Tuesday, February 28, 2012

Why doesn't arbitrage bring these prices together?

Historically, West Texas Intermediate trades at about a $2 premium relative to North Sea Brent Crude due to lower sulfur content and higher API. However, BRENT has gradually climbed above the price of WTI due to the political unrest in the Middle East (particularly in Libya) which has decreased supply of "sweet" low sulfur oil to Europe.

Which raises the immediate question, why don't producers ship oil from Texas to Europe and the East Coast Refineries that use Brent? Presumably because there aren't enough pipelines.

This highlights a theme that the Republicans are using to criticize President Obama: that the general aversion to oil and gas (represented by the President's opposition to the Keystone pipeline) has pushed up the price of oil by making the markets less competitive. In this context, less competitive means that supply from Texas is having a difficult time reaching the East Coast.

Friday, February 24, 2012

Survival of the adaptable

In the past we have blogged about the organizational structure that contributed to the rise of the US whaling industry:

...whale captains were innovators in employee compensation. In the lay system, "every member of the ship's company from captain to cabin boy signed on, not for a wage or piece rate, but for a predetermined percentage of the value of the product returned," Lance E. Davis, Robert E. Gallman, Karin Gleiter write. Savvy captains of the whaling barques, not unlike some creative corporate boards today, were keen to aligning company interests.

The fall of the whaling industry also has lessons for us:

Between the 1860s and the 1880s the wages of average US workers grew by a third, making us three times more expensive than your typical Norwegian seaman. Whales aren't national resources. They're supranational resources. They belong to whomever can hunt them most efficiently. With all the benefits of modern whaling technology and workers at a third the price, Norway and other countries snagged a greater share of the world's whales.

The moral of the story is decidedly Darwinian: its not the strongest who survive, but rather the most adaptable.

HT: Instapundit.com

Anticipate adverse selection,

...lest you be victimized by it.

Apparently the administration forgot about adverse selection when they rolled out their new "Pre-Existing Condition Insurance Plan" designed to provide health insurance to those who had been declined by private carriers. Since last summer, nearly 50,000 Americans have enrolled in the program.

Predictably--at least for anyone who has read Chapter 19--the plan is costing us a lot more than we were told, $28,994 in in 2012, more than double the $13,026 that government-contracted actuaries predicted in November 2010.

“Once you’re enrolled you can begin chemotherapy the first day of your coverage,” said Richard Popper, deputy director of insurance programs at CCIIO. “We had individuals who enrolled and in their very first week went into surgery.”

Can we get our money back from the contractors?

HT: Matt D.

Wednesday, February 22, 2012

Going undercover to monitor employee behavior

In this episode of Undercover CEOCheckers CEO Rick Silva breaks character as a fry cook to confront an abusive manager.

The bigger issue is how companies get employees to work in the best interests of the organization.  When output metrics are not enough (you care not only that the work gets done, but also about how the work is done), it may be necessary to monitor input (employee behavior).

In this case the CEO sent the employee back for "re-training" which somehow reminds me of "re-education."

In any case, bravo to Checkers for addressing what many call the only issue in management:  how to align the incentives of employees with the goals of an organization.  When you lack good performance metrics, it may be necessary to create some new ones, like undercover monitoring.

Tuesday, February 21, 2012

Walter Schloss (value investor) RIP

Walter Schloss has died.   From 1955 to 2002, his investments returned 16 percent annually compared with 10 percent for the Standard & Poor’s 500 Index. This kind of streak is very unlikely in an efficient market.

Value investors make money by buying a stock when it is below its intrinsic value. The hard part, of course, is measuring value. Schloss measured value by looking at the balance sheet.
Can they buy the company for less than the value of the assets, net of all debt? If so, the stock is a candidate for purchase.”

A competing value measure is Schiller's P/E ratio.

Solar and wind: running out of other people's money

Mark Perry at Carpe Diem reports that the Dutch have given up subsidizing windfarms just as the German's have given up subsidizing solar power.
To paraphrase Paul Gigot of the Wall Street Journal, "Solar (wind) energy is produced by mixing sunshine (wind) with our tax dollars." And the Germans, like the Dutch, are finding out that you eventually run out of other people's money (tax dollars) to fund alternative energy sources that are not justified by science or economics. As Margaret Thatcher taught us, that's always the problem with socialism - running out of other people's money...

This combines two of my favorite themes:
  1. subsidies destroy wealth;
  2. it is always easier to spend other peoples' money

Monday, February 20, 2012

Don't define the problem as the lack of your solution, ...

... otherwise you lock yourself into an answer, regardless of whether it is right or wrong.

To its credit, the Economic Report of the President has an entire chapter on "RESTORING FISCAL RESPONSIBILITY," and even pays lip service to the root causes of the problem, (i) our big medical safety net and (ii) our rapidly aging population.  However, its characterization of the "primary" concern as
"the failure of tax revenue to match Federal spending" 

tells you which solution the president prefers.   From the Table of Contents:
  • Falling Effective Tax Rates on Upper-Income Taxpayers
  • Heterogeneity in Effective Tax Rates among High-Income Taxpayers
  • Addressing the Role Of Exclusions and Deductions in Effective Tax Burdens

Friday, February 17, 2012

Are stocks over-valued?

Yes, according to Shiller's methodology, courtesy of Jon Shayne.  

Subsidies destroy wealth

...by moving assets from higher- to lower-valued uses: .

...General Electric’s Shepherd Flat project in northern Oregon is worst in blowing lots of taxpayer resources. Not only did the Energy Department give GE and their partners a $1.6 billion loan guarantee, but as soon as the turbines start running, the Treasury Department will ante up an additional $490 million cash grant.

According to plan, an important intent of this charity is to create 35 permanent new “green energy jobs”. Focusing upon just the $490 million cash grant alone, some skeptics may question whether the taxpayer cost of $16.3 million for each of those jobs might be just a little bit steep.

Our government makes it hard to distinguish reality from satire.

...while the sponsor’s contribution amounted to only about 11 percent of the total cost, they would receive an “estimated return on equity of 30 percent.” It also explained that the carbon dioxide reductions associated with the project “…would have to be valued at $130 per ton for CO2 for the climate benefits to equal the subsidies…more than six times the primary estimate used by the government in evaluating rules.”

Thursday, February 16, 2012

Interest rates cannot go any lower

Peter Fisher, managing director of Blackrock's fixed income fund, spoke at Vanderbilt yesterday. He said that we cannot rely on lower interest rates to boost the economy because they are as low as they can go.

Peter wanted the President's budget to give re-assurance to investors by reducing our long run liabilities (spending). I suspect that he was disappointed.

Stossel strikes again

This time, to ridicule the notion that the President's budget "cuts" anything:

“What if I came to you and said, ‘I’ve been on a diet for the last month, and I’ve gained 10 pounds. Isn't that great?’ You would say: ‘Wait, what are you talking about? That’s insane.’ And I said: ‘I was going to gain 15 pounds. I’ve only gained 10 pounds, therefore my diet is successful.’"

Here is what the Post calls "draconian cuts": instead of increasing spending by $9.48 trillion, they’d increase it by “just” $7.3 trillion.

We have to get used to a lower standard of living. Or else...

Monday, February 13, 2012

Three myths about capitalism

1. Capitalism is pro-business
2. Capitalism is unfair
3. Capitalism caused the financial crisis

Why you shouldn't give your girlfriend cash on Valentine's Day

Cash is a weak signal because anyone with money can mimic it. Consequently, it doesn't allow you to differentiate yourself from a stereotypical, beer-guzzling, insensitive neanderthal.

HT: Carpe Diem

Thursday, February 9, 2012

Online Dating You Can Trust (more)

I have been "off the market" for close to three decades, but I am told that people are not completely honest when they describe themselves to prospective dates. (I'm shocked, shocked to find out that moral hazard is a problem in hookups.) This misrepresentation is often an even a bigger problem in online dating sites. If only there was a way to keep online daters more honest.

Sites like eHarmony.com try to solve the problem by being an honest broker in the vetting of information. The site Badoo.com tries to accomplish the same thing by crowd-sourcing the information. That is, you link your dating profile to your social media information (i.e., Facebook). Your Facebook friends can see how you represent yourself to prospective partners as can prospective partners see your Facebook information.

Friday, February 3, 2012

Do Dealers Work for the House or the Guests?

Wynn Casino-Hotels has a controversial tip sharing policy. Card dealers must share their tips with their supervisors. At least one court has found that the practice is unfair. The more interesting aspect of this practice is that it would tend to blunt the incentive of dealers to generate income from tips. Why would management not want employees to have strong incentives to serve guests?

Perhaps it is because they are serving guests at the expense of the house. Normally gamblers who do well at the tables will tip their dealer after a particularly successful hand. Not all gamblers are equally proficient at gambling and will occasionally start to make mistakes in betting, taking cards when they shouldn't, etc. Dealers are proficient and can send subtle signals to gamblers to steer them away from these errors. The gambler is grateful and will often reward the dealer. But for this hand-by-hand intercession, the house's take would have been greater. So, the dealers have incentives to side with the gambler against the house. Tip sharing blunts this incentive. Perhaps, Wynn can only attract dealers of lesser abilities, but since these dealers are more likely to work for the house, they may generate more profits.

Hat tip: Roger Meiners

Thursday, February 2, 2012

How many economists does it take to get people to switch from oil to gas?

ANSWER: None, the market will do it.

For the fiscal year that ended in September, the gas utility UGI completed more than 7,300 residential and 1,600 commercial fuel oil-to-gas conversions, a company record. Yet, the record pace accelerated by another 57 percent in October, November and December, the first quarter of UGI’s 2012 fiscal year.

Prices, not government regulations or mandates are driving the change. Is anyone listening in Washington? How much more evidence do you want that prices deliver change?

If you really think that global warming is a problem and want to find a way to reduce carbon, tax the hell out of it, and then get out of the way.

HT: Carpe Diem