In his report, Ackman, of Pershing Square Capital, will contend that both bond insurers have said their mark-to-market losses are less than $1.5 billion, but according to his analysis, the losses for each firm will be around $12 billion.

I love that this is possible.

• [Ominous Subtitle:] “What Should the Federal Government Do to Avoid a Recession?”
• [Economic Fear-mongering:] The discussion of economic stimulus is no longer an academic exercise. In fact, real economic stimulus measures, enacted quickly, could be the last thing between us and a deep or protracted recession.”
• [Endorsement from Non-Endorsement:]On Monday I called Chairman Bernanke personally to get his thoughts on the economy. And he said that fiscal stimulus is certainly needed and he would be generally supportive of the Congress and the President enacting such a stimulus. He said that while he wasn’t going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it enters the economy quickly, it could have a very positive effect on the economy.
• [Obligatory In-Hindsight Partisan Jab:] Because of presidential inaction to mitigate the effect of the subprime mortgage meltdown, the economy is now on the edge of recession.
• [Government > Free Markets:] An effective stimulus package, which includes both expenditures and tax cuts in combination with monetary policy, is the best way to avert a recession.
• [The Most Opaque Way to Say Deficit Spending:] On the question of pay-go – […] paying for stimulus now would take away from the economic boost we are seeking to create. The stimulus, by definition, must have a net of spending over income.
• [”Non-Partisan” Now Equals “Authoritatively Correct”:] Fortunately, because of the important work of economists across the ideological spectrum and most recently yesterday by the non-partisan Congressional Budget Office, we know what works and what doesn’t when it comes to economic stimulus.
• [I Simply Don’t Believe This Is True:] We know that extending unemployment insurance is one of the most effective stimulus proposals because we’ve deployed it successfully in the past and it gets a lot of “bang for the buck.”
• [Drawing the Line in the Sand:] Renewing the Bush tax cuts, which don’t expire until the end of 2010, should be off the table, because they will thwart any chance of passing a stimulus package.

And a somewhat more rationed take (though the first quote sounds like a joke) from the JEC testimony of Bill Beach, director of the conservative Heritage Founadation’s Center for Data Analysis:

• [If That’s What Congress Does “Best”… :] Congress should take this moment of slow growth to do what it does best: set broad economic policy.
• [I Thought Everyone Agreed About a Congressional Stimulus:] I am convinced the Congress is not the best policy making body for addressing the short run challenges of the economy. That role is better played by the Federal Reserve System.
• [Stepping Across Schumer’s Line in the Sand:] The decision makers in business and investment are watching Washington closely to discern the direction Congress will take in responding to this crisis. If that direction includes tax increases, then investors will find more favorable economies to support and business owners will, as much as they can, locate their expanded activities in places with more favorable tax regimes. […] For my part, I urge the Congress to make permanent the key provisions of the 2001 and 2003 tax law changes.

I’m guessing this will all work out to a compromised stimulus package that both extends Bush tax cuts and provides temporary subsidies for unemployment-extension/home-heating/food-stamps/state-aid. That would be a firm step in the opposite directions of both smaller and bigger government.  Perfect.  Good thing everyone likes to buy American Debt and US Dollars…

All this reminds me of the old adage about taxes: “Defer, Deny, Delay.” (ordering?)  The same goes for recessions, too.

The annual limitation on purchases of United States Savings Bonds will be set at $5,000 per Social Security Number, effective January 1, 2008.

The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.

[There’s more about this here.  The process of limiting the purchases is especially onerous and comical: to reach the max you will have to buy both online and in person, in some cases buying at face value, others at half, though the limitation is the same.  This is admittedly the same as the previous policy to meet the max … but still: WTF?]

So I feel like I’m going all conspiracy-theory … but this announcement comes right when investors are fleeing anything affected by subprime (which is everything) causing a big credit crunch and hurting lots of stocks; only federal debt seems to be trusted.  While even slightly-advanced investors can still easily buy-up other forms of federal debt above the new $20,000 Savings Bonds limit, Savings Bonds are the most accessible instrument for novice investors. If When we hit a recession and the populace jumps out of the stock market, I would assume US Savings Bonds will be one of the first places to go?  Well, now the Treasury only lets you move $20,000 (and only $10,000 from the comfort of you computer), perhaps in an effort to prop up the stock market by limiting your alternatives?

A question/answer to help to dismiss/bolster my conspiracy theory:

Q. How much is annually purchased in US Savings Bonds?  Is there a big %-change during market drops?

A. Here’s the US Savings Bonds purchasing data for the last ten years, with the %-change over the previous year next to it.  (courtesy of the SF Gate’s recent article and some quick excel).  Take a look:

2007 $3.4 Billion (-60%)
2006 8.3B (+31%)
2005 6.3B (-20%)
2004 7.9B (-33%)
2003 11.8B (+20%)
2002 9.8B (+48%)
2001 6.6B (+26%)
2000 5.2B (+10%)
1999 4.7B (-2%)
1998 4.8B

The brief tech-bubble recession caused a pretty big market drop … “Nasdaq peaked at $6.7 trillion in March 2000 then plummeted to $1.6 trillion by October 2002.” (Source) … and 2002 saw the largest positive %-change in Savings Bonds purchases.  Coincidence?  Maybe.  One might also attribute the drop in Savings Bonds purchases since 2003 to the good returns in the recovering stock market?  (I don’t know what the deal with the 2007 number is … a really frothy economy? Or (more probably) just a partial number for the not-yet-done 2007?)

So while the flight-to-Savings-Bonds during a market fall may hold some water … my conspiracy theory about the new limits being put inplace to help keep the stock market up doesn’t seem right when you consider that the total issuance of US Savings Bonds is only in the single-digit billions.  The new US Savings Bonds limits really won’t make much difference in keeping money in the stock market.

And on an even more pragmatic note, I must say that it’s really not that hard to buy Treasury Bills/Notes/Bonds whose purchasing limits are much more generous $5M (per security type).  The Treasury Direct website - the same one you would use to buy Savings Bonds - has a ‘non-competitive’ auction bid process (it’s not ‘competitive’ because you agree to buy at whatever rate the auction determines rather than being able to set a stop/limit) that is right there for anyone interested.  So even with the Savings Bonds limits, there’s still lots of ways to buy lots of federal debt.

Update: I changed ‘recession’ to ‘market fall’ throughout the original post … although they’re correlated, I should’ve been clearer in my word choice.

Bad news about bond insurers in recent days sent mutual-fund managers racing into the market - scooping up insured municipal bonds at a steal.

Just as predicted, more bond insurers are getting caught in the ’subprime’ mess and the prices of the munis they backed are dropping.   However, since munis rarely default, the lack of background insurance is battering their prices more than is likely justified.

I was excited - but ultimately disappointed - with the last section of the article entitled “Insurance Even Needed?” The WSJ could’ve made the case much more strongly that the insurance is redundant/unnecessary … but of course this is an article, not an editorial.

I’m still not jumping into the market until I feel bottom … and we’re not there yet.  None of the returns -at least for Massachusetts municipal bonds - look very appealing right now.  Of course some states are better;  maybe I should move to Maine or Wyoming or some other less affluent place without a well-off middle-upper class chasing tax-exempt interest on the same local bonds?  [That’s for another post…]

and fwiw: that my investment acumen was this accurate probably scares me more than it does you.

1. Boeing - $12 Billion
2. Northrup Grumman - $8.3 Billion
3. Lockheed Martin - $7.9 Billion
…
16. Cal-Tech - $1.2 Billion
22. University of California System - $845 Million
52. Stanford University - $359 Million

If you said the list is from the Top 100 Contracters for the Federal Government in 2007, you’d be right. 

Why are Cal-Tech, the UCs, and my alma mater Stanford on the list?  Cal-Tech’s funding comes from NASA while the UCs and Stanford are funded largely by the Department of Energy. 

What’s it going to?  UC gets $235 Million to run Lawrence Livermore National Laboratory (byline: “Science and National Interest”) and $197 Million to run Lawrence Berkeley National Laboratory.  Stanford gets $359 Million to run Stanford Linear Accelerator Center.

You can find out all of the above and much, much more from usaspending.gov.  Highly recommended.

Consider this: If you divide the $146 Billion of total Federal contracts budget by 300 Million Americans, it works out to costing ~$486 dollars per person.  Boeing’s $12 Billion in contracts is 8% of the total, so everyone in America - all 300 Million - effectively paid Boeing about $39 this year.  By comparison, every American only gave Stanford about $1.26 each.

Whether you think Boeing got too much, Stanford got too little, or none of the above, you’ll hopefully think something when you explore the site.

Extra Bonus Fun:
 - Each contractor has a nice little pie-chart that shows how the % of their contracts that were ‘competitive’, with multiple bids, etc.
 - I have only looked at the $146 Billion in contracts.  There’s another section called ‘Assistance’ (Grants) that is twice as big, at $290 Billion.

p.s. thanks to Brad for the link

…a source who-shall-go-un-named shared with me that Facebook has just quietly launched a “single sign on” initiative designed to put them in position of de facto cross-site identity monopolist.

I’ve been saying for awhile that MySpace could get-back to relevancy if they became an OpenID provider.  Not much of a surprise that Facebook would be working on the same thing (they’re smart) … and not much of a surprise that they would take a proprietary approach (worked pretty well so far) …

The only prediction I want to make is that the name for their single-sign-on service will notbe something the tech community currently uses (’single-sign-on’ and anything with ‘identity’ are out).  Facebook changed ’social network’ to ’social graph,’ ‘blogs’ to ‘Notes’, a ‘website’ to ‘Pages’ … maybe they’ll just call it ‘Sign On’?  Or just ‘Login’?  Place your bets.

And on the you-own-your-identity-data-side, there’s also lots of action …

• Helvetica is everywhere.
• Fonts are more than a mere messenger. Sure, nothing new there.  That Helvetica can carry so many different meanings from so many companies/governments/artists is impressive.
• This guy summed up the differing views of Helvetica in one quote better than I can: “The clean, cool look of modernism or the sleek, sinister accomplice of hegemonic globalization?”
• Using Helvetica to fast-track your company’s brand association with modernism seems like a good call at first … but if you tie your core logo to Helvetica completely, your brand is effectively at the whim of (admittedly slow-changing) fickle stereotypes.  Example: What happens to American Apparel when Helvetica loses the association that they originally latched onto?  Erik Spiekermann makes the case that the Marlboro brand owns the distinctive font they use … and it seems like company brands using Helvetica are more-or-less owned by the font.
  Update: I just noticed that American Apparel’s new product uses a distinctive font. A handful of their recent ads use it … maybe they’re changing?
• The post-modern (Helvetica is modernism) font movement towards David-Carson-eqsue/difficult-to-read/handwritten/hand-drawn/expressive/loaded fonts has generally seemed not-very-useful to me … but Stefan Sagmeister said something that made the movement make a little more sense: (paraphrasing in my own words) ’Sometimes having a font that is hard to read - that takes some time to read - can convey the same about the underlying content.  For example, an album thats takes a few listens … or art that needs to be studied to comprehand … using a difficult-to-read font lets the reader know that they will need to invest time to understand the content, too.’  I’m not saying I’ll find a place to use illegible fonts, but I can see some of the reasoning.

As a final thought: Helvetica made me curious about typography for Chinese and other glyph-based (non alphabet) languages.  Did/do those written languages experience modernism/post-modernism in a similar way?  As someone with near-zero knowledge of Asian languages, I’m going to need to build a bit of a foundation before I can really understand the answer to my question.

The first is that investors have been selling anything not issued directly by the federal government — irrespective of the issuer’s credit-worthiness. That has included an aversion to debt issued by state and local governments.

Second, the municipal-bond market has been rattled by concerns about the financial health of companies that insure bond issuers against defaulting on their interest payments.

These insurers also guaranteed bonds backed by low-quality mortgages and are under pressure to back up those guarantees or face ratings downgrades.

That last paragraph about the private bond insurers not being strong enough to repay on default echoes David Einhorn’s take on municipal bond (under)ratings and bond insurance:

The misrating of municipal bonds directly benefits the friends of the ratings agencies on Wall Street, the banks who underwrite the deals.  A lower rating - means bigger underwriting fees.  Or alternatively, the excess cost can be shared with another great friend - I mean very large customer - of the rating agencies - the municipal bond insurers who effectively rebate some of the “overcharge” to the municipalities in exchange for a share of the savings through a scheme called “bond insurance.”  The municipalities purchase bond insurance to enhance their credits to AAA level.  Of course, since they are in fact, AAA to begin with, the insurance provides no true benefit.

I assure you that a quick peak at the balance sheets of any of these so-called AAA rated bond insurers will tell you that they are not likely to be there to pay more than a fraction of the claims they have insured in an environment where there are wide-scale defaults in the municipal bond sector.

So, what to do? Do you invest in munis even though you realize that the bond insurance is junk …. because you also know that the bond insurance wasn’t originally needed anyway … since the munis were underrated by the agencies? 

The big question is will they actually default?  The Journal reiterates the view of Einhorn, noting “that just 0.1% [of investment grade muni bonds] failed to make good on interest payments — a far lower rate than on corporate bonds.”  From my joe-citizen perspective, I’d also agree that default seems unlikely.  Municipalities probably won’t become fiscally sustainable anytime soon  … but, like most Americans, municipalities should be resourceful enough to find money to pay off their ever-mounting interest (at least for awhile).  Municipalities can raise taxes, sell off the local park, sell rights to run government services as legalized monopolies, or just ask the state/federal government for a bailout.  And that last option just means printing money, so I’d expect inflation before any of these municipalities really default.

But still, playing the markets is all about the timing your investments: if when the bond insurers get more bad press from their financial instability, muni bond prices could will drop even further and be an even better deal.  So all you have to do is time the market. Easy.

… she [Massachusett’s Governer’s Budget Chief Leslie Kirwan] is pegging the state’s structural shortfall for next year at $1.3 billion, and possibly higher.

At the Nov. 13 meeting of the Local Government Advisory Commission, local officials told Gov. Deval Patrick that structural budget shortfalls are expected to be widespread in municipalities again next year, leaving cities and towns with few options other than cutting services or asking voters to approve property tax increases.

Why the budget shortfall despite projected 3.8% “revenue growth” (tax collection)?  Predictably:

Growth in basic government costs, mainly related to health care and other uncontrollable fixed costs, are expected to outpace revenue by a wide margin next year, leaving hard-to-close shortfalls.

None of the above even makes me blink.  Of course cost increases are “uncontrollable.” (State-regulated healthcare hasn’t kicked in yet?)  Of course local property taxes will go up.  Of course.

Of course we will continue to have problems as we continue to do the following:

The biggest challenge to state and local officials for fiscal 2009 is fixing the Lottery-funded municipal aid program (Additional Assistance and Lottery distributions) that provides $1.3 billion to help balance local budgets and ease over-reliance on the property tax. The Lottery shortfall for fiscal 2008 is expected to exceed $100 million, with little hope for recovery in fiscal 2009.

What’s wrong with using lottery proceeds to fund municipal aid?  It’s not sustainable.  You’re funding a government service from the tax proceeds of something completely unrelated.  Government services don’t work unless you fund them from taxes on the beneficiaries.  We should not “ease an over-reliance on the property tax” by digging up tax revenue from something else;  those local property taxes — or local sales tax or local-whatever taxes — need to be adequate to cover whatever services the citizens request.  If those local taxes aren’t enough, don’t tax something else.  Crazy idea that the government needs to charge you for the benefits you receive.

And: even if you call the Lottery a ’sin tax’ or say that a state-run, legalized monopoly on the Lottery system helps ‘protect’ the poor-that-use-it from sleazy(er) gambling operators … using the lottery proceeds to do anything but promote-gambling is unsustainable.  Does MA really want to be in that business?

And: even given such fiscal mismanagement, municipal bonds - even those just above junk - are still far more secure than Aaa corporate bonds.

The MMA article is a fun, quick read.  How do you fix this?

I suppose it’s not that surprising that these things are rated on different scales given their different underlying variables (default, recovery rates, etc).  I just didn’t realize it happened.  I thought an A was an A.

Einhorn makes this difference especially noteworthy when he writes: “Moody’s noted the 10-year cumulative default rate for all investment grade Moody’s-rated municipal bonds, including bonds one notch above junk, is about half the rate for Aaa rated corporate bonds.”  Next time I look at Munis, I’ll give them a little more credit. (pun intended)

Regarding the rest of Einhorn’s paper: I agree with Einhorn’s criticisms of the ratings-hegemony held by the major agencies because of their exclusion from Reg FD (they get privileged information from the investments they’re being paid to rate without having to disclose it like everyone else).  Doesn’t seem like the current system is built to produce the most accurate ratings.

Sometimes (and lately more often), I look at America and think: “If this were happening in another country, we’d be outraged.”

(p.s. thanks to JCHP for passing along the paper.)