Two New Articles on Seeking Alpha

Both are basically attempts to calculate a value for GM debt.

My first article on the subject I am proud to say hit the #2 spot on the Seeking Alpha “most popular list” and stayed at various lower positions on the list for 3 days.

Trading the GM Bankruptcy

the second article is more or less a follow-up suggesting GM bonds were still undervalued, despite their gains following my first article, and offering more reasons why I thought the first bondholder offer would be sweetened, which is exactly what happened.

Good GM: The Largest IPO in U.S. History?

As the vagaries of fame would have it, I think by contrast about six people total read the second GM article, though six is a decent-sized audience for what was essentially Part II of a lawyer talking about junk bond valuation.

And yes, there will be a Part III.


Lexus IS300 v. BMW 335i and 535i

My current car (a 2002 Lexus IS300, known is some foreign markets as the Toyota Altezza)  is now 7 years old and nearing 50K miles, and after reading some very positive reviews of BMWs with the company’s new twin-turbo 300hp engines, I thought I’d give a couple of them a test drive.

In summary, I did not much like either of them. First, the interiors of the new beamers were not as nice as the older Lexus. The leather seemed cheap and reminded me of the vinyl seating at a diner. The steering wheels were too small and lacked the comfortable meaty feel of the IS’s large leather wheel. The dashboard layout was fine, but I didn’t like the way the turn signal worked, I kept having to manually turn it off and the ticking sound it made was overly loud. The paddle shifters on the 535 awkwardly stuck out of the steering wheel, in contrast to the well-placed buttons which are flush with the steering wheel on the IS300. The 335’s interior especially felt very “basic” for such an expensive vehicle.

The 300hp I6 engine in both vehicles was silky and powerful and makes great sounds when revved, but driving on the highway with light traffic I still found the extra power over my 215hp IS to be of little value. I grinned when I punched the engine on the freeway, looked down a few seconds later, and saw I was at 115. That was fun, but the tiny difference in pick-up speed when flooring the gas pedal is pretty insignificant compared to having to live with the inferior interior on a daily basis.

In the standard trade-off between a smooth ride and better handling, both BMWs, especially the 335, had somewhat more composed handing on turns and somewhat more jittery rides, but the difference on both counts was surprisingly small, and the larger size of the 535 made it more awkward to park in a tight space. Even the 335 and its run-flats was pretty smooth on a highway of average condition, though I imagine if I drove it on some decaying surface streets around Los Angeles I’d wish I were back in the Lexus.

Another minor hit on BMWs is the paint, which looked a bit cheap for such expensive cars. They lacked the deep lustrous appearance most new cars in this price range have. Maybe they just needed to be waxed, but in this price range I’d expect this to be done before I bought it.

One area where the BMWs really have the Lexus beat is fuel economy. Despite being heavier and having stronger engines, both have much better fuel efficiency ratings.

I left the dealership quite pleased. While my car was about $37,000 new, and is now worth perhaps $17,000, I liked it more than two very popular $45,000-$60,000 vehicles. The BMW salesman was knowledgeable, helpful, and low-pressure, which I would have appreciated if I had decided to buy. Instead I think I’ll keep the old Lexus for a few more years.

From an economic perspective, Japanese and American cars are much better values than European vehicles because even with recent declines in the Euro, that currency remains richly valued against the dollar and yen. On the issue of reliability, the IS300 was assembled in Japan of almost entirely Japanese parts. The 335 is only 70% German parts and assembled in South Africa. All that needless shipping of parts from Germany to Africa, and then shipping the completed vehicle back accross another ocean and past Equator to the US undoubtedly added to the cost of the 335 without adding to its value. I also question the impact on reliability that these very long supply chains may have on the 335.

California Unemployment Rate Round-Up

First, the headline number, we are now approaching a 55-year high in unemployment here in California. The Union Tribune’s article has a nice graph:

California Unemployment Chart

Looking at the data directly, the situation is pretty grim. First, between Feb 2008 and Feb 2009 the number of jobs in the state went down 495,000, even though the state’s population went up. The number of unemployed adults in California increased 824,000 during this one-year period.

Here’s what’s really bad though: more than 20% of those losses occured just in the last month.

In three counties in California unemployment is above 20%, and in 4 more it is in the 18-20% range.

San Diego and Orange counties and the inner Bay Area are doing better and holding below 10%though still worse than the national averages. LA County is worse than average at 11%, and inland Southern California counties worse still: 14.7% employment in Kern, 11.9% in San Bernadino, 12.6% in Riverside, and 24.5% in Imperial.

You can see the most recent data here at the California Development Department website.

Ponzi-Scheme Whistleblower Ordered By Corrupt Arbitration Panel to Pay a Criminal Organization $107,782

Just how corrupt and pervasively dysfunctional is private arbitration in America right now?

Via Felix Salmon, the Financial Times reports that more than five years ago a lady by the name of Leyla Basagoitia who worked at the Ponzi scheme known as Stanford Financial quit her job and alerted the SEC and the NASD (now called FINRA) her suspicions about the criminal fraud going on.
Rather than having her day in court, instead Ms. Basagoitia was forced into a kangaroo arbitration and forced by the arbitrators to pay the criminal organization she tried to blow the  whistle on $107,782.

So in part because of NASD’s arbitrators, the fraud was allowed to continue for years longer until it finally collapsed on its own weight last month.

As the article notes:

Ms Basagoitia told an arbitration panel at the National Association of Securities Dealers in October 2003 that she suspected Stanford Group Company, one of Sir Allen’s key businesses, was “engaged in a Ponzi scheme to defraud its clients”, according to case documents. In 2007, the NASD became the Financial Industry Regulatory Authority.
In a nine-point critique, Ms Basagoitia pointed to many concerns cited last week by the SEC in its charges against Sir Allen’s businesses, including allegations about the lack of a credible auditor, mis-selling of products and the promise of consistently high returns that did not “correspond to the reality of the markets”.
Ms. Basagoitia’s allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company.

Great work again by the Financial Times, in particular to reporters Robert Cookson and Michael Peel in London and Joanna Chung in New York.
PS: I had my moment in the famous pink pages of the Financial Times last year. Have a look at the end of this article.

Unemployment in the Inland Empire set to reach Great Depression levels

David Pierson of the LA Times reports that unemployment is soaring the the Inland Empire (San Bernadino, Riverside and eastern LA counties), hitting 9.5% as of October. Given that we are now well into November, it is probably above 10% now. And these are the official statistics that economists agree understate the real number of unemployed by not counting those who are working part time while looking for full time jobs, and “discouraged workers” who want to work but have given up actively looking for a job.

Meanwhile next year tax shortfalls will mean more local government layoffs. Construction employment will continue to decline as financing dries up and the last buildings that were under construction when the economy turned are completed. Retail employment will also continue to decline as consumers are either pinched or under fear they soon will be.

FASB posts The Weston Firm’s comment letter on Proposed FSP FAS 140-e and FIN 46(R)-e

Big banks and financial companies have long gotten away with not disclosing clear and accurate valuations of many types of financial assets. When I heard that the Financial Accounting Standards Board was seeking comments on proposed stronger financial disclosure rules over one type of financial asset, “Variable Interest Entities,” I reviewed the changes and then wrote a letter in support.

As it turns out, my letter was the first of 31 to be submitted. The second letter was submitted by a leading independent accountant, Jack Ciesielski, who also offered his unqualified support for the FASB proposal.

He maintains a blog on accounting issues here:

After our two letters in support came a flood of opposition letters from such models of probity, foresight, and clear and forthright financial reporting as AIG, GMAC, Freddie Mac, Fannie Mae, MBIA, UBS, and Mortgage Bankers Association.

Links to all of the letters submitted to the FASB are here.

Big New Article on Seeking Alpha

In retrospect perhaps I should have broken this long article up into several new ones. In it I comment on the prospects for solar stocks, gold, Goldman Sachs, Lorillard, Ambic, and GM senior debt. In particular, I comment on what the election of Barack Obama and a larger Democratic majority in Congress means for several investments.

One theme in this article touches on that I hope to explore further is that I believe equity markets are systematically underestimating inflation volatility.