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Good Reading -- December 2010

Merry Christmas and Happy New Year!


Facts and Figures

  1. There are about 8,000 banks in the U.S. with a total of roughly $12 trillion in assets. The four largest banks (BAC, JPM, C, and WFC) now control a combined $7.68 trillion. Including the next two banks/broker-dealers (GS and MS) takes the tally to more than $9.4 trillion.

  2. Approximately 60% of adult Americans shop at Wal-Mart at least once per month. More than 80% shop there at least once per year.


  • I think I've read most or all of the "bailout/financial collapse/Great Recession books," but one I've mentioned before deserves special attention. All the Devils are Here came out fairly recently and it is by far the best in class. Bethany MacLean is a co-author, and she is exceptionally good; her prior book, The Smartest Guys in the Room, is also excellent and an important read for any investor or businessperson. In this latest effort, the treatment of the topic is more thorough and thoughtful than others' -- focusing more on the "why" and "how" than just the "what." It might not contain a lot of new information if you've been paying close attention, but either way it is particularly good as a comprehensive recap of the integrated mess of the last 10+ years in the economy and financial markets. Highly recommended.


  1. Emails between Warren Buffett and Jeff Raikes of Microsoft -- I just came across this really interesting exchange from 1997 which touches on the business fundamentals of Microsoft, the Internet and technology landscape, and investing more broadly. Amazing how quickly things change over just 13 years...(Note: Comes from a reputable source and seems legit but I can't vouch for authenticity.)

  2. "How the Government is Creating Another Housing Bubble" -- more excellent commentary from Ed Pinto on the ongoing, government-driven debacle in housing finance. See the very bottom of this email for Mr. Pinto's introductory comments and see the attached document for the full essay.

  3. "All That Glitters" -- the latest from Howard Marks. This time it's a mostly great, thoughtful commentary on gold, which is indeed best thought of as a religion (i.e., it requires faith) and/or a fiat currency. But he lost me right at the point he seemed to suggest it's ever a good idea for an investor to think in the "third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be." That is a very dangerous and very difficult game to play, in my opinion, and a long way from my definition of investing. I would stay more in the Graham camp in that we don't necessarily always know why a gap between price and value exists or how/when/why it closes, but it almost always does close eventually; everything else is really just noise.


  1. "In China, Cultivating the Urge to Splurge" -- everybody loves China's economic prospects, but this article points out some of the many considerable challenges China faces going forward. Jim Chanos's take on China carries more weight every day, in my opinion.

  2. Law firm review recommends Calpers change its fee-payment structure -- one article here and another here. Amazing to think how many tens or hundreds of millions of its retirees' dollars Calpers spent flushed to learn this lesson. Will be interesting to see if management fees actually keep going down.

  3. "Ten Psychology Studies from 2010 Worth Knowing About" -- a few of these are pretty interesting.

Copied Below

  1. "A Dying Banker's Last Financial Instructions" -- interesting not just as a life story but also as a business story...tells you an awful lot about how Wall Street's so-called experts really think and work. (Note: I mean this as an idictment of convention on Wall Street, not necessarily as an endorsement of the book, its recommendations, or Dimensional. Although for the great majority of people, the cheapest index-approach is in fact the way to go, and it is in almost all cases superior to the active management approach as practiced by 99.9% of Wall Street.)

  2. Consuelo Mack's Interview with David Einhorn -- the usual trenchant insights from Einhorn. I whole-heartedly agree with everything here (exceptthe part about buying gold, of course).

  3. "Mittel-management" -- interesting look at some very impressive businesses in Germany and their enduring characteristics.

  4. "Wall Street's Worst at Least Can Do the Math: Jonathan Weil" -- the government tries to "send about message" about cracking down on financial criminals so as to deter future crimes. Turns out that the government was cooking the books itself in accounting for its "success." Great message.

  5. "Bargain Junkies are Beating Retailers at Their Own Game" -- a look at the world of super hyper crazy coupons. This is both amazing and terrifying (especially if you're a retailer). H/t Miguel at Simolean Sense.

Dying Banker’s Last Instructions



There are no one-handed push-ups or headstands on the yoga mat for Gordon Murray anymore.

No more playing bridge, either — he jokingly accuses his brain surgeon of robbing him of the gray matter that contained all the bidding strategy.

But when Mr. Murray, a former bond salesman for Goldman Sachs who rose to the managing director level at both Lehman Brothers and Credit Suisse First Boston, decided to cease all treatment five months ago for his glioblastoma, a type of brain cancer, his first impulse was not to mourn what he couldn’t do anymore or to buy an island or to move to Paris. Instead, he hunkered down in his tiny home office here and channeled whatever remaining energy he could muster into a slim paperback. It’s called “The Investment Answer,” and he wrote it with his friend and financial adviser Daniel Goldie to explain investing in a handful of simple steps.

Why a book? And why this subject? Nine years ago, after retiring from 25 years of pushing bonds on pension and mutual fundmanagers trying to beat the market averages over long periods of time, Mr. Murray had an epiphany about the futility of his former customers’ pursuits.

He eventually went to work as a consultant for Dimensional Fund Advisors, a mutual fund company that rails against active money management. So when his death sentence arrived, Mr. Murray knew he had to work quickly and resolved to get the word out to as many everyday investors as he could.

“This is one of the true benefits of having a brain tumor,” Mr. Murray said, laughing. “Everyone wants to hear what you have to say.”

He and Mr. Goldie have managed to beat the clock, finishing and printing the book themselves while Mr. Murray is still alive. It is plenty useful for anyone who isn’t already investing in a collection of index or similar funds and dutifully rebalancing every so often.

But the mere fact that Mr. Murray felt compelled to write it is itself a remarkable story of an almost willful ignorance of the futility of active money management — and how he finally stumbled upon a better way of investing. Mr. Murray now stands as one the highest-ranking Wall Street veterans to take back much of what he and his colleagues worked for during their careers.

Mr. Murray grew up in Baltimore, about the farthest thing from a crusader that you could imagine. “I was the kid you didn’t want your daughter to date,” he said. “I stole baseball cards and cheated on Spanish tests and made fun of the fat kid in the corner with glasses.”

He got a lot of second chances thanks to an affluent background and basketball prowess. He eventually landed at Goldman Sachs, long before many people looked askance at anyone who worked there.

“Our word was our bond, and good ethics was good business,” he said of his Wall Street career. “That got replaced by liarloans and ‘I hope I’m gone by the time this thing blows up.’ ”

After rising to managing director at two other banks, Mr. Murray retired in 2001.

At the time, his personal portfolio was the standard Wall Street big-shot barbell, with a pile of municipal bonds at one end to provide safe tax-free income and private equity and hedge fund investments at the other.

When some of those bonds came due, he sought out Mr. Goldie, a former professional tennis player and 1989 Wimbledon quarterfinalist, for advice on what to buy next. Right away, Mr. Goldie began teaching him about Dimensional’s funds.

The fact that Mr. Murray knew little up until that point about basic asset allocation among stocks and bonds and other investments or the failings of active portfolio management is shocking, until you consider the self-regard that his master-of-the-universe colleagues taught him. “It’s American to think that if you’re smart or work hard, then you can beat the markets,” he said.

But it didn’t take long for Mr. Murray to become a true believer in this different way of investing. “I learned more through Dan and Dimensional in a year than I did in 25 years on Wall Street,” he said.

Soon Dimensional hired him as a consultant, helping financial advisers who use its funds explain the company’s anti-Wall Street investment philosophy to its clients. “The most inspirational people who talk about alcoholism are people who have gone through A.A.,” said David Booth, Dimensional’s founder and chairman. “It’s the people who have had the experience and now see the light who are our biggest advocates.”

Playing that role was enough for Mr. Murray until he received his diagnosis in 2008. But not long after, in the wake of the financial collapse, he testified before a open briefing at the House of Representatives, wondering aloud how it was possible that prosecutors had not yet won criminal convictions against anyone in charge at his old firms and their competitors.

In June of this year, a brain scan showed a new tumor, and Mr. Murray decided to stop all aggressive medical treatment. For several years, he had thought about somehow codifying his newfound investment principles, and Mr. Goldie had a hunch that writing the book would be a life-affirming task for Mr. Murray.

“I had balance in my life, and there was no bucket list,” Mr. Murray said. “The first thing you do is think about your wife and kids, but Randi would have killed me having me around 24/7. I had to do something.” The couple have two grown children.

And so he has tried to use his condition as a way to get people to pay attention. The book asks readers to make just five decisions.

First, will you go it alone? The two authors suggest hiring an adviser who earns fees only from you and not from mutual funds or insurance companies, which is how Mr. Goldie now runs his business.

Second, divide your money among stocks and bonds, big and small, and value and growth. The pair notes that a less volatile portfolio may earn more over time than one with higher volatility and identical average returns. “If you don’t have big drops, the portfolio can compound at a greater rate,” Mr. Goldie said.

Then, further subdivide between foreign and domestic. Keep in mind that putting anything less than about half of your stock money in foreign securities is a bet in and of itself, given that American stocks’ share of the overall global equities market keeps falling.

Fourth, decide whether you will be investing in active or passively managed mutual funds. No one can predict the future with any regularity, the pair note, so why would you think that active managers can beat their respective indexes over time?

Finally, rebalance, by selling your winners and buying more of the losers. Most people can’t bring themselves to do this, even though it improves returns over the long run.

This is not new, nor is it rocket science. But Mr. Murray spent 25 years on Wall Street without having any idea how to invest like a grown-up. So it’s no surprise that most of America still doesn’t either.

Mr. Murray is home for good now, wearing fuzzy slippers to combat nerve damage in his feet and receiving the regular ministrations of hospice nurses.

He generally starts his mornings with his iPad, since he can no longer hold up a newspaper. After a quick scan, he fires off an e-mail to Mr. Goldie, pointing to the latest articles about people taking advantage of unwitting investors.

The continuing parade of stories does not seem to depress him, though. Instead, it inspires him further, bringing life to his days. “To have a purpose and a mission for me has been really special,” he said. “It probably has added days to my life.”

In a cruel twist, one of Mr. Murray’s close friends, Charles Davis, chief executive of the private equity firm Stone Point Capital, lost his son Tucker to cancer earlier this year. In his last several months, Tucker was often on the phone with Mr. Murray.

“Gordon has a peace about him, halfway between Wall Street establishment and a hippie,” Mr. Davis said. “It was clear that he and my son could talk in a way that very few people can, since they were in a pretty exclusive club that nobody really wants to join.”

Mr. Murray managed to outlive Tucker, but he does not expect to see his 61st birthday in March. Still, he didn’t bother memorializing himself with a photograph on his book cover or even mention his illness inside. “I’m sick of me,” he said.

But he plays along with the dying banker angle, willing to do just about anything to make sure that his message is not forgotten, even if he fades from memory himself.

“This book has increased the quality of his life,” Mr. Davis said. “And it’s given him the knowledge and understanding that if, in fact, the end is near, that the end is not the end.”

Consuelo Mack

WealthTrack - November 19, 2010

CONSUELO MACK: This week on WealthTrack, the financial sleuth-hedge fund manager who identified the gaping financial holes in Lehman Brothers, Allied Capital and the financial system at large. Where is he seeing strengths and weaknesses now? A rare interview with Greenlight Capital’s David Einhorn is next on Consuelo Mack WealthTrack. Hello and welcome to this Great Investor edition of WealthTrack. I’m Consuelo Mack. If you are looking for a morality tale about the financial crisis and the long trail of its aftermath, which we are still navigating, I think we have found just the ticket. It is the updated version of hedge fund manager David Einhorn’s 2008 book, Fooling Some of the People All of the Time: A Long Short (and now Complete) Story. Only this time, its new title reads Fooling Some of the People All of the Time: A Long Short (and now Complete) Story. And complete it is because the financing company Einhorn shorted, ultimately successfully after 7 long years, is no more. Suffice it to say, as you can see from this stock chart of Allied Capital, it was a harrowing ride. A roller coaster from 2002 when Einhorn’s firm Greenlight Capital started shorting its shares, to 2007 when the stock went into a free fall But that’s not the half of it. In the process, Einhorn was, as he describes it, “attacked by the company, vilified by the press, and investigated by the Securities and Exchange Commission.” And that’s the mild stuff. As you will see in just a moment, it takes an unusual individual to be a successful long investor, let alone a successful short. David Einhorn is both: summa cum laude graduate of Cornell, world class poker player, co-founder of value-oriented hedge fund, Greenlight Capital in 1996, when he was still in his twenties. And Greenlight has delivered greater than a 21% annualized net return for its partners since its inception by mostly buying companies long, but making its reputation shorting stocks in a very public way. One of its most heralded shorts was Lehman Brothers, another bruising, albeit much shorter battle. As for the morality tale, Einhorn believes the Allied Capital saga has a meaning far beyond the company. He says it represents what’s still wrong with the entire financial system. I asked him for some specifics. DAVID EINHORN: The basic problems were that you had accountants that weren’t doing proper oversight. You had the SEC, which was not doing proper oversight. So you have rules on the books that are not actually being enforced. You have a management team that is being dishonest. And you have all of the support network, which is supposed to actually be sort of a watch dog, actually enabling it. So you have Wall Street analysts touting management’s side of the story. You have the financial media taking on their sound bytes and adopting them as just the way that things ought to be. And so you have this entire sort of breakdown in terms of watch dogs, and then cheerleading section that is actually enabling the bad behavior to persist, ultimately to the detriment of the people who are supposed to be protected, which were the investors. CONSUELO MACK: Has anything changed? Are any of the watch dogs doing their job better? DAVID EINHORN: Well, the truth actually is, what we’ve seen is, even in the bigger financial crisis, the same watch dogs have just repeated the same behavior, just in a much bigger way. So what we’ve seen, the same kind of sort of forbearance towards Allied Capital has been granted to the big banks, the big investment banks, and so forth. The credit rating agencies, which did such a bad job with a subsidiary of Allied Capital, we now know that they did such a horrible job, perpetuating the whole crisis, and quite honestly, even though we passed a financial reform bill which is longer than a telephone book … CONSUELO MACK: Right, 2,000-some odd pages, right? DAVID EINHORN: Yes. It doesn’t actually address the obvious things that came out of the crisis that a common sense person would say, we need to simply fix them. CONSUELO MACK: So what do we need to fix? DAVID EINHORN: Number one is, we shouldn’t have credit rating agencies in any form. Even in their best, they add to cyclical pressures. They say positive things when things are good, that restores confidence; and then when things start getting into a crisis, they actually exacerbate the crisis by now saying that things are bad. Another thing that needs to be changed is, we learned that the money markets are unregulated banking institutions without reserves and without regulation, such that they can’t suffer even the smallest amount of loss. That was the big fallout from the Lehman crisis, was when the money market started appearing to have runs on them. And … CONSUELO MACK: And a couple broke the buck. DAVID EINHORN: That’s right. And soon the investors there, they basically believed that the buck could not be broken, and so the whole system was going to collapse around that. And that remains very much in place today, with all of that same risk. Number three, we learned that big financial institutions, if they’re so big, and you allow them to fail, they’re going to have domino effects. CONSUELO MACK: So even with what we’ve seen, with the banks being more prescribed in what they are able to do, I mean, using much less leverage, being more scrutinized, you don’t think that that’s enough? DAVID EINHORN: It’s just not enough. If you look at the big banks, they’ve gone from maybe 25 or 30 times leverage to 15 or 16 times leverage, or something like that. That’s still a lot of leverage. And it doesn’t count the derivatives books. And you have these huge notional derivatives books that, they’re just sort of tail risks that are sort of out there, and nobody really knows what’s in them, and nobody knows what risk they pose, and you certainly know that if any of the big four or five books that have the massive derivatives books was going to be on the cusp of failing; you would need to bail them out, the same way, in the future, that you would in the past. Notwithstanding whatever the new rules supposedly say. CONSUELO MACK: So as an investor listening to you, would you touch a bank with a ten foot pole? At this point, would you invest in one of the major money center banks? DAVID EINHORN: No. We wouldn’t invest in the major money center banks. CONSUELO MACK: In a recent letter to Greenlight Partners, which, for those of us who don’t own hedge funds, means investors, you wrote-- you were very critical of the Federal Reserve, and the most recent round of quantitative easing. And not only do you doubt it is going to be successful, but you also think that it could actually be harmful. Why? DAVID EINHORN: Well, I think it’ll be harmful for growth, right away, if the purpose of the quantitative easing is to ease financial conditions, thereby, according to the Fed Chairman’s op-ed, make the stock market go up, make some people feel wealthy, and then go out into the stores and buy things. That’s offset by the fact that they’re trying to create inflation. And the may not get the inflation where they want. They’d love the inflation to be in house prices. But they might get it instead in oil prices. Or cotton prices. Or food prices. And there’s already a lot of evidence of this. The problem is that those prices affect a large number of people who have to buy these sort of necessities of life. CONSUELO MACK: Food and shelter. DAVID EINHORN: Food and shelter, and … CONSUELO MACK: Right. Energy. DAVID EINHORN: … clothing, and energy. And if the prices of those things go up, they’re not going to have as much money to buy other things. And so you may actually not get any increase in demand. You may actually slow down economic growth. And that is separate and apart from the longer-term ramifications of going through a process of effectively money printing, buying, creating electronic money to buy Treasury securities, which is what the so-called quantitative easing ultimately amounts to. CONUSLEO MACK: Now, one of the things you just mentioned is inflation. And we are seeing inflation in hard assets. And one of the hard assets that you own at Greenlight Capital is gold. It’s your largest position. So what does gold represent to you, in your portfolio? DAVID EINHORN: To me, gold represents money. And there’s different types of money. Some people think gold is a commodity, and they want to think about jewelry demand, and how many weddings there are in India, and so forth. And how much is coming out of the ground. I think of gold as money. And you can have dollars, or you can have Yen, or you can Euros, or you can have Pounds, or you can have gold. And there’s other currencies in other countries, but those are the sort of the major currencies as I see it, and I think that the merit of gold is, given our current monetary policy and our fiscal policy, as well as the problems in the other major currencies, gold is the money, I think, of choice, that we would like to have a meaningful amount of our assets denominated in. CONSUELO MACK: So how meaningful an amount do you have? DAVID EINHORN: We haven’t really said. But it’s the biggest position in the fund. CONSUELO MACK: For individual investors, who don’t have the kind of flexibility that you do to trade and, nor the sophistication, I mean, how should we view gold, as individuals? I mean, should it be in all of our portfolios? And should we, too, view it as a substitute for paper currency? DAVID EINHORN: I think so. I think it makes sense as a diversifier, and to have this sort of money, particularly because this is the kind of money that Chairman Bernanke can’t print more of. CONSUELO MACK: You told me that your grandfather saw the debasement of currency coming really early on in the 1970s. What did he see that worried him so much, and what is it that still worries you today, and it’s the Einhorn heritage? DAVID EINHORN: Well, I don’t know if it’s a heritage, but from the time I was probably a teenager, my grandfather wanted to have the gold talk with me. So that’s kind of like a family thing. In fact, he wanted to have the gold talk with everybody. Because… CONSUELO MACK: He was a gold bug. DAVID EINHORN: He was a gold bug, absolutely, he was. And frankly, after hearing about it and thinking about it for a while, I really was a nonbeliever. He kind of predicted, eventually what would happen, eventually there being inflation, eventually the government would print too much money, so on and so forth, and he decried the deficits and the entitlements and all the things that are coming more into focus now. So quite frankly, I think he was a few decades too early. But, as I kind of see it now, and as early as five years ago I didn’t see this at all, but as of now, I kind of see that-- and he always said, this would happen eventually. He didn’t really know when. Unfortunately, it’s going to happen beyond his life, but I can kind of see things coming through the way, almost exactly the way that he would have described it. CONSUELO MACK: You want to make it quite clear to the world that even though you’re really well-known for your shorts, that Greenlight Capital is, in fact, net long; that you are long more stocks than you are short stocks. And yet, at this particular point, you describe yourself as having a modest net long position. So what, the ratio now is what, one and a half longs to one short versus-- DAVID EINHORN: Yeah, about that. CONSUELO MACK: -- normally it would be two to three longs to one short? DAVID EINHORN: Yeah, I think that’s about right. CONSUELO MACK: All right. So why do you have a modest net long position? DAVID EINHORN: We have a modest net long position because it’s actually relatively easy right now to find things to sell short. And it’s a little bit harder to find things to own. So as we look at the mix of things, there’s a lot of businesses right now, there’s nothing really wrong with the businesses. They’re established companies with long track records, but they’re mediocre businesses. And they’re trading at very fancy multiples. And so it’s very easy to find those things to sell short. It’s a little bit harder right now to find things to buy, although we’ve managed to find some. CONSUELO MACK: Can we talk about some of the longs? DAVID EINHORN: Absolutely. CONSUELO MACK: And again, some of the longs that, as a hedge fund manager, you have to be careful, but some of the ones that we know that are, that it’s public knowledge that you own at Greenlight. DAVID EINHORN: Absolutely. CONSUELO MACK: Pfizer. DAVID EINHORN: Pfizer. Pfizer is a company that has a known problem. The problem is, their biggest drug, Lipitor, is coming off of patent, and so everybody is concerned that there won’t be a lot of growth in the earnings coming beyond the patent cliff. I think this is just a known thing, and we’re going to have to just own Pfizer from here to there, and then we’ll see that there’s still a lot of earnings afterwards. The company has been massively unsuccessful in its research and development over the last decade. And I believe that they’re going to take a much more conservative view towards the R&D spending, which hasn’t been contributing very much value in any case. And so I think that there, and in some other areas, they’re going to be able to sort of cost cut themselves to maintain the profitability that they’re promising people, and then when people see that there’s still more than two dollars a share of earnings, even without patented Lipitor driving the results, I think there’ll be an opportunity for the multiple to improve on those earnings. CONSUELO MACK: Does dividends have anything to do with this? DAVID EINHORN: Well, they pay a nice dividend, and that’s fine as well. CONSUELO MACK: Apple. And you have a history with Apple, but it’s a relatively recent acquisition, again. Right? DAVID EINHORN: Right. Yes. I looked up in 1999, in December, we bought Apple at $14 a share. And then in January of 2000, we sold it for about $18 a share. And then we-- yeah. The IRR on that was fantastic, but it was one of the worst sales that I’ve ever come upon. And from there, it took off, and it seemed to trade at a very high multiple for a long time, and obviously, deservedly so, because of all the great things that they’ve done over the last ten years. Well, in any case, in the recent correction that we had over the summer, the stock came in a bit, and the earnings have really expanded to the point where even a value investor like me could get comfortable with the valuation. And looking at Apple today, the stock is about $310, or $320 a share. There’s about $45 a share in cash. So you’re paying about $265 for the business. I think they’re going to earn well over $20 a share in the next year, so you’re looking at a PE net of the cash in the low teens, which is below a market multiple. I think that Apple is still in the reasonably early stages of what they can do with their phones, with the iPad, and all of these sales feed demand for people to get Mac notebooks and desktops. And I think that there’s still really quite a long way for the growth of this company, and to get to buy a company with this sort of growth profile, effectively a low teens multiple, of an unlevered balance sheet, I think is a good opportunity. CONSUELO MACK: So what is it that attracts you to look at a company as a buy? DAVID EINHORN: Well, usually we think we figure out something that isn’t generally understood, or we feel like a company is being put into a group with a lot of other companies, and it’s somehow different from those other companies. And so, if we think we have some sort of a unique insight. But sometimes the insight is rather straight forward. CONSUELO MACK: As in the case of Apple. DAVID EINHORN: In the case of Apple, there’s a negative story. The negative story is, everybody already owns Apple, so who else is going to be left to buy it? And that seems to me, once you’ve heard that story about five times, there’s a perfectly good reason to go ahead and buy it, because a year from now, they’ll definitely be talking about something else. CONSUELO MACK: Is there a company that you’ve acquired recently that I should know about, had I paid particular attention to the SEC, to the 13F, that you think really represents the kind of work that you do in deciding to buy a company? DAVID EINHORN: Sure. One of the things we bought- actually we probably bought it a year ago- but the price hasn’t changed all that much. And the company is CareFusion, which was a spin off of Cardinal Health. CONSUELO MACK: And you also own Cardinal Health. DAVID EINHORN: And we also own Cardinal Health, which is a totally separate story. But the basic gist of CareFusion is that Cardinal Health was a low multiple business. And they were told for years, if you bought higher growth higher margin businesses, your multiple would expand. And so they bought a bunch of pretty good businesses, and they paid some prices for them. And they got to the end of the story, and Cardinal Health was still a low margin business, because they do so much revenues in their distribution, that with the low margin, it was still having a low multiple. So they decided to split the businesses, in part, and they made CareFusion, which is basically an assemblage of the high multiple, high growth, high margin businesses that they had acquired over time. So it’s things like home infusion pumps, and ventilators, and hospital storage systems, and some vaccination type of equipment and so forth. These are actually rather good businesses, and they spun them off. And at the same time, they lowered guidance in both companies and so they sort of set the bar very low. Now, the infusion business has a neat opportunity because one of their competitors, Baxter, has to recall a lot of their equipment, and CareFusion is going to be able to take a fair amount of market share. And what’s neat is, not only do they get the sales at the infusion pumps, but about a year after that they’ll start getting the recurring revenue from the disposables that come with each thing. And that’s where the high margin or high multiple is. So we think there’s an opportunity here for them to expand their revenues, to expand their margins, obviously expand their earnings, and we don’t believe that this has been fully adopted by Wall Street, which is very focused on medical devices and health care reform, and all the problems that go within that sector. CONSUELO MACK: Let’s talk about the short side. And that’s where you made your reputation, and because you were shorting Lehman early, Allied Capital, you got some short positions now. But what is it that attracts you to a company that makes you think, “That’s an interesting short?” DAVID EINHORN: I don’t think that there’s anything that different about what we do with shorts versus what we do with longs. We’re basically looking for a market misperception, a misunderstanding about what the company is about, what the company is up to, what the financials say, and what its prospects are. And more often than not, as you mentioned, it’s a long idea. And quite honestly, in terms of what I talked about at conferences and publicly, I’ve presented two or three times more long ideas than short ideas. CONSUELO MACK: They never get covered DAVID EINHORN: Well, it’s less interesting, I guess. CONSUELO MACK: Right. Right. DAVID EINHORN: As it’s turned out. CONSUELO MACK: But for those of us who don’t short, and many individuals don’t short, is there something, are there any warning signs of a company that you would short, that basically, for the rest of us would be, avoid this company, because it’s not going to be a good investment? DAVID EINHORN: I don’t think you can boil it down to particular bullet points. I think there’s behaviors that you can look for that are indicative of a potential problem, particularly once the problem has begun to be raised publicly. CONSUELO MACK: Such as? DAVID EINHORN: Such as management not answering questions directly. If there’s a question about a business, or a prospect or something, and sometimes involved in the long-short debate, or in a newspaper article; when somebody gets a newspaper article written about them, and they make a lousy comment about the news publication, it’s usually a sign that there’s some other sort of problem going on. CONSUELO MACK: Let’s talk about a couple of shorts that you’re involved in now. One of them is Moody’s. Why are you shorting Moody’s? DAVID EINHORN: We’re short Moody’s, both because we think the business shouldn’t continue to persist in its current form, and as hopeful optimists, we think eventually the world will come to see it that way. But also, and more practically, because of the liabilities that they’ve incurred, as a result of their previous behaviors. You know, the legal system in the United States takes a long time. When you file a suit, there’s motions, and this, and paperwork, and back, and then they do discovery. And there’s a schedule, and people go on vacation, and then you have your trial, and then the judge spends a long time thinking about it, and then there’s appeals. And so the process really takes a very long time. But the facts of the matter really are that what Moody’s did during the credit crisis, or before the credit crisis, has caused a lot of bond holders to lose a lot of money, and it’s not because they got the housing market wrong. It was because they didn’t do what they said that they were doing. And I believe that ultimately, at the end of the day, one or more of these law suits is going to prove successful. When you think about the number of billions of dollars of bonds that are involved, and the relatively small cash reserves that Moody has, and its ability to borrow, you’re looking at liabilities that could prove to be very large, coming out of effectively the shareholders of the company. CONSUELO MACK: So let me ask you about one last short, and that is the St. Joe Company, which is a real estate developer in Florida. And which happens, also, to be a very large long holding of another WealthTrack guest, Bruce Berkowitz of the Fairholme Fund. What don’t you like about the St. Joe Company? DAVID EINHORN: The problem with the St. Joe Company is they have a lot of land. And they have a lot of expenses. I think about $50 million a year of overhead. And the problem is, is that the value of the land is not going up faster than the amount of the expenses that they actually have. And it seems like a small problem, because what’s $50 million of expense? But the problem is, the stock trades well above what the value of the land is worth today, and every day the company exists, the expenses are more than the value of the land, so the value of the company actually falls over time. CONSUELO MACK: All right. How worried are you about the health of the banking sector right now? DAVID EINHORN: I think there’s a lot of reason to be worried about the health of the banking sector. CONSUELO MACK: And what should individuals be watching, after all of this, and I mean, what are the kinds of things that, to protect themselves, should they be watching and-- I mean, who can they trust? DAVID EINHORN: Well, the best thing for investors to do is to trust themselves. Nobody cares about your money more than you do. Not your financial advisor, not, you know, whoever is telling you what it is what you should do. And if you’re thinking about, and you feel like you can analyze and invest stocks yourself, this is fine. If you think you think you can analyze and have an advisor that helps you, and you trust the advisor not because they’re a professional, but because you think they give sensible advice, that’s fine. If you want to hire a money manager to help you, that’s also fine. But you should pick and choose and use your own gut instinct, because at the end of the day, whether you succeed or whether you fail, nobody’s going to care more than you. And frankly, that’s something I translate into my own investing. When we manage the fund at Greenlight, I want to have the portfolio how I want it to be. I don’t want to worry about what I think my investors want, or what other constituencies want. Because my attitude is, if we do badly and we don’t succeed, I want the failure to be because we at least did it doing what we thought was best. Not what somebody else told us that they thought was best, or we thought that they wanted. And that’s how we manage our fund every day. CONSUELO MACK: Music, I’m sure, to your investors’ ears. So David Einhorn, thank you so much for joining us from Greenlight Capital. We really appreciate the time you’ve given us. DAVID EINHORN: Thank you. CONSUELO MACK: David Einhorn’s new edition of Fooling Some of the People is now available on It is a fascinating and thought provoking story. We also wanted to tell you about an exclusive podcast interview I did with the street’s long time, top rated Washington analyst Tom Gallagher. Tom recently retired from ISI Group but he is as plugged in as ever. Among the topics we discussed, the surprising reaction the Federal Reserve might have to the recent barrage of criticism against it… you can hear it all on our website Thank you so much for visiting with us. Have a happy Thanksgiving. And make the week ahead a profitable and a productive one.

Schumpeter: Mittel-management

Germany’s midsized companies have a lot to teach the world

Nov 25th 2010 | from PRINT EDITION

MANAGEMENT gurus are constantly scouring the world for the next big idea. Thirty years ago they fixated on Japan. Today it is India. The more restless are already moving on to Peruvian or Zulu management. Yet in all this intellectual globe-trotting the gurus have sorely neglected the secrets of one of the world’s great economies. Germany is the world’s largest goods exporter after China despite high labour costs and a strongish euro. It is also stuffed full of durable companies that have survived hyperinflation and two world wars. Faber-Castell, a giant among pencilmakers, boasts that Bismarck was a customer.

Thankfully, a couple of management thinkers have defied the boycott on Germany. On November 18th Bernd Venohr, of the Berlin School of Economics and Law, gave a fascinating talk on the “secret recipe” of the country’s Mittelstand at the second annual Peter Drucker Forum in Vienna. Last year Hermann Simon, of Simon-Kucher & Partners, a consultancy, published an even more gripping sequel to his 1996 book on “Hidden Champions”. Put the two together and you get a good idea of the management theory at the heart of Germany’s success.

Although the term Mittelstand is sometimes applied to quite small, parochial firms, the most interesting ones are rather bigger and more outward-looking. Most shun the limelight: 90% of them operate in the business-to-business market and 70% are based in the countryside. They are run by anonymous company men, not hip youngsters in T-shirts and flip-flops.

They focus on market niches, typically in staid-sounding areas such as mechanical engineering rather than sexy ones like software. Dorma makes doors and all things door-related. Tente specialises in castors for hospital beds. Rational makes ovens for professional kitchens. This strategy helps them avoid head-to-head competition with global giants (“Don’t dance where the elephants play” is a favourite Mittelstand slogan). It has also helped them excel at what they do.

Globalisation has been a godsend to these companies: they have spent the past 30 years of liberalisation working quietly but relentlessly to turn their domination of German market niches into domination of global ones. They have gobbled up opportunities in eastern Europe and Russia. They have provided China’s “factory to the world” with its machine-tools.

The Mittelstand dominates the global market in an astonishing range of areas: printing presses (Koenig & Bauer), licence plates (Utsch), snuff (Pöschl), shaving brushes (Mühle), flycatchers (Aeroxon), industrial chains (RUD) and high-pressure cleaners (Kärcher). Kärcher’s dominance of the high-pressure market is so complete that in 2005 Nicolas Sarkozy caused a scandal, after a spate of riots, by calling for a crime-ridden banlieue to be cleaned out “au Kärcher”.

How durable is the Mittelstand model? Sceptics worry that it will eventually become the victim of globalisation: emerging-world companies will learn to produce their own clever machines at a fraction of the cost. They also worry that Mittelstand companies are too conservative. American start-ups can become global giants in a generation (Wal-Mart, now the world’s biggest retailer, was not even listed on the stock exchange until 1972). German companies are content to remain relatively small.

The first criticism is overstated. Mittelständler have not only focused on sophisticated niches that are hard to enter. They have thrown their energies into building up ever more powerful defences. They constantly innovate to stay ahead of potential rivals. They are relentless about customer service. Their salespeople are passionate about their products, however prosaic, and dogged in their determination to open up new markets. Mr Simon’s “hidden champions”, mostly German Mittelstand firms, typically have subsidiaries in 24 foreign countries, offering service and advice. Many get the bulk of their revenues from service rather than products. Hako, which makes cleaning equipment, generates only 20% of its revenue from sales of its machines.

The second criticism has more substance. Germany has a poor record at generating start-ups or at quickly turning smallish firms into giants. Mittelstand firms are finding it increasingly difficult to persuade the world’s best and brightest to make their careers in rural backwaters. But for all that, the record of the Mittelstand over the past three decades has been a history of global conquest rather than missed opportunities. Koenig & Bauer, for example, gets 95% of its revenue from outside Germany.

German lessons

So the Mittelstand is likely to keep powering Germany’s export machine for years to come. But does it have any lessons for the rest of the world? Mr Simon says that although 80% of the world’s medium-sized market leaders are based in Germany and Scandinavia, successful Mittelstand-style companies can be found everywhere from the United States (particularly the Midwest) to northern Italy, so the model does seem to be transferable.

Three general lessons—for politicians as well as corporate strategists—follow from this. First, you do not need to try to build your own version of Silicon Valley to prosper; it is often better to focus on your traditional strengths in “old-fashioned” industries. Second, niches that appear tiny can produce huge global markets.

The third lesson is that Western companies can preserve high-quality jobs in a vast array of industries so long as they are willing to focus and innovate. Theodore Levitt, one of the doyens of Harvard Business School, once observed that “sustained success is largely a matter of focusing regularly on the right things and making a lot of uncelebrated little improvements every day.” That is a lesson that the Germans learned a long time ago—and that the rest of the rich world should take to heart.


Wall Street’s Worst at Least Can Do the Math: Jonathan Weil

2010-12-09 02:00:00.6 GMT

Commentary by Jonathan Weil

Dec. 9 (Bloomberg) -- It’s bad enough that there have been no criminal convictions of any of the executives who helped bring the banking system and our economy to its knees. Now the Justice Department is touting trumped-up numbers as it tries to show it’s cracking down on financial fraud.

This week U.S. Attorney General Eric Holder held a news conference to praise the results of "Operation Broken Trust,"

which he called "a critical step forward in law enforcement’s work to protect American investors."

Holder said the sweep by President Barack Obama’s Financial Fraud Enforcement Task Force began Aug. 16 and resulted in 231 cases against 343 criminal defendants as of Dec. 1. All told there were 64 arrests, 158 indictments or complaints, 104 convictions and 87 sentencings, according to the Justice Department’s tally. Holder also credited the operation with 60 civil suits against 189 defendants.

The statistics looked squirrely on their face. Some of these cases began years ago, long before the multiagency task force was formed. It’s obvious what the prosecutors did here, too. First they tracked down every small-fry Ponzi scheme, affinity fraud and penny-stock pump-and-dump they could find that had advanced through the courts since mid-August. Then they totaled them up and called it a sweep, lumping together cases that had nothing to do with each other.

Just out of curiosity, I asked a Justice Department spokeswoman, Alisa Finelli, for the names of the cases. She sent me a 16-page printout of the criminal defendants. (Oddly, she said the civil defendants’ names weren’t available.) The first page of the list had 20 names, which I figured was as good a sample as any to use for picking cases to look up. It soon became clear that the list wasn’t entirely correct.

Count Early

For instance, the list said a fellow named Lorenzo Altadonna had been convicted in the Western District of New York on Oct. 27. Actually, he was sentenced to three years probation on Aug. 5, court records show. That was 11 days before Operation Broken Trust began, which means the task force shouldn’t have counted him in its results, even by its own loopy methodology.

Finelli said Altadonna was included mistakenly.

The first page of the list also showed a Nov. 8 federal conviction in New Jersey of a man whom I won’t name here. There was no record for him on Pacer, which is the government’s online database of federal court proceedings. But I did find an Oct. 13 article in the Daily Record of Parsippany, New Jersey, about a fraud at an insurance agency where a person with the same name had worked. The article said he had not been charged criminally.

Finelli declined to comment on why he was included in the task force’s list of defendants.

Justice for All

So of the 20 cases at the top of the government’s defendant list, two of them didn’t check out. Other defendants included a swindler named Lee Anglin, who was sentenced on Nov. 16. Court records show he was arrested in March 2006 and convicted in July 2009. The task force had nothing to do with nabbing him.

Another defendant, Anthony Antonelli, was sentenced Sept.

7. Court records in his case show he struck a plea bargain with prosecutors in January 2009. The lesson here: Justice delayed is justice counted.

I spot-checked a few names on the list’s other pages, too.

One was a guy in Illinois named Kevin Carney, who pleaded guilty on Aug. 18 in a Cook County circuit court to fraud and theft charges, according to a press release by the Illinois attorney general’s office, which prosecuted the case. That was just two days after Operation Broken Trust’s start date.

On Message

The task force’s executive director, Robb Adkins, said in an interview that the point of this week’s announcement was to increase public awareness about these types of frauds and "send a message to would-be wrongdoers." He said "there was a very large detailed effort to track the numbers," and that he didn’t want anyone to think the task force was trying to take credit for investigations that started before Operation Broken Trust.

When I asked him why the government hadn’t prosecuted any senior executives from companies at the heart of the financial crisis, he said: "Where there is wrongdoing we will bring charges, but beyond that I just can’t comment."

By all outward appearances, it seems the Justice Department either doesn’t want to prosecute systemically important frauds, or doesn’t know how. Or maybe it’s both.

It wasn’t always this way. More than a thousand felony convictions followed the savings-and-loan scandal of the 1980s and early 1990s. Some of the biggest kingpins, such as Charles Keating of Lincoln Savings & Loan, went to jail. With this latest financial crisis, there’s been no such accountability.

Operation Broken Trust may be a fitting name. Unfortunately it’s for all the wrong reasons. The public already knows not to trust the government. Flimflam P.R. stunts such as this one at least offer us a useful reminder of why.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

Bargain Junkies Are Beating Retailers at Their Own Game

  • By Matt Schwartz

  • November 29, 2010 |

  • 12:00 pm |

  • Wired December 2010

In the economic wasteland of the past three years, the biggest success story has been a website that gets us to buy stuff we never knew we wanted: helicopter-flying lessons, hot stone massages, professional photo portraiture, obscure ethnic food, hot air balloon rides. More precisely, what we buy at Groupon—the two-year-old startup that, with projected revenue of more than $500 million this year, was called the “fastest growing company ever” in a recent Forbes cover story—is the right to buy all that stuff at a huge discount, so long as we all act fast. In other words, what Groupon sells (as its clever name indicates) is coupons, but with a social twist. It’s been such a huge moneymaker that scores of copycats have emerged, including other startups like LivingSocial and 8coupons. Established online presences like Yelp and OpenTable have also jumped in; the biggest and most recent entrant is AOL, which in October announced its own Groupon clone,

Like its competitors, Groupon makes money by turning its audience into bargain junkies. Every day, customers check their email or the Groupon website to find out about the daily deal in their city. (Groupon already operates in more than 100 cities nationwide.) For the coupon to become valid, a certain number of users must agree to buy it. But then, after the offer “tips,” they have just 24 hours—or less, if it sells out—to pay their money and lock in the markdown. As Andrew Mason, Groupon’s 30-year-old founder and CEO, sees it, this tantalizing window of opportunity gives people the license to indulge in experiences they wouldn’t otherwise pursue. “That’s the beauty of the model,” he says. “We’re using these game mechanisms to trick people into getting out of the house and doing the things they always wanted to do.”

Take a step back, though, and what Groupon represents is something far bigger. It’s the mainstreaming of a new current in American consumerism, an attitude born of the Internet’s DIY ethos and nurtured by the hard economic times. One might call it retail hacking: the reconception of shopping as not just a full-time job but a contact sport, a scrum in which consumers increasingly refuse to buy on the terms dictated to them. A whole network of so-called deal-hunting sites, each with a large and devoted community, has sprung up for users to trade inside tips about little-known bargains; the largest of these sites, SlickDeals, has more than 700,000 registered members.

In this passionate consumer underground, techniques for chiseling a few percentage points (or more) off a sticker price can quickly spread to millions of shoppers. The process of selling a DVD player or even a new razor to the growing ranks of self-educated buyers is becoming as tortuous as selling them a new car., a continuously updated list of direct customer service lines and telephone-prompt guides, is undermining the ability of companies to resolve calls with automated systems. Consumers who have learned to haggle on prices at large chain stores—Target, Home Depot, Best Buy, and more—share their stories and methods on sites like the Consumerist, a blog that has become a hub for retail hackers. When Ely Rosenstock, a 29-year-old social media consultant from New York, wanted to cancel his Verizon service and buy the new iPhone, he found a loophole that let him leave his two-year contract with no termination fee; after he made this argument stick with Verizon customer service, he posted a detailed how-to video on YouTube that has been viewed more than 180,000 times.

As recently as five years ago, it would have taken years of dedicated trial and error for consumers to develop these techniques on their own. Now, thanks to forums that aggregate the collective urge to save money, novice deal hunters have access to FAQs and tutorials addressing everything from the inventory cycle at Target to methods of handling hostile cashiers. For those who know where to look, these sites form a sort of WikiLeaks of secret deals, a searchable directory of rock-bottom prices and money-saving techniques as labyrinthine and cunning as the retail universe it seeks to map.

In this world, each product has two prices. First there’s the suggested retail price—”a blatant lie,” as Jeffrey Tan, a top-rankingSlickDeals user, calls it—paid by everyone else. Then there’s the real price, available only to the deal-hunting elite.

Most retail hackers try to get their edge by manipulating one of the oldest promotional tools around—the coupon. The origin of the coupon is usually traced to the late 19th century, when a former drugstore owner named Asa Candler distributed small certificates entitling the bearer to a free glass of his new tonic, called Coca-Cola.* Ration books distributed during World War II established an indelible link in the American mind between the act of clipping and the virtue of thrift. By the 1960s, coupons were a fixture on the retail scene; one industry leader, S&H Green Stamps, claimed to print three times as many stamps as the US Postal Service. Shoppers could accumulate the stamps from participating stores and then redeem them for such rewards as toasters, clocks, and insurance policies.

At the turn of the millennium, coupon use began to slide, from 4.6 billion coupons redeemed in 1999 to 2.6 billion in 2008. Then the recession hit, triggering a coupon resurgence, driven in large part by the Internet, before anybody had even heard of Groupon. Millions of unemployed consumers rediscovered the coupon as a way to generate money—or at least cut household costs—during their idle hours. And retailers responded to flagging sales by invigorating their offers. The value of the average coupon has risen from $1.09 to $1.37 since 2005. Redemptions grew by 27 percent in 2009 alone, with Internet coupons leading the way, rising more than threefold. Online coupons have proven stickier than their paper counterparts, accounting for around 1 percent of all coupons issued but nearly 10 percent of those redeemed. According to Nielsen, the “enthusiast” couponers who use online offers most are likely to be relatively young and high-income, with 60 percent making more than $50,000 a year.

To see this ur-coupon and read its backstory, check out “First Coupon Ever” in issue 18.11, online.

The retail industry is still adjusting to the new generation of coupon shoppers, many of whom aren’t content to limit themselves to one or two deals per trip. Some of these so-called super-couponers have perfected a maneuver called stacking—combining multiple coupons on the same item, generally a manufacturer’s coupon with a retailer’s. Another technique is rolling—using earnings from retail loyalty programs (for example, CVS Extra Bucks) to buy products that earn still more points, generating a continuous flow of extra earnings. The online boards teach all these tricks and more. “Don’t be scared! You can do this!” begins one SlickDeals FAQ, before it launches into a series of links to newspaper coupon-insert schedules, store-by-store coupon acceptance policies, and thousand-line wikis with deals alphabetized by product and coded by state. There are coupon swap threads as well as RAOK (random act of kindness) threads in which coupons are given away to the first user who requests them. Members of “coupon trains” circulate their surplus coupons through the mail, taking what they need and adding what they have. “Coupon fairies” act as anonymous benefactors, bringing extra coupons to the store and leaving them on the applicable products.

“These wack-jobs who spend 20 hours a week stacking coupons? That stuff drives us batty,” says John Morgan, executive director of the Association of Coupon Professionals. “They dance all over the rules. These zealots may be following the letter of the law, but I don’t think they’re respecting its spirit.”

Indeed, manufacturers and retailers do not issue coupons with super-couponers in mind. Sometimes coupons are designed as “loss leaders” for stores, which hope to lure new or irregular customers inside. Other times they’re inducements for consumers to try—and hopefully get hooked on—a new product. But most often they’re used for what economists call price discrimination. Consider a product that costs a retailer $10 and sells for $15. Somewhere out there, the theory goes, are price-sensitive shoppers who would pay $12 if given the chance—still a profitable sale. By targeting this group with a $3 coupon, the store generates additional sales at a margin of $2 per unit, without giving up any of the $5-per-unit profits from the price-insensitive group.

Super-couponers complicate this theory considerably. According to Donald Lichtenstein, a professor of marketing at the University of Colorado at Boulder, super-couponers have learned to ignore “acquisition utility,” the pleasure and value one obtains from, say, a box of cereal. Instead, they peg their shopping decisions to “transaction utility,” the difference between what they’re getting the cereal for and what they think the cereal is supposed to cost. In other words, super-couponers don’t perceive a grocery item as food, at least not until they exit the store and serve it for breakfast. On the shelf and in the cart, the super-couponer evaluates products with the cold-eyed calculus of a trader.

Four years ago, Michelle Harrison, a 38-year-old CPA and mother of two, was just a casual deal hunter. During special sale weeks at Lowe’s Food Stores, she would spend an hour clipping The Charlotte Observer and be able to come back with perhaps $125 worth of groceries for $25. Then, at church, she met some other mothers who told her they could turn $25 into $250.

“My competitive type-A behavior kicked in,” she says. “I asked myself, what am I not doing that I should be doing? What’s out there that I don’t know about?”

So began what Harrison calls her “hardcore” phase. She started buying four or five copies of the Observer each week; whatever she didn’t use, she would swap online at Hot Coupon World, where she soon rose to the level of moderator. She learned how to time prices and decipher barcodes, and she happily shared her knowledge with anyone who wanted to learn. As the economy turned sour, Harrison began to distribute groceries from her own “stockpile” (which grocery deal hunters inevitably acquire) to local families in need. On a site called she developed a following of area mothers, and together they established an informal code among themselves—share what you know, share what you have, and obey all store and coupon policies.

One morning in September, Harrison and four of her disciples gather at a coffee shop to trade couponing stories. Harrison is dressed sensibly in sandals, black pants, and a black blouse with silver appliquè9. On the table in front of her, next to her croissant and Diet Coke, is a slender business envelope containing more than 30 coupons.

One acolyte, Lolly Miltz, explains her own attitude toward the project: “I try to keep it fun. I walk in, introduce myself to the manager, and say, ‘You better call the police. I’m getting ready to rob ya!’” Miltz, who has a breezy manner and two bright yellow swoops of hair, holds in her hands a massive purple binder containing maybe a thousand coupons—some clipped from Sunday newspapers, some printed from the Internet, some purchased on eBay. “I wonder why they waste money on advertising,” she muses. “We’ll buy whatever they want us to buy—as long as they pay us to buy it.”

A Day of Deal Hunting

Warning: Retail hacking can be a full-time job. Here’s what your daily routine might look like if you got serious about tracking down bargains. (All times Pacific.) —M.S.

5:10 am Check email for Groupon’s Deal of the Day and LivingSocial’s 1-Day Deal.

8 am Log in to Hot Coupon World and search for grocery deals in the Coupon Database.

8:30 am Expand your coupon trove at the Printable Coupons section of RetailMeNot .com.

9 am Add to your arsenal of paperless coupons by loading a batch onto your phone at

10 am Swing over to for the daily Shell Shocker deal: typically discounts of 30 percent or more on tech gear.

Noon On Tuesdays, this is the optimum time to find the cheapest domestic fares at Kayak, Hotwire, and other bargain travel websites.

2 pm Visit the Freebies section at Buxr for a compendium of links to free trial products like detergent, over-the-counter medicine, and magazine subscriptions.

3 pm Check out, a sister site of that sells brand-name apparel at outlet-store prices.

5 pm Browse the Best Deals section of

5:30 pm Scope out the Clearance section of, which offers apparel and furnishings for as much as 90 percent off.

6 pm Peruse the Gold Box section of Amazon .com for the Deal of the Day and the ever-changing Lightning Deal.

8 pm Hit the front page of to browse a broad mix of user-rated daily deals from around the web.

9 pm Look over the various offers and coupons at, where user votes determine which deals appear on the front page.

10 pm A new Today’s Woot—a deeply discounted deal-of-the-day—goes live at Woot.

11 pm Scan the Editors’ Choice tab at Dealnews, a curated bargain-hunting site.

Midnight Check the Hot Deals subforum at SlickDeals for new deals on Xbox, PlayStation, and other gaming systems.

This is the fourth day of Super Double Coupon Week at Harris Teeter, a southeastern supermarket chain. Each day this week, Harris Teeter will double the face value of most coupons to a maximum of $1.98 apiece. So Harrison has been visiting her local store once a day, every day, armed with a carefully selected battery of coupons. Her goal today is to bring home $80 worth of merchandise while spending less than a dollar out of pocket.

Harrison enters Harris Teeter shortly after 11 am. She selects a cart, makes a quick right toward the produce section, and picks out an organic red bell pepper for $1.99. Taking the first coupon from her envelope—$1 off organic produce, $1.98 after doubling—she places it in the front-left corner of her cart. “I’m on a mission here,” she says, her shoes tapping out a staccato rhythm as she moves over the tiled floor. “Please slow me down if there’s anything you don’t understand. You’ll see that I’m putting my coupons in two stacks—one for those that double, one for those that don’t.”

Next comes a bag of cherry tomatoes and three jars of Peter Pan creamy peanut butter, free with a doubled coupon—called a blinkie because it was dispensed from one of the blinking coupon boxes installed in grocery store aisles. This particular coupon came from a nearby Food Lion. The barcodes on the Food Lion blinkies start with 5, Harrison explains, and these will double this week; the Harris Teeter blinkies start with 9, and these won’t double.

In aisle 1, Harrison grabs a can of Hanover kidney beans, free with a coupon Hanover sent her after she left a positive comment on its website—a gesture she tries to make for some company every day. Her envelope contains seven more coupons obtained through online compliments, as well as four from a ConAgra Foods booklet, 13 clipped from newspapers, and one Internet coupon found via a post at Hot Coupon World.

Harrison is moving quickly now, like a Pac-Man master running patterns through the maze. The envelope emptied and the cart filled, she pulls up to register 6 and a familiar face, Jennifer K., an associate in her early twenties.

“You want me to send ‘em down?” Jennifer asks, as Harrison loads the conveyor.

“Yeah, I’ll bag for you,” she replies.

“Customer service to 6!” Jennifer announces, leaning into her microphone.

“If you save over a certain amount, they need to get an override,” Harrison says. She twists her beaded bracelet as the groceries scan, her face taut with the bridled anticipation of a card counter cashing in chips.

“The total is $1.77,” Jennifer says. “You saved $78.15.” Harrison pays, scrutinizes the receipt, and then picks up her bags and walks over to the customer service counter. The red bell pepper, priced at $1.99, has erroneously rung up at $2.79 plus tax. Harrison explains this error to Michael W., who, per Harris Teeter policy, reaches into the drawer and gives her a $2.85 cash refund.

“I actually made money on this trip,” Harrison says, beaming as she heads for the door. “A dollar and eight cents.” Outside, she begins transferring the day’s haul into the back of her Hyundai Tucson. First she has to clear away a cache of Nestlé Aquapods—$3 on sale from Food Lion, yielding a $3 Aquapod coupon, which she rolled a couple of times. Facing Harrison’s van is a black SUV. A toddler waits in an empty shopping cart while her father loads groceries into the backseat, too busy to notice when his cart—and child—begin to roll slowly, then faster, down the parking lot’s gentle slope toward a parked car. It takes less than three seconds for Harrison to assess the scene, dart past the front of her Tucson, and make the save.

“Happens to me all the time!” she says to the father before he has time to thank her.

There are millions of Michelle Harrisons out there, finding one another—and training one another—through the vast online network of deal-hunting sites: GottaDeal, RetailMeNot, Buxr, Hot Coupon World, WeUseCoupons, and many, many more. On the largest of these, SlickDeals, users flock to subforums that trade deals and tricks for every major national or regional chain. Users collect reputation points and move up through 10 levels—from Learner to Journeyman to Grand Master. These ranks are earned through such painstaking labors as scanning newspaper inserts, compiling data from these ads into easy-to-read text, and posting deals that moderators deem worthy of inclusion in the Hot Deals forum.

The users themselves are as diverse as the sites they populate and the stuff they buy. Jeffrey Tan, whose nearly 44,000 posts as yuugotserved make him one of SlickDeals’ top contributors, is an 18-year-old college freshman in New York City who spends an hour or two every morning skimming and posting new deals from, Dell .com, and The user Slowtech oversees a team of people who reply to queries and write up summaries of threads related to Target. Cathy Zeiler, aka ladycat, accesses SlickDeals daily through her dial-up modem. Once a week, she fills her minivan with groceries and distributes them to as many as six low-income and out-of-work families near her home in Wichita Falls, Texas. “I always did sales, but not like this,” she says. “The Internet gave me the resources to take it up a few levels.”

In some cases, retail hackers take an attitude toward their targets that is literally paramilitary. Every year, Dev Shapiro, the 31-year-old moderator of the Black Friday boards at, plots a map of his own favored prey, the Best Buy store a few miles from his house. Starting as early as the Monday before Thanksgiving, a full 100 hours in advance, Shapiro arrives at the store to set up his base camp: tent, propane stove, rented Porta Potti. (“I charge a buck a dump,” he says. “It pays for itself.”)

Using live recon from inside the store and information gleaned from GottaDeal—which starts posting leaked Black Friday circulars from major retailers as early as August—he draws up a plan of attack. He merges his personal shopping list with those of several friends, who join him during the final hours of his vigil. When the doors open, his team moves with the deadly swiftness of a Special Forces raid—one man to the laptops, another to GPS systems, another to the DVDs, another to the Blu-rays, and so on. One year, Shapiro brought home three GPS units, a digital camera, four laptops, three flatscreen TVs, and several gigabytes of RAM—nearly $10,000 in merchandise at face value, for less than $1,500. “Black Friday is all about information and advance planning,” Shapiro says. “You have to know where to be when.”

Shapiro’s take-no-prisoners approach to shopping is, on one level, a holdover from his profession: He makes his living as “director of logistics and intelligence” for Congregational Security, a Dallas-based firm that specializes in protecting places of worship from terrorism and financial crimes. Shapiro’s job, as he describes it, is to analyze threats. He speaks Hindi, Hebrew, and Arabic, which he uses to scan online message boards frequented by al Qaeda. He says he has worked with former Mossad officers to train parking lot greeters and arranged for bomb-sniffing dogs to scour the hotels of visiting foreign dignitaries. Most of this work happens at a desk a few feet from a rumpled Ikea bed in his parents’ ranch house in suburban Dallas, a life that seems equal parts James Bond and Seth Rogen. “I get to play with cool toys, and I get to learn,” says Shapiro, who has received training in 9-millimeter combat shooting and tactical driving maneuvers. “My job is about being prepared.”

But the hyper-disciplined assault is also, increasingly, the approach taken by all online deal hunters—everyone from college students to urban professionals to suburban mothers like Harrison. With anxieties aggravated by the recession and amplified online, they are exploiting information and employing coordination to dictate what they want to buy, how they want to be treated during the transaction, and what they’re willing to pay.

Until recently, coupons have almost always been designed to advance the interests of sellers, not buyers. As structured by retailers and manufacturers, coupons will offer the minimum economic inducement necessary to spur the sale. Perhaps the most revolutionary aspect of the Groupon model is that it begins with the collective buying power of the audience, whose sheer numbers—and proven eagerness to buy—give the startup enormous leverage with retailers. As a result, Groupon and its competitors are reimagining the coupon as a tool for dragging prices down to unprecedented lows—not a few bucks off a single product but 50 percent off restaurant bills, haircuts, museum tickets, and jeans from the Gap. Groupon keeps a full half of this halved price; the benefit to the vendor comes from exposure on Groupon’s voluminous email list, as well as the rush of new customers who will flood through the door, Groupons in hand.

For vendors, the hope is that enough of these deal seekers will convert into regular buyers to justify giving up three-quarters of the revenue from their first visit. For customers, though, it’s a whole new way to look at shopping. It encourages impulsiveness and experimentation, harnessing the ever-shifting, gamelike terrain of the online dealscape, offering users not just a collective price but a collective buying experience. After purchasing a Groupon, users can return to the site and trade stories of their adventures in retail. They get the same cycle of communal chasing and gloating offered by sites like SlickDeals and GottaDealwithout the hard work of tracking down deals and negotiating prices—Groupon’s sales team handles all that.

Andrew Mason, Groupon’s CEO, doesn’t have an office. He roams around the company’s downtown Chicago headquarters, which are spread across multiple floors of a converted warehouse on the Chicago River. Even as Groupon has grown to nearly 2,700 employees (and a mammoth valuation of more than $1 billion), Mason has kept his corporate culture even more casual and ostentatiously weird than his Silicon Valley counterparts. When I visited the offices, managers were leading a group of new employees through an elaborate alternate-reality game that involved cutting open teddy bears with knives. The game even has its own office, at the end of a row of sales staff—a place called Michael’s Room, containing a bed with scorched blankets and a toilet filled with candy.

As divergent as such stunts might seem from Groupon’s core business, Mason believes they share an essential aesthetic—they’re “purposefully random.” To his mind, the most effective coupons aren’t the ones that save you money on things you’d buy anyway; they’re the ones that come from out of nowhere, giving you license to buy something you otherwise wouldn’t. Some businesses, for their part, have complained that Groupon represents consumer interests too aggressively, attracting hordes of deal-hungry customers who never appear again. Some users are complaining, too—of long lines at events and small businesses that can’t handle the surge in traffic. But Groupon is trying to address both of these issues, allowing merchants to set a cap on the number of Groupons for each deal and refunding money to dissatisfied customers.

Because Groupon does all the work for its users—finding the business, negotiating the deal, delivering the coupon—it doesn’t cultivate in its users the expertise of deal hunters like Shapiro and Harrison. Groupon users are not hackers; they’re ordinary consumers who, instead of performing their own laborious research, trust Groupon to act as an honest broker on their behalf. This isn’t so different from the traditional retail model, in which the consumer is dependent on the vendor and happily buys whatever’s on sale.

It’s easy to imagine this pointing toward a brighter future, with the technologically enhanced, customer-friendly coupon siphoning larger and larger shares of promotional budgets directly into consumers’ pockets. One can also imagine an alternate scenario, where deep-discount online coupons turn into a last-ditch measure for businesses that can’t draw enough traffic with their asking price. Larger retailers could even grow wise to the latent tracking possibilities of online coupons and comb purchase histories to further manipulate our behavior. But regardless of how this technological arms race ends, it’s clear that the old method of unilateral pricing, with consumers groping around in the dark for the real discount, can’t possibly survive. The deal-hunting horde has the tools to ensure that no bargain stays secret for long.

Matt Schwartz ( wrote about a Korean financial blogger in issue 17.11.

From: Ed Pinto Sent: Wednesday, December 01, 2010 8:47 PM Subject: How the Government is Creating Another Housing Bubble

Yesterday, Peter Wallison and I published the attached article about the need to place some controls on FHA’s lending. By exempting FHA from any of the restrictions Dodd-Frank placed on private securities issuers, we are at risk of repeating the same mistakes allowed Fannie and Freddie to crowd out the private sector. Left unchecked, FHA will head down the same path trod by Fannie and Freddie - taxpayer losses and yet another government induced housing financial crisis. The Dodd-Frank Act exempts FHA and other government agencies from the risk retention requirements in securitizations, which means that FHA will be able to securitize subprime and other high risk mortgages without any limitations. This exemption places the private market on the horns of a dilemma. Support a prime risk definition of Qualified Residential Mortgage (QRM are exempt from risk retention) and lack the ability to compete with FHA. Support a non-prime risk definition and place one's capital at severe risk. Unfortunately, this situation has encouraged private sector groups to press for weak QRM requirements to better allow competition with FHA. At the same time, Fannie and the private mortgage insurers are reacting to being crowded out by FHA by dusting off the 97% mortgage.

The administration in working on a proposed regulation with an expected released date of January. The solution is promulgating a prime risk definition of QRM and either for HUD to rein in FHA or amend Dodd-Frank that sets quality standards for government-insured mortgages. The U.S. mortgage market desperately needs to attract private capital. Allowing FHA to do an end run around risk limitations seriously detracts from that goal.

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