information quality $$ Mar 19, 2012
• Small Biz Jobs Act Is a Bipartisan Bridge Too Far http://t.co/AwBXg184 Would not mess w/securities laws in that way to create growth $$ Mar 19, 2012
• Public Unions Send Medical Bills to Taxpayers http://t.co/Lb2XgAv9 CA Sup Ct foolishly makes healthcare nonreducible. CA will die $$ Mar 18, 2012
• As Unions Lose Their Grip, Indiana Lures Manufacturing Jobs http://t.co/vj177CT2 Like my article that few like http://t.co/WgdN7Mmq $$ Mar 18, 2012
• Pension Legislation Could Cut Contributions, Hike Taxes http://t.co/Tj1UlUz8 Stupid proposals that weaken DB pensions, companies r strongnow Mar 18, 2012

Regulation

• Where is the Center for Audit Quality When We Actually Could Use It? http://t.co/jWt09bcw JOBS Act: destroy info reliability to create jobs Mar 23, 2012
• Fed’s Fisher Says ‘Too-Big-to-Fail’ Problem Remains http://t.co/eLvHGmXt Richard Fisher favors breakup of the biggest banks. $$ Mar 21, 2012
• @carney just read your piece on the net capital rule. Similar to my piece last November http://t.co/tl28NPku Good piece. $$ Mar 21, 2012
• Top Court’s Patent Rejection Alarms the Biotech Industry http://t.co/oK11WlvR ’bout time we forced a more fundamental review of patents Mar 21, 2012

Economics

• Solar’s 80% Plunge Hurts Utilities From Hawaii to Spain http://t.co/m9eACVTp Overcapacity drives down prices of PV panels for now. $$ Mar 21, 2012
• Mean Time Between Failures http://t.co/zkT0z9cX The “recovery” is getting long in the tooth, eg it may end soon; graph: http://t.co/xOHA1IYA Mar 20, 2012
• Obama’s tax hikes threaten a new US recession http://t.co/uNHwBpeJ Looking @ 4 more years of divided govt & stalemate $$ #debtbombgrows Mar 20, 2012
• @The_Dumb_Money I would have liked to see the Banks/Etc. who owned the servicers bear more of the cost $$ Mar 20, 2012
• Partial equilibrium intuitions about choice http://t.co/215kIrmS @interfluidity more difficult to solve general equilibrium Qs than partial Mar 19, 2012
• Understanding the New Price of Oil http://t.co/TaMTaneR No surprise here; most cheap oil has been found, the price of oil should rise $$ Mar 18, 2012

Miscellaneous

• @merrillmatter Factoid: 100,000,000,000 to 1 for a monkey to type the word “banana” from random typewriter jumping Mar 21, 2012
• Is a Calorie a Calorie? http://t.co/4hyTfSvr Yes, but different nutrients come w/calories. Also, a unit of fat has 2x cals vs carbs/protein Mar 21, 2012
• Madoff’s Lament: I Was An Honest Money Manager Once http://t.co/OGp2xRHR The outside world should ignore Madoff now. Attention feeds him. Mar 21, 2012
• Trust no one http://t.co/cFYBkCA7 & http://t.co/ILP0dPlA Independent & regular journalists face conflicts of interest in giving speeches $$ Mar 20, 2012
• On Slime and Water http://t.co/8iezy0FK Pink Slime in burgers, and shortages of potable water in most of the globe, except Canada & US. $$ Mar 18, 2012
• The NSA Is Building the Country’s Biggest Spy Center (Watch What You Say) http://t.co/iUsN5D0t Time to increase encryption key sizes $$ Mar 18, 2012
• @TimABRussell I always read all the books I review; in rare cases when I don’t, I tell readers that I skimmed it. $$ Mar 18, 2012

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Central Banking

·  Been using FRED since it was a bulletin board in 1991. Great job, FRED team! http://t.co/kksvwllMMar 24, 2012

·  The Villain http://t.co/yYReRb4r On Bernanke, the man who expanded the power of the Fed far beyond constitutional limits, if there r any $$ Mar 24, 2012

·  Bernanke Sees Need for Higher Household Spending to Fuel Growth http://t.co/3LQUTGji Yes Ben, we will spend more while we are inverted $$ Mar 24, 2012

·  Fed’s Evans Calls for Stronger Commitment to Low Rates http://t.co/vSKfU36q Read paper; don’t buy it. ARIMA, no out of sample tests $$ Mar 24, 2012

·  Bernanke Says Low Rates Didn’t Fuel Bubble http://t.co/XlF50zKV Perhaps Bernanke can’t remember minor crisis; RMBS extension mid-2003 $$ Mar 24, 2012

·  That crisis created a very sharp move up in rates http://t.co/jfNAVN3o $$ Mar 24, 2012

·  Bernanke: the man, the legacy and the law http://t.co/zA7OeFc4 “courts have shied away from developing jurisprudence on monetary policy.” $$ Mar 24, 2012

·  @fatdaz It is my firm belief that no economic entity can dominate entirely; central banks have been destroyed b4; will happen again $$ Mar 24, 2012

·  Masters of the Universe Start to Challenge Ben Bernanke http://t.co/31Pr1yrQ Markets are more powerful than Central Banks, watch out Fed! Mar 23, 2012

·  European Banks Would Have Passed Fed’s Stress Test http://t.co/z5bCBeYy Ultimate insult 4 stringency of Fed’s stress tests $$ #devildetails Mar 20, 2012

·  Bernanke Stands to Gain Capital-Market Experts With Nominees http://t.co/oX8xOdEU We need some people that doubt neoclassical economics $$ Mar 20, 2012

·  Bernanke Returns to Academic Roots to Justify Fed’s Existence http://t.co/ORfma5sE Safe audiences let him talk publicly w/little risk $$ Mar 20, 2012

·  Federal Reserve Stress Tests Make Us All Muppets http://t.co/CQu827KD Ignores E-Zone contagion, increase in int rate volatility, etc $$ Mar 19, 2012

·  Bernanke: “I Want to Bring Back Irrational Exuberance” http://t.co/p0qlQwXe @brucekrasting on overheating in some debt asset classes $$ Mar 19, 2012

China

·  Ai Weiwei: “You’re There but You’re Not Existing” http://t.co/d7mLxHXm RARE interview w/Ai Weiwei, describing his detention in China $$ Mar 24, 2012

·  China’s stock-market supervision suffering http://t.co/QEBPC5ya “Understaffed securities regulator, weak legal system cited” $$ #nosurprise Mar 21, 2012

·  @Roy_Cam They can’t make money b/c of overcapacity; China invested too much in steel & global growth stinks. US exports of steel r rising $$ Mar 20, 2012

·  @Roy_Cam We only import 30% of steel used in US, 4% of which comes from China = 1.2% of steel used is from China http://t.co/FTWt80oa $$ Mar 20, 2012

·  @Roy_Cam You are right there, and that’s one reason why profitability is declining in steel industry globally. $$ Mar 20, 2012

·  China to increase fuel prices 6-7% http://t.co/dBwrepDj Pump prices at record highs; biggest rise since June 2009 #ouch $$ Mar 20, 2012

·  Sad Industry Mantra: Make Steel, Lose Money http://t.co/Pu9e6qFj Insanity; doing same thing, expecting different results. Future bailout $$ Mar 20, 2012

·  The State-Owned Enterprises of China http://t.co/55nvgUMs I think a “big bang” would work, but the Communist Party would never do it $$ #Mao Mar 20, 2012

·  Chinese property *alert* http://t.co/eklWzXkU Property sales value contracted 20% year on year in the two months ending in February. $$ Mar 20, 2012

·  China’s new home prices “no longer rising” http://t.co/UL4T3yzQ The Chinese Gov’t always gets what it wants, until it gets too much of it $$ Mar 19, 2012

·  Chinese Companies Forced to Falsify Data, Government Says http://t.co/tH0MUiYn AN example of why I don’t trust Chinese economic data. $$ Mar 18, 2012

·  @Xiphos_Trading Don’t know if there will be a crash or not, but there has been a lot of malinvestment in China, like Late 80s Japan $$ Mar 18, 2012

Europe

·  Those Catchy Spanish (Yield) Curves http://t.co/qoGmGl7E Yields backing up in the Spanish bond market; this could be the next crisis $$ Mar 24, 2012

·  Euro-Zone Banks Get Show of Faith http://t.co/ZWqd8Df5 US MMFs begin adding back yieldy E-zone bank CP $$ #wedontlearnwereallydontlearn Mar 24, 2012

·  On second thought, hold off moving that business to Ireland http://t.co/Bdu6ezon Ireland heading into recession; possibility of default? $$ Mar 23, 2012

·  @Mapsofworld Gun to the head, I think it fails entirely, but that opinion is not held with high probability $$ Mar 22, 2012

·  @Mapsofworld If the E-zone doesn’t move 2a full fiscal union, the Euro will either fail entirely, or become the currency of a smaller group Mar 22, 2012

·  The Safe Haven of the Nordic Currencies Is No More http://t.co/FquH5ZWW It’s a little early to get categorical about this $$ Mar 21, 2012

·  A Wall St. Firm Advises Greece, With Discretion http://t.co/Y12GeNZq $BLK is one powerful firm that many govts in crisis turn 2 4 help $$ Mar 21, 2012

·  Swiss Secrecy Besieged Makes Banks Fret World Money Lure Fading http://t.co/qV197Px1 What good r Swiss banks if no secrecy, tax evasion $$ Mar 20, 2012

·  Germany on a Different Track http://t.co/Gl3BNXBA While Much of EZone Deals W/Busts, Property Prices r Rising in Berlin, Hamburg, Munich Mar 20, 2012

Rest of the World

·  Israel Billionaires Put Own Interest Ahead of Holders http://t.co/QSTpBn6E What’s mine is mine; what’s yours is negotiable $$ Mar 24, 2012

·  Late Shah’s Son Selected As Iran’s Person Of The Year http://t.co/phWmAFRQ This is VOA so take it w/a grain of salt; still funny 2thinkabout Mar 24, 2012

·  Latin American Nations in Worse Shape for Crisis, IDB Says http://t.co/zlZvDJi4 “result of lower budget surpluses b4 interest payments” $$ Mar 20, 2012

·  What is the real rate of interest telling us? http://t.co/Vbk13I02 Excess capacity in devel world post bubble pop, send cap 2 emerg mkts Mar 20, 2012

Insurance

·  @CflGator Life companies should be simple, but product design exploded to the point where reserving can’t keep up; I own only 1 life co. Mar 24, 2012

·  @CflGator Variable & Universal life products have secondary gtee issues; there r a variety of long dated term products w/rsv issues $$ Mar 24, 2012

·  @CflGator and P&C insurance — life insurance is capital intensive; they are sticking with their simplest biz, aside from long-tail P&C $$ Mar 24, 2012

·  @CflGator It really depends; they wrote a lot of complex life products. On the bright side, a company in runoff is a cash cow. $$ Mar 24, 2012

·  @CflGator That’s the tough Q. $HIG offered significant secondary guarantees when they were the #1 annuity writer. May not b prop reserved $$ Mar 21, 2012

·  Hartford Shares Jump On Split, Analysts Like It Too http://t.co/APFbv4UA Not so fast on $HIG; regulators must approve a split; c my cmmt Mar 21, 2012

·  Should Hartford’s Annuity Holders Be Worried? http://t.co/HfuZO3QO Probably not; small annuitants have protection from guaranty funds $$ Mar 21, 2012

·  Annuity Case Chills Insurance Agents http://t.co/rHkg68Lw I’m always skeptical of products w/high commissions & surrender charges $$ Mar 19, 2012

Fixed Income

·  Why Fixed Income Funds May Fall Short http://t.co/cHmF3hOj On the difficulties of combating tracking error in fixed income ETFs. $$ Mar 24, 2012

·  Top Junk Pummels Treasuries for Safest Profits http://t.co/E5vl2qHB That’s the rearview mirror; will be harder to squeeze more returns out Mar 21, 2012

·  The differentiation of Agency MBS risk profiles http://t.co/IJN2mbCm Interesting to see long avg life on high coupon underwater mortgages $$ Mar 21, 2012

·  Bond Bear Market Yet to Roar http://t.co/oNENX9jc The selloff has been piddling so far, has not affected equities, & it may reverse $$ Mar 21, 2012

·  Do High Yield Bonds Know Something Stocks Don’t? http://t.co/986Evuok Equities & Inv Grade corps outperforming HY Corps- call provisions? $$ Mar 19, 2012

·  RE: @thearmotrader Thanks, you did the post that I wanted to do.  Now I just have to point to it. http://t.co/Ru22nvom Mar 19, 2012

Exchange Traded Products

·  “@HerbGreenberg mentions that once the creation/redemption mechanism “breaks” (my word, not his), that the ETF/ETN sh… http://t.co/jxK0bZfX Mar 23, 2012

·  RE: Not likely, but maybe.  If they were forced to see that they were getting a negative (or very low positive) yield… http://t.co/nnxLt2oj Mar 23, 2012

·  Exchange-Traded Notes Are Worse Than You Think http://t.co/FAO4IS3H Path-dependent fees, shadow NAVs, high fees, tracking error, credit risk Mar 21, 2012

·  Who Uses Leveraged and Inverse ETFs Anyway? http://t.co/cYpkVMr5 Retail owns 80%+. Normal ETFs r mostly held by institutions $$ Mar 21, 2012

·  Know Your Client – Leveraged ETF Version http://t.co/gqPtiZtF Doesn’t matter if leverage is internal or external, client needs come first $$ Mar 21, 2012

·  Money Managers Serving Clients First, Ego Second http://t.co/gY9bd1iR Using the investment vehicles of competing firms — a good thing $$ Mar 21, 2012

·  RE: @finadd “Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by t… http://t.co/cn5TM1cR Mar 20, 2012

·  @amy_calistri at the levels implied by the CEF pricing at some funds, it would shave the yield 3% $DHF $MAV $HIX, 5% $PHT, 12% $PHK $$ Mar 19, 2012

·  @amy_calistri Right. I watch the premiums on credit-sensitive CEFs as a measure of frothiness. If the underlying at some HY CEFs were bot + Mar 19, 2012

·  Anybody know what was up with $EFT today? Floating-rate loan CEF up 4%+, Closed near par last Friday… odd. $$ Mar 19, 2012

·  ‘Junk’ ETFs: Tread Lightly http://t.co/lXftKjwB Check the Price vs the NAV before you buy; also, if w/ds start, index bonds will get hit Mar 19, 2012

Individual Equities

·  Leon Black’s Bid Gets No Respect as Great Wolf Surges http://t.co/kqS6pNyU Used 2call this stock “little dog;” badly managed frm beginning Mar 24, 2012

·  @merrillmatter Bezos is scary-smart. I don’t own $AMZN either $$ Mar 21, 2012

·  Just watched it. Wow, very impressive RT @merrillmatter: Skynet shall be renamed SkyBezos — Order Fetch http://t.co/6l9R9bHn $$ Mar 21, 2012

·  +1, ugh RT @abnormalreturns: [post] America officially ran out of good corporate names today. http://t.co/lLGEmeAB $ABT $KFT $AAPL $NKE $MCD Mar 21, 2012

·  You’re on a roll today @merrillmatter: @AlephBlog soon our robot overlords will deliver our bread and circuses to us in the Bezos Colosseum Mar 21, 2012

·  No RT @merrillmatter: @AlephBlog I want to start a consultancy that veto’s stupid company names. Would your anti-consultancy veto that? Mar 21, 2012

·  Amazon Wrings Profit From Fulfillment as Spending Soars http://t.co/McHUqMhe Tough work 4 laborers, though. $AMZN pushes pretty hard $$ Mar 21, 2012

·  Kraft to Be Renamed Mondelez After Grocery Unit Is Spun Off http://t.co/GONE6x47 Pronounced “Mohn-dah-LEEZ.” Sigh, who got paid 4 this? $$ Mar 21, 2012

·  The 400% Man’s New Big Bet http://t.co/33rHut9y Implicitly a bet that $BRKa will always be able to buy back stock @ 1.1x book value $$ Mar 21, 2012

·  In a Major Restructuring, $HPQ To Combine Printer and PC Groups http://t.co/Aj3zaKaY FD: +HPQ; seems like a marginal idea, maybe works $$ Mar 20, 2012

·  Why $HPQ Really Needs A CEO Succession Plan http://t.co/hkPDVkAy Good cultures should promote from within; HP used to have that $$ FD: +HPQ Mar 20, 2012

·  Buffett Message Is ‘Do as I Say, Not as I Do’ http://t.co/Gcblc8oZ Alice Schroeder very acidic on Buffett; half right & half wrong $$ Mar 20, 2012

·  $AAPL to Pay Dividend, Buy Back Stock to Return Some of Cash http://t.co/uxf6jEBP About time, if there aren’t opps 2use the $$ Mar 19, 2012

Money Market Funds

·  @MarcHochstein Thanks, I found the CFA Institutes comment today, and their view is similar 2 mine in some ways: http://t.co/8yPLcXfX $$ Mar 22, 2012

·  @MarcHochstein investment restrictions moved back to 2008 norms. The ability 2 have credit events frees MMFs to pursue best advantage $$ Mar 21, 2012

·  @MarcHochstein My idea will work 4 MMFs using inv policies prior 2 2008. The MMF folks aren’t earning $$ now, but they could with + Mar 21, 2012

·  @MarcHochstein After reading this: http://t.co/aUoaN4kb Ask them, what if you traded Merkel’s idea 4 a loosening of investment rules? $$ Mar 21, 2012

·  @MarcHochstein 1 more thing; if they have any sympathy toward my idea, I live near DC & would be willing to testify to the SEC $$ Mar 20, 2012

·  @MarcHochstein Does that help? I still think my proposal, one of the few compromise proposals out there would work best of all. Mar 20, 2012

·  @MarcHochstein Having been a life actuary, most regulatory progress happens when actuaries talk w/smarter regulators & forge compromise Mar 20, 2012

·  @MarcHochstein Does that help? MMFs are just saying “We r fine, nothing needs 2b done.” 2me that strategy prob loses. Mar 20, 2012

·  @MarcHochstein Would ask them if they have any way of stopping MMF runs on a private basis; this is the SEC goal; solve that, they leave Mar 20, 2012

·  @MarcHochstein More humbly, I would ask them if they really think they can beat the SEC. SEC’s proposal is horrible, but saying “no” loses Mar 20, 2012

·  @MarcHochstein Not so humbly, I would ask that u show them my proposal that I sent to the SEC, & ask them to back it http://t.co/vuNL8tQE Mar 20, 2012

Market Dynamics

·  The Easy Money’s Been Made, Four Reasons for Caution http://t.co/9kAXqEU4 E-zone calm, risk tolerance+ , VIX low, FOMC may move soon Mar 24, 2012

·  …and then all of a sudden, THE BULLS WENT BERZERK! http://t.co/bJKCVJha Lots of bullishness out there, though Howard Marks thought otherwise Mar 21, 2012

·  @byrneseyeview That’s true, & I did a presentation on that. One more complicating factor were financials, which looked cheap but weren’t $$ Mar 21, 2012

·  @byrneseyeview Found it. Here: http://t.co/YupRW6yD It’s on a number of topics; it was well-received $$ Mar 21, 2012

·  Contra: The Biggest Bubble You’ve Never Heard Of http://t.co/0tzkPyiA Value can’t b a bubble. Growth can b a bubble. Growth & ROE meanrevert Mar 21, 2012

·  Is this time really different? http://t.co/eePs0aIV It’s never different. It’s always different. Profit margins will mean-revert; Q is when Mar 21, 2012

·  Biggs boosts bullish bets on stocks to 90% net long http://t.co/5fYQDhUC Won’t be the first 2 say this, but makes me doubt the rally $$ Mar 21, 2012

·  The Ax is Back http://t.co/B1j3f7nH @reformedbroker Reduced profits on Wall Street translates into reduced perks, bonuses & jobs $$ Mar 21, 2012

·  Public Companies: The End Is Near http://t.co/KejHwYDu There r still advantages 2being publicly traded, but has eroded since Sarbox, etc $$ Mar 20, 2012

·  S&P 500 Rises to Four-Year High as Apple Plans Dividend http://t.co/RnBf9yEw $AAPL raises the div yld on the S&P 500 by 0.08%. Big! $$ Mar 19, 2012

·  Shares and shibboleths http://t.co/CspyJCNX The equity premium over a diversified portfolio of investment grade bonds is ~1%/yr IMO $$ Mar 19, 2012

·  Hubble, Bubble, Index Trouble http://t.co/2q3CPx4g Been saying this for years, indexing changes market dynamics, what happens @ reversal? $$ Mar 18, 2012

Politics

·  Why Are Your Neighbors Just Like You? http://t.co/0lcPOuLZ On the demise of really knowing your neighbors; we try 2 reach out; few others do Mar 24, 2012

·  @traderscrucible @interfluidity My blog (& Steve’s) have always had a strong public policy emphasis. Dreaming, but we suggest better policy. Mar 23, 2012

·  Agent Based Models http://t.co/0etJ20fL “Why not keep it simple, and just say, you pay an asset tax for every dollar over $100B?” $$ Mar 23, 2012

·  The Warren Buffett Chain Letter http://t.co/31FFSrmm Draconian adjustments. What Buffett did & didn’t say. 3% deficit ejects Congress $$ Mar 21, 2012

·  Migration of sovereign debt from private hands to public institutions http://t.co/rQbDTXg3 &the debt sits til liquidity is needed -> crisis! Mar 21, 2012

·  To Stay On Top, The US Must Invest In Research Universities http://t.co/P4kyUqY0 FD: + $INTC; do it w/yr own $$ not taxes; c my comment Mar 20, 2012

·  RT @BarbarianCap: “cnbc: California Cities Scrambling to Avoid Becoming Insolvent” > the die was cast years ago; clowns, path depende … Mar 20, 2012

·  Stopping the National Debt: A Movement Led By a Cowboy, a Colonel, & a Citizens’ Cavalry http://t.co/frqAXCpy Natl Debt Relief Amendment Mar 20, 2012

·  Who is REALLY paying in the $25bil TBTF mortgage settlement http://t.co/T2h1B5CO $5B from banks, rest MBS holders eg pension plans, insurers Mar 19, 2012

·  The JOBS Act: Plutocracy in Action http://t.co/Fjo3Ppet Another article on the previous topic; don’t downgrade information quality $$ Mar 19, 2012

·  Small Biz Jobs Act Is a Bipartisan Bridge Too Far http://t.co/AwBXg184 Would not mess w/securities laws in that way to create growth $$ Mar 19, 2012

·  Public Unions Send Medical Bills to Taxpayers http://t.co/Lb2XgAv9 CA Sup Ct foolishly makes healthcare nonreducible. CA will die $$ Mar 18, 2012

·  As Unions Lose Their Grip, Indiana Lures Manufacturing Jobs http://t.co/vj177CT2 Like my article that few like http://t.co/WgdN7Mmq $$ Mar 18, 2012

·  Pension Legislation Could Cut Contributions, Hike Taxes http://t.co/Tj1UlUz8 Stupid proposals that weaken DB pensions, companies r strongnow Mar 18, 2012

Regulation

·  Where is the Center for Audit Quality When We Actually Could Use It? http://t.co/jWt09bcw JOBS Act: destroy info reliability to create jobs Mar 23, 2012

·  Fed’s Fisher Says ‘Too-Big-to-Fail’ Problem Remains http://t.co/eLvHGmXt Richard Fisher favors breakup of the biggest banks. $$ Mar 21, 2012

·  @carney just read your piece on the net capital rule. Similar to my piece last November http://t.co/tl28NPku Good piece. $$ Mar 21, 2012

·  Top Court’s Patent Rejection Alarms the Biotech Industry http://t.co/oK11WlvR ’bout time we forced a more fundamental review of patents Mar 21, 2012

Economics

·  Solar’s 80% Plunge Hurts Utilities From Hawaii to Spain http://t.co/m9eACVTp Overcapacity drives down prices of PV panels for now. $$ Mar 21, 2012

·  Mean Time Between Failures http://t.co/zkT0z9cX The “recovery” is getting long in the tooth, eg it may end soon; graph: http://t.co/xOHA1IYA Mar 20, 2012

·  Obama’s tax hikes threaten a new US recession http://t.co/uNHwBpeJ Looking @ 4 more years of divided govt & stalemate $$ #debtbombgrows Mar 20, 2012

·  @The_Dumb_Money I would have liked to see the Banks/Etc. who owned the servicers bear more of the cost $$ Mar 20, 2012

·  Partial equilibrium intuitions about choice http://t.co/215kIrmS @interfluidity more difficult to solve general equilibrium Qs than partial Mar 19, 2012

·  Understanding the New Price of Oil http://t.co/TaMTaneR No surprise here; most cheap oil has been found, the price of oil should rise $$ Mar 18, 2012

Miscellaneous

·  @merrillmatter Factoid: 100,000,000,000 to 1 for a monkey to type the word “banana” from random typewriter jumping Mar 21, 2012

·  Is a Calorie a Calorie? http://t.co/4hyTfSvr Yes, but different nutrients come w/calories. Also, a unit of fat has 2x cals vs carbs/protein Mar 21, 2012

·  Madoff’s Lament: I Was An Honest Money Manager Once http://t.co/OGp2xRHR The outside world should ignore Madoff now. Attention feeds him. Mar 21, 2012

·  Trust no one http://t.co/cFYBkCA7 & http://t.co/ILP0dPlA Independent & regular journalists face conflicts of interest in giving speeches $$ Mar 20, 2012

·  On Slime and Water http://t.co/8iezy0FK Pink Slime in burgers, and shortages of potable water in most of the globe, except Canada & US. $$ Mar 18, 2012

·  The NSA Is Building the Country’s Biggest Spy Center (Watch What You Say) http://t.co/iUsN5D0t Time to increase encryption key sizes $$ Mar 18, 2012

·  @TimABRussell I always read all the books I review; in rare cases when I don’t, I tell readers that I skimmed it. $$ Mar 18, 2012

I’m working on my quarterly reshaping — where I choose new companies to enter my portfolio.  The first part of this is industry analysis.

My main industry model is illustrated in the graphic.  Green industries are cold.  Red industries are hot.  If you like to play momentum, look at the red zone, and ask the question, “Where are trends under-discounted?”  Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted.  Yes, things are bad, but are they all that bad?  Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled “Dig through.”

If you use any of this, choose what you use off of your own trading style.  If you trade frequently, stay in the red zone.  Trading infrequently, play in the green zone — don’t look for momentum, look for mean reversion.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh?  Why change if things are working well?  I’m not saying to change if things are working well.  I’m saying don’t change if things are working badly.  Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes.  Maximum pain drives changes for most people, which is why average investors don’t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy — no one thinks of changing then.  This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year.  It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology names here, some energy some healthcare-related names, P&C Insurance and Reinsurance, particularly those that are strongly capitalized.  I’m not concerned about the healthcare bill; necessary services will be delivered, and healthcare companies will get paid.

A word on banks and REITs: the credit cycle has not been repealed, and there are still issues unresolved from the last cycle — I am not interested there even at present levels.  The modest unwind currently happening in the credit markets, if it expands, would imply significant issues for banks and their “regulators.”

I’m looking for undervalued and stable industries.  I’m not saying that there is always a bull market out there, and I will find it for you.  But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive.  I don’t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting.  The red zone is pretty cyclical at present.  I will be very happy hanging out in dull stocks for a while.

P&C Insurers and Reinsurers Look Cheap

After the heavy disaster year of 2011, P&C insurers and reinsurers look cheap.  Many trade below tangible book, and at single-digit P/Es, which has always been a strong area for me, if the companies are well-capitalized, which they are.

I already own a spread of well-run, inexpensive P&C insurers & reinsurers.  Would I increase the overweight here?  Yes, I might, because I view the group as absolutely cheap; it could make me money even in a down market.  Now, I would do my series of analyses such that I would be happy with the reserving and the investing policies of each insurer, but after that, I would be willing to add to my holdings.

Do your own due diligence on this, because I am often wrong.

First, I have some blog news:  my hosting provider made me delete 7000 spammers out of my user database.  That left me with 200+ users.  Inadvertently, in the process, around 70 bona fide users with surnames starting with the letters J-Z got deleted.  So, if you got deleted, and have to re-register, my apologies.  I tried to be careful, but made an error when matching databases.

Second, MetLife should not have to undergo the stress tests that banks do.  Banks borrow short and lend long; they are inherently unstable.  Insurance companies generally match assets and liabilities, and are stable.  The only insurer of consequence to fail in the crisis was AIG, and it was because of derivatives and securities lending issues, areas that other insurance companies do not touch, or handle differently.

Third, why does an institutional investor use an investment bank?

When I was a corporate bond manager, we used everyone.  We wanted access to deals, and if you don’t deal with all of the majors, you are shut out.  Of course every manager deals with Goldman Sachs even if they don’t trust them.  The big guys know this and keep their brokers at arm’s length.

If you are a reporter, that is why managers will not speak on record.  If the syndicate desks on Wall Street don’t like you, they won’t give you good allocations on contested deals.

Bond managers are wise to use Goldman.  They are wiser to realize that Goldman does not act in their interests, and so, be cautious.  And to the degree that you are a smart manager, you can lessen your dependence on the big guys, and work with the hungry second tier, who know that money can be made by implementing the ideas of smart investors, so find ways to buy cheap bonds for smart investors from dumb investors, and sell rich bonds from smart investors to dumb investors.  After all, brokers only make money when assets are bought or sold.

There are few friends on Wall Street.  Big institutions know that, retail investors should learn that.  But the guy who resigned from Goldman should be aware that not all clients were muppets.  Firms I was with would avoid derivatives unless we were the ones structuring them.  If we have control, derivatives are good.  If we don’t have control, derivatives are bad.  Control is good….

You should always be thinking that those who you deal with may not be acting in your interest, and often, it is because of forces beyond their control.  I was pinned with $10MM face of Teleglobe bonds and the main broker dealing in them held (unknown to me at the time) $100MM+ of the bonds.  My efforts to sell the bonds failed because the broker had a larger position, and there was no active market.

Fourth, just because you live in America, it doesn’t mean you should get a high wage.  Particularly for manufacturing wages are declining, and why shouldn’t they decline, because productivity is not rapidly advancing.  It’s like my article on comparable worth.  Most Americans are going to have to get used to being poorer, because there are many others who can do what they do for less.  And, that partly explains the 1% vs 99% argument, because as the rest of the world grows, and the US doesn’t, it has impact on those in the US that earn too much relative to their productivity.

Fifth, imagine for a moment that you are in charge of an organization that is going to play a baseball game against the winners of the World Series.  You can choose any people to be players that have not been employed in MLB for the last five years.  How well do you think you will do?

Duh. You know you are going to lose.  Well, the same thing applies for those that are arguing that the 99% can dominate the 1%.  Short of Soviet tyranny, it won’t work.  The 1%, should it really exist as a stable organization, is too smart, and will beat the 99% nine times out of ten.

We talk a lot about democracy, though our government thwarts it when it can.  Government typically boils down to aristocracy — the rich rule, and it can’t be otherwise, unless we want Communism, like China under Mao.  In the Eurozone, under the “socialism,” the wealthy happily rule.  Only societies that are wiling to destroy wealth are willing to deny power to the wealthy.  And China is a great example here, as the wealthy increasingly dominate their government, to a greater degree than is true in the US.

Money talks, losers walk, and I never give money to politicians; it is all too corrupt.  Just realize that the deck is stacked against you.  Money finds a way to win in the process eventually.

Sixth, California will suffer for making retiree healthcare unchangeable.  Retiree healthcare in its present form is not affordable by almost everyone.  Why destroy your state by making  promises that can’t be upheld?

Seventh, after you read this, explain why you might trust Chinese statistics.  I reminds me of AIG where bad news had a hard time traveling to the top.

Those that have read me for a long time know that I am a proponent of immediate annuities.  Though they pay a fixed stream of income, they are more useful than bonds, because they provide longevity insurance; they can be tailored to prove an income that you can’t outlive, for you and your spouse.

But I got really annoyed when I saw an ad that said the following:

• 7% Income Guaranteed
• No RISK of Principal

And if you click on it, it takes you here, where they talk about 8%+ returns.  Total garbage.

Yes, if you are old enough, when you buy an immediate annuity, the annual payment may be 7% or more than the amount that you gave to the insurance company.  But with the yield on long low-investment grade bonds  hovering above 5%, I can tell you with certainty as a life actuary that the life companies are not providing a 7% return to retirees — it is far, far less, more like 4%, or maybe less.

So why the difference?  Immediate annuities work off of the idea that a lot of people will die, and money from their annuities is reallocated to the living (minus a profit for the insurer, on average).  The insurer earns 4.5% on its investments, and additional money of 3.5-5.0% from deaths of annuitants supports the payments of those living, with 1% to cover commissions, administration, and profits.

So, they advertise that they are paying you 7-8%+, when they are really paying you 4.0-4.5%, and exposing you to the risk of inflation, because that payment will never rise.  Ask them for payout levels on inflation-adjusted immediate annuities, and watch your jaw drop as you see how relatively low the payments are.

This is dishonest advertising, because not only are they not giving you the true level of returns, but they tell you there is no risk of principal.  Guess what, though I like immediate annuities, the only reason there is no risk of principal with them is that you surrender your principal when you buy one.  Your principal is gone, and you have a payment stream that will disappear at death (or death of you and your spouse).

This advertisement was probably put together by an independent agency, but blame still goes to the insurers that allowed themselves to be involved in such a scam:

• Allianz
• Aviva
• Fidelity Investments
• Genworth Financial
• ING
• Metlife
• Midland National
• New York Life
• Pacific Life
• Prudential (US)

Shame on all of you.  This is deceptive advertising that defrauds those who trust the representations of your agent.  State Insurance Commissioners, please take note.

If something seems too good to be true, it usually is, and this is another example of that.

This period of the Aleph Blog covers May through July of 2010.  The one big series that I started in that era was “The Education of a Corporate Bond Manager” series.  The idea was to describe how a neophyte was thrust into an unusual position and thrived, after some difficulties.

The Education of a Corporate Bond Manager, Part I

How I learned the basics, and survived 9/11.

The Education of a Corporate Bond Manager, Part II

How I learned to trade bonds, and engage in intelligent price discovery.

The Education of a Corporate Bond Manager, Part III

What is the new issue bond allocation process like, and what games get played around it?

The Education of a Corporate Bond Manager, Part IV

On the games that can be played in dealing with brokers.

The Education of a Corporate Bond Manager, Part V

On selling hot sectors, and dealing with the dirty details of unusual bonds.

The Education of a Corporate Bond Manager, Part VI

On dealing with ignorant clients, and taking out-of-consensus risks.

Then there was the continuation of “The Rules” series:

The Rules, Part XIII, subpart A

On the biases the come from yield-seeking.

The Rules, Part XIII, subpart B

Repeat after me, “Yield is not free.”

The Rules, Part XIII, subpart C

Reaching for yield always has risks, but the penalties are most intense at the top of the cycle, when credit spreads are tight, and the Fed’s loosening cycle is nearing its end.  It is at that point that a good bond manager tosses as much risk as he can overboard without bringing yield so low that his client screams.

The Rules, Part XV

Securitization segments a security into liquid and illiquid components.

The Rules, Part XVI

“Governments are smaller than markets; markets are smaller than cultures.“

A fundamental rule of mine, but one with a lot of punch.

The Rules, Part XVII

On the differences between panics and booms.

The Journal of Failed Finance Research

Much research fails quietly, but other researchers don’t learn about the dead ends.  Better that they should learn of the failures, and avoid the dead ends.

How I Minimize Taxes on my Stock Investing

Sell low tax cost lots and donate appreciated stock to charities.

Place Political Limits on Overly Compliant Central Banks

Gives a simple rule to control central banks so that they avoid the present troubles.

Yield, the Oldest Scam in the Books

Yes, offering yield is the oldest way to trick people into handing over their money.

A Summary of my Writings on Analyzing Insurance Stocks

A good place to get started if one wants to get up to speed on insurance stocks, but there is a lot there.

Economics is Hard; the Bad Assumptions of Economists Makes it Harder

Going over Kartik Athreya’s letter criticizing nonprofessional economics bloggers.  Why the math behind macroeconomics and microeconomics doesn’t work.

Why Are We The Lucky Ones?

When you are a part of a small broker-dealer, all manner of harebrained deals get offered to you.  This explores three of them.  Note: management did not ask my opinion on the fourth deal, and that is a large part of why they no longer exist.

One more note: the guy who was going to pledge $5 million of stock in example 2 for a $1 million loan?  The stock is worth $7,000 today.

Watch the State of the States

The economics of the states tells us a lot more about the national health because they can’t print money to buy national debts.  (Though they can can raid accrual accounts…)

We Might Be Dead In The Long-Run, But What Do We Leave Our Children?

My view is that neoclassical economists are wrong.  Aggregate demand has failed for four reasons:

1. Overleveraged consumers will not readily buy.
2. Citizens of overleveraged governments will not readily spend, for fear of what may come later from the taxman, or from fear of future unemployment.
3. Aggregate demand is mean-reverting.  It overshot because of the buildup of debt, and is now in the process of returning to more sustainable levels.  The same is true of private debt levels, which are being reduced to levels that will allow consumers to buy more freely once again.
4. When the financial system is in trouble, people get skittish.

The Market Goes to the Dogs, Which Chase Their Tail Risk

Complex and expensive hedging solutions, many of which embed some credit risk, can be less effective than lowering leverage, and (horrors) holding some cash.

Fishing at a Paradox. No Toil, No Thrift, No Fish, No Paradox.

This one had its detractors, because I believe the paradox of thrift is wrong.  Too much aggregation, and it does not allow the dynamism of the economy to adjust over time, even from severe conditions.

Here’s the news of the past week:

US Economy

• How the Government Lies About the Real Inflation Rate http://t.co/g6E4KxV5 I agree inf is understated, but by 1-2%, not 6-8%/yr $$ Mar 09, 2012
• Tax Hunt Pushes Global Wealthy Into Offshore Trusts for Children in US http://t.co/l53hjFH1 Many clever ways 2cheat the taxman #thinkahead Mar 07, 2012
• How Much Do Income Taxes Affect Our Behavior? http://t.co/mADKt7a7 Answer: not much, but people favor lower marginal tax rates anyway $$ Mar 07, 2012
• On Politics, Social Security and Spine http://t.co/N8O1Eu6h @brucekrasting on the Disability Income Trust & what it implies 4 politics $$ Mar 07, 2012
• Why Young People Might (Eventually) Like to Buy a House http://t.co/yC9FX7H5 On the low end, this makes sense at present. $$ Mar 06, 2012
• Getting Ready to Buy a House http://t.co/6aqzzPmI Megan McArdle notes how low down payments r still prevalent; system not clean @ present $$ Mar 06, 2012
• Warren Buffett vs. the profiteers of doom http://t.co/02XgQ9tB Unless the US fails in entire, Buffett will be right & the scaremongers wrong Mar 06, 2012
• NACM credit managers’ index trade credit increase http://t.co/LUdFkYTZ Businesses r more confident in extending credit; coincident indicator Mar 04, 2012
• @DavidSchawel Then they are having materially better performance than the FHA; I still think housing prices have further to fall on hi end Mar 04, 2012
• Your Share of Fannie, Freddie Losses: $1,300 http://t.co/h9KdR5d3 Even considering what they are paying the US in dividends, they lose. $$ Mar 03, 2012

Federal Reserve

• @GonzaloLiraSPG Borrow, not print. Fed becomes huge hedge fund 2 arb risky debt spreads. Not in favor of this, but it is happening in small Mar 09, 2012
• Thought experiment: What would happen if the Fed borrowed enough money to buy up all of the MBS, CMBS, ABS, Agys, Corps, Munis, etc? $$ Mar 09, 2012
• What the Fed is Considering Doing in Layman’s Terms http://t.co/dXZTMXL2 Levering up, taking more risk in an effort to reduce long yields $$ Mar 09, 2012
• Bernanke Seen Accepting Faster Inflation as Fed Seeks to Boost Employment http://t.co/AyixImcf Fed is asymmetric, only fights unemployment Mar 08, 2012
• http://t.co/DR8SLua2 NY Fed never buys the on-the-run and near the run nominal bonds, does the opposite for TIPS, pushes up implied CPI $$ Mar 07, 2012
• Fed’s Money Monopoly Endangers Liberty and Peace http://t.co/TGhcvm8O Unsound money encourage governments 2b graspy & warlike $$ Mar 07, 2012
• Central bank policy driving corporate spreads http://t.co/YvV1djQb When the Fed offers cheap financing, risk asset flourish $$ Mar 06, 2012
• Woodlands congressman battling Federal Reserve’s power http://t.co/iUiwTimH Inflation only, expand role of Regional Feds; Fisher likes it $$ Mar 04, 2012
• The eventual unwinding of QE: why it’s ignored and what it could mean http://t.co/BPRMaGaU The Fed will be reluctant 2 shrink the Bal Sht $$ Mar 03, 2012

Eurozone

• Draghi Lays Groundwork for ECB Stimulus Exit as Inflation Takes Spotlight http://t.co/0y5znzjH So u can’t get inflation thru debt growth? Mar 09, 2012
• Bond And CDS Arbitrage Opportunities? http://t.co/uRDRh59G Sov CDS “cheap” 2 bonds b/c of a lack of trust in the default trigger $$ Mar 09, 2012
• Portugal. Boo! http://t.co/ZED0TWOx Mar 09, 2012
• Draghi Headache: Inflation Heating Up in Europe http://t.co/RQqvvOiC Draghi raised the 2012 forecasts for inflation to 2.1%-2.7% $$ Mar 08, 2012
• Rift Grows Between Germany’s Bundesbank and ECB http://t.co/trwAlyWm Wise Buba will take pain where ECB wil not. Follow this it will destroy Mar 08, 2012
• Goldman’s Secret Greece Loan Reveals Sinners http://t.co/eMzOvs2X When u conspire 2b shady, u work w/the shady, who will cheat u2 $GS $$ Mar 07, 2012
• French-German Border Shapes More Than Territoryhttp://nyti.ms/zDuqpi Culture matters. Policy matters. Similar people yield different results Mar 06, 2012
• Everyone Loves Mario http://t.co/2sDYYNXh Draghi is popular at present, but this will not end well, b/c bank dependence on the ECB will tell Mar 04, 2012
• The optimistic view of Europe http://t.co/xtsVrfrY Rogoff argues that these are the birth pangs of the USE: the United States of Europe $$ Mar 04, 2012
• IMF Set to Curb Funds for Greece http://t.co/XvNhtAcm IMF has 2 much exposure to EZ-fringe; could it b global system hit peak debt? $$ Mar 04, 2012

Economics

• An interesting model of asset bubbles http://t.co/cHcFGHht Follows the debt-fueled model of asset bubbles, with momentum tossed in $$ Mar 09, 2012
• Model Thinking Notes I from Stanford Class http://t.co/qHD0UCzt Those applying models to political questions predict better than others $$ Mar 09, 2012
• Investors Crave a Taste of the Island http://t.co/fjWsoVDR Amazing how reducing deficits and cleaning up finances can bring growth $$ Mar 09, 2012
• Cicero quote of the week http://t.co/Y1e6KKYL The budget should b balanced, the Treasury should b refilled, public debt should b reduced… Mar 08, 2012
• Kindleberger’s Universal Bubble and Crash Scenario http://t.co/Og2VYsX8 We are overindebted, should we be surprised that we face a crisis? Mar 08, 2012
• After 3 years, we’re all hooked on free money http://t.co/oKRDzSPD Low base rates are creating a new kind of inflation, sad but true $$ Mar 08, 2012

China

• Contra: China Inflation May Provide Room for Stimulus http://t.co/Qds1uBwx That is, if you can believe the Chinese inflation statistics $$ Mar 09, 2012
• Asian banks may b bust; tiger still bites http://t.co/2mW40PMJ Economic consultancy Lombard Street warned China is financial house of cards Mar 08, 2012
• According to Credit Suisse, the global commodity demand has peaked http://t.co/GNXsHZwL China cannot increase its demand further $$ Mar 08, 2012
• China Life Discount Swells on World Growth Woes http://t.co/Jl27DtCk I still don’t get China Life and its business model; avoid b careful Mar 08, 2012
• China needs to enhance ability to win ‘local wars’, Premier says http://t.co/THUVeHVe Dominance of the South China Sea is desired $$ Mar 07, 2012
• China’s State of the Union http://t.co/D2E2yaH0 China has fewer options by the day. GDP is shrinking because much production is worthless $$ Mar 04, 2012
• +1 $$ RT @The_Analyst: @AlephBlog ha, newsflash: people whose livlihood depends on strong real estate market say market is strong… Mar 04, 2012
• End of The World not nigh, say developers http://t.co/JTDwPtT3 A lot of cross-currents in Chinese property markets, suspect trouble $$ Mar 04, 2012
• China’s Politics in Rare Bloom http://t.co/kmDFW8ou A rare season where the hidden politics of China become publicly visible $$ Mar 04, 2012

Miscellaneous

• ‘Internet-in-a-Suitcase’: The Web Technology That Wants You to Be Free http://t.co/UXTNOHDo Not live yet, but coming 2a revolution near u Mar 09, 2012
• Wal-Mart Therapy Tried as Pentagon Copes With Traumatized Troops http://t.co/7YIU2yqJ long $WMT | PTSD? Trips 2 WMT may help, really. $$ Mar 08, 2012
• US public schools sell empty classroom seats abroad http://t.co/qTuefNqV Solves a tough problem 4 rural districts w/falling enrollment $$ Mar 08, 2012
• US Top Destination for Christian, Buddhist Immigrants, Study Says http://t.co/gZW6T62o Interesting commentary on religion & migration $$ Mar 08, 2012
• The Confucius quote is a lot like Hillel’s “Do not do unto others what you would not hav… http://t.co/XplJNuew Mar 07, 2012
• RE: @dcrothers This is too important to be left to preschools only. Mothers and fathers must take an active role in t… http://t.co/4je2nZj2 Mar 06, 2012

Markets

• Insurers to re-examine risk, capital structure in 2012 – PwC http://t.co/1Cl8bTc1 Low ins co valuations begets low interest for M&A $$ Mar 09, 2012
• Contra: Apollo Wants to ‘Be the New Bank’ in 2012, Co-Founder Rowan Says http://t.co/HjfMo5xx Might work in short-run; dangerous idea $$ Mar 09, 2012
• Tactical asset allocation — Another ripoff http://t.co/NVCwvCCQ During bear markets, TAA gains temporary cache as market timing $$ Mar 08, 2012
• Think Twice, Even Thrice, Before Trading http://t.co/618YZMAB Most of the time, trading leads to losses, people like the illusion of control Mar 08, 2012
• Trade to improve your portfolio http://t.co/fINnnvh1 Features thoughts of those who agree. When will average people listen to the good guys? Mar 08, 2012
• The mystery of the vanishing stock trader http://t.co/y0jvQ6F8 Volume is disappearing in Canada. That’s probably healthy; buy Canada $$ Mar 07, 2012
• @CflGator My simple solution to all of that is that only hedgers may initiate trades, speculators may not trade with speculators. $$ Mar 07, 2012
• Contra: Managed money goes LONG oil http://t.co/SartTMgC In mid-2008, there weren’t as many speculative longs & the price was far higher $$ Mar 07, 2012
• Companies Float Up to $20 Billion in Bonds http://t.co/CJTnGiTE If that much is getting digested easily, maybe the corp rally continues Mar 07, 2012
• @lcsonka39 @hedgefundinvest I did use the words “if” and “maybe.” I am far enough away that I’m not sure, but I have been through that b4 $$ Mar 07, 2012
• US Insurers Face $2 Billion in Claims From Tornadoes, Risk Modeler Says http://t.co/N6vW1uIn I would expect a rough weather year $$ Mar 07, 2012
• IBM’s Watson Computer Gets Wall Street Job http://t.co/qP2mlQDZ Bloodless. Soulless. Brilliant. Ultimate Risk Manager or Disaster Creator Mar 07, 2012
• Judge: Jefferson County Chapter 9 Case Can Continue http://t.co/MGn2sDTD Remember Ch 9 only gives breathing room, Empee benes relief $$ Mar 06, 2012
• Do You Need to Buy Big Oil Stocks? http://t.co/FlPMNBXN Arends: As fuel prices soar (again), it may make sense to invest where you spend Mar 06, 2012
• How To Make Financial Content http://t.co/NRLLm00B Funny takes from @reformedbroker on how various news organizations write their copy $$ Mar 06, 2012
• Demographic trends will depress portfolio returns, this researcher warns http://t.co/yDXh8J8C Arnott makes u look at the real economy $$ Mar 06, 2012
• Stocks Cheaper Than Any U.S. Peak in 23 Years http://t.co/wZAnn7Ij Key Q: what will profit margins do? Only will 2 use capital is scarce Mar 06, 2012
• Milwaukee’s Home-Grown Managers Shun Fads http://t.co/oSzOOjMh My hometown. People there are rational and not given to fads. $$ Mar 06, 2012
• Dan Zwirn, the Man Who Fell to Earth http://t.co/NmgWpqRm Grew hedge fund fast, inadequate operational support, scandal, business dies $$ Mar 04, 2012

International (rest of the world)

• One Year Later, Japan City Sees Light—in a Long Tunnel http://t.co/3JfbCqWG Too much $$ being tossed at too few people in short-run Mar 09, 2012
• Australian vs Canadian property http://t.co/7Q3pdBP1 Argues that Canada is in trouble, Australia in worse shape but a better economy for now Mar 07, 2012
• Faros Trading: Yen to Weaken http://t.co/cSAp3Fra & http://t.co/aJkOCcXQ Idea that the yen may weaken is gaining traction $$ Mar 06, 2012
• Canadian envoy to Iceland sparks loonie controversy http://t.co/QZfE9Kvi Hey, I would link to the loonie if I could, smart idea $$ Mar 06, 2012
• BRIC Investors Losing as Statists Forgo Earnings http://t.co/kuntGmOJ Worrisome trend, but political influence on firms tends 2b cyclical Mar 04, 2012
• Why Japan Is Looking Good http://t.co/trw811WG Argues that QE weakens the yen, leading to better corp performance of f low valuation $$ Mar 04, 2012
• London Is Eating New York’s Lunch http://t.co/UBEFijF7 London has a greater share of international transactions; New York too regulated $$ Mar 04, 2012

Politics

• Romney campaign says losing nomination would take ‘act of God’ http://t.co/Q0VS1qRV Whom God would destroy, he first makes proud #hubris $$ Mar 07, 2012
• Paralyzed Kids Employ Florida Lobbyists With Millions at Stake http://t.co/fmS5UIHu When there r damage caps, pleading 4 special exceptions Mar 07, 2012
• Hoping for a deadlocked convention that turns to Huckabee, or someone like him http://t.co/OCRBjpXF Mar 03, 2012
• @Nonrelatedsense I do not trust Romney, Santorum, or Gingrich. They change positions too easily. I may not like everything about Huckabee+ Mar 04, 2012
• @Nonrelatedsense or Ron Paul, but they don’t shift their views as much. Huckabee would be acceptable to both wings of the GOP. $$ Mar 04, 2012

I’ve had this idea for 15 years or so, but forgot about it until I sat down and talked with a friend who worked for a dysfunctional company that recently let him go.  My experience working in corporate America is that the best and most effective firms listen to their employees, and set up some means of obtaining their opinions on how the business could be improved.  Bad firms have managements that think that know it all, and the rank and file must merely execute what they imagine will work.

In all of the time that I worked in the insurance industry, or served on the boards nonprofit organizations, I have yet to have seen a situation where a consultant needed to be hired to solve a problem.  The middle management of the firms in question knew what the answer was, but senior management was either fighting with itself, or weak-minded.

I remember one situation where the Chief Investment Officer and the Chief Financial Officer hated each others guts, and could rarely agree.  The only way to solve a particular problem was to hire a consultant, who would neutrally give them an answer that they both would heed.

I was running a small line of business in the company, and the consultant approached me for data, which I gave him, but I asked my boss about the situation.  He told me that the company was spending roughly 7% of that year’s income to analyze the investment policy of the firm, particularly with respect to the liabilities of the firm.  I said to my boss, “If you gave me 3 months, I could solve this project on my own, and the cost would be 3% of what the consultant charges.”  He laughed and told me about the fighting above us, that led to the costs.

As it was, the consultant gave advice that was less detailed than I would have given, but was valuable, though embarrassing to the insurance company — they were invested two years shorter than they should be.  There a free lunch to pick up income and reduce risk.  You could go three years longer if you wanted to optimize risk.

Lovely, but if management had just asked its line of business actuaries to answer the questions it all could been solved for a small fraction of the cost, and with more precision.  Also, though no one talked about it at the time, it really showed that senior management really did not understand the core business, which was earning a spread over liabilities adjusted for risk.

I have another experience working with a non-profit where the executive was weak, and would never hire anyone more talented than himself.  As a board member, I was always shocked with how badly the place was run, but the board members suffered from the same disease; few were competent.  Management liked having incompetent board members.  Worse, the incompetent board members did not like anyone suggesting that there was a better way to do things, which is why I eventually left.

This management team hired consultant after consultant on things that I felt were answerable from resources within.  But being weak-minded, they did not trust their middle management to answer basic questions.  A lot of money was wasted in the process, which was particularly painful, because the non-profit did not have a lot of resources to spare.

Do You Really Need a Consultant?

There are cases where hiring a consultant is needed, but the first question should be whether those who work for the firm, particularly middle-management might be able to do a better job with it for less cost.  Going back to the first firm mentioned, I was hired by a division of the firm to provide exactly that expertise.

Even if employees are a little short of the expertise needed, giving the project to them will develop the expertise internally to deal with the question at hand and handle greater questions later.  More, it will improve morale, as employees deal with difficult problems and triumph over them.  If you want to read about one vignette in dealing with this, you can read it here.  It made me choke up as I re-read it, because it was such an amazing transformation/comeback that no one expected.

But the first priority of people management in a firm should be hiring bright people and set them free to act.  There was one firm I worked for where this was actually done, where the man in charge hired people, all of whom were brighter than him.  I was one of them, and I did not realize at the time that he had hired me to be his #2.  Small organization, informal, yeh.

He wasn’t always easy to deal with, and on a number of occasions people in our unit would come to me near the end of the day, and say “can we talk?”  When I learned the topic, I would say, “Close the door.”  Then I would listen to their grievances.

I responded to them, “Look, our boss is imperfect, but he means well, work with him.  He was courageous enough to hire people brighter than himself, which few will do.  Reason will win out here, and I will help the process along, but be sweet reason incarnate, try to convince, don’t gripe.”

And as it was, all such situations were resolved, and we produced a far better firm, with good results to the client, and good morale.  (And I quietly led useful change, which was the way I did things in my younger days.)

A New Business

So, if you as a management team think that you need a consultant to solve your problems, e-mail me.  For a nominal fee, I will ask you whether you have set up a culture with bright people who can solve problems, and whether they have tried to solve your problems.  If you have tried that, and your team can’t do it, yes, a consultant is warranted, otherwise not.  But it also means that you have hired wrong.  Get some talent in your door that can solve tough problems.

In essence, I would be a consultant telling you not to hire consultants, and to build up the talent base of your organization, such that you would never need me, or anyone more expensive than me again.  I would be a very cheap way of improving your organization.

Denouement

But what happened to the group where I became the #2?

Well, I briefly became #1 when the boss left prior to a merger.  We merged into a larger organization that didn’t really get how insurance assets should be run.  As it was, they lost the mandate, long after I was gone.

The rump of the organization now has a five star rating from Morningstar for high-yield bond management, and is happily managing assets in Charm City (Baltimore), while the immediate parent company (that they were sold to) is in NYC.

Oh, the boss who left?  He eventually found work  managing bonds near DC.  A good guy, if a little irascible. He is still a friend.  In fact, all the people I mentioned are still friends, because I don’t make permanent enemies.  I just try to promote what is best for all.

I am considering making this an end-of-the-week feature as a news recap.  Comments?

Financials

• BofA’s Clash With Fannie Intensifies as Insurers Reject More Loan Claims http://t.co/fKgxwcVO Originators need to bear UW error results $$ Mar 03, 2012
• Life as Libor Traders Knew It Seen as Abusive http://t.co/H5o5cH3G An inside look at the problems of LIBOR. Collusion & marketless numbers Mar 03, 2012
• $AIG Earnings an Illusion of a Bend in US Tax Laws http://t.co/GCZHUKsu IRS gives AIG special treatment by allowing it to use NOLs post-BK Mar 03, 2012
• You have a good point, and I may reference it when I write this evening, but valuations have compressed for all insur… http://t.co/BRTuHnvf Mar 01, 2012
• Fannie, Freddie and the $180 billion hole http://t.co/Lnoh7VPH F&F transferred wealth to early investors from taxpayers & late investors $$ Feb 25, 2012
• Make losses and prosper, AIG edition http://t.co/EYykmbmZ Hey Q: how much $$ will $AIG make in the future in order to not pay taxes? $$ Feb 25, 2012

Berkshire Hathaway

• Contra: Warren Buffett on Investing http://t.co/OH0dQxXP Buffett has not been a deep value investor for 30 years; this article misses it $$ Mar 02, 2012
• +1 RT @valueprax: Thoughts On Mergers, Acquisitions And Conglomeration From Rothbard And Buffett (@AlephBlog, $BRK) http://t.co/khZH5Uiq Mar 01, 2012
• The Truthiness of Berkshire’s Performance http://t.co/5iSsrAHL Don’t think Buffett anticipated the P/B squeeze in insurance stocks. $$ Mar 01, 2012
• Buffett Plans More Solar Bonds After Topaz Deal http://t.co/pjrAKQub Buffett doesn’t give suckers an even break, no guarantees on solar $$ Mar 01, 2012
• RE: @TheStreet_News When I wrote for RealMoney, I was often critical of Buffett, but I have shifted.  He is a great e… http://t.co/r4z14uUC Feb 29, 2012
• When you think you made a great purchase (Warren Buffett edition) http://t.co/ME9RwqFf I was surprised to learn about this $BRKa sub also $$ Feb 28, 2012

Home Schooling

• Question of priorities, could conserve RT @ReformedBroker: “How am I supposed to live on $350,000 a year?” – you’re right, kill yourself $$ Mar 01, 2012
• @ReformedBroker Have his wife call my wife; can save lots of $$ if u go from private school 2 homeschool, & it is easier than 1 would expect Mar 01, 2012
• @ReformedBroker The downside is that it is a lot of work, but not hard work, and the challenge is controlling your children frequently $$ Mar 01, 2012
• @merrillmatter I know you’re kidding, but the mothers I know who homeschool would be fearsome in the business world were they redirected $$ Mar 01, 2012

Municipal Finance, or lack thereof

• If Stockton Is Broke, Then Why Isn’t San Diego? http://t.co/dzCE9FjX Govt Unions fight to keep benefits govts shouldn’t have granted $$ Mar 03, 2012
• Pension Pain Mounts, Low Rates Boost Liabilities http://t.co/NZndpR5g More evil results of Fed policy substituting debt 4 organic growth $$ Mar 01, 2012
• To Pay New York Pension Fund, Cities Borrow From It First http://t.co/feOXK8E3 Shell game at best; net contributions needed to DB plans $$ Feb 29, 2012
• Raiding the coffers http://t.co/5h2Fx5ZL State pension plans r borrowing from their pension plans 2 fund their own pension contributions Feb 29, 2012

North Korea

• @LSilverspar You made me laugh, yes, all of these have impacts on us… but given their counterfeiting, some action should be taken $$ Feb 29, 2012
• @dpinsen And access of the Dear Leader to his favorite Scotch… hitting him where it hurts. $$ Feb 29, 2012
• @dpinsen Agree, bigtime. We got them to the bargaining table last time by cutting off their financial access to the rest of the world. $$ Feb 29, 2012
• Then once NK starts to counterfeit it, go back to new $50s & $100s; make their life tough. Feb 29, 2012
• How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill http://t.co/DkXUZsy7 This is worth doing, and create a $75 bill $$ Feb 29, 2012

Eurozone

• Greek PSI exchange summary – an offer you can’t refuse http://t.co/K4OUOqm3 Yes, we all voluntarily give up 70% of the value of r claims $$ Mar 03, 2012
• Greek Crisis May Test the Value of Swaps http://t.co/hG27iIak ISDA wimps out and does not declare a credit event; will destroy Sov CDS mkt Mar 03, 2012
• A Primer on the Euro Breakup http://t.co/OB2sdwzB Explains why the Euro will break up, at least at the fringe &y this should not surprise $$ Mar 02, 2012
• ECB Free Money May Carry a Cost http://t.co/g1bNl281 Makes governments relax & ignore structural problems, & banks arb the ECB $$ Mar 01, 2012
• ECB Allots €529.5 Billion in Long-Term Refinancing Operation http://t.co/8o0OE7XO Higher than anticipated takeup of cheap funding $$ Feb 29, 2012
• More signs of Draghi’s “stabilization” http://t.co/zdFol9Vj euro area banks show material tightening conditions in the banking system $$ Feb 28, 2012
• On PIGS on Drugs http://t.co/VtOZYdwt European states owe €12-15 billion to the pharma industry; they stop paying suppliers b4 cutting staff Feb 28, 2012
• http://t.co/wQYFVFWH “Amused – Italian banks figured it out. An hour before LTRO results, 5 Italian banks issued & bought their own bonds.” Feb 28, 2012
• Europe Gets Ready for Round 2 of Bank Loans http://t.co/N0rpX9O7 Heightening the dependence of stressed banks and govts on the ECB. $$ Feb 28, 2012
• You may want to hold off on buying that Italian villa http://t.co/EP92Zd4m 66.5% of agents report a fall in housing prices during 4Q $$ Feb 28, 2012
• @japhychron Can’t think of anyone, btw, there is a theory that a decent # of stressed banks used LTRO 2 buy in their own debt… $$ Feb 28, 2012
• LTRO programs’ impact on sovereign bond purchases by banks (past and present) http://t.co/ffbNfY3B Indirect way of financing fringe govts $$ Feb 28, 2012
• Mario Draghi reveals the Grand Plan http://t.co/Dal4wEDo & http://t.co/KNj9mhgx Good austerity results in freer mkts, more growth $$ Feb 28, 2012
• Merkel torn by conflicting pressures in Greek vote http://t.co/0iCZV4kQ Any other Firefox users noticing that Reuters pages format badly? $$ Feb 27, 2012
• @moorehn Good piece, I think many will benefit @soberlook has been writing some good stuff also http://t.co/tAlkFpXR & http://t.co/jcLBc04c Feb 24, 2012

China

• China’s Billionaire Lawmakers Make US Peers Look Like Paupers http://t.co/d2haqyDc China’s lawmakers r absolutely more wealthy than US peers Mar 01, 2012
• China May Double Rare Earth Exports as Demand Rebounds http://t.co/MaDQX4rc Quite a change from prior, makes u wonder why they change… $$ Mar 01, 2012
• Why China Will Have an Economic Crisis http://t.co/xn3W2Wxa This is getting very mainstream, makes me think I could be wrong. $$ Feb 29, 2012
• Fortress’ Michael Novagratz on Lessons from OWS, and China http://t.co/yTSqXqYR Cronyism raises the odds of domestic violence in China $$ Feb 25, 2012
• Evil Overlords or Lucky Devils: The Men Who Rule Hong Kong http://t.co/BEqw7Z0Z Long but interesting, re the influential wealthy in HK $$ Feb 25, 2012

Credit

• Junk Isn’t http://t.co/olYEeOGe Spreads are down and investor interest is up; this is my biggest intermediate-term concern at present. $$ Mar 02, 2012
• Junk vs. Loans http://t.co/JbIHAFtt & http://t.co/tccF8pML Loan participation funds cheap compared 2 junk, but downside still there. Feb 29, 2012
• The rating agencies are the farm teams for credit analysts, in the same way that Value Line is for stock analysts.  A… http://t.co/Qfj1lYhu Feb 29, 2012

Upcoming Book of Josh Brown

• I invite you to read his website http://t.co/Qom9t2Zy .  He writes a lot of clever stuff there.  One of … http://t.co/r34pi1pR Feb 29, 2012
• Confessions of a Reformed Stockbroker http://t.co/B4dkJ5XI Another preview article 4 @reformedbroker ‘s forthcoming book $$ Feb 29, 2012

Personal Investing

• Dividends Rise Again http://t.co/gT6AcZXq Their coffers bulging with cash, companies are increasing the once out-of-favor common dividend $$ Mar 03, 2012
• IRAs Get Sexier http://t.co/XVG5u56g All manner of illiquid assets can b crammed in2 an IRA if you have a friendly custodian $$ #beware Mar 03, 2012
• Treasury yields and credit spreads divergence is not sustainable http://t.co/LvfHNU4t Ordinary times credit spreads r inverse 2 Tsy yields Mar 02, 2012
• The Myth of Commodity Diversification http://t.co/ZoMhgv7M A defense of why gold is a true diversifier of portfolios versus commodities $$ Feb 29, 2012
• Conflict of All Conflicts http://t.co/RgZmO3nv from @reformedbroker I rarely get angry, but this one annoyed me; skewed incentives $$ Feb 29, 2012

Accounting rules (yes)

• Standard Setters Strain 2 Avert More Revenue-Recognition Angst http://t.co/jRlnmLPa Industry-specific revenue policies r better; reject IFRS Mar 03, 2012
• Another “Case” of Terrible Decisions Borne of Terrible Accounting Rules http://t.co/wb2PB5BF Don’t compromise on revenue recognition. $$ Feb 29, 2012
• Mark-to-Market Pensions Show Brutal Year http://t.co/NhwMePZG Some companies are biting the bullet and moving pension acctg to mark2mkt $$ Feb 25, 2012

Corporate News

• Natural Gas Renaissance Sparks Favorable Chemical Reaction http://t.co/G0QHxkVu Petrochemicals benefit from cheap fracking feedstock $$ Mar 02, 2012
• Apple Dividend May Return Part of $98B Cash http://t.co/FzFTTr2X If $AAPL can’t use all of its cash then give it to shareholders $$ Feb 29, 2012
• @PlanMaestro Operating profitability is poor, and given their business mix, their P/B is fair for a company with a 5% anticipated ROE. Feb 29, 2012
• @ToddSullivan Now if they can achieve a decent ROE, and not have weak reserving… I was wrong regarding Maiden Lane when I wrote about it. Feb 29, 2012
• CNA: A P&C Insurance Turnaround Story http://t.co/WRwhf5sV A fair analysis of $CNA, worthy for insurance investors 2 read. O, he cites me $$ Feb 29, 2012
• One thing that is not mentioned frequently is that shale gas production profiles tend to peak and decline rapidly. Th… http://t.co/flnQvRwt Feb 28, 2012
• ‘Hope Phase’ for Stocks May End in Tears Again http://t.co/z6Sbfu7n Markets anticipate sustained US growth & soft landing for China $$ Feb 28, 2012
• Confronting a Law Of Limits http://t.co/kIFgxwk8 How does $AAPL grow into its valuation? Especially where obsolescence moves rapidly? $$ Feb 25, 2012

Miscellaneous

• FDA Warns on Statins http://t.co/7K37iJVe Every drug has side effects, w/statins it may be diabetes. Be wary, & avoid all drugs if u can $$ Mar 01, 2012
• Seriously? Any reason to avoid it? RT @kasie: Days since Mitt Romney has taken questions from the national traveling press corps: 17. Feb 25, 2012
• Slavery should be an issue where liberals and conservatives could agree for policy, and maybe apply the Palantir technology 2 root it out $$ Feb 25, 2012
• Fishing as Slaves on the High Seas http://t.co/0Bakkir5 Another place where slavery still exists; sex trade, Dubai construction & more $$ Feb 25, 2012
• Why Doctors Die Differently http://t.co/e3rnOTz8 Careers in medicine taught them the limits of treatment & the need to plan for the end Feb 25, 2012
• ‘Japanese Madoff’ Flagged http://t.co/U7vgrOap Industry Newsletter Warned in 2009 About Firm’s ‘Unnaturally Stable Returns’ $$ #ponzi Feb 25, 2012
• Killer App http://t.co/kUT8X9Ji Have a bunch of Silicon Valley geeks at Palantir Technologies figured out how to stop terrorists? Palantir. Feb 25, 2012
• At 35, I was a devoted Husband and Dad of 5 children, with the oldest being 7 years old.  Nominally, I was the invest… http://t.co/AYUuRMsi Feb 25, 2012
• War with Iran:Would you go bankrupt for your country? http://t.co/d5rVA9Ww War does not stimulate the economy, contrary 2 popular belief $$ Feb 25, 2012

Economy

• Is Japan Doomed? http://t.co/qZev2jSA What? There’s a free lunch where the Govt can borrow indefinitely? NO! Cash flows about 2 shift b wary Mar 02, 2012
• Core inflation is once again above expectations http://t.co/uxjbXofE There is inflation coming; stagflation even; bad policy begins to bite Mar 02, 2012
• A Wake-Up Call for Japanese Watchdogs http://t.co/r1JMhnM2 Bigger than MF Global, smaller than Madoff; how do you say Ponzi in Japanese? Feb 28, 2012
• Oil denominated in EU currencies is at record highs; demand destruction likely http://t.co/KwWkFvJM Wonder where breaking point is? $$ Feb 28, 2012
• Gundlach warns U.S. stock market vulnerable http://t.co/g8hKrNSJ Investors concede rally almost over; still expect to earn coupon-> danger Feb 28, 2012
• Architecture Billings Index indicated expansion in January http://t.co/nZV1OCdw leading indicator 4 new Commercial Real Estate investment $$ Feb 28, 2012

From the 10K:

BHRG periodically assumes risks under retroactive reinsurance contracts. Retroactive reinsurance contracts afford protection to ceding companies against the adverse development of claims arising under policies issued in prior years. Coverage under such contracts is provided on an excess basis or immediately with respect to losses payable after the inception of the contract. Coverage provided is normally subject to a large aggregate limit of indemnification. Significant amounts of environmental and latent injury claims may arise under the contracts. Under certain contracts written over the last five years, the limits of indemnification provided are exceptionally large. In March 2007, an agreement became effective between NICO and Equitas, a London based entity established to reinsure and manage the 1992 and prior years’ non-life liabilities of the Names or Underwriters at Lloyd’s of London. Under the agreement NICO is providing up to $7 billion of new reinsurance to Equitas. In 2009, NICO agreed to provide up to 5 billion Swiss Francs (approximately $5.3 billion as of December 31, 2011) of aggregate excess retroactive protection to Swiss Reinsurance Company Ltd. and its affiliates (“Swiss Re”). In 2010, BHRG entered into a reinsurance agreement with Continental Casualty Company, a subsidiary of CNA Financial Corporation (“CNA”), and several of CNA’s other insurance subsidiaries (collectively the “CNA Companies”) under which BHRG assumed the asbestos and environmental pollution liabilities of the CNA Companies subject to a maximum limit of indemnification of $4 billion. In 2011, BHRG entered into a contract with Eaglestone Reinsurance Company, a subsidiary of American International Group, Inc. (“AIG”). Under the contract, BHRG agreed to reinsure the bulk of AIG’s U.S. asbestos liabilities up to a maximum limit of indemnification of $3.5 billion.

Retroactive insurance is an interesting business, and one that few insurers have as a core skill.  It is my estimate today that BRK is good at it, unlike most.  With Retroactive insurance, typically you are rescuing another insurer from some claim exposure that threatens their existence.  The insurer needs certainty, or something near it, and so they approach a much large and stronger insurer to absorb some of the risk of an exposure that is already incurred, but uncertain to to ultimate payout.

The rescuing insurer will charge a lot, and insist that the rescued insurer still have some risk on the matter, and probably limit its total payout, after which the rescued insurer is on the hook again.  That limit will likely be so high that the rescued insurer will say, “It’s never going to get that high.”  Fine, and maybe true, but this allows the rescuing insurer to have some certainty itself, that it will never pay an unlimited amount in the rescue.

For BRK, there is another angle, and that is that retroactive insurance produces a lot of float, and in most cases (Asbestos & Environmental) the float lasts a long time.  Thus BRK thinks it has an advantage in investing the float.  Together with their size, and the acumen of Ajit Jain, it makes them a unique place for insurers in trouble to seek shelter, for a tidy fee of course.

That doesn’t mean this can’t go wrong, but if properly managed, since BRK is one of the few companies that can do this, they probably make very good money on this.  (Ugh, they have AIG and Swiss Re as clients, which are large savvy firms.  If they need protection from BRK, and are willing to pay up, guess what — BRK is in the driver’s seat, because there is no one in the private sector capable of doing this.)

Insurance subsidiaries’ investments are unusually concentrated and fair values are subject to loss in value.

Compared to other insurers, our insurance subsidiaries may concentrate an unusually high percentage of their investments in equity securities and may diversify their investment portfolios far less than is conventional. A significant decline in the fair values of our larger investments may produce a large decrease in our consolidated shareholders’ equity and can have a material adverse effect on our consolidated book value per share. Under certain circumstances, significant declines in the fair values of these investments may require the recognition of losses in the statement of earnings.

This is potentially BRK’s largest weakness, and why I would love to see the statutory books for their insurers.  This goes beyond the large public companies that they have purchased.  Where are all of the private businesses lodged on the BRK balance sheet?  They may be there with really low valuations — I don’t know, because I have never looked — and that is why I want to ask BRK for their statutory statements.  I believe it would be intriguing.

Berkshire Hathaway Inc. has guaranteed debt obligations of certain of its subsidiaries. As of December 31, 2011, the unpaid balance of subsidiary debt guaranteed by Berkshire totaled approximately $16 billion. Berkshire’s guarantee of subsidiary debt is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all present and future payment obligations. Berkshire also provides guarantees in connection with long-term equity index put option and credit default contracts entered into by a subsidiary. The estimated fair value of liabilities recorded under such contracts was approximately $10.0 billion as of December 31, 2011. The amount of subsidiary payments under these contracts, if any, is contingent upon future events. The timing of subsidiary payments, if any, will not be fully known for several decades.

Add in $8 billion of holding company debt, and that is the risk that the holding company faces, which isn’t that much for a company the size of BRK.  BRK has bought a series of businesses that produce consistent cash flow, so don’t worry about holding company debt.

BRK has more debt than that, but Buffett lets bond investors take the risk by not guaranteeing subsidiary debt.  In acquisitions, Buffett never guarantees the debt.  But even with new debt issues, many BRK subsidiaries offer their own non-BRK-guaranteed debt, whether it is Burlington Northern, or a Mid-American sub offering debt to back a solar power plant.  Now bond investors know the BRK would never walk away from a subsidiary’s bonds, right?

No, actually they don’t know that, though Buffett’s record has been good with the debts of non-guaranteed subsidiaries.  Buffett is a better risk than most, but at the subsidiary level, you can’t be sure.  Buffett could save money and take on more risk by borrowing at the holding company, but he typically does not do that.

P/B Multiple Compression

Over the last decade, BRK’s P/B multiple has shrunk, and shrunk to the point where Buffett has drawn a line in the sand saying that subject to liquidity and market conditions, he will buy back stock at levels below 110% of stated book value.  (And, I suspect that is one reason why he spent so much time in the recent letter attempting to explain why the goodwill at BRK represented value.)  I think that means that there is now a limit, a floor to the price of BRK common stock, of course, subject to continued adequate performance.

Book Value and Insurers

Some have criticized Buffett’s growth in Book Value vs. the total return of the S&P 500 table, partly because of the declining P/B multiple.  I would simply say that this is endemic to an insurance mindset, where all we do care about is growth in net worth (book value).  Insurance is a mature, stable business.  No one has a way of obsoleting it, so we suspect.  It’s difficult to start a new insurer of any significant size, so we have protected boundaries to a degree.

Thus the focus on growing book value.  If we grow book value, eventually market value will follow, right? Right?!

Ugh, I think so, but sometimes I wonder, particularly with all of the insurers trading under book when they have little risk of insolvency.  Buffett can draw his line in the sand, but what of other insurers, many of which trade well below book?  Should they draw their own line in the sand, and defend a valuation level?

Personally, I would announce a generalized buyback without a lot of hoopla; make it boring, this is insurance after all so that should not be hard; get some actuaries to toss in big words to aid in obfuscation, so few conclude that the company will buy back significant stock.  Then start nibbling; be the bid or just behind it on days when things are weak. Don’t be a pig; rule #1 here is that the market should doubt that you are there.  But subject to that, buy, buy, BUY!!

The great Buffett after announcing his buyback only bought back 0.03% of all shares so far.  Most insurers can do much more quietly, with far less fanfare.  After all, Assurant bought back 14% of its shares last year.  Wow.  (This was the insurer that was offered in full to Buffett, and he said it was too complex… even the great one can goof.)

Now, maybe Assurant is my extreme case in buying back, and doing it at good valuations, but that in my opinion should be the goal of most public businesses with low valuations that are earning a lot, and not getting the proper respect.  Money talks, but be quiet, not brash, and suck in shares quietly at low valuations.  Let the financial statements do the bragging for you when investors realize that you have been building value doubly through operations and buybacks.

Summary

Even if you don’t invest with him, you can learn a ton from Buffett.  He is a consummate investor, businessman, and insurance executive.  Though I have never met him, I consider myself blessed to have learned from him.

Full disclosure: long AIZ

Though part of a series, this post is different.  I went back through the last 35 years of shareholder letters to analyze Buffett’s approach to acquisitions.  As Charlie Munger has said, Buffett is scary smart.  I say this because he adjusted through many different eras, while running a business that was part conglomerate, part closed-end fund.

In some ways the early years were different — more arbitrage, public investments take up more time in the shareholder letter.  But what I find fascinating is that from the earliest days, it didn’t matter to Buffett whether he owned whole businesses, or parts of them.

Part of this feeds off of Felix Salmon’s recent piece on acquisition language, where he contrasts tuck-ins and bolt-ons, correctly concluding that the difference is only one of size, even though that is an informal distinction.

But since the ’80s Buffett has always talked about acquisitions. Here’s a graph indicating Buffett’s use of the term acquisition(s):

You will note that his use of phrases like “tuck-in” and “bolt-on” occur only in the 2000s.  But the ideas were there long before that.  There were many cases in the ’90s, and to a lesser extent, the ’80s, where subsidiaries of BRK made acquisitions.  Buffett was always looking for ways to profitably deploy excess capital, and he knew that acquisitions facilitating organic growth was often far more effective than buying something totally new.  Buffett was doing tuck-in and bolt-on acquisitions for 15 years before he mentioned the terms.

Buffett always saw the public and private markets as being complementary.  He doesn’t care where he makes money; he just wants to make money.  Below there is a list of BRK acquisitions by year, with slight commentary.

One thing to understand about BRK is that full and partial ownership of private public businesses was always a part of the plan.  Growing out of a textile manufacturing business as a holding company, that should be obvious, as it should be when considering See’s Candies, BRK’s first acquisition.

Public and private, full and partial did not matter to Buffett.  He was simply interested in what could grow the intrinsic value of the the overall enterprise best, within the concept of a margin of safety.

1987-1989 was kind of an inbetween era for BRK, where Buffett would talk about his Sainted Seven private firms inside BRK, until he bought Borsheim’s in 1989, which gave him no good way to describe his private holdings with a simple moniker.

As it is, when he began doing more acquisitions, the 1991-1993 era included the “Shoe Group,” which was not among his finer moments.  But starting in 1995, with the purchase of the remainder of GEICO, is the start of the modern BRK.  Acquisitions become a regular part of the plan.  What makes that plain, was that post-1990 in years where BRK had no acquisitions, Buffett would discuss his theory on acquisitions for shareholders.  He did this because when there are few promising targets to invest in, it is usually a sign that valuations are stretched.

And in general, Buffett chose wisely with the private businesses.  Yes, there have been some that ended up being losers, or, not big winners, like the “Shoe Group,” and Scott & Fetzer’s untimely purchase of World Book, which was about to be obsoleted by Encarta, and then Wikipedia.

Buffett understood the need for sustainable competitive advantage.  He also knew how much he could afford to risk in acquiring private firms.  His “bite size” increased gradually until he could take down monsters like Burlington Northern.  He bought businesses that would be hard to obsolete.

One thing I found interesting about reading through the older letters of Buffett was that his ideas on acquisitions were developed early, long before BRK ceased to be predominantly a public company value investor, which is the way that many still regard BRK.

And as a result, it should be no surprise that as BRK grew, given Buffett’s desire for owning as much of great businesses as he could, that BRK became a conglomerate, albeit one dominated by its leading insurance businesses.

Though we can look at the different strategies employed by Buffett over the years, and see how some played a larger role early on like arbitrage and distressed investing, Buffett had a singular focus for the investments that offer decent returns in the size range that will make a difference for BRK investors.

Once BRK got big, that meant becoming a conglomerate, albeit a special one, was the logical outcome.  And I could be wrong, but that is the final corporate form for BRK.  There may come a day in a post-Buffett era when it may do many things, such as spin off companies, or centralize functions.  At present that won’t happen because BRK is the acquirer of choice for those that want to cash out, but don’t want the unique character of their organizations to change, which Buffett points at in the present Shareholders’ Letter as a unique competitive advantage.  BRK does not compete on price in acquisitions; it does compete by saying that unless something goes badly wrong, BRK will be more than happy to let the management do its thing.  It’s as if Buffett says, “Just make money, and send us back the excess.  If you have need of cash for promising opportunities, let us know.”

And then, it lets a thousand flowers bloom, and a thousand schools of thought contend, so long as you make money and grow the value of the business.  BRK is a unique business, and reflects the character of its founders (including Munger here).  No other large firm that I know of offers as much latitude to its operating units.

One final note: Buffett has also had a very good nose for sniffing out good insurance enterprises.  That’s the backbone of BRK.  It’s interesting to see over the years how he assembled the various pieces.  It would be interesting to see pre-1977 data on the insurance side, to look at how Buffett initially entered the insurance business, and transisted out of running a textile firm.

Tomorrow should have my final installment on BRK.  I will review the 10-K and provide commentary.