Thursday, February 20, 2014

Letter From Senator Toomey on Patent Troll Legislation

I sent an email to Senators Casey and Toomey of PA supporting legislation to rein-in patent trolls.  Here is his response.
February 14, 2014

Dear Mr. Morphis,
Thank you for contacting me about the Innovation Act (H.R. 3309). I appreciate hearing from you.
As you may know, Representative Bob Goodlatte (R-VA) introduced H.R. 3309 on October 23, 2013. Among its provisions, this measure would enhance the requirements for filing a patent infringement claim. I understand your support for protecting patent rights while dissuading frivolous lawsuits, and I value your input on this issue. On December 5, 2013, H.R. 3309 passed the House by a vote of 325-91, and it is currently pending before the Senate Committee on the Judiciary for review. While I am not a member of this panel, please be assured that I will keep your thoughts in mind as this measure progresses through the legislative process.
Thank you again for your correspondence. Please do not hesitate to contact me in the future if I can be of assistance.
Pat Toomey
U.S. Senator, Pennsylvania

Friday, January 03, 2014

Today Forbes announced its list of the thirty most important people under thirty.  Fortune did the same thing recently.  Are you tired of reading lists of “Thirty Leaders Under Thirty”?  Here is a list of the sixty most influential, annoying, important or just folks over sixty.  Here then, sorted by age, is The Sixty Most Important People Over Sixty.
  1. Henry Kissinger.  Still the U.S. best thinker on foreign policy and diplomacy.
  2. Jimmy Carter.  Better as an ex-President than President.  His work for Habitat for Humanity is a lesson for all of us.
  3. T. Boone Pickens.  Oilman, energy expert.  Creator of The Pickens Plan for energy independence.
  4. Frank Gehry.  Showing the world what new materials and CAD design can do to architecture.
  5. Warren Bufett. Best investor in history.  Becoming one of the best philanthropists in history.
  6. Alan Simpson.  Former Senator who, along with Bowles (below) is trying to get U.S. to fiscal sanity.
  7. Diane Feinstein.  Influential Sr. Senator from CA.
  8. Carl Icahn.  Activist investor.
  9. Anthony Kennedy.  Supreme Court Justice
  10. Jack Nicholson.  Actor
  11. Freeman Morgan.  Actor.  “Through the Wormhole” commentator.
  12. Yvon Chouinard. Founder of Patagonia, environmental activist and enemy of dams.
  13. Ralph Lauren.  Fashion industry titan.
  14. Harry Reid.  Senate Majority Leader.
  15. Toby Cosgrove.  MD and President of The Cleveland Clinic.
  16. Nancy Pelosi.  House Minority Leader.
  17. William Kock.  Billionaire businessman and Libertarian.
  18. Roger Ailes.  Founder of Fox News.
  19. Don Imus. Radio personality, philanthropist, professional curmudgeon.
  20. Barbara Boxer.  Jr. Senator from CA.
  21. Martha Stewart.  Fashion arbiter, CEO of Martha Stewart Omnimedia.
  22. Michael Bloomberg.  Former Mayor of NYC; eponymous founder of Bloomberg.
  23. Mitch McConnell.  Senate Minority Leader.
  24. Aretha Franklin.  Soul and R&B singer.
  25. Joe Biden.  VP of the U.S.
  26. Newt Gringrich.  Former House Speaker, author and conservative thought leader.
  27. Jerry Bruckheimer.  Co-creator of CSI, Cold Case, many others.
  28. George Lucas. Motion picture producer and director; world builder.
  29. Larry Ellison.  Founder of Oracle.
  30. Lorne Michaels.  Founder of Saturday Night Live.
  31. Erskine Bowles.  Co-leader of Simpson Bowles Committee. Prophet.
  32. Harold Hamm.  Founder & CEO of Continental Resources, shale/fracking leader.
  33. Diane Sawyer.  ABC news anchorwoman.
  34. Dolly Parton.  Singer, songwriter, entrepreneur.
  35. Cher Sarkisian.  Singer and entertainer.
  36. Janet Yellen.  President-Federal Reserve Bank; arguably the world’s most powerful woman.
  37. Bill Clinton.  Former President.  Co-founder of Clinton Global Initiative.
  38. Stephen Spielberg.  Motion picture producer and director.
  39. Dick Wolfe.  Co-creator of Law & Order franchise.
  40. James Rothman.  Yale Professor of Biomedical Science; Nobel Prize Winner.
  41. Camile Paglia.  Professor and author.
  42. Hillary Clinton.  Former Senator, former Secretary of State, Presidential candidate.
  43. Dick Parsons. Former CEO of Citibank, former CEO of Time-Warner, advisor to Providence Equity.
  44. Kathleen Sebelius.  Secretary of Health & Human Services. Charged with fixing Obamacare.
  45. Randy Schekman. California University Cell Biologist; Nobel Prize Winner.
  46. David Rubenstein.  CEO of private equity firm Carlyle.
  47. Bruce Springsteen.  Singer and songwriter.
  48. Mike Duke.  CEO of Wal-Mart.
  49. Timothy Dolan.  Cardinal of NY.
  50. Francis Collins.  Director, National Institute of Health.
  51. Chuck Schumer.  Sr. Senator from NY.
  52. Rush Limbaugh. Talk show host; most influential conservative.
  53. Bob Iger.  Chairman & CEO: Disney.
  54. Keith Alexander. General; Director of NSA.
  55. John Noseworthy.  CEO of The Mayo Clinic.
  56. Danielle Steele.  Top ten best-selling author of all time.
  57. Maureen Dowd.  Influential NY Times editorialist.
  58. Martin Dempsey.  General-U.S. Army. Chairman, Joint Chiefs of Staff.
  59. Rex Tillerson. CEO of Exxon Mobile.
  60. Howard Schultz.  Founder and CEO of Starbucks.

There were many other excellent choices, and my selection is largely arbitrary.  But I welcome your suggestions for additions (please don’t bother with deletions) and will consider them for my next update.  Post your comment here.

Sunday, December 15, 2013

Are Younger Employees Really an Asset to Health Plans?

We’ve been bombarded by news lately, proclaiming that The Affordable Health Care Act can only be successful if vast numbers of young adults join the plans.  And news that many, if not most, young adults have little or no interest in participating has also made headlines. Further, there are reports that a substantial numbers of young adults don’t even know about it.  But, who has evaluated the underlying claim cost data?  How does one know it is correct?
I, for one, have very serious doubts that young adults are significantly cheaper to insure.

Here’s why.
1.       As a CFO, I’ve been involved in purchasing employee health plans, and negotiating the terms and features of those plans.  I frequently asked to see the data supporting the assertion that health costs were concentrated in the older age cohort but never did.  Insurance companies and third-party administrators acted like there was rock-solid support for the claim that younger people have lower medical costs, but never produced supporting data.

2.       The assertion that fifty percent of total lifetime medical costs happens in the last year of life is irrelevant.  While this widely-circulated claim may indeed be true, with the average life expectancy of women in the U.S. of 80.8 years and men of 75.9, that last year of life is very likely to occur long after one has left the labor force.  (Note that life expectancy is increasing as well).

3.       While older adults in the workforce may indeed have more chronic ailments than younger, the cost of treatment of many of those ailments is falling.  Using heart disease as an example, with the development of statin drugs, continually lower-cost methods of bypass surgery, and the use of stents to improve blood flow, the cost of treatment of heart disease has declined.  With an increasing number of excellent generic drugs for cholesterol  lowering, blood pressure management, etc. the costs of managing chronic disease is dropping as is the possibility for costly heart attacks.  Even HIV/AIDS, which once threatened the financial viability of numerous plans, is now largely relegated to a manageable chronic disease.

4.       Employer health care budgets are rarely busted by chronic disease management.  So-called “shock claims” which spiral into six and sometimes seven figures, are more associated with:

a.       Car accidents, particularly with multiple occupants.  One of the most expensive health care claims I ever saw concerned a family of four involved in a horrific accident. All required multiple surgeries, extensive time in ICU and long physical therapy treatment after.  The total cost was well over a million dollars.  The source of that claim was a young family with young children.

b.      Motorcycle wrecks that result in expensive treatment.  While there are certainly older folks riding bikes these days, they tend to meet at point A for breakfast, ride as a group to point B for lunch, and return.  Younger riders are more likely to be risk takers.  In wrecks between cars or trucks and a motorcycle, the car usually wins.

c.       The delivery of premature babies.  The second largest claim I’m personally familiar with involved premature twins. The babies were in intensive care and given special care around the clock for weeks.  Again, having babies is not the turf of fifty year olds.

d.      Finally, I’ll admit that one category of expensive treatment usually concerns cancer, and that usually occurs with middle aged or older adults – but certainly isn’t exclusively so.  We all know of heartbreaking cases of children afflicted with this scourge.  Pediatric cancer is both incredibly sad and expensive.
It may be that there is excellent data that indicates that the cost of many older employees with chronic ailments overwhelms the costs of a few young employees with more severe medical issues.  But I’d like to see the data before I was confident in the current conclusion.

Assume for a moment that I’m right and adding younger workers into newly minted exchange plans doesn’t create as much financial subsidy from young to old as anticipated.  What effect does that have on the economics of the Affordable Health Care Act?

Monday, November 11, 2013

President Obama's TVA Proposal

Fortune Magazine recently ran an article on the TVA (“Uncle Sam’s River”, Oct, 28th.)  As a native Tennessean, I read the article with great interest.  In the President’s most recent budget proposal, TVA apparently was put on the disposition block.
Probably the vast majority of Americans have no idea that they own a utility company, or that it borrows with government-backed debt.  The Tennessee Valley Authority is a vestige of the Roosevelt administration’s efforts to end the Great Depression.  It brought electricity to great swaths of the rural South.

I propose that we Americanize TVA:
1.       Convert TVA to a “C Corporation” with approximately 350 million shares;

2.       Give each holder of a Social Security number one share; and

3.       Seek a listing on an exchange.
The American taxpayer has bought and paid for TVA and should own it directly.  And this would provide numerous benefits: Americans would feel a little richer, TVA would no longer be a credit drag on the full faith and credit of the U.S., and TVA would become subject to real governance via exchange rules, the SEC, Sarbanes-Oxley rules, etc.

Thursday, November 07, 2013

Sue Grafton and the Alphabet Series

I occasionally write book reviews, which I post here, or on Amazon, or on another of my websites. This really isn't a book review, but more of a commentary on Sue Grafton and her "alphabet series".

First, I wish Sue Grafton a very long, healthy, vigorous life.  According to Wikipedia, Ms. Grafton is 73.  While I do with her well, this, of course, is solely selfish.  I want to read her Kinsey Millhone “Alphabet” series for a long time.  I’m sure that I’m not the only fan who hopes she doesn’t retire after “Z”. (She is through the letter W currently).
In the protagonist Millhone, Grafton has created a self-reliant, disciplined, organized terrier of a private detective.  She lives a very modest lifestyle, is fiercely independent and very self-aware.  By-the-way, the series is set about twenty-five years ago, and has maintained that relationship to the current period.  Kinsey is generally a good, quick judge of character, is smart but not dazzlingly so, and solves each case as a result of tireless effort.

Ms. Grafton is a master of her craft.  While the writing is spare, she provides just the right amount of detail for the images of each scene to explode in the reader’s mind.   As the series has developed, she’s added a few recurring characters – regulars are  Kinsey’s landlord and friend Henry, Hungarian tavern owner Rosie, and a couple of on-again/off-again boyfriends.  While Kinsey long-believed that she was an orphan, she, and of course the readers, are learning that there are some relatives, which appear from time-to-time, usually not too welcomed.
Grafton also painstakingly researches each topic.  She recognizes all her sources and resources at the start of each novel.  It is only after reading a few  books in the series that it becomes obvious that she develops real knowledge on each topic before writing the book.

Most of the novels aren’t classic Ellery Queen style who-done-its, but rather a series of challenges between Kinsey and the bad guy(s).  And the bad guys tend to be small time crooks, crooked retirement home operators, or folks with broken moral compasses who cut corners, and occasionally those corners result in a murder.  Only every now and then is she up against organized crime or more serious criminals (see V is for Vengeance below).
Ms. Grafton writes each book as a standalone, so that new readers can enjoy and understand completely without having read others in the series.  However, if you read one and like it, I recommend that you go back to A is for Alibi and read them in order.
I prefer to binge-read the books.  I just completed U is for Undertow, V is for Vengeance and W is for Wasted.  Briefly on each: in U is for Undertow, Millhone is hired by a down-on-his-luck character who suddenly has a childhood recollection of  witnessing a burial in the woods.  He now thinks it was disposing of the body of a little girl who had been kidnapped. In V in for Vengeance, Millhone gets involved in a regional shoplifting ring. And in W is for Wasted, Millhone helps a former (and potentially future) boyfriend – also a PI) track down a doctor who committed murder to cover up his cooking the results of a drug study.  All feature Grafton’s taut style, thoroughly-researched backgrounds, and page- turning suspense.

I’m an avid detective/crime fiction reader going back to the Hardy Boys and Sherlock Holmes.  There isn’t a better written, more entertaining or enjoyable series than Grafton’s Alphabet series.
I noticed in two of the last three books, Kinsey has made more money than she usually makes for her private detective work.  I hope Ms. Grafton isn't setting up Kinsey, and herself, for retirement after Z....

Ms. Grafton - if someone happens to forward this to you, note that Rex Stout wrote 47 Nero Wolfe mysteries, with the last one when he was 88.
Binge-reading the alphabet series makes me sleep-deprived; nonetheless:  To long life Ms. Grafton, to long life.

Wednesday, October 23, 2013

Government Shutdown, EPA

NBC has been shadowing a couple of EPA workers who were laid-off during the government shutdown to discover the impact it is having on their household budgets and spending plans.
I wish NBC would spend some time in coal country to see what affect the EPA's open war on the coal industry has had on those working families.  As long as the EPA operates unconstrained, those jobs are never coming back.

Government Spending and Pop Culture

Last night I watched back-to-back episodes of "Castle", the popular crime series.
It was a two-parter, with a plot revolving around a series of events that, if touched-off, would result in the economic collapse of the U.S.
It turned out that the triggering event was a death of Chinese child who was the daughter of an influential Chinese businessman, and the death would be tied to the CIA.  That, in turn, would lead to the Chinese ceasing to buy U.S. government debt, leading to austerity measures, leading to tax riots, etc. etc. and eventual collapse of America.
It is interesting that Hollywood scriptwriters can foresee this, but our rulers apparently can't.

Monday, September 16, 2013

High-level Financial Comparison of Wal-Mart ( WMT ) and Amazon (AMZN )

Let’s begin with full disclosure: I own $WMT.  I don’t own $AMZN.  I shop both regularly, particularly the Sam’s Club division of $WMT for numerous products, and principally books and music from $AMZN.  I’m a loyal customer of each.
As an investor however, the Amazon valuation continues to baffle me.

I’ve compiled some numbers and ratios from each company for the trailing twelve months as of July 31, 2013 for $WMT and June 30th for $AMZN.
To make my job easier, I’m listing Wal-Mart first each time in the following comparisons.

Revenue: (in billions)

Absolute: $470.0   vs. $66.8

Revenue Growth $:  $12.4  vs. $12.5

Revenue Growth %:  2.7% vs. 23.1%

 There is no question that the clear growth winner is Amazon – adding $100 mil more in revenue in the last twelve months despite Wal-Mart’s base size advantage.  And the rate of growth is indeed impressive at almost 10X Wal-Mart’s.

Operating income: (in billions)

Absolute: $28.0 vs. $0.6

Operating income growth $: 0.6 vs. $0.0

Operating income growth %: 2.2% vs. 0.0%

Operating income as a percentage of total revenue:  6.0% vs. 1.1%

While Amazon matched Wal-Mart’s revenue growth, Amazon managed to add $12 billion in revenue and not have any of that flow to operating income.

 Net income: (in billions)

Absolute: $17.1 vs. $0.0

Net income growth $: $0.8 vs. $(0.8)

Net income growth %: 5.1% vs. (115.1)%

Amazon essentially has no income.

Cash Flow: (in billions)

(Note: I’m using a very simplified measure of operating cash flow- - net income plus depreciation and amortization.  Clearly incorporating working capital changes is better.  But that would take more time for this little project than I have.)

Absolute: WMT $24.4 bil vs.  AMZN$ 2.6 bil

Cash flow as a percentage of revenue: WMT 5.2% vs. AMZN 3.9%


ROIC: WMT 16.4% vs. AMZN (1.0)%

ROE: WMT 23.5% vs. AMZN  (0.7)%


Clearly holders of Amazon are being rewarded for stellar revenue growth and industry disruption.  And one could argue that those factors require some non-traditional valuation techniques.  I would argue to the counter: Amazon is not a new business; it has been around now for a generation.   I assume that there is little further efficiency gain for Amazon – it operates highly efficiently today – or any productivity gains they achieve are likely to be matched by similar gains by Wal-Mart. Therefore, it is difficult to see how Amazon produces an attractive return on capital without price increases-which would, in turn, reduce its advantage.

There are claims that Amazon’s real value lies in its cash flow.  But WMT’s cash flow dwarfs AMZN – albeit that much of that is consumed by dividends which AMZN doesn’t pay.

WMT’s ROE benefits nicely from years of stock buybacks thinning the equity as well as a decent level of leverage.  The resultant ROE (using an average of beginning and ending equity) is a very respectable 23.5% and ROIC, helped by very low interest rates, is an attractive 16.4%.  Conversely, I would argue that, while Wal-Mart can clearly handle its debt load, the amount of leverage may be hurting the share price some.

Finally, the returns on capital speak for themselves. If you have essentially no income, you have no return to capital.  If shareholders never demand a return of their capital, then I suppose there is no reason to provide a return.  A unique business model indeed.

My Position

I’ll continue to hold Wal-Mart, collect my increasingly rich dividend, and shop at both.  I predict that Amazon’s share price will come to earth at some point, but I don’t have a sufficient conviction to short it – and shorting against a billionaire CEO is too risky a strategy for me.