An Experiment Gone Awry

January 16, 2013

 

Yeah, the sun is at the center of the electric tower. It's not symbolism, it's just a cool photograph.

Yeah, the sun is at the center of the electric tower. It’s not symbolism, it’s just a cool pic.

Last week we broke down the Dow Jones Transportation Average, which is the older and less excitable sister of the famed Dow Jones Industrial Average. There’s also a younger and similarly low-key sibling, the Dow Jones Utility Average. It was founded in 1929 – for multiple reasons, a notable year for stocks – when all the major utility stocks were removed from the Industrial Average and left to create their own index.

Thus the DJUA consists of the prices of the shares of 15 power companies and their ilk, summed and multiplied by a constant. You probably haven’t heard of more than 5 of them, yet they’re far more important to the progression of the economy and your day-to-day comfort than Google or Facebook will ever be.

The utilities include

  • 11 electric companies
  • 2 multiutilities
  • 1 pipeline company
  • 1 gas distributor.

Applied Energy Services, based in suburban Washington, D.C. Founded by a couple of federal bureaucrats, AES operates all over the world – with 12 million customers not just in the U.S. but Mexico, the Dominican Republic, Colombia, Brazil, Argentina, Chile, the U.K., Spain, France, Belgium, the Czech Republic, Ukraine, Hungary, Bulgaria, Turkey, Nigeria, Cameroon, Jordan, Oman, the United Arab Emirates, India, Pakistan, Sri Lanka, Kazakhstan, China, the Philippines and we might have missed a couple. AES does coal, hydro, diesel, gas, oil – all the usual suspects, plus a wind project that they’re very proud of.

American Electric Power is headquartered in Columbus, and fires up 11 states. (Ohio, Texas, and much of the Illiteracy Belt.) AEP’s transmission system is bigger than all the others in the United States combined. 2/3 of their power comes from coal, 2/3 of the rest from natural gas and oil.

Con Ed – Consolidated Edison – is New York City’s major electricity and gas supplier. It also operates in New Jersey and northeastern Pennsylvania. In addition to the juice and the gas, Con Ed also supplies a peculiar 19th century relic form of energy – steam. Yes, they move simple water vapor through tunnels that manage to heat swaths of Manhattan. Cogeneration, they call it: the steam is a byproduct of electricity generation, and with a little ingenuity Con Ed does something beneficial with it instead of just letting it rise into the atmosphere.

Dominion, based in Richmond, electrifies much of Virginia and North Carolina. It also supplies natural gas to several neighboring states.

Edison International, not to be confused with Con Ed – is based in suburban Los Angeles and is the parent of Southern California’s biggest electric company. There’s another subsidiary that owns fossil fuel plants as far away as Turkey, or did until the subsidiary filed for Chapter 11 bankruptcy last month.

Chicago’s Exelon also sells electricity and natural gas, specifically in Illinois, Pennsylvania and Maryland. Many of Exelon’s assets derive from last year’s merger with Constellation Energy. Exelon also owns all or most of 17 of America’s static supply of nuclear plants.

Yeah, this is a laundry list and kind of dull. But we’re almost done and besides, we committed to this in last week’s post on the Transportation Average and now we have to finish it. And if you think this is boring you should check out how our muse Trent at The Simple Dollar spent the first couple weeks of the new year.

FirstEnergy, headquartered in Akron, has 10 operating companies that among them provide power to 6 million souls who live in the more refined parts and outskirts of Appalachia. Much of the infamous 2003 blackout that affected almost the entire Northeast and much of central Canada occurred thanks to FirstEnergy’s failure to, if you can believe this, trim some trees around a few of its high-voltage lines in Ohio. Almost 2/3 of FirstEnergy’s power derives from coal, and half the rest from nuclear.

NextEra, with offices north of Miami, generates power in 28 states and 3 provinces. Like most of its cohorts on the DJUA, it has several divisions that it operates under (Florida Power & Light, etc.) NextEra is America’s biggest distributor of solar and wind energy, which still makes up a trivial portion of the nation’s energy generation. As you might be discerning by now, the biggest differences among most of these companies is geography.

Pacific Gas and Electric, based in San Francisco, provides natural gas and electricity to customers in northern and central California. 2 years ago one of their gas pipelines burst, killing 8 people, or infinity times more than the number of people killed in nuclear accidents since the first commercial application of critical fission.

Alright, maybe this wasn’t our best idea. For those of you who’ve made it this far, we’re pretty impressed. Send your requests for future 2-part Control Your Cash pieces to info at this site’s URL. Public Service Enterprise Group of Newark gives ¾ of New Jerseyites their electricity and natural gas fix. Here’s their boring Twitter feed, and they’re still riding that solar train, too.

Atlanta’s Southern Company deals exclusively in electricity (hydro, coal etc.), not gas, and is building the first nuclear plant this country has seen in the last 30 years (near Augusta, Georgia.)

Duke Energy, headquartered in Charlotte, is a holding company. Like Southern, Duke is strictly electric, with 8 nuclear plants, 17 coal-fired plants, a dozen oil-and-gas fired plants, and 30 hydro stations among its assets. Last summer Duke merged with Progress Energy, the new combined board named Progress’s CEO to run the company, and 20 minutes later that guy resigned to spend more time with his family and pursue other opportunities. Seriously. For his tenure at the helm he received $45 million. Duke’s erstwhile CEO replaced him, and more than a few board members think they’d been duped.

CenterPoint Energy, based in Houston, sells electricity and natural gas to customers in Texas, 4 surrounding states, and Minnesota. CenterPoint is the successor company to Reliant Energy, the company that a) plastered its name on Houston’s NFL stadium and b) still exists, but as a different entity. In fact, it’s one of CenterPoint’s biggest customers. CenterPoint doesn’t sell directly to households and businesses, but rather to retail electric providers – the middlemen in the chain.

NiSource is headquartered in Merrillville, Indiana, not too far from Chicago. Its natural gas and electricity customers range everywhere from New England to the Heartland to the Florida Gulf Coast. They have an “unwavering commitment to top-tier safety and reliability, collaborative stakeholder relationships, inclusive and engaging work environments, strong governance and transparency, and forward-looking environmental practices and stewardship”, and again, if you think today’s post is dull try reading a few corporate mission statements.

One more, and let us never break down another Dow Jones index as long as we live. Williams Companies, based in Tulsa, does primarily natural gas and oil with a smattering of electric. Ten years ago Warren Buffett floated the company an emergency loan so it could hold off bankruptcy. No word on what interest he charged. Interestingly, to the extent that anything in today’s post is interesting, Williams inadvertently helped modern telecommunications flourish. The company ran fiberoptic cable through defunct pipelines.

We’re so sorry. A better post Friday, as God is our witness. Still, now you know a little about 15 enormous companies that collective employ tens of thousands, serve hundreds of millions, and pay next to nothing in tax while literally keeping the lights on.

Filed Under: Economy, Education Tagged With: ,

We’ll Give You $5 To Reject The First Offer

December 28, 2012

You’ve probably heard the expression, “You don’t get what you deserve. You get what you negotiate.” Okay, who coined it?

  1. Zig Ziglar
  2. Og Mandino
  3. Yag Oliveri
  4. Tom Peters
  5. Chester L. Karrass

1, 2 and 4 are/were self-help authors and motivational speakers. 3 is a name we made up.

5 is the right answer. You might remember him from such SkyMall ads as The Karrass Effective Negotiating Seminar. He’s this dour yet confident man:

C-dog

 

He might not even exist. Biographical information on Mr. Karrass is sketchy, but if he’s alive it seems he’s 89. That seems to be the most recent picture of him, and it looks to be at least 30 years old. Anyhow, Chet fancies himself as the authority on negotiating. Sit through one of his seminars and you’ll learn how not to leave money on the table, and how to make your adversary weep and gnash his teeth while you bleed him dry and leave a desiccated carcass where a would-be negotiator used to be.

The first rule of negotiation, as we all know? Get a number out of the other person first. Oh, you want my car? How badly? (Or conversely, You want to sell me your car? How badly?) It doesn’t matter how long the standoff (or standstill. Standoff? Standstill) lasts. Wait, wait, wait until the other party mentions a number, out of sheer boredom if nothing else. At that point, he’s already ceded tremendous ground.

What if you’ve both heard this rule and taken it to heart? Then stand there staring at each other until the 7th Seal is broken, whatever. This can’t happen in real life, only in theory, because at one point one party will say “This stalemate is eating up so much of my time that I need to be compensated for it. I quit. Either that or I’m internally recalibrating the scale and raising/lowering my price.”

Exchanging a car is the classic example, because it seems everyone does it sooner or later and the market itself is relatively unencumbered by regulation. And it usually involves head-to-head confrontation between the parties. But regardless of what good or service you’re exchanging, the rule applies. Get a number before you give one.

Here’s the funny part.

Q: How much does it cost to sit through a Karrass seminar?

 

Karrass

 

A: Exactly what they tell you it’s going to cost, Ace. Take it or leave it.

Now if you spend $1000 (excuse us, a much more reasonable $998) on a seminar, are you getting the best possible deal? Or are you on the receiving end of something one-sided?

You’re not negotiating, at any rate. Furthermore, the folks at Karrass seem to be violating the first rule of negotiating themselves. So what gives? Is everything we think we know a lie?

The Karrass people would argue that you have to be practical, it would grind their business to a halt if they had to haggle over every single transaction. The Control Your Cash people would argue that if you take the other party’s first offer, you’re paying too much.

You don’t need to drop a grand (or $900, if you can find 4 friends with too much money) to learn how to negotiate. You just need to develop a backbone. Learn to walk away. It’s this compulsion to make a deal, any deal, that leads to awful decisions. Even in the non-economic realm. Just ask the lonely guy who does everything but get down on his knees and beg a woman to go out with him because darn it, we were meant to be together. (Or less commonly, the girl who wants the abusive but occasionally charming guy to take her back.)

After you’ve bought several hundred copies of The Greatest Personal Finance Book Ever Written (complete with details on how to negotiate!) check out this 1997 release by sports agent Mark Shapiro, The Power of Nice. Don’t be fooled by the title, he’s still an attorney and thus probably an awful human being, but the book does contain one exercise that perfectly illustrates what we’re talking about.

Reciting the exercise from memory, you’re supposed to find a partner and each read one side of a page that describes financial details of a potential real estate deal, then negotiate said deal. One person, the seller, reads that he should sell the property in question for somewhere around $2 million, with a little wiggle room. Meanwhile, the buyer reads that he shouldn’t offer much more than $300,000 if he can help it.

The interesting thing is that the negotiated price is almost never around $1,150,000. Inevitably, it’s either close to $400,000, or close to $2,900,000. One party does almost all the conceding.

So don’t be that person. Easy, isn’t it? Lowball profusely if you’re the buyer, ask for something on the verge of absurdity if you’re the seller. Whether it’s a salary, a physical good, whatever. There’s an inherent reluctance to do this, for fear of insulting the other party or not having him take you seriously. Get over this. There are an infinite number of deals to be made, and only a small thinker thinks “I have to make this deal, no matter what.” Being dictated to is no way to build wealth.

Filed Under: Capitalism, Education, Making Smart Choices Tagged With: , ,

What the hell is the Case-Shiller Index? Do I care?

December 12, 2012

 

 

Karl Case and Bob Shiller aren’t much to look at, so here’s a picture of a couple of gorgeous chicks instead.

Let’s answer the 2nd question 1st. (That’s for you, series of English teachers who said that ordinal numbers must be spelled out. Go to hell.)

Yes.

As for the 1st question, it’s a way of comparing prices over time, specifically home prices.

But anyone can create a price index, right? Don’t you just need some raw data and a calculator? Houses in this city cost this much in the baseline year, they cost this much today. Divide the latter by the former, divide that by the rate of inflation and Bob’s your uncle.

Yeah, but there’s more to it than that.

The Case-Shiller index began by comparing repeat sales of the same homes. They also threw out the sales that weren’t “arm’s length” – e.g., parents selling houses to their kids or their limited liability companies. Those excluded transactions would distort the numbers, for obvious reasons.

There are plenty of official indices that track home price movements, most of which are deficient somewhere. For instance, the federal government publishes a home price index. But it’s the branch of the federal government that oversees taxpayer charity cases Fannie Mae and Freddie Mac, which means that the index only accounts for homes with Fannie- and Freddie-approved mortgages, which means that the index excludes all-cash transactions and jumbo mortgage transactions. There’s another index, developed by a private company, that goes out of its way not to restrict itself to repeat sales like Case-Shiller does, the argument being that that limits the number of transactions required to compile the index.

If this sounds deathly boring, of course it is. Even our famed CYC style can’t suscitate a topic as dry as this. What’s so special about the Case-Shiller index, and what’s made it the definitive index for measuring changes in home prices, is that it gives additional weight to repeat sales. That’s supposed to make Case-Shiller a more accurate reflection of the market, in that a house that sells twice should presumably have twice as much impact on the numbers as a house that sells only once (in the given period.)

So does the Case-Shiller index have a purpose beyond giving the news anchors at Fox Business Network a chance to quote it and sound authoritative? Absolutely it does. Because in the same country where 48 states prohibit gambling on sports, and where the Securities and Exchange Commission valiantly defends private citizens from the scourge of markets for future events, yet collateralized debt obligations are not only perfectly legal but backed with the full faith and credit of the United States government (if you happen to be on the right side)…you can wager on the Case-Shiller index!

Yes, the Chicago Mercantile Exchange lets you buy futures contracts and options – which is to say, place bets – on what the index will do. The Exchange calls it “risk transfer”, which is no different than what you do when you buy insurance at the blackjack table. (Assuming you’re playing blackjack. Don’t play blackjack.) If you think the index will rise, and with it home prices, buy a put option at a certain price. If you think the index will fall, buy a call option. If you don’t know what put and call options are, or anything else about the stock market, buy our book.

 

You’ll notice that with one brief hiccup, 2 if you count the current one, home prices have been falling since 2006. Case-Shiller keeps multiple indices, clearly illustrated on the chart. Also clear is that they move in harmony, more or less.

The Case-Shiller Index isn’t usually quoted as an absolute number, as the Dow Jones Industrial Average or the S&P 500 is. Rather, the Case-Shiller Index is quoted as a difference over a prior period, e.g. “The CSI rose 3.4% year-over-year”.

In fact, the national Case-Shiller index rose 3.6% over the index from a year ago. Good news! The housing market is recovering, errr…homes are getting harder to buy. Isn’t that fantastic?

Like every other financial statistic, how “good” or “bad” it is depends on what side of the transaction you’re on. AND…even if you’re a fan of rising home prices, the current 3.6% increase doesn’t account for inflation, which was last measured at 2.16% year-over-year. So home prices have risen about 1.44% in the last year, if you had to throw a single number on it and ratiocinate it to 2 decimal points.

There isn’t a staggering difference between one comprehensive home price index and the next. Nor is there much variation in the information these indices convey. Nor should you pay much heed to news stories that say the housing market is “recovering”.  It’s still a fantastic time to buy a house as opposed to renting, seeing as prices and mortgage rates remain at long-term lows. It just maybe isn’t as good a time to buy as it was a year ago. (A year and 2 months ago actually, factoring in Case-Shiller’s lag time.)

Filed Under: Education Tagged With: ,
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