Ben Simonton

Earnings Preview: American Capital

This stock is an easy double as management fixes, and they will, its covenant violation problems. Management got caught in mark to mark accounting, but they are extremely talented and are slowly but surely working their way out.

Airlines: Some Costs They Can't - And Shouldn't - Cut

Sounds like a stupid question to me. I would like a free market to determine how much they are paid, not some opinion held by one or more persons. What happened to the free market capitalism that made us the most prosperous nation in the world. We are fast losing it with these kind of questions.

Did Politics Cause Monday's Dow Decline?

If Obama has his way in communizing us, our status as the most properous nation (by far) will disappear. Sad. Contract law does not exist for Obama and the Supreme Court refused to review his violations. It appears that Obama needs not follow any laws.

And while Congress debates how to tax the healthcare of the well to do, their own healthcare system pays 100% of all charges for life at no cost to the Congressperson.

Mass Event Layoffs and EPS Beats

Unfortunately, the latest push to take over and/or deride businesses, to raise taxes, and to raise regulations will further convince investors that they should not invest in the U.S. Investors gave us the prosperity we all enjoy, and we are in the process of slowly killing that goose. Those in control want us to be like Europe with government's heavy hand in everything. The result is high unemployment like Europe, so we better get accustomed to it as China and Asia take over from the U.S. as the world's growth engines.

Damn sad in my opinion, but then we voters are getting what we asked for and deserve.

Revisiting the Inflation / Deflation Debate

Well said, Gary. Unfortunately, everything you have said is true.

I would add that we have become anti-business and anti-investor, much more so of late, and are causing a slow but sure exodus of business and investment. The latest spending frenzy by our federal government based on the false premise that we can afford anything we desire, as promised to us by the pied piper, is a major step down the road to reduced prosperity. We have been by far the most prosperous nation in the world, but are now rapidly moving away from prosperity while blaming our demise on the cause of our prosperity. Our country has been turned upside down.

We are going to get what we deserve. Sadly, my wife remarked the other day that she is glad we only have one grand-child. She is right. But the process is reversible although history would not support a reversal.

Two Phases of Recovery for the Economy

The recovery will be a slow one because of government interference much as occurred during the Great Depression. In addition, government has become more anti-business and anti-iinvestors thus encouraging both to invest less in the U.S. and more overseas. We are copying the old European low-growth policies just as they are trying to escape them. And the dollar? What a blast it is in for when the deficit spending overcomes us.

Consumers had better hunker down and reduce their exposure to debt and become risk-averse.

Best regards, Ben

New Bull Market or a Bear Market Rally?

You wrote -"Changing mark-to-market accounting will probably continue to benefit the banks and the financial institutions' earnings reports."

The real benefit of changing mark-to-market accrues to the economy meaning business in general. If those who supply capital to companies continue to be unable to do so, companies will not be able to fund current levels of business much less expand. One of the investment companies I know, one which lends to companies to the tune of ~$10B, had to mark down its assets by $3.5B even though they expect to hold them to maturity. Here is their explanation from their latest 10K.

"Fair Value Compared to Realizable Value

We invest primarily in Level 3 assets, generally with the intention
to hold the assets to settlement or maturity. We anticipate holding
the debt investments in our private finance portfolio until maturity
or until they are repaid through a change of control of the
portfolio company; however we cannot estimate either the future sale date or the time period before the debt investments may be prepaid before their maturity date. We also intend to hold our Structured Products investments until maturity, which could be in excess of ten years. The current lack of liquidity in the financial markets has caused investment spreads between the cost of funds and investment income to widen dramatically on our investments, which in most cases results in current fair values for many Level 3 assets that are materially lower than the values we anticipate realizing on settlement or maturity ("Realizable Value"). This is especially true regarding fair value estimates on investments with longer expected settlement or maturity dates. The current market yields used to value these investments should not have an impact on the amount of proceeds we would expect to receive upon settlement or maturity.

For example, as of December 31, 2008, we held an investment in a
commercial real estate collateralized debt obligation (ACAS CRE CDO) that has been depreciated $201 million inception to date, including $152 million during the year ended December 31, 2008. This investment is currently producing approximately $5 million per
quarter of cash flow, but its fair value determined in accordance
with GAAP is $18 million as of December 31, 2008; however, we
anticipate realizing $141 million of our investment on settlement or
maturity based on our assumptions as of December 31, 2008 of future credit losses, which includes the recession, over the life of the investment."

I conclude that although sub-prime started this crisis, it was made at least 10 times worse by mark-to-market rules which only took effect in 2008 for most companies that provide capital to our capitalistic system.

Best regards, Ben

How Innovation Sustains Prosperity

Interesting discussion.

I would not agree that we need more B-schoolers. Actually, the U.S. is suffering from a severe shortage of engineers, scientists, and workers with a valid high school education. This condition is forcing companies to move research and production facilities overseas.

Our healthcare system is a disaster since it suffers from the coercive power of government, lawyers and the courts. These force us to treat disease only with surgery and drugs while contending that food has little relevance to health. That the basis of modern medicine, Pasteur's germ theory, is wrong and Bechamps' terrain theory was right has escaped us.

To better understand the source of prosperity, I suggest reading Bernstein's "The Birth of Plenty". This book literally proves with historical references that prosperity can only be attained with the simultaneous existence of four conditions. Losing even one causes prosperity to disappear. Those conditions are property rights, scientific rationalism, capital markets, and transportation and communication, but all of these require considerable explanation in order to understand them.

This entire subject may become moot. I am personally very fearful that the prosperity we have enjoyed in the U.S. will disappear as Obama keeps his promises to socialize us. So far, he is proving good to his word.

Best regards, Ben

Negative Gasoline Crack Spread Unsustainable

Is there a web resource that tracks the crack spread?

Best regards, Ben

Hedge Funds May Have Gone Too Far

Don't forget the history of giving mortgages to people who can't afford a downpayment. In 1977 Congress passed the Community Reinvestment Act trying to force banks lend to these people. Banks were ranked by the communities they served and eventually were forced by four government regulators and Congressional Pols, mostly Democrats to lend to poor people. Then Clinton finished it off in 1995 with a revision to the act which further coerced lenders. It also created a new class of securities, Mortgage Backed Securities. Using them, banks giving mortgages could cobble a whole bunch of them together and sell them in the secondary market to investors all over the world. This made it very profitable for mortgage originators to issue lots of mortgages because they could be sold so easily to investors.

There were lots of groups reporting on what banks were doing and lobbying Congress, one of the largest being Acorn which taught Obama how to be a community organizer helping poor people get mortgages and other help.

So Congress and the government and the lobbyists created the whole crisis by creating Mortgage Backed Securities and by literally pummeling financial institutions to lend to the poor, those who could not
afford 20% down or anything down? And once MBSs were created, mortgagors had a way to unload what they knew to be high risk paper to investors thus making them more willing to make those mortgages and satisfy Congress.

Best regards, Ben