Saturday, September 01, 2007

100% Chance of Rate Cut to 5% in September

Good primer here from the WSJ on how to calculate probabilities of future Federal Reserve policy changes using the Chicago Board of Trade's 30-Day Federal Funds Futures contracts.

For example, the Federal Open Market Committee (FOMC) meets in about two weeks, on September 12. What is the probably that the FOMC will cut its target Fed Funds rate from 5.25% to 5% at that meeting? Or maybe even to 4.75%? Using the Federal Funds Futures contracts, the probabilities are 100% of rate cut to 5%, and 73% chance of a rate cut to 4.75%. Here's why:

The October Fed Funds futures contracts settled at a price of 95.1150 on Friday (see chart above). The contracts are priced on the basis of 100 minus the average effective federal funds rate for the delivery month. Therefore, a price of 95.1150 for the October futures contract implies an expected Fed Funds rate of 4.885% for October. This implies that a .25% rate cut in the target Fed Funds rate, from 5.25% to 5% is already fully priced in to the futures contracts, meaning that markets expect at least a .25% rate cut with 100% probability at the September FOMC meeting.

Since the contracts are selling at a price to reflect a Fed Funds rate (4.885%) below 5%, there is also some probability that the Fed will cut rates by .50%. What is that probability?

The implied rate of 4.885% from the futures market is .365% below the current rate of 5.25% (5.25% - 4.885%), suggesting that there is a .365% / .50%, or 73% chance of a 1/2 point rate cut. Further, there is a .365% / .75%, or 46.8% chance of a 3/4 point rate cut in September.

Using the January Fed Funds futures contract, there is a 93% probability that the target Fed Funds rate will be down to 4.5% by early 2008.

I'll revisit this post on September 12 after the FOMC meeting.

Harvesting Cash in Manhattan?

Looks like maybe a map of subway stations in Manhattan?

Well, the "sub" part is correct, but it's not a sub-way map of Manhattan, it's a farm sub-sidy map that I was able to generate from the Environmental Working Group's Farm Subsidy Database, showing Manhattanites receiving farm subsidies. Here's an interactive map of NYC that allows you to click on the red circles and find information about the individual recipients and where their farm is located.

According to National Review Online, "The red dots indicate people who live in Manhattan (and so clearly are neither hurting for money nor tilling the soil on the family farm) but receive agricultural subsidies from the federal government. The larger red blobs mark people receiving more than $250,000 in farm subsidies annually."

The farm bill passed by House Democrats in July would continue giving millionaires farm subsidies (setting the income threshold for payments at $1 million a year, and keeping loopholes in place that allow some making much more to qualify). The Bush administration has proposed sharply reducing the income threshold to $200,000 a year and ending many of those loopholes. That would reduce the number of subsidy recipients by fewer than 40,000 (of the current million or so recipients)—though I suppose it might put some rooftop gardens on Park Avenue out of commission.

MP: I'm speechless, I don't even know where to start my comments on this one. Help me out.

Safety Smackdown: China Say America Has Worms

The US and China appear to be determined to go blow for blow to determine who is the filthiest nation of them all. The latest playground-style broadside from China is that the US has worms.

China struck on Friday in its latest tit-for-tat on trade contamination with reports in the China Daily that inspectors had found microscopic worms in wooden packaging from the US and had uncovered substandard U.S. vitamin pills and fish oil for children.

Read more in The Financial Times here.

Indian Hotels Now Want Rupees, Not Dollars

Reversing a 180-year trend (see chart above, click to enlarge) from 1822-2002, the USD has fallen by 17% vs. the Indian rupee in the last five years, from a high of Rs. 48.96/USD in May 2002 to Rs. 40.62/USD today, the lowest level for the dollar in more than nine years vs. the Indian rupee.

Result? Indian hotels now want rupees, not dollars.

MUMBAI: On Saturday, most hoteliers across the country will move to a single currency pricing policy: room rates will be quoted in Indian rupees. Historically, hotels have followed a dual pricing system that allowed them to quote room rates in both US dollars - the universally accepted currency - and Indian rupees.

With the weakening of dollar against the rupee, hoteliers feel there is more value for money earned in rupees and hence have decided to price their services in rupees.

Read more here from The Times of India.

(HT: Sanil Kori)

Financial Calcuator and Finance Excel Tutorials

Now that we're at the start of fall semester, college students might find these websites helpful for their finance classes:

Financial Calculator Tutorials for all HPs, TIs and Sharp financial calculators. I have reviewed the tutorial for the HP-10BII calculator, which is used at the University of Michigan-Flint's School of Management for all of our finance classes, and I think it is excellent.

Time Value of Money (TVM) Math, some parts of this site are under construction, but it provides good coverage of the mathematics of TVM.

Time Value of Money Tutorial for Microsoft Excel, showing how to do financial calculations in Excel.

Thanks to Matt Short.

China's Health Care: Cash Up Front, Lots of Drugs

If you are Chinese, or visiting China, try very hard NOT to get sick. Here's why:

1. China has no system of general practitioners, so most people go to a hospital for health care.

2. Most hospitals demand cash up front. Chinese people cannot get treatment, even for life-threatening illnesses, until they hand over money.

3. Chinese hospitals have been turned into pharmacies on steroids, more than half their funding is from the sale of drugs. The system has in-built incentives for everyone to sell as many drugs as possible, including doctors, whose salaries are tied to prescription targets. It is no coincidence that one of the biggest corruption cases this year centred on the former head of the state food and drug administration, who was executed last month for taking bribes of $1m to approve new drugs.

4. The most common prescription is for antibiotics, with devastating effect. The health ministry says that 70-90% of child pneumonia patients are resistant to drugs used to treat the disease, because of overuse of antibiotics.

5. A Chinese journalist visited 10 hospitals this year and, pretending to be a patient, provided tea in the place of a requested urine sample. Six of the hospitals said they had discovered "blood cells" in the "urine" and immediately prescribed drugs.

Read more in the Financial Times here.

MP: China's health care system also has implications for China's trade surplus with the U.S.

The fear of being financially crippled by falling ill is an important driver of the country's high savings rates, which in turn feeds the economy's bias towards investment and, more recently, with a large current account surplus, in favor of exports.

Countries like Japan and China with high savings rates (and low consumption) typically have trade surpluses and countries like the U.S. with low savings rates (and low consumption) have trade deficits. Trade policies in the U.S. targeted at reducing the trade deficit with China will never work unless the underlying savings/consumption patterns are altered in both the U.S. and China. That is, unless the U.S. somehow becomes a high savings country, we'll continue to have a trade deficit, and unless China somehow beceomes a low savings country, it'll continue to have trade surpluses. Not likely during our lifetimes.

Friday, August 31, 2007

Who Gets The Most National Public Holidays?

Thursday, August 30, 2007

Buy Houses in Detroit for $1500, Monthly Pmt. = $7

You can go to and search for homes for sale in any city in the U.S., and you can specify a certain price range. If you search for homes for sale in Detroit, Michigan, you'll find that there are 22,387 homes for sale right now, and if you search for Detroit homes for sales between $0 and $20,000, you'll find that there are 3,431 homes for sale in that price range!

That is, more than 15% of the homes for sale in Detroit, or almost 1 out every 7 homes for sale, is priced at $20,000 or less, including the "Great Investment Property" pictured above, which is listed at a $1,500 sales price (negotiable?) with estimated monthly payments of only "$7 per month."

"$7 for a monthly house payment," isn't that about what a single pack of cigarettes cost now?

Energizer Bunny Economy

The Commerce Department reported today that corporate profits strengthened in the second quarter, and hit an all-time high of $1.646 trillion on a before tax basis and $1.154 trillion after taxes (see chart above). Profits after taxes grew by 5.4% in the second quarter, after rising by 1.5% in the first quarter. Year over year, corporate profits increased by 3.5%.

During the last five years, corporate profits in the expanding U.S. economy doubled from $829 billion in 2002 to $1646 billion ($1.646 trillion) in 2007. Another way to think about it is to say that it took 220 years, from 1776 to 1996, before the U.S. economy was able to go from close to zero corporate profits to being able to generate $800 billion of corporate profits (not adjusted for inflation) in a year, and it then took only a 5 year period (2002-2007) for the U.S. economy's corporate profits to double from $800 billion to $1600 billion. Not bad for a "Rodney Dangerfield economy" that gets no respect from the media.

Another way to put U.S. corporate profits of $1.646 trillion in perspective is to compare it to world GDP figures. If the $1.646 trillion of profits generated by American businesses were considered to be a "country," the corporate sector of America would be the
8th largest country in the world, just slightly behind Italy, and larger than the entire economies of Canada, Spain, Brazil, Russia, and about twice the size of the entire economies of S. Korea, Mexico, India and Australia!

There has certainly been a lot of volatility in stock prices, but corporate profits in the "Energizer Bunny economy" are rising steadily and consistently, and have reached all-time historical highs in each of the last 6 years! Like the Energizer Bunny, corporate profits in the U.S. economy just keep going and going and going. UP.

Wednesday, August 29, 2007

Globalization: India's Tata Motors May Buy Jaguar

India's Tata Motors (NYSE:TTM) apparently wants to cover both ends of the vehicle market, and might soon be selling both the world's least expensive and the world's most expensive cars.

In India, Tata Motors will introduce a new 4-door "1-lakh car" early next year, which is half the price of the lowest-priced cars on India's roads today and will be the cheapest car in the world. "1-lakh" rupees is 100,000 rupees, which is about $2,400 at the current exchange rate of 41 rupees per USD.

Washington Post: The cheapest car in the world is being released during a time of good fortune for many Indians. While two-thirds of the country's population still struggles on $1 a day, millions of people here have emerged from grinding poverty into the lower middle class. The Asian subcontinent's largely service-based economy has been growing 8 to 9 percent a year, and World Bank studies estimate that India's middle class will expand from 50 million people today to more than 500 million by 2025.

Typical buyers of the 1-lakh car would include the millions of Indians who currently have a motorcycle or moped as the "family vehicle" (see the picture above; look closely and you'll see two adults and 4 children on one motorcycle!).

On the other end of the vehicle market, Tata wants to buy Ford's luxury brands Jaguar (pictured above is the new 2009 Jaguar XF, availabe in June 2008) and Land Rover.

Wall Street Journal: The acquisition, which could cost more than $1 billion, also would fit the Tata Group's plans to become one of India's first global brands and diversify its businesses overseas.

It is unlikely that Tata Motors will be able to sell many Jaguars or Land Rovers in India, but it could use the companies' technology and production facilities to improve its own cars and trucks. Tata Motors also would seek to use Jaguar's and Land Rover's international distribution networks to promote its own cars abroad.

The steel-to-software Tata Group is one of India's largest and most respected conglomerates. Its 96 companies employ about 200,000 people and have annual sales of more than $20 billion. The group has been leading a wave of Indian overseas investment as local companies have used the wealth generated in India's strong domestic economy to make acquisitions around the world.

Bottom Line: As India grows and prospers, and as its middle class increases by 5 times over the next several decades, India's consumers and companies will increasingly shop and invest globally, to the benefit of many U.S. companies.

Tuesday, August 28, 2007

Carpe Diem on CNBC's Kudlow and Company

Carpe Diem got a mention yesterday (Monday, August 27) on CNBC's Kudlow and Company, showing the graph from this recent CD post about subprime mortgages. You can view the 12-minute segment here titled "Market Drilldown (right hand side), Carpe Diem gets discussed at about 8:40. Check it out!!

Overwhelming Evidence III: Good Old Days Are Now

A century ago, the typical American household spent almost half of its income on food (46.4%, see chart above, click to enlarge), 14.7% on clothing and 15.1% on shelter, for a total of 76.2% on food, shelter and clothing in 1901, according to the Federal Reserve. As a result of significantly increasing incomes and declining real costs for food and clothing, the average American household today spends only 14% of its income on food, 5.3% on clothing and 18.4% on housing, for a total of 37.7% spent on food, clothing and shelter (see chart above).

By comparison, The Economist today reports that the typical household in India today spends 46% of its income on just food, which is more than the typical American household spends on food AND clothing AND shelter (as a share of income)! And the average Chinese household spends almost as much on food (33%) as the average American household spends on food, clothing and shelter.

This example provides more evidence that despite what many people think, our standard of living is higher now than ever before, and helps to illustrate the widespread "abundance denial" in America: Even though our standard of living has increased dramatically over the last century, and even though the typical American household has never had it so good, and even though the average American's standard of living is significantly better than almost anywhere else on the planet, and even though wealth, prosperity and abundance for the AVERAGE person is at an all-time historical high, "the media constantly dwell on minor problems without celebrating the broader, more upbeat context in which they exist."

Monday, August 27, 2007

Housing Inventories Up, Housing Sales Down

WASHINGTON -- Existing-home sales fell a fifth straight time during July (see top graph), while inventories of unsold property climbed (see bottom graph) and prices dropped.

Home resales declined to a 5.75 million annual rate, a 0.2% decrease from June's revised 5.76 million annual pace, the National Association of Realtors said Monday. June's rate was originally estimated at 5.75 million.

The median home price was $228,900 in July, down 0.6% from $230,200 in July 2006. The median price in June this year was $229,200.

Inventories of homes rose 5.1% at the end of July to 4.59 million available for sale. That represented a 9.6-month supply at the current sales pace. There was a 9.1-month supply at the end of June, revised from a previously estimated 8.8 months.

There are currently 4.592 million homes for sale, which is 731,000 more than July 2006 (3.861 million) and twice as many for sale as 3 years ago (2.244 million in 2004). During the 2004-2007 period, the sales pace of existing homes has slowed by more than 15% from 6.778 million in 2004 vs. 5.75 million in July 2007. When you combine slowing housing sales with a growing inventory of homes for sale, you get more than a doubling of the "months supply of homes at the current sales rate," from 4.3 months in 2004 to 9.6 months in July 2007.

Irrational Restaurant Behavior?

Imagine that you're getting ready to go out to a restaurant with friends, and you're trying to decide whether to eat Mexican food or Thai food. To help make your decision, would you ever think of calling a phone number at random and asking a complete stranger for his or her advice on Mexican vs. Thai food? Probably not.

But once they get to a restaurant and are deciding on what to eat, why do many people frequently do almost the same thing: ask a complete stranger (the waiter or waitress) for his/her advice on what YOU should eat?

I have several good friends who can NEVER make a decision at a restaurant without asking a complete stranger (waiter or waitress) for help. Sometimes they will ask for general advice - "what's good here?" and other times they will narrow it down to Entree A and Entree B, and ask the server "which one do you recommend - A or B?"

This behavior seems completely irrational to me - why would you think that a complete stranger would have any relevant information about whether YOU would like walleye that evening instead of a steak? What you are really asking is what the SERVER would select if they were ordering their own meal, but why would you order something just because a complete stranger would order it? Just because a stranger prefers walleye over steak on a given evening doesn't mean that you will too.

Perhaps not quite so irrational is a line of questioning that goes something like this: "What entrees do people order the most of here?" " What feedback have you gotten from other customer on Entree X?" "Have you gotten any bad reports on Seafood Entree A tonight?" At least in those cases, you are trying to get feedback from a sample size of potentially many current and past diners, and not feedback from a sample size of N=1 (the server).

My thinking is that if I'm having a hard time deciding on what to eat, knowing intimately my subjective taste patterns, my likes and dislikes, my food choices over the last week that might affect my current choice of cuisine, etc., there is no information of value that I can get from a complete stranger that will help me order my food.

It is true that waiters and waitresses might have some inside information on some occassions that might help me decide, but I strongly object to irrational behavior (in my opinion) of people who constantly put value on the opinions of complete strangers when ordering food. In general, if you wouldn't pick a random name from the phone book and ask for advice on what you should eat or where you should eat, you should't ask a server for his or her advice on your food choice.

Possible Solutions: 1) Ask you friends or spouse for food advice, they have more relevant information than a complete stranger, or 2) flip a coin to decide between Entree A and B, or 3) order a number of dishes to share, this works especially well at a Thai restaurant.

Comments welcome.

Decision-Making: Private vs. Public Sector

Suppose a private company had an opportunity to save $100 million annually by switching to a lower cost input without adversely affecting the quality of the final product. The switch would typically happen without hesitation. That's the definition of a "no-brainer."

Suppose a government has an opportunity to save taxpayers $100 million annually by making coins (like pennies) with low-priced steel instead of making those coins with high-priced zinc (currently about 5 times the cost of steel), following Canada, U.K. and Europe, which have all made the switch to steel for their coins. The U.S. government deliberates what should be a "no-brainer," and takes no action. I guess that's called "politics" or maybe "no brains."

According to a Forbes article, "With the price of zinc soaring amid a worldwide commodities boom (up +400% since 2003, see chart above), it costs the government almost 2 cents to make each 1-cent coin - a pretty penny considering roughly 8 billion new ones are placed into circulation annually."

Now, who would you predict is most aggressively resisting the switch from zinc to steel for making pennies, saving taxpayers $100 million every year? As Walter Williams would say, if your answer is "the company that supplies zinc to the U.S. government for making pennies," you can go to the head of the class.

And that company is the
Jarden Corporation (NYSE:JAH), whose stock has done quite well lately, much better than the rest of the market over the last 5 years, see chart below of Jarden (blue) vs. the S&P500 (red).

Another perfect example of how a well-organized, special interest group engages in lobbying and "rent-seeking" to hijack the political process in its favor, at the expense of the "rationally ignorant" voters/taxpayers. As H.L. Mencken pointed out, it's like "two foxes (the zinc lobby and Congress) and a chicken (voters/taxpayers) taking a vote on what to eat for lunch."

Sunday, August 26, 2007

Top 10 Best, Top 10 Worst Liveable Cities

From The Economist: With low crime, little threat from instability or terrorism and a highly developed transport and communications infrastructure, Canada and Australia are home to the most liveable destinations in the world. Four of the ten most liveable cities surveyed by the Economist Intelligence Unit are in Australia, and two of the top five are Canadian. Vancouver is the most attractive destination, with a liveability index of just 1.3% (see table above, click to enlarge).

World-Class Kenyans, World-Class Competition

For the last 30 years, the Crim Festival of Races has taken place in Flint, Michigan in late August. At some point about 20 years ago, the event started attracting the world-class, elite runners from Kenya and Ethiopia, who now compete annually for the $5,000 cash prize for first place in the 10-mile race. The racing event took place yesterday in Flint, and a Kenyan runner named Festus Langat (pictured above) became the 14th Kenyan in the last 17 years to win the Crim in 47:11, and Kenyans took the top 3 places, and 6 out of the top 8 places, with two Ethiopian runners finishing #4 and #5. Read more here in the Flint Journal.

After thinking about the dominance of the Kenyans, I submitted the following letter to the editor of the Flint Journal:

Foreign, world-class runners “imported” from Kenya once again dominated this year’s Crim, as Festus Langat became the 14th Kenyan in the last 17 years to win the 10-mile race, and he and his fellow Kenyans took 6 of the top 8 places. The world-class Kenyans unquestionably elevate the level of competition in the Crim, and help make it a world-class event for Flint.

Imagine your reaction if American runners started complaining about “unfair foreign competition” from the world-class Kenyans, and proposed new Crim rules banning Kenyans, limiting their numbers, or imposing 5-minute penalties on Kenyans “to level the playing field” for Americans. That reaction should be the same as when you hear American businesses complaining about “unfair foreign competition” from China or India, and they appeal to Congress for protectionist legislation to ban, limit or penalize foreign goods with quotas or tariffs, to “level the playing field.”

Just like restrictions on Kenyans in the Crim would significantly reduce competition and lower the quality of the event, there is overwhelming empirical evidence that restrictions on foreign imports reduce competition and lower our overall standard of living.