Portable Alphalfa: Fixing the Economy by Investing in What Matters

CNBC is Irresponsible

noreply@blogger.com (Andrew Hyman) — Tue, 17 Mar 2009 15:45:00 +0000

Jeff Feldman wrote this letter to the editor of the New York Times in response to an article in entitled, CNBC Thrives as Hosts Deliver News With Attitude.

The editors chose not to print the letter, so here it is:

Unfortunately, CNBC delivers more than news with attitude. It delivers analysis with bias. And it delivers that analysis incessantly in real time. I have been on Wall Street for 40 years and was there in the late 1970’s when we went through a period as difficult as this one. If you wanted business news back then, you had to work for it. There was almost none on television, nothing more than stock prices on the radio, and most newspapers did not have a business section. The business magazines provided information that was weeks old by the time they hit the newsstands. I was an analyst at the time, which meant I was analyzing what had happened (generally six months earler because of the lag of data) -- not prognosticating what was about to happen. Contrast that with CNBC’s real time analysis and the pundits constantly telling us what will happen next. The problem is that investing is not a collegial activity -- it is a competition! If too many people act on a prediction, the prediction is less likely to come true. If too many people engage in the same strategy or take the same side of a trade (see the last 5 years), it can’t possibly work.

As to Jim Cramer, some of what he does is truly educational. He should stop there and not make stock recommendations. The height of absurdity is his “Lightning Round” in which callers throw out a stock name and he opines on it. He prefaces the round by explaining that he has no advance knowledge of the callers or the stocks they choose. This is represented as preferable to the alternative, where he would know the stocks in advance and have time to research them and provide true insight. He also might know something about the caller so as to determine if the investment is suitable. Can you imagine a doctor giving medical advice the same way? “ I have no advance knowledge of the caller or the ailment. Let’s go to Joan in Indiana. What ails you Joan?” Would anybody accept medical advice in this way? Do we want to go back to the days of medicine shows and Wolcott's Instant Pain Annihilator?

Is money any less valuable or important than health?

The banks and the mortgage brokers have been called out for being irresponsible for putting their interests ahead of and in conflict with the marketplace. The same is true of CNBC.

CenterpointProperties Wants to Run Virginia Ports

noreply@blogger.com (Andrew Hyman) — Mon, 16 Mar 2009 18:20:00 +0000

Monday's Financial Times highlighted how one company, CenterPoint Properties is interested in infrastructure investment -- notably ports. At one time, private infrastructure operators tended to be from Europe, such as Spain's Grupo Ferrovial. Perhaps this could be a new area of growth for American companies.

An article entitled, Developer proposes to take over Virginia port operations explains the potential deal:

A property developer has asked the US state of Virginia to let it take over its ports in a sign of continuing private interest in publicly owned infrastructure.
Chicago-based CenterPoint Properties announced the proposal on Friday under state laws that let private companies make unsolicited approaches for state-owned assets. CenterPoint said it would provide $8.9bn total value to the state over a 60-year concession.

....There had long been speculation that Virginia might seek a private investor in the ports’ operating arm to fund other transport investments.
Cash-strapped states have grown increasingly interested in attracting private infrastructure investment to offset budget pressure from growing health and education spending.

One quibble with the story. As someone who did graduate work in geography (on waterways infrastructure) Center Point Properties is not based in Chicago. It's offices are in Oak Brook, a western suburb of Chicago, better known as the home of McDonalds.

See map below:

View Larger Map

MBAs are looking for Green Jobs

noreply@blogger.com (Andrew Hyman) — Wed, 11 Mar 2009 10:23:00 +0000

Monday's Financial Times (9 March 2009) had a story by Della Bradshaw entitled, "Opportunities Shine Amid the Gloom," about how MBAs are looking for work in the energy efficiency, clean tech, and smart grid sectors.

Part of this demand is that (A) Wall Street is not hiring (B) Banks that take TARP money have restrictions on hiring new foreign workers if they have fired workers recently.

Senator Charles Schumer (D-NY) wishes to overturn the restriction.

Let's just hope all those MBAs won't make the mess of the green industry that they did to finance.

Martin Wolf on the Seeds of Financial Destruction

noreply@blogger.com (Andrew Hyman) — Mon, 09 Mar 2009 17:51:00 +0000

Martin Wolf in the 9 March Financial Times, in an article entitled Seeds of its own Destruction discusses how the recent financial crisis --or crises, it's hard to keep track -- has called into question much of the accepted wisdom about markets.

He also echoes a theme discussed in this blog, notably the dangers of financial engineering.

How did the world arrive here? A big part of the answer is that the era of liberalisation contained seeds of its own downfall: this was also a period of massive growth in the scale and profitability of the financial sector, of frenetic financial innovation, of growing global macroeconomic imbalances, of huge household borrowing and of bubbles in asset prices.

The growth of a financial sector that was not tied to aiding other industries, but only to helping itself, raises serious questions about the role of finance in the economy. Yes, people want to, and need to, make money, but what does that investment get us? During the past few years, were these powerful forces of finance used to develop and fund breakthroughs in the green sector, healthcare, and infrastructure? You know the answer. If they had been, perhaps we would be a lot closer to clean power, improved medicines with fewer side effects, and safer and greener transportation systems. Instead, governments throughout the world are trying to prop up banking systems loaded down with toxic assets that the banks have no way to value -- and no incentive to value. If banks had to honestly value many of those assets, they would have to make even larger writedowns on their balance sheets than they are doing presently.

Never confuse a financial engineer with a real engineer. Paul Volcker in a recent speech mentioned his disappointment that his grandson, who had a great aptitude for mathematics went into financial engineering.

And what have those financial engineers been doing for the past decade? According to Wolf, they've been innovating.

Throughout [the past decade], the financial sector innovated ceaselessly. Warren Buffett, the legendary investor, described derivatives as “financial weapons of mass destruction”. He was proved at least partly right. In the 2000s, the “shadow banking system” emerged and traditional banking was largely replaced by the originate-and-distribute model of securitisation via constructions such as collateralised debt obligations. This model blew up in 2007.

We often think of innovation as good. And in many ways it is. Innovation in astronomy made us realize the earth was not the center of the universe. Innovation in medicine took us away from bloodletting as a cure and brought us vaccines and antibiotics. Financial innovation brought us the collateralized debt obligation (CDO) and the credit default swap (CDS). And that brought us the worst financial crisis since the Great Depression.

Destitute pea pickers in California. Photograph by Dorothea Lange.

From the Farm Security Administration-Office of War Information Collection at the Library of Congress.

Jon Stewart skewers CNBC

noreply@blogger.com (Andrew Hyman) — Fri, 06 Mar 2009 19:25:00 +0000

For better or worse, I don't own a TV, so I don't have the distinct pleasure of having CNBC or what the money manager and author of Greenspan's Bubbles, William Fleckenstein, refers to as bubblevision distracting me. It also means I don't have my daughter wondering who is that man having temper tantrums on TV?

Still, CNBC, and its personalities, are not that well known outside hard core viewers, until Rick Santelli launched his now famous rant at the Chicago Mercantile Exchange. Then, Jon Stewart, of The Daily Show, struck and showed how satire can again be one of the most incisive tools to understand a phenomenon -- and how CNBC helps make its viewers poorer.

The Daily Show With Jon StewartM - Th 11p / 10c

CNBC Gives Financial Advice

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

Free Drug Free Drug Samples May End Up Costing The Uninsured

noreply@blogger.com (Andrew Hyman) — Mon, 02 Mar 2009 22:19:00 +0000

Those free samples patients get from their doctors may be very expensive in the long run, especially for the uninsured, according to a study last fall from Wake Forest University

WINSTON-SALEM, N.C. – Free drug samples provided to physicians by pharmaceutical companies could actually be costing uninsured patients more in the long run, according to a study done by researchers at Wake Forest University Baptist Medical Center and colleagues.

The retrospective study looked at the prescribing habits of more than 70 physicians in a university-affiliated internal medicine practice in the months immediately before and after the closing of their drug sample closet. The results indicate that the availability of free samples from pharmaceutical companies greatly impacts whether an uninsured patient is given a prescription for a generic or a brand-name drug.
The complete findings can be found in the September 2008 issue of Southern Medical Journal.

“It’s true that samples can save patients money in the short-run,” said David P. Miller, M.D., lead researcher and internal medicine physician at Wake Forest Baptist. “But our study shows that they may end up paying more in the long run when they are given prescriptions for brand-name only drugs.”

Read more here.

Understanding Social Media for Healthcare

noreply@blogger.com (Andrew Hyman) — Thu, 26 Feb 2009 18:17:00 +0000

Mark Senak, of the Washington office of Fleishman Hillard has put together a very illuminating post in his blog, Eye on FDA on how to use social media to get the word out about new discoveries. Although it is targeted towards healthcare, it is one of the clearest explanations of how to use social media for those who are new to the area.

The Press Release Then, Now and Tomorrow
A press release used to be sent out by fax and later email. They got picked up and printed and then people who wanted to read the article in the publication might. They might clip it out and send it to a relative. Later, with the Internet, they
might send the URL to a friend. Then print media online began offering
little "share this" icons so that you could email the article to a friend.
That was all nice progress.
Then came RSS feed. One can aggregate a large number of feeds at once, getting news from a lot of sources and then spread them on quickly.
The nature of a press release is evolving as does our forms of communications. Now, there is no one sized fits all press release.

Read more at Senak's blog.

Bernie and A-Rod

noreply@blogger.com (Andrew Hyman) — Mon, 23 Feb 2009 19:32:00 +0000

by Jeff Feldman.

Bernie and A-Rod have a lot in common. First of all, they both cheated. Second, several people suspected they were cheating. Third, both were at the top of their profession, seen as virtually peerless. Now there is no question that they are responsible for their actions and should face the consequences. But aren’t Bernie’s investors and A-Rod’s employers and fans equally culpable? Didn’t they see what they wanted to see? Bernie provided what were ostensibly above-market, low risk, returns. A-Rod hit home runs at an unprecedented rate. They both gave the market exactly what it wanted.

So let the market be warned. We have to be vigilant and when, as the saying goes, it looks too good to be true, there is a very good chance it is to good to be true. As an investor, I have a simple rule. If someone is offering consistent returns and constantly taking in new money, I assume it’s a Ponzi scheme. One can never be sure, and I may miss a great opportunity one day, but I’ve been in the business 42 years and it hasn’t happened yet.

Plus, Bernie would not explain his trading strategy and that is always a red flag.

Ironically, regarding strategy, baseball used to be a game of strategy and statistics. The home run was not the centerpiece of the game. A true baseball fan enjoyed a 1-0 game decided by a suicide squeeze just as much as a 10-9 game with 7 home runs. But over the past 20 years, as with other sports , baseball became a power game. We got caught up in the home run onslaught of what steroid enhanced players like Mark McGwire and Sammy Sosa. The video game generation does not have the attention span required for the traditional slow-moving baseball game.

Baseball has been around for more than 100 years; ballpark dimensions provide fairly consistent numbers of home runs. The game didn’t need home runs to attract fans, until recently. As the home run became more important, and since baseball could not move in the fences without destroying the integrity of the game, the incentives for hitters to take steroids blossomed. And with the hitters juiced, some pitchers felt the need to keep up. Team owners, and management, understood the value of the home run and so had an incentive to look the other way. The point is, it would be virtually impossible to change the nature of baseball from a strategy based game, to a power based game, without changing the dimensions, or the equipment. So, you had to change the players.

There is an analogy in investing. It has been extremely difficult for fund managers to produce consistent, above market, returns over a long period of time. Three quarters of
of fund managers do not outperform their chosen benchmark in any given year. Bill Miller at Legg Mason beat the S&P 500 15 years in a row (making him a Superman) then lost almost 45% in 2008. And if one invested with Miller in 1998, currently that position is underwater by 10%. So now comes Bernie Madoff to a game of strategy and statistics and he says he will not be a home run hitter but rather will consistently hit doubles and triples (and he will never strike out). Investing has been around longer than baseball and nobody has been able to overcome the odds without cheating. So with Bernie, as with A-Rod, we should have known.

The more troubling aspect of the Madoff business is the sense of entitlement expressed by his investors. They believed that the wealthy play on a different playing field with different rules. They could have their cake (higher returns) and eat it, too (no risk). I don’t know if the $50 billion number is an accurate measure of the money Bernie took, but assume for the moment it is. If that money had been invested in a basket of opportunities in medical technologies and environmentally friendly innovations, the potential returns would have been a multiple of the $50 billion and the downside would unlikely not be as bad as the total loss his investors are facing.

Madoff Style Investments Don't Cure Diseases

In addition, the successful technologies would improve standard of living for the rest of us. It is very dangerous for the wealthy to believe that they can strategically avoid risk and make money with an options trading strategy that benefits nobody but them. Even if it were possible, the eventual consequences of such a strategy could be dire. We need to invest in a sustainable, and growing, economy.

Back to Basics

Our nation, and particularly the wealthy, has to get back to basics.

Investment analysis is about balancing risk and reward -- not eliminating risk.

Trekkie Alert: Medical Tricorders May Come Soon

noreply@blogger.com (Andrew Hyman) — Wed, 18 Feb 2009 20:46:00 +0000

Peter Pitts at Drugwonks shows that soon Star Trek medicine may come to all of us in the form of a medical tricorder.

In a post entitled 510(k) for a Tricorder, he writes:

Doctors could soon be using a Star Trek-style device the size of a BlackBerry to check patients' genetic suitability to different medicines. A prototype of the hand-held device is already being tested by British scientists, who say it could be on the market in two years. The SNP (pronounced snip) Doctor is the kind of gadget that might by have used by Dr Leonard McCoy in the original Star Trek TV series.
From a drop of saliva or cheek swab it can analyse DNA to tell if a patient has the right genetic fit for a particular drug.

For those of you who don't live and breathe the FDA approval process, 510(k) refers to the process of approving medical devices for use in the USA. According to the FDA in its Premarket Notification 510(k) webpage:

A 510(k) is a premarket submission made to FDA to demonstrate that the device to
be marketed is at least as safe and effective, that is, substantially equivalent, to a legally marketed device (21 CFR 807.92(a)(3)) that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device, as described in 21 CFR 807.92(a)(3), is a device that was legally marketed prior to May 28, 1976 (preamendments device), for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found SE through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate." Although devices recently cleared under 510(k) are often selected as the predicate to which equivalence is claimed, any legally marketed device may be used as a predicate. Legally marketed also means that the predicate cannot be one that is in violation of the Act.

"Don't leave him in the hands of 20th Century Medicine." Dr. McCoy, Star Trek IV: The Voyage Home.

Grandfathering Permits in Emissions Trading Schemes

noreply@blogger.com (Andrew Hyman) — Wed, 18 Feb 2009 20:15:00 +0000

Why is it that items are "grandfathered" and not "grandmothered?" Has anyone thought of that? Especially since grandfathers can't give birth to anything?

Well, now that we're past etymology,

Rich Sweeney at Common Tragedies wrote an interesting post on 18 February 2009, entitled, The Problem with Grandfathering Permits which highlights a major challenge related to running cap and trade systems -- notably the issuance of permits based on past emissions. He notes that:

... one of the problems with output based permit allocation is that it creates an incentive for actors to alter their behavior in the period(s) prior to setting the allocation. For example, if carbon permits were simply given out proportionally based on firms’ share of total carbon emissions in the previous year, there would be a huge incentive to be as dirty as possible.

Knowing that their allowances could be based on their emissions the year before the scheme was implemented, polluters might ramp up their emissions so they could have the largest allowance possible.

Windpower Employs More than Coal Mining in US

noreply@blogger.com (Andrew Hyman) — Wed, 18 Feb 2009 15:45:00 +0000

I originally saw this in The Coffee House , which in turn referenced a post from the Green Wombat.
It seems that the windpower industry employs more people than the coal mining industry.

Here’s a talking point in the green jobs debate: The wind industry now employs more people than coal mining in the United States.

Wind industry jobs jumped to 85,000 in 2008, a 70% increase from the previous year, according to a report released Tuesday from the American Wind Energy Association. In contrast, the coal industry mining employs about 81,000 workers. (Those figures are from a 2007 U.S. Department of Energy report but coal employment has remained steady in recent years though it’s down by nearly 50% since 1986.) Wind industry employment includes 13,000 manufacturing jobs concentrated in regions of the country hard hit by the deindustrialization of the past two decades.

Madoff + Mortgages = One Economic Mess

noreply@blogger.com (Andrew Hyman) — Tue, 17 Feb 2009 21:37:00 +0000

by Jeff Feldman

The past few weeks have been full of Bernard Madoff news and mortgage disasters. What is important, however, is what these twin tales paradoxically reveal -- trying to avoid risk in investing may lead us to the riskiest investments.

Madoff is a crook; lock him up and throw away the key. What about his “victims?” Are they blameless? They were seeking above average returns from an investment they perceived to have, little or no, risk. But most of them could not explain what they had invested in and knew little about the Madoff operation. All that mattered was there was no risk. And look what happened to Zsa Zsa Gabor .

Perhaps if they had been investing in something real, like Volkswagen beetles, this wouldn't have happened -- and they would have produced something that people could use.

And let's face it, derivatives based on mortgages are pretty vaporous, too.

The buyers of securitized mortgages thought the pools they were buying were rated AAA. That of course meant that they were taking no risk and thus could leverage those investments in order to get an above average rate of return.

Then there were the buyers of credit default swaps who were buying the credit risk of entities that they perceived had little or no chance of failing, thus allowing them to earn an above average return from the premiums earned. Yet, would these people have bought into the argument that decaffeinated coffee crystals are equivalent to a high quality brew (apologies to Lauren Bacall)?

So we invested trillions of dollars, all of which were going to earn above market returns for no risk, violating every principle of finance.

Then there are the folks who have engaged in 130/30 strategies and “portable alpha” strategies under the assumption that they reduced risk without giving up any return. These investors built models based upon asset allocations, algorithms and the efficient frontier without ever giving any consideration to what was actually going on inside the companies that made up their portfolios.

Over the last 15 years, with the advent of electronic trading platforms and the rapid expansion of proprietary trading desks, the investment community has labored ,and hard, to eliminate risk from investing. Of course, it turns out that that instead of eliminating risk, the engineers have made it pervasive and now we are suffering the consequences. But why did risk become such an anathema in the first place? There is no such thing as a low-risk, high-reward investment, certainly not for long. But after the tech bubble burst in 2000, institutional investors developed an aversion to risk. Hedge funds sprung up to offer the solution. But investors were not satisfied with the returns provided by the market because they were seeking to recover the losses from the tech bubble. They maintained their aversion to risk but required above market returns. Wall Street is always willing to oblige investors. So we got what we asked for. This is similar to what happened with Enron. Through the 80’s and 90’s it became common for analysts to predict quarterly earnings down to the penny and growth companies that missed estimates were severely punished by investors. So Enron created, out of whole cloth, the stable growing earnings pattern that we hungered for.

I have been on Wall Street for 40 years. I have accumulated a good deal of knowledge and I have seen a lot. My experience told me we would wind up exactly where we are and I spent two years on a public speaking tour trying to point out the problems. Many of you will recall my rants which did little good. It is dangerous to wave a flag in the face of a charging bull.

Now greed has been overwhelmed by fear but that will pass. When it does, investors will come out of their bunkers.

Those investors will be assuming risk. Some will make money; many will lose money but we will all be better off. The investors who backed Bell took a risk that other inventors would get to the market first. Other investors backed losing systems or thought the invention would go nowhere, notably Mark Twain.

Capital formation is the basis of economic growth. Financial engineering leads to the destruction of capital and we now all know where that leads.

We must now get back to basics and make our capital markets the engine of growth they have always been and to restore prosperity for all.

Hopefully, we will return to the fundamentals of investing; looking for companies that will offer tomorrow’s innovations which will improve life for all, like the telephone

Bernard Madoff Talks About His Relationship with Regulators

noreply@blogger.com (Andrew Hyman) — Tue, 17 Feb 2009 21:30:00 +0000

Bernard Madoff talks about his relation with regulators and how violations can't remain under the radar for long on Wall Street. Just tell that to Harry Markopolos.

The short version:

The long version (over 30 minutes).

Safe Passage

noreply@blogger.com (Andrew Hyman) — Thu, 12 Feb 2009 19:29:00 +0000

by Jeff Feldman.

It was quite remarkable to watch the market trade down on Tuesday, while the Secretary of the Treasury was testifying before Congress. Just ten years ago, that testimony would not have broadcast live and 20 years ago it wouldn’t even have made the news. Now the market is analyzing testimony in real time. This morning I saw a self-promoting ad on CNBC, better known as bubblevision calling its reporting “Fast, accurate, and actionable.” Actionable is what we are all about today. Instant gratification is a requirement.

When Jim Cramer does his “Lightning Round” on Mad Money, he prefaces by vowing that he has no prior knowledge of the callers or the stocks about which they will inquire. He wants us to know that absolutely no preparation or analysis has been done to support his pronouncements. This is, of course, to demonstrate his prodigious knowledge about the stock market. But is this offering really preferable to his getting advance notice to prepare well researched opinions? What about the callers? Wouldn’t they be better off if his responses took into account their portfolios and financial situation? Can you imagine a doctor conducting a “Lightening Round” on live television? “Let’s go to Joan in Indiana. What ails you Joan?” Would anyone act on such advice? Is your money any less important than your health?

It seems we have moved beyond the old joke of “ready fire aim” to simply, “fire at will,” with predictable results. Perhaps recognizing this mentality, Secretary Geithner did not give us actionable information. The absence of same caused the Dow to decline 400 points.

Consider what would have happened if he had given the market what it was looking for? Imagine, if it became apparent from his testimony, that the bank stocks are under valued. How much money would have piled into that trade?

After the testimony, the pundits paraded onto the screen to proclaim they want certainty from the government on the value of bank assets before they will consider investing in them. This is the equivalent of the 19^th century American pioneers proclaiming, “we will not settle the west until the Government takes care of the Indian problem,” or the astronauts demanding a Government guarantee of their safety before taking off for the moon. We must be willing to take some risks without being backstopped by the Government. Note that Intel announced yesterday the intent to spend $7 billion on new plant and equipment. No guarantees. No assurance it will work out. Businesses need to start looking forward without regard for government action. If we start investing in the industries that will solve societies greatest needs: healthcare, clean tech, education, and efficient transportation to name a few, we can begin the road to recovry. Some businesses will succeed, many will fail and we will all be better off. There are no quick fixes to the hole we are in. There is nothing that is fast and actionable. This is a slow difficult grind. Those that say it is too risky or too difficult miss the point. Our country and our way of life are at stake. Those with excess capital can’t hoard their way out of this.

Their capital is worthless without a sustainable economy. And that sustainable economy is achievable. Lets turn off CNBC (making us immediately smarter) and go to work.

Bollywood Bernie Madoff

noreply@blogger.com (Andrew Hyman) — Wed, 11 Feb 2009 19:00:00 +0000

For those of you who wonder how Bernard Madoff's story would play in Bollywood, take a look at what nakedcapitalism.com has found:

Coming Soon a Theater Near You: Scumbag Billionaire

Arrogance of the Present

noreply@blogger.com (Andrew Hyman) — Tue, 10 Feb 2009 20:33:00 +0000

Saddam Hussein was supposed to destroy the world with nuclear weapons. We were supposed run out of oil six months ago (now we are drowning in it). London was supposed to become the financial center of the universe while China consumed every bit of every commodity that exists.

In fact there have been dozens of predictions over the past 30 years of events that could only be expected to happen once in a millennium. Remember Y2K? That was supposed to be the end of everything. The fact that folks are willing to make these outlandish predictions Is not surprising. If you’re not over the top, you can’t compete for media attention. But why is society willing to believe these things and worse, act upon them?

Part of the problem is the media itself. If you are over 50, you remember getting most of your news from newspapers (in effect, in arrears because newspaper write about yesterday). Now all news is “Breaking News,” delivered in real time. Thirty years ago, “Breaking News” was truly a major event (assassination, invasion or some type of disaster, natural or otherwise).

Now all news tries to be urgent and the language of urgency still rings bells in some of us. So we take seriously many of the dire prognostications we hear. They are presented logically and cogently and in the moment, cause alarm.

We are living though a developing recession in real time, watching indicators get worse on a daily basis. Inevitably, this stress must lead to panic (which also plays out on TV).

When I was a Wall Street analyst in the 60’s we got our economic data six months in arrears. It took three more months to analyze. There was never any panic when we discovered a recession in the rear view mirror; there was nothing we could do about it. We were much more interested in long term trends and cycles.

Now, the availability of data and the ever present media forces us to look at things only in the present without developing a perspective on long term trends. And when lives in the moment, it is constantly changing. The energy we expend makes believe something significant is happening. We have actually come to believe that we must be living during an extraordinary time in history when monumental events will occur.

In most 70 year periods (a generation) of human history, nothing of great significance happened. A few generations had one great event; a war, a flood or fire, a Depression, a man on the moon, etc.

This generation is willing to believe that several such events can occur during their lifetimes. This is utter nonsense.

We must reorient our perspective to understand that, from the point of view of the 40th Century, we live in the deep dark distant past. From that point of view, by the 21st Century, very little has progress has been made and virtually all important innovations by mankind have yet to be developed. It is our role to push the rock forward as much as we can. The engine of change, for us, is capital formation. We need to get back to work.

The cover story in the February 9 issue of Time Magazine is a must read. It foretells the coming revolution will be fueled by stem cell therapies and regenerative medicine. The opportunities for investors in this space will unfold rapidly over the next few years. We will be writing regularly in this blog about these developments and the opportunity for wealth creation they represent

Molecular Age Points Way out of Current Crisis

noreply@blogger.com (Andrew Hyman) — Mon, 09 Feb 2009 20:54:00 +0000

Eventually the crisis will subside and the economy will begin to recover. While we are in crisis, we tend to examine what is going on at the moment on a real-times basis; where are interest rates, what are the spreads on credit default swaps, how much TARP money to the banks need. Eventually, after the panic, we have to step back and look at the broader picture and long term trends. An understanding those trends that will lead us to where the investment opportunities are as we enter the next bull market. When seeking a trend line, we find it useful to try to go as far back in time as possible. The economy evolves through a continuum, and evolution occurs slowly, sometimes imperceptibly, over five, or ten, years

This chart shows the percentage of the economy devoted to agriculture, industry, services, and information technologies, since the beginning of the industrial revolution.

Citation: Huitt, W. (1999). Success in the information age: A paradigm shift. Revision of paper developed for a workshop presentation at the Georgia Independent School Association, Atlanta, Georgia, November 6, 1995. Retrieved 9 February 2009, from http://chiron.valdosta.edu/whuitt/col/context/infoage.html

Agriculture and industry represented 77% of the economy in 1870, and today they represent 23% of GDP. The information and service sectors reached that same 77% of GDP about 20 years ago. These long term trends will continue. There is another important trend underlying these statistics. The agrarian economy began 6000 years ago, and it represented virtually all domestic commerce until the 19^Th Century. Our farming techniques, at that time, became developed sufficiently, so we could begin to commercially extract metals and coal from the ground. These techniques formed the basis of the industrial revolution and the invention of machines. Over the next 100 years, we learned to make machines ever smaller, faster, and cheaper, fueling the manufacturing age of the 2oth Century. We eventually achieved miniaturization of machines (transistors, semiconductors, microchips) which allowed for the advent of the Information Age. That process has continued, and it has now progressed down to the atomic level. And so we are about to usher in what we will come to understand is the Molecular Age. Investors who partcipated in the advent of the Industrial Revolution created enormous wealth -- and progress. The same is true of the founders of the manufactruing companies of the 20^th Century. And the greatest wealth boom ever occurred in the creation of the Information Age. We will now reach new heights of wealth creation in the dawn of the Molecular Age

In healthcare, we are already seeing the sucessful early entrants. Consider Myriad Genetics (MYGN), a molecular diagnostics company which creates and commercializes gene based testing to identify the risk of major diseases. Myriad is seeing its sales and earnings grow at a pace of 70% per year and has seen its stock more than double in the past 12 months. The paradigm shift taking place in medicine is moving treatment away from treating symptoms toward seeking to prevent, or cure, the underlying disease. This requires diagnosing a condition at the molecular level and treating it genetically.

We currently spend 17% of GDP on healthcare and 78 million baby boomershave reached middle age. We will be at 20% of GDP in 5 years and will be spending well over $3 trillion per year. The only hope for getting healthcare under control is to intervene in disease before the patient is sick. Many companies arte developing these molecular tools. Many are publicly traded but largely unknown. This blog will be reviewing these technologies and the opportunity they represent

Limiting Executive Compensation -- A Bad Idea for the Forgotten Shareholder

noreply@blogger.com (Andrew Hyman) — Sat, 07 Feb 2009 18:19:00 +0000

by Jeff Feldman.

The government’s suggestion to limit executive compensation for firms accepting TARP money is ill-timed and poorly conceived. Don't forget that this limitation only applies to firms that take TARP money after February 5th -- which could mean no firms at all.

There is an important tenet in the investment world that is left out of these discussions. Investors, or shareholders, cannot watch their money once they turn it over to a manager or invest it in a bank.

And we know where “trust” has gotten us.

What is required is a “commonality of interest.” Executives and managers should make money only when their shareholders and investors make money. That certainly has not been the case over the last several years and not surprisingly, investors have suffered. But continuing to separate the interests of investors and executives is not the answer. Yesterday, Goldman Sachs announced it would like to repay its TARP loan so as not to be encumbered by the TARP rules. If that happens, Goldman execs will have no limit on their pay. Firms that take the loans will restrict compensation, and executives will not know if they will ever receive incentive compensation (which means it doesn’t incent anyone). So if a TARP bank exec does well, Goldman can offer the banker several times the $500,000 limit the employer can pay. So the employee takes the talent to Goldman Sachs. The taxpayers (shareholders of the TARP bank) get screwed again. The solution is to create an independent compensation board that works for the shareholders to compensate the executives properly. Its okay to punish greedy business people, and limit their pay, but to do it, at the expense of the shareholders, is frankly, idiotic.

More important, the financial markets have to get back to their primary role, which is capital formation. Little of that has happened since the tech bubble burst in 2000. In fact, it was because of that collapse, risk became anathema to institutional investors who sought out risk free, high, rates of return -- and actually believed they had found them. Bernie Madoff did nothing compared to the Ponzi scheme run by the banks on the American people. The banks discovered they could securitize mortgages and then arrange to finance the buyers of those securities with cheap debt. The supply of such paper became infinite when the rating agencies decided that any Mortgage Backed Security should be rated AAA because housing prices only go up. So we entered an age of unprecedented leverage. Look at these numbers from the balance sheets of Goldman Sachs and Merrill Lynch.

All values in billions of dollars
	December 1999		December 2007
	Goldman	Merrill Lynch	Goldman	Merrill Lynch
Short Term Debt	32	20	638	460
Long Term Debt	20	57	122	180
Shareholder's Equity	10	12	35	39

Since the beginning of 2000, Goldman has seen its shareholder equity rise 3.5 times and its debt rise 16 times. Merrill’s equity rose about 3 times while debt rose over 9 times. Both firms experienced extremely large earnings during that time. The same leverage showed up at UBS, Bear Stearns, Lehman, and many other banks. But the leverage was almost entirely related to mortgage-backed securities and credit default swaps. Obviously, as these firms and to dig deeper and deeper into the home buyer pool, the credit worthiness of the homebuyers were constantly declining. But they were able, with the assistance of the rating agencies, to make believe that all borrowers were rated equally and that all securities carried little risk. Like a ponzi scheme, the earliest investors made money because there were later rounds of investors available to provide a never ending stream of liquidity. And then it stopped. And the resulting collapse was no different than what Mr. Madoff experienced.

[youtube=http://www.youtube.com/watch?v=j5j20NSFNcg&feature=related]

Suddenly, the riskless assets were worthless. The borrowings shown above were largely secured by those assets and so there was no reason to believe the banks were overleveraged. But it turns out they were in a massive way.

Now none of this “investing” had anything to do with capital formation, innovation, or sustainable economic growth. If only a fraction of this money had been invested in developing new medical treatments for major diseases, or electronic medical records or clean energy, we would all be better off. The cycle we lived through was about pure greed and material wealth. The fund managers engaged in these activities so they could hang impressionist art on their walls. Never mind the fact that the original owners (even, in many cases recent owners) of these works paid a small fraction of what this generation has paid. The instant gratification we crave extends to the desire to have “old wealth” the moment we get our hand on money for the first time. It is a fool’s errand and a terrible waste of money. Hedge fund managers in Greenwich own billions of dollars of artwork, and unemployment has reached historic highs. Society will be much better off when the Masters of the Universe hang pictures on the wall of the people they have helped employ or made healthier or whose lives they have improve and experience the same level of satisfaction they currently get from a Picasso.