I attended the Adobe Shareholder meeting in downtown San Jose. CEO Shantanu Narayen--who has my nomination for the coolest name in business--stayed afterwards to chat with a few shareholders. He was articulate and obviously extremely intelligent. Some CEOs don't come across well at all (Atmel's George Perlegos comes to mind), but Mr. Narayen presents very well. For such a well-recognized company, very few shareholders attended the meeting, probably around 20 or so (aside from the directors).
In a nutshell, Adobe is doing very well. Almost every metric of measuring profit showed improvement, usually by at least 20%. Software has great margins, so it is usually a good business, assuming a competitor doesn't make it obsolete. But with 2 billion or so in cash, Adobe can pull a Microsoft and buy out its competition.
The refreshments were average, the usual spread of coffee, some fruit, and some muffins.
Following the Adobe/Apple saga, I asked about Adobe's relationship with Apple, and the CEO remarked that the relationship was fine and that Adobe had access to Apple's newly released code and was working on an application for cell phones called Flash Lite. Adobe seems to be creating new products that will allow it to remain the standard in the marketplace. Overall, I was impressed with the company but concerned that it was not doing enough to increase its profile in Wall Street. Adobe may want to hire a PR firm to increase its visibility among traders and the public.
"And if an epitaph be my story, I'd have a short one ready for my own: I had a lover's quarrel with the world." -- Robert Frost
Wednesday, April 9, 2008
Saturday, April 5, 2008
Jagdish Bhagwati's Free Trade Today
Professor Bhagwati has published a number of economic books and is becoming a "hot" name in the academic world. I recently read one of his earlier works, Free Trade Today. I dislike his writing style, which carries a strange odor of disarming arrogance. Still, no one can doubt Professor Bhagwati's diligent research--there were 114 footnotes in a 120 page book, some to his own works (hence, the arrogance).
This book was divided into three chapters. The first one, a defense of free trade, was impenetrable. For example, Prof. Bhagwati says that in a recession, the free market is failing to pay people their properly calibrated wage, and responding to unemployment with tariffs in an attempt to spur domestic consumption only makes the problem worse. This is because the real answer to unemployment is to create higher demand , and tariffs curtail more demand for services by limiting entrants into the market. But here's how Prof. Bhagwati expresses these thoughts:
The Keynesian warming to protection in times of unemployment due to deficiency of aggregrate demand evidently derived from the notion that tariffs could divert aggregrate demand from foreign to domestic goods. But from the viewpoint that I am setting forth about the role of free trade, it is equally possible for us to see that since the social cost of labor in a situation of massive unemployment us clearly less than its (market) wage, this is a market failure, and free trade is no longer a compelling policy. [In other words, too much unemployment leads to major social detriment, which may create a compelling scenario for government intervention.] That the optimal policy mix would still be to remove that market failure by creating a sufficiently more aggregate demand, instead of diverting a given aggregate demand towards yourself, and then holding on to free trade, is a matter that I shall turn to in the context of proposition 2 in the next section. (p. 17, Princeton U Press, 2002)
Did we all get that? (I'm still not sure I have.) Prof. Bhagwati redeems himself in the second portion of the book, which is the only portion I would recommend to anyone. In one section, Prof. Bhagwati demonstrates his high intelligence and understanding of economics vs. sociology:
First, fairness rather than justice is the defining moral principle in the United States, as compared to the more socially structured European and Japanese societies. So equality of access trumps equality of success; equal opportunity trounces equal outcomes. (p. 52)
This statement holds true, as long as the average American continues to have political beliefs slightly right of center. In an extremely interesting premise, Prof. Bhagwati also says democracy is a check against unfettered and irresponsible capitalism:
Few governments, certainly now that democracy has broken out worldwide, are likely to say instead to multinationals: come and make profits by polluting our waters and air. (p. 59-60)
In another interesting section on preferential trade agreements (PTAs), Prof. Bhagwati correctly says that rich nations insert provisions in these trade contracts that are one-sided. For example, the U.S. will focus on child labor rather than environmental or "quasi-slavery conditions for migrant labor in American agriculture." (p. 71) In addition, eliminating child labor in poor countries may lead to children entering more undesirable professions, such as prostitution. (p. 77)
The third chapter is more technical, but still readable, and focuses on how to draft bilateral agreements that favor free trade. Prof. Bhagwati points out that there are now so many bilateral agreements establishing favored trading partners or products, that it is becoming more difficult for poorer countries to navigate this system or even attain fair results.
I would not recommend this book to the casual reader, but if you want to major in economics, read this short book to see whether you have a future in the field, as most of the ideas mentioned are intelligent and informed.
This book was divided into three chapters. The first one, a defense of free trade, was impenetrable. For example, Prof. Bhagwati says that in a recession, the free market is failing to pay people their properly calibrated wage, and responding to unemployment with tariffs in an attempt to spur domestic consumption only makes the problem worse. This is because the real answer to unemployment is to create higher demand , and tariffs curtail more demand for services by limiting entrants into the market. But here's how Prof. Bhagwati expresses these thoughts:
The Keynesian warming to protection in times of unemployment due to deficiency of aggregrate demand evidently derived from the notion that tariffs could divert aggregrate demand from foreign to domestic goods. But from the viewpoint that I am setting forth about the role of free trade, it is equally possible for us to see that since the social cost of labor in a situation of massive unemployment us clearly less than its (market) wage, this is a market failure, and free trade is no longer a compelling policy. [In other words, too much unemployment leads to major social detriment, which may create a compelling scenario for government intervention.] That the optimal policy mix would still be to remove that market failure by creating a sufficiently more aggregate demand, instead of diverting a given aggregate demand towards yourself, and then holding on to free trade, is a matter that I shall turn to in the context of proposition 2 in the next section. (p. 17, Princeton U Press, 2002)
Did we all get that? (I'm still not sure I have.) Prof. Bhagwati redeems himself in the second portion of the book, which is the only portion I would recommend to anyone. In one section, Prof. Bhagwati demonstrates his high intelligence and understanding of economics vs. sociology:
First, fairness rather than justice is the defining moral principle in the United States, as compared to the more socially structured European and Japanese societies. So equality of access trumps equality of success; equal opportunity trounces equal outcomes. (p. 52)
This statement holds true, as long as the average American continues to have political beliefs slightly right of center. In an extremely interesting premise, Prof. Bhagwati also says democracy is a check against unfettered and irresponsible capitalism:
Few governments, certainly now that democracy has broken out worldwide, are likely to say instead to multinationals: come and make profits by polluting our waters and air. (p. 59-60)
In another interesting section on preferential trade agreements (PTAs), Prof. Bhagwati correctly says that rich nations insert provisions in these trade contracts that are one-sided. For example, the U.S. will focus on child labor rather than environmental or "quasi-slavery conditions for migrant labor in American agriculture." (p. 71) In addition, eliminating child labor in poor countries may lead to children entering more undesirable professions, such as prostitution. (p. 77)
The third chapter is more technical, but still readable, and focuses on how to draft bilateral agreements that favor free trade. Prof. Bhagwati points out that there are now so many bilateral agreements establishing favored trading partners or products, that it is becoming more difficult for poorer countries to navigate this system or even attain fair results.
I would not recommend this book to the casual reader, but if you want to major in economics, read this short book to see whether you have a future in the field, as most of the ideas mentioned are intelligent and informed.
Friday, April 4, 2008
Charles Morris: The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
I just read Charles Morris's The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash. It's a quick read, and he cogently explains some very abstruse financial instruments, like credit default swaps. Banks used these swaps--which generated interest payments--to increase their cash flow. One mistake they made was retaining the local branch or entity to service the loans and guaranteeing it loan payments even in case of default. For more on credit default swaps, click here.
I will be selling my KCAP stock and any hedge-fund related stocks, because it appears that hedge funds have been buying tranches of debt or giving loans to enterprises that are too speculative. Morris's overarching theme is that in a search for greater profits, Wall Street started marketing products that had higher yields and relied too much on economic models that assumed rational investors would withdraw their funds from these financial instruments in an orderly manner.
Basically, Wall Street's models created debt instruments that offered risky but higher yields within a package of more safe debt. Various investors could buy the safer debt at a lower yield; however, the more marketable debt was the riskier debt because it had a higher yield (lower yield bonds compete with the government's ultra-safe Treasuries and muni-bonds, meaning the market isn't that broad for private sellers of very safe bonds). Standing alone, neither the low-paying safe bonds would get many buyers, nor the higher risk bonds. So Wall Street made an unholy alliance of junk bonds with AAA-rated debt to create a very marketable product, increasing yields for everyone in an instrument that was supposed to be safer by spreading the risk.
The flaw was that these instruments assumed that the better-rated payers, who had been placed with riskier debtors, would be able to absorb a certain default rate. The models never thought the better-rated (AAA-rated) payers/debtors would default as well as the lower, more riskier tranches. When both the higher rated and lower rated tranches started defaulting, it became known as a "black swan" event (loosely translated, it means sh*t happens). Mr. Morris is shaping up to become this generation's John Kenneth Galbraith, arguing that the free market is no longer working, and we need more governmental intervention. (Thankfully, Mr. Morris's style is Hemingway-esque, the polar opposite of Mr. Galbraith's wordy, academic writing style.)
Mr. Morris's message hit home much harder, when, the same night, I watched a documentary about coal mine workers in Kentucky, called Harlan County, USA (1976). Barbara Kopple filmed this movie during one of the worst times in the American economy and profiled some of the worst working conditions in America. It is astounding to think that in the 1970's in the U.S., companies were talking about improving working conditions in terms of upgrading laborers from a situation with inadequate indoor plumbing to trailers as evidence of their commitment to their workers. At that time, benefits were about two dollar raises and 6 days of sick leave, and "pensions" were 150 dollars per month for some older workers. It's hard to believe that since then, other workers in positions requiring much less risk and daily manual labor, such as office government workers, have moved from demanding an equitable wage to receiving lifetime medical benefits and annual pensions worth more than what an average American makes in an entire year. During one interesting scene, a protesting coal miner near Duke Power Company's Wall Street offices strikes up a conversation with an amiable New York cop who says he could probably retire in his mid-30s with a pension worth 10,000 dollars a year. As you can see, inflation has serious consequences.
As a libertarian, this film shook me to my core, until I realized how lucky we are today. Few workers today in America risk so much for so little, and to the extent they do, they are typically poor immigrants trying to make a new life for themselves in a new country and aware of the sacrifices. In addition, despite the brouhaha about manufacturing jobs moving overseas, it is apparent that the old tactics of a strike and blocking roads to prevent scabs from going into a factory would not work today. In the modern world, you've got about 3 billion "scabs" all over the world who want prosperity and are willing to work in unstable and terrible working conditions to get a small piece of it. Globalization, by the way, is not new--Kopple's relatively more recent work, American Dream, about a group of Hormel workers in Minnesota, shows that to some extent, globalization has always been with us. The degree of that globalization, however, has changed rapidly, creating scenarios that may eventually create a tale of two cities: one prosperous, with many options, and another with few options and no union capable of staving off capitalism's "creative destruction" of certain jobs.
The promise America makes to its citizens is that while there will be differences in income and outcomes, the path to the middle class--of owning a home, putting your children through college, and being able to retire before 65 years of age--will always be there for anyone willing to work hard and make sacrifices. Recent globalization has enacted a period of creative destruction akin to dropping a nuclear bomb on certain industries, especially in the manufacturing sector. Yet, seeing Kopple's film shows how far we've come. Today, fewer Americans need to work in dangerous jobs, and we can outsource menial labor to other countries or their citizens--that is a sign of prosperity, one that is harder to see without seeing the history behind the labor movement and the working conditions that caused it.
I will be selling my KCAP stock and any hedge-fund related stocks, because it appears that hedge funds have been buying tranches of debt or giving loans to enterprises that are too speculative. Morris's overarching theme is that in a search for greater profits, Wall Street started marketing products that had higher yields and relied too much on economic models that assumed rational investors would withdraw their funds from these financial instruments in an orderly manner.
Basically, Wall Street's models created debt instruments that offered risky but higher yields within a package of more safe debt. Various investors could buy the safer debt at a lower yield; however, the more marketable debt was the riskier debt because it had a higher yield (lower yield bonds compete with the government's ultra-safe Treasuries and muni-bonds, meaning the market isn't that broad for private sellers of very safe bonds). Standing alone, neither the low-paying safe bonds would get many buyers, nor the higher risk bonds. So Wall Street made an unholy alliance of junk bonds with AAA-rated debt to create a very marketable product, increasing yields for everyone in an instrument that was supposed to be safer by spreading the risk.
The flaw was that these instruments assumed that the better-rated payers, who had been placed with riskier debtors, would be able to absorb a certain default rate. The models never thought the better-rated (AAA-rated) payers/debtors would default as well as the lower, more riskier tranches. When both the higher rated and lower rated tranches started defaulting, it became known as a "black swan" event (loosely translated, it means sh*t happens). Mr. Morris is shaping up to become this generation's John Kenneth Galbraith, arguing that the free market is no longer working, and we need more governmental intervention. (Thankfully, Mr. Morris's style is Hemingway-esque, the polar opposite of Mr. Galbraith's wordy, academic writing style.)
Mr. Morris's message hit home much harder, when, the same night, I watched a documentary about coal mine workers in Kentucky, called Harlan County, USA (1976). Barbara Kopple filmed this movie during one of the worst times in the American economy and profiled some of the worst working conditions in America. It is astounding to think that in the 1970's in the U.S., companies were talking about improving working conditions in terms of upgrading laborers from a situation with inadequate indoor plumbing to trailers as evidence of their commitment to their workers. At that time, benefits were about two dollar raises and 6 days of sick leave, and "pensions" were 150 dollars per month for some older workers. It's hard to believe that since then, other workers in positions requiring much less risk and daily manual labor, such as office government workers, have moved from demanding an equitable wage to receiving lifetime medical benefits and annual pensions worth more than what an average American makes in an entire year. During one interesting scene, a protesting coal miner near Duke Power Company's Wall Street offices strikes up a conversation with an amiable New York cop who says he could probably retire in his mid-30s with a pension worth 10,000 dollars a year. As you can see, inflation has serious consequences.
As a libertarian, this film shook me to my core, until I realized how lucky we are today. Few workers today in America risk so much for so little, and to the extent they do, they are typically poor immigrants trying to make a new life for themselves in a new country and aware of the sacrifices. In addition, despite the brouhaha about manufacturing jobs moving overseas, it is apparent that the old tactics of a strike and blocking roads to prevent scabs from going into a factory would not work today. In the modern world, you've got about 3 billion "scabs" all over the world who want prosperity and are willing to work in unstable and terrible working conditions to get a small piece of it. Globalization, by the way, is not new--Kopple's relatively more recent work, American Dream, about a group of Hormel workers in Minnesota, shows that to some extent, globalization has always been with us. The degree of that globalization, however, has changed rapidly, creating scenarios that may eventually create a tale of two cities: one prosperous, with many options, and another with few options and no union capable of staving off capitalism's "creative destruction" of certain jobs.
The promise America makes to its citizens is that while there will be differences in income and outcomes, the path to the middle class--of owning a home, putting your children through college, and being able to retire before 65 years of age--will always be there for anyone willing to work hard and make sacrifices. Recent globalization has enacted a period of creative destruction akin to dropping a nuclear bomb on certain industries, especially in the manufacturing sector. Yet, seeing Kopple's film shows how far we've come. Today, fewer Americans need to work in dangerous jobs, and we can outsource menial labor to other countries or their citizens--that is a sign of prosperity, one that is harder to see without seeing the history behind the labor movement and the working conditions that caused it.
Thursday, April 3, 2008
FYI: Brokers that Allow Direct International Trades
Disclaimer: of course, this post is not a recommendation to buy or sell any stocks/funds/ETFs. Do your own due diligence. This post is also not a recommendation of any broker. I am not licensed to give and do not give investment advice.
It is surprisingly difficult to trade directly in foreign shares, as opposed to just ADRs. Here are some brokers that allow direct access to international markets (taken from April 3, 2008 edition of WSJ):
bursamex.com/mx (Mexico)
boom.com (most Asian countries)
directbroking.co.nz (New Zealand and Australia)
etrade.com (Canada, France, Germany, Hong Kong, Japan, United Kingdom)
hermesonline.com (Middle East)
everbank.com
interactivebrokers.com
investorseruope.com
stockbrokers-botswana.com
visocap.com (former USSR satellites)
The international companies I am interested in, such as Siemens and AXA, already have ADRs. In addition, Singapore, an underrated 20th century success story, already has an ETF, which I own: "EWS." However, the Philippines may present an interesting opportunity, given the number of expats sending remittances. It is estimated immigrants in the U.S. sent 66 billion dollars abroad in 2007.
Disclaimer: of course, this post is not a recommendation to buy or sell any stocks/funds/ETFs. Do your own due diligence. This post is also not a recommendation of any broker. I am not licensed to give and do not give investment advice.
It is surprisingly difficult to trade directly in foreign shares, as opposed to just ADRs. Here are some brokers that allow direct access to international markets (taken from April 3, 2008 edition of WSJ):
bursamex.com/mx (Mexico)
boom.com (most Asian countries)
directbroking.co.nz (New Zealand and Australia)
etrade.com (Canada, France, Germany, Hong Kong, Japan, United Kingdom)
hermesonline.com (Middle East)
everbank.com
interactivebrokers.com
investorseruope.com
stockbrokers-botswana.com
visocap.com (former USSR satellites)
The international companies I am interested in, such as Siemens and AXA, already have ADRs. In addition, Singapore, an underrated 20th century success story, already has an ETF, which I own: "EWS." However, the Philippines may present an interesting opportunity, given the number of expats sending remittances. It is estimated immigrants in the U.S. sent 66 billion dollars abroad in 2007.
Disclaimer: of course, this post is not a recommendation to buy or sell any stocks/funds/ETFs. Do your own due diligence. This post is also not a recommendation of any broker. I am not licensed to give and do not give investment advice.
Polygraphs: Reliable or Just Imperfect?
The April 3, 2008 Wall Street Journal published a letter by an economist re: the unreliability of polygraph testing that I thought worth of sharing:
Your article makes it crystal clear why a person should never consent to polygraph tests, which suffer from two types of errors: showing an innocent person to be guilty and showing a guilty person to be innocent. The article illustrates that a person is likely to fail the test because of perceived or actual guilt on subjects that aren't even being tested. The test i much more likely to show an innocent person to be guilty than a guilty person innocent. This is especially true if the person being tested is reasonably honest and worries about minor peccadillos, such as taking home a paper clip or coming to work a few minutes late. Because of this, polygraph tests encourage law enforcers who "know you are guilty" to keep digging until some question of innocence can be found on some (perhaps unrelated) activity.
Duane Eberhardt
Professor of Economics, Retired
Missouri Southern State University
Joplin, MO
See related article at Mother Jones:
http://www.motherjones.com/news/feature/2002/11/ma_148_01.html
Your article makes it crystal clear why a person should never consent to polygraph tests, which suffer from two types of errors: showing an innocent person to be guilty and showing a guilty person to be innocent. The article illustrates that a person is likely to fail the test because of perceived or actual guilt on subjects that aren't even being tested. The test i much more likely to show an innocent person to be guilty than a guilty person innocent. This is especially true if the person being tested is reasonably honest and worries about minor peccadillos, such as taking home a paper clip or coming to work a few minutes late. Because of this, polygraph tests encourage law enforcers who "know you are guilty" to keep digging until some question of innocence can be found on some (perhaps unrelated) activity.
Duane Eberhardt
Professor of Economics, Retired
Missouri Southern State University
Joplin, MO
See related article at Mother Jones:
http://www.motherjones.com/news/feature/2002/11/ma_148_01.html
Tuesday, April 1, 2008
Chip Johnson of SF Chronicle, Holding Government Accountable
Chip Johnson in his April 1, 2008 column in the SF Chronicle's B1 page, reports that almost 1/3 of Oakland's city workers are making over 100,000 dollars in salary per year. That figure, of course, does not include benefits and pensions. Overall, non-federal government (meaning, county, city and state) salaries probably make up between 10 to 15% of gross domestic expenditures, which doesn't sound like a lot until you realize that it's harder to reduce salaries once they achieve such a high level. More troubling is the fact that it's harder to reduce government benefits because such benefits are vested; in addition, such costs are difficult to estimate due to the guesswork in determining a former employee's health and life expectancy for pensions and medical benefit purposes. In short, the public is indebted to the government for amounts unknown, even if the economy enters a period of recession or constrained growth.
Strangely, government employees making over 100,000 dollars a year are still eligible for overtime pay. In the private sector, most employees making 100K+ annually in base pay would be exempt and still expected to put in the hours that come with making such a salary.
The recent California Supreme Court decision allowing the public to see such salaries is INTERNATIONAL FEDERATION OF PROFESSIONAL AND TECHNICAL ENGINEERS, LOCAL 21, AFL-CIO et al., v. SUPERIOR COURT OF ALAMEDA COUNTY, REAL PARTIES IN INTEREST: CONTRA COSTA NEWSPAPERS (2007), which can be found at this link:
http://cprareq.blogspot.com/2007/08/contra-costa-newspapers-inc-v-city-of.html
Strangely, government employees making over 100,000 dollars a year are still eligible for overtime pay. In the private sector, most employees making 100K+ annually in base pay would be exempt and still expected to put in the hours that come with making such a salary.
The recent California Supreme Court decision allowing the public to see such salaries is INTERNATIONAL FEDERATION OF PROFESSIONAL AND TECHNICAL ENGINEERS, LOCAL 21, AFL-CIO et al., v. SUPERIOR COURT OF ALAMEDA COUNTY, REAL PARTIES IN INTEREST: CONTRA COSTA NEWSPAPERS (2007), which can be found at this link:
http://cprareq.blogspot.com/2007/08/contra-costa-newspapers-inc-v-city-of.html
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.
http://www.iht.com/articles/2007/08/29/asia/lee-excerpts.php?page=1
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.
http://www.iht.com/articles/2007/08/29/asia/lee-excerpts.php?page=1
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