Despite the advice of market pundits to spend this weekend relaxing we’ve been working on an update on open source software adoption.  At the same time we have been back at the links after a multi-year hiatus.  We started to think about why we got back into golf after the gap and the answer illustrates what I think is a fundamental structural shift that could help revive the sport.

Golf is a special sport for many reasons but athletically it is one of the few if not the only one when the implement that is used to hit the ball doesn’t stay constant as does a tennis racquet or baseball bat. A golfer may have to use 14 different clubs to get the job done. For all the attraction about the same number of people quit playing golf each year as take the sport up. It’s stagnant.

We know that clubs like Winged Foot are not going to change and we wouldn’t want them to.  Playing there is a religious experience that shouldn’t be tampered with.  However the notion of suspending our other obligations and connectivity for a half a day is getting harder and harder to do.

This summer we stumbled into a new model that was an epiphany for us.  We stopped thinking about playing a full round of 18 holes.  Our goal was always to squeeze in 9 and not even feel that we needed to commit to that if we were pressed for time.  So all of a sudden we were playing three or four times a week but for much shorter duration. We could begin to incorporate golf into the normal, busy life tempo that most people have.

We have seen some "executive courses" with only short par-3 holes but many of them are more driven by space constraints rather than good ideas about changing how people relate to the club and the game.

Playing 9 is a great start but maybe more forward-thinking courses need to start thinking in 3′s instead of 9′s.  Why not lay things out based on 6 out and in at least?  That would make playing 6, 12, or 18 all easy to do.  Six holes gets the round into the sub-90 minute range of a typical movie, tennis match or bike ride. 

The shorter options would also open up better pricing without having to spend $100 on a full round it becomes easy to pay $20-$25 for 6.  They economics could be better than expected because golfers would certainly make more visits to the course and I suspect would actually spend more time there.

In short by reengineering their approach to allow the sport to be integrated more easily into the typical lifestyle, golf could start to grow again.

Tags: golf, business, economics

Everyone knows that NYC is a very expensive place.  It wasn’t long ago, 1989-1990, when people were desperate to sell in NY and prices were very reasonable.  We had the market crash of October 1987 and then a bit of a recession after that.  It took about three years for the market to bottom and it spent another five years in a healthy phase before going vertical around the time I sold my last NYC property in 1995.  (Isn’t that the way it always is?)

We’ve had some major financial market cracks but so far the NYC real estate market has held up remarkably well. Many things are still just amazingly expensive.  The cost of doing business in NYC isn’t Dubai it’s very high compared to just about anywhere else in the region. 

Of course it is the one-and-only NYC and the weak dollar means that plenty of foreign money finds things in NYC still "cheap" when adjusted for currency and high prices elsewhere (like London or Dubai.) 

Still the loudest music playing in the NYC party tends to be from financial services which has been in a bad condition for the past year at least.  First we had the evaporation of Bear Stearns and now Lehman brothers is another mighty bank that traded for $60 a few months ago and now is a single digit.  We all know the story of leverage too well at this point.

We’ve watched it all with interest.  We still count NY as one of our homes (albeit just north of NYC) and wonder if one day we may again set up operations inside the City. 

Most say that low prices will "never happen" and we aren’t betting on it either.  But we still remember buying the first NYC property in 1989 and seeing owners of lofts begging for offers that were equal to their outstanding mortgages and thinking that we would possibly offer 1/2.  It was a painful time for property owners then. 

Today plenty of projects have been cancelled and half-finished homes sit on the market around NYC.  This was a result of the first round of declines and the implosion of The Bear.  Now if we add more rounds of layoffs at Citi and a withering Lehman what will we get?

Could a long financial bloodletting continue and with a higher dollar attenuate foreign interest in NYC?  Could the allure of even better places play a role?  Who can say.  The one thing that is for sure is that there’s a real lag between the fallout in the market and financial services and the change in prices for NYC area real estate.  We seem to still be in the down leg of the financial fallout.  Could mean the NYC real estate impact is well ahead of us.

During a recent client briefing by our friends at GaveKal there were a few comments and observations that struck us as interesting:

1. The US is the Saudi Arabia of food. Higher average prices are good for the country while hurting many others.

2. Emerging economies are feeling quite a bit of pain already.  Small ones like Vietnam have been visibly hurt and larger ones like India are beginning to show the strain.

3. The earthquake in China is a game-changing event.  There may be as many as five to ten million homeless.  The onset of the rainy season and snow melt will bring added flooding in the valleys.  The containment of inflation will no longer be a priority for a government that needs to rebuild ten millions homes.  Closed mines and factories that were below even Chinese standards for safety and emissions are being put back into service.

4. The increase in Asian consumption is still a 10 year trade. 

5. Two major investment opportunities that should benefit from a return to mean valuation levels are Japan and technology stocks.  Japan may be on the verge of a trend of upward revisions.  It’s also very interest to consider the massive R&D investment (22%) Japan has made relative to their (10%) market capitalization.   The US also compares well on this metric.

6. Spending on technology, information and communication is benefiting from nearly all levels of spending increases, from emerging economies to more personal digital content to increased business investments in technology platforms. 

7. There appears to be a large carry trade in operation that is shorting the USD to buy Crude.  Obviously on a momentum basis it’s been working well.  However the unwinding could be volatile depending on how crowded the trade becomes.

8. It turns out the financial crisis is the factor behind recent spikes in commodity prices, especially food.  The natural sellers, farmers, have been taken out of the market because banks that routinely financed their futures transactions no longer will do so.  This leaves the markets to function purely on speculation and in the absence of most real sellers.

9. The long-CDS trade has worked out to some extent but lessons learned from the recent collapse of Bear Stearns call the merits of the trade into question.  If the CDS is a sort of insurance policy that is cheap to buy but then does pay off even when the suspected event happens, does it makes sense to own them as investments?  Bear may only be one case but would the ECB take similar steps to bail out a faltering Italy or Greece? 

[Please note these are just scattered comments.  Any merit should be attributed to GaveKal and any errors or omissions are our own.]

– Kris Tuttle

Tags: China, Macro, Oil, Japan, Tech, Investing

In the context of economic uncertainty, financial system turmoil and a major election year it’s not surprising the market has been all over the place.

But as things begin to become more clear we expect investors to be more willing to make commitments.  The fact that Obama has rolled in the past several primaries and now leads in delegates is beginning to feel like a leader for the democrats has emerged.  Texas and Ohio could rock the boat but again it feels like the campaign message around "change" has stuck for Obama and we are past the point where that momentum can be stopped.

We are far from political experts but as the election outcomes sort themselves out investment scenarios are easier to consider. 

Oddly we are most bullish on the prospects for what an Obama victory would do for the US markets.  There’s not as much difference in the economic policies between democrats and republicans as their once was.  Although the economy and the financial markets need some cleaning up this will happen under any election scenario over the next 12-18 months.

What we like about an Obama victory is that it can very materially change the world perception of the United States which has suffered terribly under the Bush/Cheney administration.  We know that deficits can lead to weak currencies but in the case of the dollar a healthy part of the weakness may also be a reflection of the lack of confidence in America.

We’re not naive enough to think that Obama will change the country overnight or believe that he won’t make mistakes.  But a figure like Obama is inspires an image of the U.S. as a place where equality, opportunity and possibility are very real. 

A little less uncertainty and an improved appetite for things American, including the dollar, should help the market recover over time.  We also don’t think current low valuations are "deceptive" at all.  While some estimates may still need to come down we are still looking at sub-15 P/E ratios in most cases.  In the crash of 2000 we had stocks that were trading at that multiple of *sales.* 

Count us as constructive.  Our top positions continue to include DELL, INTC, AAPL, CREE, ADS, and MSFT.

– Kris Tuttle

Tags: Markets, Obama, USD

The banks are scrambling to figure out how to write new business but not compound the errors of their ways by creating bad mortgages.

One of the latest ideas is targeting grandma and grandpa who probably haven’t gone crazy leveraging their home which might even be paid for.  In order to get them to take on some fresh debt the appeals are for them to help their grandchildren go to college or buy their first home.

It’s a way for banks to write mortgages that have high loan-to-value ratios and be able to collect feels and securitize them due to their added safety.

This holiday season probably more than a few grandparents will get a proposition after a few glasses of eggnog as they are sitting comfortably by the fire.

As the system searches out any potential for fresh liquidity the last bastions of safety will get assaulted.  Grandparents need to brace themselves for the marketing onslaught.

– Kris Tuttle

Tags: banking, credit, home equity

It’s too bad when someone who should be emerging as a wise and learned man after seeing and being part of so much in the last couple of decades basically melts down into an incoherent set of denials and finger-pointing.

Because papers like the WSJ and NYT feel honored to have famous people like Greenspan publishing their thoughts and opinions they run the stories.  In the rush to sell his book and paint a picture of himself as some a noble victim of the crisis is absurd.

Here is someone who should have some honor, be committed to the truth and provide some real value in the form of knowledge and experience.  That’s the character sorely needed in our leaders that seems in scarce supply.

Anyone really trying blame Greenspan is irresponsible as well.  There are many factors to consider and at the time the lower rates were not doing much stimulating.  Greenspan made a famous statement about the US Economy when rates were low and still declining to the effect that: To not invest in the US now is to believe that the country would not grow economically with 0% interest.  Now that made it clear he was about growth at any and all costs.  But even then he was still arguing with people who felt that the growth wouldn’t come. 

The asset and real-estate bubble were consequences of that and the abandonment of any standards in the doling out of the free money to anyone who was willing to borrow the money.  Homes and automobiles became basically free given the financing terms. 

Greenspan could be useful if he would help us understand what really should be done at this point.  How deeply should we "bite the bullet" and force write-downs and workouts on portfolios?  How much should the Fed do now?  His insights would be helpful but they have to start with reality and accountability.

Like others who have read and commented on the sad state of Greenspan these days we’re disappointed and exasperated by his character meltdown.  

– Kris Tuttle

Tags: Greenspan, Fed, Economy

Currencies may not be our bag but we read the output of just about everyone who makes it their own.  Most are quite smart and some are brilliant.  After digesting it all a few things come to the surface.

1. It’s true the consumer, real estate and financial segments will be poor for at least months to come.

2. The flip side if increased exports is working as it is supposed to, we see it in the monthly figures.

3. The current level of the Eurodollar exchange rate is painful enough to change behavior (unlike $4/gallon gas in the US.)

In support of 3. we will go beyond the widespread carping about Europe being too expensive to visit or do business in right now and point to major players like VW and Airbus that are seriously looking at building factories in America (thanks to Steve Waite for the pointer to the Spiegel Online source.)

Economic indicators are not our stock and trade but the behavior of market participants is.  Based on the attitudes we see it would seem more likely for the $/Euro ratio to move closer to $1.25 than $1.75.  These things take time and the lag effects are well-documented.  But come they do… changes in behavior seem to suggest real money is starting to consider $-based assets and production too tempting to pass up.

– Kris Tuttle

Tags: Currency, Markets, Dollar, Euro

The book by Bookstaber won’t provide much additional information if you are already familiar with most of the major leverage-driven derivative trading events in recent history.  However Bookstaber provides a very readable overview as someone who was there but one step removed from the inner circles.

Towards the end of the book he makes an interesting point.  Starting with Godel, Heisenberg and Lorenz (bravo!) he moves into a discussion of biological methods for dealing with risks that are unknowable.  What comes out is a powerful reminder that the right designs for dealing with *known* risks often come at the direct expense of being able to deal with *unknown* risk.  This helps to explain why one set of regulations often leads to another different crisis, followed by a new set of regulations and so on.

Lastly there’s a good quote about research we have to include here for future use.  “There is no reason to think this exercise of tearing apart the accountants’ aggregation (10Q’s and the like) and then trying to re-aggregate it into a meaningful form can be successful.  And it certainly is not the ideal.  The ideal is not to take something that is pieced together incorrectly and then redesign it; the ideal is to start with the raw materials, the actual transactions themselves, and build from there. For example, beyond the standard accounting numbers, statistics that might be helpful for companies with non-tangible assets are the cost of acquiring new customers and the retention rate for those customers – think of the insight these would have provided into America Online (AOL) in its years of burgeoning growth – sales backlog, contracts received versus proposals made, training expenditure per employee, revenue from new products compared with revenue from old productions, the proportion of business that is done with existing customers, and the time it takes for a new product to recover its development cost.” A Demon of our own Design, Richard Bookstaber, p139.

Bookstaber may not realize that most fundamental equity research looks at precisely these sorts of things but it’s still not the rule and sometimes people who know better forget.

– Kris Tuttle

Tags: Books, Markets, Research

A few weeks ago we saw an obscure reference in a blog about a new mortgage type/home equity loan that actually allowed homeowners to borrow money against the *future appreciation* of their home.  At the time it seemed too wild to be true.  Since we didn’t find anymore confirming evidence of it we let it go.

Then today we see Herb Greenberg’s post about the Fed chairman actually suggesting the mortgage industry get more innovative with options including what he described as a "shared appreciation" provision. 

As unbelievable as it sounds it’s now apparently a fact that the Fed may be willing to go to great lengths to soften the blow from a correcting real estate market.  By pushing rates low enough and encouraging mortgages that basically push the issue again into the future we may not enjoy the level of bargains many of us anticipate.

The U.S. credit industry is indeed an amazing creature!

Tags: Finance, Mortgages, Real Estate

As an aside in his book The Great Crash, Galbraith writes a wonderful little riff on meetings before he discusses the tactics that President Hoover used to appear busy in the aftermath of the stock market crash of 1929.

“Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive and less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action.

The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending. Numerous formulas have been devised to prevent discomfort. Thus scholars, who are great devotees of the no-business meeting, rely heavily on the exchange-of-ideas justification. To them the exchange of ideas is an absolute good. Any meeting at which ideas are exchanged is, therefore, useful. This justification is nearly ironclad. It is very hard to have a meeting of which it can be said that no ideas were exchanged.”

For me this is a little gem. If you haven’t read the book you can buy The Great Crash at Amazon.com.