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What about AIG, Freddie and Fannie? Only counting your winners is somewhat biased. Packer

I think the real question is the price of college worth it and are there less expensive alternatives that can produce the same result. The real value of the student network is with the students not the school. The school uses this network to market its highly expensive services and the students get paid little or nothing back and the schools actually want them to subsidize their overpriced services. I think the key to reducing education inflation is competition as more other sources of knowledge and network become available. Packer

Sanj, You can live here in Rochester, NY and get a nice house in a middle class neighborhood for about $90/sq. ft. and a nice house in great neighborhood for $105/sq. ft. and you are only 3 hours from Toronto. What keeps the lid on housing here is the high taxes. But who knows with the "coup" in the state senate and Galisono supporting this group there may be hope. The point of maximum pessimism. Packer

What PICO and PCYO are doing is paying for the development of the water infrastructure in exchange for these rights that certain states (NV and CO) require for development. This is a cheap way for states to provide water infrastructure and I think it will be needed more as more states run into fiscal problems. Packer

I don't follow timber companies that close so I was wondering if anyone would know the impact of more biomass generating capacity (the largest projected increase of any energy type over the next few years) would have on the forestry firms? TIA. Packer

This is an interesting company. The big upside is in the water rights and real estate. Most of it is in Nevada The model for the rights is to get the rights, build infrastructure to transport/distribute the water and provide the rights to developers who have to purchase them to build houses. The model is similar to Colorado. There is a firm Pure Cycle (PCYO) that is doing a similar type of work in Colorado. I have some transaction data from some water rights work I did last year. I can provide an old analyst report & some rights data tommorow. Packer

From the valuations of acquired technology firms I have seen (esp. internet acquisitions), we done as defensive plays to maintain or enhance an existing franchise from competition. The story was expansion into new markets but the reality is was a maintenance cost to keep the current franchise in place. On a macro basis, software reduces costs but the benefits in most cases (competitive industries) falls to the firm's customers not itself because in most cases the same benefit is available to all competitors. Packer

I think one item that Hoisington does not bring out which is very applicable is the loose monetary and inflationary fiscal policy of the US. In all his examples of past, except Japan, there was monetary deflation (via the sterilization of gold reserves due to concerns about inflation). Japan has a very savings oriented culture and declining requirement for capital as there population is shrinking. The surplus of savings/capital has led to low interest rates and deflation in prices. Much of the US is opposite of this case. With a growing and spending culture that is only being restrained by debt levels and interest rates on that debt. Inflation caused be devaluation (not the push cost push inflation of the 70s) is much more possible and likely in the US situation - similar to many countries in Asian crisis. The developed world is not use to this type of inflation and thus its policies do not consider this type of scenario. This inflation will be made worse by gov't policy that is trying to establish state regulation and "ownership" over a large portion of the economy (health care and autos) that push costs higher (MPG regulation and cap and trade regulation) and gov't spending via large deficits. Packer

You are right that California spends about $8,400 per student, however, that amount has increased by about 29% in real terms over the past 10 years (like most states) and achievement has not improved on average. I think folks don't mind spending money if they think it will improve performance. If not, why spend more money? Where else but in gov't would this be acceptable? However, in the current situation there is the preseption and possibly the reality of union directed expenditures. What is needed is a third-party accounting of education dollars and union regulation. The states should regulate union dues (to minimum amount to support operations) because the members are compelled to give them and if the unions want to be out from these rules make their dues voluntary. Packer

I disagree with your premise about spending dollars on military protection against terrorist threats. It is similar to insurance on high impact low probability events. The US bears most of this burden (pays most of the premiums) to keep the threats in check. Overtime, the US effort has become more focused on the true threat of Al Quada versus the missteps of Iraq. As for education, the US has spent lots on education (increased $ per student) but the student achievement has gone nowhere. Is it the same in Canada? As for health care, the US has a good system that has paid for the R&D of many treatments that many more national health care systems now can get for cheaper. It may be time for the US to provide a similar "basic" benefit to all but in so doing it will tax away part of its future economic growth. As for infrastructure, maintenance is required but spending just to spend leads to silly projects like fast rail to places where people will never take the train like Western NY. My point is that all four activities need spending (defense, education, health care and infrastructure) but if money is spent in non-productive ways, then we all lose. In my opinion, the defense dollars have been scrutinized pretty well but the education and infrastructure have not because they can be sold by politicians with little cost/benefit analyses. Packer

Does anyone know where the value investor link page is from the last board? I can't seem to find it. TIA Packer

I was surprised (maybe not too surprised) that on average only 52% of education tax dollars goes to classroom education. That means admin/sports and other non-academic costs are almost as high as academic costs. This is probably one of the reasons why although real expenditures have gone through the roof the outcomes have not changed for 30 years (graduation rates and test scores). I have no problem paying my fair share but when almost half of it goes to non-educational services with no recourse, I feel ripped off. Packer

There are 2 ETFs/ETNs tie the Chinese Yuan - CNY and CYB Packer

We used to live in California also but moved to NY (I guess I am a sucker for high taxes). We really moved due to the high cost of living and raising a family in LA in comparison to Rochester, NY (where my wife had an option to stay home with the kids or do volunteer work which would be a no-go in expensive LA). The taxes are about the same but the cost of housing more than makes up for the difference in other costs. The schools here are also probably better than California but the education is lost as students move out of the state as job growth is slow due to in part the high taxes. I don't mind paying my fair share, I just get upset about the waste and lack of accountability for the spending and potential costs of other people's plans. The cases here in NY are just incredible. I thought that was going to improve with the new President but I am skeptical given his close ties to the unions and grandiose central plans to remake the world in his image and its attendant costs versus letting the market be his guide and providing support where required. Packer

I agree that it is a tradeoff between savings and cost of living (including taxes) and most folks will stay even if taxes are higher to a point. I just think that point has been reached in Calif, NY and other states. Unfortunately, most of the folks who the states are relying on for more tax dollars (the large wage earners) have the largest incentives and ability to move. In addition, the lobbying efforts of some unions (that are paid for by all in gov't positions whether they believe in this or not) needs to be changed. I find it ironic that more money now is being spent on lobbying than ever before when what is needed is not lobbying (which leads to poor economic outcomes) but smart spending of what we have. I just finished reading Lords of Finance and the second wave of the depression was caused by a currency crisis in the Mark and Pound. The Germans and others borrowed money from other countries to fund their economies and when an Austrian bank failed a run on their currency system caused a collapse in the Mark and Pound. Today, both Europe and the US are the German position today with the Chinese in the US position then. With all this debt, it will be interesting to see how the $ can do. Packer

You are right about alot of potential bankruptcies especially in states that have high taxes in the US. Folks in the US have a choice to move to a low tax state and save alot of money. Tom Galisono, who founded Paychex, just changed his residency to Florida from New York and will save $5 million in income taxes alone per year and more if you include property taxes. Tom tried to reform a corrupt NY state system and was hoping the new governor was going to stand up to the special interests in the legislature but he did not. He also supported Democrats and Republicans who wanted to slow down the growth of spending but in many cases unions would bus folks into lobby against these candidates and they lost. In NY, we pay $20,000 per student per year for schools (alot of money) that is close to $500,000 per year per class. My kids go to a private school whose cost are close to $10,000 per year per student. Where is the extra $10,000 per student per year going? We don't need more $ for education and services, we need a better accounting of the $ we spend. Another example is the schools around here build Taj Mahal sports facilities which in my mind are nice to haves. If the schools in NY are any indication there is alot of fat that can be cut that has been protected by special interest groups. Packer

I have also been thinking about this and reading about the 1930's to see how close we are the situation then. The common attributes are that there was a debt-induced bubble in both equities and real estate that became unsustainable. The resulting work-out of debt is the period we are in now. In the 1930's, the US was the #1 economy followed by UK then Germany and France. The German's had a more of a command-based economy (similar to Japan today). Some of the differences are a social safety net in developed countries (which will support consumer spending), the US being a debtor country versus a creditor country, monetary easing and up to now no major trade barriers. I think these factors will mute or maybe negate the effects of deflation in US dollars. The result maybe that the market stays where it is now for a few years until China starts to kick-in with the US slowly increasing. I think the days of 3 - 4 % real GDP growth are gone for now. The recovery will be in the 1 - 2% growth rate due to less leverage and more taxes (and corresponding inefficient redistribution of resources). I think rising interest could either constrain gov't spending or lead to more inflation. I think the later is easier politically but over the long-term may get us back into a stagflation situation. I still think value investing will do well and is not obsolete. Most of the value burn-outs I have seen were heavily investing in financial firms they did not understand or in resource firms that have got hot with decline in resource prices. Packer

Has anyone been looking at this sector? It appears there are alot of firms with alot of debt so some of the stock look more like call options. The revenues are falling pretty fast due to in part the automotive issues. This may be an interesting way to the survival of the autos. Some interesting ones include SGA, JRN, NWS and BLC. Packer

I think we agree that the best result is to have true free enterprise with the customer getting the benefits and the firms and the employees working as hard as they can to meet the need. I am just having a hard time understanding how unions (who in my mind in many cases have the same mentality as failed managements & don't get replaced (i.e have no competition)) are helping the situation. In addition, I am trying to understand who you include in supply-side folks? If labor unions are not a major part of the problem then why have foreign transplants not had the same problems as domestic firms? If it was just the legacy health and pension costs, why were they not spun-off in the bankruptcy so a viable set of firms can emerge without these costs. Everyone knows there are wage gaps and the unions have not taken pay cuts. I think the issue is more of a competitive industry and unions trying to maximize wages like the airlines and the unions not realizing times have changed. As to the military/contractor analogy, I think it is the exception and not the rule. I was an officer in the US Air Force and I can tell you the military is filled with some of the best and brightest talent in the country serving the country for many reasons the last of which is money. I think the wage differential shows just how much they are underpaid but if other government employees played by the military rules of the game (military code of conduct and up and out rules) I wouldn't have a problem hiring as many as needed but many do not. Packer

I agree that much of the labor trust has been in decline except in two important areas - gov't employees and in the US auto industry. The gov't employee trust needs to be busted as increasing demand for their services (and more spending on them) will not lead to better outcomes but more money in the hands if the monopolists (i.e. the unions and union employees). This has and will become more apparent governments try to become better stewards of our dollars but a constrained by these monopolists. The same can be said for the US auto manufacturers. How has the labor monopoly helped these firms without a product monopoly to protect corporate profits? It has not. When I hear of the what these folks think are concessions (i.e. no more company discounts and getting paid for not working), I wonder what planet these folks are from. I know people in the non-monopoly part of the economy (where the customer is in charge), these benefits were never part of their work package. I have a hard time understanding how the gov't helping a monopolists helps anyone but the monopolists. If we want to save auto manufacturers, then putting it in the hands of any monopolist (labor or product) is the surest way to destroy them and waste alot of money doing it. I am also having a hard time understanding what you mean by supply-side folks. Are they crony capitalists who are protecting their monopoly positions? Do they also include free market capitalist that make products and services that add value to society? The across the board tax cuts effects both but the bailouts only effect the former. I think the reason people don't like the bailouts is because the gains were from their favored position with their gov't and not from capitalist wealth generation where the customer and not the firm providing the service is king. Packer

I think one unintended consequence (even with holding the underlying bond) is that bondholders become less likely to compromise before default in terms of working-out the loan with the company as their economic incentive is not their. In addition, I think there are other legitimate uses beyond just insuring a bond. For example, re-insurance exposures by primary insurers. So even if we allow them for legitimate hedging, we still may have the issue of issue outstanding greater than bond face value and subsequent distortions in the market. Although, theoretically it may be good to have them, in practice I think it can lead to more risk-taking as some players think they are hedged (therefore leading to less due diligence and regulators allowing more unintended risk taking) and may not be and will lead to abuses that no one can control. In addition, the CDS is the only instrument I know that is in essence is leveraged bet on failure of instruments that have a public good (i.e. bonds of financial services firm that allow the firms to offer lower rates due to the leverage factor). Another angle I think is we have look at instruments that allow firms to aggregate risk and appear to have little risk but in fact have only aggregated risk and have become too big to fail. I think CDSs fall into this camp. Packer

Great Article. We need to get the free back in free enterprise by busting the finance and labor trusts. Packer

I believe the issue here is the difference as you state between crony capitalism - shielded from competition (which would have made these practices gone long ago as on an unlevered basis their profitability doesn't make sense) and aided by leverage with no regulation (which can make marginal business appear profitable in the short term) and real capitalism (who is trying to satisfy customer needs and generates a profit doing so). The idea behind the tax cuts was to provide the generators of wealth through real capitalism the ability to invest in their businesses and others. In addition, the system had become a joke as marginal rates were so high that those who could hire the lawyers paid little or no tax. Unfortunately we are headed in the same direction with higher taxes. You seem to think these folks who are the real capitalists are in the minority and the crony capitalists are in majority. I disagree. The cronies get more press. The crony capitalist problem has to be dealt with but taking money from the real capitalist that create wealth through products and services customers want and give it to the government (who is a less efficient allocator of capital than the real capitalists) has not been a very good solution and doesn't deal with the crony problem look at Europe as an example. They tax more but still have the same crony issues. So the level of tax has little to do with the crony problem. As for regulation, you need regulation in crony situation but in most other markets it becomes counterproductive. I think we should break-up the crony systems as Teddy Roosevelt did and have it so firms are never in a position of being too big to fail. If they want to take risks let them do it but also let them fail with their own money not depositors money with a gov't guarantee. All I was stating is the "supply side" idea of reducing taxes on the real capitalists is a good idea but the idea of providing subsidies to crony capitalists is not. My take on the W admin was their goal was the former but the results included the later. The alternative I see in other parts of the world is higher taxes and potentially more cronyism (as the central gov't has more money to crony). I disagree that the new administration gets the idea that crony capitalism is bad because of their actions & who they have appointed to Treasury and there economic teams. These folks have a vested interest in the crony system. The only independent person is Volcker and we haven't heard or seen much of him since his appointment to one of the economic boards (not having to do with the banks). If Obama & Co were serious about this problem they would have Volcker and Bair replace Summner and Geitner to trust bust the crony bankers and have unlevered competition make the customer king rather the crony. Packer

I agree. Most of the banking issued have to with making levered bets on assets that don't belong in commercial banks (leveraged mortgage securities, CDOs etc.) with other people's money (depositors). Volker has the right idea separate the investment banks from the commercial banks. The investment banks can make bets with their own money but the problems come in when you tie their risky assets and commercial banks liabilities (deposits) that are backstopped by the gov't. Also ensure that these new investment banks don't become too big to fail by requiring larger equity committments for larger deals/size and the more derivatives they hold or if you think they are too large break them up. Packer

This one has an interesting pedigree and is selling at 60% of book. It appears their life Re subsidiary has some guaranteed annuities that Prem spoke of that killed the life insurance firms. It looks like there investment strategy has devolved into cash, asset backed securities and private equity and a more defensive strategy? I appears to have strayed from the Byrne influenced firm but Bruce Berkowitz is still on the board. Anyone have any other thoughts/observations? Packer