Friday, May 30, 2014

The Price of the Bragging Rights for an NBA team just went through the roof!

“I can teach you how to bottle fame, brew glory, even put a stopper on death.” 
― J.K. RowlingHarry Potter and the Sorcerer's Stone

Steve Ballmer is paying $2 billion for the Los Angeles Clippers.  The business today has annual operating income of about $15 million.

A “normal” business with no bragging rights tends to be valued at about 5 times annual income.  Based on this crude metric, the value the Clippers’ underlying cash flow is about $75 million.

The difference between the pending sale price of $2 billion and the $75 million value of the cash flows is what we call the “Pride-of-Ownership Premium”.

The price of the Clippers is an extreme example.  Many times, an asset might have a Pride-of-Ownership Premium that is 25-50% of the value of the underlying cash flows.  But in this Clippers’ sale, the Pride-of-Ownership Premium is about 25 times the value of the underlying cash flows.


My thesis is that it’s easier to make money in the garbage business than owning an NBA team. Of course Donald Sterling totally contradicts this general rule.

Let’s consider the Pride-Of-Ownership Premium differences between two assets. They both might have the same underlying cash flows (say $15 million per year), but in the garbage business, the cost of buying the business is $75 million, while the NBA team (in the case of the Los Angeles Clippers) is going to cost Steve Ballmer $2 billion.

If the Pride-Of-Ownership Premium increases dramatically, like it has since Donald Sterling bought the team in 1981 for $12.5 million, then the NBA owner has made up for the small cash flows. Absent that boost, the NBA owner will not do as well financially.

Few prices go up forever (even in these less tangible dimensions) so what if, for unforeseen reasons, the Pride-Of-Ownership Premium for an NBA franchise actually drops? Suppose the NBA loses popularity to other sports (say they start losing more of their audience to the X Games) or the league is the object of nasty player strikes and the union leaders consistently talk about the rich NBA owners’ exploitation of the workers? Then the differences in the relative returns would be even more dramatic.

Once you have made your fortune, you can afford to “invest” in these bragging rights.  But until then you better realize that the Pride-of-Ownership Premium can drop just as easily as it can increase – just like everything else in life.

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Thursday, May 22, 2014

Getting Dragged Around to the Great Art Museums of the World

My wife loves to drag me to art museums.  I love her and she is willing to go to my baseball games so I go along with the plan – always with a good book in hand.

Together we have visited the Uffici, the British Museum, the Musee d’Orsay, the Tate Modern, the National Gallery of Art, the Victoria & Albert Museum, the Van Gogh Museum, the New York Museum of Modern Art, the Vatican Museums, and the Louvre, to name a few.  

I am not a student of fine art and would prefer to play in a good poker game than see another masterpiece.  But let me hypothesize (in my naiveté) on the four major reasons for visiting an art museum: 1) To enjoy a beautiful setting;  2) To be educated and entertained via a great story about the history of the art; 3) To see beautiful paintings and sculptures; 4) The pride of ownership or bragging rights of being able to say: “I saw the original Starry Night by van Gogh or Michelangelo’s Statue of David”.

Reason #1 comes down to relishing the beauty of the buildings and grounds.  Even if everything else is a letdown, at least you have enjoyed something.  From my angle, the Vatican Museum had the most gorgeous setting of any art museum I have ever visited.

Reason #2 – and this is big for me, is the museum tells an entertaining and educational story.  I think too many museums do a horrible job of educating and entertaining.  I walk by a painting by Pablo Picasso and the only story or information available is “Pablo Picasso 1901, Old Woman”.  This museum curator would starve if she had to make a living as a film writer.  Granted many art museums rent out the headsets with the recorded tours, but I have not found these very well produced.

Reason #3 (see beautiful paintings and sculptures) can be achieved by seeing the original or a great replica. In today’s museums, most masterpieces must be viewed from a distance – for the Mono Lisa which is only 30 inches by 19 inches, one can generally not get closer than about 10 feet and you can't really see the details very well from that distance. And because everyone wants to see this masterpiece, you probably will have to fight the crowds and only get about 15 seconds to study it before being pushed on to the next painting. I think I would enjoy the beauty almost as much by spending more time and getting closer to a great copy rather than fighting for this short glimpse of the original? In fact I have an altered (I would say enhanced) copy of the Mono Lisa playing cards in my poker room.

Let’s consider Reason #4 – the bragging rights associated with seeing the original.  But first, how does one really know that it is the original?  In order to authenticate a piece of art, the qualified authority frequently needs a high-resolution multispectral camera, a DNA test of the paint, carbon dates from the  canvas, studies of the brushstroke patterns, and reviews of the known provenance of the work. Every now and then a faint centuries old fingerprint can be found on the canvas and this tends to seal the deal about who actually painted it.

If I put the original The Card Players by Paul Cezanne (which sold at auction in April 2011 at a record $273 million) and displayed it in the British Museum alongside a great forgery, no one, not even the top experts in the world could tell the pieces apart from the designated viewing area.  

So I can see a beautiful replica and meet Reason #3 without seeing the original.  But what satisfaction is there in bragging about having seen a near perfect reproduction?  In this picture of the Mono Lisa, the coloring is amazing and her eyes seem to follow you as you move around. 

It is gorgeous, but here is my question: How much more beautiful is the original than a high quality photo or a million dollar forgery?  I would suggest that on this one dimension (Reason #3), the difference is negligible.  (I expect plenty of criticism on this point from art connoisseurs. Please don’t hold back.)

Which brings us to Reason #4 (bragging rights associated with seeing the original). At least I think I saw the original Mono Lisa at the Louvre.

Consider the Pride of Ownership for a stolen piece of art.  You can’t really brag about it (if you do, you will get caught.)  Few people want to buy a stolen piece of artwork.  The black market value for the original Mono Lisa drops closer to its core value (its beauty) but without the Pride of Ownership value of being able to brag about owning it.  And even its beauty cannot be appreciated much if you must hide the piece under your bed.

Back on August 21, 1911 when the Mono Lisa was stolen from the Louvre the world feared that the painting had been lost forever. It turns out that Louvre employee Vincenzo Peruggia had grabbed it during regular hours, and hidden it in a broom closed before walking out with it under his coat after the museum closed.  Nobody even noticed until the next day!

The day after it was stolen, a frequent patron of the museum, walked into the Louvre and went to the Salon Carré where the Mona Lisa had been on display for five years and noticed that it was missing.  He notified the guards, but they were relaxed because they assumed the painting was being photographed for marketing purposes. A few hours later the museum authorities confirmed that the Mona Lisa was not with the photographers – it was gone. The Louvre was closed for an entire week to aid in investigation of the theft.

But after stashing the Mona Lisa in his apartment for two years, Peruggia grew impatient and was finally caught when he tried to sell it to the directors of the Uffizi Gallery in Florence.  It was exhibited all over Italy and then returned to the Louvre in 1913. While the piece was stolen, it had virtually no Pride of Ownership premium for the thief or any potential buyers of the stolen loot. 

And here is another interesting twist in the Pride of Ownership Premium for this painting.  The massive world-wide publicity about the theft made the Mono Lisa more famous and substantially increased its Pride of Ownership Premium and overall value.  Today it is the most famous painting in the world.

By the way, when I was at the Louvre, I didn't read or hear a thing about its famous theft.  The Louvre likes to pretend that its visitors come to visit the museum only for Reasons #1 (Venue) and #3 (Beauty) and not the more earthly Reasons #2 (Great Story) & #4 (Bragging Rights).


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Tuesday, May 20, 2014

Protecting Jobs???

Of economic interest today is Lee Moak, President of the Air Line Pilots Association (ALPA), and his views on NAI (Norwegian Air International). You can read his article “Why the U.S. must deny NAI” in USA Today to get all the facts but in general Mr. Moak want the government to deny NAI operating license in the U.S. because it will mean a loss of American jobs (pilots for the most part). 

Mr. Moak uses the example of the U.S. maritime ocean-freight industry where, in 1960 there were more than 100,000 people with jobs but today there are less than 2,500 jobs. It seems that allowing non U.S. businesses to haul ocean-freight has wiped out a lot of jobs (according to Mr. Moak). Except Mr. Moak does not do any research, or maybe he did and did not include it because it does not fit his agenda. The majority of the 'lost' maritime jobs were lost, not because of foreign competition but by improvements in technology. One of the big items was the development of container shipping (lots of other minor improvements as well). The tonnage of freight shipped has more than quadrupled since 1960 while the average amount of freight handled annually by each maritime worker has jumped from 3,393 tons in 1960 to 591,840 tons today. [Mr. Mork also does not discusses the number of "new" jobs and wealth created by the increase in the goods shipped].

As the president of ALPA, Moak is calling for a freeze on new competition. He could call for the government to do other things. Why doesn't he call for the government to prohibit jumbo jets? After all these big jets reduce the need for pilots. In fact how about legislation that limits the number of people that any aircraft can carry – say 75 or maybe 50 on a plane, max? There would be lots of new piloting jobs then.

This leads me to the speculation that other jobs could also be "saved" or "created" with just a little government action. How about limiting class room size to 10 students? Think of all the teaching jobs that would be created. Or, how about legislation that mandated travel within cities to be done by rickshaw or better yet by sedan chair – more jobs created in that way and with the added benefit of reducing pollution and reducing our dependency on fossil fuels.

I know that theses suggestions (maximum 50 passengers per flight and mandatory rickshaws) are ridiculous but no more so than Mr. Mork's statements. According to him this is not about “low cost and consumer choice” but it is about jeopardizing U.S. jobs to a business model that will “reap a parent company substantial new profits by putting U.S. jobs at tremendous risk”. What is NAI thinking? Creating a low price delivery model that benefits the many – the consumer. NAI is not in business for the many, the consumers, they are in business to benefit the few, the pilots.


Thursday, May 15, 2014

The $1,200 IRS Chair

Of interest this morning was a note about a mere $44.4 million that was spent by the IRS in FY 2010 for various new furniture (chairs, showcases, partitions and shelving, and wood furniture. About 3,777 contracts with some of the comfortable chairs costing $1,200 each. BTW the total price for new office furniture, repainting, and remodeling by the IRS since 2010 (4 years) is $96.5 million (more than the IRS spent in the 8 years of the G.W. Bush administration). Oh yes, Treasury Secretary Jack Lew just told Congress that it needs an additional $1.2 billion this year. In his words: “The IRS continues its commitment to carrying out its responsibilities, providing quality service to taxpayers and preserving the public’s faith in our tax system, but the lack of sufficient funding in recent years has made it difficult to provide the kind of services American taxpayers deserve.”

Just like H.L. Mencken said: "Democracy is the theory that the common people know what they want, and deserve to get it good and hard."


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Tuesday, May 13, 2014

Competition Comes Full Circle

I love the story of how Southwest Airlines started out thinking in opposites and shifting dimensions to deliver an outstanding value compared to the incumbents.  But 47 years later, their air fares are no longer such a bargain (compared to other airlines) as they have evolved from newcomer to dominant force.

After 9/11, Government intervened with time-consuming TSA security screening which has added substantial time for the Southwest trip.  When you factor in the time required to check in, go through security, check and retrieve your luggage, not to mention the 55 minute flight time, it eats up about 3 hours on a trip from Dallas to Austin.  (One can obviously save time by not checking luggage and paying a premium for some of Southwest express business options.)

Southwest started by serving the largest three cities in Texas (Houston, Dallas & San Antonio).  They were the outsider and driven by a mission to provide great service at a low price.  Early on they considered the bus lines more significant competition than the other airlines because their fares were so low.

Southwest made it.  In fact they made it Big and as of today they have over 44,000 employees and 3,400 flights a day.  And here is where life comes full circle.  In the same Texas tri-city area (Dallas/Houston/San Antonio) that fostered Southwest, a new entrant might very well eat Southwest’s lunch in the same way Southwest caused havoc with the existing players when they entered the market.  The irony is the new entrant is a bus company.

The start-up is Vonlane and they drive a much more luxurious bus than the Greyhound your father used to ride. It includes WiFi, satellite television and radio, free luggage, free refreshments, complimentary newspapers, a closet for their attendant to hang your coat or jacket, no middle seats, 110v electrical outlets throughout and best of all plenty of room with first class seats.  All of this for only $100 each way.

A private six seat conference room at the back of the bus is also available for $600 per trip.  You can rent a regular seat only, the conference room only or some combination of regular seats and the conference room.
Last Week (May 5) Vonlane began their inaugural service between Dallas and Austin.  They soon hope to add other routes between Dallas, Houston, San Antonio and Austin.

There is no time wasted waiting in lines – you can arrive five minutes before takeoff.  And virtually the entire trip can be used productively on work, play or sleep in the same 3 hours that it takes to make the Southwest trip. 

By the way, I checked the Southwest Dallas to Austin Southwest airfare a few minutes ago for a flight later today and the lowest fare was $201 and that does not include parking.

Ain’t competition great (at least for the customer). 

Monday, May 12, 2014

Competition Saves Lives

Talking about competition and how it is improves the lives of the average person I just saw a note about something that Uber, the ride sharing app-based car service, is doing in NYC. If you have a young child you can, for a surcharge of $10, call up something called UberFamily. This new option (competition to the NYC taxi services) allows you to get a vehicle that is equipped with a child car seat.

And now for the unintended consequences.

A company called The Car Seat Lady's now trains Uber partner drivers on how to safely secure the child car seats it is using....

How about that for free markets and competition....


Sunday, May 11, 2014

The Rule of Law

A note about the "Rule of Law" and how every law should apply equally to each individual.

In July last year the D.C. City Council passed a law that imposed a higher minimum wage on any new store built within its jurisdiction. Well, not any new store - just those stores that are more than 75,000 square feet and operated by a company of $1 billion or more. Seems that the only stores that meet these specifications are new stores built (three were planed) by Wal-Mart.

 Now you may think that this is great for new employees at these new Wal-Mart stores until you think about the unintended consequences.  Wal-Mart will not build any new stores in the D.C. jurisdiction and all those possible new employees will not have a place to work which means that they will not have a job......


“An economic forecaster is like a cross-eyed javelin thrower; they don’t win many accuracy contests, but they keep the crowd’s attention.” Anonymous

Forecasters in finance, stocks, the economy, sports and elections fall to this reality. 

The key to getting and keeping a job as a public forecaster (television sports analyst, political pundit or business channel commentator) has little to do with being accurate.  Just make sure you entertain the crowd.

On the other hand, being amusing matters not a whit to your success as a trader or investor.  The market does not reward the trader or sports bettor because he tells a great story.

One only survives and thrives as a trader, investor or sports bettor by being more accurate in one’s forecasts than the general market.  You can sound like an idiot, lack a sense of humor, and frequently use malapropisms.  But all that matters to be successful as a trader is can you get it right more often than market.

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Sunday, May 4, 2014

40 U.S. Veterans die in Phoenix waiting to see a doctor

Interesting that folks like Paul Krugman and other defenders of the government Affordable Care Act point to the veterans’ health system as a prototype of the best health care in the United States. Krugman, writing a while back, said “The V.H.A. is a huge policy success story, which offers important lessons for future health reform.” But Krugman and others tend to ignore the failures of the same system. From CNN a few days ago was this item: 

“At least 40 U.S. veterans died waiting for appointments at the Phoenix Veterans Affairs Health Care system, many of whom were placed on a secret waiting list. The secret list was part of an elaborate scheme designed by Veterans Affairs managers in Phoenix who were trying to hide that 1,400 to 1,600 sick veterans were forced to wait months to see a doctor, according to a recently retired top VA doctor and several high-level sources. For six months, CNN has been reporting on extended delays in health care appointments suffered by veterans across the country and who died while waiting for appointments and care.”

We will never know if any of those 40 veterans would have lived if they had seen a doctor in a more timely manner but I would think that the odds are that some of them could have survived.

I am just pointing out what has happened in a long running U.S. government-run health care system where the data is available. Also, a large number of us have pointed to the government-run health care systems in Europe where similar problems have been reported.

I am sure that 40 dead is just a drop in the bucket and they may have died anyway but what will happen when the ACA kicks in full force? Will there be deaths because of wait time? It may be only a very small percentage of the people wanting to see a doctor, as it is with the Veterans Health Administration but what if one of those in that very, very small percentage is your father or mother, or your husband or wife, or your son or daughter?

Just asking?


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