Thursday, November 20, 2008

Another Look at Hybrids

With gas below $4, and in some states below $2, I thought I would take another look at hybrids and their economic efficiency.

While I am not against hybrids per se, I still am not completely convinced that the value proposition is there.

In my previous column about hybrids titled "Hybrids, the Real Deal or Flavor of the Month" and "Hybrid Hummer Hums," I made a general statement about how to determine if the fuel savings of the hybrid is greater than the additional acquisition cost. Also, I recommended using the MPG calculator at

I decided to compare the Toyota Camry and Toyota Camry Hybrid. Here is a table I created using data from an auto buying service. The data surprised me.

2009 Toyota Camry 4dr Sdn V6 Auto XLE (Natl) vs. 2009 Toyota Camry Hybrid 4dr Sdn (Natl)

As configured, the MSRP is $2545.00 greater ($28695.00 vs $26150.00).
Engine Type 6 cylinders standard, versus 4 cylinders standard.
Fuel Economy City 14 mpg lower fuel economy in the city (19 versus 33).
Fuel Economy Highway 6 mpg lower fuel economy on the highway (28 versus 34).
Cruising Range City 216.1 less miles cruising range in the city (351.5 vs 567.6).
Cruising Range Highway 67 less miles cruising on the highway (518 vs 584.8).
Base Curb Weight 164 pound(s) less base curb weight (3516 vs 3680).

What does all of this mean? I couldn't believe that the non-hybrid was $2545 more than the hybrid. But the story doesn't end there.

In a recent article in The Wall Street Journal about small cars, the Journal reports that hybrids are more expensive to own. To me, that didn't seem possible until I read the article.

Insurance for hybrids is more expensive, as are repair parts and labor. "The 2009 Camry hybrid, for instance, costs an average $1,957 to insure for that 40-year-old male driver, while a similar conventional 2009 Camry costs just $1,302, according to"

Also from the Journal, "Hybrid cars cost more to insure because they can't [always] use after-market parts, the labor charges per hour are higher, and the they take longer to repair," says Amy Danise, a spokeswoman for

Just when I thought I might buy a hybrid during the gas run up, I am glad I didn't. I had no idea about the insurance issue, but that is why I wrote this article.

I wanted to highlight the need for a smart consumer to perform comparisons based on all of the facts. Many people have bought hybrids to be "eco-chic" or some other non-measurable quality. Others only view the gas savings, but don't know about the insurance hit.

Ultimately, since its your money, you will decide the relative value of each option, but please, do so in an informed manner.

Friday, November 7, 2008

Keeping India Poor, One Company at a Time

**UPDATE: Tata Releases Nano to India!**

With the world's second largest population, India also has one of world's largest populations in poverty, no thanks to Mamata Banerjee and her anti-business politics.

As a an Indian MP, and member of Trinamool Congress Party, Banerjee was a leader in the violent protests against Tata Motors and the building of their Nano plant in Singur. See "Tata Motors Says "Tata" to Singur" for more information.

If that wasn't bad enough for the economically depressed city of Singur, now Banerjee announced that she would lead anti-industrial protests across Communist-led West Bengal. Further, some of her ilk would like to see her take this campaign industrial suicide nation-wide.

According to The Wall Street Journal, on 05 Nov 2008,:

"...she (Banerjee) voiced her opposition to land acquisition for a power plant, a shipbuilding yard and a technology park in the state... She said she intends to keep up pressure on Tata and wants it to return any loans it got on favorable terms from the state."

Is this what India needs? Fewer manufacturing jobs, less technology, and more subsistence farmers? These companies and opportunities will help West Bengal improve the standard of living for all who live there. Infrastructure will have to be improved, which is one of Banerjee's complaints. New jobs and job training benefits the entire population. However, Banerjee, who is wed to foolish notion that subsistence farming is somehow more virtuous than working in industry, and is willing to exploit for political gain, is deserving of great contempt.

Every country in the world that has transitioned away from primarily agrarian economy to an industrial economy has felt this type of pain. It is not easy, but is best for the well-being of the country as a whole. It is a matter of efficiency. Farming on a large scale is more efficient and requires fewer workers. Those workers could be trained to take higher paying industrial or technology jobs. Higher wealth creates a higher standard of living and demands for better services from the government, such as clean water, power, and environment. Has Trinamool Congress Party of the Communist done that for Kolkata or Singur?? I think not.

India, don't let Banerjee and her brand of populism stop your country from being its best. Men like Ratan Tata have the right idea to improve the country. Industrial growth, while not perfect, offers a better life for the poor and their families. Don't be slaves to populist politics or subsitence farming, but be free to explore the possibilities of an improved economy.

Wednesday, November 5, 2008

Hold on to Your Wallets, Here Comes Obama

So you went and did America. You voted for Barack Obama. All of that "Change" and "Hope" talk snowed you, didn't it?

Well guess what? Starting with the new Democrat congress and Obama in the White House, taxes are going to skyrocket! One of the first things on the agenda will be allowing what was known as the Bush tax cuts to expire. That is an instant tax increase on all tax payers.

We also know that Congress and President-elect Obama are going to raise income taxes on anybody making $250,000, no wait, $200,000, nope, its $150,000, ok, just everybody. The tax increase that is really going to hurt the US economy is the capital gains tax.

Captial gains tax is a tax on the increase in investments. For simplicity sake, if your investment earns $100, current tax law takes $25. In percentage terms, if your investment earns 8%, your actual return is 6%, after taxes. President-elect Obama plans to raise that rate to 35%, thus making that $100 gain worth $65, or that 8% gain is really 5.2%. Will triple tax-free bonds become more popular?

What that really means is that folks will reconsider investing that next dollar, as the tax hit may not be worth it. Additionally, if companies have investment gains outside of the US, they won't repatriate that money because it will wipe out their investment returns. Without money to improve the business, or pay dividends, the economy begins to sputter. Considering the current state of the global economy, ANY tax plan that increases the burden on individuals or corporations is both dangerous and foolish. But don't blame me, I voted for McCain. Rant over.

Monday, November 3, 2008

"Beware of Geeks...Bearing Formulas"

Warren Buffett says it all, as reported in the 03 November 2008 print edition of the Wall Street Journal, titled "Behind AIG's Fall, Risk Models Failed to Pass Real-World Test." The article explains why the risk modeling used by AIG was one of the most significant causes of the storied insurers dramatic fall and current weakness.

As I have written in the past (Financial Crisis Primer), much of today's financial crisis is based on poor risk management. Additionally, the U.S. government had a strong role in the distortion of the mortgage and mortgage-backed securities market, creating a ripple effect felt through the credit-default swaps.

What is a credit-default swap? From the article:

"In essence, AIG sold insurance on billions of dollars of debt securities backed by everything from corporate loans to subprime mortgages to auto loans to credit-card receivables. It promised buyers of the swaps that if the debt securities defaulted, AIG would make good on them."

So, AIG had a Dr. Gary Gorton, formerly a Wharton professor and now a professor at Yale School of Management, build highly detailed models to determine "worst case scenarios" for the securities AIG was using for the credit-default swaps. While Dr. Gorton provided data based solely on the default potential of the backing securities, the AIG management was the final say on what was purchased.

So far, this sounds like a good practice. A very smart PhD economist builds a huge computer simulation to model risk. What the model didn't take into account is where this all falls apart and AIG is getting almost $100 billion in U.S. government loans.

The risk model of Dr. Gorton didn't account for the loss in value of the backing securities, nor did it account for the loss in value of AIG itself. Why? Mainly because the financial instruments used to create the credit-default swaps were so complex, and the other outside factors were near impossible to predict. In short, there were too many variables making proper risk management impossible also.

One can argue, as does a current criminal case, that AIG should have exercised better judgment in how it set up and sold credit-default swaps. One can argue that conservative risk management would have minimized these issues and allowed AIG to not require government financing. Perhaps there is another lesson in all of this. When something is too good to be true, like loose credit and cheap money, it pays not to be greedy. Just ask Lehman Brothers, or should I say, Barclays?
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