Just a weekend version of the Random Musing with a twist: a collection of new risk issues and what to look for. After all, if you know where the cow pies are located, the lower your chances of stepping on one.
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Great Beer Shortage? Maybe.
First wheat, soybean, and corn; now, its hops. Hops is the fragrant but bitter flower that give beer that distinctive bitter counter to the sweetness of the malt. According to Brew magazine, the global hop shortage due to the poor crop yield in Europe has reached a very critical level. This means beer prices will be going up and many of the microbrewers may be going out of business. Definitely a sad day for the common person’s beverage. Perhaps it’s time to stock up your favorite brew before the price spikes.
Risk Event: Improper vendor and supply management. The brewers did not coordinate their brewery growth projections with the hops growers. Hops is only used for beer. So, when the hop prices really tanks, farmers stop growing hops. This led to hops shortage in 2007. However, brewers really didn’t know the extent of the shortage as there were no predictive metrics to measure hops supply and crop yield.
Corrective Action: Implement an ongoing dialogue between brewers and hops growers to establish the total supply of hops required each year and to ensure steady global supply of hops. Contacts: U.S. Hops Growers Association, Institute of Brewing and Distilling, and Brewer’s Association.
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Beer Version Of the March Madness: Fun and informative way to learn about beer. Personally, I am rooting for the Hook & Ladder Backdraft Brown. After all, it feels good to drink a tasty beer while knowing that a portion of the sale is going to help burn victims. Even if I do have to go to New Jersey to enjoy it. If you live in D.C. or Provident, RI areas then you are lucky.
Risk Event: By not having the Hook & Ladder Backdraft Brown available in the NYC metro area, NYC beer aficionados risk a bit of hazard going to the New Jersey to enjoy a great brew.
Corrective Action: Petition Hook & Ladder to bring their brew to local pubs in the NYC area.
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Pizza And Beer As Inflation Indicators?
According to MSNBC report, the prices of “recession-proof” foods such as pizza, hot dogs, bagels and beer have increased substantially. Price for a bushel of wheat went up about 350%. Pound of pizza cheese went up 36%. Price of hops increased 10-fold. Even Gray’s Papaya will be increasing the price of its $3.50 “Recession Special” of two hot dogs and a 14-ounce drink.
Risk Event: As the price of “recession proof” foods are skyrocketing, the potentiality of a combined economic recession with price inflation of goods increases, resulting in people having to substitute their favorite foods with McDonald Dollar Menu. This will result in beer gut being formed without the pleasure of having tasted beer and pizza and bagel bulge without the crunchy-chewy taste of a bagel.
Corrective Actions: Suck it up. Prices were bound to go up. But if you still can’t stomach the price increase, ask people standing in line for pizza to split a whole pie with you; it will be cheaper than buying by the slice. For bagels, do the same, except get 12 people together, that way you’ll get a baker’s dozen (13), making yours free. For hot dogs, bring along couple of extra hot dog buns, split the hot dogs length-wise and viola, you’ll make four hot dogs out of two. Also, load up on the free condiments to bulk up the hot dog and you won’t even notice the skinnier frankfurter.
Or better yet, see if you can get a job as a food taster for the Food Network. Hey, you never know.
Continue Having A Great Weekend!
Regards,
Ed Kim
riskyops.blogspot.com
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Saturday, March 29, 2008
Random Musing - Weekend Potpourri
Friday, March 28, 2008
Operational Risk – JPMorgan Chase Teaches Mortgage Brokers To Cheat
The Oregonian reported Friday morning that it obtained a copy of an internal JPMorgan Chase (“JPMC”) memo titled “Zippy Cheats & Tricks” that provides step-by-step instructions on how to enter false data into a loan approval system called ‘Zippy.’ (Hat tip to Calculated Risk.) In essence, an in-house guide to committing mortgage fraud. Here are pertinent excerpts of the Oregonian report:
“It is a primer on how to get risky mortgage loans approved by Zippy, Chase's in-house automated loan underwriting system. The secret to approval? Inflate the borrowers' income or otherwise falsify their loan application.”This is going to be potentially very damaging to JPMC as the internal memo had been forwarded on to the OCC (Office of the Comptroller of the Currency), who has so far declined to comment on the matter.
The "Cheats & Tricks" memo was instructing those [external mortgage] brokers how to get difficult loans approved by Zippy. "Never fear," the memo states. "Zippy can be adjusted (just ever so slightly.)" The Chase memo deals specifically with so-called stated-income asset loans, one of the most dangerous of the mortgage industry's innovations of recent years. Known as "liar loans"
The [Zippy Cheats & Tricks] document recommends three "handy steps" to loan approval:
Do not break out a borrower's compensation by income, commissions, bonus and tips, as is typically done in a loan application. Instead, lump all compensation as the applicant's base income.
If your borrower is getting some or all of a down payment from someone else, don't disclose anything about it. "Remove any mention of gift funds," the document states, even though most mortgage applications specifically require borrowers to disclose such gifts.
If all else fails, the document states, simply inflate the applicant's income. "Inch it up $500 to see if you can get the findings you want," the document says. "Do the same for assets."
Operational Risk Analysis
Fact 1: JPMC acknowledges the veracity of the document:
- “Bank spokesman Tom Kelly confirmed that the "Cheats & Tricks" memo was e-mailed from Chase but added that it does not reflect Chase corporate policy.”
- “I/We fully understand that it is a Federal crime punishable by fine or imprisonment, or both, to knowingly make any false statements concerning any of the above facts as applicable under the provisions of Title 18, United States Code, Section 1001, et seq.”
- “The March e-mail was sent by Tammy Lish, a former Chase account representative in Portland.”
- "I did not write it," Lish said. "It was sent to me by another (Chase) rep in another office along with some other documents that were more step-by-step customer training documents."
- “[Todd] Williams [a broker with Evergreen Ohana Group in Portland] and other mortgage brokers gave a copy of the memo to Oregon financial regulators.
Potential operational risks identified from above facts would be a violation of the following list of Basel loss events:
Level 1 - Internal Fraud
- Level 2 - Unauthorized Activity – Chase loan officers engaged in systemic entry of false income & assets data
- Level 2 - Theft and Fraud – Credit fraud perpetrated by several Chase loan officers in entering false income & assets data
- Level 2 - Suitability, Disclosure & Fiduciary – Chase Mortgage allowed these fraudulent mortgage to be approved; Chase loan officers willfully violated internal policies and the law; Chase loan officers misused client information to obtain mortgage loan approval; and JPMC now faces legal, monetary, and regulatory liabilities resulting from these violations.
- Level 2 - Improper Business or Market Practices – Chase loan officers willfully engaged and encouraged improper business practice; Chase loan officers were a party to the illegal activities; Chase loan officers willful violated data integrity by ‘cheating’ the system; and Chase loan officers promoted systemic practice of fraud by disseminating the memo to external brokers.
- Level 2 - Transaction Capture, Execution & Maintenance – Chase loan officers condoned falsifying borrower data; Chase’s operational risk management system did not pick up on this illegal practice; data integrity system did not identify the trends of loan officers and brokers making incremental adjustments to the data input to obtain approval.
- Level 2 - Vendors & Suppliers – Chase Mortgage did not properly review and monitor mortgage brokers’ operating procedures, which would have identified the systemic fraud.
This appears to be a systemic problem as many of these ‘liar loans’ have been made in the recent years and are now one of the reasons for the current credit crisis and bank write-downs -- JPMC alone had taken $1.3 billion write-down on sub-prime MBS positions. There will be other banks that will also be exposed for allowing similar activities to occur. As the OCC is now looking into the situation, I expect that we will hear more from them on this matter.
I hope astute readers are wondering the same thing as I am at this point. Which is: “Where were the risk managers and audit on this?” I find it implausible that a major bank such as JPMC that has multiple layers of monitoring and control (risk management, compliance officers, and independent audit reviews) did not pick this risk event up, given that the Chase loan officers were sending this memo to external brokers.
I hope Jamie is reading this and that he can put someone capable on this risk event ASAP to mitigate the damage.
Have a Great Weekend!
Regards,
Ed Kim
riskyops.blogspot.com
DISCLOSURE: The author holds long positions in JPM at this time.
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Operational Risk – Improper Disclosure By Citigroup Mortgage
Mike "Mish" Shedlock in his blog, Global Economic Analysis, wrote about a potentially serious breach of fiduciary responsibility by Citibank. The issue is a clear example of operational risk that will most likely result in reputational harm and financial losses from improper and inadequate disclosure of the interest rate reset on a mortgage loan.
In essence, the issue revolves around 3/1 ARM I/O (3-year fixed rate, then 1-year adjustable rate interest only mortgage). In layman’s terms, this means that the mortgage payment is adjusted annually after the first three years of fixed rate payment. By law, the reset notice must contain the Regulation Z (b)(226.5)(a)(2), which requires:
"The terms "finance charge" and "annual percentage rate," when required to be disclosed with a corresponding amount or percentage rate, shall be more conspicuous than any other required disclosure.”Now, since the reset will occur in June, what Citibank sent out in March was only a promotional letter, which does not require a Reg. Z disclosure, and not a notice of mortgage rate reset. However, the operational risk of reputational harm has already occurred as this is now being discussed negatively in a public forum.
Making the problem even worse, is exhibit E of Mish’s blog:
“Question 2. If we refinance should we stick with an arm or go to a fixed mortgage?If a Citibank loan officer indeed said they do not give those [good faith], then this is a clear violation of the Real Estate Settlement Procedures Act (RESPA). Per RESPA, a potential borrower has the right to a good faith disclosure of all the fees pertaining to a refinance.
Answer: You do not want an arm you want a fixed. We used a 15 yr. fixed as a example;
We were quoted: 15 yr fixed-5.5 with an Apr of 5.65 and a $4400.00 fee.
We asked for a good faith FAX and she said they do not give those.”
Finally, pretending to be a supervisor and then hanging up on the telephone conversation is never an acceptable conduct. This would be a clear violation of internal policies and procedures for customer service.
So, we have here three errors:
- Solicitation letter that appears to be a mortgage interest reset letter – potential violation of Reg. Z
- Not providing a Good Faith Estimate when a customer requests one – potential violation of RESPA
- Pretending to be a supervisor and then hanging up on the telephone conversation – violation of internal policies and procedure.
- Fiduciary breaches / guideline violations
- Suitability / disclosure issues
- Retail consumer disclosure violations
- Improper trade / market practice
- Client permissions / disclaimers missed
Regards,
Ed Kim
riskyops.blogspot.com
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Risk Of Trying To Time The Bottom Of The Housing Market
All of us are concerned about the dropping house prices and are doubly worried, as the news seems to get worse as the months wear on. However, with all things, one must not lose sight of the long term - especially in real estate. One thing that an real estate old-timer will tell you is that real estate is cyclical, which means that prices will appreciate and then come down and then begin its cycle all over again. The only questions are how long between the up and down cycles and how much of the change.
One thing I thought it would be interesting to do is let the excerpts from the news articles of the period speak for themselves. We will start with a quick snapshot of where we are today and then go back to 1994 to 1997 and see what happened then. Finally, there is an article from Washington Post, written in 1996, that is appropriate even today.
So let’s take a look at history and hopefully we can feel a bit of comfort in seeing that what we are facing now is not much different from what happened in the past. And much like the past, we will see the real estate market rebound.
Where We Are Now
http://www.realestateabc.com/outlook/overall.htm
“Nationally, the median average sales price fell compared to last year, down nationally by 4.65%, to a median average of $201,100. The Midwest showed the smallest decrease, only 4.04%, followed by the South at 5.90%, and the West decreased in price by 6.69%. The aberration in the median sales price showed up in the Northeast, which was up substantially, by $15.900 and 3.12%, to $270,800. Do not trust those figures for the Northeast. 2007 is the first year that median prices declined nationally since the National Association of Realtors began keeping records in the early sixties.”
A Look Back At The 90’s -- Letting History Tell Itself
January 4, 1990 - The Atlanta Journal and The Atlanta Constitution
Sales of new homes surged 9.6% in November; Average price in U.S. reaches $155,900
WASHINGTON – “Led by both a return to normalcy in earthquake-shaken Northern California and dipping mortgage interest rates, new single-family home sales in November rose a surprisingly large 9.6 percent to a seasonally adjusted annual rate of 710,000. The rate, announced Wednesday by the Commerce Department, was stronger than analysts had forecast and challenged the view expressed by some that the housing market has fallen on hard times.”
February 1, 1991 – Boston Globe
NEW HOME SALES AT 8-YEAR LOW
“Sales of new homes in the United States fell 17.5 percent last year to the lowest level since 1982, the government reported. Sales for the year totaled 463,000, according to a joint report by the US departments of Commerce and Housing and Urban Development, compared with 650,000 in 1989. The decline in the Northeast was 17.8 percent, from 86,000 sales in 1989 to 73,000 last year.”
January 1, 1992 - The Washington Post
“Leading U.S. Forecasting Index Fell 0.3 Percent in November; Lower Rates Fail to Spur New Home Sales
The nation's chief economic forecasting gauge suffered its biggest decline in 10 months in November while new home sales failed to improve despite the lowest mortgage rates since 1973, the government reported yesterday. The Commerce Department's index of leading economic indicators dropped by 0.3 percent in November, its fourth consecutive poor showing and worst since a 0.6 percent plunge last January. The decline followed three consecutive months in which it was virtually unchanged. The index, which is designed to forecast economic activity about six to nine months in the future, rose a scant 0.1 percent in October, slipped 0.2 percent in September and was unchanged in August.”
Jan 5, 1993 - Los Angeles Times
REAL ESTATE 3% Rise in Home Sales Seen for U.S. in '93, but Gains to Lag Here
“Richard J. Loughlin, president of chief executive of Century 21 Real Estate Corp., says he expects to see a nearly 3% increase in home sales across the country this year-to 3.7 million from 3.6 million in 1992.”
DECEMBER 30, 1993 – International Herald Tribune
Strong Data Point to a Good '94 for U.S. Economy
“A stream of upbeat U.S. economic statistics came to a climax on Wednesday with a fourth successive monthly rise in the government's chief forecasting gauge and a healthy gain in home sales. The index of 11 leading indicators, which is designed to predict economic activity six to nine months in the future, gained 0.5 percent in November, the Commerce Department reported. The National Association of Realtors said sales of existing homes increased by 2.9 percent in the month, to a seasonally adjusted annual rate of 4.21 million. This was the highest level since the association began keeping the statistics in 1968.”
Jan 23, 1994 - Los Angeles Times
First-Time Buyers Account for Majority of Home Sales
The median L.A. home price for first-time buyers declined from $183,600 in 1992 to $174,200 last year. For all L.A. buyers, the average home price fell 7% to $235,700 in 1993 from $253,200. Average monthly mortgage payment in Los Angeles was $1,335, the highest in the nation, but down significantly from $1,611 in 1992. The nation's lowest average monthly mortgage payment was $659 in Cleveland. Average monthly mortgage payments for all U.S. buyers dropped to $1,015 from $1,064 in 1992.”
June 1, 1994 – The Buffalo News
NEW-HOME SALES LIKELY TO KEEP SLIDING
“Some economists are saying they see more declines in new U.S. single-family home sales, following weak April sales and amid higher mortgage rates. "The message is that the best sales pace is behind us," said Michael Niemira, an economist at Mitsubishi Bank in New York, in reaction to Tuesday's new-home sales report. The departments of Commerce and Housing and Urban Development said that new single-family homes declined 6.8 percent in April”
December 31, 1994 - ASSOCIATED PRESS
U.S. NEW HOME SALES DROP IN NOVEMBER
“Sales of new homes tumbled in November for the first time in five months, and analysts predicted further declines in 1995 as higher interest rates erode consumer demand. "It's clear this is the beginning," said economist David Lereah of the Mortgage Bankers of America. "The housing sector is slowing." Joseph Blalock, an economist with the Savings & Community Bankers of America, agreed”
March 30, 1995 – NY Times
SINGLE-FAMILY HOME SALES LOWEST IN NEARLY 3 YEARS
“Sales of new single-family homes fell a larger-than-expected 14.0 percent in February to the lowest level in almost three years, even as mortgage rates dipped below 9 percent for the first time in four months.
All regions of the country reported declines. The largest came in the West, where flooding devastated communities in California and sales made their sharpest drop in 13 years.
"Builders have been telling us that higher interest rates are weakening demand, hurting sales and stamping out the housing recovery," said Jim Irvine, a home builder from Portland, Ore., who is president of the National Association of Home Builders.
Total sales decreased to a seasonally adjusted annual rate of 551,000 -- the lowest since April 1992 -- after rising a revised 2.6 percent in January, the Commerce Department said. A month ago, the Government estimated that January sales increased 3.8 percent. The outlook for the rest of the year is not promising, builders said.”
December 28, 1995 – Boston Globe
TIGHTER FISTS, GRIMMER OUTLOOKS REPORTS REVEAL FALL IN HOME SALES, BUYERS CONFIDENCE
“The holiday season failed to cheer consumers, who bought fewer homes and were less exuberant about the economy, according to reports released yesterday. The numbers provide more evidence of a slowing economy, analysts said. Sales of existing homes nationwide dropped 1.7 percent in November from October, said the National Association of Realtors.”
April 29, 1996 – The Buffalo News
HOME SALES DECLINE 7.6% IN MARCH
“Sales of new homes dropped 7.6 percent in March to the lowest level in 10 months as the housing market began to feel the effect of rising mortgage rates. The Midwest posted the only advance. The Commerce Department said today sales of single-family homes totaled 672,000 at a seasonally adjusted annual rate, down from a revised 727,000 in February. Many analysts had expected a 7 percent increase in March, believing buyers would rush to lock in mortgage rates that had begun to rise.”
December 31, 1996 - Bloomberg Business News
U.S. HOME SALES INCREASE IN NOVEMBER
“Existing home sales in the U.S. unexpectedly rose in November, reversing a string of five straight monthly declines, and setting the stage for the first yearly sales total above 4 million. November's 1.8% increase in home resales reported Monday by the National Association of Realtors, combined with a report showing a small rise in the index of leading indicators, suggests the U.S. economy will continue its slow, steady growth, analysts said.”
February 5, 1997 - The Washington Post
“A small decline in new-home sales and other signs of a softening economy suggest that Fed policymakers, scheduled to finish a two-day meeting today, will be able to refrain from raising interest rates this week, analysts said. The Commerce Department said new-home sales fell 1 percent in December, to a seasonally adjusted annual rate of 783,000 units. But for 1996, sales climbed 13.3 percent, to 756,000.”
May 28, 1997 – Boston Globe
US HOME SALES DROP FOR 2D STRAIGHT MONTH
“Sales of previously owned homes fell 2.4 percent in April, the second monthly decline in a row. Single-family homes sold at a seasonally adjusted 4.06 million annual rate, down from a 4.16 million rate in March and 4.23 million in February, the National Association of Realtors said. Despite the two monthly declines, sales remained not that far below last May's record high of a 4.28 million rate. For all of 1996, sales totaled 4.09 million, the best in 18 years.”
December 4, 1997 - Rocky Mountain News
SALES OF NEW HOMES DECLINE IN OCTOBER
WASHINGTON – “U.S. sales of new single-family homes unexpectedly fell in October, the second decline in three months and a sign a big contributor to U.S. growth may have settled on a high plateau as 1997 draws to a close. Sales dropped 1.7 percent to a seasonally adjusted annual rate of 797,000 in October, with every region reporting a decline except the South, Commerce Department figures showed. In September, sales advanced a revised 2.5 percent to an 811,000 annual rate after falling 2.6 percent in August. Previously, the government said sales of new homes fell 0.2 percent in September.”
So What Is History Telling Us?
Well, it is un-nerving and can drag out for a while but things do settle out. So be patient and do take a long-term view. However, there are people then and now who would be shortsighted to proclaim the following:
“If you're a homeowner, I hope you love your house. For another 20 years or more, your property will shower you with psychic rewards but probably not a lot of financial rewards. As baby boomers plan for the future, they'll have to take a hardheaded view of how much home equity they'll have and when they might want to sell the house that they occupied during their working years.You think that the above article was written recently? Judge for yourself, for here is the link to the original Washington Post article.
To investors who follow the stock market, pessimism makes no sense. Stock prices always bounce back after slumps and go on to new highs (at least they have in modern times).
But real estate doesn't work that way, partly because it's tied to demographic change. Take the boomers, for example. The same people who once helped drive house prices up are now the wet blanket holding them down. They own a huge inventory of homes. These houses will come on the market over the next 20 years, and there aren't a lot of people to buy at the high prices boomers think they deserve.”
It all goes to show that no one has a clear crystal ball so do have hope.
May Your Trading Be Profitable!
Regards,
Ed Kim
riskyops.blogspot.com
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Thursday, March 27, 2008
Risk To Consumers From Lax Enforcement Of FAA’s Airworthiness Directives
Associated Press (AP) reported today on American Airline’s cancellation of 325 flights Wednesday, all on routes flying the MD-80 planes. The report made it sound as if the cancellation of these flights were voluntary. In fact, AP article reported that Delta Airlines, like a good citizen was “voluntarily re-inspecting wiring on 133 MD-88 and MD-90 airplanes.”
While it seems that the sudden desire by the airline companies to take immediate corrective actions on a potentially dangerous wiring problems in MD-80 and MD-90 planes is being pro-active, the FAA’s Airworthiness Directive (AD) database indicates otherwise.
According to the FAA AD database, the AD for MD-80 series came out in 2006 was made effective September 5, 2006. In the directive, airline companies had up to 18 months from the date of the directive to perform the inspection. Here is the important excerpt from the AD [bold and italics added for emphasis]:
“2006-15-15 McDonnell Douglas: Amendment 39-14696. Docket 2001-NM- 387-AD.According to the FAA AD, this is a serious problem where the wiring bundle may cause the loss of the airplane. According to the AD, there are “…approximately 1,063 airplanes of the affected design in the worldwide fleet. We estimate that 732 airplanes of U.S. registry… the cost impact of this AD on U.S. operators is estimated to be up to $954,528, or up to $1,304 per airplane.”
Applicability: Model DC-9-81 (MD-81), DC-9-82 (MD-82), DC-9-83 (MD-83), DC-9-87 (MD-87), and MD-88 airplanes; certificated in any category; as identified in Boeing Alert Service Bulletin MD80- 29A070, Revision 1, dated July 28, 2005. [bold and italic added for emphasis]
Compliance: Required as indicated, unless accomplished previously.
To prevent shorted wires or arcing at the auxiliary hydraulic pump, which could result in loss of auxiliary hydraulic power, or a fire in the wheel well of the airplane; and to reduce the potential of an ignition source adjacent to the fuel tanks, which, in combination with flammable fuel vapors, could result in a fuel tank explosion and consequent loss of the airplane; accomplish the following:
One-Time Inspection
(a) For airplanes in Configurations 1 through 4, as defined in Boeing Alert Service Bulletin MD80-29A070, Revision 1, dated July 28, 2005: Within 18 months after the effective date of this AD, do a one-time general visual inspection for chafing or signs of arcing of the wire bundle for the auxiliary hydraulic pump, and do all applicable corrective and other specified actions, in accordance with the Accomplishment Instructions of the service bulletin. Accomplish all applicable corrective actions before further flight after the inspection.”
So, if this was a critical risk – and I happen to think that a risk of a loss of an airplane is a critical risk – then why are the airline companies like American and Delta all of a sudden performing ‘voluntary’ inspections? Could it be that the 18-month period has already passed and the airline companies found themselves in violation? (Calculated from September 5, 2006, the 18-month period ended on March 5, 2008.)
This is a clear case of blatant disregard for safety on the part of the airline companies. The cost of the corrective action was approximately $1,304 per plane. If all 732 U.S. registered airplanes had been inspected and any defects corrected in the mandated 18-month period, then the airline companies would have simply met their requirements. However, companies like American and Delta are now just getting around to their fleet of MD-80 (and MD-90s for Delta).
Luckily for the flying public, there has not been any serious incident from the gross and willful neglect by these two airline companies. However, one is reminded of the terrible TWA Flight 800 incident, which the investigators concluded was most probably caused by a frayed wiring near the center tank, which ignited the fumes. This is the same issue that the FAA AD is noting for MD-80.
This news comes on the heel of Southwest having to ground 44 of its aging B737s to perform inspection for fatal metal fatigue, which the FAA stated that Southwest neglected to perform in 2006 and 2007.
“In some cases, according to the documents the FAA provided to congressional investigators, the planes flew for 30 months past government inspection deadlines and should have grounded them until the inspections could be completed.”
According to Wikipedia’s most recently available information, American Airlines has total of 336 MD-80 series planes, Delta Airline has as a total of 133 MD-80 series, Northwest has a total of 102 MD-80 series planes, Alitalia has a total of 75 MD-80 series planes, SAS has a total of 42 MD-80 series planes, and Allegiant Airline has a total of 36 MD-80 series planes. This accounts for 724 MD-80 series planes out of a total estimated of 1,063 per the FAA AD. We do know that China is flying a lot of the MD-80 series planes, so that may account for some. Additionally, there are other nations flying MD-80 series planes because it is less expensive to purchase, about $4 million per plane, according to NY Times.
Hopefully this is a wakeup call to the FAA to start enforcing the rules and advisories that they have put out. Until then, do expect to see a lot more of similar ‘voluntary’ inspections by the airliners. I guess I will be avoiding flying on MD-80/MD-90/and B737 for a while.
May your travels be safe!
Regards,
Ed Kim
riskyops.blogspot.com
DISCLOSURE: The author holds no long or short positions in airline companies at this time.
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Wednesday, March 26, 2008
Waiting For Vulture Funds To Begin Descending
Unlike the play“Waiting For Gadot,” the Vulture Funds will show up. It is only a matter of time that they do. If we can learn from the real vulture’s mentality, it may be a little bit longer before the Vulture Funds begin their circling. This is because, like the real vultures, the Vulture Funds will not attack until the prey is very sick or dead. So, the lack of the Vulture Funds descending to feed can be viewed as a sign that the bottom has not been reached.
Why We Need The Vultures
It is ironic that investors are now welcoming Vulture Funds. In the current economic state of inaction, Vulture Funds provide a way of getting the economy going again by sopping up the defaulted and near defaulted investments currently held by the financial institutions. By taking the ‘bad’ investments off of financial institution’s books, Vulture Funds will allow them to once again have healthy balance sheets.
It sounds simple but, as with all things, it is not. The reason why the Vultures Funds have not yet descended to feed is that the banks themselves are still putting up a fight. Like a wounded animal fending itself to its last breath, the banks are in denial of their weaken financial health. Look at Bear Stearns. They were publicly stating just few days before being taken over by JP Morgan that they had sufficient liquidity. If anyone knows the movie “Monty Python And The Holy Grail", the banks are like the black knight who proclaims that the loss of his limbs are "mere flesh wounds.”
In a word: delusional.
Why The Fed Is Not Helping
Federal government is seeking various ways to prop up the failing markets from housing to mortgages to MBS. The housing market is broken and needs to fail so that banks can get their senses together to lend prudently. Irrational lending standards based on taking made up income and asset numbers at face value to lend hundreds of thousands of dollars did not make sense. It didn’t make sense in the 1970s, the1980s, and it still doesn’t make sense. Now the Fed steps in and allows Fannie Mae and Freddie Mae to increase their purchase of MBS on to their books and increase the limit for a ‘confirming loan’ to absurd levels that are not even uniform. Leave it to the Federal government to take something simple and make it very confusing.
Will this help? No. It is simple. The folks who took out the loans that are now in trouble will not qualify for the new loan limits because they never really qualified for the mortgage in the first place. It was only because the banks allowed ‘liar loans’ and other creative financing methods were these folks ever able to get a mortgage. So, with the increased loan limits it does not help the real symptom but makes an incremental improvement for those seeking jumbo loans. It is analogous to a German surgeon who operated on a patient’s rectum instead of her leg. It makes no sense.
The MBS market mess is a direct result of the housing and mortgage mistakes. Now, with FNMA and FHLMC being able to buy up to $200 billion in MBS, it is utterly ridiculous. These two GES were under tight capital requirements for their financial malfeasance not too long ago. Now, they are being paraded as ‘heroes’ who will come to save the MBS market with their balance sheet. As the song by OMC goes: “…Want to know the rest; Hey, buy the rights, How bizarre…”
When Will The Vulture Funds Descend?target="_blank" rel=nofollow
It is very interesting to note the proliferation and growth of Special Purpose Acquisition Companies (SPAC). Perhaps the SPAC will become the Vultures that will sop up the excesses. Given that the banks are not yet done with their write-downs, it may be a few more quarters before the Vultures really show in force.
May your trading be profitable!
Regards,
Ed Kim
riskyops.blogspot.com
DISCLOSURE: The author holds no long or short positions in FNMA and FHLMC at this time.
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Risk Of Increasing Competition To Visa And MasterCard
Visa and MasterCard are credit card brands that were started by banks to facilitate transaction payment. Their business model is to simply facilitate and process the credit and debit transactions between the bank of the merchant and the bank of the customer and generate revenue from the service and transaction fees. In other words, they were created to add a layer of convenience to the consumers for the payment of goods and services. As more convenient forms of using credit cards and debit cards are added, the likelihood of consumers using credit card and debit cards increases. For Visa and MasterCard, this is a good thing because, as more Visa and MasterCard credit card and debit card transactions occur, more fee income they will make – a very simple business model.
So Where Is The Risk?
The very simplicity of the business model is also the weakness of Visa and MasterCard. Due to its simplicity and the rapidly changing landscape of commerce, there are risks of increasing competition from retailers and yet to be developed or in development payment facilitation systems. Additionally, credit cards are in danger of reaching full saturation where there will be no appreciable growth of new customers or new ways of using their credit cards for payment. Finally, there are the existing competitions: American Express and Discover Card.
Risk From eCommerce
Just as Visa and MasterCard changed the landscape of commerce, there are other companies currently working on and effecting change, this time, in the electronic landscape. Internet commerce, or eCommerce, is now a major marketplace. According to geocart, an eCommerce application and service company, the market size of eCommerce in the U.S. as of 2006 was estimated to be $130.3 billion from 210.8 million online users. CNNMoney reports that eCommerce will grow to approximately $259.1 billion in 2007. eCommerce Journal estimated that in 2007 “about 13% of total US retails sales excluding cars and groceries are processed online.” While it is not a lot, it is amazing given that online sales did not exist 10 years ago.
While credit cards still dominate in eCommerce, PayPal, a payment system owned by eBay is making rapid gains. In 2007, PayPal had $47.5 billion in total payment volume (TPV), out of a total of approximately $113 billion in TPV for eBay, a 33% increase over 2006. PayPal is accepted in other eCommerce sites, making it a major contender to Visa and MasterCard for payment services on the Internet. Another emerging payment facilitator in eCommerce is Amazon Payment, which went live in 2007. Amazon Payment Service will allow payment of goods directly from a bank account or Amazon Payment Account. This service is not limited to purchases on Amazon only but on other eCommerce sites. In addition, there is a growing list of eCommerce payment facilitators that will erode credit cards’ dominance in eCommerce.
Given that eBay and Amazon, two largest online retailers, have their own payment systems to compete with credit cards will be a growing risk to Visa and MasterCard.
Risk From Brick & Mortar Commerce
Credit cards are not only being attacked from eCommerce. The traditional ‘brick and mortar’ businesses have been increasingly offering gift cards as a form of payment. While the appeal of gift cards are limited, their growing use, especially as a replacement of the traditional holiday purchases, will also limit credit cards’ growth in the existing retail market. For traditional retailers, the gift card provided a way to capture loyalty and sale without having to pay processing fees to the credit cards. Bankrate.com notes that the gift card use in 2007 would be approximately $35 billion, an increase of 25% from 2006.
Risk From Saturation
Bankrate.com article notes this risk.
“Simply put, everyone has a credit card who wants one…Credit card issuers now look to cash spending, not other credit cards, as their chief competition.”As credit card uses reach near saturation point, the next step in the evolving use of credit cards is in the smaller purchases. However, the resistance so far comes from the razor thin profit margin that is associated with smaller purchases. Therefore, the growth from adding on additional functions to the credit cards to capture more of the smaller purchases will not be as sizeable as hoped, unless payment facilitating and processing fees come down drastically.
Conclusion
The risk to Visa and MasterCard right now is that they were too successful. Having captured most of the payment facilitation and processing market, their only hope of growing is to increase fees or to figure out a way to wring out more of the smaller purchases.
To accomplish this, Visa and MasterCard are moving to a mobile platform. However, they are not the only ones. PayPal has already moved to a mobile platform. Furthermore, as technology evolves and improves, there will be more competition coming into the market for payment facilitation and processing, especially in eCommerce and Mobile commerce (mCommerce).
It will be interesting to see how Visa and MasterCard adapt to these challenges. However, it seems that investors are already betting that Visa will figure out a way. This is evident by their current trading multiple of approximately 28.75x, based on today’s close of $63.25 and annualizing their 4Q 2007 net income per share of $0.55. Knowing their model, I don’t think that this is a wise bet.
May your trading be profitable!
Regards,
Ed Kim
riskyops.blogspot.com
DISCLOSURE: The author holds no long or short positions in Visa, Amex, Discover, or MasterCard at this time.
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Monday, March 24, 2008
Growing Risk Of U.S. Ethanol Fuel Program To The Global Economy
While using ethanol as an alternatives to gasoline makes sense, the current U.S. program of using corn to make E85 does not. Based on the data widely available, the startling fact is that the U.S.’s corn-fed E85 program, while well intentioned, will have a major negative repercussion to the World Economy.
Overview Of The U.S. Ethanol Generation Program
Let’s start off with the USDA’s briefing on Corn, as of February 2008:
”Corn is the most widely produced feed grain in the United States, accounting for more than 90 percent of total value and production of feed grains. Around 80 million acres of land are planted to corn... Most of the crop is used as the main energy ingredient in livestock feed. Corn is also processed into a multitude of food and industrial products including starch, sweeteners, corn oil, beverage and industrial alcohol, and fuel ethanol. The United States is a major player in the world corn trade market, with approximately 20 percent of the corn crop exported to other countries.”In 2007, the U.S. produced 13,073.89 million bushels of corn. Add in the beginning stock of corn of 1,303.65 million bushels and 2.18 million bushels of imported corn, we had approximately 14,379.72 million bushels of corn in 2007. Currently, U.S. makes up 40% of the total global harvest of corn and contributes 70% of the world’s corn exports, making it a major source of corn to the world food economy[i]. Therefore, what our E85 generation program will have a substantial global affect.
Making Ethanol
It takes 1 bushel, or 56 pounds of corn, to make 2.5 gallons of ethanol, according to Shell. Converting all available corn as of 2007 into ethanol using the Shell’s data, we arrive at a theoretic maximum total of 35.95 billion gallons of ethanol that the U.S. can produce. According to the USDA May 2007 newsletter “Amber Waves”, our annual ethanol production capacity as of February 2007 was 5.6 billion gallons. It further states that current construction and expansion will add additional 6.2 billion gallons by 2011. If the projected ethanol production figures from the USDA is correct, we will need to add an additional 3.2 billion bushels of corn (4.7 billion bushels to produce 11.8 billion gallons of ethanol less 1.5 billion bushels allocated to ethanol production in 2007), or 22.4% increase in the current corn supply, by 2011 to achieve 11 billion gallons of ethanol. Simple economic tells us that as demand for corn goes up, in this case by expected 3.2 billion bushels by 2011, the prices of corn will go up until supply catches up. So, until that occurs, we should expect to see the prices of livestock feed and all product that uses corn and corn by-products to go up, globally.
Risk of Severely Destabilizing Global Economy[ii]
Since U.S. corn export accounts for approximately 70% of world’s corn exports, any change in corn exports will reverberate throughout the world. Therefore, there is a growing risk of destabilizing the global economy, if we are not careful with the expansion of the current ethanol production. USA Today states this risk very clearly in its February 11 article:
”Pakistan is stockpiling wheat and using its military to guard flour mills. Indonesian consumers have taken to the streets to protest rising soy prices. Malaysia no longer lets people take sugar, flour or cooking oil out of the country. North Dakota, the top U.S. wheat-producing state, may import from Canada due to tight supplies.”As the supply of grain continues to lag the growing demand, Countries will stockpile to ensure they will have sufficient supply to feed their population:
”Grains make up around 60% of the diet in low-income Asian nations, North Africa and the former Soviet republics. Vegetable oil is about 12% of the diet in Sub-Saharan Africa and about 10% in some Asian and Latin American countries, according to the U.S. Agriculture Department. The vegetable oil share of diets is growing as more processed foods are available in low-income countries. People in developing countries are also starting to eat more meat, and that drives up demand for grains. It takes about eight times as much corn to produce the same number of calories from meat as from bread, says Homi Kharas, senior fellow at the Brookings Institution.”Many revolutions throughout history have their genesis on the shortage of food staples at a reasonable price. Our American Revolution was based on what we saw as unfair taxes being levied on food staples such as tea and sugar. Therefore, the rising grain prices throughout the world will have a destabilizing effect on the global economy[iii].
- Thousands marched in Mexico City in late January to protest the increase in the price of corn tortillas, which had soared 400%.
- Argentina sharply limited beef exports last year to fight food price inflation.
- Police arrested 56 protesters in Malaysia this month during demonstrations against rising food prices.
Risk Of Severely Increasing The Cost Of All Basic Goods In the Global Economy[iv]
The rising grain prices driven by increased global demand combined with diversion of grain to fuel production is causing tremendous stress on the global economy:
“Those hit hardest by the soaring price of food are those who were already struggling to afford it. "You have people who could get along with bread at 30 cents, but not at 65," says Nancy Roman, the World Food Programme's communications and policy director. Food prices have risen so rapidly, Roman says, that the WFP will need $520 million more to provide the amount of food they had budgeted for this summer. They have saved some costs by buying food locally rather than importing it from abroad, Roman says. That saves transportation costs, and helps local farmers, too. Still, she says, "At some point, you're out of tricks.For developing countries, the rising costs of staple grains have had a tremendous negative effect on their economy as The Food and Agriculture Organization of the United Nations (FAO) estimated that cost to import food has been increasing steadily since 2000 but the rise in cost accelerated in the last few years, most recently resulting in an estimated increase of 25% from 2006 to 2007[v].
In China, inflation may hit a 10-year high, thanks to higher food prices. Costs in Singapore are rising faster than at any time in the past 30 years, according to Merrill Lynch. "A lot depends on how countries with large resources like the U.S. or EU or Brazil, how they invest and how they proceed with this biofuels initiative and how much extra land they will bring in," says Shahla Shapouri, a senior economist at the USDA. "Low-income countries are basically price takers; they are not movers and shakers."
Prices in the U.S. has been rising as well, especially corn, as a direct result of ethanol production. The June 2007 report by the Michigan Corn Growers Association notes that corn prices had increased 97% since 2006, while other commodities during the same time actually dropped:
“The incremental impact of higher input costs, including corn, will be to increase the consumer rate of inflation by 9-15% (3-5% annually) during 2007-09. Assuming food inflation would have been 3% without the increase in corn prices, this implies a food inflation rate of 6-8% during 2007-09. The study suggests the greatest inflation for consumers would be in meat, poultry, fish and eggs. Inflation for these items could be, on average, 4 to 11 percent higher annually than without the rise in corn prices. If the higher price of corn is maintained, the increased cost will be passed on to consumers. …For example, $1.00 worth of food in 2006 would likely cost $1.03 in 2007 absent of the rise in corn prices. With the increase in corn prices, $1.00 worth of food in 2006 might cost the consumer $1.06-1.08 in 2007.”Overall, the food prices in the U.S. is expected to inflate at a higher rate than the general inflation rate for the next seven years due to the growing use of corn for ethanol production[vi].
Conclusion
While the desire to wean ourselves away from foreign oil is a noble purpose, one that I applaud, the execution of the desire has severe risk consequences that will affect the global economy and socio-political landscapes. As more countries include grain and meat into their diet, supply of these food staples has not be able to catch up with the rapidly increasing demand. This has caused inflationary pressures in countries around the globe, leading to civil unrest and governments taking drastic measures such as guarding their grain storage with their military.
USDA’s own projection also indicates that the U.S. is not spared the consequences of rising grain prices. In its report “Ethanol Expansion in the United States -- How Will the Agricultural Sector Adjust?” USDA clearly notes the destabilizing risks of increased use of corn for ethanol production:
- “Soybeans compete most directly with corn and on the largest amount of land. Thus, much of the expansion in corn plantings comes from soybeans, and soybean plantings and production decline.”
- “Reduced production and higher prices for soybeans also bring higher prices for both soybean meal and soybean oil.”
- ”In response to higher corn prices, red meat production declines and growth in poultry output slows in the United States, particularly during the next several years as ethanol production ramps up.”
- “With reduced production, prices for meats at both the producer and retail level rise…”
- ” As a result, consumer prices for red meats, poultry, and eggs are expected to exceed the general inflation rate in 2008-10. Consequently, overall retail food prices in USDA’s 2007 long-term projections rise faster than the general inflation rate for several years.”
May Your Trading Be Profitable
Regards,
Ed Kim
Practical Risk Manager
riskyops.blogspot.com/
DISCLOSURE: The author holds long positions in Oil Refining Companies at this time.
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[i] http://www.earth-policy.org/Updates/2007/Update63.htm
[ii] http://www.usatoday.com/money/industries/food/2008-02-11-food-prices_N.htm
[iii] http://www.usatoday.com/money/industries/food/2008-02-11-food-prices_N.htm
[iv] http://www.usatoday.com/money/industries/food/2008-02-11-food-prices_N.htm
[v] http://www.ers.usda.gov/AmberWaves/February08/Features/RisingFood.htm
[vi] http://www.ers.usda.gov/Publications/FDS/2007/05May/FDS07D01/fds07D01.pdf Sphere: Related Content
Sunday, March 23, 2008
Pure Risk Management Training 101: Key Risk Indicators (KRIs)
Q: What Are KRIs?
A: Key Risk Indicators (KRIs) are set of relevant metrics showing a point in time status of the operating processes. Risk managers use the metrics to proactively monitor the operational process to identify potential risks that may affect the operating process long before they can occur.
Q: What Is Their Purpose?
A: When designed properly, reported timely, and measured reasonably, KRIs provide a predictive warning of potential issues that may adversely affect the Business.
Q: How Do You Design KRIs Properly?
A: Risk manager must first understand the end-to-end operational flow of the business prior to attempting to manage the risk. With a detailed mapping of the business process, data flow, decisioning branches, seasonality of the business flow, projected business growth, overall business model, and the acceptable level of risks that the business is willing / allowed to take, a risk manager can design the limits – upper and lower – of the KRIs that would yield the best quality data. It is with this data that the risk manager designs the KRIs.
Q: What Do You Think Is “Timely” Reporting Of KRIs?
A: Each business and its processes have different tenor (time horizon). For some businesses, such as overnight shippers, timely would mean near instantly. Others, such as any continuous flow process, i.e., manufacturing shoes; the timeliness of the KRIs would be determined by the company’s reporting cycle. Typically, a good risk manager would want to know, weekly, the critical operational and decisioning pathways metrics and, at least bi-weekly, for the less critical operational paths metrics.
Q: How Are The KRIs Developed?
A: KRIs are developed as part of the end-to-end review of a business process, which will identify where there is a need for early detection and escalation of issues that will adversely affect the Business
Q: Who Develops KRIs?
A: Risk manager, in concert with the senior managers of all the businesses involved in the end-to-end process, will develop the KRIs.
Q: Are Risk Management Necessary?
A: This is analogous to a person asking if one requires a torch before entering into a cavern. Even if you have been in the cavern many times, without sufficient lighting, it is going to be a very slow, arduous, and dangerous going. However, there are companies out there that do just that. These companies feel that their business models are “battle tested” and their processes have been sufficiently “refined over time.” It is these very groups of businesses that get hit with a major financial loss or embarrassing risk event. So, in short, risk management is very necessary as it is one of the essential monitoring tools for any business.
Q: Do We Really Need KRIs?
A: Knowing risk management is one of the essential monitoring tools for any business, the answer here is unequivocal ‘Yes.’ KRIs are important to the risk manager in assessing vast quantities of data in a meaningful way. Through properly developed set of KRIs, the risk manager is able to providing advanced notice of potential risk events (things that may go wrong) with the Business, well in advance of the risk event ever occurring. The idea is to use that lead-time to prevent (mitigate) the risk event or at least try to manage it.
Example: In the case of the 2004 Indonesian tidal wave that devastated parts of Indonesia, Thailand, and India, there were no advanced warning systems in place. Because of a lack of an early warning system, 13,000 people were killed (a severe risk event). How would properly developed KRIs help to mitigate some of the losses?
A simple KRI that could have helped in the example situation:
Measurement of earthquakes:
Low = any earthquake with a magnitude of 3.5 or less.
Medium = earthquake with a magnitude > 3.5 and < 8.0 (for location more than 500 mile inland).
Medium = earthquake with a magnitude > 3.5 and < 6.0 (for costal location).
High = earthquake with a magnitude > 8.0 (for location more than 500 mile inland).
High = earthquake with a magnitude > 6.0 (for costal location).
Q: Where Would One Apply KRIs?
A: KRIs can be applied to any process that the business may determine has sufficient risk of failing or causing another process to fail, resulting in financial losses, non-monetary damages, or both. Businesses can use KRIs in all their operational processes to assist in predicting potential risk events.
Q: How Do You Reasonably Measure Risks Using KRIs?
A: KRIs, like all tools, in of themselves do not manage or mitigate the risks in a business. Moreover, if improperly designed, it can lead to a false sense of security. Furthermore, improper timing of the KRIs can lead to missing the risk event altogether or not being properly prepared with corrective actions. (Sort of like yelling out “Iceberg, dead ahead!” at the moment of impact.)
Therefore, the measurement of the risks must be done in concert with (a) the senior business managers whose businesses and processes are involved in the operational pathways and (b) with senior officers of the company, to clearly understand their tolerance levels for risk of financial losses and non-monetary set backs. The combination of the nature of the business to monitor, the tolerance levels, and good design of the KRIs will allow the risk manager to measure the risks facing the business.
Q: Are KPIs (Key Process Indicators) The Same As KRIs?
A: No. Key Process Indicators (KPIs) are different from KRIs. KPIs only show what the business is doing and how much of it is being done in a period of time. Therefore, KPIs are INFORMATIVE. KRIs, on the other hand, are DETERMINITIVE.
Example: KPIs are analogous to a car’s speedometer. Speedometer tells you how fast the car is going at any given moment. However, it does not tell if the current speed is appropriate for the vehicle, road, traffic, and weather conditions. It is merely informative.
KRIs are analogous to a car’s fuel gauge. The fuel gauge will provide information but also gives you an understanding of what will happen, and approximately when. If one chooses to ignore the fuel gauge data, then one will quickly learn not to repeat that error.
Q: Can KPIs become KRIs?
A: A good question. And the answer is a firm “Maybe.” If a series of KPIs are presented in a proper and coordinated manner, then one can use the KPIs to derive a KRI.
Example: Using the car analogy again. Let’s use a series of KPIs: speedometer, clock, and odometer. Individually, these are KPIs. They are informative, nothing more. However, when taken together with an external data point, one can derive a KRI from the collective data.
KPIs for both cases: Speedometer indicates 40 MPH, clock indicates 8 AM, and odometer indicates 4,000 RPMs out of max of 9,000 RPMs.
Case 1: You are driving on a highway headed toward the business district. What is your risk level?
Case 2: You are driving down a steep incline from a top of a mountain on a Sunday. What is your risk level?
Side Note: One can make an incorrect argument that a speedometer is a KRI since if one takes the car to the maximum limits of the speedometer, then one will lose control of the car and crash. This is a false assumption since there are at least two ways to get the speedometer to the maximum without any risk of damage:
1. The vehicle is on a chassis dynamometer
2. The vehicle is a Zamboni, which has a top speed of 9 MPH and is running top speed on the world’s largest skating rink, according to Guinness.
Q: Finally, What Makes A Good KRI?
A: A good KRI should have at least the following characteristics:
- KRIs should be based on established Standards
- KRIs should be developed using consistent methodology
- KRIs should provide a clear understanding of the risk variables
- Potentiality (Can it occur?)
- Probability (If it can occur, what is the likelihood?)
- Timing (When is it most likely to occur? / How much time do we have before it occurs?)
- Severity of the Risk (When it occurs, what is the $ / % / # loss?)
- Potentiality (Can it occur?)
- KRIs must be quantifiable (number, dollars, or percentages)
- KRIs must be easily applied and understood by the end users
- KRIs must provide trending analysis of the risk variables
- KRIs should validate or invalidate management decisions and actions
- KRIs should be timely, provide a simplified but complete view of the risk, and cost effective
1. You are going to drive a mid-sized rental car through the desert to Las Vegas from Reno. Gas gauge is reads full, as is your trunk. The sign you’ve just past informed you that Las Vegas is 450 miles away. By the time you get to the midway point, the gas gauge is at 1/4 full. You see a gas station ahead but they are charging $6 per gallon of gas. You also see a sign that tells you that a full service gas station and truck stop is 10 miles away. What do you do as a risk manager? Why?
2. You have an important business meeting in an hour at your office with a client on a make or break deal. As you are leaving the house, you have a choice of two transportation options: (A) take the car, which will get you to your office in 15 minutes, leaving you plenty of time to get the final preparation done and have a cup of coffee. However, it will cost you $35 in parking fees; (B) take the metro, which usually takes 35 minutes door to door, but has been known to take up to 45 minutes with traffic. The benefit is that it only cost $2 and you can prepare on the metro while having your breakfast. What is your choice and why?
Regards,
Ed Kim
Practical Risk Manager
Riskyops.blogspot.com Sphere: Related Content
