Many people viewed some of the games of the 2010 World Cup, including the championship in which Spain defeated the Netherlands 1-0. And, just as many people who were not at the stadium wondered what was generating the continual humming, bumble-bee sound. Well, it was the vuvuzela horn, and fans took liberty to explore the entire stadium space.

From an economics perspective, the World Cup created a noticeable trickle-down effect. As you review the accompanying infographic (click image to enlarge), you will notice the large number of horns sold, which caused a large number of - you guessed it - ear plugs to be sold.

Not all have been enthusiastic about the vuvuzela horns. Already, the horns have been banned at Yankee Stadium and throughout the Southeastern Conference (SEC) of U.S. college sports, among other worldwide venues.

Given the positive economic impact attributable to vuvuzela horns, where’s the vuvuzelove?

As Econgirl and many economists stress, correlation does not imply causation. 

Sure, our Dear and Loyal Readers might interpret our pontifications as harbingers of things to come and dutifully investigate further. Regardless, just because in March we highlighted more troubling signs concerning Moody’s Corporation (NYSE: MCO), doesn’t imply that said revelations caused the stock to plummet by 28%, from $30.23 (March 30) to $21.76 (May 11).  

We merely mentioned the behavior of savvy investors such as hedge fund manager David Einhorn at Greenlight Capital with respect to the investment attractiveness, or lack thereof, regarding MCO. Accordingly, the relationship between our revelations and the plummeting stock price is spurious at best.

Nevertheless, some investors got a wake-up call after reading MCO’s 10-Q filed May 7, or by reading more recent posts by Zero Hedge, published May 8 and May 11, and EconomicPolicyJournal.com that the SEC is investigating MCO.  Here is an extract from its 10-Q (bottom of page 20):


“On March 18, 2010, MIS received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS…”


Why MCO waited nearly two months to share this material information while Buffett was dumping shares is worthy of another blog post. Incidentally, didn’t another of Buffett’s investees, Goldman Sachs, also delay revealing its own ‘Wells Notice’ and other material information?

The opinion at Coventry League and elsewhere is Moody’s may have difficulties as a going concern if the SEC enforces a cease-and-desist from being a ratings agency. In that case, some might want to paraphrase Friedrich Nietzsche: “Moody’s is Dead.”

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Note: MIS is an acronym for Moody’s Investors Service, a reportable segment of MCO.

In the past few years, investors and tax payers have been victims of securities fraud from WorldCom and Enron, to Bernie Madoff and the shenanigans of Allied Capital.  Nevertheless, citizens continue to pay taxes to fund government regulators such as the Securities and Exchange Commission (SEC) to help mitigate or prevent such fraud.  However, there has been a growing scrutiny by investors and citizens regarding the competency of the SEC.  The SEC counters that it needs more funds from citizens to be effective.

Well, in December 2008, ProPublica noted an investigative report revealing unacceptable behavior and predilections of viewing felonious pornography by several SEC staff, including senior officials earning annual salaries of $222k. The report and blog went virtually unnoticed until a few months ago when the Washington Times wrote about the SEC’s porn problem and more recently several bloggers and organizations including the Wall Street Journal, Huffington Post, TechCrunch, and Gawker provided further details of the SEC’s illicit behaviors.

Interest rate spikes, currency devaluations, too-big-to-fails, the SEC and investment theses.  These are just a few topics addressed by David Einhorn, co-founder of investment firm Greenlight Capital.

Remember Mr. Einhorn?  He is the manager who uncovered alleged fraud at companies such as Allied Capital and Lehman Brothers.  Before everyone and their brother realized these allegations were substantiated with clear and verifiable facts, the messenger was vilified.

Given this backdrop, what are some of Einhorn’s opinions and trades of recent? First, he is expecting a major currency collapse and a surge in interest rates in the next 3-5 years (see footnote below).  This is evidenced by his large allocation to gold and comments citing imprudent government deficits, among other examples.

Regarding the SEC, Einhorn is unyielding, opining in front of Congress about the SEC’s “crooked culture and lack of enforcement.”  Furthermore, he does not leave doubt regarding his thoughts about too-big-to-fail companies: “break them up.”  Edward Harrison, founder of the blog Credit Writedowns, summarizes these topics in an article at Seeking Alpha.

For practical investment insights, Einhorn rarely disappoints.  Recently he and other investors presented Vodafone Group (UK: VOD) as being undervalued (Jan 2010).

Einhorn’s thesis is based on Vodafone’s 45% stake in Verizon Wireless.  Essentially, the trade is considered a “5.5% Inflation Protected Bond with Free Non-Expiring Call Options.”  Market Folly summarizes the trade, including the slide below:

Lastly, it may be worth the effort to conduct due diligence on Moody’s (NYSE: MCO).  Buffett has been dumping shares, while Einhorn has been increasing his short position...

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Note: Einhorn’s interest rate thesis does not contradict our belief presented earlier this year regarding near-term deflation.

There is disagreement among economic observers regarding whether the economy is more likely to experience troubling inflation or deflation in the next couple of years.

Some who expect increased inflation reference current fiscal and monetary policies that, alone, are inflationary. Examples include recent government stimulus packages, historically low discount and federal funds rates, issuance of massive amounts of government and municipal debt, and expansion of the currency base, among other factors. Essentially, the more currency being created from nothing other than one’s good faith results in higher prices for goods and services (and a correspondingly lower value to said currency), ceteris paribus, to paraphrase my former economics professor. 

As is the case with most theories I’ve been taught while sitting in an ivory tower, ceteris paribus is noteworthy concerning whether theories are useful practically.

According to many who expect deflation, the rationale references value of assets and social psychology.  Regarding the former, we’ve experienced the effects of decoupling the price of an asset and its underlying secured cash value.  There are many thought experiments.  Think of houses: if everybody had to pay cash for a house, home prices would likely be a fraction of what they are today.  If municipalities could not issue bonds at reasonable interest rates or assess taxes beyond a moderate amount, then their cost structure (compensation, pensions, contracts) and prices would be lower.  These are just two of many examples, albeit presented in a simplistic manner.

What we have experienced in the past two years regarding some banks, companies and municipalities is that the price they paid for their assets exceeded the current and ongoing value of those assets: residential and commercial mortgages, stocks, credit default swaps, and tax receipt streams, for instance. 

As such, by printing more money and issuing more debt, inflation can be expected.  But, if debt of all kinds must be written down, some by 50% or even 100% (bankruptcy), then deflation is most likely to occur (prices of many goods and services decrease*).

So, the question to ask yourselves, Dear Loyal Readers, is “do you believe the current stated value of debt instruments and future obligations (on-and-off the balance sheets of companies and banks; derivatives; social security and pension funds; mortgages; credit card balances; sovereign and municipal bonds) accurately reflect reality?” 

If your answer is yes, then expect inflation.  Otherwise, expect near-term deflation.

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* In this scenario, falling prices are likely attributable to reduced spending and money supply contraction (e.g., reduced value of debt/liabilities more than offsets FED monetary expansion policies).  See The Anatomy of Deflation by Professor George Reisman for an expanded explanation of deflation.

A hat tip to the Immobilienblasen blog for the cartoon and observations:

"So this remains the Houdini rally — no jobs; no pricing power; no broad participation; and no volume."

Remember the Saturday Night Live sketch with actor Christopher Walken portraying a music producer who prods a rock band to use more Cowbell?  Quite comical.  

Now, replace Cowbell with Education, and we get a sense of the laments of many highly educated, motivated and personable people.  Two blogs at Mish’s Global Economic Trend Analysis expose the proverbial elephant in the room.  The topics relate to a structural economic shift and the educational system.  

The broad theme is the U.S. has an oversupply of highly educated and experienced professionals and an undersupply of employment opportunities that align with said talent.   

The current economic environment accentuates this point, yet it has been an undercurrent for more than a decade.  The subtext of the topics highlights the rampant inflation of the cost of higher education and a preference for mediocrity, or worse, at many organizations.

Perhaps an outcome to these dynamics will be a resurgence of individual creativity and innovation, which doesn't necessarily equate to earning college degrees.

For those interested in strategy, adapting to a changing environment, consumer behavioral trends, and, well, outright mismanagement, then analyzing the newspaper and print media industry provides a real-world, in-progress case study.

Although headlines of the death of the newspaper might be an exaggeration at the moment, there is clear and present danger.  The business model of newspapers depends on advertising revenue, which comprises about 80% of its total revenue.  In 2008, advertising revenue dropped 16.5%, according to the Newspaper Association of America.  Barclays Capital projects a 22.0% decline in advertising revenue in 2009 (see Mint.com below).  Startling, but also mirroring the economic recession.

Nonetheless, organizations that will most likely survive the economic challenges and thrive will create a new business model, with digital media being more prominent.  The extinction of the traditional daily is not likely in the near term, although it will probably play a more niche role.  Similar dynamics are occurring with telephones, internet connections, software, music and movies, to name a few.

Mint.com presents a concise one-page visual of key metrics of the top 25 U.S. newspapers.  Many others have written about the struggles of print media; Slate.com highlights the strategic and mismanagement aspects of this topic.

Well, that’s all for now, as I need to check my favorite news and entertainment blogs.

Say it ain’t so.  How many more obscure, undercapitalized financial institutions are lurking in the midst?  According to a New York Times investigative article, and summarized here, Customer Asset Protection Company (Capco), based in Burlington, Vermont, may be at risk.

Capco provides catastrophic insurance to wealthy clients in the event their brokerage firm collapses.  Basically, it provides coverage above the $500,000 offered by the Securities Investor Protection Corporation (SIPC).

The concern with Capco sounds eerily similar to the abuses regarding credit default swaps in which some firms, including AIG, sold protection without having adequate reserve capital.  In Capco’s case, the article indicates that it might have only $150 million of capital to support an estimated $11 billion of potential claims.

It is prudent for investors and customers to hedge their hedges.  One example is to retain a public company as a hedge provider and then create a hedge on that hedge-providing company via puts/calls, short position, or both.  

To many Clevelanders and Ohioans, the economy never recovered from the last recession, or several prior to it, for that matter.   Today’s headlines and stories in the Cleveland Plain Dealer highlighted the state’s 10.2% unemployment rate in April, exceeding the nation’s 8.9% rate.  Even worse, foreclosures and Sheriff’s sales in Cleveland have pummeled the median sales price of existing homes, down 73%, from $62,000 in 1Q 2007 to $17,000 in 1Q 2009.

Understandably, citizens have looked to a sports figure - in this case, the prodigy of Akron and Fighting Irish alumnus, King James - to deliver temporary relief in the form of an NBA Championship.  It was not to be.  Instead, fans were brokenhearted witnesses of the importance of team composition, despite the immense talents and leadership qualities of one member. 

Accordingly, it’s a timely reminder to all, whether it’s a business or a sports team such as the Cavaliers, that to compete and succeed among the best, appropriate and complementary team members are vital.

That said, it’s not all gloom-and-doom.  Today’s headlines also mentioned that the Cleveland area has become the U.S. leader in Alpaca farming, and will host the Second Annual World Alpaca Conference this week, where Alpaca Farmgirl will be blogging and tweeting.

And, if that doesn’t adequately lift one’s spirits, then those “At Least We Are Not Michigan, err, California” bumper stickers might deliver some sort of consolation.