Blessed by the Potato

Looks like the credit tightening may be taken seriously, as Mark Carney’s warnings are being widely picked up now. There are several other articles with similar themes this week, indeed it seemed to be the Globe’s major story for the week.

In one Globe round-up, the “As one economist puts it, Mark Carney’s warning on consumer debt is akin to leaving the cookie jar in plain sight but telling you not to touch.” analogy was put out there. I don’t think that’s accurate — the metaphor there implies that Carney is being hypocritical or just downright negligent in his expectations. But the children and cookies framework would be better phrased as “Those are for guests, don’t touch!” Because there is a good reason for the cookies (low rates) to be out — to stimulate the economy, capital spending, etc. But they’re not for the kids (housing market) since they’re already hyper enough. The cookies aren’t arbitrarily out, and can’t be easily put away just because the kids are getting into them.

Ed Clark of TD explains why regulation is needed: even though they recognize the problem, the banks don’t want to move first to tighten lending because it would be a competitive disadvantage to the bank that moved first (plus, systematic risk is beyond their business plan, and these loans are essentially risk-free to them thanks to CMHC). A good lesson for deregulation in lots of other areas: competition alone doesn’t always lead to a good outcome.

Michael James had a few good posts this week. another on index investing. I’m not a people person, so I think it’s much easier to pick stocks than to pick advisors/managers…

John Hempton has a post up about some statistics on Chinese ethanol consumption (provided by a controversial producer). There’s a discrepancy between the statistics the company provides, and what the WHO (and educated guessing) suggests is the status of alcohol consumption in China. Either the stats are wrong, or there’s a massive over-capacity building up… I’m starting to worry about stories like these. Don’t know what to do about it yet, but it’s got me thinking…

Jenn sends along this article in the economist about why doing a PhD is usually a waste of time. Speaking of finishing a PhD though, Netbug sends this inspirational video with the helpful tip: “the way to finish something on time and on budget is to ship when you run out of time or money.” Just finishing something and sending it along is the problem I’m wrestling with right now – and I’m long past out of time for sending a first draft to my committee… time to just “ship” something! :)

Jeffery Simpson has a column on misinformed people. Perhaps not surprisingly, “The people who were the most misinformed – in terms of having opinions that varied the most from verifiable facts – were those who watched Fox News almost daily.” I love learning things (I should hope so, as I’ve been a student all my life), and I like being an educator: not even necessarily as a teacher/lecturer, but even just helping to correct misinformation here on the blog. I’m deeply disappointed by (deliberate?) misinformation in the media…

Winter has arrived: last night the wind was howling and the rain was freezing. A big swing in temperature from just a few days ago. Things are just going horribly right now: I’m not even halfway towards my writing goal for my thesis this week, despite spending all kinds of time staring at the screen and wishing it was over. The diet’s been shot to hell as I run out the last of the Halloween candy. Plus last night was a new low: with the rain and the cold and the wind I didn’t feel like walking to work, but driving seemed silly considering it’s only a 10 minute walk. So, I rationalized it by driving out to pick up a pizza, and then taking that to work. Two fitness goals killed with one stone!

Do you know what I like?

Puppies.

I’m walking in to work and it’s as cold out as it will be the day in hell when I finish my thesis (i.e.: frozen over), and I’m basically freezing my nuts off and cursing the very sudden arrival of winter winds. There’s this guy walking along at a perfectly normal pace, and trailing behind him are these two tiny puppies. They’re hauling ass just trying to keep up with him, falling all over themselves if they catch up and try to jump on his leg, and just generally enjoying the hell out of life. I’m freezing, that guy is freezing, and these tiny puppies who should have no body heat left to them are just having a blast out in the wide world, just super-excited to be outside.

Conclusion: Puppies are awesome.

Sometimes, life’s little lessons are both obvious and fantastic.

The Globe had an article on travelers choosing to head to US airports to take flights, and discussed/blamed airport taxes this weekend. There are a lot of people from here that go to Detroit for flights, as it is cheaper to drive down there than take a flight out of London or Toronto most times. Significantly cheaper, since it does take gas or bus fare to get down there, as well as the hassle of crossing the border. So, is that price difference attributable to taxes as the article suggests? “Pearson, which holds the dubious distinction of charging the world’s highest fees for planes to land, paid more than $140-million in rent last year.” That sounds like a lot, but Pearson saw 30 million passengers last year. The math is simple: the airport tax amounts to less than $5 per ticket. Believe me, I’m not driving to Detroit for five bucks. The price differential is coming from somewhere else. Maybe it’s the other fees the airport is charging, rather than the government, but I suspect more blame can be pointed at Air Canada than Pearson (though the article did discuss other government subsidies in the US).

Canadian Financial DIY shows that beta is not the best measure of downside risk.

In an aptly titled article, “Priszm’s recipe for disaster”, Canadian Business magazine looks at the troubled operator of KFC restaurants in Canada. You may recall that Priszm was my single worst stock pick since I started doing my own research (yes, even my zero-or-hero bet on Freddie Mac preferreds are doing better). IMHO, Priszm’s “recipe for disaster” was two-fold. First, they didn’t have control over vital parts of the company’s budget: Yum brands (the owner of the KFC rights) did. They had the usual trick of deferring capital spending (i.e.: renovations) and claiming that since depreciation was a non-cash expense, they could pay out so much of their cashflow. Normally, that works in the trust model, if the depreciation expense you can claim doesn’t reflect the reality, so you can indeed defer/reduce capital spending. Unfortunately, it turned out that to renew the KFC franchise agreements, Priszm had to agree to renovate its locations, whether they needed it or not. That put them in a bit of a bind, not having been saving up for that all along. The second issue was that they had an interest-only loan (something I did not catch when evaluating them earlier on), and it all rolled over at once. So when lending is tough (e.g.: now) they face a liquidity crisis. I wasn’t impressed with the communication to investors about that issue, but communication issues aside, that looks to be the biggest risk facing the company right now. Either they find a new lender (and the clock is ticking — they’ve already arranged for one extension, which runs out in a month), or they could find themselves defaulting.

I think the big take-away lesson there is to avoid balloon payment schemes: it’s much easier to roll small portions of your debt, even if you have to suffer high interest rate spreads, when conditions are tight. And, if it comes to it, aggressive focus on reducing the debt could mean a company could pay off the debt as it matured, as long as the amount maturing in a given year was within its capabilities. Many lending covenants will keep companies to something like a 5 to 1 debt to earnings/EBITA ratio, so if the loan maturities are evenly spread out over 5+ years, it should be possible to become debt free by paying off the loans as they mature (by suspending dividends/capital reinvestment spending/deferring maintenance etc). Priszm’s one big loan strategy deprived them of that option.

Back to the issue of depreciation, it’s really an interesting one, and something that’s fairly important when looking at whether or not a trust’s payout is sustainable. The accounting rules provide guidelines for what depreciation figures to use — and it is important to have some kind of standard, or it would be all too easy to manipulate the books by just choosing a figure for depreciation that suits your mood. But a standard figure for depreciation is going to be perfect for almost nobody. Take computers for instance. At home we have here a powerful desktop system I use for everything from gaming to doodling to running MATlab scripts (as well as blogging, checking email, etc). The price curve of computers is such that all that power didn’t come cheap, and two years later that computer’s likely worth maybe 30% of what I paid for it, as now it just has the power of a typical mid-range desktop system. Wayfare on the other hand just has a little netbook for doing word processing and surfing the internet (and because it’s light and portable), and even though it’s also two years old now, it’s probably still worth at least half what she paid, since it’s still perfectly suited to achieving those goals. Similarly, you’ve probably seen lots of workplaces with downright ancient technology that still serves their purposes fine, even though it was long ago depreciated to zero on their balance sheets.

So, one example to think about: Canadian Helicopters (CHL.UN) is one company I like a lot – they’re paying out a decent amount of cash, and they’re earning that even under GAAP earnings. They amortize their helicopters at 4%/yr, straight-line (that is, after 25 years, the helicopters are recorded as having $0 value). I’m told though that a helicopter is far from worthless, even after 25 years. Though they didn’t say how old the helicopters were, in 2009 CHL sold 11 helicopters (plus some land) for $30 million. It’s unfortunately not spelled out how much of that was for the helicopters, or how old the units were when sold (likely fairly old since the buyer is reported to be replacing them within 2 years), but the end result was a reported one-time gain of $1.4M on the sale. Anyway, my point is that here’s a company that’s likely getting close with their amortization figures, or potentially even over-reporting depreciation (that is, their assets may be worth more than their balance sheet indicates). Though I have a “full position” in CHL at the moment, and though it’s been up a fair bit this year (I generally prefer buying stocks when they’re down), I’m thinking of getting more for this reason. The biggest issue is that its largest few clients make up a large part of their revenues, and can be fickle — Ornge took over their own operations, and for the NWS work, CHL lost out in the last round of bidding. That was offset a bit by picking up more work in Afghanistan, but now a very large part of their business is focused there.

Jim Chanos makes the case to CNN that China’s in a construction bubble. What to do about it? How will that affect the fertilizer and oil stories for China?

Michael James reminds investors that a good reason to limit trading is because of the opposition. I have to wonder if they’ve got room for another almost-PhD on their team :)

The folks at CMT report that TD’s Ed Clark supports a return to 25-year amortizations being the maximum. I’d support that: though it might be nice to have a 35-year amortization as an option for when times get tough, it’s just too tempting for enough people to make it troublesome, plus, it’s a systematic risk issue. After the first 5-year term (about the amount of time the average person goes before picking up and moving again), a person with a 35-year mortgage has only paid off about 7% of their loan. Combined with a minimum 5% down-payment, and it doesn’t take much of a move downward in house prices at all for that person to find themselves in negative equity (or effective negative equity, where their equity is not enough to allow them to sell the house and cover closing costs without finding additional funds). On a more traditional 25-year mortgage, almost 13% of the principal will be paid down in that first 5-year term. [Note that this is an interest-rate dependent calculation: I put 4% into the mortgage calculator, but higher rates result in even less principal paid down: at 6%, the paydown becomes 5% and 10% for the 35- and 25-year amortizations, respectively]

The WikiLeaks release is making waves. I know that they are themselves very secretive about where they get their information from, perhaps to protect their sources, but I have to wonder how they’re getting so much information. I also wonder if they think through what they’re doing. Scott Gilmore had an oped in the Globe examining that issue. A commenter also pointed out that these kind of full, plaintext releases may compromise cryptography. I think that modern techniques in use by governments will still be strong even with a number of cases of cryptotext and plaintext to work with, but I think it may be a question worth asking, especially if there’s a concern of a player with a long memory breaking transmissions from long ago (the news says the releases date back to 1966).

I was explaining my playlist at work today:

“This is a song about a mad scientist who is lonely, and builds himself a girlfriend.”

“This is a song about a giant squid who is lonely.”

“This one’s a love ballad from Charon to Pluto, trying to reassure and cheer up Pluto after we revoked its planet status.”

“This is a song about bedtime and how you long for the comfort of your trusty old teddy bear.”

“A whole song about Ikea! You guys all like Ikea.. for college kids and divorced men…”

“You know, sometimes, the world just wins, you know? It just fucking wins. Every. Goddamned. Time.”

“Uhh… Tater, are you trying to tell us something?”

No, I just like JoCo, ok?

Oh, fun human tricks!

So there’s this yoga pose that involves touching your nose to the ground without supporting yourself with your hands, and then sitting back up on your knees. It sounded impossible to me, but the girls say it’s super easy, and doesn’t require much back strength at all. So they do it: they kneel on the ground, with their bums right on their heels, then, with their hands behind their backs, lean forward and touch the ground gently with their nose, and then come back up. I’m amazed: it looks like magic, like that shouldn’t be possible. So they convince me to try it, and I realize why I think it should be impossible: because for a man, it is. My centre of gravity is high enough that when I start to lean over, it goes in front of my knees, and thud, I faceplant into the ground. Hard. A fun prank you can play on any male friend who doesn’t know better! (Or one who does, but is easily convinced to try stupid things that look like they should be impossible for him).

These Rogers bills are killing us. Ok, financially, we can afford $35/mo, but it just seems so silly to spend that much (now with HST!) for basic, analog cable. We don’t see the value in the higher TV packages, and especially not in digital. Especially now that there are so many shows offered on demand online (e.g., Jon Stewart on the Comedy Network, all of BNN’s programming). I haven’t watched TV in like 2 years now, and don’t have any kind of cable at my place in London. Wayfare, unfortunately, stipulates that she must be able to put something on in the background while she veges in the living room, and hasn’t wanted to give up cable.

For a while I was using my Xbox with TVersity to stream shows from the computer, but that was a little cumbersome because it meant the computer had to be up-and-running with TVersity going, etc. Wayfare wants something simpler.

So I was encouraged to see the Iomega ScreenPlay Plus HD Multimedia Player come up as an option. It’s cheap: $150, which includes a 1 TB hard drive, and promises to be easy to use, plugging right into the TV and playing most of the common digital video formats.

First up, right out of the box it looks well put-together: there are a few pieces of foam to shockproof the drive, and the cables are in baggies, but other than that the box is split into 2 neat compartments without a lot of wasted packaging. Best of all, none of that ridiculous hard-shell packaging crap that drives me nuts. It has a remote control for operating the player part of the system, and yes, it comes with batteries. It also comes with a (rather short) USB cable, and composite and analog AV cables. Nice.

I can hook it up to my computer just like any other external USB drive, and load it up with files.

Then, it also has another USB port on the front so you can plug in another USB drive and just use the player function: something I already know will come in handy since Wayfare was a little hesitant about downloading shows and then having to unhook the drive from the TV to load them on it. She can just download them to a key or other drive, and play from there.

The operation with the remote and viewing content on the TV is straightforward. Unfortunately, the file list is as “large tiles” where the tiles are unhelpful icons just showing that you are looking at a video file. Lots of wasted screen real estate there. Only 7-8 characters of the filename show up under the large icons, with a fuller name at the bottom. Weirdly enough, even though the name at the bottom only takes up half the screen, it still truncates after 30 characters or so. I tested a few DIVX files and they all played fine — some looked great, but others had a fair bit of graininess/artifacts to them. Not sure why the difference, but those same files I’m pretty sure showed up fine on the Xbox/TVersity combo. I may have to investigate the video quality a bit more… One file that absolutely refused to play over TVersity played the video, but not the audio, so it doesn’t look like there’s any more capability there. OGG and MKV files don’t even appear in the file list as options, just AVIs and WMVs.

With composite and HDMI outputs it does have high def capabilities, but I didn’t test those out.

So from a video player point of view, it does work out of the box, but looks like it could use a few more refinements yet. Oh, one other weird bug is that it sorts capital and lower-case letters separately (i.e.: it would order a list of shows like Alpha Delta Echo November Zulu alpha bravo delta… etc.), which is just not right.

I’m disgusted by this article in the Huffington Post. I’ve been warned about that rag and the quality of their science knowledge (worse than none) before, but it became the topic of some discussion over at PriusChat, and I had to check it out for myself. Note that I have ranted on this subject before.

The author describes her experience buying a Prius, after which she experienced headaches. She took the car back to the dealer, got a Highlander instead, and the headaches went away.

If that was all there was to it, it’d be fine: a weird anomaly, who knows why it happened, but her problem is solved so good for her.

But that wasn’t all there was to it. Because the Prius is a hybrid, she immediately jumped to the conclusion that somehow, the magnetic fields were causing her headaches. She then goes on to insinuate that these same fields caused “inflammatory” issues and a brain tumour in people she knows who happen to drive hybrids.

This is not evidence, it’s not science, it’s fearmongering of the worst sort.

To try to add weight to her arguments, she got a “meter” and tried taking some measurements of the magnetic fields on her own. And you know what, the only thing the general public fears more than magnetic fields are numbers, so you can bet that went well. She obviously did not know how the meter (or magnetic fields) work, because she only gives one number in the article.

Here’s the thing about magnetic fields: they’re kind of like sound. You have a frequency, and a strength. So to say you have a sound of 70 dB, or a magnetic field of 2 mG, doesn’t fully describe it. You’d also want to know if it was a deep bass thrum, or a middle C, or so many Hz for the magnetic field. And she doesn’t say that anywhere.

That gets particularly important when she pulls out this mystery meter. I’ll bet you dollars-to-doughnuts she’s trying to use a cheap “trifield” type survey meter, that only has a little dial readout for showing field strength. These are meant to be used around power line fields where you know the frequency you’re dealing with in advance, and they give very screwy results when presented with fields of unknown frequency and transients. Unfortunately, all we can say about the fields present in a car is that they are highly unlikely to be 60 Hz powerline fields.

Often, these meters are induced-current based, so if you have a 1 mG 60 Hz field, it shows up as 1 on the meter. But, if you have a 1 mG 600 Hz field, it shows up as 10 on the meter. So when someone who is unskilled at science or numbers — or much of anything really — gives a number in an article, I have basically zero faith that that number represents what they think it represents. For example, she says that just turning on the Nav and AC system in her car increased the field almost as much as the hybrid drivetrain did, but that makes little to no sense, on many levels. First off, the nav and AC shouldn’t draw nearly as much power as what’s needed to move the car (though all of these are well-shielded in a hybrid), so the measurement shouldn’t have gone as it did. And even if that was the case, it would mean that the nav and AC should be just as much a cause of her headaches as the hybrid drivetrain if she believes magnetic fields are responsible. She shouldn’t be out on a crusade against hybrids, but against in-dash nav systems!

She justifies getting a nav system in her Highlander by saying that the slightly smaller Prius “compacts” the fields, again showing that she doesn’t understand how things work — the extra space in the SUV is wasted, the design constraint still puts the nav system at arm’s reach for the driver.

She then goes on to insinuate that hybrids pose a health danger, remarking that “I started to wonder about my clients who drive hybrids. Every one of them has an inflammatory issue that baffles me…” Her byline says that she’s “Yoga, health expert”. What do you want to bet that every one of her clients, no matter what they drive, has “an inflammatory issue”?

The conclusion though was the biggest tip-off for anyone remotely familiar with the FUD surrounding hybrids that she was not a source to be taken seriously: she repeats some of the nonsense about the batteries and Sudbury, that has been debunked many times (including here), clearly indicating that she has not done her homework.

Scientific articles have peer review systems to try to catch these kinds of glaring errors, and those occasionally do fail (recently, our group tore apart an article, providing 3 pages of corrections, and the other reviewer said simply “it’s fine”). But the mainstream media, which should be more careful since it deals with a more credulous audience, often has much more glaring mistakes present — perhaps because journalists are equally credulous when it comes to technical matters.

All that said, we return to the issue of her headaches. It’s been said that we can’t disagree with the fact that she experienced headaches that went away when she changed cars. I’d say that we could disagree with even that level of evidence (did she make it up to get a controversial article out that other people would cite, even if just to debunk her?), especially given how subjective and random headaches can be. But, let’s grant that her headaches did happen, and even that they went away with the change in cars. It could be that the headaches were unrelated to the car itself, and could have been due to the stress of buying a new car, worrying about finances, etc., and would have gone away in a few days/weeks anyway. But even if we grant that somehow, the headaches were due specifically to the car, that does not lead us to blame the hybrid transmission and/or magnetic fields. There simply is no evidence of that. She had an individual problem, and she solved it by changing cars, and that’s great for her. But it’s misleading to then go and blame one specific aspect of the car without any evidence. She could have been allergic to the ecoplastic used in the dash, or to a host of other things. My favourite theory revolves around the rearview mirror: the Prius is a great car and I love it, but the rearview mirror is horribly low. I’m constantly ducking my head to look under it to check for pedestrians as I make a right turn, and if she was doing the same that repetitive head-ducking motion could have given her a headache. Or, similarly, the rear spoiler splits the rear window, at just about the height most cars’ headlights fall. If she’s driving down even a moderately bumpy road, their lights would constantly strobe to her point of view as they disappear behind the spoiler and reappear above or below it.

There are numerous reasons why this car in particular could be giving her headaches, and unless she’s willing to get back in it for some experimentation, we can’t say what factor could be responsible (if any). It brings us back to the issue of placebos: for an individual person, a placebo may work to solve their problem, such as a headache. They may be willing to pay money for a placebo (e.g., a homeopathic tincture). On the individual level, that’s fine: do what you need to do to solve your individual problem. But on a societal level, we don’t want to ascribe efficacy to what we know are really just placebos and have them for sale in our pharmacies, because it’s not good science, and it’s not good policy. Likewise, we don’t want to go around banning things like cell phones and wifi and hybrids without evidence that they are indeed causing harm (and if she’s afraid of hybrids, man, wait till she sees some of the controversy over cell phones!).

Finally, a quick repeat of my note on risk vs benefits. We know that hybrid cars have demonstrable environmental and financial benefits. We know that they can reduce our individual exposure to known carcinogens (e.g.: diesel), and our societal exposure to other pollutants. We don’t have good evidence that they even do have increased magnetic fields inside of the passenger compartment, and if they did, whether those fields would be harmful. The risk-benefit right now is highly likely skewed towards there being a worthwhile benefit, but because people are so afraid of the unknown, the unknown risks are large in their minds, and lead to articles like this one.