Southwest to buy Airtran

That was unexpected.  A sign of even more consolidation coming to the industry?  Maybe the industry as a whole can actually become profitable in the long-term?  Is this bad news for consumers?

A Review of Jimmy Stewart is Dead by Laurence Kotlikoff

I loved the author's The Coming Generational Storm, so I was really looking forward to reading this.  I was sadly disappointed.  Perhaps Professor Kotlikoff suffered blunt trauma to his head in the intervening years?  Because I cannot believe that the insightful author of The Coming Generational Storm could produce this nonsense.  This is the kind of ivory tower, pie-in-the-sky, impractical, oversimplified tripe that gives academics a bad name.

Where to start? Perhaps the most important criticism is that the scheme outlined in this book provides no replacement for the fractional reserve system, which generates 97% of the money circulating in our economy.  Individual entities functioning as lenders cannot create money through fractional reserve accounting. Only banks as they exist today can do that.  If only individual entities loan money (which by the way would require them to take time away from whatever specialized work allows them to make money and become experts on lending - another catastrophic failure of Kotlikoff's idea), we could only create 3% of the loans that currently exist. The real economy would have to shrink by 97%!

In light of a failure so abysmal, perhaps it's not necessary to say anything else, but the other flaws in his system while perhaps not as catastrophic do illustrate how little thought he's given this conception.

* Without risk-taking banks can only make a profit through the fees they charge on the pass-through products he proposes. Many of them would be completely unworkable. As the most obvious example: who would PAY to have a bank hold their cash? DUH!

* His idea that people would buy pass-through products that would replicate credit default swaps and life insurance would require everybody to become a PhD quant.  What makes him think this would work any better than the current system?

* Finally, our system failed because of human's intrinsic nature to find and take advantage of the misincentives and flaws that are endemic to any human enterprise. The idea that smart guys won't find the holes in his system and exploit them just like the current parade of criminals did with our existing system is naive to say the least.

In short, the premise of this book is irreparably broken.  The book is not worth the paper it's written on.

SAP to buy Sybase

SAP has agreed to pay $65 a share for Sybase ($5.8 billion in cash) handing the maker of mobile and database software a premium of more than 55%.

United and Continental approve merger

Will be world's largest airline.

Directors at Continental and United airlines have approved a stock-swap deal that would combine them into the world's largest airline.  The deal values Continental at some $3.2 billion.  The Sunday board actions were described by a person with knowledge of the votes, who declined to be identified because the companies plan an announcement on Monday.  The combined airline will be called United, based in United's hometown of Chicago, and run by Continental CEO Jeffery Smisek. United CEO Glenn Tilton will be chairman.

HP to buy Palm

HP and Palm announced that they have entered into a definitive agreement under which HP will purchase Palm at a price of $5.70 per share of Palm common stock in cash for an enterprise value of approximately $1.2 billion. The transaction has been approved by the HP and Palm boards of directors.

Two thoughts:
1) This is a great plan for HP because we all know how well the acquisition strategy worked out for Fiorina.
2) At least it's a good buy at $5.70 a share for a company that IPO'd at $38, moving to a high of $165 and closing at $95 on its opening day.  

China's Geely to Buy Volvo From Ford for $1.8 billion

http://www.foxnews.com/leisure/2010/03/28/chinas-geely-buy-volvo-ford/?test=latestnews

Not again!?

Lehman used Repo 105 for no articulated business purpose except "to reduce balance sheet at the quarter–end." Rather than sell assets at a loss, "[a] Repo 105 increase would help avoid this without negatively impacting our leverage ratios." Lehman’s Global Financial Controller confirmed that "the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet" and that "there was no substance to the transactions."

But the decision not to disclose the effects of those judgments does give rise to colorable claims against the senior officers who oversaw and certified misleading financial statements – Lehman’s CEO Richard S. Fuld, Jr., and its CFOs Christopher O’Meara, Erin M. Callan and Ian T. Lowitt. There are colorable claims against Lehman’s external auditor Ernst & Young for, among other things, its failure to question and challenge improper or inadequate disclosures in those financial statements.

Ernst & Young was advised by Lee on June 12, 2008 that Lehman used $50 billion of Repo 105 transactions to temporarily move assets off balance sheet and quarter end. The next day ‐ on June 13, 2008 ‐ Ernst & Young met with the Lehman Board Audit Committee but did not advise it about Lee’s assertions, despite an express direction from the Committee to advise on all allegations raised by Lee.

http://lehmanreport.jenner.com/

Top 25 Market Cap Companies

1 Exxon Mobil XOM $316B
2 Microsoft MSFT $253B
3 Wal-Mart WMT $204B
4 Apple AAPL $203B
5 Procter & Gamble PG $183B
6 Johnson & Johnson JNJ $176B
7 General Electric GE $175B
8 Bank of America BAC $172B
9 JPMorgan Chase JPM $170B
10 International Business Machines IBM $162B
11 AT&T T $150B
12 Wells Fargo WFC $152B
13 Cisco Systems CSCO $148B
14 Chevron CVX $147B
15 Pfizer PFE $138B
16 Google GOOG $138B
17 Berkshire Hathaway BRK $136B
18 Coca-Cola KO $124B
19 Oracle ORCL $124B
20 Hewlett-Packard HPQ $121B
21 Intel INTC $116B
22 Merck MRK $114B
23 Citigroup C $113B
24 Pepsi PEP $100B
25 Philip Morris PM $94B

Wow! This is HUGE!!

Coca-Cola's (KO 52.75, -2.41, -4.37%) is acquiring all the assets and liabilities of Coca-Cola Enterprises (CCE 25.54, +6.36, +33.16%) North American business (KO currently has a 34% equity ownership in CCE). This reverses a business strategy of keeping bottling separate that has been in place for over a century.

Mathematica Links

Economics

Econometrics

Financial Engineering

Financial Risk Management

Moral Hazard: Reforming the Financial System

http://www.cfawebcasts.org/modules/Catalog/CourseDetails.aspx?ProductGroupID=7252

Why do we buy stuff from China again?

US product safety authorities plan to launch an investigation into the presence of the toxic metal cadmium [a known carcinogen] in children's jewelry imported from China after lab tests showed some pieces were made almost entirely [i.e., as much as 91% in some cases] out of the dangerous substance. (Source: CBC News)

I've said this before, and I'll say it again. There's no such thing as an economic free lunch. If it's cheaper to make in China, it's because they cut corners that we don't. Everybody thinks it can be done because labor in China is cheaper. If the exact same product could be produced in China for less, then every firm would do it ... which would bid up the cost of labor in China (and bid down the cost of labor in the US) to the point where the profit opportunity would disappear. Labor in China and labor in the US don't even need to come close to parity, since there are so many additional expenses associated with manufacturing abroad. It's basic economics.