September 2011


‘A Conundrum’

“What’s facing Kodak is whether it can give assurances to third-party buyers that they’re not going to get sued,” Mark Kaufman, an analyst at Rafferty Capital Markets in New York, said yesterday by telephone. “Here’s the irony: If they sell the assets for a good price, the issues of insolvency are over. It’s a conundrum.”

A bankruptcy filing “would be a mechanism to get this asset sale done,” said Kaufman, the only analyst among seven tracked by Bloomberg who rates Kodak as “buy.” He values the patents at $2.4 billion.

Hence the call for advice with regard to restructuring. If EK can restructure, to provide time to allow IP sales to take place, which then allows time for the strategy change to return to profitability. Further, after having just drawn down on a credit line, to then file for bankruptcy, that would expose the senior management to allegations of fraud and likely criminal prosecution, therefore, I don’t believe that bankruptcy filing is imminent.

The bet then is that time can be negotiated. With 18,800 jobs on the line, there will be I’m guessing, some political pressure brought to influence a positive outcome. Now the story becomes: will the patent sales take place, and will they afford enough of a time window to bail out the sinking ship to get it to port?

At the moment I’m thinking yes, it probably will. If that is the case, then holding the position makes rational sense. One question answered. Second question: does it make sense to allocate further capital to try and trade around/out of the position? The jury is still out on this one.

I’m starting the critique of Dr.D’s paper today simply through an examination of the introduction, setting the scene.

Introduction

Although income inequality appears to be a fact of life there remains general agreement that there should be such a thing as social justice, if this is given to mean at least an approximation to equality of potential achievement.

The definition from wikipedia:

Social justice is based on the concepts of human rights and equality and involves a greater degree of economic egalitarianism through progressive taxation, income redistribution, or even property redistribution. These policies aim to achieve what developmental economists refer to as more equality of opportunity than may currently exist in some societies, and to manufacture equality of outcome in cases where incidental inequalities appear in a procedurally just system.

Social Justice, means redistribution, via government, to create this egalitarianism. This egalitarianism has a purpose. That purpose is to promote the acceptance of government by the majority. Government being a minority requires acceptance through the majority to exercise its coercive power, to have this power accepted as a positive, rather than the coercive theft that it actually is. This social justice is simply one tool, propaganda, by which government creates this acceptance.

Redistribution simply does not work. Further it is always coercive, much of the time it involves theft. Redistribution, claiming to be social justice, in point of fact can be no such thing when it relies on coercion and theft to accomplish its aims. Redistribution occurs primarily through the tax system, but can also be created through subsidies, tariffs, regulation, and of course inflation which is outright theft. To claim the ethical high ground via the violation of ethical practice is simply nonsense.

This apparent incompatibility can only be reconciled if money income is neither the only measure of human well-being and fulfilment nor the only means to achieving it. Yet it may well be that the fundamentals of the global financial and economic system are such as inevitably to both widen income inequality and also to increase the importance of money in achieving individual well-being and happiness.

The use of ‘money’ as a metric for measuring in a quantitative manner ‘individual well-being and happiness’ is fraught with difficulties, as will be seen later in the paper as the research is presented as evidence in support of this statement.

In this paper I intend to demonstrate this in two ways. Firstly I suggest how particular changes in economic circumstances are likely to affect different groups of individuals based on our knowledge of the relationship between human well-being and income levels.

We are treated to an almost Marxian class system analysis by which the author demonstrates his thesis.

I go on to extrapolate the likely socioeconomic consequences of this. Secondly I will look at the economic and social data over a particular time of marked economic change in the UK, the period roughly between 1980 and 1995, to show that the extrapolation made in the first section appears to be true. On the assumption that these hypotheses continue to be supported by the empirical evidence, I suggest how the trends toward inequality and the increased importance of money might be ended or even reversed.

As this paper was written in 1998 and the data was from 1980 to 1995 essentially there is no way of appraising whether the data was mined first and a theory constructed around the data, or, the theory formulated, and the data then collected, and applied to the theory.

We can now however, look at the theory as stated, and refer to the data subsequent to the paper being written: thus we can look at the same data statistics from 1999 to 2011 and compare the results. I haven’t actually done this yet, I have been more interested in working my way through the theory, but I shall definitely do so in the future.

From the usually informed Caroline Baum

I talked to many economists about the state of macroeconomics. Their responses, filtered through my own prism, are encapsulated below.

1. Flying Blind

“There’s a lot we don’t know about macroeconomics and particularly about business-cycle theory,” says Harvard’s Greg Mankiw.

That’s why he begins his “Ec 10” class on the principles of economics — still Harvard’s most popular course — with microeconomics: “the stuff we do know,” such as supply and demand, the utility function and profit maximization. Basic principles, in other words. Things like, if you tax something more, you get less of it. (You can’t repeat that often enough.)

2. Inexact Science

Economics is considered to be a social science. Unlike the natural sciences, where one can conduct a controlled study, it’s impossible to hold everything else constant in something as complex as an economy. There are too many moving parts to isolate the effect of any single variable, such as infrastructure spending or targeted tax cuts.

Economists have a simple way of dealing with this issue. They publish their findings with the default caveat of “ceteris paribus,” or other things being equal, which they never are.

3. Math as Science

Econometricians have tried to make economics appear scientific by dressing it up with mathematics. Models have replaced logic. Economists tell us with a straight face that a specific dollar amount of government spending will generate 1.9 million jobs.

“Stop using decimal points,” says Russ Roberts, professor of economics at George Mason University and co-creator, with producer John Papola, of EconStories. “Get rid of the grandiose claims. Go back to first principles.” (See No. 1 above.)

4. Good Politics, Bad Policy

It’s no coincidence that conservatives tout Hayek’s government-do-nothing philosophy while liberals advocate Keynesian stimulus, the bigger the better. Sometimes it’s hard to know which is the driver: the policy or the politics.

Often the ideas seem to provide the ammunition for advocating certain policies. You know what they say about guns falling into the wrong hands. By the time the politicians are done with them, the ideas have been subsumed by ideology.

5. Wrong Ballpark

Forget Keynes and Hayek, says Laurence Kotlikoff, professor of economics at Boston University and a Bloomberg View columnist. “The interesting macro that’s relevant isn’t getting any attention,” he tells me. What we’re dealing with is “coordination failure.”

As Kotlikoff explains it, “there is no auctioneer clearing markets,” no place where buyers and sellers can come together.

“Like the agora of ancient Greece?” I ask, hoping to sound smart.

Too literal, he says. There is no forward market for labor, for example. No contingent claims market.

Uh-huh. Now I know I’m out of my depth. Suddenly it’s not so hard to see why macroeconomics doesn’t have all the answers.

After the shocker that occurred today, I was at various points in the day tempted both to increase the position size, and simply to sell out the entire position and book the loss. Obviously both potential decisions were rather influenced by the massive red flashing on my screen.

My purchases to date are: Initiated position on July 5 2011 @ $3.02. Increased position size on July 19 2011 @ $2.50. Increased position size on September 26 2011 @ $1.88, which is my position to date. Losses are standing at 77% on the position.

I have been running various numbers on the financial statements from the 2007 statements through to the most recent Balance Sheet. The numbers are in distinct contrast to the market reaction to the news, which was essentially a financial restructuring, which was taken to read as an imminent bankruptcy. The numbers from the financial statements suggest that EK will survive, assuming that my interpretation of said numbers is not delusional.

Therefore I have essentially two choices: [i] sell out, book the loss. [ii] continue to hold. If I choose option [ii] there are further decisions that then follow on: [i] simply hold existing position passively. [ii] hold position and trade the position. If I trade the position, currently that means that I will have to allocate more capital to the trade, which if my analysis turns out to be wrong, magnifies the error further.

At the moment I have to decide who is the more rational, the market, or me. The only positive is that the weekend gives me some additional time to make a final decision. Should I decide to hold and try trading out of the position, I will probably wait until the end of the week to let the dust settle somewhat, which may hold true even if I decide to sell out and book the loss.

Eastman Kodak Co. has hired law firm Jones Day for restructuring advice as it faces growing concerns from investors over its turnaround prospects, people familiar with the matter said.

The move to hire restructuring lawyers signals Kodak is intensifying efforts to ensure it has the financial wherewithal to complete a difficult strategic and financial revamp. Shares in the 131-year-old company have lost around a third of their value this week following Kodak’s disclosure that it pulled $160 million from a credit line.

That drawdown heightened concerns about the company’s cash flow and triggered downgrades of its credit rating.

Kodak’s shares plunged Friday afternoon, down 49% in recent trading to 86 cents.

Not looking real good at the moment. I’ll have to have a serious think on this.

Another paper from Dr.D is in the works. I can’t link directly to the paper, but you can link to it via this blog post.

As an introduction:

Where does the money go?

Where does the money go?
I’ve just posted a paper I produced in 1998, which seems rather prescient. I made the point that the hidden growth of money was leading to fairly predictable changes (not for the better) in our economy and society. Here’s some excerpts from the introduction:

Although income inequality appears to be a fact of life there remains general agreement that there should be such a thing as social justice, if this is given to mean at least an approximation to equality of potential achievement. This apparent incompatibility can only be reconciled if money income is neither the only measure of human well-being and fulfilment nor the only means to achieving it. Yet it may well be that the fundamentals of the global financial and economic system are such as inevitably to both widen income inequality and also to increase the importance of money in achieving individual well-being and happiness.

In this paper I intend to demonstrate this in two ways. Firstly I suggest how particular changes in economic circumstances are likely to affect different groups of individuals based on our knowledge of the relationship between human well-being and income levels. I go on to extrapolate the likely socioeconomic consequences of this. Secondly I will look at the economic and social data over a particular time of marked economic change in the UK, the period roughly between 1980 and 1995, to show that the extrapolation made in the first section appears to be true.

On the assumption that these hypotheses continue to be supported by the empirical evidence, I suggest how the trends toward inequality and the increased importance of money might be ended or even reversed.

I will endeavour shortly to update the examination of trends in the paper.

Empiricism gone mad. Interestingly, he contradicts many of his recent assertions.

NEW YORK (CNNMoney) – Companies have yet another reason not to boost hiring: rising unemployment taxes.

Employers around the nation are getting socked with higher state unemployment tax bills as states are forced to shell out more than $1 billion in interest payments this month. More than 30 states have had to borrow billions from a federal fund to cover unemployment benefits for their jobless residents in recent years.

And this is only the first of two tax spikes employers are contending with, on both the state and federal level. Come January, companies in 24 states could have to shell out between $21 and $63 more per employee in federal unemployment taxes.

These hikes are the latest in a series of unemployment tax increases as states look to replenish their unemployment trust funds devastated by the Great Recession.

Last year, employers paid 27.8% more in state jobless taxes, said Doug Holmes, president, UWC Strategic Services on Unemployment & Workers’ Compensation, a business trade association.

“Unemployment taxes, which were a relatively low bottom-line cost in 2008, are now becoming a significant cost,” Holmes said. “It discourages companies from electing to hire new employees.”

The spreads twixt the high yield, or smaller companies, the companies that tend to operate in the US rather than through foreign subsidiaries, and therefore are more likely to hire locally, are getting no help from the lowering of the 10yr Treasury Note via Operation Twist.

The more accurate time preferences of consumers are being revealed through the spread. Consumers are valuing current consumption above future consumption. Thus more resources are being directed to consumption rather than investment, which lengthens the productive process, lowering consumer prices through increased supply. With the rising yields, investment projects that look to increase production and employment are being curtailed. Thus the employment numbers will show little if any improvement, and in point of fact are likely to worsen.The increase in current consumption demand and curtailing of future supply, lead directly to rising consumer prices, which is the opposite of what is required.

To that end, consumer based stocks would become more attractive. Food and beverage based common stocks should do reasonably well in a rising present consumption world. Two that I hold [as an example] would be SVU which are supermarkets and VGR which are cigarettes, both pay a dividend.

Further energy stocks should do well. Oil is a part of all consumer goods, and indeed part of the growing of food in the first place. CDXS which is a renewable fuels energy stock fits the bill in this space for me.

Germany’s parliament is due to vote on expansion of the EFSF tomorrow [Thursday 29 Sept] Obviously the ramifications are significant.

“Some men worship rank, some worship heroes, some worship power, some worship God and over these ideals they dispute, but they all worship money.” —Mark Twain

Next Page »

Follow

Get every new post delivered to your Inbox.

Join 111 other followers