No Need to Worry

The Consumer Product Safety Commission, a Federal agency charged with making sure products you buy are safe, came out with an important ruling today. They have decided not to ban the use of arsenic in the manufacture of pressure treated lumber. They claim this decision is based on the fact that few manufacturers use arsenic anymore.

Pressure treated lumber is used in many outdoor applications. That’s because it is resistant to rot and insect damage. But one of the major uses for treated lumber is children’s playground equipment: it’s softer than plastic or metal, and doesn’t get as hot or cold either. Even the CPSC admits that arsenic treated lumber poses a hazard to children when used in playground equipment, citing “an increased risk of lung or bladder cancer for people who played on such playground equipment as children.” Furthermore, the stuff has become an ongoing headache for communities both as they try to determine how much contaminated playground equipment they have, and as they attempt to dispose of arsenic tainted wood.

So lets make sure we understand the CPSC’s position: arsenic treated lumber is dangerous, but it’s okay to continue making it because almost nobody makes it anymore.

Granted, the EPA has already said it cannot be made after the end of the year, but sellers are allowed to deplete their stock, and frankly I fail to see where the EPA has outlawed importing the stuff. What possible reason could the CPSA have for not keeping in line with the EPA decision? For pity sake, the EPA decided it was bad, and this is the same EPA that decided it was alright to relax sewage treatment rules and approves thousands of untested chemicals for household use.

This isn’t the only government agency that has said we need not change the rules because nobody uses them. Attorney General John Ashcroft’s Department of Justice is playing the same semantic game with respect to Section 215 of the PATRIOT Act. Section 215 is the portion which (among other things) allows the FBI to check your library records, with reduced warrant requirements, and without anybody being allowed to tell you.

Ashcroft claims there is no need to fix this egregious breech of 4th Amendment rights because after all, Section 215 has never been used. Most of America replies “Good! Then you won’t miss it if we take it away!” Ashcroft counters “But I might need it someday.”

Right, just like those roller blades you bought 5 years ago thinking you would get in shape, but all they do is gather dust in a closet. Get rid of them now: just like Ashcroft’s pet legislation, you will only get hurt if you use them. Just ask Monica Lewinsky, Linda Tripp, and Valerie Plame about the importance of privacy.

Melting Money

Maybe you missed the latest mutual fund scandal. This one could still cost you money, even if you don’t own the funds in question.

Putnam Investments, a division of insurance company Marsh & McLennan, runs a bunch of mutual funds. At the last date of record, they had about $272 Billion in assets, spread across 12 million customers, about 700 of which were “institutional investors” — large accounts such as states and pension funds. As you will see, these figures are apt to drop rapidly. Keep in mind that the mutual fund industry as a whole is about $7 Trillion, and that 95-100 million Americans have money in mutual funds. This fund family is something like 3% of the industry.

As CNBC so politely puts it, “Putnam is facing a probe into improper mutual fund trading and losing some clients.” Two managers are accused of civil fraud, and that’s before the U.S. Attorney sent subpeonas. The SEC and Massachusetts are surely only the first to get in on this action; sabre-rattling between SEC Chairman William Donaldson and New York Attorney General Eliott Spitzer has already commenced.

The crux of the matter is something called “market timing.” By this we do not mean waiting for a stock to hit the “right price” before buying or selling — something totally legal that almost all stock owners do. Some people say the benign label of “market timing” whitewashes what it really is: fraud; stealing from the customer.

There have been a number of illegal and unethical “market timing” schemes used. One involves buying or selling after market hours, after some bit of important news has been released perhaps, at the closing price. Example: XYZ Corporation announces blowout earnings after the market is closed; Unethical Fund Manager Dewey Cheatum colludes with another fund to buy at the closing price (when nobody knew the news) so he can sell it in the morning for a few dollars profit per share. In a variation of this scheme, a manager uses international stocks — which trade at different hours than American stocks. Yet another “market timing” scheme involves detecting brief inconsistencies between where another fund is trading and its NAV (Net Asset Value, what it is worth), then exploiting this difference with rapid trades (scroll down) in and out of the fund.

Several Putnam employees are accused of illegal market timing, and more charges are likely to come down soon. This problem apparently was investigated internally as early as 1996, and little was done save to issue official policies declaring it a no-no. The trades in question are from 1998 and 2000, a period of time when the funds in question underperformed. Wouldn’t you be upset if your fund was losing money and yet the managers of the fund were pocketing $700,000 from personal trades? Wouldn’t you think they should put their money right next to yours and execute the best deals for the fund they are paid to run?

Some large investors think so. And they are speaking with their wallets. Massachusetts wants to pull $1.7 Billion. Rhode Island, $651 Million. Iowa, $594 Million. Connecticut, $277 Million. Well over a Billion from such sources as The Pennsylvania Public School Employees’ Retirement System, The New York State Teachers’ Retirement System, The Vermont State Teachers’ Retirement System and others. An even longer list of behemoth investors are “monitoring developments.” It could add up to some real money!

Frankly, the markets could get a bit bumpy. I seriously doubt Putnam has $4-5 Billion in cash sitting around to send to these big investors. That means they are going to have to sell stuff, and to sell that much is going to drive some prices down. That’s why this could cost you money if you own any stocks or stock-holding mutual funds. A savvy investor might make some quick money if he could take a billion or so worth of a top holding off Putnam’s hands.

And yet in the midst of all this, there are those who say not to drop these guys like a hot potato. When would be a better time? When all the institutions have gotten out, having forced the managers to sell absolutely everything at stupidly low prices and driving the value of all Putnam’s holdings down? When the NAV is so low that Joe Average can’t afford to sell his worthless holdings?

As if all this isn’t bad enough, remember that Putnam isn’t the only fund family whose managers stand accused of making trades that line their wallets and leave investors holding the bag.


No, that’s not the Richter Scale rating of the latest earthquake in Farawayistan. That’s the annualized rate of growth that the United States’ economy allegedly had in the third quarter. It happens to be the biggest surge in the Gross Domestic Product since the Reagan Administration.

But if the economy is growing that fast, where are the blowout profits from Wall Street? If we really spend 15% more on computers and software last quarter than the previous quarter, why didn’t all the computer and software companies announce a spectacular quarter?

Where are the expanding small businesses? Shouldn’t they be hiring? Are we really to believe that there was so much overcapacity that they don’t need to be buying office supplies and building bigger facilities?

And what about the consumer? They are refinancing the house like crazy, but that can’t last forever; will they be buried in debt when interest rates inevitably rise again? And if we really bought almost 27% more cars than in the previous quarter, what are we doing with all the used cars? Why aren’t the car makers posting, say, 15-20% greater profits? Supposedly those $400 child tax credit checks made a big difference. Even if it did, that won’t happen again this quarter.

As I write, the Dow and NASDAQ are up half a percent, and the S&P 500 is pretty much flat. I do not believe the markets anticipated such a high GDP number. Just yesterday the FOMC said there would be no change in interest rates in the foreseeable future, and I have every reason to think Greenspan had this figure handy. Therefore, the markets are not anticipating that the higher GDP will immediately cause interest rates to rise. That leaves the possibility that Wall Street does not think this is real. Or rather, investors do not think that the fortunes of publicly traded companies will be beneficially effected. Let me get this straight, the economy is great but business is not improving?

Where is the money going? Some of it went overseas in the form of a reduced trade deficit and reduced exchange rate for the dollar. That doesn’t really help Joe Average, who will now have to pay more for everything imported. Some of the growth represents “inventory drop,” or the sale of stuff that has been sitting in the warehouse for a while. The people and suppliers who made this stockpile possible were paid some time ago.

The fact that the number of jobs out there is still declining should make us question this high GDP number. Clearly one trend or the other is not sustainable.

Fair Use?

Yesterday, the Librarian of Congress issued some rules clarifying the scope of the DMCA. For those who don’t keep track of this stuff, the Digital Millenium Copyright Act essentially reiterates that making and distributing illegal copies of copyrighted works is illegal. Furthermore, it makes devices that circumvent copy protection and Digital Rights Management (DRM) illegal. This has resulted in some amusing cases where permanent markers and computer shift keys are technically illegal. This is the law that got Dmitri Skylarov* in trouble a couple of years ago.

To be brief, there are 4 exemptions:

1) It is legal to publish a list of internet sites blacklisted by filtering software. This is considered crucially important for determining whether such filters work adequately without unduly restricting access. It is also vital for preventing ideological abuse of such filters, for example blacklisting materials on unpopular but legal political groups.

2) It is legal to circumvent a damaged, obsolete “dongle”. How annoying would it be to lose access to a possibly expensive computer program just because some little gizmo got broken and the company that made it is out of business!

3) It is legal to emulate obsolete programs that ran on obsolete hardware.
Go ahead, get out the old Apple II disks. Or, here’s something you might enjoy.

4) It is legal to circumvent copy protection of eBooks for the purpose of access by the handicapped. What Skylarov did is now unambiguously legal, so there.

One interesting aspect of these guidelines is that not one of them will cost copyright holders any money. Heck, two of the rules specifically deal with materials not for sale anywhere at any price. Indeed, the rule allowing circumvention for handicapped access may increase eBook sales.

DMCA is still an over-reaching behemoth of a law, and it still needs to be cut down to size. Nevertheless, these four guidelines are a good first step.

*If you are not familiar with this case, please feel free to read up. The way I used to explain it back in the day was that Skylarov was a Russian citizen arrested in the United States for violating a law of the United States while in Russia.


This is one of those days in the markets when you can’t tell the players without a scorecard.

* Bank of America buys FleetBoston for $47 Billion, in a deal which might result in you receiving more financially oriented junk mail. If you honestly believe this deal will pass regulatory scrutiny and come to pass, you stand to make about $5 per share by buying now, at about $39.50 per share, and waiting until the deal finally closes to be paid $45 worth of B of A stock. This spread indicates that the experts do not think it will come to pass, at least not in a timely manner: they could make more money elsewhere.

* Anthem is buying WellPoint for a mere $16 Billion and creating the nation’s largest HMO and covering 26 million people. Oh yeah, and Anthem was able to make a cool profit of $196 Million last quarter. WellPoint announced $176 Million in earnings last quarter. This represents overcharged customers. If you think this will make healthcare cheaper or bring medical care to underserved areas, I have a bridge in New York City I’d like to sell you.

* Not enough medical mergers you say? Then how about United Health buying Mid-Atlantic Medical for $3 Billion? Oh yeah, and United Health reported $476 Million in earnings in just 3 months — almost a half billion dollars. Hurry up, I may not be able to hold that bridge any longer without your deposit.

* For you tech lovers, don’t forget Symantec buying ON Technology for $100 Million in cool cash. Nothing brings security to a nearly monopolistic operating system like a nearly monopolistic computer security vendor. I do not begrudge Symantec their $83 Million profit; nobody is striking or mounting political campaigns on the high cost of computer security software.

* Finally, for that international flair, InterActive would like to buy the French company for a mere $62 Million. And here I had been told the French were very must against Anglicized names.

These are, of course, just the big deals. The ones that people are paying attention to. If it weren’t for these, you might hear about one or two smaller deals that simply aren’t perceived as being that important.

Mergers, like many other things on Wall Street, make a lot of money for some people — mostly bankers and lawyers — on Wall Street. But they are not always good, and even when they are good, they are not good for everyone. MCI-Worldcom, Cendant, Travellers-Citibank, and AOL-TimeWarner come to mind.

This is a game you don’t want to play without an exit plan.

Yo, Word™ to the Office™

Have you heard about the new version of Microsoft Office? Microsoft bets $150 Million you have. The rollout has been accompanied by a massive marketing campaign and a media blitz. Frankly you’d have to be living in a cave — or using a Macintosh — not to have noticed.

Office accounts for a third of Microsoft’s revenues: over $9 Billion dollars annually. It has a huge operating margins too. That being the case, $150 Million in advertising for the new version doesn’t seem like that big a deal, even as part of a half billion dollar marketing budget. But the problem is how to get perfectly happy users to spend $400 on the new version, particularly in an economy that is mediocre at best. In fact, about a third of the registered users haven’t upgraded since 1997. Add more features? Most users only use a fifth of the available features anyway according to Microsoft’s own research.

Badmouthing the old product and adding dubious features most people will never use hardly seems a good answer, particularly considering that Office historically has a large piracy problem. Touting enhanced security will not make people magically flock to the new product either, since most technically literate people believe Microsoft should have made it more secure in the first place.

I think many of us would appreciate an “Office Lite” product: give us the 20-25% most commonly used features of Office for $100. It needs to create and read the major standard filetypes for Word and Excel, it needs a secure but simple email client, and for the sake of argument a stripped down PowerPoint. In an ideal world, it should take up significantly less than 481 megabytes of hard drive space, have a relatively low RAM requirement, and be zippy enough to use on older systems without pain. Oh, and “Help” should not launch Internet Explorer. It is arrogant to assume that the sort of user who chooses this product wants to be connected to the internet every time he or she needs to figure out a new command. There should also be a clear upgrade path to the full product.

Most people simply don’t need half of Office has to offer, and the new version does not make that better. What a shame that most school computer classes seem to revolve around how to use Microsoft products. I would rather see kids learning to program computers than learning to put together PowerPoint presentations. It will be over a decade before this trend impacts Microsoft’s potential pool of programmers.

Now you’re asking for it

Some years ago, when I was a somewhat younger ShortWoman, I worked in the kind of business that required “closing techniques.” That’s a fancy name for getting a sizable check and a signature out of a customer. I personally preferred a very soft close; I showed my product in its best possible light and demonstrated its benefits; either my product was going to work for the customer or it wasn’t, and no amount of badgering the customer was going to change that. As a result, I was one of the few people in my industry who routinely had people come back a day, a week, a month later with checkbook in hand. Furthermore, I had more “renewals” — repeat business — than many colleagues.

But even with the softest of closing techniques, I still had to ask for the money. People might say no, but they can’t say yes if you don’t ask. Churches and charities even know this. Does the local preacher leave a box at the back of the hall for offerings? No! He passes the plate up and down the aisles, putting your donation or lack thereof literally “in front of God and everybody.” And hasn’t every mailing from a charitable organization you have seen included a card preprinted with “Yes! I would like to help! Here is my donation of…” and usually a series of checkboxes with recommended amounts. Some of these are preprinted with your name and address, and come with a handy envelope. “No” is never ever listed as an option.

Strangely enough, there are pockets of corporate America that have not figured out that they must ask for the money. Every “buy now pay later” scheme rests on the sinking sand of not asking for the money. Witness, this item in the current issue of Forbes:

That just happened with Mitsubishi in America, which had great success selling cars to people who couldn’t pay. Possibly you remember the Mitsubishi commercials: loud music, young drivers at the wheels of sporty cars. And what deals: no money down, no payments for a good while. Sales kept rising, but not the payments on the cars. Mitsubishi lost hundreds of millions of dollars, and the bill isn’t final yet. The company stopped the giveaways, replaced management and canceled its U.S. expansion plans. Recovery will take years. But I know that in a few years another company is bound to do the same thing.

Nor is Mitsubishi the only company to have the delusion that moving product is more important than getting paid for it. Google for “no payments for” (be sure to include the quotes) to get an idea of how big this problem is. As of this writing, it would appear that I can get 90 days with no payments and a fair interest rate from WalMart, Dell, and Honda Motorcycles. I can also apparently get no payments for 12 months on Pella windows and doors, and certain Sony Grand Wega televisions from Crutchfield. This is the results of 5 minutes searching, to say nothing of any local vendors which may offer ludicrous deals of their own. Furniture stores seem to be particularly bad about failing to get the money up front. If the “no payments until next year” ads haven’t started in your area, they will soon.

Is it a sale when the customer buys it, or when he pays for it? That is a question to ask yourself when reading up on companies you’d like to invest in.

Between Iraq and a Hot Place

The debate over who will pay to fix all the stuff broken in the war with Iraq is heating up. Europe would like to contribute what amounts to a token sum, Japanese sentiment is not exactly feeling generous on the issue, and the United States Senate would like to shift half the burden to Iraq. This would amount to roughly 17% of Iraq’s 2002 Gross Domestic Product — 17% of every dinar spent in the whole country last year. This does not reflect debts Iraq owed before the war. By way of comparison, the entire national debt of the United States amounts to roughly 66% of the GDP.

However much we believe in self-reliance, telling Iraq to pay for the reconstruction of their country themselves is like telling a child to go earn money for his own dinner. Since we broke it in the first place, it’s like having to pay to repair your car after being hit by an uninsured driver. And some of the things we wanted to implement were esoteric to say the least: Zip codes; state of the art garbage trucks; one month courses in how to be a businessman. And that’s just some of the stuff that was taken out.

Now that we are giving the people of Iraq the dubious gift of an American style national debt, we would also like to give them a Western style central bank. They do have a central bank, of course — where else would the Husseins have kept their money? But as it stands, the Central Bank of Iraq is more like a Treasury Department and Mint. This makes them very different from our Fed, which buys and sells bits of the national debt, controls interest rates, and controls reserve rates — the amount of actual assets your bank or brokerage has to have on hand. You remember, like in George Bailey’s speech about how the cash wasn’t in the bank, but in all the houses they helped people buy.

Islamic banking is hampered by the Qur’an’s prohibition against charging interest. So our theoretical Iraq Fed will not necessarily have interest rates to tamper with. This also means there will be little to regulate in the way of reserve requirements — certainly nothing that requires regular non-legislative meddling. So the theoretical Iraq Fed will have nothing to do but muck about with the national debt, see above. Critics call it “prone to fiscal abuse from a provisional government and future Iraqi governments with more proposals for expenditure than probable sources of revenue.” Iraq needs a Fed like a diabetic needs a donut.

However, it is now clear that we can stop looking for Saddam Hussein. Yes, that’s right, neither he nor Osama are the real enemy. Lt. Gen. William “Jerry” Boykin informs us that the real enemy is none other than Satan himself.

Whatever your views on the General’s theology, applying it to the War on Terror poses a very serious problem. Under his world-view there are only 3 possible ends for the War on Terror: the annihilation of the “Christian” world; troops marching into hell to personally kill Satan; or Armageddon.

Even winning is losing. Maybe we ought to keep looking for the proverbial “devil you know.”

Healthcare Wars: The Grocer Strikes Back

As of this writing, Southern California is in the midst of a Grocery Workers’ Union Strike. Von’s, Ralph’s, and Albertsons are all affected. Managers and scab workers are attempting to keep the doors open. Specialty grocers and other competitors are experiencing a small windfall, as shoppers choose to patronize the fully stocked stores with no picket lines out front. The strike is not isolated to California, but has spread to workers in West Virginia, Ohio, and Kentucky. Votes are being held in other states, such as Indiana and Missouri. Nevada workers are choosing to stay at work. The strike is already having an economic impact on the companies involved.

The biggest single issue in all these strikes is Health Care Insurance, specifically what percentage of the cost should fall to the employee. Some of you probably know my opinion of insurance, and health insurance in particular: it drives up costs. Health insurance is doubly inflationary because it adds at least 2 middlemen. Yet it has become a necessary evil.

The Grocers and their unions are not the only ones struggling with this issue, either. There is also a Transportation Union strike in Southern California. There has been an attempted “sick out” of Los Angeles area law enforcement officers. Clinic workers and steel workers in Duluth are considering a strike over the same issue. Even states are having to address this issue. When people from all over the country from various walks of life agree something is a problem, from California to Minnesota to West Virginia, you may be assured that it is a problem.

Nor is this a problem isolated to large businesses. Small businesses and the self-employed are even harder hit by rising healthcare insurance costs. These people — the true backbone of lasting growth in the American economy — are being forced to consider drastically cutting or even eliminating benefits. Or closing up shop and getting a “real job” that provides benefits.

There have been many proposed solutions to the interrelated problems of rising healthcare costs, rising insurance costs, rising out-of-pocket costs, the 43 million Americans with no health coverage whatsoever. They range from expanding government programs that provide health coverage to children to adopting a single payer system. A few believe healthcare costs can be reigned in by streamlining the system and demanding efficiency. Some believe that simply offering choices — telling employees that if they want the best care money can buy it is as simple as paying for it — market forces will drive down the cost of care. This seems like exactly what companies like Kroger and Safeway are trying to do, without success. Some even believe that capping the amount of money malpractice insurers have to pay will be the magic bullet that sets everything right by stabilizing the doctors’ cost of doing business.

While many consider the lack of insurance to be the biggest problem, I tend to see insurance itself as the biggest problem. I therefore think that one of two extremes is the solution: either provide basic and necessary healthcare services as a single payer system, where consumers are free to purchase additional coverage; or eliminate employer provided health insurance altogether.

That sounds radical, doesn’t it?

It would be accompanied by rules saying that insurance companies had to treat all insureds in a given area as a single group, and maybe replacing the corporate health insurance tax break with an individual tax break — the line already exists on the 1040. Wage scales would also have to be initially adjusted upward substantially to account for the shift in responsibility. Let’s do the thought experiment and think about what might happen.

Unless you have made COBRA payments or purchased an individual policy, you probably have only the haziest idea what health insurance costs. That’s because most people have coverage partially subsidized by their employers, who in turn have it partially subsidized by a tax break. So sure, a lot of people would drop coverage when confronted with what policies actually cost. However, insurance companies would very quickly get wise to the idea that they have to do something to keep policies quickly or watch their revenues be decimated. Low cost major medical policies would be all the rage in short order, covering medical emergencies of all types but not necessarily every runny nose.

The people who work in your doctor’s office would no longer have to deal with insurance companies every minute of the day, and could concentrate on their primary customer: you! The reduced paperwork means your doctor might actually make more money while reducing the cost of an office visit. This benefits even those with no insurance at all. Hospitals would still have to deal with insurance companies, or course.

Corporate America would even benefit, because no money would be sucked off to ever-increasing health insurance premiums. They would still have to raise incomes, but they still stand to profit on this “outsourcing” of responsibility. Wall Street will love the initial profit increases, and the reduction of uncertainty.

It will never happen, but it was an interesting thought experiment.

Babylonian Potpourri

“The person who is in charge is me.”President George W. Bush

Not since the famous declaration of Alexander Haig that “I am in charge” have such words been so elequently spoken, indeed not since Truman proclaimed that “The buck stops here.”

The President’s remarks were largely in reply to critics who maintain that he needs to assert more control over things in Iraq. Even Republican Senator Bob Lugar stated that “The President has to be President” in an equal show of oratory splendor. Democrat and presidential hopeful John Kerry was less conciliatory, refering to Bush policies as “haphazard, shotgun, shoot-from-the-hip diplomacy.”

And which policies are they upset about? What seems to them to be loss of control?

Is it that we have been averaging about 22 attacks on American soldiers each day for the last week? That 320 American soldiers have died in this conflict, over 90 of them after hostilities were declared over? That suicide bombers, guerilla attacks, and other random acts of violence are now common? Is it that Iraq has become a terrorist Mecca?

Is it the American soldiers who, while not being attacked, are bulldozing farmers’ fields in an attempt to force them to become informants? Or maybe it’s the soldiers’ letters ghost-written by the Administration and sent to hometown newspapers saying how great things are in Iraq, how proud they are to serve there. Wow, that’s the way to bring peace and stability to the region.

Maybe it’s the fact that various American officials can’t make up their minds whether Saddam Hussein is or is not anywhere near his hometown of Tikrit?

Oh, no, it must be that public opinion of the war has soured, particularly in Iraq.

Speaking of which, there are some rather large hurdles to getting Americans out of the country, since almost everyone agrees that now that we’ve gone and removed the government and destroyed the infrastructure we can’t just pack up our tanks, say what a lovely time we had, so sorry about the mess, and go home. There is a lot ofreconstruction to be done. Something like $87 billion dollars worth of reconstruction. That’s a enough money that people are paying attention. Of course, if we just put Iraqis to work and give them paychecks for this, it would probably cost more like $87 million — partly because we would not be lining the pockets of American corporations, partly because wages are lower there, partly because the locals would be building it instead of trying to blow it up.

The UN would like to set a deadline of December 15 for getting started on a Constitution and an interim government. This is unquestionably another prerequisite for American forces leaving Iraq. Unfortunately, the same diversity we claim to cherish here in the States makes it difficult to even decide who should have a voice in writing the Constitution and how much power various ethnic and religious groups should have. They could spend until December 15 just arguing about who should bring coffee and donuts for their first meeting. More than one person has suggested just giving them a finished documentperhaps one from their own past — and letting them improve upon it. Retired Colonel John Warden has written some excellent thoughts on Iraq exit strategy.

Here at home, prepare to have your winter coats scrutinized, and warn the kids that the nice TSA officer might have to inspect their teddy bears more closely than usual. It seems that Homeland Security has decided the Bad Guys can use a nice fluffy explosive called “nitrocellulose.”

The War on Terror has certainly not made me feel more secure.