There Is Such A Thing As Too Much Education

Society's leaders continue to advocate education as necessary for financial and social success:

President Barack Obama, addressing graduates at historically black Hampton University on Sunday, said that it is the responsibility of all Americans to offer every child the type of education that will make them competitive in an economy in which just a high school diploma is no longer enough.

Unfortunately for most college graduates, this kind of advice comes at least a decade too late.  Some degrees still have fairly high ROIs but these will be arbitraged down as more students pursue these degrees.  My own MBA in finance isn't worth anything in the job market because I don't have a privileged family pedigree to back it up.  People who've actually done the math on payoffs from college are starting to learn the truth:

As the price of a college degree continues to rise, there's growing evidence that the monetary payoff isn't quite as big as often advertised. The best estimate now is that a college degree is worth about $300,000 in today's dollars—nowhere near the $1 million figure that is often quoted.

Subtract the interest payments on student loans and the ROI of your typical bachelor's degree will be in negative territory soon enough.  This may be a moot point as further credit contraction will dry up traditional sources of student loans. 

Politicians, particularly at the left end of the polity, depend on campaign contributions from teachers' unions for their continued livelihood.  Even conservative politicians go along with this scam because the system worked quite well for them.  All those years spent drinking and carousing in the Ivy League paid off with dynastic alliances, trophy marriages, and elite family introductions to movers and shakers.  Those options aren't available to the hoi polloi, but that doesn't stop the elites from encouraging them to waste money on college scams.  Elected officials will thus continue to talk up the value of consumer acquiescence to the education racket's greed. 

The best advice I can give to anyone genuflecting at the "more education" altar is to consider something else first.  Working in entry-level jobs and developing a plethora of real skills will pay off in the austere decades ahead once middle-class workplaces have dried up and blown away.  Don't get some worthless credential just to impress an employer.  I'm more impressed with people who work for themselves.

The Limerick of Finance for 05/09/10

The IMF gave Greece a loan
To backstop Greek debt that banks own
A short while has been bought
It will all be for nought
The euro will sink like a stone

The Haiku of Finance for 05/08/10

Euro can't survive
EU can't stabilize Greece
Start the countdown now

Cyberdefense Hawks Try To Scare Up Some Profits

The path to extraordinary profits for defense contractors follows some tried and true methods.  This template has been refined through decades of Cold War contracts, not to mention supplemental appropriations for Iraq and Afghanistan.  First, scare people into fearing something:

The US must prepare itself for a full-scale cyber attack which could cause death and destruction across the country in less than 15 minutes, the former anti-terrorism Tsar to Bill Clinton and George W Bush has warned.

Richard Clarke claims that America's lack of preparation for the annexing of its computer system by terrorists could lead to an "electronic Pearl Harbor".

Next, position yourself as the single most qualified provider of a solution:

Good Harbor is led by Richard A. Clarke, a contributor to ABC News (including World News Tonight and Good Morning America) who teaches at Harvard's Kennedy School of Government, and is a #1 best-selling author and frequent writer on terrorism and security issues. He leads consulting projects for Good Harbor in the areas of security risk management, cyber security, and counterterrorism.

Finally, establish a history of making consistent campaign contributions to federal elected officials.  Presto!  You're all set to win massive contracts from DOD and DHS.  While you're waiting for Uncle Sam to pay up, you can chase contracts from allied governments:

Abu Dhabi has also signed contracts with several U.S. firms, including Good Harbor Consulting. Good Harbor has been operated by former White House counter-insurgency adviser Richard Clarke.

 

Happy profiteering!  I'm getting in line myself. 

Full disclosure:  Alfidi Capital LLC is registered in the U.S. government's contractor database.  It has not performed any contract work for the U.S. government up to the time this post was published.  Alfidi Capital and its CEO have no business relationship with any firm mentioned in this post.

US Banks And Their Heavy PIIGS Exposure

How in the world did I miss this one?  US banks have a ton of exposure to the European debt crisis:

JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital, Burnell wrote.

No wonder the administration is closely monitoring the situation.  Speculation about "sabotage" in the markets is a smokescreen to deflect public attention from the administration's real focus:  The credit markets may seize up all over again if the TBTF banks are unable to stay solvent, just like September 2008.  The only things keeping the banks afloat now are FASB-approved accounting fraud and the FDIC's unwillingness to force mortgage asset writedowns.  A sudden bond default from a PIIGS country would absolutely clobber JPM and MS. 

French banks aren't the only ones who'll need a bailout if things get worse.  On the other hand, the second go-round of the credit crunch could offer us a chance to experiment with something besides bailouts.  We could try seizure, equity cramdowns, forced asset selloffs, bank breakups, and prosecutions.  If the White House wants my advice, they know where to reach me. 

Full disclosure:  No position in JPM or MS at this time.

The Haiku of Finance for 05/07/10

Wall Street down this week
Waiting for Europe to sink
So who caused the plunge?

Europe Peering Over Brink While San Diego Tries To Step Back

The prevailing wisdom holds that Greece's insolvency is mainly a problem for European banks and others holding sovereign debt.  CDS prices on the PIIGS continue to climb:

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened.

This panic among CDS insurers is enough to force up the yields on the sovereign debt of Portugal et al.  Major bondholders like PIMCO booked some terrific gains these past years when governments fell in love with deficit spending.  Their bond portfolios rose when central banks raced to ZIRP.  Now the bill is coming due and bond funds - along with those hedge funds that thought the smart move was to bet on debt-fueled fiscal stimulus - are going to be hurt.  Greeks couldn't care less that their public employees' intransigence on benefits is a proximate cause of this mess. 

Some government entities learn faster than others that fiscal profligacy must end.  San Diego is firing its first salvo in what will prove to be a long battle against public employee unions.  This battle will rage in seats of government all across America as elected officials come to grips with pension plan deficiencies.  If only European capitals could adopt some of San Diego's common sense.  Hey, SDCERA, are you still exposed to credit default swaps through D.E. Shaw? 

Full disclosure:  No position in bond funds at this time.

Goldman Sachs And Galleon Group - What's The Connection?

Let's keep kicking Goldman Sachs!  It's so much fun and it doesn't cost a penny.  Their CEO seems to have job security:

Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein may take comfort from Wall Street’s legal history: Even after being sued for fraud by regulators and paying multimillion-dollar fines, the biggest financial firms rarely depose their leaders.

It's harder than you think to fire a guy heading a firm under investigation for criminal fraud.  For one thing, Warren Buffett gave him a ringing endorsement at Berkshire's annual meeting.  CEOs directly implicated in corporate wrongdoing are more at risk of dismissal.  Maybe GS's critics would have a stronger case if they can trace wrongdoing directly to the boardroom:

Rajat Gupta, the Goldman Sachs Group Inc. director who is being investigated by U.S. authorities over his links to Galleon Group LLC founder Raj Rajaratnam, had a long-standing business relationship with the billionaire hedge fund manager.

You may recall that Galleon Group is a hedge fund whose principals are under investigation for insider trading.   Goldman Sachs was allegedly one of the stocks Galleon illegally traded.  Was Galleon using info from inside Goldman in its trading?  If so, how high up were their sources?  Goldman's senior folks have some explaining to do. 

Full disclosure:  No position in GS at this time. 

WPO Trying To Sell A Weakened Newsweek

I'm aware of the irony in linking to a New York Times story for this development.  The Washington Post Co. is putting Newsweek up for sale:

As the American conversation has become harder to sum up in a single cover, that era seems to be ending. The Washington Post Company announced Wednesday that it would sell Newsweek, raising questions about the future of the newsweekly, first published 77 years ago.

Wow, this comes barely a day after a reader prompted me to look into the drag on WPO's earnings from their declining print media holdings.  They may just be going through the motions in looking for a buyer, as a turnaround effort just isn't worth it.  I say just shut Newsweek down and write it off as a tax loss.  I used to read it as a teenager and remember being very disappointed at the lack of depth in their political and business reporting.  Thankfully, I eventually discovered The Economist. 

Maybe WPO should also throw in the towel on their namesake daily newspaper and just make it an online political portal.  That way they can go head-to-head with The Huffington Post.  The WPO ten years hence will look nothing like its historical incarnation.  BTW, Berkshire Hathaway was once a textile maker and now does something completely different; its new mission includes part ownership of WPO.  Times change.

Full disclosure:  No position in WPO at this time.

YRC Worldwide's Turnaround Isn't Working

YRC Worldwide is still losing money:

YRC Worldwide reported a net loss of $274 million on $1.1 billion in revenue in the first quarter of 2010, despite deep cuts in operating expenses from a year ago.

Losing 25% of your topline while YOY volume declined is a death spiral.  Companies that lose as much money as YRCW don't have the luxury of waiting a long time to see the results of their turnaround effort.  YRCW is making all the right moves in reshuffling its board but it's still hamstrung by its unionized workforce.  Pension plan contributions coming due are another facet of the problem YRCW faces in dealing with unionized drivers who think they can play a game of chicken in negotiations.  These problems may be insurmountable.

Full disclosure:  No position in YRCW at this time. 

Follow-up on WPO (for Hondo!)

Here's a longer response to a comment from one of my readers in response to my post about WPO.

Thanks Hondo. I haven't read the Barron's article. My criticism was of print media in particular, not necessarily WPO as a whole. Media companies will have to continue to diversify their business models to stay viable.

Buffett himself acknowledges how weakness in print media can drag down the rest of the firm:

For the newspaper industry, however, setbacks are more troubling. "It blows your mind how fast" the newspaper industry is losing ground, Buffett explained, according to coverage by The Wall Street Journal's MarketBeat blog. However, as Barron's pointed out last month, Berkshire Holding Washington Post earns most of its revenue from its Kaplan private-education subsidiary, which could be worth more than the firm's current market cap alone.

Looking at WPO's 10-K from March 2, their Education division has shown steadily increasing revenues since 2007.  Meanwhile, the Washington Post's paid daily circulation declined to 615,628 in 2009 from 657,918 in 2007.  The MD&A's discussion reflects the firm's focus on shifting the firm more into the education services market, with mention of Kaplan's serial acquisitions and strong revenue growth.  It also mentions declines in print advertising revenue in 2009 (23% at the Post, 37% at Newsweek).

Indeed, WPO's management sees the handwriting on the wall.  Shareholders should welcome continued progress away from the print media business segment.  Weakness in print is clearly what's dragging down ROE at WPO!

The Haiku of Finance for 05/03/10

Two airlines link up
Routes to cut and fuel to share
Plus more baggage fees

United And Continental Will Face Peak Oil Together

Peak Oil theorists allege that airlines are like a canary in a coal mine.  Their health provides early warning of energy shortages as they must pay a premium for fuel.  The merger of United Airlines and Continental will put this proposition to the test:

United Airlines has agreed to buy Continental in a $3 billion-plus deal that would create the world's largest carrier with a commanding position in several top U.S. cities.

The new United would surpass Delta Air Lines in size, which should help it attract more high-fare business travelers. It will fly to 370 destinations in 59 countries.

The good news for investors is that an airline with global reach and over $7B in cash can withstand plenty of economic turbulence.  The bad news is their focus on business travelers.  I still believe the global economy will experience a second phase of its Great Recession.  Businesses facing declining earnings will cut back on nonessential expenses like business travel.  Furthermore, the declining availability of cheap petroleum (Peak Cheap Oil) will put a permanent floor under fuel prices this decade, permanently raising variable costs across the entire transportation sector. 

Don't forget that United has already been through a bankruptcy this decade in the aftermath of 9-11.  This industry isn't exactly immune to shocks whether they're endogenous (crashes, hijackings) or exogenous (fuel costs). 

Feel free to take a chance on playing this merger if you understand the airline industry.  I'll pass and wait for clearer skies.

Full disclosure:  No position in UAUA or CAL. 

The Haiku of Finance for 05/02/2010

Big fat Greek bailout
Euro weakens day by day
Nothing has been solved

Learning to Love Goldman at Berkshire's Annual Meeting

I published a recent post imagining how Warren Buffett could his justify his bet on Goldman Sachs.  I doubt that he took my advice, but he and I might be on the same wavelength:

Berkshire Hathaway CEO Warren Buffett declared his support for Goldman Sachs Group Inc. CEO Lloyd Blankfein Saturday, and said he has no plans to sell his company's stake in the bank.

I'm no fan of Goldman Sachs, but their ability to influence the federal government's regulatory mechanisms offers them a durable competitive advantage that Buffett ought to love.  Come to think of it, Berkshire Hathaway is going to need every ounce of influence that GS can steer its way.  The firm has billions in custom-made, long-dated European puts and other derivatives outstanding that might be subject to collateral requirements under new legislation.  Warren Buffett feels that his company should be compensated if it is forced to re-write these special contracts. 

Maybe Goldman Sachs is teaching the Oracle of Omaha how to ask for a stealth bailout.  That would cause me to re-evaluate my esteem for the man and Berkshire "Too Big To Fail" Hathaway. 

Full disclosure:  No position in GS or Berkshire Hathaway at this time.