Monday, April 30, 2007

Deadline for avoiding pension crisis in Germany approaching

A paper in the European Journal of Political Economy posits that reforms to the German pension system will be politically viable until the year 2016, when the "politically decisive cohort" will be at the age where they will overwhelm any effort to reform the pension system through the electoral process.

My thoughts on this issue start off with how the young working populace of Germany will respond should pension reforms fail to be enacted as seems likely. One option is emigration; the younger cohorts will have less loyalty to any particular nation, and I think that could be extended to include less loyalty to the EU itself than some might think. I could see Germans emigrating to countries such as Australia or perhaps Canada(?) or even the USA, where the demographic and therefore tax imbalance is not so large. The other option would be to find employment/opportunity in the underground economy, where the tax authorities would have difficulty enforcing their levies. Perhaps holding down a part time legitimate job to maintain appearances, while doing off the books work in the rest of one's time would be an option for overtaxed Germans.

In either case, the result would be a further drop in tax revenue for the pension system making it even less sustainable. So the political outcome might be a bargain where the retirees accept reduced benefits in exchange for avoiding even greater reduced benefits due to a "silent rebellion" if you will, as I outlined above.

One factor that might postpone the pension crisis is the notable migration of workers from the countries newly admitted into the EU (and further east) towards the western countries. I have seen several articles in the business press that have noted a "brain drain" of young and educated workers from places like Romania and Ukraine to western Europe.

I think that the younger age groups tend to generate most of the innovation in developed economies, but capital is generally held by the older age groups. So a bargain will need to be struck between these two groups if aging societies are to maintain consistent economic growth.

Potential revision of Japan's constitution re military

The VOA has a story titled "Japan Considers Amending Pacifist Constitution" that leads by stating "After years of talking about it, Japan's governing party has moved ahead this month with plans to revise the country's constitution. The changes would expand the role of Japan's military - a significant break from its post-World War II pacifist era." The article then goes on to quote some notables on the issue:

-Proponents of the changes, such as Osamu Nishi, professor of constitutional law at Komazawa University in Tokyo, say Japan needs to be able to project force commensurate with its economic power. "Japan is not the same country as it was 60 years ago," he said. "It has become a big country with a responsibility to keep world peace"...I agree with this 100%...

-"Law professor, Pema Gyalpo, of Toin University in Yokohama is a constitutional advisor to the ruling Liberal Democratic Party. He says a change in the military's role is necessary to meet any threat caused by China's growing military might. "Because in recent years it has been very obvious that China is increasing their military budget by double digits, and this is very great concern for the Japanese," Gyalpo says. Gyalpo also believes that if Tokyo wants to become a global player and a member of the United Nations Security Council, it has to take a more active military role"...again, I agree 100%...

Japan needs to take greater responsibility for its own defense. As things now, Japan is generally dependent on the US for protection should a crisis arise.

Links of the day

Should Americans Worry About Foreign-Government Holdings of Dollar-Denominated Assets?...nice discussion re China's massive holdings of US debt...the short answer is "no"...

Corruption in pictures

"An Integrity Department investigator visited this school where children were still attending lessons in an overcrowded, thatched hut, while their new Bank-funded schoolhouse - just a few hundred meters away - was being used by a local official to store onions"...check the first link for a photo of the hut...This is why all of Bono's efforts will achieve far less than he thinks. Developed countries have been pouring aid into Africa for decades, and the greater part of that aid has been going to line the pockets of corrupt officials.
I recommend that anyone read "Dark Star Safari" by Paul Theroux. This book is a narrative of his travels through Africa, in large part through countries where he worked as a volunteer in the sixties. His conclusion was that the outlook for Africa is not good, in large part precisely because of the corruption that has taken hold.

Ranieri on the MBS Market: It's Broke...Calculated Risk's summary of a meeting concludes with "Securitization of loans did not, actually, eliminate the risks inherent in property markets; it seems to be capable, in fact, of magnifying those risks"...the key point is that with securitization, the spreading of risk among a large number of stakeholders makes it difficult to get agreement among the stakeholders on how to resolve a default because of conflicting interests and the large number of stakeholders...

Private Equity's Polonius..."Increasingly, activists and private equity have become at odds. This is particularly so in going private transactions. Activists have begun to ask serious questions about auction processes as well as the prices being paid for publicly held firms. "Why," the question goes, "should we sell you this firm cheaply today so you and your private equity partners can make hundreds of millions later when you re-offer it publicly? We are leaving a lot of value on the table. We, and the other public shareholders (activism can be a highly populist pursuit, but only when the institutional shares are already a tight proxy race) are being cheated"...

U.S. Office Vacancy Rates Rise..."if office vacancy rates continue to rise, combined with a significant increase in supply coming this year and next, a further reduction in business investment (especially for structures) is probable"...

Friday, April 27, 2007

Links of the day

Exchange Rates ‘Do Not Reflect Economic Fundamentals’...a Morgan Stanley analyst believes that "The euro is 12% overvalued in real terms"...

Japan Goes to AA...Claus Vistesen analyzes the validity of S & P's debt upgrade...

When Analysts Don't Talk to Management..."an analyst at Banc of America Securities...dares to rate companies without meeting with corporate management"...this "research is likely to get read much more by BofA's individual retail clients – the kind of people for whom his market knowledge and expertise has a lot of value when it's applied on a stock-by-stock basis like this"...

Tap water is becoming trendy...Slate says "there is a sort of reverse snob appeal in shunning bottled water. Restaurants like Chez Panisse are telling their customers that they prize the Earth—and their customers' values—more than their own profits"...check the link for the good Dr. Seuss reference...

Data points regarding consumer spending...Mish talks about automakers' problems and connection to housing crunch..."
U.S. auto industry sales have dropped far below expectations for April, a Ford Motor Co. executive said on Friday as rival General Motors Corp. rolled out an incentive program intended to boost crucial month-end sales.

"This month is terrible," Ford chief sales analyst George Pipas said in an interview. "We are not even close to where we expected to be in April"..."GM is offering lower-interest financing to customers with weaker credit ratings through this weekend in an effort to boost sales for April, sources familiar with the sales plan said on Friday. GM will offer reduced interest rates to customers whose credit is assessed at two of its lower rating levels on all brands except Saab, the sources said"...Mish calls that like it is: "smack in the face of a subprime lending fiasco, GM is desperate enough to boost sales by lowering finance charges to customers with weak credit ratings. This is as foolish as it is desperate."

Meanwhile, "Hundreds of thousands of motorists in financially beleaguered Michigan have downgraded their auto insurance -- a money-saving gamble that could leave them without a ride if their vehicle is stolen or smacked by another car.

The latest available data shows that nearly 300,000 comprehensive policies were dropped from 2000 to 2004 -- a trend that has continued, some large insurers say"...

Bribery-still a standard business practice?

I raise this topic in the context of a scandal involving Siemens, a Germany company which is currently in the headlines due to bribery prosecutions of some of its employees. An example is "Bribery trial deepens Siemens woes" from the International Herald Tribune where the first sentence in the story states "Two former managers for the engineering conglomerate Siemens told a German court Tuesday that they meted out €6 million in bribes in Italy as part of the company's strategy to anchor itself in the booming market for power generation equipment." The managers defense is described as "Both men also said that they had not violated a German law forbidding bribery of public officials abroad because the Italian utility in question, Enel, was already effectively privatized."

Further along in the article, the IHT states that "In 2002, Germany passed an additional law extending the prohibition on bribery to all employees abroad, whether at public or private companies." Apparently, the bribing of a foreign office-bearer was not punishable in Germany until the late 1990s. Germany passed an "International Bribery Law" in 1998 to rectify that. Also, since the "Tax Exemption Law" became effective on March 24th, 1999, bribe money is no longer tax deductible in Germany.

There is a Bribe Payers Index which rates countries according "to the propensity of firms with headquarters within their borders to bribe when operating abroad."

Does economics follow the scientific method? NO

The New Economist asks this question with its post "Does empirical economics follow the scientific method?"...the post references a paper titled Do Economics Journal Archives Promote Replicable Research? where "The authors attempted to replicate the results from 138 empirical articles in the Federal Reserve Bank of St. Louis Review. Of the 138 articles, 29 employed software they did not have or used proprietary data, and were excluded. Of the remaining 117, they were able to replicate only 9 of them: a lousy 8 per cent." The study concluded that the academic economics community creates strong disincentives to researchers who might wish to test the validity of any particular piece of research through attempts to reproduce results of said research.

Thursday, April 26, 2007

Links of the day

Game Console Wars: No Longer a Bipolar Landscape...two opinions on Xbox 360...

"After hemorrhaging billions of dollars during all but one quarter of the Xbox unit’s existence, there is clear pressure on Robbie Bach and Peter Moore to turn a profit this generation. Nowhere is this more clear than the cost of the company’s Xbox 360 accessories: $100 for a Wi-Fi add-on. $100 for a 20 gigabyte hard drive. $50 for a 512 megabyte memory card (originally $40 for a measly 64 megabytes.) Add to that now $179 for the 120 gigabyte hard drive, and it becomes clear that Microsoft’s strategy can only be described by a single word: price-gouging"...

"you are right about the dangers of milking profits. Sony and Microsoft are trying to charge what the market will bear. Nintendo is moving in and seizing the opportunity to grab the consumers who want reasonable and historical prices. If Nintendo gets too much momentum, the tables will turn, Microsoft will squander its advantage, and Sony won’t get liftoff"...

Wednesday, April 25, 2007

Low Fertility Rates a Temporary Artifact of Demographic Transition?

Let's look at the proposition that although Western countries' populations in general are aging, global fertility rates will rise from current low levels at some point. This would be due to the idea that reproductive rates in western societies are down not because people no longer want to have kids, but because the part of the life cycle when it is seen to be economically feasible to raise children has shifted from the traditional reproductive age (20s-30s) to (40s-onward) and that as reproductive technology advances, childbearing age is being and will still be redefined to wider periods of life. As a result, we could expect to see an increase in the number of children of "aged" parents.

Just based on anecdotal evidence here in the US, it is fair to say that the shift in expectations as to when the ideal time to have children might be has definitely shifted to the 30-40 year old age range. And fertility technology has advanced to the point where women in their late thirties and forties are having children. There are some issues with the fertility technology, however. One is the increased likelihood of multiple births in a pregnancy. I don't have hard data at my fingertips but once again anecdotally couples that go to fertility clinics have a meaningfully higher rate of twins and triplets than couples who get pregnant the old-fashioned way. That could be a deterrent to the use of fertility technology, and damp the potential increase in total fertility.

Also, it is clear that women bear greater risk to their own health when pregnant their late thirties and forties, and there is increased risk of birth defects in the child as well. This also could dampen the use of fertility technology.

As far as ideal family size and the economic feasibility of having children are concerned, I believe that in countries today with low fertility rates, women have strong disincentives to having more children. Reduced personal income due to taking time off from work to bear and care for a child, and reduced personal time for studies, play, or work factor into the child-bearing decision. My impression of modern women of childbearing age in Europe and Asia is that careers and leading an independent life take precedence over raising children. I believe this is somewhat borne out by recent data found in a paper titled New Empirical Evidence on The Low Fertility Trap Hypothesis by Wolfgang Lutz, Vegard Skirbekk and Maria Rita Testa. A key finding published in this research identified by Claus Vistesen(which I paraphrase here) regards "the very recent evolution of ideal personal family size...based on data from Southern Europe and France. As we can see the decline might look ever so slight but once we get the figure in percentages it shows that the decline in some countries is pretty hefty given the fact that we are only talking about 5 years. Moreover, note that Italy's personal ideal family size is fast approaching below replacement levels and seeing that this is a lagging factor of actual fertility decline the evidence of a traps seems particular sinister here. Also of course the drop in Spain's ideal family size of about 9% is something to watch."

To sum up, it is not out of the realm of possibility that fertility rates in aging societies will rebound. Whether this will occur or not is to a large degree a function of social attitudes toward child-bearing. The trends noted in the study referenced above do not bode well for such a rebound.

Housing market update

-Sales of new homes were off 23.5% compared with March 2006...“The inventory of unsold homes rose by 1,000 to 545,000 in March, representing a 7.8-month supply. Sales in the previous three months were revised lower as well. February’s revised annualized sales pace of 836,000 was the lowest since September 1999"...

-“Cheating on mortgage applications is so widespread and so seldom punished that it’s fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans.”

“‘Misstatements about employment and income are being made every day,’ Russell said. ‘The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.’”

-The Herald. “The shutdown of wholesale lender Mortgage Investment Lending Associates Inc. was sudden, but not a surprise to many of the employees laid off over the past year.”

“‘I’ve been waiting for it,’ said Amorita Simon of Everett, who lost her job there in February 2006. ‘And I knew the way that MILA ran itself, it was only a matter of time.’”

-The Vancouver Sun. “West Fraser Timber president Hank Ketcham said Tuesday the forest industry is facing the worst recession he can recall with no end in sight.”

“‘To us it is a typical cycle. We have seen it in the mid-’70s, early-’80s and early-’90s. In real dollar terms, lumber prices today are lower than they were in 1982, which was the worst recession I remember,’ the West Fraser president, a lumberman since 1973, told analysts.”

“The benchmark price for lumber from the B.C. Interior dropped to $253 US a thousand board feet in the first quarter of the year, down from $343 US a thousand board feet one year.”

-The Daily Courier from Arizona. “The construction business of former Arizona Senate candidate Elise Townsend of Paulden filed for bankruptcy this week, three months after the Arizona Registrar of Contractors revoked its license.”

“Townsend filed the bankruptcy for her Pres-cott-based business just one day before her major lender planned to auction off 1,120 vacant acres she owned in southern Arizona because she hadn’t made any payments in recent months.”

“Townsend said she went from selling 151 homes in 2005 to fewer than a dozen this past year. She’s stuck with 37 she can’t sell right now. At least a half-dozen are not finished and the values have dropped 20 percent to 30 percent. ‘This isn’t just a Townsend problem, it’s a national problem,’ Townsend said.”

“The bankruptcy filing lists at least 72 mostly unnamed individual investors, including some who were local residents.”

-The East Valley Tribune from Arizona. “Las Vegas homebuilder Jim Rhodes has suspended his large-scale development in Mohave County, a company representative confirmed"...“Rhodes has pulled work crews from his Pravada development in Golden Valley southwest of Kingman, where he has plans approved to build more than 32,000 homes on about 5,750 acres"...“The Mohave County Board of Supervisors approved general plan amendments for four Rhodes developments in December 2005. But his plans to build more than 130,000 new homes there have stalled because the Arizona Corporation Commission has yet to issue a certificate to operate a water and sewer company that would serve his development in Golden Valley"...130,000 homes!!!! 4 people per home that's over a half a million people...

-The Press Enterprise. “The number of homes on the market in the Inland region is at its highest level in eight years, according to Multi-Regional MLS, which tracks resale homes in western Riverside and San Bernardino counties and eastern Los Angeles County. The service reports that more than 34,700 homes are listed for sale in the region.”

“The month’s supply of listings, or how long it would take for this supply of homes to be sold at the current pace, is at 13.2 months, up from 6.9 months a year ago.”

Ranking of world cities by GDP

A site titled City Mayors has the details of a study done by PriceWaterhouseCoopers which ranks world metro areas by each metro's GDP. Here is the ranking table from that research for the top 50:

Richest cities and urban areas in 2005
City/Urban area
GDP in US$bn
Tokyo Japan
New York USA
Los Angeles USA
Chicago USA
Paris France
London UK
Osaka/Kobe Japan
Mexico City Mexico
Philadelphia USA
Washington DC USA
Boston USA
Dallas/Fort Worth USA
Buenos Aires Argentina
Hong Kong China
San Francisco/Oakland USA
Atlanta USA
Houston USA
Miami USA
Sao Paulo Brazil
Seoul South Korea
Toronto Canada
Detroit USA
Madrid Spain
Seattle USA
Moscow Russia
Sydney Australia
Phoenix USA
Minneapolis USA
San Diego USA
Rio de Janeiro Brazil
Barcelona Spain
Shanghai China
Melbourne Australia
Istanbul Turkey
Denver USA
Singapore Singapore
Mumbai India
Rome Italy
Montreal Canada
Milan Italy
Baltimore USA
Metro Manila Philippines
St Louis USA
Beijing China
Cairo Egypt
Jakarta Indonesia
Tampa/St Petersburg USA
Pusan South Korea
Kolkata India
Vienna Austria

Leading countries in share of global gdp

Here is a chart from Wikipedia that shows the rankings as of 1998:

Region / Country GDP (PPP)
mill. of International dollars
GDP Share
percentage (%)
World 33 725 635 100
United States 7 394 598 21.9
People's Republic of China 3 873 352 11.5
Far East (excluding China, India, Japan, Russia) 3 140 603 9.3
Japan 2 581 576 7.7
South America and Central America 2 285 700 6.8
Republic of India 1 702 712 5.0
Germany 1 460 069 4.3
West Asia 1 236 328 3.7
United Kingdom 1 150 080 3.4
Russia and Central Asia 1 132 434 3.4
France 1 108 568 3.3
Canada and Australia 1 061 537 3.1
Africa 1 039 408 3.1
Italy 1 022 776 3.0
Eastern Europe (excluding Russia) 660 861 2.0
Mexico 655 910 1.9
Spain 560 138 1.7
Netherlands 317 517 0.9
Belgium 198 249 0.6
Sweden 165 385 0.5
Austria 152 712 0.5
Switzerland 152 345 0.5
Portugal 128 877 0.4
Denmark 117 319 0.3
Norway 104 860 0.3
Finland 94 421 0.3

There is a chart at econstats that lists every country in the world and their shares of world gdp; it's way too large for me to post here but it includes data up through 2006.

Here is a ranking as of 2005 from the World Bank:

Total GDP 2005
(millions of Ranking Economy US dollars)
1 United States 12,455,068
2 Japan 4,505,912
3 Germany 2,781,900
4 China 2,228,862
5 United Kingdom 2,192,553
6 France 2,110,185
7 Italy 1,723,044
8 Spain 1,123,691
9 Canada 1,115,192
10 Brazil 794,098
11 Korea, Rep. 787,624
12 India 785,468
13 Mexico 768,438
14 Russia 763,720
15 Australia 700,672
16 Netherlands 594,755
17 Switzerland 365,937
18 Belgium 364,735
19 Turkey 363,300
20 Sweden 354,115
21 Saudi Arabia 309,778
22 Austria 304,527
23 Poland 299,151
24 Indonesia 287,217
25 Norway 283,920
26 Denmark 254,401
27 South Africa 240,152
28 Greece 213,698
29 Ireland 196,388
30 Iran 196,343
31 Finland 193,176
32 Argentina 183,309
33 Hong Kong 177,722
34 Thailand 176,602
35 Portugal 173,085
36 Venezuela 138,857
37 Malaysia 130,143
38 Israel 123,434
39 Czech Rep. 122,345
40 Colombia 122,309
41 Singapore 116,764
42 Chile 115,248
43 Pakistan 110,732
44 Hungary 109,154
45 New Zealand 109,041
46 UAEmirates 104,204
47 Algeria 102,257
48 Nigeria 98,951
49 Romania 98,559
50 Philippines 98,306

Links of the day

Bank of Korea Takes Aim at “Yen Carry” Traders..."Tokyo is the ultimate source of inflation in global commodity and stock markets"...that seems correct to me, but this is the first time I've seen it said so directly...

UPS Misses on Sales as Domestic Shipments Lag...evidence of the US economy slowing...

1Q07 Insurance Earnings: What's Working, What's Not..."Insurance is different from other industries because of the accounting complexity involved. That complexity is necessary, because insurance is one of the few industries where one does not know the cost of goods sold at the time of sale. That’s why insurance is one of the slowest industries to report earnings. As one might expect, the insurance companies generally report in order of increasing accounting complexity"...

KKR: Japan 'Fertile Territory' for PE...what I get from this is that reforms in the corporate sector in Japan are still moving very slowly despite the country's economic problems of the last 15 or so years. The telling statement from KKR is this: "Regarding the slow change in Japan to embrace more efficient operations and shareholder value, Kravis commented that it will "eventually happen," but it will "take time" and is "not going to happen overnight." He said KKR believes there will be change"...the implication is that change hasn't been happening very much...

Crashes: The Florida Real Estate Craze...

"Florida became the popular U.S. destination/residence for people who don't like the cold. The population was growing steadily and housing couldn't match the demand, causing prices to double and triple in some cases, which was not exactly unjustified at this point. But, news of anything doubling and tripling in price always attracts speculators. So, once people began pumping huge amounts of money into the real estate market it took off. Soon everyone in Florida was either a real estate investor or a real estate agent.

Unfortunately, the rules are the same whether you pay too much for a stock or for a piece of land: you have to make that much more to claim a profit. This did happen for awhile, and land prices quadrupled in less than a year. Eventually, however, there were no "greater fools" to buy the disgustingly overpriced land, and prices began to adjust ever so subtly. Speculators realized there was a limit to the boom, and began to sell their properties to solidify their profits while they could.

Then everybody simultaneously saw the writing on the wall, and panic selling ensued. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower"

When did this happen? Not 2006, but in 1926...

WaMu Option Arm Capitalized Interest - And Why Its DANGEROUS..."In March of 2006, Washington Mutual recorded net income of $985 million dollars. 4Q06 they booked $1,058 mln. This last quarter, they booked $784mln.

But in those three quarters they booked $194mln, $333mln and $361 million, respectively, in PayOption ARM "Capitalized Interest." This was booked and recognized as EARNINGS.

Now here's the problem: In 1Q 06, 194 million out of $985 is 19.7%. In December, it was 31%. But this last quarter, it was FORTY SIX PERCENT, more than a DOUBLE over the year ago levels" they are recording as income interest that borrowers failed to pay(what is referred to as negative amortization)...I agree with the author of the linked post that WaMu is likely to have to eat quite a bit of this paper income at some point in the next couple of years...

Developers! Developers! Developers!..."A Seattle developer has proposed a mixed-use project in Columbia City aimed at providing homes typical workers can afford to buy, while another developer also has condo plans in the up-and-coming South Seattle neighborhood.

The 63-condo development, called Columbia City Place, would be built on a vacant former auto lot at 5201 Rainier Ave. S., and units would cost between $200,000 and $400,000"..."Shapiro said he and partner Murray Kahn are keeping prices down by using more basic finishes and wood construction for the upper floors, rather than concrete and steel, by installing above-ground parking and by building in Columbia City, where land is cheaper"...

IBM Gets Religion: Board Authorizes $15 Billion Stock Buyback..."We have generally been critical of tech companies overinvesting"..."We are all for innovation and opening new markets, which is also why we are against overinvesting in existing markets. Too much capacity has largely commoditized the semiconductor business. That industry would do better by limiting its capacity growth, investing marginally in new opportunities, and returning the rest to shareholders so they can put the money to use in other exciting new areas. Industries mature, and when they do they need to recognize their maturity and act their age"..."Credit Oracle (ORCL) for being among the first to recognize it - but in keeping with the general growth mindset rather than returning capital to their own shareholders they are returning it to the shareholders of companies they acquire. The end result is still less capital in the industry"...amen!!...

Monday, April 23, 2007

Japan and the fertility trap-a worst case scenario?

The way I understand how a negative scenario for population dynamics could play out in Japan is as follows:

Japan has a large segment of its population that is approaching retirement. When all of those people retire, they expected to be supported by the working population which is now far too small to support the large number of retired persons. Of course, theoretically those retirees should have some significant savings since we've been informed for years that the Japanese are great savers. So the burden of supporting a large retired population with a small labor force might be delayed for a few years. On the other hand, the use of savings by the retirees forms a wave of dis-investment that could torpedo efforts to offset the shrinkage of the workforce with robotic or mechanized production(of which much has been made in the press).

Political and social division ensue. Leaving aside the options the Japanese government has for handling that situation, pretty soon thereafter members of that retired group start dying. In 2006, according to's World Population Datasheet, there were 9 births for every 8 deaths in Japan. When the retirees start dying off, that ratio reverses and could go fairly high in the other direction, say 12 people dying for every 8 born. So massive population shrinkage ensues.

Since the population is shrinking, domestic demand naturally is shrinking as well, and therefore Japan becomes even more dependent on exports for positive GDP growth. In reality, once the ratio of births to deaths goes much below 1.0, positive GDP growth is not possible. The shrinkage in domestic demand will be too much for any increase in exports to overcome. And when the yen's value versus other currencies eventually rises to a realistic value, exports will drop off as well.

Since the population is shrinking, real estate prices decline steadily as well. So there could be a negative home equity effect on consumer spending.

Another major problem will be the large national debt built up which now will need to be covered by the output of a much smaller labor force. A default by Japan on its sovereign debt could occur.

Did I leave anything out?

Links of the day

Energy: The Technology Industry's Newest Sector..."Venture capital investments into innovations around energy more than doubled in 2006 to $1.8B invested in 183 companies. The increase was even greater in the alternative energy sub-segment, which jumped 272% to $727M in 39 companies"..."the recent increase in crude prices reflects more of a reversion to the mean from very low prices a few years ago. In 2003 crude was selling about the same price it did in 1983 ($26/bbl) despite the fact that inflation figures would allow crude to trade at more than double that figure and still be well within the envelope of a long-term decline in real energy prices"...

The Profitability of Ethanol Production..."
Ethanol producers earn $0.46 per gallon ethanol sold. This is a margin of roughly 30%"...

HP Extends Market Lead Over Dell..."HP saw more than 28.2% market growth, while Dell, the second overall PC manufacturer, saw -6.9% growth last quarter"..."HP's increasing domination can be attributed to several key factors. One of the main reasons is the company's renewed efforts to launch low cost PCs that can attract consumers who need a low-cost, efficient PC"...

Iraq may hold twice as much oil..."
Iraq could hold almost twice as much oil in its reserves as had been thought, according to the most comprehensive independent study of its resources since the US-led invasion in 2003"..."The study from IHS, a consultancy, also estimates that Iraq’s production could be increased from its current rate of less than 2m barrels a day to 4m b/d within five years, if international investment begins to flow"..."Production costs in Iraq are low, particularly compared to the more complex offshore developments. IHS estimates that they are less than $2 a barrel"...

Home Equity Is Rising Source Of Funds, Greenspan Paper Says..."Housing equity served as a growing source of funds for U.S. consumer spending between 2001 and 2005, financing close to 3% of total personal consumption expenditures, according to a paper co-authored by former Federal Reserve Chairman Alan Greenspan.

In the paper, posted on the Fed's Web site Monday, Greenspan and Fed Economist James Kennedy estimate that between 1991 and 2005, equity extracted through home sales, home-equity loans and cash-out refinancings freed up about $530 billion per year in cash available for other uses, such as consumption and debt repayment"...thanks to CR for the tip...

AMD may have lost almost one third of its market share in Q1, says iSuppli..."iSuppli vice president Dale Ford estimates that AMD’s overall market share in the microprocessor industry may have declined 4.7 percentage points from 15.7% in Q4 2006 to 11.0% in Q1 2007"...

Cisco: U.S. Enterprise Business Decelerating..."
the company has apparently increased “partner-focused incentives” designed to shift business in from the July quarter. “Based on the past three months, many resellers now believe that U.S. enterprises have begun to delay discretionary spending above and beyond normal seasonality typical of the [calendar] first quarter"...

Ontario Fuel Stop...a fascinating look at how one airline handled weather problems to get passengers on their way at aviation blog Rant Air...

Saturday, April 21, 2007

Light Rail Transit Success in Utah

Light Rail Transit Success in Utah?...posts a New York Times story describing how transit-oriented-development is being accepted by the market in the Salt Lake City metro area...Here's why:

As a Salt Lake metro resident I can fill you in on a few pertinent details.First, the primary TRAX line goes from a large mall-oriented development at the south end of the Salt Lake valley northward in essentially a straight line to the downtown area of Salt Lake City itself. The primary intent of this line was to allow commuters an alternative to driving to their jobs downtown. The secondary TRAX line runs on the same tracks as the primary line in a small part of the downtown Salt Lake City area and then swings east with its final destination as the University of Utah and its associated medical centers.The metro's bus lines have been configured to allow folks living east or west of the TRAX main line to catch buses that travel east-west routes that intersect with the TRAX line.Some destinations that are located right next to TRAX stops include the site of the Real Salt Lake soccer stadium that is being built, the stadium for the local AAA baseball team, the arena that is home to the Utah Jazz, and Temple Square.The reason that ridership is exceeding projections is because the TRAX lines go to destinations that are popular. In addition, commuters find that the light rail is a good alternative to driving when their offices are located in close proximity to light rail stations.

The reason that voters here approved the massive expansion of the mass transit system is that we recognize the benefits that the current system provides, and cities that are not located on the existing lines want lines that will connect with the main system.

Friday, April 20, 2007

Links of the day

Federal Reserve Limits Commercial Real Estate Financing..."the guidance looks to limit what it construes as the most risky loans–those where loans values exceed 100 percent of project costs"...

McDonald's a case study in adapting and succeeding

McDonald's Corp. said Friday its first-quarter earnings climbed 22 percent, boosted by surging sales in Europe and strong demand for its new U.S. menu items.(AP)

This is after all the hullabaloo from the movie about the guy who ate nothing but McDonalds' food for a month, and how McDonald's was supposedly responsible for an obesity epidemic.

McD's management has navigated its way through these troubles masterfully. McDonald's said it has recorded 48 straight months of higher sales from its established restaurants, its longest such streak since 1980.(AP)

Their addition of new products like snack wraps, more salads and premium coffee, and remodeling of restaurants to a more upscale feel are part of the company's resurgence. I have been very impressed with the decor in their remodeled stores; and I have seen analysis that indicates that McDonalds' coffee offerings are impacting Starbucks' results.

Europeans clearly like McDonalds' food as "
McDonald's quarterly results were boosted by a particularly strong March, with same-store sales rising 8.2 percent worldwide and 11.2 percent in Europe, boosted by a discount-price or value menu in the United Kingdom and successful promotions in Germany and France"(AP).

Google's first quarter report

Quick summary of the numbers:
-69% increase in profit from year earlier quarter = $592 million up to $1 billion
-66% increase in revenue from year earlier quarter = $2.25 billion up to $3.66 billion
-40% increase in searches from year earlier in February

Phil Davis has a very nice analysis of the report here:

-"If this is an arms race it is more like the one between the US and Mexico than the one between the US and Russia! Microsoft (notice we now ignore Yahoo) is fighting this battle with conventional forces and studying battle plans from the War of 1812 while Google is literally taking satellite images of their offices and devising strategies for battlefields that haven’t been invented yet"...

-"Make no mistake about it, Google is one of our country’s greatest exporters, pulling in over $100M a month in overseas revenues (imagine our trade balance without them!)"...

Eric Schmidt in the conference call said "Each of these strategies involves creating solutions that benefit both advertisers and users, and it is the synergy between them that we have been able to harness. Targeted, useful, effective advertising will continue to be our mantra; you all know that, of course. Technology and efficiency is the core of our technology approach, and it really does benefit end users." The contrast between Google's excellence in execution and Microsoft's stumbling and fumbling couldn't be greater. The cultural difference between these two companies is epitomized by Schmidt's statement. It is clear to everyone that Microsoft's main goal is to continue to milk their installed base while they fumble around trying to find a coherent strategy for the future.

Meanwhile, the contrast between Yahoo and Google is nicely summarized by this headline from another SeekingAlpha post: Google: Twice Yahoo's Size, Growing Revenues Nine Times As Fast...

Thursday, April 19, 2007

Loosening of lending standards has taken place in commercial RE too

As evidence, I submit the following post from the Retail Traffic Court blog at the website Retail Traffic:

"Retail Traffic Associate Editor Elaine Misonzhnik is at the ICSC Carolinas Idea Exchange conference and is offering observations from the show. Here’s her first dispatch.

Cap rate compression is causing some concern in the region. With asking prices often out of sync with market fundamentals, Daniel Taub, senior vice president of Pleasanton, Calif.-based Ross Stores, is worried that buyers will not be able to get sufficient returns to justify these purchases. “Rents have not appreciated enough historically in most markets to justify lower and lower cap rates,” he said.

Taub thinks that lax lending standards are partly to blame. “There is a degradation of discipline in the marketplace because there is so much new, in some cases unsophisticated money, that’s compressing cap rates,” he notes.

The problem will have the biggest impact on class B and C assets and on markets with less than 100,000 people, according to Richard Lietz, regional vice president with Tarrytown, N.Y.-based DLC Management. “There, the pressure really makes a retailer re-evaluate the rents because there is not enough return,” he said."

Explosion of earnings restatements is due to...

the fact that companies weren't spending enough on internal and external auditing pre-Sarbanes-Oxley. says "An explosion in accounting errors — in part reflecting the difficulties of today's complex rules — has forced nearly a quarter of U.S. companies to learn the art of the restatement."

Later in the story, the author states "Reports showing the prevalence of errors due to equity accounting, followed by expense recognition, general "misclassification," acquisitions and investments, revenue recognition, and tax accounting, confirm for (Glass Lewis managing director Jonathan) Weil that companies weren't spending enough on internal and external auditing pre-Sarbanes-Oxley. That, as much as harsh rule-making, was at the root of many restatements. "Find me one major institutional investor who has ever complained about auditor fees," he says. "Glass Lewis doesn't like excessive costly duplicative regulation either. But the stronger regulation you have of internal controls, the lower the cost of capital should be for companies."

Well, the problem with that is CEO's generally want to spend as little as possible on the accounting function. They want quick and dirty ERP financial implementations, and don't want to hire enough staff to properly implement financial systems and then maintain those systems. At budget time, the accounting department is generally at the bottom of the priority list. The linked article quotes a Grant Thornton principal who agrees:

"Companies are in business to produce their product and sell it at a profit, and the reporting of the processes around that is a secondary goal," he says. "In some cases, it's become too secondary."

Further, the article states that "Generally, companies have tried to keep auditing fees at a minimum. Glass Lewis managing director Jonathan Weil, the editor of the San Francisco–based firm's financial research, suggests that restatements often stem from companies having spent at "ridiculously low levels" for their pre-Sarbanes-Oxley auditing."

How to foul up your company

Do what 3D Systems Inc. did, according to this story at

"The headquarters were being moved from southern California to a new Rock Hill, South Carolina, facility. It was outsourcing its global logistics to UPS. And an Oracle Corp. enterprise resource planning system had gone on-stream in the second quarter."

Undertaking three major operational changes at the same time is almost a guarantee for severe problems. This company wound up with results like this: "CFO Fred R. Jones "stepped down by mutual agreement," and was replaced as interim finance chief by Gerald J. Pribanic, a partner with executive services firm Tatum LLC. Then, a delay in filing the annual 10-K report led to a notice from Nasdaq that 3D Systems' stock is subject to delisting, although 3D Systems continues to trade while it appeals the notice." Also, "According to an August company news release announcing preliminary third-quarter numbers, 3D Systems "quickly began to experience unforeseen disruptions and delays in operating the system." Other things were going wrong, too: supply-chain glitches, for example, complicated the entering and processing of customer orders."

Update: The Motley Fool commented on this company as follows:

I just don't see 2007 as the breakout year for 3D Systems. It will be busy getting its house in order after the accounting mishap, not to mention the disruptions caused by a move to a new enterprise resource planning system. The company has stayed aloft this long in part because of the successful defense of its patent portfolio, but it can't glide on that resource forever."

Links of the day

Nissan to Launch Clean Diesel Maxima in U.S. in 2010...that's good news; I would be interested in one...I currently am driving a 1993 Altima with 156,000 miles on it and it still runs nicely...

Gold not really a great investment?...Here's a chart found at Institutional Economics that shows the real price of an ounce of gold since 1900...

Micro-Innovation: vacuums..."Joel Moykr is an economic historian who argues that much technological progress comes from small improvements, and these little improvements are complementary to the large improvements that most people focus on"...example is "the vacuum cleaner, as Dyson created this new vacuum based on cyclonic separation"...check out the link for a diagram...

Analysis of Intel stock trades based on dollar flow..."
Recall that dollar volume flow looks at whether transactions occurred on upticks or downticks and weight those transactions by their dollar volume. As a result, it's an excellent indicator of institutional interest in companies and sectors"...
The Fannie & Freddie Bailout: Less Than Meets the Eye...
"There is some good news in yesterday's announcements, but it doesn't have much to do with the headline $20 billion figure. What Fannie and Freddie announced yesterday is important rather because it finally creates an official criterion for what constitutes a good subprime mortgage. Banks love to write loans which conform to F&F's standards, and now they can do that in the subprime market. That will go a long way to reducing the amount of dodgy mortgages being written – although of course underwriting standards have already tightened up an enormous amount since last year.

In the meantime, though, individuals facing foreclosure today, or people who live in a house they can't afford, should take little comfort from the headlines. None of this is going to help them in the slightest"...

Pension Watch..."That approaching wave of pension debt is bigger than it looks. The purpose of this site is to provide an overview of the multiple pension crises that are about to drown America's taxpayers"...a wealth of information and links are made freely available...nice...

A list of 750 real estate blogs...

Improving economic conditions in Washington DC?..."Washington D.C. and the surrounding area has undergone a dramatic transformation that has re-cast the area as a dominant retail hub—rivaling for the first time cities like Los Angeles and Boston"..."Retail spending in the Washington D.C. region is now $19.2 billion a year—nearly double Boston’s figure of $11.2 billion and greater than Los Angeles"...

Commodities Bubble Not Bursting Any Time Soon..."
Year to date, the Standard & Poor's 500 Homebuilding Index, which includes large builders such as Pulte Home Inc. and D.R. Horton, is down 20 percent while copper prices are up 86 percent. Is China really buying all that copper?

The answer provided here in Dissecting the Duck Diagnosis, a rebuttal to Ms. Baum's column (long before the two of us exchanged emails earlier this year) was "Uh, Yeah"....

Wednesday, April 18, 2007

Georgia (the country) is reforming

The Private Sector Development Blog says that "Georgia had the biggest drop in corruption in all of Europe – last year in a survey 95 percent of Georgians reported not having to pay a bribe to receive public service." That is good news. Other reforms mentioned include:
-"Slashing the number of taxes from 22 to 7; a tax rate reduction from 60 to below 40 percent, which more than doubled the revenues"...
-"Further cutbacks in payroll and corporate taxes – all from a new single taxation authority – are scheduled for 2008"...
-"Abolition of most tariffs, combined with a reduction in the time required to import goods from 52 to 4 days"...
-"Eradication of 756 business licenses and permits"...

There is more on Georgia at the link above...

Are derivatives being valued properly?

One Jesse Eisinger considers this question at Market Movers. Since the credit derivatives business is essentially an insurance business as pointed out by Eisinger, we have to ask how skilled are the insurers(swap sellers) at underwriting(doing due diligence) on the asset they are insuring; and whether the insurance sellers keep any minimum amount of assets in storage to allow them make good on their policies(swaps). My belief (and Eisinger's) is that the answer to question one is "not very" and the answer to question number two is "probably not".

So if a particular credit defaults and the swap seller can't make good on its policy, the swap(insurance buyer) loses both the cash they paid for the insurance plus the cash lent to the borrower. It is as if a Florida resident bought a house and storm insurance, and a hurricane comes through, blows their house down, and the insurance company sold so many policies that its claims exceed the value of the assets it has been holding in anticipation of claims. The resident loses the policy payments they had made plus their house; and are probably still stuck paying the mortgage on a now nonexistent house. That's a triple whammy!

Links of the day

Calculated Risk has posted some information from a press release by a Downey Financial (DSL). The shocker in there is this: "Neg am ARMs are down to a mere 81% of portfolio, from 92% a year ago." This company looks like a time bomb waiting to go off. The comment thread attached to the post has a good discussion of how this particular lender might be able to manage its loans without collapsing...

Google's Deal For DoubleClick Could Be The End Of Yahoo..."
Combined with AdWords, DoubleClick could give Google the ammunition it needs to kill Yahoo.

If Google had any one weakness when it came to fighting Yahoo, it was display advertising. Not anymore. This deal gives Google a straight shot into the world of online branding. Google has been working for the last several years to build relationships with Madison Avenue. Now Google can use DoubleClick to enhance these relationships.

Even more importantly, Google can combine its AdWords and contextual advertising technologies with DoubleClick's platform and backlog of data to deliver the most comprehensive, contextual, and behaviorally-driven online ad solution on the market"...

Homebuilders have low-profile obligations that force them to keep building... From "Breaking News", pg C16 of 3/28 WSJ...

"The top five(builders) have almost $13 billion in commitments to local authorities, having promised to build the necessary infrastructure for new housing developments. They back these commitments with surety bonds, which are pledges to pay a municipality a big slug of money if a builder doesn't finish a project. These surety bonds total between a quarter and a third of the book value of the leading home builders. Centex's $6 billion of surety bonds actually exceeds its book value, though it estimates it has just $2.5 billion of work left to complete. In a recent regulatory filing, Lennar revealed it had $1.8 billion of these commitments. However, they won't affect its balance sheet unless they are triggered.

The surety bonds make it tough for home builders to walk away from projects. With land prices falling, disposing of development land and dealing with surety bond commitments is costly. This leaves home builders with one option -- to keep building. But that's not appealing either, as home sales are falling and inventories keep rising. In more than one way, the builders have dug themselves a hole"...

"Lawmakers Resist Bailout of Subprime Borrowers"..."Democrats and Republicans have been careful to say they won't legislate a "bailout," which ostensibly would pay off the balance of delinquent loans to protect people's credit. While other legislative approaches are debated, Congress is pushing regulators and the industry into action."

"Testifying at a hearing in the House Financial Services Committee yesterday, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks and investors contributed to the boom in subprime lending with exotic products and loose standards, so they should be held accountable now that times are tougher. "I think we should hold the servicers' and investors' feet to the fire on this," Ms. Bair said. "It was clear to investors that these were high risk. I think everybody needs to share the pain now."...this is very good news...

Just discovered a blog at called "The Numbers Guy" describes itself as
The Numbers Guy examines numbers in the news, business and politics. Some numbers are flat-out wrong or biased, while others are valid and help us make informed decisions. Carl Bialik tells the stories behind the stats, in daily updates on this blog and in his column published every other Friday in The Wall Street Journal. Carl, who holds a degree in mathematics and physics from Yale University, also cowrites The Daily Fix, a sports column on He welcomes your comments at"

From's Washington Wire:
" Distracted by violence in the Middle East, the U.S. isn’t paying enough attention to the region, losing its regional influence to a rising China and potentially weakening antiterrorism cooperation, the Singaporean prime minister cautioned in an interview.

In Southeast Asia, America has “many friends and many strategic interests,” Prime Minister Lee Hsien Loong told The Wall Street Journal ahead of talks with President Bush scheduled for early next month. Noting that the conflicts in Iraq and Afghanistan increasingly dominate Washington’s political agenda, Mr. Lee, 55, repeatedly stressed that the U.S. needs a closer engagement with Southeast Asia — a region of some 500 million people that includes the world’s most populous Muslim country, Indonesia, and some of the world’s most dynamic economies. America’s focus is elsewhere

Unlike the U.S, he said, China has been very skillful in increasing its economic and political clout across this area, which includes traditional U.S. allies like Singapore, the Philippines and Thailand, and valuable oil and mineral resources. “The Chinese are very active, assiduously promoting their relationship with Southeast Asia,” Mr. Lee said. “They’re very good at it.”...I agree with the Prime Minister's views :)...but it is not possible for any US Administration to make every region of the world top's important to recall that when President Bush was first elected his top priority was Mexico and Latin America, and that was knocked aside by 9/11...