Economics & Finance

Hedge Funds and Jim Gaffigan

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I was watching Jim Gaffigan (the comedian) on Conan O’Brien the other night and he was talking about the “innovation” of the upside-down ketchup bottle. He said that for years we basically were always holding it upside down and then after fifty years someone figured out, hey, let’s just have it come out the bottom in the first place. He said that future generations wouldn’t look on us favorably because it took us so long to grasp something so obvious…

A pretty funny joke but in fact this is sadly applicable to hedge funds, of all things. Let me explain the connection.

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Over the Air

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A few threads connected…

Recently I was at a dinner party with some friends. A young teenager from the East coast was at the dinner and I asked him the question “Do you know anyone who doesn’t have cable TV?” He thought for a few seconds and said “Yes, one friend has satellite.” He didn’t even think to consider that anyone would just get over-the-air TV.

A couple of months ago I helped my parents pick out a digital TV and surround sound system. My parents are “old school” and don’t even want to consider paying every month for television, so we just plugged in the over-the-air antenna to the one on his roof and we were in business with digital television. The picture quality is very high – over the air digital TV broadcasts in higher quality than over cable or satellite because it is uncompressed.

Today they announced that the Cubs playoff games were going to be broadcast on TBS only. If you don’t have cable or satellite, you won’t be able to watch the game. This situation is compounded by the fact that the games start at 9pm central time; if you are older it isn’t reasonable to expect that they’d go out to a bar or restaurant until midnight when the game is done. Of course, lots of them have cable, but probably the majority of the people that DON’T have cable would be older than average. I imagine that WGN TV, which has broadcast the Cubs for years, will be flooded with calls from irate viewers.

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Chicago Sales Tax Hike Proposed

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It is sad when two of my more depressing prophecy-type posts intersect…

Cook County is the vast county within which the city of Chicago resides, along with a large number of affluent suburbs. Cook County has a population of over 5 million and is the 2nd largest county in terms of population in the United States.

In this post from March of 2007 I discussed how a succession movement could be in the future of Cook County. Specifically, I noted how the huge expenses of maintaining hospitals was burdening the county and killing their ability to live within a balanced budget.

In this post from December 2006 I went through sales taxes, which are among the most regressive taxes in the arsenal of tax tools and the fact that Cook County and the City of Chicago have one of the highest and most unfavorable sales tax regimes in the country.

Now, in a single article in the Chicago Tribune titled “County Urged To Boost Sales Tax – City Total Would be 11% Under Plan” dated September 25, 2007 shows the likely intersection of these negative trends. Todd Stroger, the epitome of political nepotism, who campaigned on a plan to streamline the bloated Cook County work force, has done nothing of the sort and is now looking about for a revenue boost to cover the inevitable annual increases in expense growth.

The line from Mayor Daley says it all – “A sales tax is a hard pill, but how do we fund three hospitals?”

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What Is Not Seen

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A few months ago the Senate  Democrats here in the State of Wisconsin floated a plan to provide universal health care for all residents of the state.   The first question most will ask is “who is going to pay?”   The answer is that the plan ($15bb worth) will be funded through a payroll tax.

The plan is dead in the water as the Republicans who control our State Assembly are having nothing of it, but in the next election there is the distinct possibility that the Democrats will win back the Assembly, and will then control the Governor’s chair, the Senate and the Assembly.

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Risk and Return

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A recent article in Barron’s magazine was titled ‘Weathering the Storm in Style’ and it discussed what retirees could do if the market tanked in the years while they were living off their retirement savings. The article mentions people who planned to retire just prior to the 2002 market meltdown but whose portfolios went down significantly (25% – 40%) and they had to change their plans and keep working as a result.

Later the article mentions how many “good years” you need in the years following the meltdown in order to make up for the bad times. For example, if the market drops 25% in one year, you will need to gain 46.67% in the following year to recoup the gain plus make 10% more (i.e. if you have a base expectation that the market will make you 10% in a year, you don’t just need to recover the drop, you need to make up for the ‘lost year’.

I covered a similar conceptual issue in a post titled “Percentage Returns… and other Lies” about how the portfolio managers could have a series of good looking years after a debacle like 2002 and yet investors still hadn’t recovered their initial investment (let alone make 10% / year to boot). I used a bit of my own portfolio for color commentary in that post, to “humanize” it, like a good journalist should.

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