Wednesday, October 25, 2006

Republican auto de fe

The rage driving Republicans as they face a historic loss of power in a couple of weeks is causing their vicious attacks to bounce off of their intended victims and to ricochet back on themselves – setting these human rage torches up in flames.

When Deval Patrick won the Massachusetts Democratic gubernatorial nomination in September I thought his upbeat, charismatic style would invite the traditionally vitriolic attack ads from Patrick’s Republican opponent, Kerry Healey. Furthermore, I hoped and anticipated that Healey’s campaign would backfire because I thought that the Massachusetts electorate was looking for a change from the divisive political tactics that have helped Republicans gain office in recent years. According to the
Boston Globe’s Joan Vennochi, this is just what’s happened as Patrick is now favored to win 53% of the vote to Healey’s 26%.

A similar auto-de-fe is happening on a national scale in the form of Republican radio host, Rush Limbaugh’s mockery of a video supporting stem cell research produced by Parkinson’s Disease sufferer
Michael J. Fox. Video of Limbaugh’s reaction is making him look just a bit insensitive and off his rocker. It’s unclear whether people who claim to have religious values would view his reaction charitably or not.

If the polls are anywhere close to being right, America is finally waking up to the downside of the rabid Republican hate machine. Let’s hope that the Republican control of the polling places is not able to overcome the great blue wave on its way to Washington to put out the Republican fire.

Tuesday, October 24, 2006

Is HP's spying campaign just investigative reporting by other means?

DealBreaker took me to task for a post last week which suggested that journalists and Hewlett Packard's board were after the same things -- damaging dirt -- but they simply use different means.

A New York Post reporter sent me the following e-mail in response:

read your article on the WSJ reporter's reflection on her connection to this whole HP mess.

Investigative reporting is legal. To be fair, i am one, but still. Its done in the daylight, using open or at least notionally public sources, with little effort made to conceal footprints. The source of the story almost always has full knowledge of the investigation and is given a chance to respond in detail in advance of publication. There is careful legal and editorial vetting of the process; the reporter would get fired for breaking rules of the paper, let alone the law.

example: if a reporter on a "project"--news speak for investigative reporting--told an editor that he spent the day trailing the target of a story's husband around all day, or nicked some trash, he'd have spent his last day on the job.

on the other hand, HP spent 6 figures to go through a woman's trash, illegally obtain and monitor her phone use, and trail her husband around. this was done at the order of the chairwoman of the board.

Here was my reply:

was not trying to diminish the illegality and immorality of what HP did. I just noticed that both HP and the reporter were digging for telling details using different methods.

I was also trying to make an uncomfortable point – investigative reporters and spies are both after the same thing – damning details -- they just use different methods. And reporters probably think that their methods are perfectly ethical whereas I think that their methods can sometimes be kind of sneaky – particularly when they’re trying to dig up dirt on someone.

Are there examples of reporters who might have done something sneaky -- even if they believed they were acting for the public good?

I was thinking that the use of anonymous sources is not on the very highest ethical plane. There are many reasons why a source would want anonymity. But in some cases, a source is commenting off the record because to do so on the record would result in the person losing his job – in effect the reporter is an accomplice to the employee violating corporate policy.

But the employee and the reporter are engaged in a mutually beneficial transaction – the employee may be blowing the whistle on a corporate policy which he believes is wrong and the reporter is getting a good story and possibly helping to right what the reporter perceives as a wrong.

Both believe that the ends justify the means. The employee knows he is violating company policy by sharing corporate secrets with the reporter but he also wants to keep his job so he agrees to talk only off the record. And the reporter knows that he is an accomplice to the source’s violation of corporate policy but the reporter’s boss allows him to do this because it’s accepted policy within the journalism field.

But in so doing, the quality of reporting may be compromised. A reader doesn’t know how much credence to give to information provided by an anonymous source. How can a reader judge the reporter’s judgment about what is reality and what is spin?

The HP case involved a CNET reporter getting information from an anonymous source who turned out to be an HP board member. If the reader had known that the source was that particular board member, then it would have been easier to judge the accuracy of the information provided. But in the process, the reporter was an accessory to the board member violating corporate policy against revealing confidential information. The board member may have even violated SEC disclosure laws in the process.

My conclusion is that reporters’ hands are not completely clean when they use anonymous sources. But they’re a lot cleaner than HP’s hands after using the tactics that Tam described.

Sunday, October 01, 2006

Profiting from real estate's decline

Real estate is falling down. That much has been well established. What remains to be seen is who will profit from that decline and how they'll do it.

Being "right" too early can be a big investment mistake. Back in July 2002 Amey Stone wrote Housing: Is It a Bubble If It Doesn't Pop? in which I commented on the coming real estate collapse. We revisited the topic in May 2005 with Getting Crushed in a Housing Collapse in which I recounted how I bought my house at the market peak in June 1986 only to watch its value decline about 20% and to wait nine years before it recovered to the June 1986 price.

From what I've read, the latest surge in housing peaked in about July 2005. This is also about the time that housing stocks reached their high – from which they've tumbled about 40% through September 2006.

It has seemed to me for years that the flood of money that the Fed pumped into the economy when it began cutting interest rates in January 2001 has – in effect – kicked the aftershocks of the dot-com collapse down the field. More specifically the flood of cash took the wind out of one bubble and pumped it into another one – namely real estate.

The value of real estate more than doubled from $12 trillion to $25 trillion between 2000 and 2005. Since the Fed began raising rates, though, it appears that this balloon has slowly begun to burst. Foreclosures are skyrocketing -- up 53% in the last year -- and prices are reversing direction even as $500 billion worth of Adjustable Rate Mortgages (ARMs) will reset their interest rates at a higher level by the end of 2006. This will probably accelerate the foreclosure rate and throw more properties onto the market as banks attempt to minimize their losses on the loans.

The potential problem is not limited to residential real estate -- it could affect commercial real estate as well. Having lived through the early 1990s collapse of the commercial real estate market -- which wiped out New England's second biggest bank -- Bank of New England in around 1990 -- I am attuned to possible signs of a recurrence. With antennae buzzing, I note that on the national level, commercial real estate loans climbed to $1.3 trillion in 2005, up 16% on the year.

The Office of the Comptroller of the Currency (OCC) has found that a third of nationally chartered banks have commercial real estate loans that amount to 300% or more of bank capital. And the OCC has said that banks with more than 100% of their capital in construction loans or more than 300% of that capital in commercial real estate generally need more thorough scrutiny from regulators. Such scrutiny has in the past resulted in bank failures.

A collapse in real estate could slam the broader economy. Since Goldman Sachs estimated that the real estate boom accounted for 10 million new jobs I'd expect many of those jobs to disappear as builders cut back on new construction and consumers slow their pace of buying houses and borrowing to finance them.

The big question for the economy is whether investors who are taking their profits in real estate -- one estimate is that at least $125 billion could be available -- will reinvest them in the stock market. If so, the effect could be beneficial for the stocks in which this real estate cash finds a home.

But as money is pulled out of real estate and mortgages default there will also be some big losers -- potentially real estate developers who borrowed too much to build properties that are not likely to be occupied and issuers of risky mortgages to borrowers with limited incomes and poor credit ratings.

Big profits await the investors with the risk appetite and analytical skills to short the right stocks before they file for bankruptcy. I'll be looking for these kinds of opportunities over the next several months. And if you own real estate, such opportunities could be a prudent hedge.