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 http://www.fueleconomy.gov/feg/savemoney.shtml.

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 Insure.com."

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 Insure.com.

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.

"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?

Financial Crisis Primer

**Make sure to read Part II, here.**

While I have written posts about the Freddie/Fannie mess as well as the collapse of Lehman and Bear, I found an excellent synopsis of the situation in the Sept. 19, 2008 print edition of "The Wall Street Journal." Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

On page A21, Todd G. Bucholz writes in the Bookshelf section an article titled, "The Woe on Wall Street." The article is a review of David Smick's book, The World is Curved. Here is where I found this gem of knowledge:

"The real problem running throughout the system was not a lack of new regulations. It was a lack of skin - that is, skin in the game. Mortgage brokers turned into fly-by-nighters, immune from the effects of reckless decisions. Local bankers, securitized loans and packed them off to some naive investor or to a rating agency manned by analysts who weren't sharp enough to get a job at Bear Stearns or Lehman. Homebuyers who put nothing down or lied about their income could pack up and run off, leaving no skin behind. The entire housing sector began to look like a motel renting rooms by the hour, as johns and hookers snuck out during the wee hours."

Phew, in a paragraph, that's it. Each player had a part to play. In each case, there was a lack of fundamental risk management. Mortgage brokers were setting up loans to folks who shouldn't have had them. The banks lent the money anyway, and sold off the loans to those who didn't have the skill or desire to evaluate them properly. Investment houses saw low interest rates as the sole risk premium, ignoring all that they had learned at Wharton or Harvard. Protect your Medical Identity with TrustedID. $1,000,000 Warranty & Great Customer Service

While I don't wish to understate dishonesty or chicanery, I can't speak strongly enough of proper risk management. I invite all those who study or have studied such things to go back to your Finance books. Look at the sections about risk management. Its worth the read. And to think, I only got my MBA from a state school.

US Taxpayers Cover Freddie's Fannie

The US taxpayer is going to insure the financial solvency of two public companies. Sounds a bit odd. So odd, that Jim Rogers of Rogers Holding proclaims, " (the U.S. is )more communist than China right now."

According to the Wall Street Journal Print edition ("US Seizes Mortgage Giants", Sept. 8, 2008, A1)

"In its most dramatic market intervention in years, the U.S. government seized two of the nation's largest financial companies, taking direct responsibility for firms that provided funding for around three-quarters of new home mortgages."

What is person to think? Should the government be meddling in a publicly-traded company's solvency? Is it right to have the government backing the fortunes of shareholders? Is there some greater good at stake to make this more palatable?

Freddie Mac and Fannie Mae are federally-chartered, publicly traded companies. Both companies' missions are to make home ownership more affordable, as well as making financing more reliable. Sounds good, right? Ah, but the catch is that when government is in the business of making things "more affordable," it presumes that the market can't do that effectively, thus creating constraints and other conditions not present in the market, which may or may not increase risk.

While millions of Americans have benefited from home ownership, and world financial markets have benefited from the buying of mortgage-backed securities (until recently), it would appear that these businesses have been a success. However, with flood of loose mortgages and the collapse of the credit market, maybe these "affordable" mortgages weren't such a good idea.

But they were! When the government chartered the businesses, it assumed the risks via the conditions placed on Freddie and Fannie. While there has been considerable legislative debate over their existence, they have provided the financing for millions of mortgages. However, it is time to pay the piper, and that is just what the government did, step in and put US taxpayer money on the line to pay for a system set up over four decades ago.

Right, wrong, or indifferent, when the government proposes interference in the free market, it is up to the citizens to either approve or disapprove of the action. US taxpayers should view this situation with great concern and think long and hard about the value of these two institutions.

I don't presume to have an answer, but I am willing to hear the arguments for both sides and would like to see more detailed analysis to make an informed decision.

Oil Speculation is Good!

Does $4 gas get you down? How about those high airline fares? I have heard the cry, "Quick Congress, do something!!!" Airlines have sent emails and taken out ads decrying speculation, yet if I recall, all airlines buy oil futures. Yes, buying futures is the same as speculating, and it is good!

In the 22 July edition of the Wall Street Journal, there is an editorial titled, "An Energy Sarbox." The editorial clearly details the 40 hearings Congress has had and all of the associated hand wringing. Before we go any further, the future purchasing of commodities is good for all consumers. It allows for businesses to plan how much of any commodity they will consume in the future, and for what price. It allows these same businesses to set stable prices. Additionally, it allows for contracts to be made on future outputs at fixed prices.

Back to the knuckleheads in Congress, the article spells out how the left goes back to the old power play book. Declare a crisis, then move in to increase power.

"Instead of merely increasing funding and manpower at the US Commodity Futures Trading Commission, it vastly broadens the CFTC's regulatory purview. It also orders the CFTC to distinguish between "legitimate" and "non-legitimate" traders."

So what happens when US lawmakers make doing business in America too expensive and difficult? They leave. So, if Congress wants to "wring the speculation out of the market," they are going to run all commodity exchanges out of the country. Yes, that would be the NYMEX (New York Mercantile Exchange) and the Chicago Mercantile Exchange. Guess what happens when things go overseas? You got it, they can't be regulated. So much for regulating "speculators," Congress!

Nuclear, American Style

I have written about nuclear power on two occasions, "Build Wind, Drop Nuclear? Germany Loses its Mind!" and "Nuclear, Silver Bullet or Money Pit." While I generally have a positive outlook on nuclear power, I must agree with William Tucker, author of "Terrestrial Energy: How Nuclear Power Can Lead the Green Revolution and End America's Long Energy Odyssey," which is due out in September, as to how the US can do it better.

In the 7-12-2008 edition of The Wall Street Journal, Mr. Tucker writes an editorial titled, "Let's Have Some Love for Nuclear Power." He outlines the strengths and weaknesses of the current energy situation in the US, and points out how coal, while abundant and efficient, creates significant amounts of CO2 and other pollutants. He also clearly spells out the costs and inefficiencies of solar and wind.

What makes Mr. Tucker's discussion unique is that he points out the need to allow investors to decide whether to invest in nuclear, and not just rely on subsidies. As I mentioned in my "Silver Bullet" post, some companies have decided not to pursue new nuclear plants. For nuclear to be successful, a stable, regulatory environment must be in place, as well as re-allowing the recycling of spent nuclear fuel.

Government, yes I said government, can help out in both instances. Regarding regulation, the US government has improved and streamlined the process for building new plants. Now all it needs to do is overturn that genius president, Jimmy Carter's ban in fuel recycling. Tucker gives an easy to understand example. France, which has produced 80% of its electricity needs from nuclear over the past 30 years, recycles its spent fuel. The waste product fits in one small underground room. Imagine if the existing spent fuel could be recycled for fuel, as well as industrial and medical purposes, not only would nuclear power be even less costly, but actual waste would be reduced.

Let's here it for more clean nuclear power, as well as nuclear recycling!