Thursday, January 31, 2013

ATF Botches Another Sting Operation

After reading this article, I am amazed that anyone has faith in the current ATF.  This is the kind of bumbling that we laugh at in movies like "Police Academy" however, Hollywood in all of their imagination, has never come up with something so hilarious.

Or so serious.  Because this is real life.  That money being used to pay premium prices for guns that were bought from Gander Mountain, are your tax dollars.  The guns (including a REAL assault rifle, the fully automatic kind) they lost are also real and on the street.

And somehow, a new and improved background check for me is going to stop firearm crime.

Doing something isn't helping.  Maybe we should stop doing something...  

Please God, Let the Irish Win!

A significant amount of people think that God influences who wins sporting contests.

I hate to say that religious people are whackjobs, but at least the above poll indicates a minority of religious people are whackjobs.  Let's assume for a second that God plays favorites.  When Notre Dame plays TCU who is God's favorite? Obviously Notre Dame this year. But what about next year?  What if God's favorite team doesn't have fans that pray for victory...a la Notre Dame vs. Alabama - or was that just God punishing them for Manti Te'o's lie/not lie fake girlfriend?  This is really confusing.  Maybe Notre Dame is just really lucky and didn't play any teams that God likes.  And does God like all sports, or is there something like Gymnastics or Curling that we don't have to worry about being on the wrong side of God for?  I mean it, this is really confusing.  Lance Armstrong doped, but maybe God wanted him to win all those Tour de France's.  If not, then God doesn't care about cycling, otherwise God would have caused someone else to win.  Unless they were all doping and Lance was the least dopey doper.

Seriously, I will admit to saying a tongue in cheek prayer for my favorite team once in a while, but I look at it more as when an atheist says "Oh my God!"  It isn't tacit approval of the concept, it is merely an interjection. At first I thought there was no way this could be an actual poll, with actual results that reflect reality...but then I remembered that a similar amount of people believe in alien abductions and that Obamacare is going to reduce health care costs.

You can't win them all (unless God is on your side and you're praying to win them all!)

Wednesday, January 30, 2013

Stockpile, Cache, Armory, Arsenal

I read about these words a lot in the media.  I am not sure the writers know what they mean. A couple of guns?  A few guns?  500 rounds of ammunition?  Sorry if I don't get excited when you say some criminal's arsenal consists of a handgun, a shotgun, AND a rifle.  I know people who carry that when they go to a 3-gun match.  How did 3 guns get to be an "arsenal."

Then there are the large "cache's" of ammunition.  100 rounds.  200 rounds.  God forbid he has 1000 rounds!  Um, its small little bits not much larger than a nut.  Once again, I know of people who have this much ammunition on their person or in their vehicle on a daily basis.  I've had people pay me for rides to work using a couple hundred rounds of ammunition. It really doesn't take up that much space.

Let me put it in perspective a bit.  A box of 50 rounds of 9mm is approximately the size of a block of cream cheese.  That's it. And that includes an inordinate amount of packaging.  A 550 round box of .22 LR is about the size of a recipe card box (the 3x5 kind).  500 rounds of most rifle ammunition will fit into a box about the size of two Harry Potter books.  One round of 7.62x39 is about half the size of a sharpie marker cap. A pack of five 12 gauge shotgun shells is the size of a small point and shoot camera.  Do you have a visual image yet that ammunition just doesn't take up that much space?

I have at least 3 or 4 "stockpiles" around my house based on these definitions.  Heck, whenever I load magazines to go to the range, I have a new "stockpile".  I have, literally, thousands (as in X followed by at least three zeros) of rounds of ammunition.  I have a couple of friends who have in the neighborhood of 100,000 rounds or more.

Are we paranoid?  No more than you are for filling your gas tank when it gets near empty.  I have a 20 mile round trip commute to work.  I fill the entire tank up every time I stop for gas so that I only have to stop for gas once every three weeks (or about every 21 uses of my car) rather than every day by only putting in what I am going to use for the day. Likewise, I shoot around 500 rounds of ammunition for every time I go to the range.  To be comparable, whenever I top off on ammo buying, I should have 10,500 rounds.  So, no, it is no more paranoid than buying milk by the gallon instead of a half pint.

Most people who have "stockpiles" of ammo do so because they don't want to go to the store all the time.  Most criminals probably only have as much ammo as they can carry, but I am not sure that anyone has ever done a study on how much ammunition criminals "stockpile."  If news stories are an accurate representation, they stockpile a whole lot less than I do.  

Tuesday, January 29, 2013

Fireworks Safety in Iowa

Iowa is sort of a funny state when it comes to fireworks.  They only allow sparklers and snakes.  Now, snakes are completely worthless, but by restricting us to only sparklers, there is a limited market so you can buy 36 sparklers for about $3 every 4th of July.  It is a good thing that the people of Missouri have recognized this and have fireworks warehouses at the border on every highway coming out of Iowa. (I've noticed that Indiana does the same favor for Illinois.)

So, to give you an idea, this is considered safe by the State of Iowa:

That would be a 3 year old holding a sparkler which is burning at 1800 degrees about two feet away from her body. While, on the other hand, the below picture would be unsafe and therefore illegal to do in Iowa:

Those would be 3 fountains shooting the same 1800 degree sparks 5-10 feet in the air.  Notice that there are no children within 2 feet of the sparks (in fact they are at least 10-15 feet away). Now inspite of the illegal nature, on the 4th of July you can hear fireworks going off all over the city and throughout the county.  So if there is going to be no enforcement of the law, why bother with it?

One of the most interesting things about sparklers, is that you can make them into almost any other firework with a little ingenuity.  Bottle rockets, roman candles, fountains, even mortars.  Sure, you may not have all of the fancy colors, but it is all right there for you.  Good thing that Missouri sells sparklers for 50/ $1!

Sparklers by far are probably the most dangerous fireworks when it comes to children and injuries.  My guess is that they account for 90-95% of all injuries related to fireworks.  That doesn't mean that I am for banning them (certainly not anymore than I am for banning marshmallow roasting), but I am for some modicum of common sense in our laws and regulations.

Monday, January 28, 2013

Motivational Posters - Pregnant Wife Edition

Well, my wife hasn't been in the spotlight in a while, and while the pictures to create these are a few years old now, the inspiration from them is timeless.  First, while I recognize that there are people on both sides of the IWB or OWB debate, this one might be a little more controversial.

In the late 90s and early 00s, cell phones were getting skinnier.  Since we don't have one and everything had a cell phone pocket, I thought up a new use for them.

Be sure to come back for more, I'll need to get my wife set up for another photo shoot!

Friday, January 25, 2013

Christmas Ammunition

Someone commented to me that they didn't think my Christmas present of ammunition was very ... Christmassy (you know, that peace, love, good will towards men thing). So, see if you can guess which is the correct response:

a) Don't worry, it was full metal jacket stuff and I only use that for target practice, hollow point is the preferred type for perforating bad people.

b) The Son of God only used a whip to clean the temple because a Glock would have been too messy and a 1911 only carries 7+1 rounds (besides the fact that they hadn't been invented yet).

c) It's OK, it was Winchester White Box, made in the USA. All of the materials (lead, copper, and brass) are fully recycleable or (in the case of gunpowder) completely organic/natural/not harmful to the environment.

d) The Barrett .50 BMG wouldn't fit in the stocking.

Thursday, January 24, 2013

Romney's Taxes vs. my taxes

Since tax season is coming up, I felt inspired to post this bit I had previously posted on Facebook.

I was thinking about how "awful" it is from the revelation that a) Mitt Romney makes millions of dollars a year, and b) he has an effective tax rate of less than 15% (because almost all of his income is from Capital Gains/Dividends not ordinary income). So I decided to take a look at my own finances, what is my effective tax rate?

To begin, let me iterate that I fall into the top 15% of wage earners based on reported AGI in table 488 of . Lest you think that makes me a millionaire, the top 3% make $200,000 or more (so I wouldn't even fit Pres. Obama's definition of millionaire). So I have admitted that I make less than $200K. Now going back on my tax returns to 2001, I averaged my federal taxes (income and payroll), state taxes, and charitable contributions.

Why include payroll taxes (SS and Medicare)? Because in the end it is money going to the federal government to finance our nation. Mr. Romney probably pays nothing into SS and Medicare because (if you look at his return) he has no ordinary income (line 7 Wages, salaries, and tips). At 7.65% (5.65% currently), this is by far the biggest tax bite that workers in America pay (and if you include the employer portion, you can double that number to 15%). So, without refundable credits, you are automatically paying an effective tax rate of 7.65% if your income is primarily derived from ordinary income.

Anyway, my effective federal tax rate remained around 12% from 2001 to 2007. In 2008, it dropped to 7% (this would have been under Bush II). And then in 2009 and 2010 it was down to 6%. So, not only does Mr. Romney pay 2.5X an effective tax rate as me, he also pays about $3 million more than me. Can't say I have anything to complain about there. Besides, my tax return is only about 20 pages, not the 200 that Mr. Romney has to do. And I still do my own taxes, so I am not paying an accountant a few grand.

My state tax (when I lived in a state that has an income tax) has remained fairly stable at 4.5%. I have no desire to try and figure out what Mr. Romney's rate is. Nobody seems to care. They only care about his Buffet rate.

As for charitable contributions, mine have remained between 10% and 15%. This is right in-line with the 13.7% that Mitt donates to charity. So, maybe I should like Romney after all.

Having done my own taxes for my entire life, I would guess that the only people who are paying more than a 15% effective tax rate are those that fall into the 1% (according to IRS statistics those with income of about $350K) that the Occupy movement rails against. The exception would be single or married with two incomes who make between $100K and $350K. But even then, we are still talking about less than 7% of the population. If you make less than $100K and are paying an effective tax rate of more than 15%, you haven't figured out how to do your taxes. Get some advice from an accountant, and follow it.

So, have you ever bothered to figure out what your effective tax rate is? (Hint: It is not as easy as taking your paycheck withholding and dividing it by your income.)

Wednesday, January 23, 2013

Progress - It's Why We're Here Today!

Another great news article. JC Penney will finally follow the lead of lots of other stores and eliminate (mostly) their check out clerks replacing them with self serve kiosks. Naturally, some people are concerned that this is going to cost people jobs.

Yes. By golly gee willikers it will! And that is what JC Penney needs to do to survive. Cut out the expensive employees, so they can make money again. Because if they aren't making money and have no forseeable chance of making money in the future, then they might as well shut down.

People happen to be a BIG expense. Take the phone system. We used to employ thousands of operators to direct calls all over the country. Then the computer came about and pretty soon we were able to place calls all over the world and all of those (or most of them) operators lost their jobs.

And it was GREAT! Not because they lost their jobs, but because we were able to remove thinking humans from a mundane task that can be satisfactorily performed by a computer at a fraction of the cost. This has two benefits. #1 the customer can call anywhere for a whole lot cheaper (phone calls now cost a fraction of what they did just 25 years ago and we make far more of them) and #2 that thinking human has the option to use their brain for more creative/inventive/entrepreneurial work (like figuring out how a computer can get rid of the next mundane task).

This is called progress, we have been doing it for about 10,000 years since our hunter/gatherer forebears figured out they could produce a lot more through agriculture and husbandry. Of course, if you still want to make toothpicks by hand, be my guest. I happen to like my spare time to play video games (you know, those things thinking humans invented for our entertainment).

JC Penney, welcome to the 21st Century!

Tuesday, January 22, 2013

Cursive Writing

Yeah, I didn't like it much when I learned it in elementary school. I do remember my elementary teachers hammering it into my head that in high school and college all of my papers would need to be written in cursive. They were wrong (no fault of their own - they just didn't see the computer revolution that was imminent).

So is it worth it to still be teaching cursive? Look at it from a foreign language standpoint. My teachers also beat it into me that learning a foreign language was the doorway to the rest of the world. Really? As I have grown up, I found out no, it isn't - not being afraid to go to a foreign country and ask for help is.

I have been to Canada, England, Germany, India, Japan, and Taiwan. I learned German in high school but never used it. I speak Mandarin which was useful in Taiwan, but I was with native friends so would have survived without knowing any (my wife did fine and she doesn't speak it). Japan, everyone speaks English. India, most people you interact with speak English and the chauffeur I had didn't speak it but we got along fine with sign language and pointing at things.

Had I "listened" to my teachers I would have had to spend years learning German, Mandarin, Japanese, French, Hindi, and Tamil to enjoy the places I have been. I'm glad I didn't. I found English speakers and enjoyed those places anyway. We are fortunate to live in a country where the primary language is English. The rest of the world has adopted English as the de facto language of the world. Which means we don't necessarily have to learn theirs.

Does that mean we shouldn't learn another language? No, but it also means we shouldn't force it on people. One of the great conundrums of the modern world is there is so much knowledge it is impossible to try and gain it all. Leonardo Da Vinci would be flabbergasted by how much a sixth grader has learned. Which means it is more important than ever to prioritize what you are going to learn with your time.

For me, things like 19th century bonnet literature (i.e. Jane Austen) have ZERO value. I am not interested. I think the stories are dull. Unfortunately, my English teachers had different ideas. Good for them. I'm a grown up now and I don't need to waste my time reading "Pride and Prejudice." Would understanding that stuff add value to my life? Probably. My guess is that there are plenty of allusions to "great" 19th century literature throughout life that I miss.

So what? I am not interested. I have chosen to dump that crap from my mind and replace it with scientific knowledge that I like. So, when I read an article on the Higgs-Boson, I see all sorts of nuances that are satisfying and enjoyable to understand. I once spent a two hour meal talking with a stranger about the nuclear fuel process. She seemed genuinely interested and I was happy to impart the knowledge that I had. Do some people do the same with F. Scott Fitzgerald? Absolutely, just not me.

What does this have to do with cursive? Well, it is no longer a necessary skill for the vast majority of written communication. We have computers and Ipads for that. It will always be around in historical documents, but like foreign languages, learning American cursive has its limits. There are plenty of people who have learned the cursive writing styles of 18th century Germans.

Learning to read cursive nowadays is akin to learning juggling. It is a neat skill to have, but very limited practical applications. If you are going to be a clown in the circus, by all means juggling becomes a necessary skill. For someone like me, it is just a trick I do to entertain my kids. Likewise, reading and writing cursive is a must for historians and genealogists. For the rest of us it is a parlor trick to decipher hidden codes. Juggling and cursive writing are rather easy skills to acquire. It probably takes less than a month of a little practice each day to become proficient (I learned juggling over the course of a month in New Jersey, maybe a half hour of practice a day). My wife taught my daughter cursive in about the same amount of time.

So, no, we shouldn't force everyone to learn cursive anymore than we should force them all to learn juggling. Even though it takes minimal time to learn, our schools shouldn't fill up their time with "useless" skills that take minimal time. Let's all recognize that cursive's time has come and gone. But if your kids want to learn cursive, or you want to teach them this curiosity on your time, by all means do it!

Monday, January 21, 2013

Some People Aren't Obese

With recent reports that 1/3 of Mississippi is obese and obesity being "epidemic" throughout the US, I can understand the First Lady promoting healthy eating. But there are a couple of people who do not need to be told they can't eat junk food.
#1 President Obama. At the Iowa State Fair he said Michelle wouldn't allow him to have a fried twinkie. Why not? Fried twinkies at the Iowa fair are good, I've had one. Its not like our President is out of shape. He looks to be in very good shape. Quitting smoking is about the only bad habit I see him having, and that even probably helps keep his weight normal. So, President Obama, tell you're wife you are going to indulge. Your campaigning schedule is rather grueling and you are in no danger of gaining weight.

#2 Gabby Douglas. On Leno just after the Olympics, Michelle jokingly ribbed her for having a Egg McMuffin to celebrate, particularly that it should be on a whole wheat bun. Gabby can eat whatever she wants. She has finished all of her competitions, her metabolism is sky high, and an Egg McMuffin is not going to balloon her like a blimp. In actuality, I am a little disappointed in Gabby. An Egg McMuffin is not something that is traditionally considered unhealthy. It has eggs, bread, meat and cheese. Couple it with an orange juice and you have all four food groups.

In 1984, Sharlene Wells consumed a half pound of fudge just hours before appearing in the Miss America swimsuit competition on national TV. Next time Gabby, when you are in England go with a Treacle tart and clotted cream. And there is no reason if you are satisfied with your body, to apologize to anyone for what you are eating. If you are not satisfied with your body, the only one you have to apologize to is yourself.
And just so you all know, I had a scoop of Haagen Daas ice cream on a cone last night and it was delicious. I felt no guilt, and my pants fit just fine this morning.

Friday, January 18, 2013

Piecing Out Appliances for Money

Last year our glass oven top met an unfortunate demise at the hands of our stone cookware (serves the glasstop right for busting one on the stones when it was set on the "On" burner three years ago). So after much internet searching I found that a new glasstop for the stove would cost $425 delivered to our house. A brand spanking new stove and oven would cost only $525.

Looking over the life expectancy of stoves/ovens it is around 8-12 years. So paying 80% of the replacement cost for the repair just didn't make much sense. We ordered the new stove. In the meantime, I decided to do some more internet searching to see what the cost of some of the replacement parts that aren't broken are.

Control Panel - $381
Large Burner - $109
Small Burner - $62
Burner Switch - $45
Control knob - $15

So with a half hour, I removed all of these items from the old stove, since they were still in perfect working order. If I can just get 25% of the retail price, I have paid for half of the new stove. If I get 50%, then the new stove was free. $500 for 30 minutes of work, isn't too bad. The sad thing is, if I was really tenacious, I could have stripped the whole thing and probably had $2000 worth of parts to sell, and then sell the shell for scrap steel and get another $2.

Maybe I should go into the spare parts business. Just buy new stoves, take them apart and sell the parts. It would work with cars too. I could be a millionaire in just a matter of months. After the week of auctions, it turns out I made a total of $23.48, the market just isn't there.  So, I am not quitting my job and moving to the Bahamas.

Retrospectively, the market has got to be really slim.  Consider that there were 2 million of this model made. And they were made over a 10 year period, 200,000 a year.  Parts don't start breaking until the 8-12 years and only in 25% of them, so 50,000.  There are still 52 weeks in a year, so only 1000 potential customers at the time that I am selling the stove parts.  Only 25% of these are regularly online, and only 25% of those think to check eBay.  So, that puts me at 65 potential customers.  There are about 30 different parts on the stove that could break, I had 10 of them for sale, so now my customer base is down to 20.  It wouldn't take too many errors in my estimates to bring it down to the 1 to 3 people that were bidding on the parts.  Markets can be funny that way when you look at the variables that make up demand.

New York Forgets About Police Officers

In New York's ram-em-through gun law, they forgot to include exemptions for their law enforcement officers.  Seems once the law becomes effective, they will all be law breakers with their service pistols, issued by the government. The best quote though is below:

State Senator Eric Adams, a former NYPD Captain, told us he's going to push for an amendment next week to exempt police officers from the high-capacity magazine ban. In his words, "You can't give more ammo to the criminals"

NY doesn't want its police officers (who may arrive on the scene 1-20 minutes after being called) to face criminals with less than 15 rounds in a magazine, but it doesn't care if victims (who are already on the scene because they are the scene) only have 7 rounds.

Criminals vs. Police Officers - BAD. 
Criminals vs. Victims - GOOD.
I sure hope Texas' plea to gun owners from NY to move there is effective.

Thursday, January 17, 2013

A Housewife with Some Sense on Guns

This is my cousin-in-law (is that really a thing?):

Great sense of humor!

Why Do We Still Have the Dollar Bill?

I've said in the past get rid of the dollar bill. While this is probably the 20th time in the last 50 years that Congress has looked at the proposal, perhaps we will have some sense this time and do it. Don't bet the house on it (when has Congress made a fiscally sound decision in the last decade), but I'm hoping for a long shot here!

One thing why you shouldn't get your hopes up - the Treasury is finishing up an 18 month study of this issue. Whatever money we spent on this study is a complete and utter waste. Several countries have gotten rid of their $1 bills, and not just third world banana republics - trading partners like Canada, England, and even the Eurozone have recognized for decades that the $1 bill was a money waster.

The fact that we are behind several third world countries who don't have reliable running water or electricity is an embarrassment. If we really need a study, we should have asked the Canadians for their 30 year old study and then relabeled it - total price $100K. If the study from 30 years ago showed that it was cheaper back when everyone carried money, it is going to be that much more cheaper now that hardly anyone carries money. 

If it is the metal composition, we are also behind the eight ball. Since we stopped putting precious metals in coins in the 60s, we should have immediately gone to the cheapest metals possible. No sense in trying to pretend like the money has melt value. Once again, several other countries (including many banana republics) have done this. While I am not too keen on steel from a collector's standpoint, it is very practical. I'd prefer a chrome steel or nickel steel alloy that doesn't rust. Cupronickel is good (what our nickels are made from) but expensive. If we wanted to stick with this then get rid of the penny, nickel and quarter and just have dimes and half dollars (then no one will get the dollar confused with the quarter). Several countries use a stainless steel alloy which remains nice and shiny decades later. 

So, if all of these other countries have been able to figure this out, why do we need to spend 18 months and millions of dollars on a study to come up with the same answer? And people wonder why we are adding $1 trillion in debt each year. Easy, just take this philosophy and magnify it by every item in the federal budget.

One area of the economy that would be affected is strip clubs.  I am not sure strippers would like to be pelted with dollar coins for their performance.  However, this could easily be solved by the strip clubs printing their own bills and then patrons can purchase a bundle upon entering. The workers would then turn in their gathered bills at the end of their work day for real money.  (Sure, this would eliminate a lot of the under the table transactions that probably go on, but that would mean more tax dollars - its a good thing!) Disney does this as sort of a souvenir gimmick (or at least they did 30 years ago).  I have Disney Dollars (with portraits of Mickey and Goofy) that can be used as real money in the Disney themeparks, but have no value elsewhere.

Good Luck New York! Hope Those Gun Laws Work Out for You...

While reading this, please keep in mind that the number of guns in the US has increased each and every year since at least 1965.  Furthermore, it is estimated that the number of guns in the US is increasing at a faster rate than population such that now we (probably) have more guns than people. Read on...

New York became the first state to pass gun control legislation since the Newtown murders.  Obama has made it known that he is signing executive orders to ... follow the laws that were already passed.  Meanwhile he is also trying to get Congress to pass some of the same stuff that New York did.  In a nutshell, New York is requiring the registration of existing assault weapons and banning their sale and transfer, and limiting magazine capacity to 7 rounds.  Plus all of the grandfathered 10+ round magazines are no longer grandfathered, but must be disposed of within a year.  All of this to decrease gun crime and make everyone safer.  Of course, the law makers don't realize that they already had an AWB ban (the new one makes it a one cosmetic feature test rather than a two cosmetic feature test - and I am not being sarcastic about that, they are cosmetic features which do not affect the firepower of the rifle at all) and a magazine limit left over from the Federal AWB and magazine limits which expired in 2004.

First point to understand.  Rifles are used in very few murders throughout the country and especially so in New York.  Based on FBI statistics, all rifles (of which assault weapons are a subset) are used in about 1% of murders.  There is enough variability from year to year that I can guarantee no affect to crime will be measured - because none can be, which is what was found with the last assault weapons ban.

Second point to understand. Magazines are used in handguns and handguns are used in the majority of murders.  However, the vast majority of murders only have one victim, and the vast majority of the time, that victim is not shot more than 7 times. (Shots tend to attract attention and most criminals don't like to draw attention to themselves in the process of committing a crime.) I make these statements without citing evidence, because I haven't come across a source for this evidence.  Which makes my statements just as supported as anyone who arbitrarily chooses a number that is going to make us safer and reduce crime. So, even if criminals decided to obey the magazine law, the law is not going to hinder them from carrying out their plans.

But, I like to see some sort of evidence to support my position, so I went and gathered data from the FBI Uniform Crime Reports.  Since gun control laws are suppose to decrease gun crime, they should have a noticeable affect on the murder rate because approximately 70% of murders are committed with guns.  The FBI has statistics going back to 1965 for NY.

Some things to learn from this graphic.  First, in spite of the murder rate being 1/100 of overall violent crime rate, it is a very good proxy for what the violent crime rate is doing.  The increases and decreases line up almost perfectly.  In most cases the relative magnitude between periods is fairly uniform as well. Except that crimes committed with guns are a minority of violent crimes, only around 20% of violent crimes are committed with guns. If the availability of guns is a contributor to crime, then murder and violent crime should not be so closely correlated. Some other factor or factors have to be the impetus behind violent crime (and therefore gun crime).

Second, on the graph I have listed the major gun control legislation with bars indicating when it was in effect.  If gun control were effective at reducing gun crimes, then we should see a drop in murders that is relationally 3 times the drop in violent crime when new gun control is implemented. We don't.  In some cases we see the exact opposite.  After the 1968 Gun Control Act, murders went up, but violent crime went up even more.  One could argue that gun control in this case resulted in more crime and more murders, not a good thing in either case.  In 1986, FOPA passed and violent crime and murders both went up again, with violent crime again outpacing the increases of murder.  More evidence that gun control had no positive effect on our crime rates. In 1994 AWB were passed and crime went down.  But violent crime (remember only 25% of it involves guns), went down proportionately more than murder rates did.  Of course there were other provisions to this bill so perhaps they were the major contributors. Except that crime rates and murder had already been decreasing for 2-4 years prior to the passage of the bill, so maybe there wasn't anything to this bill (which is what the government found when they studied the issue).  Finally, in 2004 we had an excellent opportunity for a test case.  The Federal AWB ended, but NY kept theirs (including the magazine restriction to 10 rounds).  If gun control really was effective, then we should see a dramatic difference between NY and the US as a whole.  We didn't, more on that later.

Third, murder rates have remained relatively stable since 1998.  Yes, there has continued to be a downward trend, but nothing like the upward or downward swings that the previous 30 years had had. Violent crime didn't reach a leveling off until 2004, but is also has seen relatively minor changes compared to the 30 previous years.

Fourth, while not on the chart, it is interesting to note that violent video games never even got off the ground until the early to mid 90s - the video graphics technology wasn't there before.  By the time that the market was going strong in the late 90s, murder rates were already below anything seen since 1970.  Perhaps this explains why we haven't seen a further drop, on the other hand, we haven't seen an increase either so if video games are to blame, then they certainly aren't doing too much.

Next, I expanded out to look at all of the types of violent crime.  Some quick figures about gun usage based on Department of Justice Statistics.  Guns are used to commit these crimes the following percentage of the time: murder 70%, rape 10%, robbery 40%, aggravated assault 20% (I just label it assault in the chart for simplicity).  So, what I would expect from effective gun crime prevention legislation is that there should be little to no change in rape, barely noticeable in assaults, a noticeable change in robbery, and a significant change in murder.

This does not match that at all.  Lets go through each one. I already pointed out how murder doesn't fit the mold for any of the gun control regulations passed.  Next is rape, the type of violent crime that least uses guns in its commission.  The US rape rate mirrors the violent crime rate.  NY tracked the US rate up until the late 1970s and then leveled off (while the US rate continued it's rise). In the mid 80's, the NY rate started a decline which accelerated with the overall decline of violent crime in the early 90s.  No evidence that gun legislation affected this in the least, which is expected.  Rape rates move independent of gun control.

Up until the early 2000's, NY has had a robbery rate that far exceeded the US rate.  In some years, NY's robbery rate exceeded the total violent crime rate for the nation. After gun control legislation passes, the robbery rate changes in the same manner as the murder rate or the violent crime rate, which is to say, it doesn't provide any supporting evidence that gun control works.

While having more assaults per 100,000 than the US as a whole for 30 years, NY finally crossed under the US curve in 1995.  Of course, the results of gun control legislation match what occurred for the violent crime rate. Since 2008, assaults have climbed to match what the US rate is.  Overall, the data doesn't match the hypothesis, so the hypothesis cannot be correct.

Earlier I mentioned that NY gave us a test bed by keeping their assault weapons ban and magazine restrictions.  So, I looked a little closer at the last ten years in NY.  Surely, if the AWB and magazine restrictions (which NY just made more stringent) had an effect it would show up here.

Not to beat a dead horse, but it hasn't.  The only area that NY and the US are different in is assaults, and as I mentioned before, NY is on the rise.  But, once rates get low enough, there are only going to be minor changes, so let me see if I can amplify those minor changes.  I started by taking each rate from NY as a percentage from of the US (>100% means NY rate is higher than US, etc.).  Next, I found the year to year change: negative numbers mean one of two things (both of which are in NY's favor) 1) the rate in NY is decreasing faster than the US rate (or crime is decreasing faster in NY than in the US) or 2) the rate in NY is increasing less than the US rate (or crime is increasing faster in the US than in NY).  Likewise, positive numbers mean the opposite (bad for NY compared to the US).

I added a polynomial trendline in black and marked the end of the US AWB in red - remember, NY still has it.  It appears that NY was seeing decreased crime (or less increases) compared to the US from 1974 to 2006.  Neither one of those years correspond to a gun control legislation in their favor.  If gun control legislation were effective, we should have seen greater negative numbers after the red line.  Unfortunately for NY, since 2006 crime rates have been stagnant, while for the US it continues to decline.  If this means that there is some threshold below which we cannot reduce crime rates for our society and NY has reached it, then any gun control legislation under the guise of reducing crime at this point in NY is a farce.  As it is, there is ample evidence that gun control legislation to reduce crime is a farce under any circumstances.

But don't we need to do something? Why? If whatever we are proposing to do has already been shown to be ineffective, why burden the government with more laws to enforce or burden the people with more laws to break. But, what if one life were saved? One life hasn't been saved. There is no evidence that gun control has helped the crime situation.  If you think that one life will be saved, show me the evidence.

On the other hand, what if I told you that there isn't a damn thing we can do about crime?  What if I said that the primary cause of crime is so completely out of our control (because the solutions are horrifying to any sane person), that there is no point in trying.  Playing around, I created the following graph that shows a pretty darn good correlation between something and violent crime.

In both NY and the US, the percentage of Males between the ages of 20 and 39 is one of the best predictors of the violent crime rate.  I would have extended the graph all the way back to 1965, except I only could find reliable population demographic data back to 1981.  The crime rates are from the FBI, the population data is from the CDC's WISQARS database.

We have long known that Males disproportionately are responsible for crime.  We also know that the 20-39 age range is the most common age for violent crime offenders.  For nearly 20 years in the US (and 17 years in NY), the violent crime rate (which is a proxy for murder rate and gun crime rate) is directly predictable by the ratio of males between the ages of 20-39.  What is the solution? Lock up all men?  Kill them all at 20? Drug them all into submission?  I am talking about a stage in life that half of the population goes through for approximately 1/4 of their life.  When the number of men in this age range is a higher percentage of the population, we have more violent crime.  When it decreases, crime goes down.

Do I believe this is the major cause? I don't know, I stumbled across this while I was playing with other numbers and will have to do some more research.  This is by far one of the closest approximations of estimating crime that I have found.  It is far more predictive than the number of guns or the strength of the gun control laws.  But people don't want to be told they can't do anything.

We want to control things.  In the end, we can't. Life will go on.

Wednesday, January 16, 2013

Why You Shouldn't Believe 100% of What You Read

One of my favorite subjects in college and something that is both abhorred and misunderstood by 99.999% of the population. Rest assured, when anyone uses statistics, you should feel very confident in throwing the BS flag for the following simple reasons.

1. 79% of statistics are made up on the spot (or is it 78%)
2. If they aren't making it up, the person quoting some statistic has a 90% chance of not knowing where the statistic came from.
3. If they know where it came from, there is a 95% chance that they haven't actually read the source material.
4. If they have read the source material, there is a 37% chance it was made up (see rule 1), or if the source is Facebook, blog, or comment forum, this number jumps to 93%.
5. If the source material is accurate, the quoter still has a 82% chance of not understanding what the statistic was actually measuring.
6. If they understand what the statistic was actually measuring, there is a 61% chance that the situation they are applying the statistic to was never intended because of the exceptions or assumptions within the study.
7. If the statistic is applicable, there is less than a 2% chance that the quoter has logically thought through the implications of the statistic and realized that there is a 66% chance that A) it is irrelevant or B) it actually means the opposite of what was thought.
8. More than likely, the statistic contradicts some other strongly held belief of the quoter and he will simple ignore it in that situation.

So in summation to the quoter's favor there is a (.21*.9*.05*.07*.18*.61*.02*.66)= 9*10^-5 % chance of them being right, hence the need to throw the BS flag more often. This is the same as flipping heads on a coin 20 times in a row. Sure it happened in Godot, but this is real life. If you could be assured of those odds, it would make playing the lottery worth it.

Tuesday, January 15, 2013

Real Life Implications of "Crying on a Suitcase"

Since we bought a Karaoke Machine for Christmas a few years ago, I have paid more attention to the lyrics of songs. Yes, half of those songs my parents told me had bad lyrics really do have bad lyrics. Of course, then you put on their music and find out that theirs was just as bad. Recently one of the favorite tunes on the radio that I have heard is Casey James "Crying on a Suitcase". It is the old cliche guy does something stupid, girl leaves, guy realizes he did something stupid, guy then goes to great lengths to win the girl back. Countless movies, stories, and songs have stuck with this tried and true meme. However, today I really listened to the lyrics and realized A) this guy is a psychopath, B) he probably hasn't seen what society is like since the year 2001, and C) there are a number of ways he will end up in jail before he even gets to the girl. So let me break it down for you:

"Boy don't wait, don't think, don't lock the door behind you" - The song begins with an invitation for anyone who is casing out his house to come on in. Seriously, unless you live far out in the country you should lock your door when you leave.

"Run and jump into your truck, and hit the gas, burn some rubber up" - Based on the urgency, I am going to guess that traveling within a reasonable facsimile of the speed limit is not in the cards. Depending on where he is burning the rubber up, he could be passing through a school zone, passing a stopped school bus, not yielding the right of way to an emergency vehicle, traveling excessively in a construction zone, etc. Some of these are only a light fine. But being pulled over is going to delay his getting his girl by at least 20-30 minutes. Unless he chooses not to pull over and decides to run from the cops. This has got to be at least a misdemeanor if not a felony in every jurisdiction. Jail time #1.

"Take a shortcut, take a back road, take the shoulder to the exit" - Shortcuts and back roads are not necessarily bad. Unless that shortcut takes you across the median against traffic. Reckless driving, its enough to get a ticket if not a suspended license. Using the shoulder for the exit is forgivable if your close to the exit, my guess since he isn't talking about a traffic jam is that he just is trying to shave the last few seconds off. Not good. Besides, broken down cars and emergency vehicles use the shoulder so now, the guy is risking an accident just to see the girl. Pulled over once again or running from the cops. Jail time #2.

"Skip the parking, screw the ticket, hit the curb and leave it sitting" - I usually skip the parking and wait in my car at the loading zone, but he is talking about screwing the ticket to, so obviously he is looking for a no parking zone, handicapped, or some other place he shouldn't be putting his car. This may work for a few minutes, but he is definitely going to get a parking ticket, if not being towed. It is not impressive to your newly won girlfriend to walk her out of the airport and hail a taxi to go to Bubba's Towing and Wrecking because you were irresponsible. If there is a cop on hand (which at many airports there are) he may stop the guy before he has a chance to screw the ticket and then the guy is left with waiting 20-30 minutes to get to his girl or running from the cops. Jail time #3.

"Whatever it takes You gotta get to that gate" - What is this guys definition of whatever. Surely he must have an idea of where he is going. Without that, the search is going to be futile unless you are at a single concourse airport. Can you even imagine showing up to Atlanta Hartsfield without knowing where your girl is going? Let's say you do know where she is going, does that mean you know where her connecting flight flies through? And do you know what airline. The two of you left on a bad note, so she probably didn't relay her travel plans (unless this is a romantic comedy and its necessary for the plot). Since 2001, they don't let just anyone through security, particularly disheveled 20ish men running through the airport after leaving their running car on the curb. So, I am assuming that Casey's theoretical guy is going to skip the security lines and make a beeline for the concourse exit. There is only one TSA agent here, so it should be easy to run past. Of course, I think purposely doing this is a crime that will land him in jail. Jail time #4.

So, by the end of the first verse, our guy has miraculously found his girl crying on her suitcase (which if it is large enough to be used as a seat, probably should have been checked baggage, but the airlines don't seem to care much about this). If he is lucky (and swift footed) he will have about 5 seconds to express his undying love and apology before he is tackled by personnel from 3 or 4 different law enforcement agencies. This will be followed by questioning by the FBI, TSA, County Sheriff, Airport Police, and State Troopers. No one will believe his story and probably through him in the slammer to sober up (whether he was drinking or not - no sensible person in their right mind does what he just did).

And his girl, seeing this situation, she'll realize she made the right decision, wipe away the tears and start up a conversation with a junior stock broker on the flight back to Kalamazoo. The conversation will lead to a blossoming relationship and they'll live happily (and boringly) ever after.

I know, my story can't really be expressed in song and Casey James is inadvertently advocating breaking the law, but I still like it. Besides, I like Taylor Swift too, and all she sings about are her boyfriend breakups and get togethers.

Monday, January 14, 2013

President vs. Miss America

Question of Wisdom: 

Why do Americans choose from just two people to run for president and 50+ for Miss America ?

Answer of Truth: 

Because none of the people running for president in the last 200 years have looked very good in a bikini.

At What Cost? (Part III)

People who say that "it is worth any cost to save one life" are liars or idiots (which includes President Obama).  So, take a deep breath yourself because you have probably said that.  Hopefully, you fall into the idiot category instead of the liar category.  Sure it sounds good on the surface but what of the ramifications?

The speed limit was changed from 55mph to 65 mph to 75 mph and deaths and accidents increased.  But we traveled to places safer.  Maybe you are the one that still travels at only 55mph because it is saver.  I doubt it. So that must not be worth the cost to save one life (or 1000 lives).  10% less travel time for 300 million people is just too high of a cost.

Surely the cost of water bottles isn't too high to save one life?  But society seems to disagree.  We have water bottles that have minute amounts of chemicals that could kill you.  But the convenience must outweigh the cost of lives saved.  So maybe there is a price.

Vaccinations have been one of the largest contributors to increased longevity in the 20th century.  Yet portions of the population still refuse to get vaccinated and pretend it has no other affect on the population at large.  Even worse, we jump on unsubstantiated bandwagons claiming they cause autism or other diseases.  People claim doctors are poisoning our children.  That's just reprehensible.  Unfortunately, it also shows that some costs are too great for some people to save one life.

Alcohol is related to many kinds of deaths - violence, car accidents, diseases, etc.  Yet, we already had this discussion in America and decided that a glass of bubbly or a pint of brewski WAS too high of a price to pay to save one life. Some may argue that prohibition wasn't really enforced, but that then begs the question: what was the point of the law in the first place if society wasn't willing to enforce it? (We could ask DC the same question since they have chosen not to prosecute David Gregory for willfully breaking the law on national television.)

This argument of spending any amount to save one life is coward's moral high ground.  Am I so special that my family or my country should go into unrecoverable debt to keep me alive?  No, I'm not that narcissistic.  But what about your child, or my child?  Let me answer again, no, no, and NO.  There is a price that we are willing to pay to save a life, but there are also plenty of prices we aren't willing to pay and many times when those are monetized, it is shockingly low. (I have seen figures from some "safety" laws that put the value anywhere from $50,000 to $20 billion per life).

This argument has been used in any number of "safety" issues over the decades, most recently for stricter gun control.  Usually the issue is so ill defined that only a callous person would reject the argument, but I reject it. Every single time. No matter the issue it is attached to.  So let me start off by setting the record straight.  No person in their right mind wants to kill children. Ever.  It takes a special kind of demon to perpetrate that evil.  And it is evil, whether you believe in God or not.  Killing children is evil! But nearly as evil is the demonization of people who don't share your viewpoint by trying to claim they (or me) want children killed.  Human nature guides us into making monsters of our enemies.  That doesn't make it right.

So hopefully we agree that killing children is wrong.  Killing any innocent person is wrong.

There is lots of talk about figuring out what we can do to reduce gun crimes.  After all, most murders in the US are committed with guns.  So lets look at what the cost will be? Assuming that any law proposed is 100% effective at eliminating rifles (through bans/confiscation/registration/etc.), would murders go down?  Theoretically.  Because about 400 murders are committed with rifles each year, we could reduce our murders by that much.  At 12000 murders a year, this is a drop in the bucket, but perhaps one worth doing.  Except that is not as simple as 12000-400=11600.  In order for this to be true, we have to believe that none of those murderers wouldn't have substituted a different weapon.  So the equation becomes 12000 - 400 + Sub = ??,???.  If all we are doing if limiting rifles, there are plenty of handguns (which are the most frequently used murder weapon anyway).  Knifes, clubs, and bare hands have proven less deadly; but explosives and fire have proven more deadly.  So, theoretically the number may go up!

What about other effects?  Those have costs too.  Even assuming 400 less murders happen, and none of the substitution weapons cause death, those knives, clubs, hands, fire, and explosives will cause injuries.  So, aggravated assaults go up, which means, overall, the violent crime rate has not changed.  We have just substituted 400 of one type for 400 of another.  But murder is more serious right.  Is it comforting to a rape victim to say, "At least he didn't kill you?"  That's a shallow argument for "less" murders.

The law abiding are also going to be affected, presumably from less access/availability to defensive firearms. Rifles are used defensively.  How much is anyone's guess, but every organization that has studied the issue finds their use at least 100,000 times annually and perhaps up to 2.5 million times annually (guns are used in about 600,000 crimes annually). So if the 100,000 is correct and only 1% of these foiled crimes now become violent crimes, then we have added another 1,000 to the violent crime list. So violent crime has now gone up.  Admittedly, 400 murders will not result, the majority will end up being robberies and aggravated assaults with murder and rape making up probably less than 30. But overall, the country is less safe.  Violent crime has increased.  So, is it worth it to save 390 lives a year only to affect the life's of 1410 other people?

If you believe that it is worth any cost, ask yourself, "How many extra rapes is one less murder worth? How many years of nightmares of children seeing mom and dad assaulted in their home should we trade for one less murder committed with a gun?"

Some like to point to England with their 50 gun murders a year as an example for the US to follow.  Really, so you would be satisfied if the US only had 300 gun murders (adjusted up for population)?  Say that to yourself, "I would be satisfied with 300 gun murders a year."  I wouldn't be, I want 0 murders.  Would you be willing to trade more violence (but less death) in the US for a lower number of gun murders? Kids being maimed by a psycho with a molotov cocktail is preferable? Even if it is 10 times as many kids?

Sorry, that logic defies my understanding.  It is a comparison that a rational person cannot make. Trading one for the other is not fair, regardless of the multiplier you apply. I want less crime (I care not whether it is committed with a gun or with bare hands).  So I continue to research ways that we have reduced crime and advocate those (suprisingly, probably the largest decrease in crime has nothing to do with our control, but involves the relative population size of 15-29 year old males to the rest of the country).  Poverty is a large indicator, yet we aren't implementing any policies that will help bring jobs to the inner cities (on the contrary, we are doing the exact opposite in a lot of cases).

A lot of crime is drug related.  Its another cost that people are unwilling to pay.  Would you support legalizing drugs if it could be shown that there would be an overall decrease in violent crime? Some countries have and not seen an explosion of drug use and a decrease in crime.  Unfortunately, this shibboleth remains in our country so that no one seriously characterizes what the affects would be.

Figuring the cost of some policy is extraordinarily complex, and so most of us are content to just look at it as X-Y=Z.  Sociology and Criminology will never be hard sciences.  X-Y rarely equals Z in the realm of the human mind.

Saturday, January 12, 2013

Hedge Fund Manager Ackman Goes in the Ring Against Herbalife

In recent investing news, I have been following the kerfluffle between hedge fund manager Bill Ackman (who I'll admit I had never heard of before, but I don't follow hedge funds) and Herbalife, a corporation that sells weight loss shakes and business opportunities to sell weight loss shakes (I'll admit, while I don't know exact details about this company, I am familiar with their business model and have studied it extensively).

Back in December, Ackman made a presentation to some investors where he laid out his case that Herbalife is running an illegal pyramid scheme and will be shut down by the FTC.  As part of this he announced that he had taken a short position of $1 billion with a price target of $0.  In other words, he doesn't have any intention of covering his short because he beliefs the company will be shut down by the FTC.  Herbalife has responded to this presentation with their own during they recent investor phone call. Depending on which side you are on, the news seems to indicate that this response was either a slam dunk or an airball.

In a nutshell, Ackman's presentation goes over the funny math that Herbalife uses, which, in their estimation, shows that Herbalife distributors make more money from recruitment than they do from retail sales of their product.  I have gone through their presentation, and I find their logical argument rather impressive.  But there were some numerical errors that I found along the way.  So let me go through those.

First, on slide 10 and 11 of the presentation linked to above, it compares Herbalife to other consumer product companies like Church & Dwight, Energizer, and Clorox (as a disclaimer, I own Clorox stock and have for about 12 years).  The problem I have with this comparison can be easily seen on the slide 11, is that all of these companies have several brands that span the spectrum of consumer buys: cleaning products, food, clothing, cosmetics, etc. I was familiar with almost all of the brands, even if I didn't know what the parent company name was (Church & Dwight has Arm&Hammer, Nair, Trojan, and Xtra).

One of the things that Ackman brings up is even though all four of these companies are similar in size and in the consumer products brand, Herbalife is a relative unknown. I can think of two reasons for this.  1) Herbalife primarily sells a narrow segment of the consumer products market, namely health and wellness products and advertises by word of mouth (this is a segment that I don't use much products in so am not very familiar with) and 2) although similar size to the other three, Herbalife sales are primarily international.  So, I thought I would test these hypothesis.  Since all four are publically traded the information I need is right there in their filings to the SEC.

 Below is the information that I gleaned from the SEC EDGAR site of filings. Dollars are in millions. I looked at the last quarterly report available for each company.

Revenue Largest Segment Largest Segment % Revenue US Revenue US revenue %
Herbalife $1017 Weight Loss/Nutrition 91.0% $203 20.0%
Church & Dwight $725 Household Products 61.9% $530 73.1%
Energizer $1124 Personal Care 59.9% $579 51.5%
Clorox $1338 Cleaning 45.6% $1035 77.4%

In a nutshell, my two hypothesis are correct.  Herbalife is more concentrated in sales in a single segment than any of the other three.  And Herbalife relies on International sales far more than any of the other companies. Neither of these is inherently bad, it just shows that Ackman's comparison wasn't the best comparison. Whether or not there actually are more similar companies to compare it to, I don't know, I'll leave that to his paid researchers to figure out.

Second, slide 12 identifies Herbalife as a $2 billion brand that no one has heard of. Ackman explains how he comes up with this number, 29% of total product then adjusting for shipping costs and Herbalife's revenue/discount reporting.  I just use the 29% and look at their total sales and come up with $853 million.  So, less than $1 billion brand.  Furthermore, as shown above, most of these other brands probably have 50%-75% of their sales in the US, while Herbalife only has 20%, so their Formula 1 shake is only a $170 million brand in the US.

Third, slide 14 shows that Herbalife sells more powder drink mix.  Except does it really.  They sell more $ wise.  He doesn't include the premixed liquids, although I will all together since Herbalife doesn't offer it and my guess is if they did then their powder sales would decrease and liquid sales increase. I didn't bother to look up the actual amounts for the other brands but assumed that Ensure and Slimfast had 60% sales in the US and GNC had 90%.

Sales Adjusted for US
Herbalife (Ackman) $1800 $360
Herbalife (mine) $853 $171
Ensure $700 $420
Slimfast $600 $360
Leanshake $50 $45

This is more evidence why Herbalife is relatively unknown.  No matter which numbers you believe, Herbalife isn't the most popular weight loss shake.  But lets look at these numbers in another way. How many servings of each are actually sold? Ackman gives us the information needed on slide 16.

Sales Cost per Serving # Servings US Servings
Herbalife (Ackman) $1800 $2.87 627 125
Ensure $700 $1.03 680 408
Slimfast $600 $1.04 577 346
Leanshake $50 $1.74 29 26

Sales and servings are in millions and it looks like Herbalife has an even smaller market share on a serving basis than before.  So to answer the question, why is Herbalife a relative unknown in the US? Because for every 1 person drinking their shake, there are 6.25 people drinking these other three brands.  This isn't even all of the brands available. A quick look on the internet found that Walmart has a weight loss shake - the Equate brand which is cheaper than any of the ones that Ackman lists (disclosure, I also own stock in Walmart and have for 6 years).  I doubt I could easily find sales of this brand shake, but it is possible that it and many others are a significant player on the weight loss shake market.

Fourth, slide 21 states that Herbalife products are commodities and lists several competing brands.  This in and of itself isn't enough for me to say that Herbalife is a commodity as opposed to a premium product like they claim.  So, I compared the nutrition label for the above Walmart weight loss shake to the Herbalife shake.  Guess what I found? Yep, basically identical (when the powder is mixed with 8 oz nonfat milk). Herbalife has less fat and more protein, and a few of the nutrients are different. Walmart has a full day supply of Vitamin C and Vitamin E while Herbalife only has 25%.  Comparing the ingredients, Herbalife has soy protein (accounting for the extra protein) and that is about it.  So, unless you want to pay a hefty premium (up to $2 a serving) for that extra 7 grams of protein, you would be just as well off buying the Walmart brand.  And after looking at this, I can agree with Ackman that Herbalife is not a premium product, just a premium price.

That is about all of the problems, that I see.  I think Bill Ackman could have made a stronger case by comparing with more appropriate companies.  That being said, Herbalife has responded and there are some issues I have with how they play with the numbers.

In response to Ackman, Herbalife touted the information from a customer survey they had done by Lieberman Research Worldwide (another company I have never heard of, but there isn't any reason for me to necessarily).  During an interview on CNBC, the CEO implies that 90% of their product is sold to people outside of the distributor network.  On the other hand, the 3rd Quarter conference call that Herbalife had and is referenced in the report linked above states that 90% of customers are outside of the distributor network.  These are two very different things.  So are one, both, or neither of them correct?

Let's do some more looking.  We know that this survey was conducted in the US so we'll try to confine ourselves to that market.  However, much of the information in the quarterly report for Herbalife is for the North American market.  Fortunately for us, Mexico is not part of that reporting and the numbers for North America are only a few percent higher than for the US by itself (i.e. $209 million revenue vs. $202 million).  That being said, I'll use North America as a proxy. $ figures are in the millions.

Net sales $209
Monthly Active Sales Leaders 67,826
Total Distributors 372,000
Retail Sales $332
Distributor Allowance $158

So, here is the first bit of information.  The Active Sales Leaders qualify to buy product at a 50% discount. All other distributors can only buy at a 25%, 35% or 42% discount.  Retail sales is the recommended retail sales price and distributor allowance is the discounted amount of retail sales.  So net sales is then retail sales minus distributor allowance plus shipping charges.  The first thing that can be seen is that a significant amount of sales is from active sales leaders (this would be expected).  To determine exactly how much, I'll just assume there is only two discounts 50% and 25%. Using a little algebra this equates to 90% by Active Sales Leaders and 10% by the rest (so it follows the Peter Principle).

Getting back to the Lieberman report for a minute.  They found 5.5 million customers from the past 3 month period, over 90% were not in the distributor network, and 2/3 were likely to buy again. With only 372,000 distributors total in North America, if there are 5.5 million customers, then of course 90% are outside of the distributor network.

Next I'll assume that all of the non active distributors (305,000) are only in it for personal consumption, this is somewhat implied in the Herbalife filings. 10% of $332 million is $33.2 million in retail product sales over a 3 month period.  Divide this by the distributors and you have $109/ quarter or $36/mo. This is equivalent to a single 750 g bottle of the Formula 1 shake powder (30 servings).  Herbalife recommends 1 serving a day for weight maintenance and 2 servings a day for weight loss.  So, none of these distributors are using the product for weight loss, or there are a significant number of them that don't use the product regularly, or (considering Herbalife sells several products) using some algebra again 25% use $100 per month (Herbalife recommended), 20% use $39 per month (one bottle), 25 percent use $39 per quarter, and 30% use $39 per year.

So, if people are becoming distributors just for personal consumption, they certainly aren't consuming a whole lot.

Next we have the 68,000 active Sales Leaders who are buying $300 million retail (for $150 million) each three months.  And there are roughly 5.1 million customers that are buying from these distributors if all of the numbers are correct.  To begin, that is 75 customers per distributor (which is 3 times the amount from the Herbalife plan - slide 58), however, it amounts to only $1470 per month in retail (which is a little more than half of what the Herbalife plan shows of $2500/month).  So at a minimum, the standard sales pitch of the opportunity should be updated to reflect what is actually happening, of course, it is kind of hard to get someone to buy in to finding 75 regular customers.  If you figure there is one hour spent per quarter on each customer, plus meetings and other Herbalife related stuff, you have a full time job!

If there are 5.1 million real customers, what are they buying?  Let's assume that the 68,000 distributors also have a personal use of $100 retail per month (as recommended by Herbalife), that leaves $280 million being purchased by the customers - $55 per quarter.  So, that translate to two of the smaller bottles per quarter (not per month per quarter).  In other words, the customers aren't using it for weight loss or maintenance. Which means if these are the real customers of Herbalife, then Herbalife doesn't understand how its products are being used by the public. To answer the other statement from Herbalife, Sales Leaders are buying $20million per quarter for personal use (if they are using $100 per month) and all other distributors are buying $33 million per quarter for personal use.  Which means that the distributor network accounts for at least 16% of all sales, so no 90% of Herbalife product is not sold outside of the distributor network.  If it is, then the distributors themselves don't believe in the product enough to use it.

The last funny bit of numbers that I wanted to look at is one of the "X has more A than M, B than N, C, than P..." So I used the USDA food information database to find out what is in each of the items listed on the Formula 1 sales page.

Formula 1 Mango Banana Chicken Broccoli Yogurt Beans
Calories 180 124 105 127 15 103 237
Protein (g) 17 2 1 17 1 10 15
Fat (g) 1 1 0 6 0 0 1
Carbohydrate (g) 26 31 27 0 3 14 43
Sugar (g) 23 28 14 0 1 14 1
Fiber (g) 3 3 3 0 1 0 10
Calcium (mg) 250 23 6 7 21 366 80
Vitamin A (mcg) 210 112 4 6 14 4 0
Vitamin C (mg) 18 75 10 0 39.2 2 0
Iron (mg) 1.05 0.33 0.31 0.77 0.32 0.17 2.97

Let's go through the claims one at a time.  "More Vitamin A than a Mango." Yes, but I never thought of mangoes as a Vitamin A food, compared to carrots, it only has half as much Vitamin A.  And a mango will give you all of the Vitamin C that you need for a day.

"More Vitamin C than a Banana." Again, when did bananas become a vitamin C food?  Yes, the statement is true, but since we already got almost 4 times the vitamin C from the mango, it is moot. "More protein than a chicken thigh." Well, depends on the size of the chicken thigh, I found them to be equal.  Besides as mentioned above, this is soy protein compared to animal protein.  Is there a difference, I don't know, ask a nutritionist.

"More fiber than 1/2 cup of broccoli." Yes, but the same as a mango or a banana.  Besides, broccoli has so little calories you could eat two cups of it and have more fiber than Formula 1. "More calcium than 6 oz of yogurt." Not from what I found, but then again, I don't know what yogurt they are using as their baseline. Yogurt also has a sizeable amount of protein.

"More iron than 1/2 cup of beans." Again, not from what I found, but I don't know what beans they are talking about there are lots of different kinds of beans (I used black beans, because I eat them). Beans also have almost as much protein as the Formula 1.

If you added all of these foods together you would get 711 calories. This is a decent sized meal.  However to compare it I also adjusted them down to 180 calories.

Formula 1 All Foods Adjusted Foods
Calories 180 711 180
Protein (g) 17 46 12
Fat (g) 1 8 2
Carbohydrate (g) 26 118 30
Sugar (g) 23 58 15
Fiber (g) 3 17 4
Calcium (mg) 250 503 127
Vitamin A (mcg) 210 140 35
Vitamin C (mg) 18 126.2 32
Iron (mg) 1.05 4.87 1.23

Looking at this there is less protein, sugar, calcium, and Vitamin A.  Other than Vitamin A, all other nutrients could be equalized or better by simply adjusting the proportions of each food and get the same nutrition as a shake.  The vitamin A can be taken care of by adding carrots to the mix.  In other words, there is nothing special about the Formula 1 shake that can't be found by limiting your portion size of common foods. Personally, I happen to like eating a variety of foods which is part of the reason I am not into the shake meal fad.

Overall, I think the Herbalife business model sucks for distributors.  Sure Herbalife makes a lot of money from it, and as long as they can continue to get 1 million or more new people to sign up each year, this could go on forever.  All of the MLMs have proven that there is a ready and willing market of potential distributors willing to sign up for the next thing.  So, I find a bet for Herbalife going to $0 a long shot.  Add to this that there has been little enforcement of the FTC regulations for pyramid schemes over the last 30 years.  The MLM industry has jumped into the lobbying game with both feet and it has profited them nicely.  So relying on the FTC to shut down Herbalife is also a longshot.

On the other hand, I have to go back to the business model.  It sucks for distributors.  The information on the internet has exploded in the last 10 years.  Analysis of the Herbalife business model (or any MLM for that matter) with actual numbers, not the rosy picture they paint for themselves of the ideal model, looks dismal for not just the average distributor, but up to 99% of all participants.  Using Herbalife's North America numbers, 372,000 distributors, while only 68,000 are actively selling. If 99% are losing money after all expenses are accounted for, then 3720 sales leaders (5% active sellers) are making money. This matches what Ackman shows on slide 74. While it has lasted for 30 years, I can't see it lasting for another 30 years based on the information available. Which means I wouldn't bet on Herbalife going up significantly.  In conclusion, I believe the information that has been presented thus far probably limits where Herbalife is going to trade in the future (barring any action by the SEC or FTC), somewhere between $25 and $50.