Friday, October 1, 2010


Let's see who's trying to bury the news after hours.

If IOC isn't fun enough for you, now we get to see who is trying to bury news by announcing after the close. A bozo no-no! Although WDFC increasing its dividend looks like a benign start.

Fine With Fines

Many midsized companies will likely pay the punitive fine rather than offer health insurance.

Could the fine have been set low to act as a relief valve for small business?

What is the impact of Obamacare on labor-intensive businesses? Large restaurant chains are very nervous about the looming cost impact. One chain with $80 million in sales expects health care costs to increase by more than $2 million next year ... which could cut up to a quarter out of profits. Similarly, another 50-unit IHOP franchisee sees a similar magnitude of increase.

Not surprisingly, both will opt to pay the fine for uncovered employees rather than offer insurance. The cost of the fine is a fraction of the cost of insurance. If the administration is serious about forcing universal coverage, expect that fine to go significantly higher in the near future.

Of course, the alternative and highly cynical view is that the fine, by being set so low, was put in purposely as a relief valve for small business. Then the administration could claim success while reducing the actual impact on small business. Stranger things have happened.

QE 2 Debate

In the real world, any actual monetization would be ineffectual.

I'm really not sure if more quantitative easing is going to happen. I think the Fed is using Hank Paulson's old "bazooka" strategy: show them a big enough gun, and you never have to use it. They've been planting talk of QE 2 to get economic players to believe it could happen, hoping that it is enough to get people to behave as if it is happening already.

In the real world, any actual monetization would possibly (probably?) be ineffectual. Minneapolis Fed President Kocherlakota put it brilliantly in a recent speech:

Banks have nearly $1 trillion of excess reserves. This means that they are not using a lot of their existing licenses to create money. QE gives them new licenses to create money, but I do not see why they would suddenly start to use the new ones if they weren't using the old ones.

I see no reasonable counterarguments to that point.

Who Needs Greece When You Have Ireland?

Ireland is already in a depression, and the new four-year budget will shrink the economy even more.

The Irish seem to be serious about honoring their sovereign debts, and they are being crucified in the process. The government will soon issue a new four-year budget -- maybe it should try a five-year plan? -- that will cut spending and raise taxes. Over the long term, this is the right thing to do, as shrinking the role of government in the economy will spur faster growth ... in the fullness of time.

As Keynes didn't say, however, in the short run, we are all dead. Ireland is already in a depression, and these changes will shrink the economy even more. Debt doesn't change, so the debt burden is ballooning to nearly 100% of GDP. (The budget deficit will reach one-third of GDP even after the cuts.)

I am surprised the Irish are taking this sitting down, unlike the Spaniards and Greeks, who are protesting. But that is sure to change. Ireland is likely to be the first European country to see massive social unrest that will stop further austerity measures. I thinking Ireland could be the first to default on its debt.

The current government may be completely serious about keeping bondholders whole at the expense of its people, but the people will simply vote them out.

Bond markets always try to pose the threat that if an entity defaults, its access to the bond market will be cut off. I would like anyone who believes that to show me evidence that this actually occurs. Argentina seems to have no problem issuing debt, and how many times has that country defaulted? The bond markets have very short memories, and post-default a country actually has a healthier income statement, thus making it more creditworthy!

The implications of default are far more benign than paying the high interest rates that reflect the risk of default before it happens. The Irish will figure this out soon, in my opinion.

Apotheker Yields Negative Side Effects

Hewlett-Packard's new CEO cost the company $3 billion in market value when his hiring was announced.

This reaction reflects our unhealthy cult of the CEO. Hewlett-Packard is a global enterprise with 300,000 employees, all of whom make some contribution to the company's success or failure. It is not that CEOs don't matter; clearly Hurd helped to fix a dysfunctional Hewlett-Packard over the last few years and really added value - building on what Fiorina had started. But do they matter as much as we proscribe? And are they really worth these gargantuan pay packages? (That is an economic question, not a political one!)

I was pleased to see the former CEO of HBC getting a severance package of all of $2 million upon his exit last week. Seems the Brits still have some semblance of restraint.

"Those with enterprise haven't the money, and those with money haven't the enterprise."

-- Ben Graham (1932)

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