Talking Business - Was Steinbrenner Bold, or Just Lucky? - NYTimes.com

I posted a note earlier this week about George Steinbrenner and his financial success with the Yankees.

There was a good follow-up piece in this morning's New York Times about Steinbrenner. In it columnist Joe Nocera suggests that at least part of the Steinbrenner's success was due to luck rather than simply good business skills.

Here's an excerpt:

...What would have happened if {former Cleveland Indians owner} Mr. Stouffer had been sober that December day in 1971, and had said yes to Mr. Steinbrenner? Would Mr. Steinbrenner have been as successful if he had owned his hometown Indians rather than the storied New York Yankees? Or was his success due mainly to the fact that he just happened to buy the No. 1 franchise in the biggest television market in the country — at the exact moment the value for sports franchises was about to take off? To put it another way, was George Steinbrenner a good businessman, or just a lucky one?

Mr. Nocera may have a good point (and I thought the piece was very well-written) but I also believe that luck plays a role in many success stories, both business and elsewhere.

One of my favorite stories involves the early days of personal computers. When IBM entered the PC business in the early 1980's, they made the decision to buy the operating system rather than develop one internally. After some investigation, IBM found there were two companies in the Seattle area that had each developed a workable operating system. One made by a fellow named Gary Kildall. The other was a young kid whose mother Mary was on the board of the local United Way, and so had developed a friendship with Frank Cary, then head of IBM.

So a group of folks from IBM flew to Seattle, and went to see Gary Kildall. Unfortunately for Gary, he had decided that it would be a good day to fly his glider, and so literally was not a home when they showed up.

So the IBMers went to their next stop, a little company called Microsoft headed by this scrawny kid named Bill Gates. The rest, as they say, is history.

Was Gates just lucky? Or was he able to see the opportunity, and aggressively purse (note also: Microsoft did not actually have a workable operating system until right before IBM came to visit. Gates bought the system from a local programmer)?

In the end, I would agree that Steinbrenner was probably lucky, but he also deserves credit for using his lucky break so well.

Talking Business - Was Steinbrenner Bold, or Just Lucky? - NYTimes.com

Fed's volte face sends the dollar tumbling - Telegraph

OK, it's a beautiful summer day in Boston, and I snuck out of the office for today to play a little golf with my bride Christina (who, much to my dismay, is beginning to outdrive me).

Then I came in, and turned on the computer to see what some of my favorite columnists are thinking.

Yikes!

Here's the latest thinking from London, via Ambrose Evans-Pritchard of the Telegraph:

... a deep change is under way in investor psychology as funds and central banks respond to the blizzard of shocking US data and again focus on the fragility of an economy where public debt is surging towards 100pc of GDP, not helped by the malaise enveloping the Obama White House...

The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016.

"The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months."

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

Now, Mr. Evans-Pritchard has been more of the more gloomy writers in recent months, but clearly the markets are on edge. With the 2 year Treasury note now yielding 0.60%, and the 10 year Treasury below 3% again, the worries about double-dip and deflation seem very topical.

Lots to think about - even on the golf course!


Fed's volte face sends the dollar tumbling - Telegraph

Demand for financing leads global economic recovery toward 'wall of debt'

I suspect we're going to see more of these types of stories in the months ahead.

There is, without question, trillions of dollars of debt that will be maturing in the next few years. In addition, with virtually every government and most municipalities running fiscal deficits, there will be more need to raise capital from the bond market.

As this article from this morning's Washington Post discusses, there are generally two points of view on whether this tsunami of debt is something to be worried about.

The pessimistic view is that interest rates in general will be pushed higher, especially for lower quality borrowers, as massive amounts of debt need to be funded:

"There will be a tightening of financial conditions," said Mohamed El-Erian, chief executive at bond-fund manager Pimco. He said his company expects that governments, corporations and leveraged buyout firms will all have to cope with stiffer requirements as they refinance maturing bonds, "some of which will not be refinanced on any terms."

Then there is the more optimistic view, which says that the funds from the bonds that will be maturing need to be invested somewhere, and that probably will be in new bond issues:

Some analysts play down the risk, arguing that the low-interest-rate policy pursued by the U.S. Federal Reserve effectively pulls down rates across a variety of markets -- including for some corporate debt. Corporations and banks have comparatively large cash reserves, they note, and investors who shun equity markets may put money into well-rated corporate, government or financial bonds.

Even with the large amounts of government bonds to be sold, it was unlikely that the total demand for credit would outstrip supply by so much that interest rates are forced appreciably higher, said Larry Kantor, head of research for Barclay's Capital.

In general I am in the more optimistic camp. There is simply too much money chasing yield in a deflationary world. Moreover, ever since the U.S. government starting running huge deficits in the 1970's, there has always been this worry about governments "crowding out" private sector capital needs, but this never really came to pass.

Demand for financing leads global economic recovery toward 'wall of debt'

So where are all the muni bond defaults? - Investment News

One of the most common discussions I'm having with clients these days is about the credit quality of municipal bonds.

Small wonder. It's hard to pick up a newspaper these days without reading about the serious and deep fiscal crisis that many states and local governments are facing. And yet municipal bonds remain essentially unscathed.

The simple truth is that municipalities need the bond market more than it needs them. Delay or default on your debt obligations, and you lose your access to capital. And unlike individuals or corporations - who can use the bankruptcy code to avoid payments - many municipalities are legally prohibited from seeking bankruptcy protection.

Here's a section from today's Investment News:

“Municipal credit concerns have diminished,” Janney Montgomery Scott LLC, a Philadelphia-based adviser, said in a note to bond clients on July 12. “Investors continue to seek tax-free income and the strong credit track-record of general- obligation and essential-purpose municipal bonds.”

Lawmakers are willing to anger voters with reduced services and higher taxes to retain the favor of investors, who buy more than $400 billion of state and local debt each year to finance roads and bridges, pay for new schools and maintain parks and libraries...

Municipal bonds default less than company debt, Moody's said in a February report. The average failure rate for investment-grade municipal debt from 1970 through 2009 was 0.03 percent, compared with 0.97 percent for similar corporate bonds, the analysis said. Of 54 municipal defaults in the period, only three were general-obligation bonds backed by the full faith and credit of the issuers, Moody's said.

Defaults occur when a borrower misses interest payments or fails to maintain adequate reserves for future interest. Since the Great Depression of the 1930s, only one state -- Arkansas -- has defaulted. That was after it assumed debts of its municipalities to keep them from financial failure.

Most of the $15.5 billion of such events in the municipal market since 2008 involved debt backed by specific revenue streams, like levies on new Florida housing developments, rather than by a government's obligation to repay investors from taxes.

So where are all the muni bond defaults? - Investment News

Steinbrenner's death raises estate tax issue - Investment News

There have been lots of articles in the press today about the death of George Steinbrenner.

One of the pieces called him the best-known owner in professional sports, which I think is probably true (BTW: the portrayals of Steinbrenner in Seinfeld were always funny).

Since I am in the investment management business, I naturally was interested in some of the investment and estate planning issues raised in Steinbrenner's passing.

Although I doubt he planned it that way, Steinbrenner picked a good year to die from an estate tax standpoint, as the attached article from the Investment News points out:

The late New York Yankee owner, who died on Tuesday of a heart attack, left an estate estimated to be worth $1.15 billion, consisting primarily of his share of the Yankees' YES broadcasting network, according to Forbes. But in all likelihood, the tax man will take the collar on this one — and won't get a penny from the Boss' estate.

Indeed, Mr. Steinbrenner's family looks set to inherit his estate practically tax-free, thanks to the expiration of the federal estate tax in 2010 and the light tax regime of the Boss's home state, Florida. By comparison, New York state has a 16% estate tax.

“It is the ultimate home run,” Ronald Aucutt, a partner at law firm McGuireWoods in McLean, Va., told Bloomberg.

Steinbrenner's death raises estate tax issue - Investment News

A number of the articles have focused on the fact that Steinbrenner bought the Yankees in 1973 for $10 million, and today the Yankees are estimated to be worth $1.6 billion. So I pulled out my calculator, and figured this was a compound return of 14.7%.

http://www.nytimes.com/2010/07/14/sports/baseball/14steinbrenner.html

As it turns out, any way you look at it, the Yankees were a great investment, assuming they will be selling.

That said, according to the articles, while the Steinbrenner family has no plans to sell, it is not really clear who would actually pay that type of money for the Yankees. True, they are on the top of the Majors, but they also have the highest payroll in the league, and highest costs.

If the Yankees falter (we can only hope, says Red Sox nation!), attendance would surely decline (see: New York Mets). In other words, buying the Yankees today is like buying a high P/E stock - there's already a lot of "good news" priced in.

While it is true that the Steinbrenner family is largely avoiding estate taxes, the family also does not get the step-up in basis that previously heirs received at time of death. As you recall, when Congress put the "sunset" provision in the capital gains bill in 2001, they eliminated the step-up in basis at time of death in 2010.

If the Steinbrenners were to sell, they would pay long-term capital gains tax of at least 15% (at the federal level), or about $240 million.

Finally, there is the interesting question of how Steinbrenner's return on his Yankee investment would compare to other investments over the same time period.

For the purposes of this analysis I have ignored taxes simply because it makes the calculations way too complex (e.g. dividend tax rates have changed numerous times over the last 37 years, as have capital gains rates).

So, assuming that Steinbrenner's syndicate took the same $10 million that they invested in the of the Yankees in 1973 and invested in other assets, here's what the total return would have been:

• Even after the "lost decade" of 0% returns for the last 10 years, the S&P 500 have returned a compound return of 10.1% since 1973. This means the $10 million would have been worth approximately $350 million;

• Of course, if George had been smart enough to recognize that the stock market was in a bubble in 1999, and sold all of the stocks and reinvested in bonds, he would have received $383 million in 1999 which would today would be worth $705 million;

• $10 million in Treasury Bills starting in 1973 would have returned 5.5% pa , and be worth $72 million today;

• $10 million in Treasury Bonds starting in 1973 would have returned 7.5% pa, and be worth about $150 million.

So the Yankee investment was a "grand slam" for the Steinbrenners compared to other alternatives.

One more interesting point: I was surprised to see how much the additional 4% in total annual return from the Yankee investment relative to stocks added to the ending amount of money. That is, the difference between 14.7% pa and 10.1% pa may not seem too much, but over the course of 37 years it is huge - in this case, more than $1 billion more.

Football Games Have 11 Minutes of Action - WSJ.com

This is why I stopped watching football - and one of the reasons I enjoy soccer so much more. With soccer you get at least 45 minutes of non-stop action every half (plus any comp time). With football you get:

Here's an excerpt from the article:

According to a Wall Street Journal study of four recent broadcasts, and similar estimates by researchers, the average amount of time the ball is in play on the field during an NFL game is about 11 minutes.

In other words, if you tally up everything that happens between the time the ball is snapped and the play is whistled dead by the officials, there's barely enough time to prepare a hard-boiled egg. In fact, the average telecast devotes 56% more time to showing replays.

So what do the networks do with the other 174 minutes in a typical broadcast? Not surprisingly, commercials take up about an hour. As many as 75 minutes, or about 60% of the total air time, excluding commercials, is spent on shots of players huddling, standing at the line of scrimmage or just generally milling about between snaps. In the four broadcasts The Journal studied, injured players got six more seconds of camera time than celebrating players. While the network announcers showed up on screen for just 30 seconds, shots of the head coaches and referees took up about 7% of the average show.

Football Games Have 11 Minutes of Action - WSJ.com

Obscure book by British adviser becomes cult hit after Warren Buffett tip - Telegraph

OK, so I'm a sucker for books recommended by Warren Buffett.

But in this case I might just have to wait.

According to this story in this morning's London Telegraph, Mr. Buffett has been recommending this book about the collapse of the Germany's Weimar Republic in the 1920's. There are actually other books that have been released in the past year or so about the economies in the 1920's and 1930's - notably Lords of Finance by Liaquat Ahamed - but none carry the imprimatur of the Greatest Investor Who Ever Lived.

So after reading this short article (link below) I went to Amazon.com to see just how much it might cost.

Obscure book by British adviser becomes cult hit after Warren Buffett tip - Telegraph

Problem is, the hardcover version of this "instant" classic (which was actually published in 1975) is a cool $800. The paperback can be yours for "only" $39.

http://www.amazon.com/When-money-dies-nightmare-collapse/dp/0718302141/ref=sr_1_1?s=books&ie=UTF8&qid=1279024796&sr=1-1

For the time being, then, I think I'll just have to wait until the Kindle version comes out.