Premature Yankee MVP Honors

I know it might be premature, but I can’t help it…

Quietly, my all-time favorite player and all around mench, Derek Jeter deserves World Series MVP honors, once again! This guy is a money player, Yankee Captain, and all around incredible talent on and off the field; let’s look at the numbers:

He leads the team in the World Series and in the playoffs in batting average, batting a jaw dropping .412 in the World Series against the best pitching in baseball. He leads the team with 7 hits with 2 doubles. Only one other player, Hideki, is batting higher with .500 but he has had 4 at bats, going 2 for 4 with 2 home runs… Derek has had 17 plate appearances and has scored a team high 3 runs so far.

The only other two players that I would consider for MVP are:

Of course Mariano Rivera, check this out:
In three games he has a 0.00 ERA, He has saved 3 out of the 4 games 2 of which were real nail biters and having to go two innings in game 2 and has been unbelievable under pressure, btw last night we saw the value of Mariano when, Lidge, the philly "closer" blew the game.

And the other, believe it or not Jorge Posada, and this is why: He has been great behind the plate, in particular last nite, basically guiding CC and the other pitchers thru the game. He has a team leading 5 RBI’s, 3rd in Hits with 4 hits, and is batting .308 in the World Series.

BTW: if you look at the old core of JETER, PETITE, MARIANO, POSADA, you quickly realize that they are STILL doing it after 13 years and without them, we are not a Championship team.

Honorable mention:
CC Sabathia – going on short rest, but I have a problem giving the MVP to a starter
A- Rod, although he has been hitting a quiet .143 he has been absolutely clutch coming through at the right times for his team making him a most valuable player candidate!

Let me know your thought!

Go Yankees.

Karl Marx Predicted It!

Now, I am not a communist nor socialist (not that there is anything wrong with that). I do feel that private property is as innate to man as eating and drinking. But...elements of Socialism, community, global and social resposibilty could and should be incorporated into our American version of Capitalism and we would all be better off for it (even if it meant a bit more taxes, btw, Americans pay the lowest tax out of all 1st world western nations).

I was at a Greek Fest at my Son's school and a friend handed me this quote that he received via email. I read it and said, "ok, you have just summarized our current situation, so what?" He then proceeded to tell me that the quote was written about 100 years ago, by Karl Marx!

It seems Karl Marx knew a thing or two about the causes of banking crises:

"Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism"

Karl Marx, Das Kapital, 1867

Now you tell me if the dude was spot on or what?

For the sake of accuracy, let me say that I have not done any research or verification as to the authenticity of this quote. I did do a google search (Karl Marx debt) and I found another site, with the above quote also attributing it to Karl Marx. There were some comments on the site stating that it is not an exact Marx quote. Either way it's a very clear and concise summary of the malaise we are currently in. I am not sure the road we are now on will lead us to Communism, but certainly, there is a need for much more oversight, and resposibility in our markets. The quote is interesting and if it was spoken 100 years ago, it's all the more impressive.

OSO.

Yankee Baseball

It Takes Money to Make Money:

Ok, yes it has been a while but hey it's supposedy the holiday season and I should be busy selling diamonds and watches (wake up people, its not too late to buy!!) I have also been making an effort not to put up any more "bad news" articles up on my blog, in particular, ones that deal with the economy because things have gotten so bad that we can all use some good news, or at the very least a distraction. And what better than Sports, or my favorite distraction, the business of sports.

Which brings me to all the wheeling and dealing that is now going on as a result of the Major League Baseball winter meetings in Vegas. Recession, depression, yeah right, not in baseball where the money is fast and plentiful. Nobody knows how to shmear the money around better than my beloved Yankees.

I am a die hard Yankee fan and one of the biggest belly aching cries I hear from all my jealous Yankee hater friends (and there are a lot of them out there, in particular those motley fans from Queens that are still holding on to memories that are over 22 years old, lol, even though the Mets have learned to play moneyball very well too) is that "sure the Yankees win, they out spend everyone in Major League baseball", meaning we use our money to put us in a better position to win (why is that wrong again?).

The cries were at a peak when the Yankees spent all that money to get A-Rod and have now returned in full blast after the Yankees signed pitcher CC Sabathia to a 161 million seven year deal that is the most ever paid to a Major League pitcher and the fourth highest ever in baseball for any player. Is it a huge amount? yes! Is it way too much for anyone to make, let alone an athlete? Maybe. Does it make sense for the Yankees to spend that kind of coin on him, Definitely YES! Now let me explain why...

The Yankee empire consists of the team, NY Yankees, and the YES Network, which shows most of the Yankee games and other programing throughout the year. Together, the estimated worth of the Yankee empire is about 4 billion dollars. Last year Forbes had the Yankees valued at about 1.3 Billion dollars and Goldman Sachs put a valuation or sale price on the YES Network for 3 billon dollars. The team will now be playing in a new stadium -palace that had a price tag of about 1.3 billion dollars.

Now it is common knowledge that the Yankees make no money, might even lose money if they do not make the post season. The team (not including the YES Network) states annual revenues of about 357 million dollars. Now, if the YES Network is worth 3x the team, lets assume they have annual revenues of about 900 million dollars. So total estimated revenues for the Yanks are about 1.2 Billion dollars or 7.5 million dollars a game. Now, lets assume that playoff games are worth at least double the regular season games in revenue (Forbes says they are) so that means that a playoff game is worth about 16 million per game to the Yankees. Not to mention all the added attention and excitement a good playoff race makes thereby increasing the amount YES can charge for advertising etc... So if the Yankees make the playoffs and have a good first round 5 game series they earn an additional 80 million dollars (and that is only for the first round, they clean up if they advance and make an absolute killing if they go to the World Series).

This year, as we all know, the Yankees did not make the playoffs for the first time in 13 years. The Yankees missed the playoffs by 8 games. Not much. If we recall, the Yankees had a chance to go after pitcher Johan Santana, who eventually went to the Mets. The Yankees did not want to spend the money nor did they want to give up some of what, at the time, they thought were top prospects like pitcher Ian Kennedy and pitcher Phil Hughes, who both combined last year had a grand total of ZERO wins. On the other hand Santana had 16 wins for the Mets and had he been a Yankee, we would have most likely made the playoffs since, as I mentioned we missed by about 8 games.

So now we know that missing the playoffs costs the Yankees a ton of money. We also guesstimate that the Yankees earn about 16 million per playoff game in revenue! So a 5 game division series nets them 80 million or half of the seven year contract being paid to CC Sabathia. If they advance to the next round and play a 6 or 7 game series (or even 5 games), they make back ALL of what they are paying Sabathia in one year. We wont even discuss the ridiculous money they make if they go to the World series (and G-d willing win).

With Sabathia, the Yankees now have arguably the best starting pitcher in baseball. He is younger than Johan Santana, and perceived as tougher. Together with him you have Ching Ming Wang , a proven ace starting pitcher, and Chamberlain who is also amazing. If they resign Petite and get Burnett or a similar ace pitcher (like Ben Sheets) they will undisputably have the best starting 5 pitching rotation in baseball poised to deliver a deep playoff run and lots and lots of playoff dollars (not to mention merchandising, increased brand worth, ever stronger ticket sales, etc...) No doubt, some of my own hard earned dollars will end up in the Yankee coffers as well.

So to sum up, spending 161 million over seven years on CC Sabathia is a great deal for the Yanks. He will get them into the post season and if he does that he will get them revenue equal to at least half if not all of his seven year salary in one season (maybe two, but we will be optimistic here!). Talk to me next October and I will tell you for sure if it was worth it or not, but I guess you got to spend it to make it!

Happy Holidays,

OSO.

Quote of the Week:

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

Thomas Jefferson 1802

The 800 Pound Gorilla - Credit Default Swaps

With credit markets frozen, the equity markets down close to 40% for the year, and looming unemployement and bank troubles, one can easily say that we are in a very troubling economic situation. Over the past two weeks we have seen companies in distress being bailed out by the Government, not only in this country but across the globe. I have heard many debate as to whether a bail out is correct. Should we be using tax payer money to prop up these struggling companies. Maybe we should let them fail, after all capitalism is (in the timeless words of Gordon Gekko) a "do it right or you get eliminated" system.

The reason why a bailout is necessary and the reason why the Government understands that we cannot let these banks and insurance companies and major corporations go under is because of the 800 pound gorilla that is out there that people talk about in hushed, nervous tones; the Credit Default Swaps or CDO's. Now before I get into the not so easy business of explaining what they are let me just say that this problem is HUGE with a capital H. It is a total house of cards or even a pyramid scheme and once any of the cards are removed the whole tower will come tumbling down. Credit default swaps, I believe, is the real reason why we cannot allow for a massive failure, in particular a company that is holding a great deal of these securities such as AIG, AMBAC, and all the major US banks. If one goes, it will start a panic in the credit default markets, one that we cannot cover because this market is larger than the GLOBAL GDP and is in the trillions of dollars!

What is a Credit Default Swap?
Credit default swaps are insurance-like contracts that promise to cover losses on certain securities or bonds in the event of a default. They typically apply to municipal bonds, corporate debt like a bond from Ford Motor Co., and mortgage securities like the ones that are in distress all over the country. CDS's are sold by banks, hedge funds and others.

The buyer of the credit default insurance pays premiums (just like car or home insurance) over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft. So for example, lets say I am an investor and I bought a Ford Motor Co. Bond for 1 million dollars that gives a return of say 8%. I then, want to hedge my investment, or reduce some of the risk so I take out an insurance policy on my investment that says in the event of a default (meaning Ford Motor Co. cannot pay me my money I lent them by buying their bond) you will pay me my money back, and for this I pay a premium just like any other insurance policy. Easy money for banks or insurance companies during good times since the risk for a default is minimal but the premiums are good money coming in! Just like an insurance policy...

Except that it doesn't work like an ordinary insurance policy because banks and insurance companies are regulated; the credit swaps market is not. As a result, these policies or contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security or bond defaults. The instruments can be bought and sold from both ends — the insured and the insurer. So when times are good and there is no real threat of a default, who cares, people put out these policies, get the premiums then make a market in these policies by selling them, swapping or trading them for money or other securities, great. EXCEPT, nobody was checking to see if the people now holding these credit default swap contracts actually had the money to pay in case of a real default.

Now, fast forward to 2007 /2008 / 2009, where mortgages are going bad, the economy is in the crapper and the possibility of corporate defaults are real. So what is happening. People are looking at their credit default contracts and are realizing they might actually have to come up with the money to pay if these companies or mortgages go under. But we do not know if they have that money or not since these contracts have been traded sometimes 15 to 20 times!

Sooo...
#1 the value of the credit default swap drops because nobody wants to trade them anymore, now banks and others holding this product need to take hits on their balance sheets and write off their value
#2 the people who thought they were insured realize they might not be and are very nervous
#3 people do not want to buy bonds anymore because they cannot get insurance to hedge anymore, so lending slows and when lending slows, growth slows, the economy slows, jobs disappear and on and on...

So how big is this problem? It is Enormous. Check out the numbers below that I got off the internet:

Commercial banks are among the most active in this market, with the top 25 banks holding more than $13 trillion in credit default swaps in the U.S. alone— where they acted as either the insured or insurer — at the end of the third quarter of 2007, according to the Comptroller of the Currency, a federal banking regulator. JP Morgan Chase, Citibank, Bank of America and Wachovia were ranked among the top four most active, it said. The Bank for International Settlements reported the notional amount on outstanding OTC credit default swaps to be $42.6 trillion in June 2007, up from $28.9 trillion in December 2006 ($13.9 trillion in December 2005). By the end of 2007 there were an estimated $45 trillion to $62.2 trillion worth of credit default swap contracts outstanding worldwide. Can you believe these numbers?

On September 23, 2008, Christopher Cox, Chairman of the U.S. Securities and Exchange Commission, placed the worldwide Credit Default Swap market at $58 trillion, and stated it was "completely lacking in transparency and completely unregulated." The U.S. Office of the Comptroller of the Currency reported the notional amount on outstanding credit derivatives from reporting banks to be $16.4 trillion at the end of March 2008. (For reference and perspective, the U.S. GDP for 2007 was $13.8 trillion, while the world's GDP for 2007 was estimated at $54.3 trillion).

Warren Buffet, considered America's smartest investor described derivatives bought speculatively as "financial weapons of mass destruction." In Berkshire's annual report to shareholders in 2002, he said, "Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses--often huge in amount--in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)."

The market for credit derivatives is now so large, in many instances the amount of credit derivatives outstanding for an individual name is vastly greater than the bonds outstanding. For instance, company X may have $1 billion of outstanding debt and there may be $10 billion of CDS contracts outstanding. If such a company were to default, and recovery is 40 cents on the dollar, then the loss to investors holding the bonds would be $600 million. However the loss to credit default swap sellers would be $6 billion.It acts like 'insurance' but isn't. "It is an insurance contract, but they've been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a 'swap'.

Unfortunately, although defaults are rare they tend to occur at the same time and are usually highest during recessions. In order to ensure that a hedge fund or other company had sufficient funds to meet payouts, in the past they would need to put aside sufficient funds to cover an average of at least 2.6% defaults per year. A more conservative investor might put aside enough to cover defaults of 5%. However the more capital a fund puts aside to cover losses, the lower the potential returns because they cant use their money to invest and get higher returns. This encourages funds to use as little capital as possible. However in recessions defaults can climb much higher than 5%. With insufficient provisioning many financial institutions could fail.

According to Moodys, defaults could exceed 10% in 2009 in the event of a US recession. Now we all know that a recession is here already so if companies have not adequately provisioned for much higher defaults, then many such financial firms will fail. As the credit default swap market is not regulated, there is no offical body ensuring that sufficient capital is being put aside to cover potential losses. This increases the possibility of a failure of a large market counterparty and causing a systemic failure that can potenially bring down the whole US and even global economy. Am I sounding alarmist? I hope so because this is a real live problem that is out there. This 800 pound gorilla needs to be deal this NOW because if the CDS market starts to unravel, combined with the already severe Sub prime crisis we are facing, we would be in for a "perfect Storm" the like of which we have not seen since the Great Depression.

A meltdown in the CDS market has potentially even wider ramifications nationwide than the subprime crisis. If bond insurance disappears or becomes too costly, lenders will become even more cautious about making loans, and this could impact everyone from mortgage-seekers to municipalities that need money to fix roads and build schools.

Go online and enter Credit Default Swaps and read about this totally over leveraged, unregulated powder keg that is just sitting out there. There is a ton of discussion on the Sub Prime issues and how to deal with them, but in my view, this needs to be put front and center and a solution needs to be found asap before this unravelled and spirals out of our control.

I welcome your comments as always,

Addendum: Funny how I finished this article last night and today, Reuters wrote a story about how the NY State Attorney General's office is launching a probe into the illegality of Credit Default Swaps; see link below:

http://www.reuters.com/article/topNews/idUSTRE49J1GC20081020?feedType=RSS&feedName=topNews

OSO

Note: Information for this post was taken from:
Wikipedia
Investopedia
Time.com
Some of the above was paraphrased and posted directly from those sites.

A Smarter Bailout Plan

I receive my fair share of email forwards as I am sure most of you do as well. Occasionally, there is one in the bunch that is clever and noteworthy. Today, I received one from my friend Jon that really made a ton of sense. So much so, that I decided to post it onto my blog word for word.

Take your time and read it. It makes a ton of sense, now I am not an economist (neither are the people we elect by the way) nor am I an accountant but this plan really makes me think. Send me your thoughts, is this fantasy or reality, either way its a place I want to be!

Btw, thanks for your comments on my last post although it seems that only right wing conservatives have the time to reply (a call out to all my left of center friends that are letting these right wing comments go unanswered!). I look forward to hearing from you all. Enjoy, its a definite eye opener.

OSO.

The "We Deserve It Dividend":

I haven't run the numbers since my calculator won't go up this high (I guess only "government" calculators have this many numbers) but the concept is valid. The Government is talking about a bailout of our financial system totaling about 850 billion, (which is technically not a bail out since many of the assets bought will be sold later at a higher price). Sort of puts the bailout investment in perspective.......I'm against the $850,000,000,000.00 bailout. Instead, I'm in favor of giving $850,000,000,000 to America in a We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up. So divide 200 million adults 18+ into $850 billon that equals $4,250.00. My plan is to give $4,250.00 to every person 18+ as a We Deserve It Dividend. It means that every adult 18+ has $4,250.00 in their pocket. A husband and wife has $8,500.00 in total.

What could the average American family do with $8,500.00? Get current on their mortgages - housing crisis solved. Put away money for college - it'll be there. Save in a bank - create money to loan to entrepreneurs. Put a deposit to buy a new car - create jobs. Invest in the market - capital drives growth. Pay for medical insurance - health care improves. Enable Dead beat Dads to come clean - or else. Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces. If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed by one of our candidates for President. If we're going to do an $850 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG, and the others- liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't. Sure it's a crazy idea that can "never work." But can you imagine the Coast-To-Coast Block Party. How do you spell Economic Boom? I trust my fellow adult Americans to know how to use the $850 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC.

Where Has Our Money Gone?

Today was an awful day on Wall Street! The dow was down 504 point, bringing the Dow to just above 10,900 (remember when they popped the champagne about 8 years ago when the dow passed 10,000 for the first time?!). The credit crisis, or sub prime crisis, whatever you want to call it, is in full swing, erasing some of our most prominent companies and wreaking havoc on our financial system and economy as a whole.



Yup, this is serious. Bear Stearns gone. Lehman Bros. (who by the way was the first ever company that I used to trade stocks in college, awww) is gone. The giant Merrill Lynch has been bought by Bank of America and there remains only two major firms; JP Morgan (which is technically part of Chase Bank) and Goldman Sachs, who faced all kinds of nasty rumors today as the only two remaining large investment houses on Wall Street. Sad.



The Banks are next. AIG is faltering, looking for a mere 40 billion "bridge loan" to keep them afloat, with no takers as of yet. Washington Mutual has so much crap on their balance sheets that they are on the brink as well, with rumours that Barclays and / or Bank Of America (who seems to have an endless appetite for down and out financial companies) will take WAMU over. Citibank, has already taken billions in loans and "investment" from their Arab friends and has written down a mere 10 billion last quarter with a warning saying more is to come. Who is left?

People this is very serious. We have a very bad liquidity crunch with the safest place to put our money being our bedroom matress. Our banking system is grinding to halt. What is really amazing is that this credit crisis has been going on for about a year and half now and companies still do not know what is real and what is worthless on their balance sheets. Or...maybe they do know but are trying to let the bad news out gradually which seems never ending.



My point here is that we have been in difficult times and there are difficult times that lie ahead. There will be no quick fix here. Christmas will stink as people will not spend. We have not yet hit a bottom and the effects of what is happening will be without a doubt, higher unemployment (no money to create jobs, no bank lending to fuel business growth), reduced salaries, less consumer spending, basically tough economic times. Soooo...what can we do? Well I can tell you what we should NOT be doing as a Nation and that is spending billions of dollars a month on a war in Iraq.



Let me explain; when you dont have money, you dont spend money. When you have a situation where you have limited money but need it badly to improve your situation, you dont waste it else where. When you are facing a tough financial situation you take stock of your resources and maximize them as best as you can. Making sure you spend your money wisely to help you navigate through the tough times. This is the exact OPPOSITE of what our Government is doing.

PEOPLE: we spend 10 billion dollars a month in Iraq. We spend 12.3 billion dollars a month in Afghanistan and Iraq combined. Lets do the math:



10 billion a month in Iraq=

120 billion a year=

1/2 a trillion dollars in 5 years!!!



What credit problem? We have no problems, we must be filthy rich! The Treasury chose NOT to bail our Lehman Bros today but will spend about 2.5 billion this week alone in Iraq! Now, I am not saying that the Government should bail out every failed company, after all, they made bad decisions and need to pay the price. Their investors invested in a failed business model and now they must also deal with that reality. BUT, the harsh economic reality is we need our money now to help get us through this very tough economic situation. I think in the long run a financially strong America will be more secure than a weaker one because the day will come when we will no longer be able to afford to defend ourselves.

Imagine if we took the 120 billion dollars we piss away in Iraq every year and put it into our infrastructure, our financial institutions, building projects that create jobs, education, R & D for alternative energy! We would be the strongest country on the planet in every respect. This is a very different country than eight years ago. We no longer have the luxury to spend billions chasing nukes that are not there. We need to be smarter in terms of how we manage our money. Of course, nobody is closing up America, but we do need to make better choices to secure our future and let me tell you, he who is the strongest financially wins.

As always, I welcome your comments.

OSO.