New EPA Gas Mileage Guidelines - Good or Bad?

The Environmental Protection Agency, in a rare show of backbone, has forced automakers to display fuel efficiency figures on the sticker that are closer to actual reality. Almost all auto buyers have known that these figures are only useful for comparison purposes, so its effect on our oil consumption culture may be a blessing or curse.

Owing to changing driving habits, most vehicles have been overstating fuel efficiency for quite some time. The EPA estimates that most vehicles are overstating by about 8 - 12 percent. The hybrids, darlings of the environmental crowd, have been claiming upwards of 60 mpg while most owners report somewhere in the 40 - 45 mpg range, a 30 percent difference.

The truth-telling exercise is certain to wake people up. Not only is the U.S. lagging its foreign competition in fuel efficiency standards, most of what we publish is bogus. A great number of vehicles -- and no automakers -- now meet our current CAFE standards. If the EPA started to enforce our current standards, that by itself would decrease our gasoline consumption enormously. However, we not only need to get up to snuff with our current standards, we should up the CAFE standards by 20 percent, just to keep pace with China.

It is too early to tell if the new standards will increase the volume of whining from Detroit about the cost in jobs and money to put higher standards in place. The foreign competition has been living with the higher standards, and does not seem to be suffering (though, to be fair, foreign automakers have been fudging their numbers, too).

N.Y. Attorney General (and Governor-Elect) Sues UBS for Wrap Accounts

Eliot Spitzer, current Attorney General and incoming Governor of New York, has long been the bane of Wall Street nogoodniks. With only two weeks to go in office, Spitzer sued the largest financial services firm on the planet, Union Bank of Switzerland (more commonly known as UBS), for allegedly overcharging customers in fee-based accounts. As with many Spitzer actions, the suit has been greeted with calls of over-reaching and headline pursuit. Seeing as my firm's eschews commissions in favor of this type of fee-based business, I find myself in a unique position to comment on the merits. If you are wondering what type of relationship is proper for your situation, read on.

Traditionally, brokerage customers were charged commissions when they made a transaction. If you bought 100 shares of XYZ, the broker probably tagged you for a few hundred dollars. When brokerage commissions were de-regulated in the 1970's, and especially since the 1990's when technology has made it possible to process trades for a few pennies, competition has pretty made it difficult for the army of Merrill Lynch-style brokers who had to convince their customers that their advice was worth $300 when several online brokers were charging $9.99. Additionally, this problem created a conflict of interest when brokers had the incentive to recommend more trades than would be suitable for most, a practice known as churning.

To respond to these competitive pressures, brokerage firms unveiled so-called "wrap" accounts. In these programs, customers generally get trades at low or no-cost, but instead pay the firm a small percentage of assets under management. A typical wrap fee is in the 1.5 - 2 % range, so a customer with a $100,000 balance would be dinged for $1,500 to $2,000 per year. This might be a good deal for a customer that trades a lot. These accounts are also suitable for someone who truly wants somebody else to make all the financial decisions. For that type of service, 1.5% - 2% is neither unhead of, nor unreasonable.

The abuses on Wall Street happen when brokers put their wrap customers into vehicles that already have steep fees, and without having read the lawsuit, I am almost certain this is where Spitzer found his outrage. Very few brokers these days are calling about individual stocks. Instead, most commission-based brokers are selling vehicles such as mutual funds or annuities, which themselves have steep fees of up to 3% per year, and maybe even front-end loads of up to 8.5%. Theoretically, at least, these fees are supposed to pay for the professional management and decision-making. So, why pay an additional wrap fee on top of this? Piling on fees on top of fees is unethical, but many of our sterling, white-shoe firms get away with it.

When faced with increasing quotas, and decreasing trading commission income, moving low maintenance, self-directed customers into wrap accounts is an easy way for a sales manager to meet his goals. Trust me on this, as I've witnessed it firsthand. This type of practice is one reason I chose to open my own practice, rather than be conflicted between clients and my boss.

Now, to be certain, Spitzer is himself only telling half-truths. Wrap accounts are not the problem in and of themselves, and for many, many people, they are absolutely appropriate. A wrap fee is appropriate under two circumstances: 1) When you have a Separately Managed Account (SMA) which consists of a broad pool of individual equities, and 2) When you have no desire whatsoever to make the financial decisions, but you want your broker to take advantage of the opportunities that arise. At First Sustainable, the Folio method of investing allows an investor to buy an underlying index of stocks, thereby cutting out the mutual fund structure. It is more tax efficient, usually less expensive, and better able to handle social screening. We charge customers nothing (or a nominal ticket charge, depending on the security) for trades, and instead assess a wrap fee that is still less expensive than the average actively managed mutual fund.

In their defense, UBS has 2 million wrap accounts. At that scale, finding a few instances of inappropriate behavior is a given. They will claim that the practice is not widespread. I can not comment for UBS, but I can say definitively that unscrupulous operators, some of whom reside in this country's largest firms, are everywhere. On balance, Spitzer's move is once again positive news for investors. Anything that can raise an awareness about when these practices are appropriate will be useful.

Green Peace Ranks Tech Company Responsibility
Dell 2nd, Apple Dead Last

The environmental watchdog, Greenpeace, released the 2nd edition of its Green Electronics Guide, ranking tech companies on their commitment to environmental responsibility. On a 10-point scale, Nokia (NYSE:NOK) scored the highest with a 7.3. Surprisingly, Apple (NASDAQ:AAPL), the company with former Veep Al Gore on its board, came in dead last, owing to its tepid commitment to recycling, the continued presence of some dangerous chemicals in its manufacturing process, and the lack of a timeline to phase out these chemicals. The full list is below:

Nokia (ADR:NOK) - Good on all criteria, but needs clear timeline for PVC phase out for all applications. Score: 7.3/10

Dell (NASDAQ:DELL) -Loses points for not having models free of the worst chemicals. Strong support for takeback. Score: 7/10

Fujitsu-Siemens (ADR:FJTSY) - High score on chemical policy, some models free of worst chemicals. But should improve takeback and recycling. Score: 6/10

Motorola (NYSE:MOT) - Big improvement on all criteria, info on cleaner products, still to provide clear timelines for phase out of worst chemicals. Score: 6/10

Sony Ericsson - Some models without the worst chemicals, provides timelines for chemicals phase out, but needs better chemicals policies and takeback reporting. Score: 5.7/10

HP (NYSE:HPQ) -Needs to do better on the chemicals criteria especially phase out timelines and greener products. High scores on takeback. Score: 5.7/10

Acer - Improved chemical policies but no models free of the worst chemicals. Needs to improve on takeback. Score:5.3/10

Lenovo (ADR:LNVGY) - Progress on most criteria but loses points for not having products free of the worst chemicals, on takeback and recycling. Score: 5.3/10

Sony (ADR:SNE) - Some models without the worst chemicals, loses point for inconsistent takeback policies. Score: 5/10

Panasonic-Improved score but no commitment to eliminate BFRs, and poor on takeback. Score: 4.3/10

LGE-Improved chemicals policies, but no cleaner products on the market, loses points for inconsistent takeback policies. Score: 4/10

Samsung-Scores points for timelines for toxic phase out but poor on waste criteria. Loses points for inconsistent takeback policies. Score: 4/10

Toshiba (ADR:TOSBF) -Some models without the worst chemicals and reports on recycling, but no timelines for chemical phase out and poor on other waste criteria. Score: 3.7/10

Apple (NASDAQ:AAPL) -Low scores on almost all criteria and no progress. Score: 2.7/10

The report's primary benchmarks were the company's use of dangerous chemicals, specifically PVC (a vinyl plastic) and brominated flame retardants (BFR's), the presence of these chemicals in their current models, and the presence of a plan to phase out these chemicals from their model lineup. Additionally, Greenpeace judged the company's commitment to a takeback program when the product becomes obsolete. This measure is especially important to keep those aforementioned chemicals out of landfills. A final criterion was the company's efforts to push responsibility onto their supply chains.

Particularly pleasing for me is the presence of Dell at the number 2 position. As I have mentioned in these posts before, I am a former employee of both Dell and Apple. When I was at Dell in the early part of this decade, environmental responsibility was not important to the company at all. To this, I would like to relate a humorous story. My superiors at Dell once sponsored a contest among the lower ranks to come up with a marketing gimmick for the Small and Medium Business Division. I suggested a takeback program when a new system was purchased. As the thinking went, you got a competitor's computer out and our computer in. Hauling away old machines had gotten to be a bigger problem in Corporate America. Plus, it's the right thing to do for the environment. In short, the idea was laughably dismissed as being impractical, expensive, and not worthwhile. Seeing this company at the forefront of the computer recycling movement is now gratifying.

A short time later, I had defected to Apple. When asked about computer recycling in front of employees, Steve Jobs, dismissed protesters outside Apple's headquarters as extortionists from environmental groups. Apple, too, is making headway on the recycling front, but has so far resisted efforts to phase out those harmful chemicals.

Blood Diamonds

A new Warner Bros. movie out this season is sure to spark discussion on the propriety of the diamond trade. Starring Leonardo DiCaprio (Titanic, The Aviator, The Departed) and Djimon Hunsou (Amistad), the epic is a fictionalized account of the 1990's conflict in Sierra Leone, which was, in part, financed on the backs of poor miners engaged in back-breaking, dangerous, and exploitative work in the diamond mines. The trailer is attached here:



Diamond merchants are surely watching the extent to which the film is embraced here in America. As one of the hallmark lines in the movie goes, as delivered by Jennifer Connelly (A Beautiful Mind) but paraphrased here, nobody would want to wear a diamond on their finger if they knew that someone lost their hand to get it. The fear is that moviegoers will look at their wedding ring as they depart the theater and resolve to not buy another piece of jewelry. That fear is well founded, because a diamond's value is inherently nothing more than some shrewd marketing by De Beers, SA, the stateless, privately held consortium, along with that company's iron-fisted control over diamond supply.

Over decades, the company has exploited the population's vanity by insinuating that your significant other must not love you as much as your friend's significant other if he did not get you a stone as large as hers (or his, I suppose). Today, it is simply accepted protocol to spend THREE MONTHS SALARY on an engagement ring. To me, that figure is just flabbergasting, and a blatant commercialization of something not meant to be commercialized. (Fair disclosure: I am fortunate to be married to someone who would have valued a Cracker Jack ring as much as the minuscule diamond dust that I could afford at the time of our engagement.) Quoting Mordechai Rappaport of the Rappaport price list in a recent Fortune article, "when a guy gives a woman a diamond, and someone was killed for it, it is not worth anything."

To be fair, the $60 billion industry supplies much needed export income and jobs to an already impoverished continent. A public awakening to the true cost of that bling on your finger poses enormous risk to those people, too. Also, according to the industry, only a small percentage of worldwide diamonds originated from conflict areas.

Recognizing their conundrum, the industry has started to embrace the Kimberley Process, which is a certification scheme. Several member countries agree to only trade with themselves. The self-policing members inspect each other's facilities, with the hope of having their diamonds declared conflict free. Still, the nature of the process is ripe for abuse. Aside from having members self police, the stones themselves make it difficult to certify. It is not like they have serial numbers attached to them. Black markets in the banned countries still thrive.

Into this fray steps what is possibly the biggest challenge to De Beers hegemony in its history, the fairly new process of creating synthetic diamonds. Using sophisticated, high pressure equipment, some startups have learned how to make actual diamonds that are structurally and materially the same as the real thing. Only the most sophisticated jewelry experts can tell the difference. At least for now, these companies are marking their diamonds with barely visible serial numbers. These processes threaten to bring lab-produced mass production to an industry that requires scarcity. If you rationalize your diamond purchase on the notion that it will always retain its monetary value, sell now.

If I had it my way, we would all awaken to the fact that love is signified by everyday commitments and not some thing, be it jewelry, cars, perfume, gifts, or whatever. Seeing that as a utopian notion for the time being, if you are purchasing jewelry this holiday season, make sure your jeweler understands and embraces the Kimberley Process. Kimberley may not be perfect, but it is the best we have at present. If the person at the counter looks at you cross-eyed, move on to another one. Many web merchants are now specializing in conflict-free diamonds, such as Brilliant Earth (I have never used them, nor do I specifically endorse them). Stay safe and responsible this season.