For the managed portfolio, I am considering exposure to discount retailers (WMT) and fast food chains (MCD). WMT is especially attractive with its low (0.02) beta and uncontested status as the leader in the art of discount selling, despite its social "injustices". Both have rallied considerably since December 2007, and are technically at a consolidation phase right now. This adjustment would be made by dumping citigroup and possibly reducing stakes in some other industries (e.g. defense right now is overweighed with both BA and LMT). Obama's (likely) presidency may shake up allocations some more (hence my mention of defense).

My parents were complaining, after my flight back to Houston, about why the price of a ticket has gone up by 50 from $300 to $350. To attempt to answer the question, I did a bit of handwaving explanation using 1600 miles (from Berkeley to Houston) as a guideline. Taking 20 MPG as a standard and $4 gas, we get about $320, and the time savings and "customer service" you get with a plane ticket suddenly seems like a bargain by comparison.

Seekingalpha has more to say about this:

Below are some startling statistics comparing year 2007 to year 2000 for the 7 largest US major airlines. [American (AMR), United (UAUA), Delta (DAL), Continental (CAL), Northwest (NWA), US Airways (LCC) and Southwest (LUV) control 71% of the US market share.]

So why again are plane tickets so cheap by comparison?

Let's take a rough estimate of how much hybrid technology costs - $6000 is a reasonable figure (from a slightly biased source)

Consumer reports suggests a real world MPG of 44 (let's take 45 for the heck of it).

The average MPG for new vehicles is 24.7 (Source: 2005 Highway Statistics from the U.S. Department of Transportation, Federal Highway Division). Let's take 25.

EIA suggests that the average vehicle is driven about 12000 miles a year.

Let's do some math. Taking an average gas price of $3.613/gallon as of 5/5/2008, that is $770.13 saved per year. Disregarding amortization, this is under 8 years (7.79 years) to pay off the "hybrid cost". Of course we disregarded a whole bunch of stuff (maintenance, individual vehicle costs, the fact that SUVs and trucks are included, etc).

Of course, someone will come up with completely different figures, so this figure is not necessarily relevant. Anyways.

Aldo V da Rosa's textbook Fundamentals of Renewable Energy Processes states:

The 135 kg of sucrose found in 1 ton of b&c are transformed into 70 liters of ethanol with a combustion energy of 1.7 GJ. The practical sucrose-ethanol efficiency is, therefore, 76% (compare with theoretical 97%). One hectare of sugar cane yields 4600 liters of ethanol per year (without any additional energy input because bagasse produced exceeds the amount needed to distill the final product). This however does not include the energy used in tilling, transportation, and so on. Thus, the solar energy-to-ethanol conversion efficiency is 0.13%.

(For reference, one hectare is 2.47105 acres).

4600 L of ethanol is 78783 moles, which provides 110831 MJ of energy (taking the heat of combustion = -1406.8 KJ/mol). This is equivalent to 0.0035 MW over a year. With average internal combustion engine efficiency of 20%, this becomes 0.0007 MW in effective energy, slightly below the energy required to power a home. Remember this is without transportation and delivery costs.

In contrast, a recent solar stirling engine project was a 4500 acre array constructed in southern california that produced 500 MW, or 0.274 MW per hectare. Taking a (really) conservative electrical energy efficiency of 80% (below legal requirements for cars), we get 0.219 MW, or enough to power about 220 homes.

Granted, I would suspect the solar array to have much higher starting capital cost, but a 300x increase in efficiency is nothing to sneeze at. So much for corn ethanol as the "fuel of the future"…

Wikipedia has an article on cost basis. Basically, cost basis is "the amount of your investment in property for tax purposes", and it is changes of cost basis that the IRS looks at to assess whether you made money / they should tax you (don't quote me on this). Unfortunately, it also hides a nasty thing — dividends and capital gains reinvested in a portfolio are taxed, BUT also count towards cost basis.

Some math:

Say a stock returned 5% in dividends for a year while its price remains unchanged, and that it declines 5% after issuing the dividends. With a starting investment of $1000, your account after this would be $997.5. So approximately break even (or to be precise, a 0.25% decline). But gain/loss with cost basis is computed by taking the total VALUE of your securities (in this case, $1050) and taking 5% from there - or in other words, a net loss of 5%. To say this is deceptive would be a gross understatement.

The only surefire way I've found to accurately track portfolio performance is the bank transfers in/out approach - take the current account balance, and amortize it with respect to starting and any transferred capital. Unfortunately, most brokers don't track these statistics, so you might have to play around with Excel for a while to do this, especially if you make several transfers (e.g. direct deposit, etc).

End of rant…

In fact, TIPS can even be global - a newly released ETF called the SPDR DB International Government Inflation-Protected Bond ETF (Symbol: WIP) is the first global ETF to launch in the states. I went with IPE instead because of its rock bottom expense ratio (0.19%) and my already significant international diversification - for such a low-yielding product, expense ratios are key. WIP, meanwhile, weighs in at a reasonable 0.50%, but it could be lower. If you're looking to add some negative beta to your portfolio … you can't go wrong with TIPS.

Anyways, to start off, here's a presentation from JP Morgan about the "strategic rationales" for acquiring Bear Stearns. Questions obviously arise as to the motive of this acquisition: was it just a bail-out, or was it JPM looking to gain at least some human resources from Bear?

Some "almost-facts":

• Discounting the cost of infrastructure, Bear is essentially PAYING 1 billion for a bailout by JPM. It's obvious that the acquisition was not done of a purely profit motive.
• The Fed allowing security companies to borrow at a discount rate is motivated by JPM's acquisition.
• The market is really looking forward to a 100 bps cut soon .. in fact, its already probably priced in, barring that we don't decline further.

More on this later.

• Only 3 of 87 respondents provide the correct value for the standard deviation.
• The ratio of too-low answers to too-high answers is 6.5:1, with the typical response 25% below the actual standard deviation.
• Real-life asset returns generally do not have normal distributions, and extrapolating the reasoning used by most respondents to some "fat tailed" asset returns would result in underestimation of the standard deviation by 90%. Confusion regarding measures of market variability is therefore consequential for decision making.

This is obviously detrimental to decision making, and is partially the reason that people simply aren't rational when it comes to even a coarse estimate of volatility -> risk. But the 3rd point brings up an important issue with this view - perhaps for the stock market at least, standard deviations are simply unsuitable for describing distributions with significant (positive) kurtosis?

Try magnifying this image. A pretty window should pop up. That means it works!

This is a test.

Cool.