Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Securities Analysis and the Housing Bubble

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In the general field of securities analysis (predicting stock prices) there are two basic schools of thought, fundamental analysis and technical analysis. Fundamental analysis can be summarized as saying that stocks are worth a price based on their financial statements and that investors can profit by deeply understanding the details of said information. Benjamin Graham with his book “Securities Analysis” is an example of a fundamental approach to stock valuation.

On the other hand, a different school of thought belongs to the technical analysis camp, which states that stock prices have patterns and can be bought or sold for profit based on these patterns. Technical analysts frequently chart stocks and are responsible for the myriad types of charts available at any financial web site (such as Yahoo!) including “Bollinger Bands” and the like.

Without going into the relative validity of both theories (an endless topic in and of itself) I will glibly summarize the two models as “buy it because your detailed financial analysis says it will go up in value” vs. “buy it because it has been going up and other items similar to it are going up in price”.

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Nuclear Power and The Chicago Tribune

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On the editorial page of the Chicago Tribune they recently wrote an article titled “Restored Faith In Nuclear Power”. This article summarizes the recent earthquake in Japan and the fact that it occurred right under a nuclear plant. Even though the plant wasn’t rated to support an earthquake, it withstood a 6.8 magnitude earthquake with only minor damage and no radiation leakage.

Next, the article talks about the fact that there is some nuclear construction occurring in the US. They cite the Tennessee Valley Authority (TVA) and the fact that they restarted the Browns Ferry Nuclear Plant in mid-May 2007 after a $1.8 billion effort, which took 5 years. Other nuclear plants on the drawing board are supposedly reducing the licensing frame to four years and construction to three years, meaning that nuclear plants could come online in seven years.

The article also mentions that the UN report on global warming mentioned that nuclear power had to be part of the mix alongside wind and renewable resources to reduce global warming. Thus, they conclude, the US can have faith in nuclear power, and left the feeling that in fact more nuclear power is on the way.

While I personally believe that nuclear power IS an essential part of our energy portfolio and that encouraging nuclear power is good for the country and our balance of trade, I think that this editorial is way too optimistic and there in fact is little hope of a nuclear power revival in the US.

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Muni Bonds and Garbled Journalism

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One of the best financial periodicals available is the Wall Street Journal and I read it daily. I find their standards, overall, to be quite high. Occasionally, however, they write a garbled piece which brings me back to my opinion that “generalist” journalists should go the way of the Dodo. The article in question is titled “Exodus from Muni Bonds Could Yield Opportunities” from Saturday, August 25th.

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Ten Percent of the Home Owners… Now and Potential… Gone

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I used to have a few co-workers who lived in Boston in the 80’s. In the 80’s Boston had a massive real estate boom that ended in a bust. Two stories stood out in my mind:

1) when the first guy sold his condo, he had to bring actual cash to the closing because the sales price wasn’t enough to cover the mortgage debt
2) the second story was more complex. A woman’s parents lived in a small house in an affluent area near Boston. The couple was up to date on their mortgage payments. However, the value of the house plummeted to a point where the mortgage was significantly higher than the value of the underlying house. As such, the bank had the right to “call” in the mortgage even though her parents were current on their payments. Since they didn’t have enough money to refinance, they lost their home

Now the real estate boom is collapsing, but not due to plummeting housing values (like the Boston crisis, above) but due to a liquidity crisis. Existing buyers who put little or no equity into their homes are going to find that they can’t refinance – per this article (which is consistent with what I have seen elsewhere) deals aren’t getting done unless the buyer has a solid credit score and is willing to put down 10% of the value in a down payment. New buyers also face this 10% down hurdle which will effectively shut them out of the market for more expensive homes.

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Death of a Brand

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I remember in the late 80’s when Montgomery Wards was having financial problems. They embarked on an advertising campaign called “Brand Central” where the front entrance of the store featured the names of all the brands inside, prominently displayed. My first thought was, wow, Montgomery Wards must have NEGATIVE brand equity. They felt that their name was driving away customers, and instead they put up the names of their products. Montgomery Wards went bankrupt, as everyone knows, and now their former HQ in River North is a chic high rise called the “Montgomery” and hipsters hang out in the remodeled former catalog facility nearby, which has high end restaurants and a health club.

This sign, broadly defined, signifies the same damaged brand name – in this case, AT&T. Comcast is using AT&T as a synonym for poor service and high prices – assuming that leaving AT&T would be a “plus” for their customers. I won’t comment here on the irony of Comcast as the pot calling the kettle black…

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