Monday, March 31, 2008

The origin of "K Yew"

Some readers might notice the "K_Yew" nickname I have on my blog, but in no way is this a cute phonetic bit. The International Heald Tribune did a wonderful interview with Lee Kuan Yew that I just discovered. Here is one of my favorite bits from the interview:

The system works regardless of your race, language or religion because otherwise we'd have divisions. We are pragmatists. We don't stick to any ideology. Does it work? Let's try it and if it does work, fine, let's continue it. If it doesn't work, toss it out, try another one. We are not enamored with any ideology.

Let the historians and the Ph.D. students work out their doctrines. I'm not interested in theories per se.

It should not surprise anyone that this man is one of my heroes. The full interview is below, but if the link expires, you can go to the International Heald Tribune, Asia-Pacific, and do a search for the full interview, which spans eight pages and is dated August 29, 2007.

Wednesday, March 19, 2008

Starbucks Shareholder Meeting (Howard Schultz: "This will not stand." )

Puget Sound

U of Washington Law School

Seattle's Museum of Flight

First Starbucks at Pike's Place Market

Pike's Place

I went to the lovely city of Seattle to attend my first Starbucks (SBUX) shareholder meeting. This particular meeting was highly anticipated because of Howard Schultz. After leaving the CEO helm, only to see a downward spiral in SBUX's share price, Mr. Schultz returned and was greeted as an anointed savior. My friend said he looked like a cross between Pat Riley from his L.A. days and a Sopranos character, and he meant it as a compliment. Mr. Schultz does come across as a street-smart, wiry Mafia guy who was born to lead. (His slicked-back hair and nice suits draw comparisons to Pat Riley, another man from humble origins.)

First, let's talk about Seattle: the city is clean, fun, and mid-sized. I wanted to spend some time seeing the city, so I planned a three-day trip. The first two days, I felt like I was in a ghost town, because after being in San Jose, which has twice the population, Seattle felt tiny at just 500,000 people. On the other hand, the upside of fewer people is a better ability to control the local environment. As a result of conservation education and being so close to several lakes and near Puget Sound, Seattle's air feels noticeably clean and healthy. Indeed, one look at the view around Puget Sound, and you can't help but relax. Larger cities often forget that they are virtually concrete and asphalt fortresses, and spending a few days in Seattle proves that modern urban living and the environment can harmoniously co-exist.

Besides the cleanliness and beautiful lakes, Seattle distinguishes itself by having no state income tax. While that does seem to reduce government spending, it also results in making some cities, like Bellevue, into designated shopping mall areas and not much else ("Old Bellevue" is one unexciting, short block). Thus far, the retail businesses have left plenty of land for other uses, and with a sales tax of around 9% generating significant revenue, it seems reasonable to assume Seattle will continue to welcome retail establishments.

I would suggest skipping Bellevue, as well as the Space Needle (Seattle's version of Toronto's CN Tower, allowing visitors a bird's-eye of the city). After Chicago's Sears Tower, the Space Needle seemed unexciting and smallish to me. Instead, spend your time walking up and down "The Ave" near the University of Washington (don't miss the majestic George Washington statue near Red Square) and Broadway Street, Washington's version of Berkeley's Telegraph Street. I had a fantastic time walking up and down the Ave and Broadway.

The other "touristy" areas are Pike's Place, Pioneer Square, and the International District, all within walking distance from each other. The "original" Starbucks is at the Pike's Place, and was fun to see, old logo and all. Pioneer Square has an interesting memorial dedicated to firefighters who died in the line of duty and a few bars and shops, but not much else. A few blocks away are a small Chinatown and Little Saigon (after the trouble San Jose has had with this name, I chuckled at how common the "Saigon" name seems elsewhere). Neither district impressed me much, as they consisted of only a few blocks. Other than good restaurants--including one that sold a delicious durian milkshake--the "Asian" districts didn't seem to offer anything unique.

Seattle owes quite a bit to its Asian population--one of the first Boeing designers was Chinese, and Asian immigrants have revitalized the city. Seattle calls itself diverse, and nearby the university, it certainly is; yet, when compared with such an integrated Asian population in the main downtown and university areas, the International District seemed to include a less upwardly mobile immigrant population.

The Flight Museum, nearby the airport, was also fascinating, if you enjoy seeing actual, life-size planes used in World War I and II. There was even a miniature model plane section, which displayed about 100+ mini-planes. The price of admission included seeing the inside of an older Air Force One and Concorde. The Concorde wasn't much different from a regular plane on the inside, but the aerodynamic design was obviously novel at the time. Air Force One was plush, as expected, with some couches and large seating spaces.

Some downsides to Seattle: a) the water coming out of my hotel faucet was opaque; as a result, I would recommend not drinking Seattle's tap water; and b) Seattle is very eco-conscious, and seems to discourage driving by making parking somewhat expensive and limited. Parking is not an issue for tourists like me, who can use Seattle's decent bus system, and the parking situation is nowhere near the level of difficulty in San Francisco; at the same time, it was unusual to see a city discouraging personal transportation.

Now, to the main event: the Starbucks meeting took place at the Seattle Center in the Queen Anne neighborhood (near the Space Needle). Schultz came out to cheers from the audience, and immediately launched into a motivational speech about how although these were tough economic times, Starbucks needed to focus on making better coffee to attract customers back. His speech was geared to both shareholders and employees ("partners"), and many SBUX partners came to the meeting. After telling everyone that the poor performance "will not stand," Schultz had several ideas on how to improve sales, including using a new espresso machine that allowed the fresh aroma of beans to permeate the stores ("Mastrena"). This machine also had a lower height, allowing more interaction with customers. The SBUX baristas cheered the lower height of the machine, but it was unclear whether the cheers were because their shoulder muscles would be less weary, or whether they were looking forward to the prospect of easier eye contact with customers.

Mr. Schultz also announced Starbucks' acquisition of a local company that invented a machine that brewed an individual cup of coffee in seconds, creating a single, ultra-fresh cup of coffee ("Clover"). In addition to those two innovations--the "Mastrena" and the "Clover," Schultz introduced a loyalty card that allowed regular customers to receive their "customizations," such as syrup shots, for free, as well as a partnership with an eco-company (whose direct impact on the bottom line was ambiguous). There were a total of six new ideas, including a web-site for customer feedback and the introduction of a new blend of coffee, but the Mastrena was the main upgrade.

k.d. lang performed a few songs, and her voice was beautiful, even better than her "Constant Craving" days. Her rendition of Leonard Cohen's "Hallelujah" was inspiring. (Starbucks doesn't announce who their annual musician will be, which creates additional buzz around their meeting.)

The other entertainment highlight was Mr. Schultz playing a "Colbert Report" clip on the host's travails when SBUX shut down for a few hours to re-train employees (Schultz said, in all earnestness, that the limited shutdown was not a publicity stunt). Upon leaving, each shareholder was given a bag with some SBUX goodies, including a CD (I learned that Aretha Franklin copied her "Respect" song from Otis Redding), a mug, and some coffee beans. All in all, the meeting was a great experience.

Wednesday, March 12, 2008


Teachers and government employees always ask for more money, claiming that they cannot attract good employees because entry salaries are too low. Putting aside the argument that government employees exchange, in some areas, somewhat lower salaries than their private industry counterparts for a pension and other benefits, the amount of money government employees have taken from private citizens is vast.

Benn Steil, Director of international economics at the Council on Foreign Relations, provided recent numbers on how much private citizens have given California's state government (Wall Street Journal, March 2008):

The Public Employees' Retirement System has 259 billion dollars in assets.

The State Teachers' Retirement System has 169 billion dollars in assets.

Even so, these entities are underfunded in future obligations/payments, meaning that they will most likely put initiatives on future ballots asking for more funds/taxes from private citizens.

Applied Materials (AMAT) Shareholder Meeting (March 11, 2008)

I attended AMAT's shareholder meeting yesterday. All in all, it was uneventful. Only two people asked questions, and I was one of them. (Quite a contrast from the Apple meeting.) The food was above average--Starbucks coffee, some fruit sticks, and pastries.

AMAT did have an excellent presentation showing that its nano-manufacturing technology was used in many applications worldwide. More specifically, the projected growth for products relating to LCD displays and solar technology was high, and AMAT indicated it was well-placed to achieve sales in those two areas.

Much of AMAT's revenue comes from Taiwan and South Korea. I asked what companies in Taiwan were AMAT's major buyers of products, and the CEO answered that it was mainly DRAM manufacturers. Such companies would most likely include Inotera and Nanya Technology; however, neither of those companies offer ADRs in the States. American investors can buy SMOD if they are interested in Taiwanese DRAM makers. (A search also uncovered this unrelated, interesting stock: TRCR.)

My original thinking was that if AMAT was projecting high growth in certain areas, its future stock price could be ascertained by checking its Taiwanese buyers' health. But the picture is more complicated, I found, because even if the Taiwanese companies buy more products from AMAT, overall prices need to stay stable to increase profits. Favorable margins are a key component of growth, and Inotera's President has said that a sharp decline in DRAM prices has caused Taiwanese DRAM makers to cut back on their capital spending plans this year. Thus, the question is whether AMAT's buyers will decrease overall spending and hurt AMAT's ability to sell more of its products. I don't know--the shareholder meeting, while well-done, left me with more questions than answers.

I did discover another (non-legal) definition of "deposition"--page 2 of AMAT's 10-K states that a deposition is also a "fundamental step in fabricating a chip. During deposition, layers of dielectric (an insulator), barrier, or electrically conductive (typically metal) films are deposited or grown on a wafer."

Overall, AMAT's shareholder meeting was professional and informative, but scarce on specifics.

Thursday, March 6, 2008

Adobe and Stock Investing ("The Wide Moat")

All the talk about Adobe's technology not being compatible with the iPhone made me wonder if its stock was still a good hold or buy. One key to investing is making sure you don't buy outdated manufacturers or companies that have products out of favor with consumers. Warren Buffett famously refused to invest in tech companies during the 2000 stock market boom/bubble, avoiding companies he did not understand because he could not calculate whether a particular technology would survive long-term.

Taking a look at the top 40 companies in Santa Clara County in 1982 and 2002, I recognized only 20% of the top revenue-generating companies on the 1982 list--and most non-stock-investors would only recognize three or four names. After Steve Jobs' comments at the Apple shareholder meeting, I became more curious about Adobe's product, especially because I own shares in both Adobe and Apple. I wondered whether Adobe would be one of those companies missing from the 2022 list. Mr. Buffett has a metric called a "wide moat." Basically, a wide moat is how secure a company's product is from competition/attack. Imagine being in a castle and having no moat. You will be invaded and possibly vanquished. But with a wide moat, attackers need to spend more time, energy, and resources to attack you and might avoid your territory. I asked one my friends, whom I've known since high school and who has always impressed me with his tech knowledge, whether Adobe had a wide moat. Here is his response:

PDF is an open international standard created by Adobe.

Anyone can create software that uses or reads PDF files. PDF is actually native to Macs. The imaging model of Mac OS X is PDF. The Preview application can display PDF files, as can version 2.0 and later of the Safari web browser. System-level support for PDF allows Mac OS X applications to create PDF documents automatically. When taking a screen shots under Mac OS X versions 10.0 through 10.3, the image is captured as a PDF; in 10.4 and 10.5 the default behavior is set to capture as a PNG file, though this behavior can be set back to PDF.

In other words, on a Mac virtually all applications can read and create PDF documents without downloading any software from Adobe.

Microsoft hates PDF and is trying to replace it with XPS, but they have been unsuccessful so far. Windows Vista comes with the tools necessary to create and read XPS documents. Some third party companies have created XPS tools for Macs and Linux systems. Thus, Adobe provides all PDF software for Windows systems.

So you might wonder then why do people buy Adobe PDF creation software for Windows and Macs? Yes, that's right, Mac users buy PDF creation software from Adobe too. The answer is that the PDF format is much like Microsoft Word. Over the many years of its existence, it has become a big fat pig of specifications and rules. The *only* software capable of reading and creating every feature with 100% accuracy is Adobe's software. The main reason for this is because Adobe adds new stuff to the PDF specification almost every year. For example, Adobe PDFs support DRM. Their DRM scheme was broken and thus Adobe added a new DRM scheme to the following year's specification. If you want to make 100% product you would need to implement both DRM schemes. However since only enterprise customers use the DRM feature and average-joe- computer user could care less, they don't need a reader with DRM support. Thus, most non-Adobe PDF software does not implement PDF DRM support.

PDF has many features of this sort that are only used by niche customers (e.g. enterprise). Enterprise customers have money and thus are willing to pay for these products. Windows users usually have no choice but to buy Adobe's software if they want to *create* PDF files. Mac OS X users can create basic PDF files for free, but if they want to use features like forms support then they too will have to buy Adobe's PDF creater.

In the same token, Google Docs lets you import Microsoft Word documents, but it doesn't support every feature of a Microsoft Word document. Often Google Docs users will import a Microsoft Word document only to discover the formatting is messed up in some way. So then those users go back to Microsoft Words for their documents.

BTW, Adobe's bread-and-butter product is not PDF, but Photoshop. Photoshop is the de facto standard for Digital Art. Although there's free alternatives like GIMP, Photoshop has huge following with a large investment in education and training. When you go to college to study Digital Art, you are taught Photoshop. Photoshop is the standard. Transitioning to GIMP from Photoshop is too hard. So, most people just end up buying Photoshop when they graduate (or download a pirated copy from the net). If your business deals with Digital Art like Apple, then you buy lots of copies of Photoshop.

There you have it. I am holding onto my Adobe shares. And for the record, I didn't think Mr. Jobs was trying to disrespect Adobe with his response to my question. I think he was just trying to say that no such product existed, and if anyone could create such a product, it would be a boon for the tech industry.

Wednesday, March 5, 2008

Apple Shareholder Meeting Follow-Up

This news story is based on the question I asked re: Adobe at the Apple shareholder meeting--the story's negative slant was surprising, especially because it excluded Mr. Jobs' positive comments about Adobe at the meeting:

Adobe's Flash Player Not Suited For Phone, Apple CEO Says
Dow Jones

"Adobe Systems Inc.'s (ADBE) popular media player for cellphones simply isn't good enough for Apple Inc.'s (AAPL) iPhone, Apple Chief Executive Steve Jobs said Tuesday in the most substantive comments to date about why the iPhone can't now be used to view a large percentage of videos on the Internet."

"Apple's iPhone, with all its cutting-edge mobile Internet trickery, needs something much better than the current Flash player that Adobe makes for cellphones."

Perhaps the more accurate term would be much "faster," not "better." Basically, Adobe's existing software is designed for larger electronics, like laptops, not devices as small as the iPhone. But Jobs didn't seem like he was intentionally slamming Adobe. He was saying that no product existed that provided the speed he needed--he said, "There's this missing product in the middle.

This part is interesting: "The companies have a history of strained relations. Several years ago, Adobe dropped support for Apple's Macintosh computers and then introduced other software products that were only compatible with Microsoft Corp. (MSFT) software...With the continuing tensions over the iPhone, it appears the two may be drifting further apart."

See, this is surprising, because neither CEO seemed to indicate that there were any strained relations, at least not currently. Still, it makes for good drama in the high tech Valley.

The article was written by Ben Charny; Dow Jones Newswires; 415-765-8230.

Tuesday, March 4, 2008

2008 Apple Annual Shareholders' Meeting

I always enjoy attending Apple's shareholder meetings. Apple's meetings are like no other company's annual meetings, except for possibly Berkshire Hathaway. People today who asked questions traveled from Wyoming, Kentucky, and Pennsylvania. I asked a question about Adobe's relationship with Apple and why the iPhone was incompatible with Adobe's flash technology. Steve Jobs responded that the Adobe flash was too slow to be used in the iPhone, and thus far, no one had developed a similar technology that could be applied to smaller devices such as the iPhone that did not suffer from a loss of speed. He reiterated that Apple used Adobe extensively in its Macs and that the relationship was fine, and the iPhone issue was not an Adobe-specific issue because no company had the necessary technology.

Apple's meetings are fun because people feel comfortable enough to make comments as well as questions. Today, an older shareholder mentioned that last year he came with a tie, and this year, he had learned not to let his "generational handicap" get in the way and came tie-less (I actually wore a tie but was the only person I saw wearing one). Others asked specific questions about technology. What makes Steve Jobs so special is that he seems to know all of the features and quirks of his products, even to the most minute detail. As a result, Apple attracts a lot of smart shareholders who love the technology and can't wait to ask Mr. Jobs questions.

Apple's board of directors included Al Gore, who attended today. When he entered the room, most people started clapping. He has gained some weight and looks like a football linebacker--big, with a presence.

One shareholder proposal on executive compensation actually passed, causing Mr. Jobs to crack, "I hope you can help me with my one dollar annual salary." Comments like these make Mr. Jobs a joy to watch--even when he loses something, he still lets you know he's right, and he's on top of the matter. In someone less charismatic and prepared, this attitude would be insufferable. But Steve Jobs, in creating a viable competitor to Microsoft, has the allegiance of all the "Macheads," who view him as a genius sent from the tech heavens. In fact, almost every year, someone inquires about what will happen to Apple if he leaves or "gets hit by a bus."

At the end of the meeting, I went to shake Steve Jobs' hand. He is a wiry fellow, much trimmer than he looks on television. Immediately after the meeting, he went in a corner to talk with Eric Schmidt of Google before coming down to chat with the shareholders. Perhaps he was talking about a new Google-Apple product. With Steve Jobs, you always wonder what the next big thing is going to be, and that's the wonder of being an Apple shareholder and user.

Monday, March 3, 2008

"Burning Platform"

The information in recent posts relating to bond ratings and the declining dollar has far-reaching consequences. Take a look at this headline from the Financial Times, January 11, 2008: "US's triple-A credit rating 'under threat'"

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody's, the credit rating agency, said yesterday.

The warning over the future of the triple-A rating - granted to US government debt since it was first assessed in 1917 - reflects growing concerns over the country's ability to retain its financial and economic supremacy.

Also from the Financial Times, August 14, 2007:

Drawing parallels with the end of the Roman empire, Mr. David Walker, former U.S. Comptroller, warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”

“Sound familiar?” Mr Walker said. “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Mr Walker’s views carry weight because he is a non-partisan figure in charge of the Government Accountability Office, often described as the investigative arm of the US Congress.

Sunday, March 2, 2008

Bond Ratings Explained

In my February 29, 2008 posting ("Warren Buffett's Letter..."), I mentioned that California's bonds were rated the second-worst in the entire country (single A). Why is this problematic? Two reasons: 1) the relatively low rating shows that the health of the state economy isn't as stable as it could/should be; and 2) low bond ratings mean that future expenses may exceed future revenue, making borrowing for new projects (think schools, tax credits to the poor, new roads and bridges, etc.) prohibitively expensive. In short, Californians may not be able to maximize funds for future generations if bond ratings do not improve.

Let me put this in perspective. California's rating is A. Investment grade bonds are bonds rated in the top four quality categories by either Standard & Poor's (AAA, AA, A, BBB) or Moody's (Aaa, Aa, A, Baa). Some readers might think that the credit risk assessors have rated Californian bonds in the top three, so there is no problem. But, as I stated above, California has the second worst rating in the nation, which means that the accountants who have studied our expected revenue and expenses are saying that our economy is projected to be the second worst place to invest in the entire United States. Moreover, our lower bond rating means that we have to pay a higher interest rate if we want to borrow money, which, over time, could create more liabilities for our children in the form of billions of dollars of interest payments. Other than mis-management and the irresponsibility of our elected representatives, there are no reasons why liberal Oregon, post-Big-3 Michigan, low-growth West Virginia, and high-growth Texas should be able to issue higher-grade investments than California.

Furthermore, California's economy is one of the top ten largest economies in the entire world, so its low bond rating means that the state is not budgeting well at all (i.e., our elected representatives are concealing future costs, or enriching themselves or their lobbyists' pet projects at our expense), and if we enter a recession, the effects would be felt world-wide. As a result, this bond rating exposes a crack in California's economy that could potentially impact not just you, but that 13 year old kid in Thailand who makes clothing to sell to us.

I own a T. Rowe price international bond fund. In my bond fund, 56% of the bonds held have higher ratings than California's bonds. The bond invests primarily in Austria, Malaysia, Italy, Japan, France, Germany, and the United Kingdom. Already, some of T. Rowe Price's investors have basically decided, "Why invest in California if you can get an equivalent, more stable return internationally?" Meanwhile the EU's GDP is now equal to the U.S. It doesn't it take a genius to figure out what will happen if this trend continues. We must take measures to fix these issues lest the price of oil and other major commodity indices become denominated in euros (or some other currency), causing Americans to spend the majority of their days working to pay taxes to Washington, D.C. so that our representatives can use those funds to send payments abroad.

For a more in-depth explanation of bond ratings, see

The Wire, Season 2

I'm only on the second season of The Wire, but David Simon is looking like a genius. The actors in this series are aren't the normal Hollywood contenders--they're gritty and real, and one risk of seeing these characters for six seasons in one role means they will be typecast with the crime genre far more than other actors, limiting their overall exposure.

The Wire
's first season seemed long. I know now that Mr. Simon was developing his characters for upcoming seasons, and the first season was like the first 50 pages of a good 400 page book--somewhat tedious, but necessary. The second season was flawless. It deals with the ports and the shipping unions, which we do not normally see or hear from, but are vital hubs of activity nonetheless. One of the best-developed characters, Frank Sobotka, says something poignant about the state of our economy:

"You know what the trouble is? We used to make sh*t in this country, build sh*t. Now we just put our hand in the next guy's pocket."

It's exactly what Warren Buffett is saying about the U.S. economy and the American trade deficit, but it hits home a little harder coming from a non-billionaire.