Billionaire hedge fund manager at 38 retires

Recently, John Arnold announced that he would close his hedge fund Centauras Energy and return money to investors. Arnold is pretty young being only 38 and has been an energy trader for 17 years. Apparently, the fund only made a 4% return for advisors which is not the typical double digits return that John Arnold would return. Last year he returned 9% and made $360 in the process. In 2006 Centauras Advisors earned 300% which was much better than in 2005 when they earned 150% (mostly due to the blow up of Amaranth Advisors).

Arnold got his start at the now defunct Enron. He went to Vanderbilt University where he earned an economics degree and even his professors weren’t surprised when they heard he was earning billions. When he worked at Enron Arnold was a natural gas trader and did very well. In 2011 alone he earned $750 million. Many people and politicians complain that traders create little to no value. However, this is not true. Traders don’t increase prices because they are responding to the fundamental market conditions. In order for a trade to be made there has to be both a buyer and seller. People get enraged when prices of oil increases however don’t even talk when the prices go down which is due to traders like John Arnold.

Arnold is setting off into the sunset quite early. He mainly wants to depend his time and resources with the Laura and John Arnold Foundation which has around $700 million. In 2011 alone John and his wife Laura donated $100 million to various different causes. Really John Arnold is saying is that he does believe he can’t earn the great returns he has been making. Usually financial planning professionals say that you can withdraw up to 4% of your income and still be able to retire. So essentially John Arnold could withdraw $120 million per year which is a substantial amount of money (this would vary depending on how much he gave to charity). Clearly, though there an opportunity cost for Arnold not running a hedge fund. He could be helping other people get rich but has decided that philanthropic pursuits are worth then what he can make in the future. I have a feeling that after a while John Arnold will want to get back in the investing game in some way in the future.

David Koch, Robert Kraft, and Marc Jacobs

I thought this story was pretty interesting. Apparently David Koch and Robert Kraft were at the Met Ball and someone overheard Koch and Kraft discussing Marc Jacob’s attire. The comment was made by Robert Kraft that “I don’t know about the white underpants” and then David Koch responded by saying “I agree, don’t you think he should’ve worn matching black boxers?” People that don’t even like David Koch should agree on this one.

I had no idea who Marc Jacobs was but apparently is a fashion icon within the industry. Although, looking at the photo I posted above I find it interesting that people spend so much money on a guy who doesn't seem to know how to dress himself. David Koch himself from what I have seen seems to dress classy and usually color coordinates with his wife Julia. It seems as if the billionaire is better dressed than the fashion designer. 

David Koch Donates $35 Million to Smithsonian's Natural History

The other day David Koch gave $35 million to the Smithsonian’s National Museum of Natural History in order to build a dinosaur hall. This is not Mr. Koch’s first donation to the museum. In 2006 he gave $20 million to create the David H. Koch Dinosaur Wing and then in 2009 he gave $15 million for the Hall or Human Origins (which now bears his name). No doubt that this money is for a good cause. As I mentioned in this post David Koch is an American hero not only for running a successful company but also for his very generous charitable giving. Nearly every article I have read in some way shape or form mentions how Koch has been a long time donor to the Republican Party. I would be willing to bet that his charitable donations have far surpassed his donations to any political party.

Koch credits his father for taking him and his twin brother Bill at any early age to visit the museum.  It is great that Koch is giving back. Although, you could argue he really doesn’t need to give back considering how many jobs he has created, how much food he has put on the table for Koch employees, and how many retirees are benefiting from working for a company that exploded in value under both David and Charles Koch.  As Walter E. Williams would say the only people that owe anything to society are criminals since they are really the only people who took from society. Koch has not only created wealth for himself and Koch employees but is now using that wealth to give back to charities whom will do far more good than the government. In fact, maybe someone should nominate David Koch for the Nobel Peace Prize by creating thousands of jobs, increasing the standard of living of many more, and giving back to charity. It is really sad when the media vilifies the Koch brothers considering how much they both have benefitted society. 

Hostess vs. Unions

As I mentioned in my previous post Hostess is now going through the bankruptcy process. Recently Hostess is in talks with the Teamsters Union. During the bankruptcy process companies have to create a plan and present it to creditors and get it approved by the courts in order to proceed. One part of the plan calls for Hostess to raise at least $400 million from current lenders and possibly new investors.

Around 83% of Hostess’s employees are unionized. In fact the company has close to 400 different union contracts. Hostess sounds more like a bureaucracy then a business. The company has 40 different pension plans when most companies only have one. Hostess pays about $100 million every year to their multiple pension plans. Speaking of the pensions Hostess has a pension fund that is underfunded by $2 billion. The company also owes pension creditors $950 million. This site has a create run-down of who all Hostess owes. I have seen stories of people complaining about how the executive salaries increased. However when I look at the largest costs I see “Union health and welfare/pension” at over $989 million. The second largest creditor is flour which is a mere $8.53 million. So clearly the labor costs are what have put Hostess in such bad shape and not executive compensation. People forget to that a CEO never sets their pay. Board of directors and the compensation committee of a company decide how much a CEO will earn and usually most executives are paid in the form of stock options not cash. Therefore, the executives total income is mostly tied to how well the company does. The executives at Hostess didn’t want the company to go bankrupt and really lost out of a lot of money since the company is now in bankruptcy

It is tragic that Hostess is now in the bankruptcy process. If there is one root cause of their bankruptcy it would have to be the high cost of labor unions. As I have mentioned before labor unions protect the unproductive. If I were Hostess I would do everything I could to bust up the unions. If that didn’t work I might consider firing everyone and then having a rehiring process with the condition that unions couldn’t be formed. Hostess lost $340 million in their last fiscal year. People have a desire for sugary snacks and goodies. According to data from the CDC around 36% of Americans are obese. Hostess has good products that people enjoy. If you don’t believe me just look at the skyrocketing rate in diabetes.

In 1980 around 153 million people had diabetes. By 2010 that same figure increased 56% to 347 million people. Hostess may get bought out by a private equity company who can attempt to turn around the company. Although, I think these private equity companies would become hesitant with the existing union problems.

Apple Sidestepping Taxes and Pursuing Excellence in Tax Avoidance

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 In this story from the New York Times it is reported (or really whined about) how little Apple pays in taxes. The story starts off by talking about how Apple put an office in Reno to side step paying higher California taxes. Technology companies in general can move their headquarters to different states or around the world more easily than manufacturing companies due to the fact that making software, applications, or intellectual property doesn't require billions of dollars of capital investment in property, plant, and equipment.

Apple paid $3.3 billion and had a profit of a little more than $34 billion which makes their effective tax rate less than 10%. One technique that Apple uses to reduce their taxes is what is known as the double Irish arrangement. This is part of a tax avoidance by placing intellectual property outside the United States and without paying U.S. taxes. The money from the intellectual property is licensed from an outside company from Apple that is located in Ireland, and licenses the rights to a second company also owned by Apple that is also located in Ireland. The second company gets income and taxed at a low rate and avoids being taxed at high U.S. rates. It important to know that tax avoidance is perfectly legal and different from tax evasion which is where someone purposely goes out of their way not to report income, defraud the IRS, or essentially never intending to pay their taxes. Apple should be commended on such accounting excellence. Also Apple is not the only company that takes advantage of this. Eli Lilly, Google, Microsoft, and even Pfizer use the same strategy to lower their taxes. I would also point out that hiring the people to find these strategies is not cheap. Tax ninjas are not only expensive, but are not easy to come by. The true cost is adding in what it cost in time and money for the services of the tax ninjas.

I love how the New York Times tries to vilify Apple for not only pay their taxes but to suggest that companies like Apple are the reason why states of California are now facing a financial crisis. California is in crisis because of generous benefits to state employees, overspending, and high tax rates which lead not only companies but people out of the state. If California simply lived within their means and lowered state rates you would see people starting to move back.

The tax system is not only complicated at the personal level but also at the corporate level. GE filed a 57,000 page tax return. This seems ridiculous. How many hours and money was spent simply on the return? The tax code needs to be revamped at both the personal and corporate level. My suggestion would be to have a progressive tax rate at the personal level without any deductions. At the corporate level I would propose a flat 15% level. You might say “This will deprive the government of revenue!” The problem is government spends whatever it can get its hands on. I would argue that lower corporate rates would bring business back into the United States which would increase revenue which actually would be a problem since Congress would spend it. At the same time I would propose a balanced budget act. My balance budget act would be a little different. If Congress was not able to balance the budget everyone in Congress would be fired. This would make for interesting politics and ensure some accountability.  Until any of this happens companies will use all possible deductions, credits, schemes, and sandwiches to keep more of their money. 

FDA: Stifling New Cures

In this report by Avik Roy of the Manhattan Institute finds that the cost of Phase II trials is increasing the costs of drugs. Roy finds that 90% costs related to the development of a drug occur in Phase III. Roy response is to allow drugs that have passed Phase I and Phase II trials to be marketed to patients. This is something similar to what I have purposed, however I would be okay with letting drugs on the market once they have been approved from a safety standpoint. Since everyone has different body chemistry, cells, and since no two people are alike it is unwise for the FDA to make a blanket statement when they disallow certain drugs that could clearly benefit certain individuals.

The costs of drugs according to the Tufts Center for the Study of Drug Development have increased from $100 million in 1975 to $1.3 billion (in 2000 dollars). The cost even after adjusting for inflation has dramatically increased. One reason the costs have increased is because the trials have required more patients, more resources, longer trial periods, and more medical tests to be performed. In 1999 the average length of a clinical trial was 460 days. By 2005, the average increased to 780 days (or just over 2 years).

The author’s suggestion of allowing limited marketing before Phase III is a step in the right direction. I would also want to not require prescriptions for drugs. What is really interesting is why people need to waste their time to make an appointment just so a doctor could renew a prescription (think of how wasteful it is for someone to make an appointment with a dermatologist just to get face wash). If a prescription weren’t required people would still go to the doctor for medical advice. Also moving drugs from behind the counter to over the counter would dramatically drop prices since places like CVS, Walgreen's, and Wal-Mart would all have to compete with each other. The most important point however is that people along with their doctors could experiment with different drugs to see if they helped. This would allow for more information to be spread to the masses which in the long run would benefit everyone. Some people might get hurt in the short term but in this world we do face tradeoffs.

It seems puzzling that year after year the FDA increases regulation when we have more data about who we are and how we operate. Medical data has exploded in the past few decades leading doctors and patients to know more about certain conditions. In some cases now patients know more than some doctors especially if they have a certain illness. Doctors sometimes will look up symptoms during a patient’s visit to pinpoint exactly what they might have. Also with genome sequencing doctor's can look at a patient’s DNA and have a better understanding of what illnesses or diseases they may get face in the future. With all this information you would think the FDA would be regulating less. Knowledge is power and there is no question the FDA is doing more harm than good. 

Natural Orifice Surgery: Surgery of the Future?

                Something interesting I have learned about in the past week weeks I natural orifice surgery. I saw an article about a woman who had her appendix removed through her vagina. This reminded me of surgeries they use to do in ancient times. The way natural orifice surgery works is the surgeon operates on the body through natural openings such as the mouth, vagina, rectum, and urethra. By doing this the surgeon doesn’t have to cut the skin which can lead to infections and complications. Only around 1,000 patients in Europe, Britain, and America have undergone this surgery. Hopefully more people will undergo this surgery in order to see if it has benefits over traditional surgery.

                Surgeons have already used natural orifice surgery to remove prostates, kidneys, appendices, gallbladders; it can even be used to perform weight loss surgery.  Surgeon Kurt Robert of Yale University performed the first appendectomy (appendix removal) in 2008. The surgery was less than an hour and half and the woman had no visible scars. Dr. Mitchell Humphreys of the Mayo Clinic removed the prostate of one man in 2010 and so far has had no signs of complications. Dr. Vikram Reddy a assistant professor of surgery at Yale University is experimenting with natural orifice surgery for patients with Crohn's disease (gastrointestinal). One other advantage to the surgery is that there is less of a chance of the patient of hernias. There however are risks associated with this procedure like any procedure. Since there is an internal incision usually made it can cause internal leaking from the incision made on the inside of the body.

                There is no doubt natural orifice surgery is in its early stages. Hundreds if not thousands of surgeries will have to be performed in order to determine if this new type of surgery offers any benefits.  What is fascinating is how surgeons use to have to make large and long cuts to perform surgery. Then in the 1980’s and early 1990’s surgeons started doing laparoscopic surgeries. Then in the early 2000’s robotic surgery was introduced. Perhaps natural orifice surgery will take off in the next ten years. Only time will tell.

Walter E. Williams on the Decline of Morality in Society

Vintage Williams from '94...

Estate and Gift Tax 1917-2009 (Percent of Total Revenue)

First Free-Market Hospital: The Surgery Center of Oklahoma

Perhaps the only free market hospital is in Oklahoma City, Oklahoma. The Surgery Center of Oklahoma performs all different types of surgeries ranging from ear, nose, throat, general surgery, urology, ophthalmology, and various orthopedic surgeries. What is different about The Surgery Center is Oklahoma is that they don’t go through insurance companies. Let me repeat this no insurance is involved in these procedures. What is even more interesting is that the prices for all surgeries are included on the website.  By doing this the surgery center is able to not have to deal with the bureaucracy of insurance companies and able to actually charge less because of the bureaucracy. The surgery center also has an infection rate of only .3% in 2006, .04% by 2008, and in 2010 only .001% which is a fraction of the national average of 2.6% per year.

I am always curious why finding outcomes of hospitals is so hard to find. For anyone with insurance they really don’t care what the cost of a procedure is because usually there is a price ceiling on what they pay in any given year. This would be the same thing as going to the grocery store with no prices loading up on whatever you desired an then paying a fixed amount every time you visited the store (think co-pay). In this scenario, there is no incentive to care about what the cost of anything is or its benefits. Health care works the same way. We need a single-payer system of people paying out of their own pockets. A common complaint to this might be that “People can’t pay out of their own pockets because prices are too high!” People fail to realize the reason why prices are high. If the American Medical Association got rid of their cartel and let more people practice medicine, the FDA allowed patients to take drugs after they passed Phase I of clinical trials, and if prescription drugs available without prescriptions the price of health care would drop faster than you could say abracadabra. All of the things I mentioned artificially increase the price of medicine. Also getting rid of the employer deduction for health insurance and allowing individuals to decide would help. Another thing that would help is allowing people to buy health insurance in different states. Why it is illegal to buy health insurance in different state is beyond me.

The United States needs more hospitals like The Surgery Center of Oklahoma. When people have to pay with their own money they pay much closer to attention to the costs and benefits. Setting up a hospital is no easy feat due to the massive amount of regulations required to start one. I would prefer to lower to barriers to entry and allow anyone open a hospital. We want hospitals popping up like McDonalds and Wal-Marts. It would be positive to have more for profit hospitals. People might say “Well for profit hospitals have no incentive to make people better”. Organizations and businesses have reputations. If a hospital was known to make people worse no one would go there putting the hospital out of business. More for-profit hospitals would cure our quasi private/public health system.