Thursday, June 10, 2010

More Cowbell

So another post on BP. I was actually going to write this last night which would have been more timely but instead I inflicted my thoughts on my wife during a car ride. I think she'd prefer me to use this venue.

This past week brought to mind the SNL skit "More Cowbell." You probably have seen it numerous times but for me Christopher Walken is the media, demanding more cowbell, aka anger, from Will Ferrell, the President. Probably not a great analogy, but since I just spent 15 minutes watching SNL skits on Youtube, it works for me.

An article written by Andrew Ross Sorkin and published in Monday's NY Times dealbook postulated that BP could go bankrupt due to the spill. Like most Sorkin articles it lacks any factual support other than rumors circulating on Wall Street. Since every banker seems to have 5-10 hare-brained schemes in the works at any point in time, it's not unreasonable to think that somewhere in Manhattan or London some poor analyst is slaving away building a pitch book to use for meeting with potential bidders for BP's possible carcass.

Sorkin has a bad habit of latching on to trends of the moment and pulling back from them later on. On April 16th, Dealbook, of which he is editor, broke the news of the SEC case against Goldman Sachs. If the chief investment officer of one the largest public employee investment firms in the country is to believed, Dealbook published a 1200 word article with 2 minutes of Goldman being served by the SEC, implying that the story was leaked ahead of time to Dealbook for obvious reasons (such as being gullible and sympathetic). Otherwise, the NY Times should be congratulated for employing the world's fastest readers and typists. Since April 16th a number of articles written by Sorkin have begun to analyze the case after realizing that some very savy finance professionals consider the entire case a farce. Most notable was the 180 he displayed in writing this after moderating the Berkshire Hathway annual meeting and listening to Warren Buffett.

I mention all this to say that no sane investor considers BP to be at risk of bankruptcy. Indeed, Sorkin's own article closes with a quote from Robert Bryce, "Yes, BP is a financially sound now. It is unlikely to go bust near term. Instead, BP will spend the coming decades circling the drain, mired in endless litigation, its reputation irreparably damaged, and its finances weakened." This is more than a little dramatic; the idea that the possibility of a bankruptcy decades from now warrants any attention seems over done. The product BP sells, oil, is indistinguishable from any other firm's, countries have yet to produce sensible energy policies that will wean their citizens from it, and it is not a consumer product. Unlike a case of poisoned food, this crisis will not change BP's revenue, only introduce a new cost that will be spread out, according to a number of analysts, over 5-10 years and total some $30-40 billion, far less than the decrease in shareholder value over the 60 days.

Yesterday during testimony before Congress, Ken Salazar stated that he thought BP should pay damages for oil workers laid off due to the administration's moratorium on new deep-water drilling. This was re-iterated by Robert Gibbs during a press briefing. Among other things, this sent BP's stock into a tailspin yesterday afternoon when it closed at $29.20. There's a slight problem with Gibbs and Salazar's assertion, namely the legal logic due to the absence of proximate cause. The moratorium was announced because the President felt that a thorough review needed to be completed of MMS' procedures since they were "obviously" not stringent enough. BP is required to pay damages for claims where its action are the proximate cause of the loss, but here the proximate cause of the laid off worker is the President's moratorium. The President evidently felt that the scandalous behavior of MMS was a contributing factor to the disaster, but now wants BP to make whole everyone affected by his decision to fix MMS. Nevermind the 15 months in which he let them continue in their old "corrupt" ways.

My guess is this won't hold up in court, but it has a nice ring to it when spouted by the media which is the real reason for making the statement. As with most recent news, BP will continue to take accusation after accusation on the chin until the well is capped so there's little reason for substantial improvement in the short-term (witness my belief this past weekend that the share price would pop up). But for an investor with a longer time horizon, say 12-18 months, BP shares should see significant appreciation.

This morning, BP opened at $31.35, up nearly 7.3% overnight. Absolutely nothing good for BP happened in the intervening 15 hours except that the relief well probably went 30 meters deeper. My suggestion is that investors went home and realized that the President had fully transitioned from being the rational, competent leader to Will Ferrell on the cowbell. Instead of trying to weather the temporary storm of frightful stupidity in the press over the past few weeks, he has become a full fledged participant, willing to say or do anything to make the Christopher Walken shut up.

Note: I've written 3-4 posts on the cheapness of BP and overall ridiculousness of the spill. Though I've not explicitly condemned BP or postulated that they be seized so all those poor Louisianans can feel better about their beaches, readers should not construe this as being supportive of the current state of US energy policy or as indicative of my personal views on the relative merits of a large oil company. The current situation is to me a clear cut case of the market severely mis-pricing an asset, and being a capitalist, I see no problem in profiting from another's fear by purchasing at a discount and holding until sanity prevails. When it returns to a fair valuation, I'll most likely sell my position, it wasn't all that well run to begin with.

Wednesday, June 9, 2010


Another short post, this article is about a Saudi Fatwa that directs females to give breast milk to unrelated males in order to allow unrestricted visiting. I am unsure as to why they settled on breast milk, why not a blood cocktail? Seems easier to produce, no less weird and just as likely to pass disease.

Islamic clerics have a habit of producing crazy fatwas on a regular basis. See this list on Foreign Policy's website. My personal favorite is the one against Mickey Mouse.

All this makes me glad I don't live under a theocracy regardless of the religion of the leadership.

There's a relatively interesting website,, for the nerdy among us. The website's creators have found a way to compile data from various organizations and present it in relatively easy to use formats. The technology now seems to be owned by Google.

You can browse through the graphs but the most interesting is the "Wealth & Health of Nations." I am not convinced that the data is entirely accurate, especially prior to 1900 in developed countries and the last 40-50 years in developing nations, but the general trends should be a close approximation of the truth. As an example, if you track the United States from 1800 to 1880 the life expectancy remains constant at 40. This doesn't seem realistic since life expectancy measures expected life span if current mortality rates remain constant. In that 80 year span there were multiple wars, outbreaks of disease, and so on. The US did have an extremely high population growth rate at the time, so it is possible that it remained relatively constant over that period. For those of you who are history buffs, isolate the Russia, Germany, France, and Great Britain, the effect of war on life expectancy is shocking.

Another graph that is interesting to look at is the GDP vs. Cereal Production per Hectare. A hectare is roughly 2.5 acres and cereals are the building blocks of most people's diets. Generally speaking productivity (in this case yield per hectare) rises with GDP, save for countries that have climate issues, i.e. Australia. The data for this graph isn't perfect since different products have different yields per hectare. I am postulating here that this is why Egypt has such a high yield, but it could also be related to the validity of data from countries with uncertain political systems.

Note: I use wikipedia for source information because it represents a pooling of knowledge that for history, science, finance, or other technical subjects is generally accurate. I only post links if the wikipedia article is accurate at first glance and consistent with other sources.

Sunday, June 6, 2010

The Lynching Mob and BP

After the failure of the top-kill, the mob otherwise known as the American public has been whipped into a frenzy by media, politicians, and various misguided citizens. Though I am not an apologist for BP's actions prior to the accident (mostly because there is no clear information if negligence was a factor), I have a perverse delight in monitoring the ridiculous behavior that it has caused. So here's a compilation of some of the more irrational positions taken in recent days.

1. Boycott BP convenience stations - First, many if not most BP gas stations are franchisees, meaning they are not owned by BP but by small business owners. I was trying to find specific data from BP's 10K on the numbers of BP branded gas stations, but I gave up after 10 minutes. If I find the numbers I'll post them later. In Minnesota, Ohio and Wisconsin, BP owns none of the stations with its name on the front and that trend is likely similar across the country. Finally, while these franchises are required to purchase BP products, the actual gas is usually a mix of product from various companies (Exxon, Chevron, Shell, and so on) based on the area of the country you live in. The Department of Energy handily explains this on its website, and it makes sense. Refineries, storage stations, and pipelines are far too expensive for a firm to build exclusive yet redundant capacity. Think about how many of each would be needed if each brand of station required their own infrastructure from the well head to the customer.

2. "There are reports that BP will be paying $10.5 billion – that’s billion, with a B – in dividend payments this quarter” - President Obama on 4 June 2010
I like the way he said this statement but have yet to decide that whether its dumb or brilliantly calculating. BP does pay dividends to shareholders, currently $0.84 per share every quarter (May 5th is the most recent ex-dividend date), but it's $10.5 billion for the year, not the quarter. Since he has a number of bright economic advisors who presumably are aware of what dividends are and how they are paid, I am not convinced that this is an innocent mistake of quadrupling reality. "There are reports" seems to me a way to say something which can immediately be "clarified" at a later date while simultaneously whipping up the emotions of citizens. I also would like to point out that the NY Times ran this without clarification. Whether BP continues to pay out its dividend doesn't matter. It has a legal obligation to pay for the cleanup and all legitimate claims which it has publicly stated it will do. BP made $6B in net income during the quarter that ended on March 31st and had $12B in cash or short term investments. Though the reports of large fines and cleanup costs probably awe most people, it is actually not deadly to a company of BP's size. The bulk of the fines and cleanup costs will be paid over a long period of time, leaving BP plenty of time to save for the eventual expenses.

3. Seize BP - Robert Reich started this bizarre movement. It has since blossomed into a movement of fellow knee jerkers, including the Rev. Jesse Jackson. Beyond the insignificant matter of such a move being potentially illegal, the President already has the authority to do what Reich wants. Reich's stated reasons for temporary receivership range from "getting the truth" to making sure that sufficient resources are being used to combat the spill. As previously discussed, BP's interests are aligned with that of the government due to financial penalties so the likelihood of BP hiding some secret well stopping device seems remote. As for "getting the truth" what happened to subpoenas and the legal system that makes our country not a banana republic? Furthermore, if the US government did exercise temporary receivership, it seems likely to face the potential of getting stuck with the bill. BP would be able to argue that the government's erroneous decisions during receivership lead to increased damages.

It is probably not surprising to readers that I think BP's current share price, $37.16 as of Friday's NYSE close, is too low. I expect that given the success this weekend in containing the spill it will rise sharply tomorrow in trading. Full disclosure, this is profitable for me personally so I suppose I should continue to hope for more moments of hysteria in the coming months.

Friday, June 4, 2010


One of the more irritating things about politicians is their habit of gerrymandering congressional districts. Gerrymandering is the process of drawing election districts to blatantly favor one political group over the other. If you have ever wondered why your U.S. Representative seems crazier or more unethical than the average person, gerrymandering is the reason (though I'd argue the absence of term limits has an effect as well). Tom Delay, the former Republican House majority leader, presided over the most ridiculous session of gerrymandering in recent history which resulted in, among other things, Texas State Senators fleeing their state for first Oklahoma and then New Mexico to prevent a vote on the newly proposed districts.

43 states have more than one U.S Representative (Alaska, Delaware, Montana, N. and S. Dakota, Vermont, and Wyoming are represented by a single Representative), but of those 43, 7 states (Arizona, Hawaii, Idaho, New Jersey, Washington, Iowa, and Maine) use independent bodies to draw congressional districts. The other 36 have their congressional districts decided by the state legislature. This of course gives rise to some ridiculous looking congressional districts, but the use of independent bodies does not necessarily guarantee reasonable outcomes.

Take for instance the New Jersey 10th and 13th, each of which are comprised of 2 geographically separate areas, which alternate from North to South. Why is this might you ask? Well it turns out that the 10th district was drawn so that 58% of the population is African American and 15% Hispanic while the 13th is 48% Hispanic and 13% African American (2000 Census data). Take a wild guess as to the race of the Representatives from each district. I am not so naive to suggest that the race of citizens should be completely ignored when drawing congressional districts, but designing them to explicitly support one ethnicity over another seems to be at odds with our stated values.

In states where the legislature completely controls redistricting, the results are not surprising to the cynic. The New York 8th is comprised of two parts, the west side of lower Manhattan and a strip of Brooklyn. The New York 9th has 4 distinct parts, one of which is half an island within the Jamaica Bay Wildlife refuge. Both of these districts were designed to have predominantly (70-75%) white middle-class residents. A bordering district, the New York 10th, is 63% African American and has an average income roughly 2/3 that of the 8th or 9th. Basically, New York's legislature deliberately segmented the state's representatives by race and income in order to protect incumbent politicians. All three districts are represented by someone who has been in office for at least 10 years and generally the only time a new person enters office is when the prior representative dies, gets poltically promoted (becomes a Senator for instance), or goes to jail.

I will comment that I do not disagree with the Voting Rights Act of 1965, which ensures that underrepresented minorities have a voice in Congress. However, state legislatures have managed to apply extraordinarily discriminatory policies in choosing districts, stratifying citizens on the basis of their race, socio-economic status, or political beliefs. If you are a politician or work in politics, this makes perfect sense since it allows you to easily manipulate your constituents. But for the poor voter it results in bitterly partisan representatives who spend the majority of their time preening for the press rather than serving Americans.

The hopelessly optimistic and doe-eyed solution is to require congressional district boundaries to match those of counties and be contiguous. For counties in which the population is very high, the county would be represented by multiple representatives. For example, each congressional district currently has about 640-650000 citizens as of the 2000 Cenus. Cook County (contains Chicago) has roughly 6M residents which would mean the county would have 8-9 representatives. This is obviously more difficult for voters who must choose 8-9 total representatives each election cycle, but it decreases the likelihood of re-electing incumbents while requiring the representative to serve a much more moderate constituency. My opinion is that the end result of such a system would be a more responsive and less partisan elected government. This solution is clearly difficult to impliment, and would require a constitutional amendment. The odds of getting a sufficient number of American citizens to take a break from dissecting the sex habits of Tiger Woods and Jesse James to focus on this issue is low, but a voter can dream.

Note: To see the maps of congressional districts in your state go here.

Wednesday, June 2, 2010

Army Officer Management

Today's blog post will most likely be extraordinarily boring to the vast majority of readers. To those who served or currently serve in the Army, it is a subject that most of you spent countless hours discussing.

In the past 3-5 years there have been several news reports discussing the increasingly grim retention rates among junior officers (as a sample: here, here, here, and here). Three individuals from the Office of Economic and Manpower Analysis at West Point recently published a series (part 1, part 2, part 3, part 4, part 5, part 6) on officer manning which largely validates some of these concerns.

Their research echoes many of the complaints that I heard among fellow officers. Given their positions, they have access to personnel data which has allowed them to verify what was previously anecdotal evidence passed among lieutenants and captains. Their central premise that the Army focuses on quantity rather than quality certainly rings true and the final solution of an integrated officer management strategy focusing on recruiting, training and retaining talent is far from controversial.

Though I agree with their proposed solution, it seems unlikely that the Army's leadership would replace the current system in which they exercise complete control over each officer's career for a more market based system. In my opinion there are few senior officers who believe that their own intellectual abilities can and will be frequently eclipsed by their subordinates. It is a common problem among military officers to misconstrue experience with talent and therefore ignore future ability. For the proposed solution to occur an entire organization must realize that it has been incorrect for the past 10-15 years. That's no small feat without some outside influence.

The research that they conducted leads to some fairly surprising data:
1. ROTC graduates with 4 year scholarships have the lowest retention rates among officers followed by USMA (West Point). I'd always been told that the lowest retention was West Point but here the data is very clear.
2. OCS now accounts for around 40% of commissioned officers, up from 15% through the late 1990s. Of these OCS graduates, 25% were former E-7s (up from 5%), and percentage of OCS candidates who are below CAT II has increased from 15% to 35%. CAT II refers to a rating which is based on the Armed Forces Qualification Test (AFQT). The AFQT ranks individuals based on their potential for future success in the military. CAT II is the top 35% of the pool of test takers. While I can not attest to the validity of the test (that it does accurately predict future military performance), it is still disconcerting to see the quality of the average OCS candidate dropping.