What happened to Chuck E Cheeze?

Posted by jerry as finance

When I was a kid, the highlight of my year was to get to go to Chuck E Cheeze.  They had many cool games and the singing, dancing animitronics.  I hadn’t been there is a long, long time until last year.  I went for a birthday party that my son was invited to.  It was pretty well run down.  And the store is a very nice part of town.  At the time I dismissed the experience as catching them on a bad day. 

So, yesterday I get to go again for another 5 year old’s birthday.  Nearly a year later.  The first thing I notice as I’m walking around is that ALL of the games are the very same as my last visit.  I also notice that the same games that were not working last time are STILL not working this time.  I would estimate about 5% of their games are broken.

So, it comes time for the party to gather.  As we sit down, the lights dim and the curtain opens and the animitronic Chuck E Cheeze starts to sing and do his bit.  Except there’s no sound.  One of the kids sitting at the table behind me asks her mom: “mommy, why can’t Chuck E Cheeze talk?”.

As I look around, there are some TV screens built into the walls.  Some big, some small, all of them BROKEN.  Two of them have only the red color gun working, the other colors making a nasty zig-zag line on the screen. 

Now it’s time for Chuck E Cheeze to make his floor debut.  As he’s meeting and high-fiving the kids, another employee is getting a large boom box out, asking a fellow co worker if the right CD is in.  She takes the stereo over to the wall near where Chuck E Cheeze is greeting his fans and plugs it in.  And hits play.  The group of kids conga’s around the store behind Chucky to music coming from the portable stereo.

After they all return, the employee lights the candles on two cakes - there are two simultaneous parties happening, after all.  She runs over and changes the song to the Chuck E Cheeze happy birthday song.  Which is interactive.  And requires the employees to dance.  The employees are trying to get the crowd to sing their part of the song: “I say happy… You say birthday… Happy…”  silence.  Over and over and over.  I would swear that I was in some kind of bad Chevy Chase movie. 

I felt pretty bad for the poor employees who kept bumping into each other as they are attempting to pull off the corporate dance moves, and being unsuccessful at rousing the crowd.

On my way home, I started to wonder: why is it like that?  Then, I remembered seeing a sign on the door as I walked in: “All of our games are now just 1 token!”.  Ah, that’s it.  When I went 30 years ago, the games were a quarter as well.  The games I can play at home on my Wii at least compare favorably to the best games at the store, blowing most of them away.  Going to Chuck E Cheeze is not the experience for my kids that it was for me.  When I was a kid, Chuck E Cheeze had games that seemed so far advanced I felt like I was in the future.  It was a maical place to me.  For my kids, Chuck E Cheeze is a challenge to get as many tickets at possible to cash in for some crappy toy. 

The margins of that store have to be razor thin. 

Iran’s decision to trade oil in Euros instead of dollars

Posted by jerry as finance, politics

Iran announced that it is now trading oil Euros instead of dollars.  The weakness in the dollar is cited as a primary reason, though it is understood that the growing tension between the US and Iran is probably a key factor as well.

The general reaction I have seen is: “Holy Crap!”.  But, I have to wonder: what is the real impact of doing such a thing, from any side?  Oil is a fungible commodity.  Currencies are traded on the market.  Oil sold in Euros is still convertable to the current exchange rate to dollars.  So, someone who wants to buy a million barrels of oil from Iran has to convert $120M to 75M Euro before conducting the transaction?  That does sound grave.  I suppose the net effect is that Iran will be holding $80B less US dollars per year.  Since NO US institution can transact business with the Iran anyhow, Iran is most likely having to exchange them for Euros, Yen or some other currency before doing anything meaningful with it anyhow. 

I suspect the risk is that the whole oil market will eventually follow suit.  With the recent behavior of the US, that seems likely, but I still have to wonder: will we care?

Our Economy is in Trouble

Posted by jerry as credit crunch, finance

In the past 24 hours, Bank of America has announced that it entered into an agreement to acquire Countrywide Financial.  That’s an amazing thing.  Countrywide holds north of 20% of mortgages in the US.  As the housing market continues to unwind, they are seeing an increasing number of delinquent payments.  Despite this, Countrywide has to continue to pay the investors who funded a given mortgage until a disposition has been reached on that mortgage - either a new payment plan can be established, the borrower pays up, or the mortgage goes into default.  Normally, a company like Countrywide would tap a line of credit to help cover any difficulties.  These days, though, extremely few investors want to buy debt.  So,  Countrywide sits in a position where it is exposed to the point where it may have to file for bankruptcy protection, which will cause a further unwinding as it’s credit rating deteriorates.  BoA can be seen as a white knight coming in to provide a stable foundation for Countrywide to continue operations.   For it’s part, BoA needs to protect the $2B investment is previously made in Countrywide.

Clearly, this is a signal that we are in trouble.  The market is clearly looking to the government to ride in and save the crumbling economy with a stimulus in the form of a rate cut.  The fed futures rate currently predicts a 50 basis point cut before their next meeting, and another 50 basis point cut at the meeting.  We know that the market is hanging it’s hat on this as we saw yesterday during Big Ben’s speech.  Part of the speech had apparently been leaked shortly before it began, and a certain comment about the fed being willing to take action to help stimulate a recovery was taken out of context, causing the market to rise dramatically.  The market then fell as the statement was read and the real intent was clear.

Here’s the issue: interest rates arguably got us into this position and we are expecting it to get us back out.   The government has a set of levers that include:

• Overnight, inter-bank interest rate - the “fed rate”
• Interest rates on fed-backed borrowing - the “discount window”
• Taxes
• Deficit

It can be argued that the “taxes” and the “deficit” levers are broken at the moment.  President Bush was out this week touting more tax cuts, but they seem like a hollow rattle coming from a lame duck president with an opposing congress.

So, what will lowering rates do?  Arguably, not a lot to solve the actual problem we are experiencing.  In a NORMALLY FUNCTIONING economy, lower rates would stimulate spending, corporate mergers, capital investment, and so on.  But, we can observe that investors are so wrapped up in bad press of credit markets that it seems unlikely that the past trends will apply.  We would likely experience more of the negative consequences of lower rates than positive.  The negative consequences being inflation.  Unfortunately, we have an inflationary headwind blowing against the US economy that really is not linked to the US economy.  We have seen most commodities double or triple in price over the past 24 months., largely driven by the growth of other economies, and to some extend, growing speculation through vehicles like ETFs.  The inflation caused by lowering rates will only be additive to the existing pressures.

What caused the credit markets to go to hell in the first place?  The obvious answer is a misread by the fed when it chose to being a rate rising campaign many quarters ago.  Certainly, a slower rise in rates would have allowed some of the unwinding we are seeing to occur over a longer time.  However, the REAL cause was the lowering of rates earlier in the decade.  We call ourself a “free market”, but then when things get tough, our government feels that it has to intervene to artificially keep the economy propped up.   That is a recipe for disaster.  The kind of disaster that we’re watching now.  The government needs to remove the Federal Reserve Bank from it’s set of levers to control stimulus to the economy and use it only for what it is intended - to control inflation.  Absolutely, doing so will cause many years of pain and recessions, but once the market is able to find it’s own way, we will have a much more stable environment.  We have to let free markets be free.

In the wake of the “credit crunch”, we are going to see things get much worse as the problems move away from housing and to general consumer credit.  We know that the US economy is largely driven by consumer spending, and we also know that US consumers spend out of debt.  On a macro scale, what happens when consumers do not have vehicles to use debt to spend with?  A sharp correction will have to result.  Certainly, it’s not going to fall off of a cliff.  Many factors will prevent that - lowering interest rates, foreign investments, etc, but we should expect that John and Jane Doe will be spending less time at the Wal Mart that before.  This is particularly true as unemployment starts to rise and key commodities like food and gas become much more expensive.  In the recent past, we have had an offset to such things from rising property values.  We no longer have that offset.

From the standpoint of an investor, it looks like a great opportunity to buy into the market.  Just like it’s a great time for someone to buy a house.  We will get through this, but it’s going to be a wild ride for the next few months.