Professor Elam

Candid Camera Takes A Dark Turn

Increasingly employers are interested in 'extra curricular' employee activities.  Increasingly employers are doing searches of You Tube and such sites looking for inappropriate behavior.

Well that just happened to the President of Iowa Central Community College.  Robert Paxton will receive a $400,000 severance package but will no longer be President of that school.  We caution readers to be careful both what they themselves post and what others might do. And, well, the old saying still holds, if your Grandmother would not be comfortable in a situation, you should probably not be there either.  The photo appeared in the Des Moines Register.

Vampires, I wasn't Kidding..

 A few posts back I mentioned Twilight, the wildly popular vampire series about a girl with a vampire boyfriend. I linked this to the donwturn in markets, ie, popular culture refelcts and drives the economic evniroment. Some of you doubted the causality. Well, guess what

Dead Until Dark  is another populare vampire series again featuring a young gal with a vampire boyfriend. In this tale, vampires have come out of the dark so to speak and taken residence where else, in a town in northern Louisiana, Bobby Jindal take note. True Blood is the artifical drink of choice which keeps the vampires fed and off the local residents. This was such a great mainstream idea that, are you ready,

True Blood will debut this September on HBO as a regular show. In the prequel on how we made True Blood, the producers link vampire society to of course, everything social, sexual, racial, you name it.

The point from a socionomic standpoint is that this age old idea of vampires being creatures of the night has become quite mainstream. While readers will once agin question the causality of this, we would point out that HBO was certainly free to bring back musicals, say a contemporary version of Grease. They did not and we maintain this is no accident but a social phenomenon.  The show should debut just as the financial markets make a last high at least within a week or so would be my guess. If so, the mood of True Blood will match the mood of  the market which is to say down.

 Make mine a Oh Positive, shaken not stirred.

Boeing Pension Plan

Boeing like other companies is trying to move away from the defined benefit plan, but of course the union wants one.  And no doubt AIRBUS with a lot of European employees has one.  And so Boeing is caving and apparently going along with the idea rather than face a strike. I would say this is a short term mistake, they might as well cross this rubicon now.

This is an excelelnt article as we study the libaility and equity side of the blanace sheet in Intermed II as well as Fin Statement Analysis. The FASB does not make companies own up to all their future liabilities in this or the operating lease area. IF they did Ford and GM would be out of equity.

Speaking of Ford, it went to a new low of $4.35 yesterday. GM is a few cents above its low at $10.04. Rather than excoriating the members of the other party on their national televised party conventions it seems to me this would be a good time to engage in a dialog. Will America have American owned car companies or not? Reminder, Britain does not have any, it could happen here.

Again, this is an important article.

Kindle Heats Up

Kindle is Amazon's electronic book reader.  Go to Amazon.com to take a look.  I have written about this on the blog, both Sony and RCA have tried marketing elec book readers without much success. Now AMZ has sold $100 M of the $360 device since last November.  AMZN is now buying websites that feature used books or articles about books to encourage people to download. 

Listening to music on an iPod is a natural act since one does not have to 'read' the music.  Watching a movie on an elec player is a natural act since one watches rather than reads the movie. But the book experience is rather different. I subscribe to Business Week becasue I would much rather have the paper copy to highlight and carry around. I can read it anywhere without a computer.  For me there is a river to cross in the elec book realm not present in movies or music. How about you?

I can certainly see the advantage of the elec book from the standpoint of storage. Once read, it would be much handier to have it electronically, particularly to search for a passage. And facing another move, it would certainly be easier to haul around 200 books, the capacity of a current Kindle, than to box them up, move their weight, and then find a place to put them.

THe next edition of Kindle will reportedly cost $300 and like all devices be thinner faster etc. It seems to me that to kick start this device, it needs  a  bonus promotion like

AMZN partners with a major textbook publisher, the publisher makes a semester of books available on the Kindle, the book price is discounted and for participating, Kindle is bargain priced at say $99, the whole bundle of books plus Kindle is less than the purchase of the printed books themselves, now that would be a raionale to do this for the student

or the reader Kindle, needs to incorporate an MP3 player at least, would Apple be interested in an iBook, now there is an idea, which would play music and allow you to read a book, maybe listen to music and read, a bad idea but no doubt a popular one

Your thoughts?

MBA Enrollment Up

The number of people taking the GMAT is the best indicator of grad business school enrollment.

College enrollmentis actually counter to the economy. Economy down people rationalize they might as well be in school as htey cannot get the job they want now anyway.  The hyperlink describes that this is the fourth year of increased GMAT testing.  So which is it, does an improved economy call for more and better educated students or does an imporvement mean that jobs are so plentiful that one does not need more eduction to get into the workforce?

Conversely when the economy slows and more go to college, does the supply of college grads increase out of porportion to jobs availa ble?  Or am I just sounding like Karl Marx here....

And Now for the Important News

Okay amid Michelle Obama's speech, Russia's incursion into Georgia, trhe housing slump, what is it that has Americans riveted with attention, well you might have missed this were it not for the blog but

American Idol will add's  a foruth judge next season. Actually I do have a few observations about this.

Resistance to New ideas - When Simon Cowell pitched the idea for an AMerican version of Pop Idol which had huge audiences in Britian, all three traditional networks turned him down. Indeed it took a call from Rupert Murdoch's daughter to Rupert to get the idea considered. Moral, it is tough to get anyone to buy into a new idea.

Benchmarking -  Now however American Idol is an established idea in its product maturity stage, so what to do to change things up. Do you note the spin in the article, Paula has had to endure being the only female! 

My guess is that Paula has been thrilled to be the only female judge, it certainly revived her moribund career! Now she gets to share the stage with a genuine talent who writes songs sung by Idol winners (no accident there I would say) and who is clearly, gulp, younger.  I am sure Paula is saying oh swell, but at least she is still on the panel, eh?d  Paula was opriginally a cheerleader for a Pro Team that bvecame a sort of manufactured pop singer by a reccord label. Her actual talent is choreographing dance routines, not surpising given the cheerleader background. By the say, can you name the signature Paula hit tune, I didn't think so....

Skilling Seven Years Later

Jeff Skilling former CFO of Enron, has his 25 year conviction on appeal. IN short order the Court of Appeals wil decide whether he shoudl be a free man. Frankly I would think he would do better on the outside preaching about the lack of board oversight and external accounting audit failures as Barry Minkow (ZZZZ Best) does. But this article is an interesting retrospecitve of what happened and how Arthur Andersen and the Enron Board failed in their duties.

You will recall that CEO Ken Lay cheated the hangman's noose so to speak by handily dying of a heart attacke before his sentencing... 

Bailouts We Report You Decide

Observers at a Conference suggest that the FED is too closed to Wall Street. It is therefore too prone to bail out bad decisions.  Good point, I just mentioned in the last post that large insurance firms did not engage in such folly. Yet the FED has 'bailed out' Bear Stearns.  I also mentioned that Congress is now being asked to 'loan' $50 B to essentially re capitalize Ford and GM. Shortly after 9/11 Congress worte poorly managed airlines checks for $15 B. LUV had $2B in the bank at the time, why didn't the others?  WHy didn't Congrfess demand improved financial management in exchange for your money, bad deal I would say.

What is both the ethical and financial imperative that the FED should follow? IF you or I open a deli at  down the street from this campus and go bust, will Bernake bail us out, not likely.  What is your take?

Again as I have mentioned before, when these bad investments are folded into another company we never really learn what the failed company did, their errors are not on display as a lesson to others. Or as Jim Rogers put it, the guys at Bear Stearns get to keep their Maseratis bought with bonuses paid on these failed schemes while you and I get the bill for their mistakes. Funny I don't hear the candidates talking about this, do you?

Lehman, the New Soap Opera

Readers will redcall that Erin Callahan was ousted as the Lehman CFO when she failed to 'rally investor confidence in their financials.'  Apparently she should have spent more time studying cheerleading in college and less in finance. But I digress...

Now Lehman CEO Fuld faces a rebellion. LEH is down 80% this year. We are reading Warren Buffet's 2007 letter to shareholders in Inermed II and Statement Analysis. What are the two precepts that Warren uses to evaluate how well one of his companies are doing?  YOu will recall that  they are

return on invested capital

how much wider is the moat around the company, is this company doing something unique that other companies cannot easily duplicate.

Okay how well did LEH do in this regard, the answer is that it was or is a disaster.

They operated on a razor thing capital of only 3%.  They borrowed short term in the commercial paper market to invest long term in mortgages. When a few mortgages failed to pay, their 3%n capital was wiped out. So there was no return on invested capital.

LEH did not construct a moat at all, they simply mimiced what CITI, MER and others were doing. Once the ship of sub prime started to sink, everyone wanted to sell those 'assets' at once, of course there were no buters, at least not at market prices. MER, see previous post, sold $30 B at 22 cents on the dollar, whoops. One has to look at a different industry, say insurance to find firms that did not succumb to this folly. One is not hearing such disaster stories about Travelers or New York Life for example.

Ninth US Bank Fails in 2008

THe collapse of the oil prices in 1986 resulted in virutally everyhttp:/bvank in Odedssa, TX failing. The FDIC was created as a resutl fo the Craqsh of 1929.  FDIC stands for Federal Deposit Insurance Corporation.  It insures customer deposits to a ceiling level. Amounts in the bank over this amount are not insured.

Columbian Bank had deposits in excess of this limit. Apparently the FDIC is not going to cover those deposits. The Crash of 1929 was not just a waterfall decline in stock prices. Banks at that time were allowed to loan  money on stock purchases. In fact banks could loan 90% of the purchase price. When stock prices declined more than 10% the collateral was gone.  The Crash occurred in Oct of 1929. By March of 1930 prices had  declined such that one third of the banks in the US would close, along with the loss of all the depositors' money.  This wiped out one third of the money supply in the US as the Dow Industrials fell from 390 to a low of 41.  Such borrowed money purchaseds are known as going on MARGIN. The margin is the deposit the customer makes to purcdhase the stock.

Congress passed the Glass Stegall Act to prevent banks from lending on securities. Phil Gramm sponsored legislation repealing this provision in 1999. His time, he is an economist by the way, could not have been worse.  Banks got into the sub prime mortgage and well if you read the blog you know the rest- CITI, USB and many others have essentially gone broke and had to be re capitalized.

Today margin requirements are 50%. While this sounds realistic, consider that leverage or potential margin is actually infinitely higher. ONe can now deal in all sorts of sophisticated derivatives (which means Wall Street knows what it is doing right up to the point of going broke in which case they need a bail out as they are ttoo big to fail) such as puts, calls, indices, derivatives, reverse interest rate swaps, sliced and diced mortgages, etc.  Witness the fall from Dow 14,000 last year to 11,500 today.

We study accounting and the blog attempts to link finance and economics into a more understandable curriculum palette so that students can see the big picture.