Econstories.tv has posted a very entertaining video comparing the economic theories of John Maynard Keynes and the free market theorist Friedrick von Hayak.  It’s a little long at over 7 minutes, but well worth investing the time.

So, who do you side with?  Keynes or Hayak?

I recently came across this bleak outlook for the US Municipal Bond Market written by Frederick J. Sheehan (see link below).  While this is just one man’s opinion, it’s enough to give a bond investor at least a few sleepless nights.  Some of the historical precedents he points out, especially those from the Depression Era, are chilling.

The Coming Collapse of the Municipal Bond Market (PDF)

It should come as no surprise that analyzing and quantifying “risk” are the name of the game in this economy.  The risk profile for Municipal Bonds is no exception.  Unfortunately, there may be some validity to the concept that Municipal Bonds carry more risk than anyone had anticipated.

According to a recent article in The Arizona Republic, some municipalities don’t see the benefits of the Qualified School Construction Bonds (QSCB’s) and are forgoing their use.  The American Recovery and Reinvestment Act, otherwise known as the ”Stimulus Plan”, created the QSCB’s as a way to incentivize new school construction.  The bonds are unique in that they pay no interest to the bondholders.  Instead, the bondholders receive a federal tax credit.  A deep investor market for these bonds has not yet emerged and many issuers are having to pay additional interest to bondholders to incentivize them to purchase the bonds.

In addition, the QSCB’s come with several requirements which may make them costly to implement.  The first requirement, and most punitive, is the requirement to utilize Davis Bacon Wage Labor rates.  Depending on the locality, this requirement alone can increase construction costs significantly.  It is not inconceivable that any interest savings achieved by using the QSCB’s could be eaten away via higher construction costs.  Secondly, there are significant and severe reporting requirements that go along with several of the ARRA created bonds, not just QSCB’s.  We have heard of some municipalities that are having to dedicate a full time staff person to handle the reporting requirements.  In a fiscal environment where every costs is being scrutinized, adding a position may not be palatable.

Much like most things in life, there are always pro’s and con’s associated with any decision.  Municipalities are well advised to lean heavily on their financial advisors as they work through the various funding options for new projects.

Boeing recently announced that they had chosen South Carolina as the location for a second production line for their 787 Dreamliner long-haul jet.  The Company current has a fuselage assembly and installation operation in South Carolina and this latest move will be a dramatic expansion of those capabilities.  According to Jim Albaugh, president and chief executive of Boeing Commercial Airplanes:

“This decision allows us to continue building on the synergies we have established in South Carolina with Boeing Charleston and Global Aeronautica”

Union officials in Everett Washington, the home of the current production line, were less than enthusiastic.  Union leader Tom Wroblewski said Boeing has:

“has betrayed our loyalty once again, walking away from our discussions.”

I guess you can’t please all of the people all of the time.  The Boeing announcement comes on the heals of the announcement by South Carolina that shipping giant Maersk has agreed to continue operations at the Port of Charleston (after announcing they would be leaving).  All in all, it’s been a great month for South Carolina economic development news.

Maersk Line announced yesterday that they continue operations in Charleston, South Carolina through 2014.  This is a reversal of a previous decision by the line to leave the east coast port.  This is obviously great news for Charleston and demonstrates their commitment to serving their shipping line clients in the best possible manner.

On the eve of September 11th, 2009 the United States fired the first shot in the trade war with China.  That was the day that the President signed an order to increase the tariff on imported Chinese tires by 875%!  With a swift stroke of the pen, the tariff went for 4% to 35% and the trade war had begun.  China responded almost immediately accusing Washington of “rampant protectionism”.  According to Beijing, the action is not only ill thought out in a time of economic mayhem, but also violates WTO rules and goes against specific promises made at the G20 summit this April.

China has promised a retaliatory action and is currently scrutinizing the imports of American poultry and autos.  The United States claims that any retaliatory effort would be “inappropriate”.

In signing the order, the President was responding to a petition from the United Steelworkers Union who was concerned about not being able to be competitive with Chinese tires.  The President stated that the new tariffs would save the jobs of 7,000 Americans.

What is interesting in all this is that the American consumer is left out of the discussion.  The consumer wants choices and value.  By implementing this order, the President is insisting that the American people pay more for their tires.  He has removed a low cost choice from their available options.  In the end, it is the consumer who pays more, buys less, and suffers the most.

Recently GlobeSt.com ran an article about several national brokerage houses adding auction services to their line up of available product lines.  After reading the article, I had the opportunity at lunch to discuss the trend with one of the regions most active investment sales brokers.  It was a very interesting discussion as we tried to hash out whether auctions would take off as a trend for institutional level assets, or whether it would be solely reserved for the smaller, private equity transactions.

I’ll fill you in on the results of our conversation later (I don’t want to bias your comments), but I would be very interested in hearing some of your thoughts on Auctions as a buying and selling tool for institutional investors.

So, on with the comments…

I was stuck by this question last month as I watched the Tour de France bicycle race.  Of course, I was cheering for Lance, hoping for a big comeback.  But, I also wanted to cheer for the “American” team.  It dawned on me that there was no truly American team.  Team Garmin Slipstream had the American sponsor, but most of its riders we foreign.  Team Astana had a Spanish sponsor, but a fair number of American riders.  Even Lance lives a fair amount of the year outside of the US.  In the end, I had to settle for nearly-American teams, but it got me thinking…

Today I read another article about a “Buy America” clause being added to a House spending bill that precluded any of the $33b of appropriated funds from being used to purchase cars other than those made by GM, Ford or Chrysler.  Yes, those three are American registered companies.  However, Mercedes, Toyota and many other have plants located in the US that employ thousand of Americans.  A portion of a dollar spent on a Toyota will work its way back to the American workforce.  BMW does a great job of keeping the South Carolina economy humming with their Greenville plant.  Conversely, many of the Ford vehicles are assembled in Mexico or Canada and employ their nationals.

So, what is the tipping point where a company becomes American?  For cars, I’d assume the profit margin to be in the 6-10% range.  That means that 90-94% goes to someone other than the manufacturer.  I know the dealers take 10-20% of the sales price, and we’ll assume they are “American” whether the car is a Honda, Ford or Fiat.  The remaining percentages goes to the raw goods and labor to assemble the car.  In some cases, that’s Americans and it some cases it’s not.  Conceivably, you could buy an American car and have 70% of the money go outside the US.

In this global, flat economy trade-restrictive “Buy American” clauses don’t make much sense.  They do, however, make politicians feel proud enough to wear their American flag lapel pins… (which was most likely made in China).

Wednesday’s $39 billion auction of 5-year Treasury notes was met with very poor demand and could drive interest rates higher for America’s increasing deficit. Two metric stood out as harbingers of disappointing results. First, the bid-to-cover ratio came in at only 1.92. This represents the lowest value for this metric in over a year and is an indicator of general investor malaise. Second, the yields for the notes came in unexpectedly higher. This would indicate that the buyers were in the position of strength in the pricing negotiations. Never a good sign if you have a vested interest in the seller, which we all do.

“It was just a horrendous result,” said William O’Donnell, head of U.S. Treasury strategy at RBS Securities in Greenwich, Connecticut. – as reported by cnbc.com

It is anticipated that today’s (Thursday) auction of $28 billion of 7-year notes could be met with equally week demand. Overall, the lack of demand and pricing ability for Treasury notes could mean that the cost of borrowing increases significantly for the US. It appears to also be a clear sign from our largest foreign and domestic lenders that we need to throttle back on our levels of debt.

Richmond, Virginia, July 21, 2009 – Moreland Property Group, Inc. (MPG) announces its ABA (“Audit, Benchmark, Act”) Lease Analysis Program as an expansion of its asset management and advisory services. The ABA program is designed to identify and recover lost value in the lease agreement and provide landlords, tenants and banks with a complete picture of how their asset and lease compares to the market and identify future profit opportunities and cost savings… more