(Un)Healthy Results (Part 1)

What should we do about health care?

This political football has been around for a while. Ever since the IRS exempted employer contributions to health insurance, health care has been a child of the Federal Government. Now Medicare transfer payments are often the largest line item in State budgets. And an inefficient health care system threatens our economic vitality.

One solution is to nationalize, like Canada or France. Many call this the “single payer plan.” But most people don’t think a Federal Health Service wouldn’t be any more efficient than the Post Office. That’s not likely to solve our problems.

Proponents of reform ignore the fact that 30 of the 40 largest health care companies are located in the US, providing both jobs and new treatments. They just look at the health outcomes of other countries and expect that the necessary innovation will come out of somewhere, or nowhere. And innovation is the mother’s milk of health care success.

Plans that destroy the economic incentives for innovation will only result in a sick system.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Newspaper Stories

Why are there newspapers anymore?

Everyone gets their news off the web, right? I mean, just fire up your computer, surf to your favorite sites, get your Google Alerts, and update your RSS aggregator. Doesn’t everyone do this? Or not. What I just described is a lot of trendy new-speak.

The newspaper business is still huge. Last year it had over $45 billion in total revenues. That’s more than Google and Yahoo combined.  But because the number of subscribers is falling, many observers have written off the industry as dead.

But not so fast. They may not be great growth investments, but the right structure can be very profitable. Buy a paper and manage it down in size. It will end up smaller, but more focused. And the right manager can double his investment.

This can explain why many papers are consolidating rather than just dying. And for creative investors, the opportunities are endless.


Douglas R. Tengdin, CFA
Chief Investment Officer
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That ‘70s Show

Is it 1970 all over again?

Energy price increases, negative real interest rates, and a slowing economy have many people making the comparison. Add in the froth of Dow 14,000 as compared to the “Nifty Fifty” of yesteryear and the similarities seem a cinch.

But let’s look at some details. In the early ‘70s credit was pretty easy to get. With the sub-prime crisis, banks have tightened underwriting standards. In the ‘70s we lived in a bipolar world, with an ascendant Communist block buoyed by US failure in Vietnam. Now the US is the world’s only superpower, and comparisons of Iraq to Vietnam seem far-fetched. In the ‘70s US exports were collapsing, stymied by an overvalued dollar. Now trade is burgeoning, and a hypercompetitive environment continues to drive innovation and price wars.

Comparisons of the current economy to the ‘70s are superficial, at best. At worst, they amount to little more than fear-mongering.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Airline Economics

What is it with airlines? Why are they always in financial trouble?

For as long as I can remember, the airlines have reminded me of everybody’s poor uncle, always in debt and down on his luck. Whether it’s price wars, mechanic strikes, or terrorism, the industry seems to live under one of those dark clouds that storms and rains just on the main character.

Currently the pressures are immense: soaring jet-fuel prices, serious maintenance issues, unprecedented flight delays, and cutthroat competition are combining with an economic slowdown to make many consumers question whether it’s worth flying at all this summer.

Airlines strike me as one of those businesses that are great fun to be in, but are often lousy investments. The excitement and glamour of flying make it so attractive that loads of very smart people get involved in the business. As a result, competitive pressures push margins to the minimum, and there’s just no wiggle room.

Don’t get me wrong: I love flying. But right now the industry seems to be hitting a perfect storm.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Backyard Effect

In the ski business, it’s been said that an inch of snow in New York is worth a foot in the mountains. People often decide whether to go skiing based on how things look out the window, not on the latest snow reports

A similar thing seems to be happening in the economy. The sub-prime debacle has a lot of financial firms reeling. Thousands of professionals have been laid off as a result. And one long-time analyst told me that the employment picture is the worst he’s ever seen it.

But that’s just Wall Street. In the heartland, exports are booming, profits are healthy, and higher food prices mean that many farmers are actually earning a profit. I don’t want to minimize the slowdown, but it’s really not all that bad.

But you wouldn’t guess that from the reports you get from Wall Street economists. The “backyard effect” means that it’s tough for them to paint a positive picture when their buddies are getting laid off.

Understanding the context reminds us to consider who’s writing the latest report.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Goldman’s Digger

Recently Goldman Sachs predicted that oil will reach $200 / bbl. I don’t know how they came up with that number, but I don’t think we’ll get there from here without some major supply disruptions.

The last couple times we saw big increases in oil prices—in the mid and late 70s—we had oil embargos and a coal strike. The energy price increases were a major part of the subsequent recessions. Supply disruptions are painful. And prices crashed afterwards.

Given enough time and high prices, consumers adjust their behavior and producers innovate. We’re in the middle of such an adjustment now. I don’t think we’re headed for a recession, but in a couple years energy use will be vastly different.

The real price of oil has fluctuated wildly since the ‘70s. In inflation adjusted dollars, a barrel cost over $100 in ‘79, and below $10 in ‘98. Right now producers seem to be in the driver’s seat. But in time, I expect them to be over a barrel.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Slicing Through a Bubble

We’ve popped the internet and the housing bubbles. So what comes next? Many people think that the next bubble to burst will be oil. But are we really in a bubble?

Oil prices have gone up in recent years even as production has risen. That means that the price is going up because demand is increasing.. That marginal demand is mainly coming from China, India, and the rest of the developing world.

If we were in a bubble, there would be extra production and lower demand. Inventories would be rising. We saw that with the internet (remember Cisco’s inventory problem) and housing. But oil inventories have been pretty stable.

So what is the likely future oil price? That depends on many political things we can’t predict: energy policy, tax incentives, environmental regulation, and others But one thing is clear. At these prices, consumers will slow their consumption. It just takes some time for them to ease up on the throttle.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Earning with a Smile

So what’s going on with the economy? Inquiring minds want to know.

One way to look at how the economy is doing is to look at much companies are earning. We’re fortunate in the US because our largest employers need to report how they’re doing four times a year. We’re almost through earnings season. How’d we do?

The headline doesn’t look great. With three fourths of US companies reporting, earnings are down about 12%. But if you exclude banks and brokerages, earnings are up about almost 9%. And the non-financial companies that lost money were mostly builders

So what does all this tell us? Apart from the bursting of the housing bubble, the economy is doing just fine. If the banking system doesn’t melt down — and so far the Fed has done pretty well helping us avoid that—we should be in for better times ahead.


Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!

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Going Postal

Last week first class postage increased from 41 to 42 cents. Surprised?

Most people I talk to are unhappy but resigned about the increase. Why expect efficiency from a legally protected monopoly? Realistically, many costs have fallen. So why are rates rising?

We all know about energy prices. But that’s just a recent issue. One real answer is that the Postal Service has finally been ordered to fund its benefit packages. And mail volume isn’t growing fast enough—owing especially to email—to keep the Postal Service growing.

But as the real cost of mail rises, consumers will find alternatives. Spam used to be junk-mail. And my spam-filter works just fine. In the meantime, the Postal Service seems to be entering a death spiral of rising costs, rising prices, and lower volume.

In any case, I expect accelerating price increases going forward. Four-dollar letters, anyone?


Douglas R. Tengdin, CFA
Chief Investment Officer
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$3 Gas!

Chrysler has a new marketing deal Buy one of their cars and get guarantee of $3 gas for three years.

A lot of people are excited about this. At least, a lot of economists. They read about consumer angst regarding higher oil prices and they think, “Wow! Another way that the car companies are fooling those ignorant consumers.”

You see, the gas price doesn’t affect the average household budget all that much. If someone drives 15,000 miles per year, they may use 600 to 700 gallons of gas. So a $1 increase in gas will cost them–$600 to $700.

The prospect of the car company pitching for half of that gets marketers excited, because they think the hype will sell cars without costing the company much. But my guess is that the consumer isn’t so easily fooled. Hummers and big pickups are a testimony to consumer rationality. The $3 gas off may well go the way of free toasters at the dealership.


Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!

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