Friday, August 08, 2008

Booming Business-School Applications

THE ECONOMIST -- Applications for full-time Master of Business Administration (MBA) programs are booming.

Summer Rally: King Dollar Roars Back, Oil Plunges


The U.S. Dollar index for major currencies reached its highest level this year, and is at the highest level since December 21, 2007 (see chart above). Oil fell today by almost $5 per barrel in the spot market to $112.43 (brent spot) and $115.20 (WTI) and below $115 in the futures market. Stock market rose by +300 points.

Cartoon of the Day

Thank God for the Chinese Consumer

The health of the global economy used to rest on the back of the American consumer. Now it will rely on the Chinese.

In the U.S. and Europe, public debate centers on China as a low-cost producer that puts workers in the developed world out to pasture; hence the popularity of antitrade legislation. But the real story is the rise of the Chinese consumer, whose passion for spending is remarkably American.

Take Yum Brands, with its Kentucky Fried Chicken and Pizza Hut restaurants. In the U.S. and Germany, it is barely growing and has anemic margins. In China, KFC is hugely popular and growing more than 25% a year. It has 2,000-plus outlets that constitute a fraction of KFC's global presence but account for a staggering 20% of the company's total profits.

KFC is one of hundreds of struggling U.S. and multinational companies doing booming business in China. Proctor & Gamble and Oil of Olay found new life selling to the Chinese. Nike has long been an avidly desired brand for young Chinese. Caterpillar, which has seen its U.S. business contract because of a weak residential construction market, has hardly been able to keep pace with the demand for its combines and earth movers in a rapidly industrializing China. Otis Elevators, a division of United Technologies, has an enviable backlog servicing China's endless skyscrapers.

Luxury companies ranging from Louis Vuitton to Versace to Coach look to Chinese affluence as the next wave to replace a waning Japanese market, an aging European one, and an unpredictable America. And, let's not forgot gambling. Macau recently surpassed Las Vegas as the most lucrative gambling destination on the planet. You can always tell a country's proclivities to spend based on its eagerness to gamble.

The Chinese consumer is the only thing standing between hundreds of global companies and the abyss. While some U.S. companies may have cut jobs to outsource to China, think of how many more jobs they might be cutting if they were losing money or barely profitable. Caterpillar keeps its factories open in the U.S. because of what it currently needs to sell in China. So do countless other companies.

~Zachary Karabell in today's WSJ

Thursday, August 07, 2008

Some Hope in Pending Home Sales Data?

US News and World Report -- After months and months of painful data, economists said there is a sliver of sunshine in a housing report released today.

The National Association of Realtors announced that June pending homes sales increased a stronger-than-expected 5.3% from the previous month, although sales remain more than 12% lower than year-ago levels (see chart above).

Economists had been expecting the report to show a 1% drop. "While this indicator is volatile and affected to an unknown degree by foreclosures, it does suggest that conditions in the resale market for real estate may be stabilizing," economists at Goldman Sachs said in a report.

King Dollar Rally Continues

The summer rally for the U.S. dollar continued, as the Broad Dollar Index went above 73 today for the first time since mid-February (see graph above). Today's index of 73.05 is 4.35% above the level of 70 in mid-July.

If You Subsidize Unemployment Benefits, Guess What Happens? You Get More Unemployment

USA Today -- The Labor Department said Thursday that new applications for unemployment insurance rose a seasonally adjusted 7,000 to 455,000 for the week ended Aug. 2, the highest level since March 2002.

The latest snapshot of layoff filings is worse than analysts expected. Economists were expecting claims to drop to around 430,000.

The new layoff figures were distorted by an outreach program to notify people that they could qualify for additional benefits under a new law.

When people went to state claims offices to apply for extended unemployment benefits, state officials discovered that some were eligible — but had not filed — for their initial unemployment benefits, a Labor Department analyst said. That accounted for some of last week's increase, he said.

According to the American Shareholder's Association, "So, if you fund more unemployment benefits, you get more people claiming them. Hardly a surprise. This report seems to indicate that about 25,000 people are now on the unemployment rolls who otherwise would be finding a job."

Adjusted for the Growth in the U.S. Labor Force, July's Jobless Claims Are Below Average

The top chart above shows initial jobless claims (4-week moving average) and the civilian labor force from 1987 to July 2008. The labor force has increased by 30% since 1987, so the frequent comparisons of today's jobless claims of around 419,500 (4-week moving average, see today's BLS report) to previous periods and previous recessions is potentially misleading (thanks to Dennis Gartman for reporting this).

The bottom graph above (click to enlarge) shows initial jobless claims as a percent of the labor force, to adjust for the increase over time in the population and labor force. July's 0.248% level (383,375 average weekly claims / 154,603,000 labor force) is below the 0.27% to 0.33% range of the last recession in 2001, and way below the 0.30% to 0.40% of the 1990-1991 recession.

Further, today's level of 0.248% is still below the .257% average since 1987. Perhaps the BLS should develop a new measure of unemployment claims, adjusted for the size of the labor force, just like the unemployment rate gets adjusted and reported reported (as a percent of the labor force).

Options Expand For Avoiding Crowded, Pricey ERs

When a heavy metal door swung over her 14-year-old son's foot, ripping the nail almost completely off his big toe, Tina Mobley didn't want to take her chances in a crowded hospital emergency room or wait for an appointment at the pediatrician's office the next day. Instead, she drove to an urgent-care clinic inside a Wal-Mart in Yulee, Fla., near her rural home. Within minutes, the doctor on duty numbed the pain with an injection, removed the nail, and cleaned and bandaged the injury.

Patients who need immediate care for injuries and illness, be it a nail-gun puncture or a severe stomach bug, are increasingly turning to walk-in urgent-care clinics. These facilities aim to fill the gap between the growing shortage of primary-care doctors and a shrinking number of already-crowded hospital emergency departments, with no appointment necessary and extended evening and weekend hours. Urgent-care clinics are staffed by physicians, offer wait times as little as a few minutes and charge $60 to $200 depending on the procedure -- a fraction of the typical $1,000-plus emergency department visit. Some offer discounts and payment plans for the uninsured; for those with coverage, co-payments vary by insurance plan but may be less than half the amount of an ER visit, which range from $50-$200.

MP: Another example of a consumer-friendly, market-driven, convenient and affordable health care option that didn't require Congressional approval, Senate hearings, new legislation, sweeping government reforms, or a government takeover of the U.S. health care system. Never underestimate the power of the invisible hand to provide real, workable, consumer-friendly solutions.

In contast, Senator Obama's proposals for health care reform include new government mandates, increased government regulations, and government subsidies. Never underestimate the power of the visible foot of government to provide imaginary, unworkable, consumer-unfriendly solutions.

Index Investing: Refusing to Believe in Magic

…building a portfolio around index funds isn’t really settling for average. It’s just refusing to believe in magic.
~Fortune, 1999

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund…
~Warren Buffett

No matter where we look, the message of history is clear. Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.
~John Bogle, Founder of Vanguard

Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.
~Andrew Smithers and Stephen Wright, authors of "Valuing Wall Street"

I own last year’s top performing funds. Unfortunately, I bought them this year.

After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding “no.”
~Eugene Fama, Professor at University of Chicago

Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (vs. an index fund) by incurring transaction costs.
~Burton Malkiel, Professor, Princeton

It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.
~Paul Samuelson, Nobel Prize Winning Economist

You'll find more quotes here or here from Brendan at Ross Asset Advisors.

King Dollar Makes A Comeback

The U.S. dollar index for major currencies (data here) came close to a 6-month high yesterday, reaching the highest level since mid-February. Forward markets are pricing the dollar at $1.9071/BP (+2.24% premium) and $1.5166/Euro in one year (+1.64% premium), vs. $1.9507/BP and $1.5419/Euro currently.

Wednesday, August 06, 2008

Small Differences in Variability of Ability Translate Into Big Differences 3-4 Std. Deviations from Mean

Results of a statistical experiment, to follow up on these two CD posts(link and link):

1. Generate a random sample of 1,000,000 observations in EVIEWS, distributed normally with zero mean, and variance of 1, representing female mathematical ability on a standardized test.

2. Generate a sample of 1,000,000 observations, distributed normally with zero mean, and variance of 1.21, to represent male mathematical abililty, with greater variability according to the table above for Grade 8.

3. Then look at the upper tail of each distribution and compare the M/F ratio for the "super-genius" level, many standard deviations above the mean.

4. For 3 standard deviations above the mean, the M/F ratio is 2.4 (3,188 "males" vs. 1337 "females").

5. For 4 standard deviations above the mean, the M/F ratio increases to 3.8 (111 males to 31 females).

6. For 5 standard deviations above the mean, there are 3 males and o females.

Assume that to be successful and get tenure in the math department at Harvard or MIT, you have to be 3-4 standard deviations above average, which is what
Larry Summers said - "We're talking about people who are three and a half, four standard deviations above the mean...."

In that case, wouldn't we expect females to be under-represented, as the experiment above demonstrates, where "men" represent 77% of those observations 4 or more standard deviations above the mean?

See Alex Tabarrok's related discussion here on Marginal Revolution.

In Pictures: Real Estate Bubbles and Non-Bubbles

California Real Estate Bubble:
Florida Real Estate Bubble:
No real estate bubble in Texas:
No real estate bubble in South Dakota:
Source: OFHEO, via St. Louis Fed

More on Boone Pickens' "Boone Doggle"

Boone Pickens says we spend $700 billion a year on foreign oil, which he calls a "transfer of wealth." But exchanging money for oil at the market price is an exchange of things of equal value. If we didn't value their oil more than our dollars, we wouldn't participate in such a bargain (MP: ECON 101).

He laments that the U.S. consumes "25% of the world's oil." The phraseology is common, and misleading. Oil is produced to meet demand. He might as well complain that, with 25% of the world's GDP, we consume 25% of the world's advertising.

As Mr. Pickens says, we can't drill our way out of the dilemmas of living in the world. But drilling is one of many things we can do that are worth doing. Over time, the price mechanism and technology will tell us how to harness the energy that is infinite around us. There's the sun, the tides, geothermal and nuclear -- energy is not in short supply; only know-how is. And a shortage of know-how is a problem that our society, as long as its basic incentives remain intact, is constantly solving every single day.

~Holman W. Jenkins in today's WSJ

Tuesday, August 05, 2008

Rush Limbaugh Quotes Carpe Diem: "Buying Foreign Oil is An Exchange of Wealth, NOT A Transfer"

This CD post (about T. Boone Pickens' rantings about oil and the "biggest transfer of wealth in history") was read today in its entirety on the Rush Limbaugh radio show (transcript here).

Limbaugh comments: T. Boone, he knows better than this. He knows this is not a transfer of wealth. A transfer of wealth is taxing producers, taking it away from them and giving it to non-producers. Transfers of wealth are things like the estate tax when the money you take from somebody doesn't redound to them in any way, shape, manner, or form. But this purchase of oil every year from foreign sources is not a transfer of wealth. It is an exchange of wealth.

Oil Industry Ranks #60 By Profit Margin

Exxon Mobil reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

~Wall Street Journal

See a sortable list of profit margins by industry here. When ranked from highest profit margin to lowest, Exxon's industry (Major Integrated Oil and Gas) ranks #60. That is, there are 59 industries MORE profitable than the oil industry.

Agflation: End of $1 McDonald's Double Cheese?

ABC NEWS -- Since 2006, the price of bread has risen 24%, beef 4.4%, cheese 6.6%, and condiments, from ketchup to mustard to pickles, 3%. Rising food prices add a dime to the wholesale cost of every cheeseburger.

For McDonald's, the biggest change surrounds the star of its dollar menu, the double cheeseburger. Some franchises are now selling it with one slice of cheese instead of two. Others are raising the price by as much as 19 cents, taking it off the dollar menu altogether.

"The life of the double cheeseburger remains to be seen," Jeffery Bernstein, Lehman Brothers analyst, said. "They'll still sell it, but you might not be seeing it for a dollar for much longer." For McDonald's, the dollar deals drive traffic, accounting for 14% of sales.

HT: Reason

Economic Stimulus Boosts Real Disposable Income

According to yesterday's BEA report (Table 10), real disposable personal income increased in June by 3.4% compared to June last year, following a 6.4% annual increase in May (see chart above). Both growth rates (May and June) were above the 2.6% average growth in real disposable income since 2001, following 7 months (October 2007 to April 2008) of below-average growth (see chart above).

On a monthly basis, the June growth in real personal disposable income was negative at -2.6% (from May), but only because May growth was so high (+5.7% monthly growth from April, and 6.4% annual growth from May 2007).

Although real disposable income growth showed weakness in the last quarter of 2007 and the first quarter of 2008, the above-average annual growth rates of 6.4% (May) and 3.4% (June) suggest that the economy showed positive signs of income growth in the second quarter, largely due to the the Economic Stimulus Act of 2008. According to the Joint Committee on Taxation and the Congressional Budget Office, "rebates to individuals are expected to total $106.7 billion for 2008. The majority of rebates were sent during the initial round of payments, which began April 28, 2008, and will continue on a weekly basis through mid-July 2008."

Cartoon of the Day

From American Dream to National Nightmare: Our Obsession with Homeownership Has Gone Too Far

Robert Samuelson in Newsweek:

The real lessons of the housing crisis have gotten lost. It's portrayed as the financial system run amok; the housing market became a casino. The remedy is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger and more important truth: our infatuation with homeownership, embedded in dozens of government policies, has turned housing—once a justifiable symbol of the American Dream—into something of a National Nightmare.

As a society, we're overinvesting in real estate. We build (and buy) too many extra-large homes. McMansions, if you will. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes, limiting the ability to save for retirement and other needs. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. The avid pursuit of a few more percentage points on the homeownership rate (it rose from 64% of households in 1994 to 69% in 2005, see chart above) has condoned enormously damaging policies.

MP: Easy credit and government housing policies made bad homeowners out of good renters, along with making good homeowners with a $200,000 house into bad homeowners with a $500,000 house.

Gas Falls to $3.32 Per Gallon in Missouri; But Don't Expect Much Media Attention; It's Not Bad News


Prediction: Falling gas prices will receive considerably less media attention than rising gas prices.

Exhibit A:

Google News search (last 30 days) for "rising gas prices": 6,300 results

Google News search for "falling gas prices": 37

Ratio: 170 to 1

In other words, rising gas prices have gotten 170 times as much media attention as falling gas prices during the last 30 days. What makes this especially interesting is that gas prices have mostly been falling over the last 30 days, and yet rising prices are reported 170 as much as falling prices!

Monday, August 04, 2008

Windfall Profits Tax:It's What They Do in Venezuela

In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation. It's what politicians do in Venezuela, not in a free country.

~WSJ Editorial

MP: Just wondering about Bill Clinton's $31 million in speaking fees between 2001 and 2005, wasn't that a "windfall"? See chart above (click to enlarge) of the $7.5 million in Clinton's fees in 2005 alone.

Share of Olympic Medals = Share of Income

The chart above shows 2006 income shares from the IRS, and medal shares at the 2004 Summer Olympics. Notice the amazing similarity? For example, the top 5% of U.S. taxpayers earned 36% of all income, and the top 5% of the 74 medal-winning countries (the top three: U.S., Russia, and China; and 70% of fourth place Australia's points to total 3.7 countries) won about 33% of the total medal points (598.3 out of 1832).

Perhaps any competitive process, whether it's athletics or the economy, distributes results (medals, income) unequally? And perhaps that unequal distribution, whether it's income or Olympic medals is a natural, expected outcome of any competitive process?

The Olympic medal winners are respected and admired, despite the inequality of outcome in those competitions. We should pay the same respect to the winners of our free enterprise system - the successful workers at the top of our economic ladder.

Warning: Expect Major Medal Inequality in Beijing

According to these IRS data, the top 50% of U.S. taxpayers earned 87.3% of all income in 2006, and paid 96.89% of all income taxes.

According to these Olympic medal statistics from the 2006 Winter Olympics, the top 50% of the competing countries won 88% of the medals and 88% of the points (3 for gold, 2 for silver, 1 for bronze).

Warning: Expect more major "medal inequality" at the Summer Olympics this year.

Question: The results of income distribution conform very closely to the inequalities outlined above for Olympic medals. Why does the general public accept major inequality of outcomes in sporting events like the Olympics, but then object so strongly to an unequal distribution of income and favor attempts to redistribute income through a progressive income tax system?

Should we consider "medal redistribution" to reduce the inevitable significant "medal inequality" and achieve a more "fair" outcome in Beijing, with some kind of progressive "medal tax" - the more successful a country is at winning medals, the more medals they have to give up for redistribution? Just wonderin'.

Revolutionary Amphibious Car: The Gibbs Aquada

FLINT JOURNAL -- Gibbs Technologies, a British company, hopes to begin marketing the revolutionary amphibious car, the Aquada (pictured above), as early as late 2009. It has established a temporary tech center in southeast Michigan and recently announced plans to move into a permanent facility in Auburn Hills with the help of a $5.9-million state tax break.

The Gibbs Aquada is an amphibious vehicle capable of speeds up to 100 miles per hour on land and 30 mph in the water. Gibbs has won dozens of patents to make what it calls High-Speed Amphibian technology a reality. With about $100 million spent on its development, the Aquada is capable of 113 mph on land and 35 mph on water with the 175-horsepower engine used in the prototypes. Those top speeds are expected to rise to 135 mph and 40 mph once the vehicle is equipped with the 250-horsepower V-6 engine the company is planning to use for production.

The amphibious car is an idea auto enthusiasts have dreamed of almost since the first automobile took to the road. But before Gibbs, technological limitations stood in the way. One example was the 1960s Amphicar, which was capable of only 7 mph in the water.

Estimated price: $85,000

Sunday, August 03, 2008

The Rise and Fall of Hillary Clinton's Web Presence

The rise and fall of Hillary Clinton's: a) search volume in the U.S. (top line above), and b) news reference volume (bottom line), according to Google Trends (click to enlarge), over the last 12 months.

McCain Odds Go From 30% to 38% in 17 Days

McCain's odds on (click chart to enlarge).

Zip Code, Zip Code, Zip Code

BusinessWeek has an interesting slide show and article about the "Real Estate Boom and Bust in the Same Metro Areas" (article here) which looks at the best- and worst-performing zip codes in the 20 largest metro areas. EconomicPicData blog summarizes the BusinessWeek data in the chart above.

For example, in Dallas' Preston Hollow area (75220 zip code) there has been a +33% increase in asking price over the last year, with a median list price of $310,564 and average marketing time of 125 days. In the Fort Worth area (76110 zip code) of the Dallas metro area, asking price has decreased by -19%, with a median list price of $104,538 and average 118 days on the market.

MP: There is no "national real estate market," it's thousands and thousands of local real estate markets. As these data show, there's not even a single "local real estate market" by metro area, it all comes down to zip code areas. Since there are about 43,000 zip codes in the U.S., that 's probably an approximation of the minimum number of local real estate markets, and many local markets probably vary within a zip code, as Buck reminds us.

Best Non-Political Solution: Suck It Up

Americans are not suffering from weak or negative economic growth. They have suffered a loss of wealth, a very different ailment, from two major factors. The first is high oil prices, the equivalent of a huge tax increase. The second is the housing bust, which has vaporized more than a trillion dollars worth of assets.

When you have a loss of wealth, the best way to cope is to accept it and adapt to a lower standard of living, sooner rather than later. Sending out rebates, eliminating gas taxes, bailing out homeowners and accelerating monetary growth, among the proposed remedies, do exactly the opposite. They spare us the obligation of dealing with reality by making us feel richer so we can keep on as we were before.

But they don't change the stark fact that we are poorer now and will remain that way for some time. And they ultimately backfire by wasting money, igniting inflation or both.

In the long run, we will adapt to the new realities, the economic impact will moderate, and the pain will fade. Till then, our least destructive option is to do something no politician would dare suggest: Suck it up.

~Chicago Tribune columnist Steve Chapman

Government Demotivational Poster

Available from as a lithograph or desktopper.

HT: Andrew Cannon (click to enlarge)

How Much Does Top 1% Pay of All Income Taxes?

Update: The chart above is from the Joint Economic Committe (based on 2006 IRS data), showing the percentages of federal personal income tax paid by different groups of taxpayers: The top 1% of taxpayers pay about 40% of all income taxes, the top 10% pay 71%, and the top 50% pay 97% of all taxes. The bottom 50% pays less than 3% of all income taxes paid.

The IRS has also released tax share data by state, and those data show that the top 1% of taxpayers pay as much as 51.5% of all income taxes collected in Wyoming, and the top 1% paid as little as 27.6% of income taxes in Alaska. The top 5 and bottom five states are show below:

Share of 2006 Federal Income Taxes Paid By Top 1%

Top 5 States
Wyoming: 51.5% (top 1% of Wyoming taxpayers paid 51.5% of federal income taxes collected there)
Nevada: 49.8%
Florida: 47.8%
New York: 46.7%
Connecticut: 45.4%

Bottom 5 States
27.6% (top 1% of Alaska taxpayers paid 27.6% of all income taxes paid)
West Virginia: 27.7%
Iowa: 30.1%
Maine: 30.9%
Michigan: 31.1%

U.S. Average: 39.9% (top 1% of taxpayers paid 39.9% of all income taxes paid)