Myriad Owns Your Genes

Yesterday a federal appeals court ruled that companies could patent genes. The U.S. Court of Appeals agreed with Myriad Genetics in the case. Myriad has a patent that tests for the gene BRCA1 and 2 which tests for breast and ovarian cancer. If a woman has the BRCA1 they are 60% more likely to develop breast cancer before they hit 90.

The court claimed that if the DNA is isolated from the body it can be patented. So in essence, our DNA once it becomes isolated can become patented. Blood tests are like this except I don’t know anyone that has a blood test patent per se. The important question however is will this genetic test inhibit growth within the genetic testing industry. Myriad has somewhat of a monopoly since if women get tested for this one gene they have to get a specific test done. The test costs around $300-$3,000 which in the grand scheme of things doesn’t seem a lot if it can accurately tell you whether or not you have cancer. I say Myriad has somewhat of a monopoly because there are other companies out there that can sequence the genome, analyze the genome, and predict what diseases you may or may not have. This is an alternative and perhaps in time will be a better one as genome sequencing will become cheaper and more companies will be created to figure out how to interpret the results of the genome.

Technology seems to always improve while coming down in price. I have a feeling genetics and biotech will be the next wave, however I have no idea when the wave will flood the market or crash. Sequencing the genome has become relatively cheap in recent years. As more people get their genome encoded the need to interpret and predict what the genome means becomes very valuable. This process could take a decade or longer but once it happens we will have more data than ever before.

George Soros-Now A Family Office

Recently, George Soros told investors of his hedge fund that he is returning around $1 billion and turning $24.5 billion into a family office. One of the main reasons Soros is turning his family worth into a family office is because hedge funds will now be regulated under the Dodd-Frank financial reform. The regulation forces hedge funds to register with the SEC by March of 2012. Compliance is a subject everyone in the financial industry knows about. If anything I would argue the financial services is one of the heaviest regulated industries. The argument for Soros going with becoming family office is family offices don’t have to register with the SEC which is somewhat weird because of the way family offices are run. Family offices are in essence financial concierge for family with above $100 million. The costs to run a family office can run around 3% of net worth or $3 million per year. Family offices are no picnic. People who have earned amassed sums of wealth are usually not the easiest people to work with. My theory on why these people are not easy to work with is because the people that have earned a lot of money have done so by usually having high standards, attention to detail, and hard work. These people couldn’t get rich by not caring (unless they inherited the money).

Usually they are created once people realize they have a lot of money and have a lot to manage. The family office pays all the credit card bills, manages investments, teaches the family about philanthropy, and even plans travel arrangements. According to a Wharton Study as of 2008 there were only 1,000 family offices. Nearly half of these family offices had over $1 billion.

What is strange however is why family offices would be exempt from registering with the SEC? I would imagine family offices have access to personal of funds of people with loads of money. This could give way to serious fraud or embezzlement on the advisors part. Maybe the SEC thinks that well these people have enough money so we shouldn’t really worry about them.

What I find the most interesting is that George Soros who talked about how he wanted regulations put on banks and the financial sector is now trying to dodge those very same regulations he was in favor of. This reminds me of people who are in favor of higher taxes yet never voluntary pay higher taxes. People can always voluntary pay the Clinton tax rates if they want to or send their money to IRS. It is interesting how what people say and what they do or completely different things.

Post Office Cutting Service = Time to Privatized

The U.S. Post Office is now considering closing 3,700 post offices. The post office last week said they soon they will cut Saturday mail service and could go to mail service three days a week by 2025. In 2011, the Post Office is expected to lose $8.3 billion. The U.S. Post Office employs over 583,000 people. What is really bizarre is why so few people are talking about getting rid of it or drastically scaling it back. The Post Office has been in business since 1789. If you added took the income-expenses since 1789 the total $13 trillion. Yes $13 trillion or a little less than the total U.S. GDP for one year has been spent on mail. So the United States would have been better off never have creating the Post Office and using a private organization.

A no brainer is to let the government to privatize the mail and let FedEx and UPS to work their magic. FedEx moves 3.4 million packages a day. UPS delivers 15.6 million packages and documents a day. I am here to inform you that these companies also make a profit. UPS made a profit in 2010 of $3.49 billion. FedEx made a net profit of $1.18 billion.

People might say something like “I don’t want a business seeking profit delivering my mail”. However, we meet people every day in profit seeking businesses that deliver high quality with low prices. If anyone has been to the post office they know of the long lines, employees who seem too busy to help you, and inferior service. I never notice long lines at a FedEx or UPS store. As a general rule I don’t notice any long lines at profit seeking entities. An employee that has worked for the Post Office has never been laid off. What incentives do Post Office workers have if they can never be fired?

On the books is a law that makes it a felony to allow anyone to deliver first class mail except for the U.S. Postal Service. It is somewhat strange that this is still in effect today. FedEx and UPS handle millions of pieces of mail. I see no reason why UPS or FedEx wouldn’t be able to handle the job of the U.S. Postal Service since they already handle millions of pieces of mail every day. Communities could work deals with any mail carrier they wanted for their mail like they do with trash and recycling. More than half a million people would be out of work if the U.S. Post Office was shut down. However, some of these people could work for a for-profit company and be required to create value. Some of these people would have not had jobs for long if they spent one day in the private sector.

Very few people I think realize how much money the U.S. Post Office is losing every year. If the American people realized how much U.S. taxpayers are subsidizing the mail I believe they would be more in favor with getting rid of it and privatizing it. The Post Office could have never in a million years dreamed of FedEx or UPS.

Netflix Higher Prices

Netflix, recently announced they were going to increase prices for their service. People under the new plan will have to pay $7.99 per month to just stream (or watch movies online). The cost of renting movies is an additional $7.99 per month. Usually companies over time lower their prices if they know what they are doing. Somehow I get the feeling that some people in the finance department are just now realizing they can charge more money and they believe customers will stay or they are losing money with the postage they have to pay for on mailing DVD’s and need to recoup their costs. The question however is will Netflix get more for their dollar with the price hike?

For me personally I think Netflix a wide variety of DVDs that you can choose from to be mailed to you. However, the streaming service is somewhat lacking. The first time I was able to use streaming on Netflix I was amazed about how many movies were available. After about a year or so the novelty wore off. One of the problems is that the cost to bring content to customers is pretty high. The idea is to have great content to attract customers and use that money to attract more customers. Last year, Netflix signed a deal where Netflix would pay $200 million per year to stream movies from Paramount, Lionsgate and MGM. This year Netflix signed a deal with CBS for an undisclosed amount to stream. The trend has been for Netflix to spend a lot of money on streaming. In the first six months of 2010 Netflix spent $117 million for content. Netflix supposedly has a library to around 20,000 as of last year from streaming. However only around less than 9% of popular movies can be accessed through streaming. The question however is will Netflix still have customers after they increase prices. Demand curves do slope downward. After Netflix announced they were increasing prices there were 80,000 negative comments on their Facebook page.

At the end of the day Netflix has to please consumers. Streaming movies should be cheaper than sending movies through the mail because of postage. Hopefully, Netflix will figure out what movies people want and deliver.

Netflix, recently announced they were going to increase prices for their service. People under the new plan will have to pay $7.99 per month to just stream (or watch movies online). The cost of renting movies is an additional $7.99 per month. Usually companies over time lower their prices if they know what they are doing. Somehow I get the feeling that some people in the finance department are just now realizing they can charge more money and they believe customers will stay or they are losing money with the postage they have to pay for on mailing DVD’s and need to recoup their costs. The question however is will Netflix get more for their dollar with the price hike?

For me personally I think Netflix a wide variety of DVDs that you can choose from to be mailed to you. However, the streaming service is somewhat lacking. The first time I was able to use streaming on Netflix I was amazed about how many movies were available. After about a year or so the novelty wore off. One of the problems is that the cost to bring content to customers is pretty high. The idea is to have great content to attract customers and use that money to attract more customers. Last year, Netflix signed a deal where Netflix would pay $200 million per year to stream movies from Paramount, Lionsgate and MGM. This year Netflix signed a deal with CBS for an undisclosed amount to stream. The trend has been for Netflix to spend a lot of money on streaming. In the first six months of 2010 Netflix spent $117 million for content. Netflix supposedly has a library to around 20,000 as of last year from streaming. However only around less than 9% of popular movies can be accessed through streaming. The question however is will Netflix still have customers after they increase prices. Demand curves do slope downward. After Netflix announced they were increasing prices there were 80,000 negative comments on their Facebook page.
At the end of the day Netflix has to please consumers. Streaming movies should be cheaper than sending movies through the mail because of postage. Hopefully, Netflix will figure out what movies people want and deliver.

Downsize Government & Raise Revenue: Sell Government Owned Assets

One way government could easily raise revenue is to sell government owned assets. Strange that I don't here either party talking about this. Here is a quote from CATO's Downsizing Government website.

"At the end of fiscal year 2007, the federal government held $1.2 trillion in buildings and equipment, $277 billion in inventory, $919 billion in land, and $392 billion in mineral rights. The federal government owns about one-fourth of the land in the United States."

At the same time we could also privatize roads, air traffic control, airports, and anything else that doesn't impose negative externalities.

Thomas Sowell: Debt Ceiling

Thomas Sowell talking to Dennis Prager on July 20, 2011...

Number of Pages of Federal Tax Regulation From 1913-2011

Seems as if spending has not only dramatically increased over time, but also the amount of federal regulations businesses have to comply which has increased exponentially. In 1913, there were only 400 pages of federal regulations to comply with. This year there are over 72,000 pages of federal regulations to comply with. Increasing the amount of regulations is a tax increase for businesses which pass along the costs to consumers. I wonder how many pages of regulations would equate just one percentage point in a tax hike.

Borders, Amazon, & E-Books

this week Borders announced it was going out of business. Borders was a bookstore that was popular in the 1990s and now is going to vanish. Most people forget Borders use to sell movies and music along with books. Borders from what I remember had a pretty good café that was somewhat of a Waldenbooks which was a bookstore that usually was located in malls was a subsidiary of Borders will also be going out of business. Borders had 399 stores and close to 11,000 employees. The store should finally be out of business in September.

Some people are saddened that Borders is going out of business, however I view Borders going out of business as an overall positive. The marketplace lets people know when they are doing the right or wrong thing. Even though people are claiming e-books are what caused Borders to go out of business I would argue Borders has been in trouble ever since Amazon. E-books as of 2010 made up 9% of all consumer book sales. The Kindle has been attracting attention for readers. The first Kindle sold in 2007 for 2007 for $399. Right now someone can buy a Kindle for $139. Not only has the Kindle become cheaper but the quality has improved. The Kindle is smaller, has built in Wi-Fi, and can be read in sunlight. The number of books that can be read on the Kindle has also dramatically increased from when it debuted. When the Kindle first launched people could only download 88,000 books. In July of 2011 people could download more than 950,000 books (including free books). Over time the number of books will no doubt increase. I have a feeling out of print books could be republished since anyone with a Kindle and could download it. Another benefit is e-books allow people to download books in a minute which is much faster than getting in the car and driving to the bookstore. The downloadable books also seem to be cheaper than the physical copy of the book. Profit margins should be going up for e-books since the cost of the marginal cost of an e-book is nothing (just the file). The only major costs I could see would be the rights to the ownership of the work.

At any rate, book stores maybe extinct in the next 10 years. However, I think we will have more books than ever available. The Kindle 2 can hold around 1,500 books which could save a lot of book shelves. Since the data is electronic it would also be easier to store notes and information instead of highlighting like people usually do.

If anything the e-book would put more book stores out of business in the long term. The benefit though will be more reading done by everyone which is a positive thing. Knowledge is power.

Future of Fast Food: Self Service Using a Kiosk

One night before finals I was thinking of certain inventions that are great ideas but not implemented. One thing that isn’t out is a fast food kiosk. If you think about it self service kiosks for fast food would save not only time but money as well.
The basic idea of the kiosk is to allow a customer to basically see the menu usually and order whatever they wanted. The machine prints out a receipt and a server brings customers their food. So in essence the customer becomes an employee inputting what they want into a computer. People can customize their items with the options on the screen. One thing I have also noticed is that fast food kiosks have is pictures of all the items on the menu. Usually when you go to a fast food restaurant you can only see pictures of certain items. I would think this would lead to higher sales since people are better able to see an item.

Younger people would be more inclined to use this service. In fact according to the Restaurant Industry Forecast in 2007 said that 71% of people between the ages of 18-24 would rather used kiosks than cashiers. In a survey done by EMN8 (a company that sells kiosks to fast food businesses) 84% of people who used the kiosks said they would return to the same fast food place which was higher than the percentage of people who would return that used a cashier. No doubt kiosks would make it easy for fast food places to balance their registers at the end of every night. Also fewer servers might be needed since a computer can be run 24/7 and never get tired. Not only would self service increase sales but also increase profitability because fewer workers would be needed. I doubt that self service kiosks would put all fast food servers out of business because someone would always have to deliver the food.

Self service kiosks would take people time to get use to. Over time customers would get better at being able to order food which would save even more time and allow more customers to get their food. For some odd reason I get the impression people would rather type what they want into a computer than telling someone. Even though it is subconscious some people may not want to be judged when ordering with a human cashier. Also with so many people texting things these days instead of calling people I wonder if people would feel more comfortable with this technology then others. Maybe fast food places could set up an ordering system so if someone was driving around town they could order from a smart phone, pay for the food over the phone, and pick up their food. Although, drive through is pretty quick already.

The future will tell us if this technology heats up or fads like so many other technologies. We live in a world filled with ideas. The question is can the ideas be executed in a way that creates value and makes everyone better off.

Poor Getting Richer

Poliliticans often say how the rich have been getting richer but the poor have remained poor. Although, this makes for great rhetoric if politicians cared to look at some data they might change their minds. According to the U.S. Census more than 40 million people are in “poverty”. However, the term poverty is somewhat misleading. Most of us when we think of the word poverty think of people who are homeless, struggling to get by, and maybe even malnourished. Robert Rector in a paper from the Heritage Foundation using data from 2005 shows that the poor nearly all have refrigerators, televisions, stoves and ovens, air conditioners, and DVD players. With summer time here there are always stories about how poor people don’t have air conditioning. In 1980, only 41.2% of poor households had air conditioning. By 2005, 78.3% of households had air conditioning. Also 46% of poor households live in their own homes. 75% of poor people own one car and 30% own two cars. Clearly, the poor are not living on the streets starving to death but have things that even middle class people in other countries wished they could have.

The poor people in America have it better than in most countries around the world. People at the bottom of the United States socioeconomic ladder are still higher than some of people in the top 10% of other countries.

Another myth is that the people at the bottom of the socioeconomic ladder never move up. This type of nonsense should be forbidden. Panel data (meaning tracking people over years and decades) from University of Michigan Panel Study of Income Dynamics shows that only 5% of families that were in the lowest 20% of income earners in 1979 were still there in 1991. However, 52.7% of the income earners in the top 1% in 1979 were gone by 1988. Real incomes have not also stagnated as some people claim. Real incomes for households have increased 29% despite household size getting smaller. Also if we look at wealth in generations more than 66% of Americans born a generation ago have greater income than their parents. So if we look at income groups and people over time and we see the poor have gotten richer not poorer as some like to say. Also the standard of living of everyone has increased through those greedy entrepreneurs. Twenty years ago hardly anyone had a cell phone or internet connection. Today these things are abundant with quality improving while prices keep dropping. People in every income class are benefitting from this. Truly the poor aren’t as poor as some people would make you believe.

The Case for Paying NCAA Athletes

With the college football season coming around the corner the question keeps coming up of whether college athletes should be paid. According to the NCAA for the 2010-2011 the total revenue collected was $757 million. What is really interesting however is that the expenses were the exact same. I find this somewhat ironic.
At the end of last year I watched Pony Excess a documentary about how players for SMU were being paid by boosters (people who fundraise for the school) enormous sums of money to entice players to come to SMU. However, it wasn’t just SMU that was paying players to come to their school it was nearly everyone in college football. SMU was the only school however to get the death penalty which shut down their season and I would argue since then has tarnished their football program ever since then.

Somehow people in America have t he romantic idea that athletes are at any university to get a good education in addition to playing sports. People tend to argue about the high rates of graduation from colleges with sports programs. There are exceptions like Vanderbilt who apparently have a graduation rate of over 90%. However, I would mention some programs with this claim. The first is that college athletes in general don’t always pick the most demanding majors. This would make sense though since their primary role is to play sports. Also professors are pretty aware of who the athletes are since they get notices if there is a “school-sponsored” trip. Professors also don’t usually require the same amount of work from athletics that is required of regular students. This only perpetuates the notion of athletes spending more time on the field than studying or in class.

If we want to be honest though the role of college athletes is somewhat of a minor league or farm league for majors sports teams. Nearly everyone on the field is making money except for athletes. Camera men, refs, and even ball boys are making more than athletes. The highest paid people on the field are usually the coaches. Most people are not aware that college coaches are paid more than professors, deans, and presidents of colleges. The argument is that since sports exposes the school to the nation if the coach is good and keeps winning the school will spread to states and cities where the school is not well known or entice people to apply to that school. John Calipari who is the basketball coach the University of Kentucky is paid $4 million per year. Nick Saban who coaches the University of Alabama football team makes on average around $4 million. However, college coaches are underpaid compared to professional coaches. Bill Belichick is paid $7 million per year to coach the New England Patriots. LA Lakers coach Phil Jackson makes $10.3 million per year. Professional athletes make much more than their coaches however which is how it should be in college sports. The athletes themselves collectively determine the outcome of a game than any coach on the field yet they are not paid. Statistics from NCAA, the odds of an NCCA basketball player getting drafted are 1.2%.Don’t forget to get the odds of just playing basketball in the NCAA are 3.1%. For football the odds are a little better with 1.7% of NCAA senior football players getting drafted into the NFL. So if over 98% of college athletes will not go pro why don’t colleges at least pay them for their time on the field? Colleges could also establish relationships with professional sports teams in order to recruit NCAA players.

Paying athletes would not put money in the pockets of college kids, but also reduce the corruption of college sports. The reason we have the scandals is because it is illegal to pay athletes which in economic terms suggest they are not getting paid their market value. Allow players to be paid any amount by the school or have donors endow positions with their own money and we would have a better system. The NCAA wants to try to convince people that they are trying to promote young men and women playing a sport and getting a degree in the process. People should never look at the intentions of any program they should look at the outcomes are results as the true test of anything.

Debt Ceiling Nonsense and What the Government Should Be Doing

With the debt ceiling approaching soon it seems as if seems as if politicians will have to figure out what to do regarding the financial state of America. The Democratic Party wants to cut spending on programs that don’t spend that much money while raising taxes on the most successful people in society. Republicans on the other hand want to cut more spending while not increasing taxes.

I would argue that not raising the debt ceiling would be a step in the right direction. If nothing gets done spending will have to be cut. The only thing that would have to be paid is the interest on the debt. The 14th Amendment required that the United States pay interest on the debt before anything else. According to the Treasury the interest on U.S. debt for 2011 will be over $385 billion. Also remember that the United States currently has an AAA (highest) credit rating. Standard & Poor’s and Moody’s who rate the credit of sovereign countries have threatened to downgrade the United States if they don’t pass the debt ceiling. People have been saying if we don’t pass the debt ceiling we will default on our debt. I am not sure how they can claim this when the interest on the debt is $385 billion and the Treasury last year took in $2.3 trillion (while giving $467 billion in refunds). However in 2010, the government spent $3.46 trillion. It doesn’t take a financial wizard to figure out that in 2010 we had a deficit of over $1 trillion. So the interest on the debt is around 16% of all of the income the government takes in. The largest item for the national budget is Social Security. In 2010, $695 billion was spent on Social Security benefits. The second largest item was the defense budget which was $664 billion. Unemployment and welfare benefits were $571 billion for 2010. What I never understood is why the government separates spending into mandatory and discretionary. As households know all spending is discretionary. I am really boggled when the media says we have to raise the debt ceiling. If people simply called their credit card and raised their credit limit every year the credit card company would soon cut off their credit.

The United States government is bringing in plenty of revenue however Congress decides to spend more than they take in. One no brainer would be to let people opt out of Social Security. This would decrease the future obligations to future retirees which will slow down spending. The same thing should be done for Medicare and Medicaid. Some other no brainers would be to abolish the Department of Health and Human Services, Department for Education, Department of Energy, Department of Agriculture, and Department of Labor. Getting the government out of many aspects of our lives will not only save money but increase productivity since these displaced workers will have to find jobs in the private sector. Eliminating these departments would save close to $200 billion. The United States in 1948 spent under $800 per person and by 2004 this number reached $4,300 (both adjusted for inflation).

Military spending could also be reduced. We have close to 78,000 troops in Europe and over 47,000 in East Asia. I am all for the country defending ourselves but do we really need all these troops in places that are relatively free and safe. I don’t see China or Japan mobilizing thousands of troops in countries all over the world.

On the revenue side it would make sense to go to a flat tax and get rid of all loopholes and deductions to make the tax system much simpler. Americans spend 6.1 billion hours each year just complying with the tax code. Not only do Americans spent time on the tax code, but also complying with more regulations every year. In 2009 alone 60,000 new pages of regulations were added. The cost for these regulations was $1.75 trillion. Moving to a flat tax will make the tax system easier and simpler however I have a feeling: tax attorneys, CPAs, and real estate agents would lobby against a flat tax. The current tax system creates so many inefficiencies and waste. I am all in favor of a tax return that can fit in on a postcard with easy to read print. Also lowering the tax rate of dividends and capital gains to 5-10% percent would allow more Americans to keep money in their pocket and attract investment from overseas. Since 54% of people are invested in the market in some way (either through 401k plans, mutual funds, or IRAs) a vast majority of people would see an increase in their dividends. Dividends are a double tax since corporations already pay taxes on their income and then shareholders have to pay taxes on the dividends when they receive them.

Many empires have collapsed over time. It is possible for America to collapse if we don’t start taking serious steps to get our fiscal house in order. Politicians are only doing what the people elected them to do. If we don’t make changes soon our country will no doubt start to collapse like a house of cards.

Tiger Woods and Money Problems

So it seems as if Tiger Woods is now in different kind of trouble. I saw a recent article that speculated that Tiger Woods might go broke. Although, no one has the full details of his balance sheet his expenses seem to be increasing while the amount of money coming in is decreasing. Forbes in 2009 estimated Tiger Woods to have a net worth of $600 million. True, this seems like a lot, however has some other issues going on as well. The most costly error was Tigers’ boogey off the golf course that cost him $100 million. So now we are left with $500 million. In addition to this, according to the PGA in 2009 Tiger was making $10.5 million. The next year Tiger made $1.29 million and year to date Tiger has only made $571,363. I thought the top 1% only got richer? The main reason why Tiger is making less is because his ranking has decreased which means less money. Perhaps maybe his divorce not only wrecked his marriage but his career as well. Tiger has other money from endorsements, but is hard to pinpoint with any accuracy what these numbers are or will be.

I am surprised that Tiger is living such a luxurious lifestyle after his divorce. Last year Tiger took out a $54 million mortgage. The house has property taxes of over $400,000 per year. Tiger had to also add three different pools, a tennis court, golf course, and an elevator. In addition to this Tiger also pays property taxes on his mother’s $2.6 million house.

Time will only tell if Tiger goes broke. The ironic thing was Tiger majored in economics at Stanford. I guess he never took a personal finance course. Someone could easily write a book on the celebrities who have made fortunes only to see it all gone.

Dead Children Make Bad Laws That Don't Make Us Safer

A week or so ago America (most American mothers) were outraged when they heard the verdict of the Casey Anthony trial. The prosecutors didn’t have any evidence that Casey Anthony killed her child. People seemed to think the Florida jurors lost their minds. However, I believe Americans are suffering from a fallacy of presumption. The burden of proof is beyond reasonable doubt which means that the jury has to be 90% sure that Casey Antony killed her daughter. I don’t the reason people got upset was because no one really believed a mother would not report her own daughters’ murder while partying in the meantime. There is no doubt however that the odds of Casey Anthony getting arrested for something completely unrelated to this are high.


Now people in Florida want to create a new law called Caylee’s Law which would make it criminal if a parent did not report their children missing to the authorities within 24 hours. Parents would even be guilty if it turns out their child wasn’t even harmed. The problem that might occur is innocent parents would be penalized even if it wasn’t their own fault. If kids decided to sneak out of the house and stay at with a friend the parents would still get in trouble. Should police really be concerned with this when there are must more serious crimes being committed. Advocate groups who I have no doubt have the best of intentions don’t realize the law of unintended consequences. For instance, laws intended for sexual offenders like Megan’s Law and the Adam Walsh may have the best of intentions but the data begs to differ. For instance, the recidivism rate for Michigan was 3.5% for registered sexual offenders. The other 96.5% are first time offenders with no prior felonies or sexually related crimes. A study in New Jersey showed that these types of laws had little effect to decreasing the amount of sexually offenses. Sarah’s Law had similar consequences. The reoffender rate over a 6 year period was only 8.5%. So in essence the vast majority of sexual offenders are very unlikely to commit the same crime again. The punch line really is all of these laws have not made kids any safer yet have probably made everyone else less safe. People in media might make you believe that children are snatched up randomly from crazy people but the chances of a victim knowing their offender are pretty good. Sexual offenses are horrible. However, what about other crimes people commit like murder, burglary, arson etc? Instead of enforcing these laws I would much rather spend more time and energy enforcing existing laws that prevent people from harming one another. Tradeoffs do exist. People have to understand perfection is not for this world or this lifetime.

What Makes A Successful CEO?

I have often wondered what type of characteristics a typical CEO might have. The typical person thinks of the CEO as some all around person, who is charismatic, attractive, and socially outgoing. I would say that some of these characteristics are what some CEOs have, however they are not necessarily the characteristics of CEOs. For instance managers who promote people could look around the company and see what type of characteristics people in upper management have and try to find those same skills in other people they are trying to promote. Also usually people with many advanced degrees are not the best CEOs. People might think, "Well this person has a PhD" so therefore they should know how to run a company. There are all different kinds of intelligence. I would say there are exceptions to this Lee Raymond of ExxonMobil and Jack Welch who both have PhDs in chemical engineering.

Luckily, Steven Kaplan of the University of Chicago has done some research on this topic and should have a forthcoming article published in the Journal of Finance. Kaplan did an interesting study based off 4 hours interview with people interviewing for CEO positions in private equity and venture capital firms. Kaplan’s main argument is not to hire someone because they have very good people skills. The better test of a CEO is their track record of getting things done. Moreover, Kaplan states that a CEOs talent, skills, and abilities are important characteristics in figuring out who to hire as a CEO. CEOs in general have to get the job done or they are fired. Building off Kaplan’s research on executive compensation CEOs today face a higher turnover rate than decades ago. The important thing for any organization is to make progress. This means constantly making things better and improving. People that create results generally are people that get the job done and progress not only themselves but the company as well. Three traits that Kaplan mentions that what board members should look at in their hiring decision is someone what is: persistent, efficient, and proactive.

I do think that most good CEOs are also effective communicators. These people tend to be articulate and are pretty good speakers. However, I don’t think this should determine whether or not a CEO gets hired. The most important thing is a CEO has to understand the business they are in and the possible risks and how to mitigate them. Any CEO can look like a genius when the market or their industry is doing very well. However, the true test of a CEO is managing a company when things are bad. Many companies take on too much debt, create products that people don’t buy, or invest in projects that will never see a dime. Good CEOs know how to try to mitigate risk. Also another characteristic I would say that is important for a CEO is delegation. CEOs of any Fortune 500 company get hundreds of emails a day. These people have to understand what is important and what isn’t. Good CEOs know who knows what, and how to use that for the company’s benefit. I really don’t think people understand what it takes to be a CEO.

I am always intrigued when they say this CEO makes X times the average worker. No one ever stops to think that usually the CEO is also X times more productive than the average worker. Not only that the average worker does not have the skills needed to become a CEO or else CEO compensation would decline dramatically. Also being a CEO is not a 9-5 job. I would be willing to bet that no CEO in the Fortune 500 works less than 40 per week. Anyone who simply thinks they can walk into a major company and take over and not create a catastrophe is mistaken

Ron Paul: A True American Hero

Today, Ron Paul announced he would not seek reelection in the U.S. Senate. Ron Paul is probably my favorite politician of all time. What I like about Ron Paul is how he sticks to his principles of limited government and more liberty. Usually even when people select a candidate they have issues with them. Ron Paul is different however. I really don’t think there is any policy issue I disagree with him on. What I am surprised at is that even people like Bill Maher were okay with Ron Paul. Democrats seem to like him because Paul was against going into Iraq and Afghanistan from day 1. In addition to this, Paul is liberal on social issues however once democrats hear his ideas on the Federal Reserve and free markets they are turned off. In a strange way, it seems as if libertarians should be more in favor because people seem to not like both the Republican and Democratic Party. I always say that the libertarian party is the best of both worlds. I use to be a Republican because I was for less government but as I grew older I tended to realize that what politicians say and do are completely different. Also I started to realize that conservatives tended to not look at the evidence when it came to social issues and just used religious beliefs or what they thought was right instead of looking at the evidence.


It seems as if politicians no matter what political affiliation move to the left or right of what they say they will do once they are in office. The main reason I believe for this is political pressures. Ron Paul is the only candidate I believe that wouldn’t cave in to these pressures. Although this is hard to prove because even though I support Ron Paul I am wise enough to realize he will never become president.

I think Ron Paul’s lasting impact will be his fight for more transparency with the Federal Reserve and his strong commitment to defending liberty. Hopefully future candidates will be inspired by Ron Paul and use some of his ideas in the future.

Texas 7 Solutions and The Real Problems With Higher Education

Recently, in Texas there has been a call to reform higher education. Austin businessman Jeff Sandefer has come up with seven solutions for fixing higher education in Texas. Some of the solutions include measuring teacher efficiency and effectiveness, separating research budgets from teaching budgets, and putting state funding in the hands of students. Many of the solutions are very broad and don’t talk about what is specifically entailed. Although, I would say overall these solutions would be a step in the right direction.
One of the largest problems I see in higher education is the tenure system. Basically, professors that show their value in the early year of their careers are rewarded with guaranteed lifetime employment. Academics are rewarded based off their past not what they can provide for the future. Anyone who works in the business world knows that employees are paid based off the present value of future cash flows they can provide to the employer. For instance, professors are paid based on many factors like research, teaching, and service. No doubt that some of the highest paid members of a college (besides athletic coaches) are the most prolific professors. What seems evident to me however is that research and teaching are very different. It is rare to find a professor that is both prolific in research and a quality teacher. In terms of research professors are rewarded more for publishing their research in a top journal as opposed to a second or third rate journal. This is interesting college is a place to educate people. How does research a professor does enhance student learning? People could say, “Well it makes the professor on top of his field”. The articles academics publish are not meant for the lay person. Sometimes even other academics don’t fully grasp the articles. So why is research rewarded if it doesn’t pass on knowledge to students? Public schools put more pressure on professors to publish and in some ways are more like research institutions. Private schools on the other hand don’t emphasize research as much and focus more on the quality of the teaching. Teaching should be compensated since that is essentially is what the school is providing. If schools want researchers they should just pay them to research but not force them to teach courses. Allowing professors who are good at teaching to just teach is a good idea. The school would allow professors to use their comparative advantage (research or teach) which would make everyone better off.

One no brainer for some departments in higher education is to privatize them. Departments could get sponsorship from corporations or private donors, and rely less on the school (or taxpayers if it is a public school). If companies really wanted to they could even form partnerships with schools and work with researchers. The problem is too many universities have departments that have little to no value. So many people go through college and get a degree but never end up using that degree.

Getting rid of the tenure system would be a great idea. One common argument about tenure is academic freedom. This is the argument that professor should be free to tell students their thoughts even if the subject is controversial. This argument really doesn’t make much sense given many subjects are not subjective. For instance, how political can a math professor get over 2 + 2 = 4? Also students usually pick universities that have similar values. So if student A is conservative he most likely isn’t going to pick a school that is liberal. Although, even within conservative schools certain departments usually have the same political orientation. Also, students are usually perceptive in how the teacher acts. Often they will tell their friends about a crazy professor who rambles on about things that have nothing to do with the subject. In a more free market approach schools if they wanted to could randomly record lectures of professors to see what exactly they were telling students. Parents should also be allowed to see what professors are teaching their students (since usually they are the ones paying). In a market setting people get to see what they pay for. College seems to be different. Somehow it seems as if people wonder through college take classes and get a degree. However, many courses in college a student ultimately never uses. College is useful in teaching people how to have some discipline, working in groups, and networking. Too much money is spent on education for things that have little to do with educational outcome. Parents and students rightfully complain about college costs. Colleges decide to build brand new facilities even though it is unlikely that it will increase student knowledge and expanding existing facilities would be much cheaper. Dorms today look like hotel rooms compared to the dorms of yesteryear.

Higher education needs market intervention. Allowing colleges to think more like businesses is a step in the right direction. Departments should have to justify why they need to spend money on X. Funding from donors, corporations, and foundations would also be beneficial. Another great idea would be to get the government out of funding college education. Truly private markets provide what employers, students, and parents would want. One problem I have is when career centers of colleges show statistics of how much students make when they get out of school. However, often what people really care about is how well they are doing over a period of time. A better study would be to look at students that graduated, their GPA, and to see how well they are doing now. Someone could land that first job, but then quit or be fired so that really doesn’t tell us much about long term employment prospects. What I find interesting is that people often graduate high school and then go to college. I would be curious to see what would happen if people graduated high school worked for a few years to not only save money but build some maturity skills of living in the real world.

NFL = Nationalized Football League

If you have been following sports news recently you might be aware of the possible shut down of the 2011-2012 NFL football season. I blogged previously about the struggles with the NBA and it looks like the NFL could be having issues.

The main problem is fighting over revenue. I find it interesting that the MLB, NBA, and NFL all use words like “revenue sharing” when their owners who are usually billionaires are more accustomed to profit sharing. The league could have even hundreds of billions in revenues by if the cost to maintain the league is just one dollar above the cost then there is no profit. Right now the NFL has $9.4 billion in revenue. Yet I think the more interesting question is how much profit the league makes. Also considering how much public money sports stadiums get it’s pretty clear that the taxpayers in the cities where NFL franchises are located are losing. I would be in favor of more corporate sponsorship. Citigroup and Barclays paid $20 million ever year for 20 years just to get the naming rights for stadiums. Clearly, if we have more of this there would be less of a burden on taxpayers who don’t even go to a single game.

What is also interesting is the idea of salary gap. In 2009 the salary gap for a team in the NFL was $123 million. This is a large increase from 1994 when the salary cap was close to $35 million. Since each NFL team is only allowed to have 53 players the average annual salary a player would make is $2.3 million. Last year the highest paid player in the NFL was Phillip Rivers who made over $25 million and is quarterback for the San Diego Chargers. Just paying the quarterback would consume 20% of the salary cap and we haven’t even filled the roster for the rest of the offense or defense.

Another problem with NFL contracts is that high prospect rookies are guaranteed millions of dollars even before they step on the gridiron. Could you imagine a Fortune 500 company hiring a CEO and saying, “Well we have heard great things about you so here is $20 million no matter what happens”? Matt Stafford comes to mind when I think about this. Stafford was a very hot prospect who was quarterback and drafted by the Detroit Lions. The team guaranteed him $41.7 million. His stats for the 2010 season were nothing to write home about as he had more interceptions than touchdowns. Sam Bradford signed a six year deal worth $78 million of which $50 million is guaranteed. His performance last season was better than Stafford’s but still not Pro-Bowl material. Agents often sign multiyear contracts for players because agent’s get paid based off the contract value. Agents try to convince everyone that because their client had one good year they should be rewarded with a long term high paying contract. I think there are few if any other compensation packages that work like this. Imagine you are working at a company and have a very productive year and exceed expectations. The company calls you in and tells you they want to reward you with a large multiple of your current salary and a guaranteed bonus so you don’t leave. If companies had a compensation system like this workers would slack and decrease productivity especially when they have guaranteed money coming to them. Although, players and agents would be opposed to it a one or even two year contract would make more sense than multi-year deals on a short period of time. The players that were consistent and productive would actually get paid more and the players that were just a flash in the pan would be the most hurt.

Something else that might help the NFL is to allow teams to issue stock. Selling off the ownership to individuals would allow teams to be more run like a business. Shares could be traded on the financial markets and the value of the stock would be derived off wins, losses, attendance, and factors that would affect the team valuation. Sports fans could actually have as they say a piece of the action which would be great for them and teams wouldn’t have to rely on funding from one individual investor but could be supported by millions of fans across America.

The Case Against Pollution, EPA, and Environmental Whackos

You wouldn't know unless you listened to Al Gore or environmental whackos that we actually have less pollution now then we did in 1980.

Amazing pollution decreasing despite rapid increases in GDP, cars, and people. Heaven just might be on earth!

Looks like all forms of pollutions have been going down since the 1980s.

The Rich: Why We Need Them

I enjoy when people say we should try to "soak the rich" and try to extract money from them since they have so much. People forget that the only way people get rich in this lifetime is by creating value. The only way you can create value is by building companies that provide products and services that people like. The only way to build these companies is by hiring employees.

Looking at the 2010 Forbes 400 list and seeing who the richest people are it seems evident that these uber rich people have to hire people if they want to create more value.

1. Bill Gates- Microsoft (89,000 employees)
2. Warren Buffett-Berkshire Hathaway (260,519 employees)
3. Larry Ellison (108,429 employees)
4. Christy Walton (Wal-Mart 2.1 million employees)
5. Charles Koch (70,000 employees)
5. David Koch
7. Jim Walton
8. Alice Walton
9. S. Robson Walton
11. Sergey Brin and Larry Page (24,000 employees)

(Note I didn't include Bloomberg number 10 because it’s hard to figure out exactly how many employees Bloomberg has because they have so many subsidiaries)

The richest people in America create over 2.6 million jobs. If you think about it for a moment though it would make sense that some of the wealthiest people in society would have to manage large organizations. Companies can only grow if they hire employees that add value. CEOs and executives of large companies are compensated so well because they are overseeing tens of thousands of employees. Managing means more responsibilities means longer hours which means more stress and misery for executives and CEOs. Businesses create more employment than any government agency could dream of. A capitalist creates a job for someone who didn't have a job. I have yet to see a poor person give a rich person a job or even a middle class person a job.

People might argue that the rich people really don't create jobs and just count their money. The only way people can continue to be rich is by investing their money in productive assets (stocks, bonds, real estate) or working. Investing money in a company gives that capital which allows them to build more factories, buy more equipment, and or hire more people. In addition to this the rich also do spend money (in fact some rich people spend so much money they end up being broke). According to Moody's, the top 5% of income earners account make up 37% of all consumer spending. If 70% of GDP is based off spending then in theory close to 24% of the GDP comes from the top 5% of income earners. Note to be in the top 5% one would have to earn a little over $160,000. If not only are these super rich people creating jobs they are also spending money! Also an important point to consider is that the richest people pay the most taxes. According to the Tax Foundation, the top 1% of income earners in 2008 paid 38 percent of all federal income taxes. The top 1% paid more in federal income taxes then the bottom 95%.

The rich are not only creating companies that make products that people enjoy, but employing many people to help create that product or service people want or need. In addition to all of this the rich are paying a large share of taxes. To say we don't need the rich is just utter nonsense. The top 5% of income earners earned close to 35% of the nation’s adjusted gross income yet paid close to 59% in federal individual income taxes. Clearly, the rich are a net benefit to a government that wants to continue to spend money.

Health Care: Problems, Solutions, and Cures

Recently, I have been thinking a lot about markets and how healthcare really isn’t a free market. When I think about free markets I think about people buying goods and services. In any free market people decide what products and services they want. Healthcare does not work like this. According to the U.S. Department of Health and Human Services in 1960 close to 50% of total health expenditures were out of pocket. In modern times this percentage has dropped to 10%. However, other people picking up the tab (insurance companies, government, third parties) has skyrocketed from 55% in 1960 to close to 90% in recent years. Clearly, this is not a free market when someone else is paying. One problem is that insurance covers too many things. I can understand a market for catastrophic insurance (getting cancer, a serious illness or disease), but for everything else we should let free markets reign.

One argument you hear a lot is “Insurance companies are just greedy”. Insurance companies profit margin are just a little above 3%. Software companies, oil companies, and even telecom companies have higher profit margins. Health insurance companies are highly regulated.

Another problem I see is one of barriers to entry in medical care. The American Medical Association (AMA) restricts who can and can’t become a doctor. The AMA is in charge of granting medical schools. What is very interesting is that today there are around 129 medical schools which is less than the 166 medical schools we had a century ago. This is all despite the fact that the number of medical school applications has increased exponentially in the last 100 years! I am perfectly okay with allowing nurses to do some of the duties of doctors. A lot of ailments that people have (sinus infection, aches, and sore throat) nurses could easily handle. In 2008, there were around 2.6 million nurses. Nurses would be paid more since they would be engaging in more valuable activities. The other major problem is the FDA (Federal Drug Administration). The cost of developing one drug in 2008 was $993 million. If you are one of the major drug companies you are going to be very sure you have a product that can make it to market. The FDA requires that companies go through a clinical trials and a four step process. The drug has to first be evaluated for safety, then the drug has to be evaluated to see if it effective, then people have to actually take the drug and double blind tests with placebos have to be in place. This process takes many years. Meanwhile people with the ailments that the drugs are trying to cure or help are suffering. The number of patients required to conduct a clinical trial have also increased. In the late 1970s only 1,600 people were required for a trial. By the mid 1990s this number increased to 4,200. The number of drugs getting approved every year by the FDA is not in the hundreds its only a couple dozen. In 2009, the FDA only approved 25 new drugs. Yet in that same year more black box warnings were issued than the amount of drugs approved. The black box label warnings are warnings for people who may misuse the drug even though there are directions and a list of possible side effects already on the prescription. Could you imagine if iTunes was in charge of approving new songs and only approved 25 songs in one year? Consumers would be outraged. People could argue “Well songs are one thing but health is another issue”. I think I care more about my life then even my own doctor. There are times when consumers are more informed than even their own doctors because people do actually seem to care about living. When people are dealing with decisions that have huge consequences they will seek information. The icing on the cake is prescription drugs which I mentioned in a previous post. There are close to 4 billion prescriptions written a year. What doesn’t make any sense is requiring a prescription for harmless things like benzyl peroxide (face wash) which I don't believe anyone has ever died from. Drugs like this should just be moved to over the counter which would free up time for the doctors writing the prescription and the consumers who have to waste their time going to the doctor. Also consumers would save money because if you got CVS and Walgreens competing for prices they would drive down prices instead of insurance companies trying to figure out how much they would cover. Moving hundreds of prescriptions from back of the pharmacy to over the counter would improve healthcare.

People are often mad because of the prices they pay for healthcare, but often see what are causing the high prices. Getting rid of the AMA would allow more people to become doctors which would bring down the cost of medical care. Also bringing more drugs over the counter would decrease the cost of prescription drugs since they would be sold in free market places like CVS and Walgreens which would have to sell the drugs for what consumers would pay.

Facebook: 700 Billion Minutes and Opportunity Costs

I recently saw that 700 billion minutes were spent on Facebook in one month. I crunched the numbers and did some analysis.

-700 billion minutes is equal to 1.3 million years (again this is just the time spent on Facebook in one month)

-700 billion minutes also equals around 11.66 billion hours. So assume the value of just one hour on Facebook is $1 this means that $11.66 billion is wasted on Facebook in just one month. If we assume $10 per hour this would mean $110.66 billion dollars again in only one month. People have to understand these opportunity costs!

Question:
Is the aggregated amount of time on Facebook really worth it?

Happy Fourth of July!

Happy 4th of July to all my American readers! This is also my 150th blog post!

Frank McCourt and How Not To Run a Baseball Team

Recently Frank McCourt has been in the news. I usually don’t read Vanity Fair but this month there was a good article about Frank McCourt and his wife Jamie McCourt. Frank McCourt is the owner of the Los Angeles Dodgers. In essence, right now the Los Angeles Dodgers are broke. McCourt can’t pay its bills and owes millions of dollars to various parties. The Dodgers owe slugger Manny Ramirez $20.9 million, Andruw Jones $11 million, and Hiroki Kuroda $4.4 million. Not only do the Dodgers owe players but are around $400 million in debt. Apparently, Frank McCourt has had a divorce which has caused some financial hardship however his spending is out of control for even a billionaire. The McCourt’s net worth in 2009 was $1.2 billion. In 2010, the couple started to go through a divorce. To start off McCourt was had many different homes. Here is a list of their estates

-$27.3 million beach home in Malibu

-$21.3 million Homby Hills, California (near Playboy mansion)

-$19.5 million home Cap Cod

-$16 million Massachusetts home (main home

-$6.5 home Homby Hills

-$6 million ski condo in Vail, Colorado

-$4.7 million land in Cabo San Lucas

-$7.7 million lot in Yellowstone

-$360,000 per year for a suite in the Montage hotel
Don’t the McCourt’s realize people can only live in one place at a time? What is very interesting is that Frank McCourt has an economics degree from Georgetown. The McCourts were also paying a hair dresser $10,000 a month to cut their hair five days a week. Reportedly the couple also paid $100,000 per year for “positive energy”. The recent divorce is now causing even more financial issues as Frank McCourt has to pay his wife $225,000 per month plus over $400,000 per month to pay the mortgages. No this is not a mistake his wife is getting $625,000 per month or $7.5 million per year.

One problem the McCourt’s got into is they were using the Los Angeles Dodgers as an ATM. The McCourts bought the Los Angeles Dodgers for $421 million in 2004. By 2009, the Dodgers had taken on $459 million in debt. What is really confusing is how Forbes can claim the value for the Dodgers is hundreds of millions when the team is consistently losing money. Apparently, the McCourt’s took out $108 million for personal distributions. One deal that could have saved the McCourt’s was a possible deal with Fox. The deal would have been worth anywhere from $1.5 billion to $3 billion. McCourt would have given Fox the rights to broadcast Dodger games for the next 20 years. One problem was Major League Baseball (MLB) has to approve any deal like this. Budd Selig the commissioner of the MLB didn’t allow the deal to go through. Then Budd Selig goes in and has MLB take over the day to day operations of the Dodgers. Is Budd Selig aware of private property and the rights associated with it? McCourt was trying to get a hedge fund to lend him $150 million in order to manage the day to day operations and pay off debts. What is interesting however is everyone seems to think Selig did the right thing by stepping in. However, looking at the McCourt’s finances what genius was in charge of allowing them to purchase the team? MLB has financial rules and guidelines and most likely looks at an individual’s liquidity in order to see if they can afford the team.

Corporate CEOs: Do They Make Too Much?

Once concept I have been thinking about for a while is executive compensation. The media and average person will say these people are paid outrageous sums of money even when their companies go down the drain. The only exception I actually agree with these people on was the financial bailout where CEOs were paid a lot even though their companies were bailed out by the government.


Beginning in the 1970’s companies began as part of executive pay to give certain employees stock options in order to align the same values between employees and managers. In 1992, the Securities and Exchange Commission (SEC) wanted publicly traded companies to offer more disclosure in terms of how executives were paid in order to allow shareholders more transparency. Companies before June 2005 did not have to expense stock options on their income statement. After June 2005 companies had to expense stock options or show them as a cost. Today options make up a large part of executive compensation. What is ironic however is that when CEOs were paid millions of dollars without stock options people complained because it was too much. When these people complained and said that CEOs should be paid based on how well the company does the CEOs started to make even more money and people complained even more. People seem to get upset with the amount of money other people make no matter how they are compensated.

Steven Kaplan at the University of Chicago has studied executive compensation and has some interesting data on executive compensation. Kaplan makes the important observation that when looking at CEO pay there are important things to look at. First, since such a large part of how much CEOs are paid is in stock options. Stock options are awarded to CEOs but they are not really worth anything until they are exercised. I really don’t believe people understand how executives are granted these options. Basically, executives who often have worked at the company are awarded them because they have performed well, created value, and often have been with the company more than a decade. All these are requirements just to get the stock options. On top of all this there is a time CEOs have to wait from the time the options are awarded to exercise them. Once employees are granted stock options they can’t sell them. A vesting period or waiting period is requires and this could be as little as 2 years or 10 years. Usually companies that are established have longer vesting periods since they want to reward long term behavior. So to complain and say that executives and CEOs are in it for the short term is nonsensical considering they have to wait long periods of time to cash out their stock options.

Kaplan’s research also shows that companies in the top ten percent of actual pay (not what the options were worth when granted but only after exercised) had stock returns that were 90% greater than companies within the same industry over the previous 5 years. However, companies in the bottom ten percentile in their industry saw their stock underperform 40% over the previous 5 years. So in essence what this means is that CEOs that don’t perform well will lose money since most of their compensation comes in the form of stock options. Turnover in these companies has also been increasing. In the 1970s, around 10% of Fortune 500 CEOs lost their jobs. In modern times, around 60% of Fortune 500 CEOs lose their jobs. One large reason CEOs are fired are because of poor performance. Another explanation for why CEOs are making lots of money is that the only way a company can make more profit is by expanding or adding more employees. CEOs will only add employees if they think value can be created. So as a firm grows in the number of employees CEOs are in charge of managing more resources. Research from Gabaix and Landier in 2008 showed that since the 1980s firms have increased in size by a factor of four to seven times which is the same increase in CEO pay. According to Kaplan’s data CEO pay from 2000-2007 was decreasing (I haven’t seen his data after 2007). CEOs these days are put under more scrutiny than ever before. After the 1992 rule by the SEC there was more shareholder activism and regulation regarding publicly traded companies. Sarbanes Oxley has also made CEOs basically sign their life away if there are any mistakes. It is interesting to see how many CEOs going into private equity and hedge funds as opposed the other way around.

CEOs are actually underpaid compared to people in private equity and hedge fund managers. In 2010, John Paulson earned $2.4 billion. In the same year Larry Ellison was paid $84.5 million. Or to put this in a perspective a union leader would understand a hedge fund manager is making 28 times the amount of a CEO! In fact the top twenty five hedge fund managers are paid more than the combined amount all of the CEOs in the S&P 500. Hedge fund and private equity firms don’t have to worry about the same kinds of regulation as public companies (maybe this is one of the reasons they make more).

So the case by be that CEOs are underpaid. CEOs work extraordinary hours, have to deal with burdensome regulations, have to take the blame if the company goes down the tubes. Shareholders can always vote CEOs out of their position. To think that CEOs just sit around and count their money and pick out wallpaper like I believe some people do is foolish. Firms have been expanding which explains some of why CEOs are now making more. Also the technological revolution of the 1980s and 1990s allowed CEOs to create more value. If people really believe CEOs are overpaid they should try to become a CEO so they can make oodles of money and drive down the price an average CEO can make.

TCU Admissions 2011 and Historical Acceptance Rate (1979-2010)

2011 seems to be a popular year for high school seniors to apply to Texas Christian University (TCU). This year 19,000 students have applied. In the fall of 2010 over 14,000 students applied to TCU a little over 7,000 were accepted (50% acceptance rate) and 25% of those who applied enrolled. Since this year 19,000 students have applied it will be interesting to see what the admissions office will do. The admissions office could accept more people but not beyond a certain amount since there are only so many dorms freshman can live on campus. I have a feeling 2011 may be one of the most selective years in TCU history. The acceptance rate has been declining since 1979. One big reason I think kids are applying to TCU is because of the football team winning the Rose Bowl and the TCU baseball team was also in the college world series last year. Although, this is nice I would rather have TCU known for its academics rather than its athletics.

Source for graph: TCU Fact Book

Linkedin, Zynga, Facebook and IPO Madness

So this year the number of companies offering an initial public offering (IPO). So far this year there have been 148 IPOs according to Renaissance Capital. This number is greater than the number of IPOs in 2008 and 2009. One thing is different about these IPOs is that they are earning money. However, the amount of money these companies are making is very little.

Linkedin which essentially is the Facebook for business people only earns an estimated $15 million. The company is now worth $9 billion. After the first day of trading Reid Hoffman became a billionaire. How is a company making so little worth so much? People believe that the company will increase profits over time. Also people might be buying the stock because they believe other people think it will be worth valuable.

Zynga is trying to get into the IPO this market this week and raise $1 billion. The company created the game social network game Farmville. The company in 2010 reported profit of $90.6 million on close to $600 million of revenue. Actually for a software company this is a very low profit margin. Considering the company doesn’t have large capital expenditures like plant, property, and equipment and just makes software you would expect them to be making 30-40 cents profit on every dollar of revenue.

I love how analysts or reports say things like “Only a small percentage of the market share has been tapped”. Market share is meaningless. A company could have 100% market share in an industry that is losing money. What investors care about is growing earnings and profits. Facebook is an example of this kind of thinking when they already have over 700 million users and people say they can keep growing by leaps and bounds. One thing I am beginning to notice is that some people are actually cancelling their Facebook account because they have things to do. What is really interesting is when people claim Facebook is worth $50-$100 billion despite the fact that no one really knows how much Facebook earns in profit. What is very confusing is how a company can be worth $50-$100 billion even though hardly anyone buys anything from Facebook. Companies like Kroger, Disney, and Best Buy are all worth less compared to Facebook yet have millions of people who fork over money to purchase something.

People forget about MySpace as this week it was sold to a group of investors (including Justin Timberlake) for $35 million even though it was bought for $580 million in 2005. I have a feeling what happened to MySpace may happen to companies like Linkedin, Facebook, Zynga, and all of these companies going public.

I see very few “established” companies going public. Recently, I saw Dunkin’ Donuts was going public and raising $400 million to do so. The company reported close to $27 million in 2010. The company has been previously owned by Bain Capital and the Carlyle Group. Companies like Bain and Carlyle buy companies like Dunkin’ Donuts and try to turn them around. The company has close to $2 billion in debt so perhaps they are trying to finance themselves by issuing shares.

For all of these companies time will tell though how well they do. Research shows that a large majority of IPOs do not do well. This is part of creative destruction as discussed by the economist Joseph Schumpeter. The only household name companies in a few years will be the ones that survive while the ones that failed will be forgotten. We have to remember companies have to survive in a profit and loss system (unless you have friends in Washington D.C).

Gene Sequencing and Value Creation

Lately, I have become interested in the genome and genetics. In an earlier blog post I talked about biotech and how I felt it was some sort of bubble. I still think it could be for the short term but a boon for the long term. In the 1990’s tech companies were short term bubble yet today we enjoy all the benefits created in that era even if companies went out of business. Biotech and genome companies I believe will go through the same thing. Companies in this industry are relatively young and the industry itself isn’t mature.

One important distinction I learned is that gene sequencing is a process that takes a vast amount of information on a individual’s DNA and can be stored but really isn’t meaningful. Since DNA is just a string of letters there really isn’t any value in the genome being sequenced. The true value comes from understanding mutations, variants, and commonalities with other people. The real value of an invention comes by its use. Companies like 23andMe scan genetics and these tests are only a few hundred dollars. However, 23andMe is only scanning .02% of the genome. Companies like Knome, Illumina, Complete Genomics, and others are trying to sequence the full genome. These companies are sequencing the whole genome. The whole genome has six billion letters. It will only be meaningful and valuable if we understand what letters are missing if you have cancer or some serious illness. Many people will have to get their genome sequenced in order to figure out patterns in the genome. Companies like Knome and Illumina provide analysis of the genome but the cost can still be thousands if not tens of thousands of dollars. Knome is offering whole genome sequencing with functional interpretation for around $5,000. Clearly, over time sequencing will only get cheaper and one day may be regularly going to the doctor. However, it will only become more valuable once people get it done and scientists look the genomes of millions of people in order to figure out if anything can be learned. I think of the internet or phone. The phone or internet would not be very valuable if let’s say you have one and no one else does because then you can’t communicate or talk to anyone. However, once other people get phones and computers the value rises exponentially.

Once scientists start studying genomes and figuring out what letters are associated with different diseases they could try different therapies and see which ones worked on people with similar traits. Drug companies could figure out how to target people with certain genes or traits. Once we get this knowledge we will be able to make better decisions and know even more about ourselves than ever before.

NBA = National Bankruptcy Association

So recently the NBA and NFL have had some issues with owners and players negotiating pay. This week the NBA missed its deadline and now is placed in a lockout. This is not the first time the NBA has suffered a lockout. As I write this could be the 4th NBA lockout. The last one took place in 1999 and lasted from July 1998 to January of 1999. The NBA Players Association (NBA union) wanted higher raises for players and minimum salary set for the NBA. Currently, in the NBA if you are a rookie the minimum you can get paid is $490,180. This is easily in the top 1% of all income brackets and it is only the minimum. After just 1 year of being in the NBA your salary is bumped up to $788,872. After 5 years the minimum you can make is $1,027,424. After 10 years and over the worst you can do is around $1.4 million. Clearly, even a below average player can make above average income in the NBA. On the other side of the equation there are also maximums for how much a player can make in the NBA. For the first year of NBA the maximum can make is $13 million. Even though the salary a player can make in their first year is between close to $500,000 and $13 million this amount is still fixed. What is also interesting is that athletes in general tend to sign contracts for many years. Even CEO’s are compensated on their performance for the year. In sports if you have one good year you can get paid well for many more years. Salary represents future benefits and not past benefits unless you are a tenured professor.

The NBA has some other problems as well. One major problem is revenue sharing. The NBA has $4 billion in revenue to share. Not only does the NBA have issues with sharing revenue but nearly all the teams are losing money. The NBA has 30 teams. 22 teams out of 30 are losing money. So in essence only 8 teams are earning money. It would be interesting if the same teams lose money in some years while making it in other years. One problem is the idea of revenue sharing. Revenue is not what you keep after costs or profit. Profit sharing would be a novel idea for the NBA. One way to decrease costs is to get rid of the collective bargaining power of the players association and allow every player to be a free agent. Some players may only be able to produce $200,000 to a team. Some players might be worth $30 million. This salary is still very good yet the player’s union tells owner “The only way we are showing up on the court is if we making close to half a million dollars”. If the NBA season is only 82 games a rookie makes $6,000 a night. After just one year the amount per game $9,600 per night. What is the point of having a union for the NBA when players get an agent?

If a lockout does occur players will no doubt have some cash flow issues. Athletes in particular do spend a considerable of money and are not savers by any means. A Sports Illustrated story by Pablo Torre shed light onto the spending habit of athletes. Within just five years of retiring around 60% of NBA players are broke. Five years is a short amount of time to be spending money that should a lifetime.

The NBA has issues no doubt. I have a feeling that the NBA season will be extended and a combination of players taking cuts in pay in order for teams to have an easier time to make payroll. Local municipalities also need to stop funding stadiums that are not even used for the full year. In the past 20 years taxpayers have provided more than $10 billion to fund new stadiums. I would rather see corporate sponsorships and having private donors or organizations donating to create a new stadium. Players should also go to contract on a year by year basis. A system like this would reward players who consistently do well and punish players who have one good year.

The NBA and the NFL could learn from a market based system. If 22 companies in the S&P 500 were constantly losing money they would be out of business. Not only that the companies in the S&P 500 would never dream of sharing revenue because they know they have to produce profits or value that is added.