Mark Brandon is the Managing Partner of First Sustainable (, a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Saturday, October 28, 2006

The Conspiracy To Lower Gas Prices

During the Clinton years, right wing nut jobs made a mint by propagating theories of a drug-addled president, who was responsible for offing Vince Foster and his own Commerce Secretary. They were ludicrous theories, of course, but they still made money. Supporters of Clinton, as well as non-partisan moderates like myself, rolled their eyes. Several years later, left wingers are showing that they can be just as unhinged. Theories of a GOP-led conspiracy to manipulate gas prices prior to the election are just as misguided as those suggesting that they were manipulated on the way up. Unfortunately, USA Today reports that about 42 percent of respondents believe it. I say it is unfortunate not because a Democratic takeover of Congress would be necessarily bad. It is unfortunate because it distracts from the real energy policy outrages.

In case you missed it, moreso than any other issue, including the Iraq War, George W. Bush's approval ratings are tied to gas prices. The charts of each could be mirror images. Clearly, the drop in gas prices puts a cork in the Democrats' champagne bottles. The conspiracy stems from the proximity of the price drop to the elections, along with a mysterious move by Goldman Sachs to decrease oil's importance in a widely followed commodities index. The new Treasury Secretary, Hank Paulsen, just joined the administration from Goldman.

Let me be clear on this. Nobody is able to manipulate global oil prices enough to account for such a steep drop. Not Bush. Not Exxon. Not the Saudi Royal Family. Not even OPEC. Financial markets players, especially those in a commodity market so large, are just too greedy to let it happen. Whenever prices get too far away from reason, other players will fill the gap to bring prices back to normal. Not doing so would cost them money, or at least cause them to miss an opportunity (which they view as one and the same).

Gas prices are going down for several reaons, just as they went up for several reasons. The increase of the last 2 1/2 years was brought about from pretty good economic growth in the world's largest consumer country (the U.S.), torrid growth in two economies that account for 1/3 of the earth's population (India and China), supply disruptions in Venezuela and Nigeria, supply disruptions from Gulf hurricanes, and instability in the Middle East in the form of wars in Iraq and Lebanon. The new thing about the last round of increases was the speed, brought about by an army of speculators flush with hedge fund assets. The speculators amplify and speed up changes that would have occurred eventually, but they, too, are incapable of manipulation. In fact, speculators often cause prices to overshoot the reasonable targets, which usually creates a bloodbath in the pits.

This year, economic growth is beginning to cool in the U.S., China, and India. Not only is the supply that was knocked offline by the Gulf hurricanes coming back, no new hurricanes have exacerbated the problem. Fears of a World War III-like blowup in Israel and Lebanon are subsiding. Iraqi oil production has just surpassed pre-war production levels. Add to this the worldwide scramble to bring new supply online while prices are high, and you have the classic, market-driven antidote to high prices. This time, the speculators were caught off-guard. When the weather services announced that, counter to previous reports, the Gulf Hurricane season would not be as severe as thought, billions upon billions of long hedge fund money evaporated nearly overnight. One large fund, Amaranth Advisors, blew up completely to the tune of $9 billion.

One reason commodities are such an enduring asset class is the length of their up and down cycles. Because of permitting, environmental studies, building infrastructure, and other reasons, suppliers in extractive industries will always take awhile to meet demand after it becomes apparent. Last month's alleged (and I do mean alleged) find off the Gulf Coast will take years before we see the first drop.

Even OPEC is almost powerless when it comes to setting prices. They were somewhat successful during this last upswing only because every member except Saudi Arabia was pumping at their capacity. As oil prices started dropping, the Saudis called for production cuts from their members, and were promptly given the bird by the other members. If a small number of countries who have benign (or otherwise) dictators are unable to cooperate, how could the administration marshall multiple oil companies with shareholders to answer to and operations all over the planet?

It may be fanciful to expect the electorate to grasp complex principles, or that politicians will embrace facts and reason instead of pandering. But, I believe the conspiracy business detracts from what are real Bush Administration energy policy failures. Taxpayers still shell out billions in drilling subsidies to oil companies at a time when prices require no such subsidy. The infernal tax writeoff for SUV's still gives people an incentive to buy the most inefficient gas guzzlers. Much of the energy legislation is not only supported, but actually written, by energy companies. And, government subsidies to the alternative energy technologies that can really help ween the country off oil are but a fraction of the aforementioned oil drilling subsidies. Leave the conspiracy talk to Oliver Stone.

Wednesday, October 25, 2006

Alarmism in Climate Change Circles?

Many reasons exist for the lack of urgency among politicians and the general public about Global Warming. One of them is a sense that they've all seen predictions of doom in the past, some of which are laughable now. Senator James Inhofe, who is the leading skeptic in Congress, recently held up a 30-year-old Newsweek article warning us all of the coming Ice Age as a result of Global Cooling. The theory was that aerosols in the air would reflect the sun's heat back into space, resulting in cooler temperatures and a return of the North American glaciers. The increased glacier cover would bounce more of the sun's radiation back into space, creating the feedback loop of cooler temperatures and more glacier coverage. Back then, we were coming off several back to back years of cooler-than-average temperatures.

A few weeks ago, I saw a PBS documentary on television about Global Dimming. In this scenario, man-made atmospheric particles such as coal soot from power plants absorbs the light from the sun before it gets to the surface, causing a change in growing seasons, shifting monsoonal rainfall, and cooling the earth's surface. The worst type of manipulation was used in this documentary, showing images from the 1980's Ethiopian famine with emaciated children and dead cattle. The show concluded with a demonstration that the solutions to Global Dimming could easily be implemented, except that eliminating the cooling effect would exacerbate Global Warming. Switch to pictures of oceans on fire, stranded polar bears, and collapsing glaciers.

This morning, I read a story of one lone scientist who has a theory that the asteroid that killed off the dinosaurs was actually only the final straw in a wave of species extinction caused by tens of thousands of years of warming. Not much weight is given to this theory in scientific circles, yet it deserved a spot in our morning newspapers.

Predictions of Armageddon, including your "run-of-the-mill" global catastrophes and the actual Armageddon apocalypse of the Bible, have always sold newspapers and magazines. Educated, and not-so-well educated, readers have come to regard them with fatigue. With all due respect to Al Gore, a politician makes a living by predicting doom and gloom (which can only be avoided by electing me). Why should the general public accept him as the spokesperson?

Now we have panels of virtually all respected climate scientists and numerous Nobel laureates saying that we really are facing a catastrophe from Global Warming. Here is where this cause departs from the other two. There is virtually no argument that Global Warming is happening and that humans are causing it. The questions are only what will the consequences be and how bad will it get.

Anybody who reads this blog knows that I am not a denier of Global Warming, and I even appreciate Al Gore's efforts. I am not qualified enough to know if those other theories hold water. However, I feel like a strategy change is in order. Thus far, we have been relying on manipulative pictures and video of doom and gloom. Even "An Inconvenient Truth" was guilty of this (by the way, I do believe this is a great film). The advocates need to take a page from Ronald Reagan and profess eternal optimism that we can invent our way out of this mess. Demonstrate the technologies. Show how cleaning up the atmosphere can be both helpful and profitable. Relive how multiple countries were able to come together to help eliminate CFC's, thereby actually shrinking the hold in the ozone layer. Above all, hammer home at every turn how THERE IS SCIENTIFIC CONSENSUS. The naysayers need to be marginalized as the kooks (or worse) that they are.

Of course, I realize that this is all easier than it sounds, and that many good people are already working on these fronts. One writer who does this extremely well is Amory Lovins of the Rocky Mountain Institute. His book, Natural Capitalism, is one of the reasons I am in this business.

Saturday, October 14, 2006

Grameen Founder Yunus Wins Nobel Peace Prize

If Community Investment and Microcredit are your particular flavor of social responsibility, one has to rejoice over Bangladeshi Muhammad Yunus' win of the Nobel Peace Prize. The selection represents clear acceptance by the Nobel committee that poverty reduction will trump even the best statesmen as a tool for world peace and stability. Grameen Bank, the for-profit institution founded by Yunus, claims to have helped lift 100 million people out of poverty in its 30 year existence.

As a refresher, microcredit involves lending small amounts to poor, often rural, often undocumented individuals on an unsecured basis. These individuals are unlikely to find sympathy at a traditional lending institution, at least not at reasonable rates. The average size of Grameen's loans is $200, though they are often as small as $50. While one would expect that loans made to people living on the razor's edge of poverty to have a high default rate, Grameen claims to have a better repayment rate than even the stodgiest of traditional lending institutions. They achieve this by having a complex social pressure system in place. The loan applicants must be part of a group of five, endorsed by the other members, and if one of those members is not current, all members will be unable to get more loans. Some of the success stories involve loans to buy egg-laying chickens, beauty shop supplies for hairdressers, even corrective eye surgery to enable a parent to get back to work.

Though widely considered as the father of the microcredit movement, Yunuf and Grameen have spawned a worldwide movement, reaching almost every corner of the globe, including the United States. Sadly, some of the best financial innovations of the last century have yet to meaningfully be applied to microcredit. The securitization of bundled loans is in its infancy. Loan insurance, a la MBIA (NYSE:MBI) or FGIC for U.S. municipal entities, is almost non-existent. Standards of grading credit, a la Moody's (NYSE:MCO) and S&P, are not uniform enough to attract the largest pools of capital.

We see hope on the horizon. Pierre Omidyar, founder of E-Bay (NASDAQ: EBAY) has made $100 million available to for-profit enterprises engaged in poverty reduction through the Omidyar-Tufts (University) Microfinance Fund. Accion International, a global non-profit making microcredit loans, has just partnered with AIG, one of the largest financial institutions on the planet, to deliver financial literacy and education campaigns across the globe. Lots of success stories involving companies finding profit from the poorest 80 percent of world population can be found in a wonderful book by C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

Thursday, October 05, 2006

Blue Chip Companies Face Class Action Over 401(k) Fees

St. Louis law firm Schlichter Bogard & Denton has filed a class action suit against US Blue Chip companies Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), United Technologies (NYSE: UTX), Bechtel Group (private), Caterpillar (NYSE: CAT), Exelon Corp. (NYSE: EXC), and International Paper Co. (NYSE: IP) over excessive fees in their 401(k) plans. Each defendant has either denied wrongdoing or refused to comment thus far, so let's examine some evidence against them.

At issue is the companies' fiduciary obligation to ensure adequate supervision over fees under the Employee Retirement Income Security Act (ERISA) of 1974, which sets forth standards for qualified plans. Put simply, companies that sponsor these plans have an obligation to make sure that their plans are being managed -- this is crucial -- in the best interests of employees.

Why choose these companies as the first defendants? I'm speculating, but I would think it is because these are old line companies that happen to have both old-line pension plans and 401(k) plans at the same time. With pension plans (defined benefit), a company has to make up any shortfall from promised benefits. With 401(k) plans (defined contribution), the employee bears all risk. Therefore, by comparing the company's pension management with it's 401(k) management, malfeasance (or at least negligence) can be shown.

Financial people have known about this negligence for years, and I am glad someone is shining a light on this cesspool of corruption. Management and the fund complexes have been conspiring at the expense of employees for years. First, some background.

A mutual fund is supposed to enable small investors to have sufficient scale to afford professional management and lower expenses. As assets increase, scale increases, so a fund's expense ratio should go down. Over 25 years, assets in mutual funds have increased from a few billion to over 8 trillion in assets, thanks in large part to the increasing popularity of 401(k) plans. Roughly half of all mutual fund assets are held in defined contribution plans. With that kind of spectacular growth, one would expect expense ratios to fall. Instead, they have actually inched up. The average actively managed mutual fund in a 401(k) plan has an unconscionable 1.57 percent in fees. Companies such as Vanguard, whose funds are still truly mutual, are owned by their shareholders. Their funds have expense ratios which are roughly half of their brethren that are managed by mutual fund complexes. Think about that. Eighty basis points on $4 trillion dollars amounts to a $24 billion dollar skimming operation perpetuated annually by fund management complexes.

However, they could not accomplish this travesty without willing accomplices in senior management at large companies. How? The first way is by performing myriad services, such as compliance testing and administration, for free. By doing so, the company gets an earnings boost by not paying out of pocket for these services, in exchange for a larger management fee, which is almost invisible to employees and certainly does not count against earnings. The value of the extra percentage, however, far surpasses the value of these free services. The second, more sinister, collusion involves the implicit suggestion that fund managers, who collectively own a mammoth portion of corporate America, will not rock the boat on corporate governance and executive compensation issues. Company management gets free reign to loot the corporate till, while the fund complexes are free to fleece the employee retirement plans.

The cost to employees can not be overstated. That eighty basis points does not sound like much, but over a 30 year horizon, it could literally mean that the retiring employee's nest egg is 1/3 to 1/2 of what it would have been with reasonable fees. As pension plans are fast going the way of the dinosaurs, this affects just about everybody.