Tuesday, October 09, 2018

A Favorite Annual Event

We have a bit of the Indian Summer going on in Wisconsin right now.  It reminded me of some of Gerry's old posts.  Here is a repost from our friend Gerry, on what Injun Summer is all about.

Injun Summer is happening now. Addled white P.C.progressive leftist types hate that term.

So how about "Native American Post Equinox Weather Phenomenon"?



For years The Chicago Tribune published this John T. McCutcheon illustration annually. It was part of Americana, tradition and as apple pie as anything Norman Rockwell painted. I have published it here before skipping a year or two. Just hanging on to the past I guess.

Injun Summer always takes me back to my childhood. It was then that this illustration captivated me. I wanted to draw like that. Just looking at it I can smell the leaves burning in the acrid, decaying autumn evening air. After school we played football in a nearby field with that same sky in the background, that same smell in the air and the early evening darkness eventually chasing us home for dinner.

By definition Injun Summer is the first warm spell following the first frost. The frost came and went last week surrendering to a warm trend this week with temperatures in the 70's.

In honor of Injun Summers past, I will go out at sunset tonight and burn some leaves.

The text for that illustration also written by John T. McCutcheon follows….

Sunday, August 26, 2018

Smashing Pumpkins in 2018 and 1991

The Smashing Pumpkins came to Portland on Saturday, August 25th at the Moda Center (the arena where the Portland Trail Blazers play). It was a good show and the sound was excellent (we recently saw a show at the Veterans Arena adjacent to the Moda Center and the sound was so terrible we walked out half-way through the show).

They played the hits - most of the show was based on their first few albums - Gish, Siamese Dream, and Mellon Collie and the Infinite Sadness, and a bit of their next two.  There wasn't a lot of their most recent work - the local paper described the show as "Give the Gen X'ers What They Want".

The whole band was there except for original bassist D'Arcy.  Like (nearly) everyone else, I had my story of when I ran into the Smashing Pumpkins back in Chicago - James Iha and D'Arcy were behind me in line at Best Buy purchasing CD's a long time ago.

While I love the Smashing Pumpkins unconditionally, I can see how Billy Corgan's "woe is me" routine would be grating.  He had a bad childhood and it was highlighted from the very first song "Disarm" where he had pictures of himself as a child with annotations and they weren't happy, for sure.


They also played a couple (unnecessary) covers.. this one was from "Stairway to Heaven" where a religious icon (of sorts) was walked through the main floor seated area by some monks in robes.  They covered "Space Oddity" by David Bowie, as well.  The show could have been about 45 minutes shorter and just as good, but I've got to hand it to Billy Corgan and crew, they try to give the fans lots of music.  James Iha even joked about how long the show was going to be when he introduced the band about 1/2 way through.

There were some articles I read about low ticket sales for the Smashing Pumpkins tour but the Moda Center seemed pretty crowded - the floor was sold out and the first level seemed full.  They did block off some of the top sections.  The fans were definitely into the show and happy to be there.


The first time I saw the Smashing Pumpkins was back in 1991 when they played on tour with the Red Hot Chili Peppers and Pearl Jam.  Thanks to the internet we found the ad from 1991 at the Aragon Ballroom (below).  Like all the shows back then, we pre-partied a lot to save money so it is kind of hazy; I definitely remember Pearl Jam going on first and Eddie Vedder dove from the stage into the crowd which was quite impressive - he had to run fast and hurl over the gap between the stage and an empty area to reach the fans.  I wasn't expecting that. 

The Smashing Pumpkins came up next - I knew some of the songs from Gish (I particularly like "I am One") and they played a couple off Siamese Dream which either wasn't out yet or I didn't know any of it.  Then the Red Hots came out - they were lowered from the rafters and wore helmets that shot flames - and the whole place turned into a big mosh pit.


It's been a long strange ride for the Smashing Pumpkins and it was a great show, although if you weren't a Smashing Pumpkins fan you would definitely get a "Spinal Tap" vibe due to Corgans' pretentiousness.  I guess now due to my age Smashing Pumpkins are basically classic rock nowadays.

Cross posted at Chicago Boyz


Sunday, August 19, 2018

Portland Adult Soapbox Derby

One of the benefits of having an extinct volcano in your city is that you can build large soapbox derby cars (life size versions of the ones you might have made out of a block of wood in Boy Scouts decades ago) and race them down the mountain. In Oregon this is called the "Portland Adult Soapbox Derby" and they ran it yesterday out in the sun on a beautiful day.

I love this car. It is a parody of the "Wild Wild Country" guru from the recent Netflix documentary covering the guru who came to remote Oregon in the 1980's and ran a sex cult with dozens of Rolls Royce cars in the middle of nowhere (central Oregon).







Here's the teletubbies!



And finally, note the interesting beer that the Gilgamesh brewery brought to the rally. They don't serve Coors Light here...

Saturday, August 18, 2018

Going off of Facebook and Life Experience

As I age, I find it interesting to see the ways I change, think and act.  With life experience (i.e. as I get older) I have seen myself act much more rationally and deliberately.

I have been through a lot over the past three years or so.  Now that many of those things are in the rear view mirror, I know that I can pretty much get through anything, and this experience has given me a lot of insight as to what may be happening in others lives - and created some cold, hard steel. Outside of a tragedy happening to my wife or kids, I look at problems now, shoulder shrug and say to myself "eh, I've been through worse".  This experience has taught me that you just don't know what people are going through sometimes.  How all of this affects my attitude toward Facebook is explained below.

I was a daily Facebook user for a long time but it morphed from a pretty cool place where I could see my friends on vacation and watch their kids grow up into a toxic swamp of advertising, information tracking, and narcissism.

Several months ago I went idle.  In other words, I left my information up there but started to not check in.  Mostly this was due to a large project at work - I simply didn't have time.  But when some of that work project began to wane I was pleasantly surprised that I just didn't need Facebook anymore.  Having to sift through all of the ads and other garbage was too time consuming and I didn't get any enjoyment out of it any more.  My life experience taught me that time is the most valuable thing I have and I need to use it wisely - and I do not have any extra energy for toxicity.

Yesterday I took the next step and I put my account into "de-activation".  This means that you can someday log back on if you want to, but you are un-seeable by others on Facebook.  I did this because I am going to give myself a little time to try to remember if I had any photos there I really want (likely not).  I am guessing there are none and that I will take the final step and "delete" the account in a few weeks.

Political season is coming and that makes Facebook even worse.  The people that you thought were your friends (well, they still are your friends, but work with it) turn into screaming lunatics and you find out things about them that aren't, well, the most desirable traits - at least in my book.

I am still on Instagram and actually enjoy it.  I like how famous people will take you into their world and you can see how they live, even though you are only getting the good parts and much of it is fake.  The price is right.

I am sure that Instagram will get wrecked too - heck they are owned by Facebook - but this is why we can't have nice things.  In the big picture, social media is a losing proposition for pretty much anyone, but I get why people like it.  I simply don't have time for the garbage anymore.  I guess it is called "growing up".

Like the song says:

When I grow up, I'll be stable,
When I grow up, I'll turn the tables







Thursday, July 26, 2018

West Coast Real Estate Starts to Turn

When I moved to the West coast I noted that prices were generally high relative to incomes.  It is well documented elsewhere that San Francisco area housing prices are very high and Seattle has been skyrocketing as well.  In Portland, housing isn't as costly as Seattle or San Francisco but is very high relative to the local job market, particularly within the city limits and in the nicer areas.  A condo in "the Pearl" in Portland (a local high rise market) is 2-3 times what I'd pay for a comparable unit in my former River North area in Chicago.



From an economic perspective, the income tax changes passed in late 2017, particularly the virtual elimination of the State and Local Tax deduction (SALT) for high earner households, along with continuing reductions in the mortgage interest deduction, should have had an immediate, negative impact on house prices in high tax states such as Oregon and California.  I didn't see these effects, but changes in the housing market take a long time to appear, because many transactions are already under way and sellers will hang on in the market rather than taking a perceived "hit" to the value that they expect to receive.

It looks like the market, in Portland at least, has crested and is (likely) to proceed in a downward direction.  From an article in Bloomberg titled "The US Housing Market Looks Headed for It's Worst Slowdown in Years"
Dustin Miller, an agent with Windermere Realty Trust in Portland, said he’s trying to manage sellers’ expectations, something he hasn’t had to do since the end of the last housing boom. One customer, a baby boomer moving to a new home across the state, expected to have buyers fighting over her house. She got one bid, below her asking price.  “Buyers want to shop and take some time, as opposed to having to rush and throw offers in,” Miller said. “It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off.”
The real estate agent refers to this as moving from a 'peak' to 'leveling off' and we will see if this moves to a prolonged rout, like we had back in 2008-9.  It will also be interesting to see if real estate in high tax states doesn't bounce back as fast as real estate in states with lower tax rates, but we won't be able to see the net effect of this for many years (and it is but one variable among a sea of variables).

I have a semi-sad theory about this - I don't think folks understand the impact of the changes in tax laws until they file their taxes.  Whether due to complexity (it is hard to model just a couple of variables in a tax program unless you know what you are doing) or a lack of financial acumen, I believe that after 2018 taxes are filed in the middle of 2019 you will start to see more of a "wealth effect" as home owners start to realize the potentially large impact of the changes to the SALT deduction.

As I look out my window in Portland I hope that they complete the high rise buildings that they are working on, and don't break ground on new ones.  We used to look at partially completed buildings for many years in Chicago after the 2008-9 crisis, until they finally completed them up to 5 years later.

Cross posted at Chicago Boyz

Sunday, July 01, 2018

Disruption - Scaling an Application

Today in the NYT they had an article about an online dating app called "Raya". This tool is designed to let exclusive rich / celebrity folks match rather than being mixed in with everyone else on Tinder.

From my perspective, the interesting fact isn't what the application is "about", but how easy it is to build a scale a worldwide tool with all necessary functionality. From what I can gather in the article:
  • The entire company is run with only 13 people, including technical staff
  • The platform is exclusive to Apple iOS, and costs $7.99 / month (if you are accepted, which is rare), with additional up-charges
  • This world-wide, fully functional app was built with limited investment and seed funding
  • The app was built and launched quickly, in likely a year or so (based on the dates provided in the article)
Let's look at how modern platforms and capabilities have enabled this sort of rapid delivery, scaling and enabling of a business model.  In the past, building a business such as this would have been a large-scale project.  By building it on the Apple iOS platform, however, the developer is able to tap into a huge amount of existing infrastructure, including:
  • Apple basically provides distribution through the iPhone, operating system, and entire infrastructure of the App store which includes billing 
  • Increasing power of the phone itself (likely all these rich and famous folks are on the latest models) enables advanced features and fast responses, as well as a consistent experience for users
  • The platform and embedded capabilities allow for rapid builds and prototyping, upgrades and security
It is astonishing that such a ubiquitous and enabling platform exists, with the ability to scale to an essentially infinite degree, with little (to no) up front investment.  This platform and environment facilitates rapid prototyping, the ability to grow quickly (if there is demand for your app), and provides an entire environment for notifications, customization, etc... that you can leverage.

If someone would have told you ten years ago that you could
  • Build a piece of software that can reach customers around the world
  • Scale up at a rapid rate with little or no upfront investment
  • Have billing, notifications, user experience, etc.... mostly done for you "out of the box"
You'd think that they were dreaming.  And yet it is here, today.

What are the implications of this?  I think that a lot of the assumptions that we make about how strong incumbent positions are, how fast challengers can emerge, and how low the barriers to entry are for many markets are incorrect.  Since the key demographics are already all mobile (and the majority of the highest income US consumers are on iOS), you can jump quickly into Apple and evolve rapidly.

Since many companies today make little or no profits and "value" is the stream of future cash flows (when presumably the company will be profitable and able to capture and hold market share and customer revenues), the fact that competitors can rapidly come into your space with little incremental investment should make long-term investors shudder.  

Cross posted at Chicago Boyz

Sunday, June 24, 2018

Disruption - Online Ordering

The retail restaurant industry already is an area of fierce competition. Just think of all the restaurants in your community vying for your attention and business. And this is also an industry with slim margins and a high mortality rate - even after a couple years' away from Chicago, many of the local restaurants we used to patronize have turned over in one form or another.

Since I've lived in a "big city" environment for decades, I am used to just walking over to a nearby restaurant to eat or potentially pick up a delivery. However, that isn't an option for everyone, and digital delivery through various methods is now an important differentiator between chains and individual firms.

The NYT had an article titled "App Takes Orders for Mom-and-Pop Pizzerias" about a company called Slice that offers a tool for small, individually owned pizza restaurants to offer sophisticated ordering capabilities in multiple methods in order for them to compete with chains like Dominos which run a significant portion of their business through online ordering. Small chains typically cannot build their own specific tools and will need to purchase these capabilities as a service.
Slice sends customers’ online orders to the restaurants through their preferred method — email, fax or phone. Restaurants deliver the meals with their own couriers. For each order processed, Slice receives a $1.95 commission, or around 6 to 7 percent of order totals on average, Mr. Sela said. In contrast, GrubHub charges up to 18 percent of the order to process online sales for its clients.
In a business with small margins, giving up 18% or even 6-7% of revenues off the top line seems to be a very significant cost, but at least it allows these restaurants to "even the playing field" with larger chains.

I recently ordered from a local Thai restaurant for pick up and then had their own App for iOS which I downloaded. I liked this option a lot because it leveraged Apple Pay which is the safest way to do online commerce (because you don't end up giving your actual credit card number - Google Pay likely provides the same benefits) and it was very easy to use. I noticed that the app was powered by "ChowNow" and I checked out their site.



ChowNow offers subscription pricing at a much lower price-point than even 6-7% for a company with even modest online orders. They charge per month or annual with a relatively small setup fee, per their web site. Each restaurant can do their own online approach and integrate in the technology, whether it is through Facebook or an app or some other method.

From my experience, it isn't the particular value of ChowNow that is interesting, it is the relentless downward pressure of price competition in Technology that captivates me. With the rise of SaaS tools consumable around the world, the cost of these sorts of services (which do differentiate a bit from one another, but in the end become a commodity) is driven down to marginal cost (approaching zero) over time. At some point this may be only a couple percentage points of revenues, similar to the cost of a credit card terminal.

I remember when websites that we would consider bare-bones today cost millions to setup; today you can emulate that functionality for almost nothing. Unlike other areas of the economy, the cost pressure on technology services is relentless and continually evolving, with few barriers of competition. Watching something as simple as online ordering and marketing can be a lesson in the power of unbridled capitalism - the power to deliver better and more capable services at a lower and lower cost each year.

Cross Posted at Chicago Boyz

Friday, June 15, 2018

The Death of the Internet

This site has a long history. Over the years we've had a bunch of different (mostly great) contributors. We met a lot of friends through posting here. We (used to) get insight and even spar a bit (in fun) with commenters.

But the internet is mostly dead. Obviously we aren't the first folks to notice this and we are going over ground that has been thoroughly plowed but just wanted to give my 2 cents.

Comments have been wrecked by bots. They are the best proof of the iron laws of economics that things that are charged at a price of zero will be consumed infinitely. Since it doesn't cost anything to spam nor are there any effective barriers to spam, spam has taken over the world. See below, on a different site I run, that really doesn't try to push or sell anything to boot (little eCommerce value).



Just thousands and thousands of spam comments. You can't even open the door for comments anymore, else you are just overrun.

Of course on a parallel front there is the problem with trolls. Hell, a few trolls are fine, but obviously when they just jump on any post and / or are really fronts to sell something, then it is garbage. There are a few ways to deal with this, but many large sites have abandoned comments and any sort of two way dialog.

Social media has picked up much of what used to be personal blogs. And there is nothing wrong with that. I'm far from a social media expert and try to stay far away personally because it just seems to be a rabbit hole with no end. Also people curate themselves in the best possible light and / or just jump on everything with internet rage since it doesn't cost a cent to bring the internet outrage, just like the spam bots above.

Then you get to commerce, where lots of the ratings are rigged. I've bought stuff with 5 stars only to find out it is mostly garbage. You need to try to figure out what comments are real and what's fake, and pull value out of the page where you can find it. Obviously the big giants are working to fix this 24/7 (when it is in their interest to do so) but that, too, has been significantly damaged.

That's not to say that there aren't a lot of good things out there. Google Guides and maps don't pay folks and in some ways are like the old internet, with people putting up things for others to use, except that now we are all slaves to drive revenues to the internet monopoly Google. Not as much fun, that, but since the internet is all carved up between vast monopolists, there's no point in shouting down the toilet.

Maybe something good will come from all of this. I don't know. But it is clear to me at least that everything that can be wrecked with free technology like bots has been wrecked. And the more fun parts of the web have mostly been captured by giant monopolies that want you in their garden.

The news and newspapers are already beat to death but when we started it was good to try to point out what was real and what was not real. Many of the writers didn't know what they were talking about and the internet tried to lay in alternative points of view but damn this has descended into madness. I just tune it all out.

I'm waiting to jump back into something that interests me, where I can contribute, and be part of a (small) community that tries to help each other. That will be coming, in some guise, and when I have time I can do so. It certainly isn't all bleak. My mother gets immense pleasure out of the shared ancestry.com approach to genealogy, and that's great. There's lots of good threads to navigate and more to come.

Just two cents to think of the old and what is dead.

Monday, June 04, 2018

Monday Morning Blues

I see that Eddie "The Chief" Clearwater died over the weekend.  He was one of my "go to's" when I was fully enjoying the Chicago blues scene in my younger days.  I remember seeing him somewhere with a brass band behind him like in this tune below.  It doesn't get much better than an old blues guy with that brass in the background.  RIP Eddie.

Saturday, April 21, 2018

Seismic Upgrade, Moral Hazard and Gentrification

While there has not been a recent major earthquake in the Pacific Northwest, research has proven that the area is seismically active. Building codes were established to withstand earthquake damage and new buildings have been held to this higher standard. However, there is a substantial portion of the commercial and residential buildings which have not been retrofitted to date. This cool interactive map shows earthquake risk in Portland based on the age of construction... and the pervasive color "red" is bad.

While wood frame houses may fare reasonably well in an earthquake, the highest risk buildings are large structures made of brick. The term for these sorts of buildings in Portland is "unreinforced masonry" or URM for short. They are the buildings that give Portland all of its "character" like classic old apartment buildings and multi-use commercial and residential structures. Many schools, churches and community centers also fit in this classification. This article estimates that it would cost $4.6B to retrofit the remaining URM buildings in Portland. They also note that at the current rate of upgrades, it would take 100 years to complete the effort.

I read a different local article and an engineer put it most pithily
The value of an URM building is zero
I do see some building owners "biting the bullet" and doing a seismic upgrade. When I look out the window of my building I can see many of the older buildings that have been upgraded in this manner, and many that have not. Here is a construction notification for a nearby 5 story masonry building that is being retrofitted.



There are two threads here that are most interesting to me:
1. How do owners of apartment buildings, where residents will most certainly be at higher risk of death during an earthquake, sleep at night? They talk about the costs of retrofitting as if it is an abstract event; but not doing so creates an economic externality of human misery that apparently they value very little if at all
2. Any mandate the city or region employs on URM will almost certainly drive gentrification because owners will have to invest in higher cost apartments and in turn raise rents; ironically, the city's mandates on re-use and burden of oversight rules will make the future rent increases even more burdensome

The likeliest solution is some sort of "muddling along" in the near term. For valuable commercial and high rise residential locations, the inevitable commercial upgrades will drive the URM upgrades. For apartment buildings, the future is much dimmer, because if you are a landlord owning an URM building, you can't raise and invest the money if your local competitors are just going to "accept" the URM risk (on behalf of their residents, ironically). In fact, it makes no sense at all to invest anything more than the cosmetic minimum in these URM buildings, which will move them down the road of being slums at some point in the future.

Cross posted at Chicago Boyz

Friday, April 20, 2018

Disruption - The Weed Market in Oregon

Oregon allows recreational marijuana. Originally, there were laws limiting growers to local Oregon companies (when it was a medical marijuana industry) which were effectively eliminated when the transition was made to recreational usage (allowing out of state funding). There was also a relatively small local market for growing cannabis.

Dispensaries cropped up everywhere, even in seemingly small, out of the way tourist towns with only a few hundred souls. It seems that you can't go far without seeing the "green cross" that symbolizes a marijuana dispensary. Unlike other states, Oregon allowed anyone meeting basic criteria to open a "weed store".

While it surprised many of the locals who curated their wares and made custom strains of local cannabis, the free market reared its head and drove down prices on effectively undifferentiated product and storefronts. From the local WWeek newspaper:
A gram of weed was selling for less than the price of a glass of wine... we have standard grams on the shelf at $4... before we didn't see a gram below $8... Wholesale sun-grown weed fell from $1500 a pound last summer to as low as $700 by mid-October.
As a result of this, there is significant consolidation in the market as smaller growers either bow out or are bought up and dispensaries are being purchased by large groups (often vertically integrated with growers) at fire-sale prices.
(the) Oregon cannabis industry is a bleak scene: small businesses laying off employees and shrinking operations. Farms shuttering.
One farm profiled in the article went into growing weed with the expectation of selling at $1500 a pound; when they finally had to liquidate most of their crop at a weed auction, they only received $100 a pound.

The entire Oregon recreational cannabis industry has played out exactly as you would expect in a market with few barriers to entry and a relatively undifferentiated commodity:
1. Suppliers rush in to take advantage of high prices for crops, turning what was originally a weed shortage (and resulting scarce supply) into a huge spike in supply which in turn drove down wholesale prices to almost nothing on the margin
2. Retailers who have little or no differentiation are being driven out of business by low profits or being forced to run at a loss

For me the interesting part of this is not the plain execution of basic market economics (in an industry with low barriers to entry, prices will drive down to near marginal cost of the most efficient operator), but in what that means to "adjacent" industries. For example, if a gram of (high quality) weed is the price of a single glass of wine (actually a lot less at $4... that is probably 1/3 of the price of a glass of decent wine at a standard restaurant), will customers switch from beer or wine to cannabis? From an economic perspective (cost / buzz) this would be a relatively clear-cut choice. Over time economists should chart the impact of low cannabis prices on both prices and consumption in adjacent alcohol industries.

Cross posted at Chicago Boyz

Monday, April 16, 2018

Craps and The Casino in Neverland

Dan and I play craps and hit the sports book annually for the Super Bowl. Craps is a great game to play because:

1. The odds are almost 50/50 if you play it right (or close enough)
2. Everyone on the table can have a lot of fun when the dice get hot
3. You can drink for free (usually) as long as you are playing, so if you are breaking even, you are essentially making money

A couple of years ago I moved out to Portland and they opened an Indian casino recently called Ilani about 25 minutes north of the city (when there isn't traffic). It is a large casino with many restaurants, lots of slots machines, and many table games. So I headed out there to try it out, and signed up for a "rewards card" which lets you earn comps as you play (you hand it to the dealer when you buy in your chips). Along with my rewards card I gave them my address and email so now I am on their mailing list for a regular stream of deals.



I laughed very hard when I received this mailed offer of what is a craps table apparently in neverland. There are so many things wrong with this picture that I can only start to point them out.

1. There are fit and good looking folks at the craps table. Ha ha if you have one normal looking person you are doing fine... to have 3 pretty girls and 2 normal looking guys is unheard of
2. The women appear to be drinking wine, martinis and champaign. I may have seen wine out of a tumbler glass but even that's rare... never seen the other ones especially not in formal glasses
3. THE BETS ARE SO WRONG! LET ME COUNT THE WAYS...
- the first guy on the left has one $5 chip on the pass line and about ten $5 chips as "odds" behind it. I know for a fact that maximum odds at that casino are 5x odds (they are 3-4-5 for the degenerates out there)
- the woman right of the guy about to roll the dice is playing the "pass line" and the "don't pass line" AT THE SAME TIME. THIS HAS LIKELY NEVER HAPPENED IN THE HISTORY OF CRAPS
- someone is betting the "don't come" line. Never seen that bet, but at least it is possible
- It is hard to count the cips and possible that there are some "big" denominations under the stacks but the pass line vs odds make no sense at all

We'll go back to that casino and I can point this out to management and I'm sure they'll be like GTFO but it will at least get a laugh on my part.

Sunday, January 21, 2018

Tax Reform Impact - Capital Gains and Investment Income

Recently I was at Powell's bookstore when I came across this book which attempts to be an introduction to the complexities of taxation. I thought that this was in the spirit of what I was going to try to do as I start to review the 2017 Tax Reform act and its' myriad impacts on the economy and individual incentives.



As an individual investor, I started with looking at capital gains and investment income. Some thoughts:
1. The same general split applies; long term gains are taxed at favorable (lower) rates, and short term gains are taxed as ordinary income. The ordinary income tax brackets are always higher than the capital gains brackets
2. The tax rates for capital gains are 0, 15% and 20%. These are the same as under the previous tax laws. Here is a brief article from the Motley Fool
3. The rates on ordinary income have gone down a bit, so the average person would pay less on gains, all else being equal (but this gets into your state and the standard deduction, a different topic). Thus there is no significant impact on investments here, it should be slightly favorable
4. Although there was talk of changing the way stock sales are accounted for to limit "tax loss harvesting", these changes did not occur. I believe that you can still deduct up to $3000 in losses against ordinary income, but I haven't been able to find that yet to confirm either
5. The 3.8% surtax on gains if your income is above $250,000 remains the same; this does not seem to be impacted by the law
6. While there were changes throughout the code that impacted REITS (real estate limited trusts) and MLP's (Master Limited Partnerships), these changes didn't fundamentally impact their value to classes of high income investors (they still have favorable tax characteristics)
7. There was some discussion of eliminating the Federal tax free nature of municipal bonds, but that deduction remained intact
8. There also was some discussion of changing the 401(k) deductions; this too, remained intact
Thus for investors, the basics of investing for individual investors (not the super wealthy) and the impact of taxation did not see significant changes under the new tax law. The types of tactics you would use under the prior tax law mostly moved into the new environment intact.

Cross Posted at Chicago Boyz

Saturday, January 20, 2018

Defeated

Last night I attended the Illinois basketball game against the Badgers here in Madison.  The final score showed Illinois getting shellacked by 25 points but that really doesn't tell the tale.  The Illini were dominated from the opening tip.  They never led, and played absolutely awful from the get-go.

I am not sure why the new coach even took the job.

These are "bottom of the bucket" days for the Illinois athletic department, as far as the two big money sports go (men's hoops and football).  We were "defeated" in Big Ten play in football this year and are "defeated" so far in basketball.  I was thinking that this could be some sort of record if we go one entire year not winning one conference game in football AND basketball.

So I donned my research hat and took a look at the last time this happened.  Of course, the internet is awesome and I found this article.

Interesting that BC did just this very feat a couple of years ago.  After that you need to go back to TCU some 45 years ago.  Then you go all the way back to the world war two era for that Georgia mark, which isn't really fair since the season was stopped by the war.  From there you have all of the Sewanee marks, which are also dumb since they were obviously in a conference that outclassed them.  Then you go back to Northwestern in 1925.

So hey - the Illini could make history this year.  In futility.

Sunday, January 07, 2018

Disruption - MoviePass

MoviePass is a service that has gained a lot of new users lately - it allows you to see unlimited movies (only one a day) each month for $9.95, which is essentially the price of a single ticket. How it works is that they give you a Mastercard that is connected to your mobile phone - when you get to the theater, you connect with them at that time and they authorize the card specifically for the amount needed to pay for the movie and then you pay and go inside. The process is set up so that theaters can't deny MoviePass at the box office because it is basically just another Mastercard and the only way to disable it would be to disable accept MasterCard, which is impractical or likely impossible for a host of reasons. The movie theaters receive the full price of the ticket through MoviePass, even if it is more than the $9.95 subscription fee (movies can cost almost $20 in Manhattan, for instance). In the short term, this is a "boon" for movie theaters because Wall Street investors are subsidizing their full price tickets.



Here is a NYT article on the growth of MoviePass. Per the article, they are adding 1 million subscribers a month. The ostensible play (what they say) is that they plan to "break even" on the cost of the service (if you see roughly one movie / month) but then they will make their money on using data from customers in an aggregated fashion to sell to the movie studios for marketing and targeting. They believe that this data and targeting consumers can add 5-7% to the box office gross. Note that the guy who helped found MoviePass was an executive at Netflix and RedBox named Mitch Lowe and he is very sophisticated financially and connected so he is a serious rival to the movie industry in general.

In today's economy, companies like MoviePass are (apparently) able to raise funding for business models like this that run accounting losses and burn cash now, under the promise that they are going to make money later. For years Facebook ran cash and operating losses and now is one of the most profitable companies in the world (and they haven't even monetized key parts like Messenger yet). Uber today still burns prodigious amounts of cash but has obviously captured critical mass in terms of usage and position in the marketplace (likely just needs to change the model to become profitable).

What is the real play for MoviePass? In the short term theaters will receive a burst of revenue (and concessions) from full ticket priced payments basically subsidized by the capital markets through MoviePass. Regardless of what MoviePass "says" about using this data for marketing, the true existential risk(s) that theaters see is that:

1. Theaters offer an "undifferentiated service". While a ratty old theater can drive folks away, most modern theaters allow you to select your own seat, have a nice comfy chair, and have upgraded concessions. That is the "price of entry" nowadays
2. Theaters don't control content. Other than the occasional art theater, theaters just show movies from the major studios and are a pass through of whatever content they deliver
3. Theaters have a problem with capacity optimization. Theaters are mostly empty during the day and leave seats available at night, and since customers don't have a relationship with the theater (because they are undifferentiated), the chains don't connect enough to do real-time pricing or other tactics to "fix" this and even out their business
4. Theaters face a challenge in that the "home experience" is rapidly approaching the quality of going to the theater, and in some cases may be better (you don't have to watch commercials at home, for instance)
5. Theaters rely heavily on concessions to survive, which isn't a problem per se but it drives strange behavior from both customers (you can't bring in your own food) and the theater (weird pricing where you can't really buy a small they drive you to a giant tub of popcorn)
6. It is a big ask for younger people to turn off their phone for 2 hours. Maybe in the future theaters will just give up and expect people to be on their mobile devices, I don't know. Or if you have a tool like MoviePass where you aren't as connected to the particular cost (because you pay by subscription) the fact that you can just "walk out" and it costs you nothing might make millenials more inclined to go

In summary, theaters are in a weak position like all undifferentiated retail. They have high fixed costs and no direct relationship with their customers that is substantial. If a company like MoviePass can galvanize the theater's customers and work with the customers directly, theater owners rightly fear that MoviePass in turn could demand huge discounts for their customer base, and in turn extract the value out of the business and the theater chains would be left with the capacity and operating costs and not the key customer relationships which drive revenues.

If this occurred, it would probably lead to a rationalization of the movie industry in a variety of ways. The chains would need to live on a very small margin which would shake out the business and reduce capacity. In turn, a company like MoviePass could aggregate demand and offer differentiated pricing to encourage customers to attend during off times, or just shut down the offtimes which could allow the theater to reduce staff accordingly. They could also offer advanced technology to make purchases of concessions to be seamless and pre-ordered and even tailored to the impending customers.

This is all speculation. Maybe MoviePass just runs out of cash or investors balk. But the movie theater chains are in a difficult position with high fixed costs and little control of their movies and an indifferent relationship with their customers. MoviePass won't be the last attacker in this space, just like how Napster may have died but ultimately they provided the impetus to change the music industry forever.

Cross posted at Chicago Boyz