Old Stuff
Waiting for Minot
It seems that Minot Air Force Base and the housing crisis have something in common - a series of many missteps with no sign of recovery. Tonight the wire services are reporting another incident involving the ballistic missile crews stationed at Minot. While this latest faux pas did not put any weapons directly at risk unlike when they 'accidentally' loaded a B-52 with some AGM-129 nuclear tipped cruise missiles last year, it does point to how much the culture from the SAC days has been lost.The reports say three of four crew members were sleeping July 12 while (apparently) still on duty after swapping out missile control codes. These 'codes' are part of a device which is then brought into the underground missile control facility and in the event of war, is used to activate and launch the 150 Minuteman III missiles siloed throughout North Dakota. As described by Air Force Times
The device, kept in a locked case, installs the codes that allow the missile launch control center to command the ICBMs in the missile silos. One piece of hardware is installed and the old one is removed, somewhat akin to changing hard drives in a computer.The old control codes were brought into a room above ground and stored in a lock box (where was Al Gore?) while the crew waited to be relieved of the codes and end their shift. Interesting enough, Air Force rules permit any two crew members to be sleeping. Whether that rule applies during peacetime or only during heightened alert when crews might be forced into extended duty is uncertain.
What is certain is that at no time were the codes compromised as they were a) in the lock box, b) inside the missile facility and c) behind a guarded security perimeter. Beyond the anticipated disciplinary action and blemish on their records, the sleepy heads will also suffer interrogation by the NSA. Ouch. Left unsaid in all the reports is who found them all asleep? Was it the fourth of the team (rat!), the new crew or some remote link with video and audio?
Secretary of Defense Gates recently canned the top two Air Force officials after a review of the earlier incidents (B-52 and the nose-cone fuse assemblies mistakenly sent to Taiwan) found Air Force leadership consistently failed to demonstrate the required concern over the security of the US nuclear deterrent. “This incident represents a significant failure to ensure the security of sensitive military components, more troubling, it depicts a pattern of poor performance,” said Gates at a Pentagon news conference in reference to the Taiwan mishap. Clearly, the leadership and cultural problems flow all the way down the ladder and even the firing of two bigwigs was insufficient to keep a missile crew from slipping up and sleeping on the job. Even prior to these incidents at Minot there were problems. In November 2000, one of the launch control facilities at Minot became the only such facility in US history to suffer a major fire - the above ground building was completely destroyed.
Ivan must be snickering. Can you imagine this happening during the cold war? The disdain this crew would receive from their equals would be almost as bad as the official reprimand but today this type of incident would probably be laughed off by other crews behind closed doors or over beers. Left unsaid in most reports: The 91st Space Wing (AFSPC) is responsible for one of the three operational strategic missile bases in the United States. While technically off 'alert' status by order of President Bush (43), this is more a matter of semantics - these missiles are ready to fly on a moments notice. That is, so long as everyone is awake.
UPDATE 08/03/2008: Unable to get out of their own way, Minot made the news again on Friday night after a truck transporting the 38 ton booster for a Minuteman III missile to a launch facility overturned about 70 miles from the air base. The Air Force reported there is no hazard and locals seemed unfazed by a booster in a ditch off the road. The same spokesman noted this has happened "3 or 4 times before in the past 25 to 30 years." Sec. Def. Gates must be banging his head against the wall.
The Scourge of Short Sellers
Citibank 15, AIG 20, Merrill Lynch 22, B of A 19, LNC 42, Freddie Mac 4, Lehman 13 ... the list of financial companies whose stock has been battered the past few months is seemingly endless. Most are down at least 50%, many over 70% from their 52 week highs. By now we all know the story behind the plummet - sub-prime CDOs, CDO2, CPDOs, CDS and the resulting very large write downs. Certainly, some degree of punishment was appropriate for these companies given the poor risk controls and for some, reduced earnings potential over the next few years due to de-leveraging. Some have also taken realized losses on their bad investments or non-performing loans. Yet many, especially the insurance companies, have only taken paper losses and will quite likely see write-ups over the next two to three years. This is because they are valuing many of their holdings at extremely low levels because of a lack of liquidity in the markets for these specialized assets. Simply, if nobody wishes to buy anymore of these assets the only bids (if any) will be below fair/intrinsic value. Anybody who has sold a home or auto in a stagnant market understands this - bids will be few and usually well below what anyone would consider 'fair' value yet unless you absolutely needed to sell you would wait for the market to improve. The same applies to many of the CDOs and CDS on the books today but unlike a house which remains yours until sold, these assets are continuously receiving income streams which shortens their expected life. So while nobody may want to buy your CDO or CDS, you may in fact be paid back all you were due (or not pay in the case of a swap).So why have their stock prices gone so low? Is it simply panic selling? We will concede a portion of the move to 'panic' selling by investors who have suffered margin calls, wish no more pain or no longer understand what they own and are willing to take their lumps immediately. But panic selling happens over a short period of time, not over weeks and months. The plummet from late last week through this past Tuesday smelled of panic selling but that explains only the last few points. What of the rest that could be deemed 'excessive?' To begin, one should probably look at the daily volume traded.
Since June 17, Citibank has traded 49% of its 5.2 billion share float. AIG about 46% of its free float. Freddie Mac 274% of its float. A typical trading day a year ago would see each of those companies trade 0.5% of its float, or 11% over a 22 day period. So without question, turnover is way up. As are the number of shares being sold short. Short sales are the sale of borrowed stock - perhaps you think company A will report bad earnings and you would like to profit on an expected move lower. You can ask your broker to 'borrow' shares from another account which you can then sell. When you close your short position by buying the stock back, those shares are returned to the original holder. Most times there is no asking involved, brokers as part of their normal operations will borrow shares of common names and typically provide traders with a 'short-list' detailing which stocks can be shorted and how many shares are available. If the name you want is not on the list, they can usually call around to find some shares to short but probably will not bother unless the amount is worth the trouble. Not surprisingly, brokers get a small fee for lending the shares (you didn't think the actual owner would, did you?) which may rise as demand for shortable shares grows.
Short selling has always been viewed negatively by many investors who rush to blame 'evil short sellers' every time their stock declines in price. This is, of course, a naive view. In the normal course of things, short sellers provide additional liquidity to a market thus enabling those seeking to buy to obtain shares at a better price. In thinner issues, a short seller could also be the difference between buying your amount at one price instead of paying increasingly higher offers for smaller pieces until your order is complete. And those investors who regularly blame short sellers for all their ills rarely, if ever, thank them for pushing prices higher when they cover en masse creating a 'short rally'.
There are also non-speculative, legitimate reasons for short selling used daily by hedge funds and portfolio managers. As an example, a fund might hold a long position in Chevron feeling it is well run and has good reserves. However, they may not have good feel for the direction of crude prices in the near to medium term. In addition, when deciding on the purchase of Chevron they reviewed Exxon Mobil but felt it was not replenishing reserves fast enough and that management was not proactive. This presents the fund manager a way to stay long Chevron while minimizing his exposure to uncertainty in the crude market - to sell short an equal value of Exxon Mobil. As long as he holds this position his return will be based on the relative performance of these two companies. There are also a large number of hedge funds which use a 'long-short' strategy as the underlying basis for the fund, seeking to be market neutral. Gains (or losses) are achieved through fund manager 'alpha' - the ability to add (subtract) return in excess of the market. But again, we are speaking of relative stock/sector performances. A long/short strategy can be successful even if those stocks sold short increase in value. (more)→
War Powers?
Perhaps we can forgive James Baker III and Warren Christopher. After all, both served as secretary of state and both are getting on in years (78 and 83 respectively). But how is it that they can conjure up something as insulting to the American people and all those who have served in uniform or in government?WASHINGTON - The next time the president goes to war, Congress should be consulted and vote on whether it agrees, according to a bipartisan study group chaired by former secretaries of state James Baker III and Warren Christopher. In a report released Tuesday, the panel says the current law governing the nation's war powers has failed to promote cooperation between the executive and legislative branches. It says the 1973 resolution should be repealed and replaced with new legislation that would require the president to inform Congress of any plans to engage in "significant armed conflict," or non-covert operations lasting longer than a week. In turn, Congress would act within 30 days, either approving or disapproving the action. [...]Encourage the two branches to act in a way true to the spirit of the Constitution? When exacly did the Constitution cease becoming the law that binds both the executive and legislative branches? Where in the Constitution does it say 'you may ignore this paper if it is expedient to do so or makes you feel better?' We hate to think of the money which has been wasted by this commission when all that was required was a mandatory remedial course on the United States Constitution for our legislators and executive branch employees. Specifically:
"What we aim to do with this statute is to create a process that will encourage the two branches to cooperate and consult in a way that is both practical and true to the spirit of the Constitution," Baker said in a statement. Source: AP
Article I
Section 1. All legislative powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.
Section 8. The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;
To define and punish piracies and felonies committed on the high seas, and offenses against the law of nations;
To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water;
To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years;
To provide and maintain a navy;
To make rules for the government and regulation of the land and naval forces;To provide for calling forth the militia to execute the laws of the union, suppress insurrections and repel invasions;
To provide for organizing, arming, and disciplining, the militia, and for governing such part of them as may be employed in the service of the United States, reserving to the states respectively, the appointment of the officers, and the authority of training the militia according to the discipline prescribed by Congress;
Senator Kyl On Our Nuclear Deterrent
Have you ever wondered if a politician read a statement their office put out? Or considered having someone else check it for believability first? We had that moment yesterday morning while reading the letters section of the Financial Times. There, across three columns, was a letter from Arizona Senator Kyl titled 'Next US president should modernise nuclear arsenal'. We will forgive him for the choice of headline as that is the job of the FT editor. The content, however, was all his and all very, very unconvincing. We did pen a response (not yet published) and portions of this post are from that letter. Brevity prevented us from doing in a letter what we can do here - address each of Kyl's points as he attempts to convince us the US nuclear deterrent is in dangerous decline.His first point is that
First, more than 31 countries have security guarantees with the US, many of which place those countries under the so-called US nuclear umbrella. ... We must be aware of the cascade of proliferation that will likely result if the world loses confidence in the US deterrent. Countries such as Japan, S. Korea, Germany and Turkey rely on the US deterrent so that they don't have to develop their own. Saudi Arabia has expressed interest in obtaining civilian nuclear power: the only logical explanation for this move is that the Saudis are concerned that Iran will acquire nuclear weapons. [emphasis ours]
Ah, where to start! Is there any evidence the world has lost confidence in the physical capacity of our nuclear deterrent? We have never heard anyone question the ability of the US to deliver a working nuclear weapon anywhere in the world at a moments notice. Perhaps instead Senator Kyl refers to the impression some may have (i.e. Japan) that the US no longer is willing to use our nuclear weapons except if similar weapons are used directly against the US and not a third party, ally or not. But that is decline in political will. Do you know where he is going with the Saudi statement? Is Kyl implying that the Saudis will somehow turn an advanced commercial light water reactor into a bomb making machine? This would be next to impossible when considering the design and fuel of these reactors, IAEA safeguards, no existing large scale working enrichment cascades nor a heavy water reactor to convert natural uranium into plutonium (as is speculated Iran's intention is for their IR-40 facility at Arak). Or maybe the Saudi royal family will hide behind the containment tower in the event of an attack by Iran? As to why the Saudis might want to use nuclear power? Over the long term they can sell domestic oil or natural gas on the open market for more than the cost of running a nuclear facility? The nuclear facility is cleaner than burning oil? Natural gas pipelines are far easier to sabotage? They need large amounts of power for desalinization plants? (more)→
