INVESTMENT PERSPECTIVES BLOG

A forecast is not a plan. A forecast has no strategic component. Those real-life plans that are forecasts in disguise are immune to our thesis that total value equals economic value plus strategic value. They are trivial but not uncommon examples of my general thesis and occur when operating the existing business is the sum and whole of the business plan. Looking at this circumstance is useful because the distinction between economic value and strategic value becomes very evident.

An example may be helpful. General Power has sales of $4 billion, employs $2 billion in capital, and earns $400 million. It has grown revenues and income over the past five years at a steady 5 percent per annum. Its business plan for the coming year projects revenues of $4.2 billion on a capital base of $2.1 billion with profits of $420 million. Such a plan is merely a forecast. The whole world expects this result. In this event, the business can be valued solely by the discounted sum of its future free cash flow (FCF) growing at 5 percent per annum. Any valuation above that number would not be justified because there are no plans to enter new businesses or to change the business strategy. General Power’s free cash flow would ultimately be used to buy back stock, or it would be distributed as dividends to shareholders because the company has, by our definition, no interest in investing the cash for any other purpose.

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If management flexibility, represented by real options, is the key to value creation, logic would seem to tell us that losing flexibility can destroy value. This section will illustrate this point.

The first example occurs under command-and-control conditions. In a planned economy, a plant manager may be rewarded only for producing his quota, which he will attempt to produce whether it is needed or not. This condition alone guarantees that market economies will outperform centrally planned economies. Such “plans” destroy value, at least in comparison to plans that allow for flexibility.

Comrade Zhukov’s plan is to produce one million liters of black paint and to deliver it to the Lada factory. He is given one hundred thousand 10-liter cans, one-half million liters of solvent, and the required amount of polymer base and carbon black. He has no incentive, nor access to resources, to produce more. If Lada doesn’t want the paint, it’s not his problem. And if there is a fire in the carbon black factory, well, that would not be his fault. So in principle he has no options. His Western counterpart, Ms. Jones, with a similar business plan, might trim production and inventory to adjust to a current shortage of cans, prebuy to take advantage of low prices for polymers, and attempt to exploit a new market trend toward red sports cars. She may perceive options to recycle cans, inventory an emergency supply of polymer, and purchase red pigments. All of these options add value.

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Modeling risk can be associated with the data quality as well as simple bugs in the calculation engine. The sector came of age at a time when the reporting requirements were minimal. Some servicers have voluntarily increased the volume of reported data. Best practices for disclosure in the sector include web-posted reports, detailed lease rollover information and investor updates detailing extraordinary items—especially related to expenses.

Other securitized assets tend to have reasonable proxies for collateral performance, such as loans of a similar credit profile and vintage. There is no market indicator for the risk and performance of an aircraft lease contract, which means the servicer has a monopoly on the pieces of information necessary to forecast deal performance.

Investors in the aircraft ABS sector must be diligent about doing the work to become comfortable with the risks inherent in this asset class. Modeling aircraft lease cash flow and then evaluating the corresponding liability waterfall is fraught with potential modeling risks. Even though the focus of this discussion is on asset-side modeling, the resulting analytics will also depend on the assumptions made in the liability model. From this perspective, the modeling of interest rate hedges represents a risk. The swap notional amount varies as a percentage of the Class A balance outstanding on each deal with varied standards of disclosure to help or hinder modeling.

Investors should avoid the pitfall of attributing too much predictive power to even the most elegant models. The key from the investor viewpoint is to evaluate opportunities in the sector in such a way as to gain comfort that model error is skewed to the upside.

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Suppose we were to run a contest in which a group of 30 individuals were asked to predict the outcomes (heads or tails) on a series of coin flips. After each coin flip, some of the players would drop out because they made the wrong selection. If we continue the experiment until there is one person left, the winner, would he be skillful or simply lucky? In any contest, there are winners and losers. In sporting events, we attribute winning performances to skill. Does this make sense in other endeavors? If markets are completely efficient, there should be no reward for skill, so ex post abnormal performance can only be attributed to luck.

Another interpretation is that the market prices managerial skill at fair value. So, an exceptional manager who generates an alpha of 2% earns that 2% in the form of a management fee. After fees, that manager’s performance looks identical to the average manager who generates an alpha of 0.25% and earns a 0.25% management fee.10 The lack of variation in CDO manager-fee structures suggests that the marketplace does not currently price skill differences across managers.

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States have great flexibility in moving tax base and spending among local governments. The classic case is Texas. State officials wanted the revenues and tax policy consequences of a statewide property tax for schools, but the state constitution forbids such a tax. The effect is achieved by a complex device which gives school districts the option of choosing among five alternatives. If they don’t choose one, the state merges them with another district. The options include sending local property tax money to the state for redistribution to other districts, sending it to a neighboring poorer district by transferring some tax base to that district, or paying the cost of educating pupils from another district.

States can also move property tax money by how they distribute state-assessed revenues from such entities as railroads, pipelines, and electric transmission lines. They can do even more. For example, Mississippi decided that the tax base represented by the Grand Gulf nuclear power plant shouldn’t just go to the district where the plant is located. So it distributes property taxes on the plant to every taxing jurisdiction where power from the plant is sold — a large part of the entire state.

California, facing a fiscal crisis in the early 1990s, effectively shifted much of it to cities and counties. It moved substantial chunks of property taxing authority from municipalities and counties to independent school districts. It then took credit for the added school district revenues as though they were increases in state aid.

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States can effectively mandate local taxes by making eligibility for state aid contingent on local governments levying them. For example, Florida requires local governments to levy certain gasoline taxes and Arkansas requires local income taxes in some school districts. Such moves can become quite elaborate. For example, in the 1990s, California: (1) allowed its temporary 0.5% sales tax surcharge to expire, (2) induced nearly every county to adopt a new 0.5% local option tax leaving taxpayers paying the same amount as before, and (3) adjusted state aid to counties to leave both state and county finances in about the same condition as before the shift.

The subject is highly complex, but states can effectively mandate local property tax increases through their school aid formulas, as Georgia and other states have done. The mechanism can be as blatant as a requirement of a minimum local tax effort to receive state aid and as subtle as increasing the tax rate assumed in calculating the local effort subtraction in school foundation formulas.

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States have been increasing their gasoline taxes and other highway user charges such as vehicle registration fees and drivers’ license fees. These moves are continuing as many states are in the midst of highway construction programs which cannot be sustained without further increases. States have been increasing taxes on cigarettes and tobacco products, both to raise additional revenues and discourage smoking.

As deregulation continues to affect natural gas, telecommunications, and electric power, states have been forced to reconsider special excise taxes on companies providing these services. The trend is toward eliminating special public utility taxes in favor of treating companies in these industries more comparably to companies engaged in manufacturing.

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A high percentage of legislators and governors have expressed a desire to cut property taxes, which are the least popular of the three major tax sources — income, property and sales.

Several states — notably South Carolina, South Dakota, and Wisconsin — have financed large rollbacks of property taxes with state revenues. Many states have financed more selective property tax relief. Voter initiatives to limit property taxes have been a major factor in the fiscal policies of Oregon and potential initiatives have encouraged consideration of property tax relief in other states.

Taxes Affecting Economic Competition

Concerns over making or keeping states economically competitive have been a major factor causing state tax changes over the past decade. The changes affecting business taxes are covered in detail in “Interstate Economic Competition and State Tax Policy.” Competitive concerns have also led states to abandon their estate and inheritance taxes — except for the taxes that can be 100% credited against federal estate taxes. Extra state taxes remain in only a few states.

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They call themselves banker and are Truth bad gambler. The crash greedy clique must also be criminally prosecuted.

Imagine that times following situation: A gambler Laden, in which one on the outcome of football matches or horse races can be set, goes bankrupt. The Wettgewinne the customer can no longer be distributed. There is simply no more money there. The head of the betting then screams after government support. He calls by using taxpayers’ money should obscure his shack to be saved.

Actually unimaginable. But what is currently playing across the Atlantic, running around after this pattern. The daring gambler simply call themselves bankers. Several managers of U.S. financial institutions, whose name until recently sounded so incredibly seriously, have gezockt like one of those rounds of poker in smoky back rooms, which we know various mafia movies. Their operations were high, the risk as well. Only for the loss of billions in dizzying sums moves, they do not just stand.

Painful sight in the share custody

Do it now to a large part of the government and the U.S. taxpayer. But that’s not enough: The risky deals with the Americans with real estate loans, which many home buyers could never be repaid, take all of us. Because U.S. citizens were allowed to buy houses, they really could not afford, and banks with bad loans is more than questionable traded, also stuck in the mess we are now. Given the current exchange curves hurts to look into the private equity depot. The global consequences are currently not yet in sight.

In the newspapers we read a lot of missing currently controls and high depreciation allowance for the affected houses. I miss it, however, the clear message: There were not only rivets in pinstripes at work. In my opinion, were including not a few criminals.

Who is responsible?

The monetary damage they did to reach meanwhile amounts that go beyond our imagination. But I’ve never read that one of these mega-gambler and Geldvernichter interrogated or even been arrested. Is there in this billion-dollar disaster anyone who is responsible?

The U.S. Federal FBI has now becoming investigations against various financial giants because of suspected fraud initiated. One can only hope that those responsible for their criminal activity probably someday be held accountable.

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