Political Calculations
Unexpectedly Intriguing!
30 June 2006

Carnival Midway from The Jerk Welcome to this week's edition of On the Moneyed Midways, where we round up the best posts from each of the blog carnivals dedicated to money and business-related matters, with one post declared to be The Best Post of the Week, Anywhere!(TM)

We're anxious to get going early for the big holiday weekend, so we'll simply wish you a very happy Fourth of July and point you toward the week's top business, economics, marketing, personal finance, investing, debt reduction, frugal living and personal development posts!

On the Moneyed Midways: June 30, 2006
Carnival Contributor Post Comment
Carnival of Business More Pressure and Positioning, The Last Paragraph Direct Response Works Jim Logan has been critiquing a sales letter - looking at what works and doesn't work. This post is Part 2 of a series, so don't miss the links to his other posts on the topic!
Carnival of Business The War on Wal*Mart The Boring Made Dull BMD asks 'How progressive can it be to keep poor and marginally qualified people from getting jobs, and by extension increasing dependency on the state, as well as raising the costs of living for all?'
Carnival of the Capitalists Why Buy Locally, When You Can Get Things Cheaper from Overseas? Ripples David St. Lawrence identifies that it's the sense of connection that matters when an individual chooses to buy things from a local producer or service provider. But, if the seller of that local product or service doesn't take pride in their work, that connection is lost, so why not buy things produced far away?
Carnival of Career Intensity The Value of Dead End Jobs The Business of America Is Business Starling David Hunter reviews an article by economist Thomas Sowell, noting that the absence of a career ladder for a given job has no bearing upon the future career of the individual doing the job.
Carnival of Debt Reduction Common Mistakes in Becoming Debt Free Debt Free debtblog highlights what people often do wrong after getting out of debt and advises those in debt to avoid the pitfalls and tailor their approach to their personal situation.
Carnival of Investing Pensions - The Not So Good Old Days Ask Uncle Bill Pensions are getting a lot of press lately, much of it lamenting their decline. Uncle Bill shows just what's wrong with those traditional pensions, in The Best Post of the Week, Anywhere!
Carnival of Marketing Making Promises. Meeting Expectations. Brand Story Rob Marsh shows the importance of meeting expectations after making promises, cautioning that if "the experience doesn't match the story, the experience becomes the story."
Carnival of Personal Finance 529 Savings Plans vs. Coverdell Education Savings Accounts (ESA) JeffSHoward.com Jeff Howard compares 529 plans against ESA's as a means of funding your child's education and finds the advantages of the 529 plan far outweigh those of an ESA.
Festival of Frugality The Mindset for Saving Towards Better Life Victor Fam talks about the life altering events that changed his mindset on spending and saving.
Personal Development Carnival Succeed in Job Interview The Sum If a job interview is anywhere in your future, reading Sunny's post on preparing for this life-changing event should be part of your preparation!

Previous Editions

29 June 2006

First up, what the Fed might do today! Barry Ritholtz asks:

I simply don't know how all this 50 basis point chatter got started and pinged around Wal Street like its a likely option.

Hell, why only 50 ? Why not 100, if the economy is so damn strong?

If we go by the recession prediction model published by the Fed earlier this year, the current spread between the 10-Year (5.21%) and 3-Month (4.85%) Treasuries, increasing the Federal Funds Rate (FFR) to 5.25% will keep the probability of recession occurring in the next 12 months at 27%. (Do the math yourself here.) That would be certainly be fully consistent with the level of recession probability for the last 3 Fed hikes.

But, this time around, the Fed has more room to maneuver since the spread between the 10-Year and 3-Month Treasuries has been widening. If they increase the FFR to 5.5%, the odds of recession increase to just 30% - not that much different and, in fact, well within the range the recession probability level has been bouncing around in over recent weeks. This would allow them to get more of a jump on inflation with less risk to the economy, allowing them potentially more flexibility with adjusting rates later in the current cycle.

At 100 basis points however (a full percent increase in the FFR to 6.0%), the probability of recession in the next 12 months jumps to 37% - a sharp increase that would very likely spook the markets, making such an increase unlikely in my view.

Update (2:25 PM EDT): So, what did the Fed do today?

The Fed opted to continue along the 27% recession probability line by only increasing the Federal Funds Rate to 5.25%. The chart below illustrates this latest move in the Fed's most recent tightening cycle:

For this Federal Funds Rate, the U.S. Treasury yield curve would have to invert by more than 44 basis points (.44%) between the 3-Month and 10-Year treasuries in order to reach the 50% probability threshold for a recession occurring in the next 12 months!

Update (2:49 PM EDT): And just for fun, can you pick out when the Fed made their announcement for the new Federal Funds Rate on the charts at the right?

Update (3:00 PM EDT): Well, it appears that the probability of recession may be dipping slightly - at this writing, the 3-Month Treasury is yielding 4.68% and the 10-Year Treasury is yielding 5.15%. With the new Federal Funds Rate of 5.25%, that would put the probability of recession at 24.5%! I'll be updating the chart above after the market closes for the day....

Update (3:55 PM EDT): Well, whad'ya know? The 3-Month Treasury bounced back up to 4.83% and the 10-Year Treasury moved up to 5.19% - making the spread between them 0.36%. In other words, exactly what I've already shown in the chart above, so no changes are necessary!

27 June 2006

Greg Mankiw inspired a new tool this morning - here's his commentary, with our tool for doing the math following....

In a previous post, I expressed a preference for consumption taxation over income taxation. In a comment, Daniel Demetri (an ec 10 student this past year) asks an important question about incentives:

I'm confused as to why a consumption tax does not affect incentives while an income tax does.... People don't care about saving money--they care about spending it.

With income tax: 1 hr work --> $16 pre-tax --> $8 post-tax --> $8 of chocolate cake, video games, and Red Sox tickets.

With consumption tax: 1 hr work --> $16 pre-tax --> $8 of chocolate cake, video games, and Red Sox tickets + $8 of tax.

The amount worked and the amount spent are the same, so what's the real difference?

Daniel is exactly right, as far as he goes. If we are looking at the decision to work today in order to consume today, consumption and income taxes have similar effects. Both discourage work effort.

Consider, however, another margin of adjustment: Work today in order to save and consume in the future. Let's continue with Daniel's example of a 50 percent tax rate. Suppose that the interest rate is 7 percent, so $1 saved today becomes $2 in 10 years.

With income tax: 1 hr work --> $16 pre-tax --> $8 post-tax --> $16 of savings in 10 years --->$4 more in income taxes on the interest--> $12 of chocolate cake, video games, and Red Sox tickets.

With consumption tax: 1 hr work --> $16 pre-tax --> $32 of savings in 10 years --> $16 of chocolate cake, video games, and Red Sox tickets + $16 of tax.

So under a consumption tax, there is a greater incentive to work and save today in order to consume in the future.

You'll have to go to Mankiw's post for the formulation which begins after this point, but here's our tool for doing the math described for comparing the amount of consumption an individual might realize after a consumption tax versus that after an income tax:

Wage and Tax Information
Input Data Values
Real Wage per Hour, W ($USD)
Interest Rate, r (%)
Tax Rate, t (%)
Time for Deferred Consumption, T (years)

Consumption Amounts
Calculated Results Values
Amount of Consumption After Income Tax ($USD)
Amount of Consumption After Consumption Tax ($USD)
Difference in Consumption ($USD)
Consumption Tax Approach - Income Tax Approach
Before Tax Relative Price (for Comparison)

Mankiw comments on the math:

You can see that the consumption tax creates a constant wedge: the after-tax relative prices is 1-t times the before-tax relative price, regardless of T. However, an income tax creates a growing wedge. The larger is T, the greater is the gap between the before-tax and after-tax relative price. In other words, a consumption tax taxes current and future consumption at the same rate, whereas an income tax in effect taxes future consumption at a higher rate than current consumption.

The bottom line: Both consumption taxes and income taxes discourage work, but income taxes discourage saving as well.

Labels: ,

Money magazine is out with its latest list of the "best" jobs in the U.S. for 2006! In doing so however, we once again have an example of a mainstream media outlet whose idea of putting information online only involves reproducing the same list they put in their print edition. Is that really good enough in this day and age? We here at Political Calculations say "No, we're mad as hell, and we're not going to take this anymore!"

Okay, we're not quite that angry, but we're motivated enough to take matters into our own hands. That's why we've taken Money's list of the best jobs in the United States and reproduced it below - but unlike Money magazine's version, we've put it into a dynamic table format that you may use to sort the list according to what you might like to see. Want to find the lowest paying job on the list? Just click the "Average Salary and Bonus" column heading! Want to rank the jobs according to their 10-year growth prospects? Click the "10-Year Forecast Job Growth" column heading! And, if you want to rank them in reverse order, just click the appropriate column heading again!

At some point, we realize that the MSM folk will catch on and start producing their own dynamic tables, but in the meantime, we're happy to provide more functional versions of the lists they produce....

The "Best" Jobs in the U.S. for 2006
RankCareer10-Year Forecast Job GrowthAverage Salary and Bonus
1Software Engineer46.07080427
2College Professor31.39081491
3Financial Advisor25.92122462
4Human Resources Manager23.47073731
5Physician Assistant49.65075117
6Market Research Analyst20.19082317
7Computer/IT Analyst36.10083427
8Real Estate Appraiser22.78066216
11Advertising Manager20.34107049
12Physical Therapist36.74054883
13Technical Writer23.22057841
15Medical Scientist34.06070053
16Physical Scientist12.18080213
18Curriculum Developer27.53055793
20Public Relations Specialist22.61084567
21Sales Manager19.67135903
23Property Manager15.30078375
26Social Service Manager25.52074854
28Health Services Manager22.76092211
29Advertising Sales Agent16.330112683
31Management Analyst20.12063426
32Occupational Therapist33.61051973
33Mental Health Counselor27.18053150
34Landscape Architect19.43050383
35Biotechnology Research Scientist17.05066393
36Urban Planner15.17060891
38Speech-Language Pathologist14.57058329
39Meeting and Convention Planner22.21056072
41Biological Scientist17.03061317
42Financial Analyst17.33066203
45Environmental Scientist17.11059027
46Lab Technologist20.53051502
47Registered Nurse29.35068872
48Sales Engineer13.96078875
50School Administrator14.55073767


26 June 2006

Harrison Loke of the Finandom blog recently wrote about some simple formulas that you can use to decide if refinancing a loan makes sense for you. We here at Political Calculations are always on the lookout for interesting math that we can turn into tools, so we've chosen to take on some of Harrison's formulas as our latest project!

First up, how long will it take for you break-even on the refinancing charges that you will have to pay? The following formula may be used to provide the answer:

The formula above may be used to find the number of months that it will take to at least cover the cost of refinancing. But, the formula makes two assumptions that may or may not be true in your case:

  1. You are making monthly payments on your existing loan.
  2. You will be making monthly payments after refinancing.

What if you went from a monthly to a biweekly payment period? Or vice versa? Or making payments at some other interval? The tool below takes the most common payment intervals into account in determining the number of months it will take to break-even after refinancing your loan:

Current Payment Information
Input Data Values
Installment Payment
Frequency of Payments
Refinancing Information
Installment Payment
Frequency of Payments
Refinancing Charges

Time to Break-Even After Refinancing
Calculated Results Values
Number of Months to Break-Even

For the tool above, a negative result indicates that you will not at least recover the costs of refinancing.

Why This Might Be Important

The amount of time that it takes to make back the amount of money it cost to refinance your loan is an important factor to consider if you may be retiring the loan in the near future. In the case of a mortgage, for example, if you will be selling your home and moving before breaking even on refinancing - or in the case of a car loan, if you will be trading it in for a newer model.

Labels: ,

23 June 2006

Carnival Midway from The Jerk This week's edition of On the Moneyed Midways rounds up the best posts from each of the blog carnivals dedicated to money and business-related matters, with one post declared to be The Best Post of the Week, Anywhere!(TM)

This week's edition features a new Carnival, the recently launched Carnival of Future Millionaires (welcome aboard!) and also marks what we're declaring to be the final demise of the Festival of Job Hunting, which appears to be dead again (not to be confused with the excellent movie starring Kenneth Branaugh, Emma Thompson and Derek Jacobi!). As far as we're concerned, it's staying dead....

And now, some bad news, then some really bad news. The bad news is that the Carnival of Debt Reduction, hosted this week by Finandom, is not available as their server has been down while we have been compiling this week's edition of OMM and even now as we are posting, so there will be no contribution from the Debt Reducers for this week's carnival.

The really bad news is that the often excellent Carnival of Entrepreneurship doesn't appear to have a host this week, or any scheduled for future weeks. We hope this is just a temporary situation, as the entrepreneur's carnival often provided The Best Post of the Week, Anywhere! for OMM. We hope they don't repeat the Festival of Job Hunting's zombie-like performance....

On the Moneyed Midways: June 9, 2006
Carnival Contributor Post Comment
Carnival of Business Dumb Advertising! Future Tech Web Daniel Scocco wonders why marketers are still using the same marketing techniques of 30 years ago and points to Google as a company that recognizes the need for more intelligent, interactive and converged advertising techniques.
Carnival of Business Business Review: Regal Cinemas Mine That Data Why do snacks cost so much at the omniplex? Kevin Hillstrom mines data from Regal Cinemas' financial reports to show where theater chains make their money.
Carnival of the Capitalists Time for Innovation Slow Leadership Carmine Coyote delivers The Best Post of the Week, Anywhere! with his contribution showing howbot little work pressure and overwhelming work pressure result in little employee creativity.
Carnival of Career Intensity Being a Successful Business Owner BOB - Business Opportunities Blog Marcus Markou weighs in on the issue of how small businesses fail simply because the business owner doesn't know how to build a company that works without them.
Carnival of Future Millionaires Why Boring Stocks Can Be Oh So Sexy Debt Free Steve Faber finds that the stocks of companies that aren't part of the latest investing fad, but have high dividend yields make a lot of sense (cents?!)
Carnival of Investing Bring on the Bear! Guzzo the Contrarian Bear markets have always been good to Guzzo, who parked his stock market money back in May and is now raking in nice yields from money markets and CDs while waiting for stock prices to reach their bottoms.
Carnival of Marketing Storytelling Spare Change Nedra Kline Weinreich shows how the best marketing tells a story and makes a connection with the audience.
Carnival of Personal Finance Cut Costs (and Buy a Plasma TV) fivecentnickel.com nickel caught an episode of the Today show, in which they suggested taking your lunch to work everyday instead of eating out and also suggested using the savings to buy a plasma TV.
Cavalcade of Risk Why Women Earn Less Frugal Wisdom from Wenchypoo's Warehouse Wenchypoo sheds light on why women earn less and finds that it's not because of discrimination, but rather a matter of information and tactics.
Festival of Frugality Starbucks Alternative It's Just Money lamoneyguy has a DIY solution to the high price of coffee products from the world's largest coffee chain, and points to recipes you can use to make your favorites at home!
Personal Development Carnival Increase My Productivity! Milo Riano Milo Riano shares his goals for blogging and develops a strategy for increasing his productivity.

Previous Editions

22 June 2006

U.S. politicians are once again grandstanding on what level the federal minimum wage should be set, with the latest proposal just rejected. But it may all be a moot point as the number of minimum wage jobs in the U.S. has substantially declined even while the size of the total workforce has grown!

The following chart graphically depicts the decline in the number of U.S. workers earning the minimum wage or less, for such professions as waiters, bartenders, etc. who are paid below the federal minimum wage with the expectation they will be earning substantial income in the form of tips. The data presented in the chart is taken from the U.S. Bureau of Labor Statistics (HT: Greg Mankiw):

U.S. Workforce profile with Minimum Wage Earners, 1979-2005

Overall, we find that the number of individuals earning the federal minimum hourly wage or less has decreased from 7.8 million people in 1980, representing 8.9% of the total U.S. workforce in that year (the peak since data began being collected in 1979), to just 1.9 million people in 2005, or 1.5% of the total U.S. workforce last year.

This trend has occurred despite the total percentage of hourly-paid workers remaining fairly constant at roughly 60% of the total number of U.S. workers over the intervening years from 1980 through 2005.

Labels: ,

21 June 2006

With apologies to Homer Simpson, we came across this fun tidbit (via PSD Blog):

  • SOMETIMES low tech is much better than no tech. A simple, affordable way to apply crop fertiliser directly to plants looks set to revolutionise the way poor farmers in sub-Saharan Africa grow food. And it all hinges on beer bottle tops.

Beer caps represent a case study in good design - they're attractive, light weight, inexpensive, fun and far more functional than the original designer(s) would ever have expected. So functional, in fact, that we thought it might be useful list a handful of the applications, other than the new agricultural one above, to which we've found this marvelous device put to use:

  1. Keeping carbonated beverages in their bottles. Yes, this application is pretty obvious, and sure, screw tops are effective too, but traditional beer caps are less expensive and use much less material. Also, even though they've been around since 1892, there's still a lot of innovation at work!
  2. Marketing. Not only can they tell you what's inside a bottle, they can also tell you if you've won a promotional contest!
  3. Money. Cameroon is the real leader here, but we're still hoping the U.S. Mint will recognize that the Golden Dollar is a bust and will partner with U.S. breweries for its replacement.
  4. Marking trails. We guess we could leave a trail of beer bottles along our path as we mark where we've been when we've ventured into the wooded wilderness, but beer caps are far lighter and the ridges on the edge are ideal for pressing into tree bark without damaging the tree.
  5. Refrigerator Magnets. For decorating your refrigerator or just holding up important notes or children's artwork!
  6. Jewelry. Or more specifically, earrings. Save hundreds over traditional gold loops and diamond studs!
  7. Clothing. If this bicycle innertube/beer cap belt doesn't convince you that recycling is the future of fashion, nothing will. Then again, perhaps a bikini made from beer caps might convince you....
  8. Collectables. If this E-bay page is any indication, there's a healthy market for beer caps with the collectable crowd! Speaking of collecting, don't forget to visit the Ultimate Beer Cap page.
  9. Catching fish. Beer caps make lures fish can't resist.
  10. High-tech entertainment. All you need is a beer cap and a laptop computer. Hours of fun....

Special hat tip to the ReadyMade blog!

Labels: ,

20 June 2006

This past weekend, on Meet the Press with Tim Russert, Congressman John Murtha (D-PA, former USMC Colonel) called for the redeployment of U.S. troops from Iraq, citing several nations in the region where they might be based. Then, in a stunning display of his military acumen, he suggested that the Japanese island of Okinawa in the East China Sea might be an ideal spot from which to base troops and aircraft to provide a "timely" response to events on the ground in the Middle East.

Tim Russert was somewhat skeptical:

MR. RUSSERT: But it’d be tough to have a timely response from Okinawa.

REP. MURTHA: Well, it—you know, they—when I say Okinawa, I, I’m saying troops in Okinawa. When I say a timely response, you know, our fighters can fly from Okinawa very quickly. And—and—when they don’t know we’re coming. There’s no question about it. And, and where those airplanes won’t—came from I can’t tell you, but, but I’ll tell you one thing, it doesn’t take very long for them to get in with cruise missiles or with, with fighter aircraft or, or attack aircraft, it doesn’t take any time at all. So we, we have done—this one particular operation, to say that that couldn’t have done, done—it was done from the outside, for heaven’s sakes.

Perhaps the best way to examine the issue of Murtha's idea of a timely response in launching an air strike is to consider the recent air mission that targeted and killed Al Qaeda's "prince" in Iraq, Abu Musab al-Zarqawi. Here, two F-16 fighter jets dropped two 500-lb bombs on Zarqawi's location north of Baghdad after intelligence confirmed his presence.

The U.S. 10th Air Force reports that an F-16 conducting an air-to-ground strike mission may "fly more than 500 miles, deliver its weapons with superior accuracy, defend itself against enemy aircraft, and return to its starting point." The map to the right illustrates this 500 mile combat radius, centered on the island of Okinawa. (See a larger version.)

Notice how the Middle East isn't anywhere within that 500 mile radius?

Our next map, which we generated courtesy of the Great Circle Mapper shows the shortest route from Okinawa (OKA) to the Baghdad International Airport (SDA):

The shortest route around the globe from Okinawa to Baghdad is 4,904 miles, nearly 10 times further than the F-16's effective combat radius. Also note that conducting such a mission from Okinawa would require the coordination, cooperation and permission of the nations of Japan, China, Afghanistan, Russia, Iran and Iraq! And who knows how long it would take the U.S. State Department to secure their permission?!

Of course, the U.S. might consider flying a route that would not pass through the airspace of these or other nations, but at the cost of severely extending the time and distance the aircraft would have to fly. Compared to operating from bases in Iraq, it's no contest which option offers greater advantages.

If nothing else, I think we can see now why Representative Murtha never achieved the rank of General in the U.S. Marine Corps....

19 June 2006

What is the most significant mathematical equation ever developed?

We here at Political Calculations started wondering about this question while researching potential tools to develop. Here are our candidates for the title: 1+1=2

1. This simple formula is often the first one that children are taught, making it the foundation for all math that comes later!

2. Math formulas are meaningless unless they have beneficial real world applications. The key to attaining financial independence is contained in the formula above! Einstein's equation

3. If you ask anyone on the street to name a mathematical equation, odds are that Einstein's E=mc2 is the one they'll give you! Einstein's equation tells you exactly how much energy (E) is contained within a given amount of mass (M) - linking it to the universal constant of the speed of light (C) as a bonus! Euler's equation

4. Euler's equation above is both unique and mystical in that it expresses nine different mathematical concepts in a very nice, simple package: addition, equality, logarithms, exponents, negative numbers, square roots, imaginary numbers, pi, and multiplication! Plus, in the words of one individual: "What could be more mystical than an imaginary number interacting with real numbers to produce nothing!" Simple Future Value with Compound Interest

5. It's one thing to have money to save or invest. It's another thing to make it grow over time. The simple formula above might be use to determine the future value of your savings or investment given it's starting value (P), the annualized rate of return (r), the number of compounding periods per year (m) and time in years (t). We've already developed a more sophisticated tool to do this math, but this formula is at the heart of it!

And those are our Top 5!

16 June 2006

Carnival Midway from The Jerk Well, we spoke too soon last week when we pronounced the Festival of Job Hunting to be dead. It's back this week, but it seems to be on life support as it only has five posts, and two of them are duplications!

Now, we could go on about zombie carnivals, and honestly, we like them much better than haiku-oriented blog carnivals, but that would be keeping you from reading the best business, money and personal finance posts, as well as The Best Post of the Week, Anywhere!(TM) Just scroll down for this week's edition of On the Moneyed Midways!

On the Moneyed Midways: June 9, 2006
Carnival Contributor Post Comment
Carnival of Business The Ultimate in Branding It's Just Money lamoneyguy provides examples of the top brands, whose product and company names have become synomynous for entire classes of products.
Carnival of Business Reverse Insurance Part 1: What It Is The Radical Libertarian What if you never had to pay any insurance premiums until after you've had a loss? Aaron Kinney describes the differences between traditional and reverse insurance.
Carnival of the Capitalists The Best Place for a Kids' Lemonade Stand Is… The Scratching Post KT Cat shares a lesson that the participants in Donald Trump's The Apprentice could have used in the first edition of the show!
Carnival of Career Intensity RadicalHop.com RadicalHop.com This week, host David Lorenzo commends the blogs of contributors rather than an individual post. Of the five selected, the recent posts found at RadicalHop.com by Peter Kua best exemplifies what Career Intensity is all about!
Carnival of Debt Reduction Day 44: Pinch and Pay We're in Debt The King of Debt shows how consolidating his family's cable and telephone services has reduced their monthly expenses and freed up additional cash for paying down their debt.
Carnival of Entrepreneurship Simplified Marketing Plans for the Real World Small Biz Survival If you're going to sell your products, you need a marketing plan. Becky McCray shows how to keep it simple. A great post!
Carnival of Investing Sun Tzu and the Art of Using Neural Nets D'igital Breakfast Thomas is surprised that his market model for predicting the closing value for the S&P 500 is performing so well. Not to mention excited and skeptical. Plus, for all you number crunchers out there, he's posted his model spreadsheet and instructions!
Carnival of Marketing Forget Benefits, And You Will Sell More Michel Fortin A great lesson in copywriting from one of the world's best copywriters. The Best Post of the Week, Anywhere!
Carnival of Personal Finance Can You Make Money from Jim Cramer's Picks? Seeking Alpha Nick Mulcahy highlights research that says "yes", and notes that it may be done in a way that viewers of Mad Money might have had in mind.
Festival of Frugality MyPoints A Penny Saved… Thatedeguy is willing to receive spam in exchange for rewards, and finds a site that delivers!
Festival of Job Hunting Job Interview: What Not to Say chrisQuimby.com Chris Quimby provides all the answers we wish we could when interviewing for a new job!
Personal Development Carnival Developing a Stronger Mind Emmanuel Oluwatosin: Inspiring Excellence, Realising Ambitions Emmanuel Oluwatosin says you need to hire yourself as your '”mental manager” and suggests six jobs you need to assign yourself straight off!

Previous Editions

15 June 2006

Last year, Political Calculations copied and pasted, ahem, presented Rob Arnott's speech discussing his research (available as a 408KB Word document) into the performance of stock market index funds whose composition of individual stocks is weighted according a fundamental business measure, such as aggregate revenues or book values, instead of the weighting stocks within the fund by market capitalization, as is done with major indices like the S&P 500.

Since then, Powershares Capital Management has launched an Exchange Traded Fund (ETF) based upon Arnott's indexing strategy, FTSE RAFI U.S. 1000 Portfolio (NYSE: PRF). The following chart illustrates the new ETF's performance with respect to the S&P 500, Nasdaq and Dow indices since its inception in December 2005:

As we can see in the chart above, the PRF index so far seems to offer somewhat better performance with less volatility than the price-weighted Dow and the market capitalization-weighted S&P 500 and Nasdaq indices. But this performance begs a question: if weighting individual stocks within an index according to fundamental business measures works better than traditional methods of weighting stocks in an index, why aren't there more such funds, including funds with different weighting metrics?

The answer is: they're on the way. Powershares plans to offer nine additional fundamental-weighted funds, but focused upon applying Arnott's fundamental-weighting technique to the individual sectors of energy, basic materials, industrials, consumer goods, health care, consumer services, telecommunications and technology, utilities, and financials.

Meanwhile, investment firm WisdomTree is seeking to create its own series of fundamentally-weighted indices, with significant input from Princeton professor Jeremy J. Siegel, author of Stocks for the Long Run and The Future for Investors. Siegel provides a taste of WisdomTree's pending offerings writing in the Wall Street Journal ($ only, excerpt via Econlog):

...According to my research, dividend-weighted indexes outperform capitalization-weighted indexes and are particularly valuable at withstanding bear markets. For example, the Russell 3000 Index lost almost 50% of its value between the bull market peak of March 2000 and the October 2002 low. Over this same period, a comparable total market dividend-weighted index was virtually unchanged. A dividend weighted index did have a bear market, but it only corrected by 20%. Moreover, the dividend-weighted index bear market didn't start until March 2002, and it lasted only six months (compared to 24 months for the cap-weighted index). The dividend-weighted index is now about 40% above its March 2000 close, whereas the S&P 500 and Russell 3000 are still not yet back to even. A similar performance occurred in other bear markets.

The historical data make an extremely persuasive case for fundamental indexing. From 1964 through 2005, a total market dividend-weighted index of all U.S. stocks outperformed a capitalization-weighted total market index by 123 basis points a year and did so with lower volatility.

But do these fundamental-weighted indices really offer better performance? Arnott suggests that "if his index had existed from 1962 through 2003, it would have beaten the S&P 500 by 1.9 percentage points annually." Jason Zweig notes:

For all of indexing's idiosyncrasies, Arnott's version just adds new ones. His emphasis on big companies with lots of physical assets and loads of employees gives his index a tilt toward value stocks, at least compared with the S&P. Who knows whether that stock-picking method will work as well in the next 42 years as it has in the past 42?

Writing in Kiplinger's Personal Finance, Steven Goldberg reports analyst Baie Netzer's conclusion that "the main reason the back-tested new index did so well is that it has a value tilt -- that is, it loads up more on undervalued stocks than does the S&P 500."

As Arnott is the first to point out, that's the point:

The index is intended to serve as a counterpoise to the S.& P. 500, which is weighted by market capitalization, or the stock market value of a company's outstanding shares. While the S.& P. 500 dropped by a cumulative 11 percent from 2000 to 2004, the RAFI notched a total return of 45 percent over the same five years, he said.

The S.& P.'s market-cap metric, he said, causes it to consistently overweight highfliers and to underweight bargain-priced shares. In that respect, the tail can wag the dog, causing the index to present a distorted picture of the market, he said.

"The S.& P. 500 gets whipsawed by every bubble when it inflates and when it deflates," he said.

Mr. Arnott says his index offers a better picture of the stock market's prospects because it underweights overvalued stocks and overweights undervalued shares.

Labels: ,

13 June 2006

The Good News: Dean Logan, whom we here at Political Calculations speculate may very well be the worst and most incompetent election official in the United States, has resigned from his post as the Director of Elections in King County, Washington!!!

The Really Bad News: He's resigning to take the Number 2 elections job in Los Angeles. Jeez, don't you LA folk have enough problems with voting irregularities?

Yet To Be Determined: What Democratic Party hack will be appointed to fill Logan's former position in King County? Will it be someone who can restore credibility to the office? Or will it just be someone that King County Executive Ron Sims and the Washington State Democratic Party can count upon in a close race at the expense of election integrity, much like Dean Logan? Stay tuned!

(HT: Sound Politics)

The alleged unethical conduct of Washington's King County Medical Examiner's Office (KCMEO) in providing the brains of certain cadavers to a research laboratory in exchange for grant money has paid huge dividends to KIRO-TV's Investigative Reporting team. KIRO Reporter Chris Halsne, Producer Bill Benson and Videographer/Editor David Weed received the 2006 National Press Club Award for Consumer Journalism (Television) for their investigation of "Brains for Sale."

In their reporting, KIRO's investigative team revealed how the KCMEO funded an additional staff position for a pathologist using the proceeds they obtained in selling the brains of mentally-disabled individuals after their death to the Stanley Medical Research Institute (SMRI). SMRI sought the brain tissue of these individuals, believing that studying the organs might provide insights into their disorders. For its role in acting in the role of a "brain broker", the KCMEO received roughly $8,300 from SMRI for each such brain the KCMEO harvested, beginning in 1995. The proceeds to KCMEO from SMRI total nearly $1.49 million.

What makes the Medical Examiner's office conduct appear to be unethical in this case is that its staff pathologists, with the strong encouragement of the office's management, may have had a de facto quota to fill. In seeking to harvest the desired quantity of brain tissue, KCMEO appears to have harvested organs in several cases without either notifying or obtaining the deceased individual's or their families' consent. Several affected families have filed suit, seeking damages from the KCMEO. The cases are presently working their way through the Pierce County Superior Court system.

More Details and Commentary

12 June 2006

On June 7, 2006, the great state of Florida made it possible to better match the supply of tickets and the demand consumers of entertainment events by removing the state's penalties for ticket reselling (a.k.a. "ticket scalping"):

Good news for people with tickets for hot games: Gov. Jeb Bush signed a bill into law Wednesday that removes penalties for ticket scalping.

Bad news for Miami Heat fans with tickets to the championship games they want to sell for big bucks: The bill doesn't take effect until July 1, long after the end of the NBA Finals.

Under the measure, Florida's 60-year-old ticket scalping law, which forbids selling tickets for more than $1 above the face value, will be eliminated and in its place will be an open-market system that will allows ticket owners and Internet brokers to sell tickets at whatever price the buyer agrees to pay.

Economist Greg Mankiw reviewed an editorial advocating against the passage of the bill, in which a concert promoter argued that the bill was "'ridiculous' because it only 'makes more money for scalpers,'" leading Mankiw to ask three questions, upon which we'll speculate:

1. Why would someone who makes a living putting on concerts object when ticket resellers get their products into the hands of buyers with the greatest willingness to pay?

In two words: seller's remorse. This phenomenon is something that happens often in the world of real estate and represents, in the words of Coldwell-Banker, "a stupendously strong conviction on your part that you're about to sell your house for less than it's really worth. When you're in the cruel grip of seller's remorse, facts take a back seat to perceptions."

Here, the significantly higher price obtained by a ticket reseller would represent a significant "perceived" opportunity cost to the promoter who feels that they could have earned a higher profit. This sentiment ignores the promoter's own risk, or rather, does not fully recognize it. For example, what if the promoter couldn't sell all the available tickets to fill the concert venue? How many tickets would they have to sell to guarantee they would cover their business costs and at least break-even?

This also leads into Mankiw's second question:

2. Why do concert promoters often price tickets well below the equilibrium price in the first place?

Two reasons, all business:

A. Profitability. Here, the promoter has adopted a pricing structure that reduces their risk of not being able to at least break-even on an event or series of events. The trade-off for guaranteeing this level of profitability with this reduction is risk is that the promoter sacrifices the potential to earn much higher profits.

B. Marketing. By setting the price for tickets below the market's equilibrium price, the promoter is able to bring out more potential customers than they would if they charged a higher price. This higher level of demand may be exploited by the promoter who might realize greater profits in a number of ways, such as adding additional performances of the event, which has the benefit of providing little additional cost for substantial benefits, or by reducing the risk of promoting other events by selling tickets to otherwise "disappointed" customers for these substitutes.

It also has the effect of creating "buzz" among potential customers, who upon seeing "apparently" high demand for an event would have the perception that the tickets are highly desirable. We should also add that this "buzz" has the side-effect of fueling the resale market for the event's tickets!

Mankiw's third question is also interesting:

3. If a concert promoter like Mr Stoll sold tickets with a "not for resale above face value" clause, should the government prohibit scalping as part of its duty to enforce private contracts?

Interesting, and I should add, addressed in the comments of Mankiw's original post in far greater depth than we could cover here. Well worth reading!

09 June 2006

Carnival Midway from The Jerk Today, two new carnivals join On the Moneyed Midways' weekly roundup of the best posts from the blogosphere's major money-related blog carnivals! Kay Bell of Don't Mess with Taxes hosts the inaugural edition of the Carnival of Taxes, while we've finally gotten around to adding the Carnival of Personal Development, which offers many posts that may benefit an individual's career path.

Gone however is the Carnival of Job Hunting, which appears to have died a quick death after just three editions (the last edition, which we covered last week, came during the Memorial Day holiday and only featured one post.) The related Carnival of Career Intensity, while gone this week, should be back as David Lorenzo only suffered server issues!

But enough about who's in and who's out this week! Below are the best posts of the week, as well as the post we've scientifically determined to be The Best Post of the Week, Anywhere!(TM)

On the Moneyed Midways: June 9, 2006
Carnival Contributor Post Comment
Carnival of Business The Top 5 Points a Venture Capitalist Wants to Hear Matt Inglot If you're looking to score some serious venture capital, Matt Inglot tells you just what today's angel investors are looking for when deciding what new businesses to back.
Carnival of Business Long Term Success or Survival? Future Tech Web Did you know that the vast majority of companies underperform the market? Daniel Scocco finds that an inability to deal with innovation, rather than poor business administration lies at the heart of the matter. The Best Post of the Week, Anywhere!
Carnival of the Capitalists The Easiest Way to Fool Smart People Paul's Tips Five words describe this post of how con artists prey on the desire of people to not be seen as not being smart: 'inverted blade-center upside matrix'!
Carnival of the Capitalists Is It Time for the End of the SBA? The Entrepreneurial Mind Professor Jeff Cornwall finds that the Small Business Administration has outlived its usefulness an an agency for encouraging entrepreneurship in the economy.
Carnival of Debt Reduction Food Fight We're in Debt The Queen of Debt shares her grocery shopping secrets for staying in budget, noting that keeping a budget is key to reducing debt.
Carnival of Entrepreneurship Innovation Brain Freeze Business and Technology Re-Invention David Daniels identifies that doing four things really well is much better than doing fifteen things mediocrely. And since Microsoft's Steve Ballmer is cited, be sure to also see this video clip!
Carnival of Investing Support and Resistance Levels InvestorGeeks Jason Coleman divines the future moves of a stock from reading its charts in a tutorial on technical analysis.
Carnival of Marketing Quick Marketing Tip: Duel Okdork.com Okdork reveals the secret of driving traffic to your product, service or website: start a rivalry!
Carnival of Personal Finance Home Depot Inc Shopping Experience Fat Pitch Financials Declining or poor customer service is often an early warning sign of trouble brewing at a company. George of Fat Pitch Financials has taken Home Depot off his watch list until they get serious about serving their customers.
Carnival of Taxes 30 May 3006 The Picket Line A tax resistor has decided to stop paying his self-employment tax, and has done the math to figure out how much it's going to cost him. Carnival host Kay Bell mentions potential jail time as another factor that may need to be taken into account, but perhaps that's not a concern in the year 3006....
Festival of Frugality Getting Things Cheap Christine Kane Sometimes, as Christine Kane observes, getting things cheap costs a lot of money - especially when you might not have bought an item otherwise!
Personal Development Carnival Using Risk to Your Advantage SuccessKey.net The Success Coach weighs in on how you can use risk to discover new opportunities in life.

Previous Editions

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations

Thanks in advance!

Recent Posts

Indices, Futures, and Bonds

Closing values for previous trading day.

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified