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Today’s Potpourri

May 30, 2012

State Budget

There have been a few things keeping me from blogging lately — like an imploding state budget and obvious ramifications from that predictable news. It is becoming difficult to keep up with the state’s revenue deterioration. “It has become worse than the worst-case scenario,” say our contemplative elected leaders. Personally, it lands in the mid-range of my scenarios, which you know makes it really bad.

The thing that bothers me most about this current budget crisis is that I don’t like to be converted into a short-term thinker. It seems the worse things get with our state finances, the more our visual horizon is lowered. Instead of looking ahead to see where we are going, we are looking straight down at our feet and hoping we don’t run into anything. Eventually, the problems become so overwhelming with the state budget that everyone involved suffers from the same short-sighted contagion, no matter how hard one might struggle against it. It is all an exercise in the predictable!

Face-plant

“What do you think of Facebook? Do you plan on buying any of their IPO?” How do I respond to these questions? Rather easily now that we have seen Facebook’s face-plant. No, I did not get sucked into the hyperbole about the Facebook IPO. Not because I knew that their debut was going to be a complete flop, but largely because there was so much hysteria behind this IPO. I never like buying the “in thing,” because the emotions affect valuations. I asked my 19- and 20-year-old kids what they thought about Facebook. I asked them why MySpace is so ‘yesterday’ and if the same thing could happen to Facebook. “Oh, dad (which interpreted means, get a clue), Facebook is just a fad. There will be greater social network products in the future.”

Facebook does not have a monopoly on social networking. It is our personal information that is of value to the company. And it is the selling of their personal information that Facebook users largely hate. I see the friction between what brings value to Facebook and what their consumers hate as a long-term problem. Also, Twitter and other social networks (LinkedIn) are very real competitors for Facebook. Sometimes, investing on emotions works and other times it doesn’t, but seldom do I think it is a good long-term investment.

What is really sad is that the State of California was counting on the Facebook IPO to help their budget shortfall by nearly $2 billion.

Mr. Market

The markets are not feeling so well this morning. Each day is a different story. The markets are up because concerns over Europe are easing; it’s down because of renewed concerns over Europe. Actually, it seems to be following the spreading contagion throughout Europe, but in reality it is a contagion attached to finance and, more specifically, debt enabled by finance. This morning the stated reason for our markets’ decline is Spain’s woes. I bet Greece is happy to get the spotlight off of themselves for a day or two.

Ten-Year Treasury Note 

Interest rates for U.S. treasuries continue to collapse. As I write this, the 10-year note is now at an all-time low of 1.62 percent. I thought it was really something that the 10-year note broke under 2 percent — but now we seem to be headed under 1.6 percent! Collapsing interest rates have various ramifications; it drives investors to other investment options in an effort to eke-out a little better return. This equates to taking on more risk. But the impact I am most concerned about is how diversified institutional investors, such as pension plans, make up the difference between low fixed-income returns and other, riskier investments. If you need to earn 7.5 percent in your overall portfolio and you are earning less than 2 percent on your interest for fixed income, you need to consistently average much higher than 7.5 percent on other investments classes within your portfolio. To do so might drive you to take more risks than you normally would. To take more risk means you are taking more risk and increasing your chance of losses.      

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