Porn Shooting Blanks

This post first appeared on Minyanville.

"Regrettably, it's true, standards have fallen in adult entertainment. It's video, Dude. Now that we're competing with amateurs, we can't afford to invest that little extra in story, production value, feeling. People forget that the brain is the biggest erogenous zone."
- Jackie Treehorn, The Big Lebowski

It seems there's no escaping the structuring deflation rippling its way through the formerly consumerist underbelly of American society. Prices are falling, bling is on the decline -- and now, according to the New York Times, even porn is feeling the ill effects of shrinkage. (No, not that kind.)

Pornographic filmmakers have long debated the pros and cons of plot and character development in their movies: On the one hand, there has to be something in between sex scenes to allow actors and viewers alike to take a break. On the flip side, however, character development in porn is sort of like those personal interest stories during coverage of the Olympics: Absolutely no one cares.

Industry executives say that viewers are now demanding shorter and shorter clips, and films are increasingly devoid of plot and focus exclusively on the sex itself. This shift, in part, is in reaction to the flood of X-rated footage now available for easy viewing online.

The advent of the Internet as a medium for video distribution has been a boon for smut-peddlers, enabling even amateurs to capture their lewd acts for the world to see. And, of course, to pay for. DVD sales have been hit squarely below the belt, with some experts estimating that sales have fallen more than 50% in the past 3 years alone.

Big porn studios, like Vivid Entertainment and Digital Playground, are rapidly changing their business models to meet the thrust of consumer demand. Rather than full-length features, producers are instead opting for "vignettes," a series of sex scenes tied loosely together with a common theme. This provides for easy distribution of the clips themselves, in the likely event that viewers can't be bothered to watch the entire film.

Meanwhile, more traditional media, as it's wont to do, is following porn's lead. After all, it was the pornography industry that first capitalized on the VCR, perfected the art of pay-per-view, and pioneered the concept of premium online content.

Rhythm New Media, who delivers video content through a mobile phone-based distribution platform, recently launched an application for Apple's (AAPL) iPhone where users can splice together snippets of Family Guy episodes, creating, in effect making their own version of the show.

TiVo (TIVO) and other digital video recording services offered by cable companies like Time Warner (TWC) and Comcast (CMCSA), offer TV viewers the luxury of seeing exactly what they want, when they want it. YouTube, now owned by Google (GOOG), has likely advanced this trend more than any other online media site, as attention-deficient users comb through millions of short video clips.

Ultimately, the demise of the intricate, well-developed pornography film was sort of inevitable. I mean, let's face it, the vast majority of porn aficionados aren't looking for surprising plot twists and dramatic action scenes.

They're looking for action of an entirely different sort.

Banks Reject California's IOUs

This post first appeared on Minyanville.

Apparently, IOUs issued by an insolvent state aren't as good as cold, hard cash.

Last week, after state leaders failed to find a solution to an ongoing budget crisis, California began issuing IOUs to banks and other creditors. Now, despite initially agreeing to accept the IOUs in lieu of actual payments, some of the country's biggest banks are refusing to honor the promises to pay past Friday, July 10.

According to the Wall Street Journal, among the newly defiant banks are Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). Along with an announcement yesterday by Fitch Ratings that it had dropped California's credit rating to BBB -- just a few notches above "speculative" levels, this shift in sentiment puts immense pressure on Sacramento to find a lasting solution to the state's woes.

California plans to send out $3 billion in IOUs in July alone. The IOUs mature on October 2, and promise to pay recipients 3.75% in annualized interest -- presumably, in addition to the principal. The state has said that without the IOUs it would run out of cash by the end of July.


Other 49 States Could Go the Way of California



The fear -- although there's no reason to assume this yet -- is that California's other disgruntled creditors will jump on the banks' non-acceptance bandwagon in a show of defiance. This would be a crushing blow to Governor Arnold Schwarzenegger and California state legislators, potentially forcing them to go hat in hand to Washington for a bailout.

Since 2 of the banks refusing to honor the IOUs are controlled by the federal government (and since the remaining 2 are essentially being run by Washington insiders), the Obama administration's hands-off posture suggests it may be taking one of 2 possible stances.

Obama may be taking the hard line -- sending California the message that the state's political wrangling has to cease given what's at stake. After all, if the nation's most populous state were to run out of cash, the impact on its more than 30 million residents -- not to mention the US economy as a whole -- would likely be severe.

On the other hand, Obama may have a more disturbing goal in mind. It's possible that the administration is considering making a power grab of epic proportions. After all, it's had little compunction about seizing embattled automakers General Motors (GPM) and Chrysler, and hasn't shied away from becoming deeply involved in the day-to-day management of the nation's banks.

Perhaps President Obama's true motive is to wrest control of California away from its languishing leadership, sending the other 49 states a stern message: Get your fiscal houses in order, or get absorbed by the massive bureaucratic machine that is the US government.

Naturally, this latter possibility is pure speculation on my part. But given the President's actions since taking office, and given his apparent desire to expand the reach of the federal government to an extent previously unimaginable, it's not inconceivable.


Professor Steve Smith asks:
Economic Recovery? What Economic Recovery?

States Could Face New Shortfalls as Homeowners Beg for Lower Taxes

This post first appeared on Minyanville.

When the value of your house starts heading to south, there isn't a lot to be thankful for. Some homeowners, however, are looking for a silver lining.

The New York Times reports that homeowners across the country are petitioning state and local governments for lower property tax bills. The timing couldn't be worse for municipalities, many of which are already facing a cash crunch. In California, the state has begun issuing IOUs to contractors and other creditors. Some states, like New Jersey, have increased property taxes in an attempt to prop up revenue -- much to the chagrin of its homeowners.

As property values fall, homeowners face bills that can far outweigh what they would owe should the taxman keep his records in real time. This doesn't sit well with most citizens -- many of whom are already behind on mortgage payments and struggling to make ends meet.

Property taxes are assessed using myriad formulas and reassessment schedules, such that predicting exactly how much you'll owe each year can be nightmarishly complex. Historically, as home prices rose, periodic reassessments benefited homeowners, since the tax assessed value of most properties lagged their true value.


In California, for example, property taxes have increased around 1% per year since 1978 (the year in which voters enacted Proposition 13). Since then, home prices have soared -- the recent decline notwithstanding -- which means residents who have lived in the same home for decades owe a fraction of the taxes than do those neighbors who just moved in.

Requests for tax reassessment have skyrocketed as besieged consumers look for ways to trim monthly expenses. According to the Times, petitions in Ohio have increases fivefold; lines at government offices in Atlanta stretched around the block on the March 31 deadline to file reassessment requests; and in New York, municipalities had to hire extra staff to handle the influx of petitions from cost-conscious homeowners.

Meanwhile, localities are suffering from lower tax receipts across the board as job losses slam income taxes, anemic consumer spending hits sales taxes, and a weak business environment is reducing or eliminating corporate profits. This means staff cuts, wage decreases, and fewer services -- all at a time when the federal government is banking on the public sector to pull the economy out of its tailspin.

Even as Washington funnels billions into the financial industry, bailing out the likes of AIG (AIG), Citigroup (C), and Bank of America (BAC), money has been slow to reach local governments. The endgame isn't clear: Unlike the federal government, states don't have the luxury of running a budget deficit. When counties, cities, or even states go broke, they just go broke.

The next round of bailouts could be just around the corner.

Banks Balk at New Consumer Protection Agency

This post first appeared on Minyanville.

Echoes ripple from the lonely barn, its doors agape, the music of rusty hinges piercing the silence. The horses, long gone, are nowhere to be seen. Yet on the dusty horizon, one can barely make out the silhouettes of badge-wielding regulators astride their trusty steeds, racing in to slam shut those hideous, open doors.

After ignoring repeated warnings about the looming dangers of predatory subprime-mortgage lending, turning a deaf ear to consumer complaints about obscenely high credit-card fees, and generally allowing the financial industry to run amok during decades of wild profiteering and debt-fueled excess, Congress is hastily piecing together a plan to protect consumers from Wall Street.

The Wall Street Journal reports that lawmakers are reviewing draft legislation proposed by the Treasury Department that would create the Consumer Financial Protection Agency, or CFPA, whose sole aim would be to protect consumers from the financial industry. The new agency wouldn't oversee securities under the ever-shrinking umbrella of the Securities and Exchange Commission (SEC) or most insurance products, but instead would play an active role in drawing up federal mortgage-disclosure requirements, as well as enforcing newly enacted credit-card rules.

And in what should come as no surprise, bankers are up in arms.

The American Bankers Association, a trade association, complained that the new agency would "stifle product innovation." According to the ABA's president Ed Yingling, "Basically, the government is deciding what every bank in every circumstance should offer." (Pssst, Ed, that's because bankers proved downright unable to decide what to do on their own without blowing up the lab.)

While one can hardly blame lobbyists for doing what they're paid to do -- lobby -- it's not likely that complaints from the likes of Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) are going to find a lot of sympathy in Washington. When an industry displays an abject inability to make good decisions to the extent that its blunders nearly bring down the entire world economy, it should take its regulatory medicine and move on.

To be sure, the agency is likely to be tough on mandate, light on enforcement. But that doesn't mean banks can't still whine about it. After all, the CFPA will be partly funded by the financial industry, so really, how tough can it be expected to be on the very firms that pay its salaries?

The new agency's task of designing regulation in our post-crisis world will be tricky. Indeed, mostly because the crisis hasn't passed.

As noted by Minyanville's Kevin Depew, although the worst of the credit crisis is likely behind us, the debt crisis remains in full swing. Washington doesn't seem to understand this, and is acting as if systemic risk is a term we won't be hearing again. Their focus then, will be to legislate aggressively until the next election cycle, in the hopes of proving to their constituency that they were tough on those Wall Street fat cats -- the AIGs (AIG) of the world that stole from the pockets of ordinary Americans.

This is a typical political response, and will likely result in a period of over-regulation --which will stifle advancements, but will do so in an industry where an overabundance of unchecked innovation ran well beyond its usefulness.

The upshot is that for the few small firms nimble enough to dance around the new rules and step in where behemoth banks are unable to tread, opportunities will be plentiful. Indeed, in the void left when banks went running from all loans that even sniffed of real estate, private lenders are reaping huge rewards.

That's as it should be: Recessions are breeding grounds for opportunity. That is, of course, if you know where to look.

California Finally Runs Out of Cash

This post first appeared on Minyanville.

It's official: California is broke.

For months, the most populous US state has been in the throes of a historic budget crisis, as lawmakers have repeatedly failed to agree on how to resolve a $24 billion deficit.

What was once the country's richest state is preparing to issue IOUs to a host of creditors, according to the Financial Times. Among the dubious recipients of these IOUs: Contractors, information-technology companies, and food-service groups that cater to prisons. Funding for education and interest payments on its bonds are guaranteed by state law.

Governor Arnold Schwarzenegger is taking a hard line with legislators, accusing them of offering up a piecemeal solution to the state's woes: "I will veto any majority tax increase bill that punishes taxpayers for Sacramento's failure to live within its means. It's time for the legislature to send me a budget that solves our entire deficit without raising taxes," the Governator said yesterday.

Lawmakers appear blindsided. It's almost like the state went broke all of a sudden and they haven't had time to properly prepare a solution. Not true: The state has been in and out of financial crisis for more than a decade.

After Schwarzenegger vetoed an $18 billion budget package in January, calling it "deeply flayed [sic]," members of the California legislature pulled a literal all-nighter to try and agree on spending cuts, tax hikes, and other measures to get the state back on sound financial footing. The proposed agreement -- hailed as an eleventh-hour solution to what could have become a fiscal nightmare -- was put to a state-wide referendum in May.

Voters rejected the proposal, soundly. Of the 5 measures on the ballot, the only one that passed were new rules that cut the pay for elected officials. And for good reason.

California politicians are a woeful bunch. Despite being home to some of the most profitable and innovative companies in the world, the state is perennially short of cash. Oracle (ORCL), Google (GOOG), and Genentech (DNA) all hail from the San Francisco Bay Area, while San Diego remains a mecca for biotechnology research and is home to mobile-communications giant Qualcomm (QCOM).

The state has vast natural-resource reserves, has a booming agricultural industry, is a popular tourist destination, and has some of the most heavily trafficked ports in the world. Good weather and generally high quality of life has made California the destination for dream-seekers for more than 150 years.

Yet, despite everything it has going for it, California's political process is a complete disaster. In an attempt to allow voters to play a more direct role in governance, the state's referendum system allows citizens to collect signatures and get measures onto statewide ballots. Enough votes on election day and any Californian can see his or her whimsical dream become law.

This has created a patchwork of legislation, rules, and special interests that have hogtied what would be the seventh-largest economy, were it to be a sovereign nation.

As the calendar turns tonight on its new fiscal year, California could be the first state -- like its bailout-begging brethren on Wall Street -- to go hat in hand to Washington pleading for a rescue.

Commodities Not Ready to Roll Over Just Yet

This post first appeared on Minyanville.

Despite the trillions of dollars in unprecedented stimulus we've seen in the over the past 24 months, investors are still reducing their bets on rising commodity prices.

According to Bloomberg, hedge funds and other speculators reduced commodity exposure by 23% in the 2 weeks ending June 23. Though this can be attributed, in part, to profit-taking after the first quarterly increase since early 2008, traders aren’t convinced that excess inventories will be corrected any time soon.

The effect of any future economic growth on commodity prices is likely to be mixed. Even as higher demand from consumers and businesses for raw materials expands, so too will capacity, because miners, farmers, and drillers will ramp up production.

And the debate is heating up as to whether the longest recession since World War II is on its way out. While George Soros declared the worst of the financial crisis over, and the Federal Reserve said economic contraction is slowing, the World Bank lowered global economic growth forecasts, and economist Nouriel Roubini said higher fuel costs could deepen the ongoing slump.

On Wall Street, investors have been betting on a recovery, as oil-service firms Transocean (RIG) and Schlumberger (SLB) have risen 82% and 55% from recent lows, respectively. And, despite a recent pullback, miners like Freeport MacMoran (FCX) Newpont Mining (NEM), along with steel producers ArcelorMittal (MT) and US Steel (X), have had exceedingly strong years to date after some downright abysmal months.

Well-known hedge managers have jumped on the rising-prices bandwagon: Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, threw his weight behind the commodity trade earlier this month, announcing that his hedge fund, Universa Investments, planned on betting on massively higher prices.

But rising commodity prices -- indeed, all rising prices -- are a result of not only constricted supply, but of higher demand. As the US and the world as a whole prepare for a future devoid of cheap and easy credit, old expectations about economic growth must be tossed aside.

We're entering a transitional period, one in which economies in both developing and developed nations must readjust to the notion that debt isn't a sustainable vehicle for growth, and that true productivity and innovation must drive any increase in the standard of living. In the long run, this return to traditional capitalistic values will result in a rising tide that lifts all boats.

Recession-Weary Consumers Desperate for Fewer Choices

This post first appeared on Minyanville.

"Quality is a characteristic of thought and statement that is recognized by a non-thinking process. Because definitions are a product of rigid, formal thinking, quality cannot be defined."
- Robert Pirsig, Zen and the Art of Motorcycle Maintenance

Retailers, reacting to the ongoing structural shift away from excessive consumerism, are beginning to choose quality over quantity.

Finally.

This morning's Wall Street Journal highlights efforts by stores like Target (TGT), Wallgreens (WAG), and Wal-Mart (WMT) to reduce their product offerings, limit shelf clutter, and generally simplify the consumer's shopping experiences. Suppliers like ConAgra (CAG) and Clorox (CLX) are also trying to get ahead of the curve, and are reducing the variety of their offerings.

As shoppers become more selective, confronting a dizzying array of salad-dressing options inspires many to simply throw up their hands and go with a brand they know. As one customer told the Journal: "There are too many choices. I just went with Kraft (KFT), because I know Kraft."

This trend clearly favors dominant brands, since smaller, lesser-known varieties will be muscled out by firms able to spend millions on marketing. And while this may stifle innovation in the cutting-edge barbecue-sauce industry, stiffer competition ultimately weeds out the weak, thereby making room for real future innovation. As sales become concentrated inside big, often stodgy conglomerates, nimble upstarts have a chance to move in with new and improved products.

In eliminating superfluous brands, products, and package sizes, retailers are also slashing inventories -- a key part of rebalancing consumer demand with supply, and a necessary component of any sustainable economic recovery.

Wal-Mart, the world's largest retailer, isn't just slimming down its offerings. After analyzing sales patterns, the company discovered that, in market segments with growing sales -- flatscreen televisions, men's shaving cream, and garbage bags, for example -- increasing variety actually helped sales.

On the other hand, when consumers begin to shun certain products (toilet paper, mouthwash, and microwave popcorn, for example), fewer choices actually helped stem the decline.

And while it looks like Americans now prefer frequent shaving over the regular use of toilet paper, swapping variety for simplicity represents a healthy shift in priorities. Consumer spending, once directed towards glitzy status symbols (hey, even fancy barbecue sauce became a social marker), is now focusing on the useful and necessary.

This -- despite its grim implications for purveyors of the sleek and pointless -- is a good thing.