I attended the Trimble Navigation Limited (TRMB) shareholder meeting, which was geared towards its employees rather than shareholders. Of the 100 or so people there, only about five of us were non-employee shareholders. There wasn't even a Q&A session at the end of the two hour meeting, which was highly unusual. The meeting seemed more like an internal company pow-wow, where the CEO was focused on motivating his employees, than an actual shareholder meeting.
I originally bought this stock a few months ago because it appeared to be the next GE and its price seemed too low (at the time). However, even to this day, I cannot understand the company's products very well. The CEO, Steven Berglund, spent the first part of the two hour meeting talking about how the company had "redefined" itself throughout the years and now focused on construction, advanced devices, mobile hardware, "ready-mix" solutions (just the first of very vague and confusing terms used throughout the evening), and precision agriculture. He said that TRMB does not have a growth strategy based on acquisitions, and only acquires companies to enter new markets. He focused on the fact that the "international marketplace is key to our success," and later referred to "aggressive internationalism" as the company's plan.
He indicated that he wanted to target customers in waste management, farming, forestry, and utilities. The CEO stated that in most of the markets Trimble was involved, the market penetration (a favorite phrase of CEOs) was low, and was usually around only 30%. Therefore, Trimble did not have to use words like "product life cycle" or "saturation." There was some pump-it-up phraseology of the "annihilation of complacency" and "humility and caution" being goals of the company.
Some very vague terms were used, such as saying that the company's products require "concept-selling capabilities," and Trimble "sells people things they don't know they need." For a value investor and Buffett acolyte such as myself, these phrases made me want to run for the hills.
After the CEO's presentation, there were several presenters, all of whom were touting some company product and who were unfortunately completely dull. I have heard of Six Sigma Black Belts, but now I got to hear about "Kaizen facilitators" and "customized improvement initiatives" and other terms only a business major could love. There were numerous graphs and pie charts showing how the company's products incorporated several different advantages for its customers. I felt like I was in a corporate Dilbert meeting.
But that's just it--Trimble is sort of like your Dilbert company. They are high-tech cost-saving consultants, like the guy who comes in your office and says you can save 100 million dollars by ordering fewer paper clips or by removing the olive from airplane meals. The difference is that Trimble sells high tech products that allow its customers to save money. There's no doubt that its product line is impressive--by having so many software and hardware engineers working in several different divisions, Trimble can deliver everything from its own IC Chip, boards that use other companies' IC chips, GPS systems (including ones that tell a farmer exactly where he is in his field), spatial imaging software, radios, antennas, GNSS sensors, and many other products.
There were some exhibits of the company's products, focusing on farmers, construction, GPS devices, highway projects, and reference design boards. Obviously, Trimble has a diverse product line and a diverse array of customers.
Because I still had a hard time understanding the business, and was very surprised at the lack of a Q&A session, and I went up to CEO Steven Berglund after the meeting to ask him some questions. I am not sure if it was the way I approached him, but he seemed upset that I questioned the lack of a Q&A session; to his credit, however, he did spend about 3 to 5 minutes answering my questions (in a defensive, brusque manner). I asked him about his employee breakdown. He asked which division I was talking about, but finally indicated that software engineers, then hardware engineers, then salespersons made up much of his workforce. I asked him who his major customers were. Again, he retorted that there wasn't any one big customer, not even the Caterpillar, CNH, and Nikon companies I mentioned (they were mentioned in the 10-K) . He replied that I should go read the 10-K. But he obviously hadn't read carefully all of the 10-K, because he would have known that I referred to CAT, Nikon, and CNH from page 20: "We believe that in certain business opportunities our success will depend on our ability to form and maintain alliances with industry participants, such as Caterpillar, Nikon and CNH Global."
By this time, CEO Steven Berglund was becoming more and more agitated, so I thought I'd ask him just one more question and move on. I had read in the 10-K that salespersons were paid in part on commissions, and asked him whether a significant number of his salesforce were independent contractors rather than employees. After some brusque comments asking me what I was talking about, he finally said that no, as far as he knew, the only independent contractors were "dealers," and that his salespersons were employees. That is a good sign, as it indicates that Trimble employees would be more loyal to the company as compared to independent contractors.
The food spread was fabulous, but lacked coffee and sweets. It was basically a buffett dinner style with shish kabobs, dips, bread, vegetables, and chicken entrees.
I was disappointed that CEO Steven Berglund was so brusque, as he appeared to be a good public speaker, but I suppose when you're in that position, and your stock has done well, you can afford to be that way. I am waiting on the sidelines on this stock because of its recent run-up. Many of the potential customers Trimble wants to sell to--such as local government and smaller businesses--may be cash-strapped if the economy doesn't rebound. If you believe that companies will be more likely to hire outside consultants to show them how to save money, you would probably like Trimble Navigation. There's nothing like seeing increased costs to make a CEO jump at the chance of finding more efficient ways of doing business. But if you believe that in a recession, all companies try to save money in ways that don't require paying for major products or new ways of doing things, then you may dislike Trimble's strategy. In addition, the company didn't seem to have any devices that relied on solar or nuclear power, or some other non-semiconductor-based environmental product. I kept thinking during the meeting that there must be some reason why there is such low market penetration in all of the areas Trimble is trying to sell into. Unless Trimble has re-invented the wheel--which it very well may have done, as I've never seen some of the products it offers--there will always be competitors going after the low-hanging fruit. It appears Trimble may be going after the more specialized, difficult-to-get rewards. A recession may not be kind to this company, but perhaps the big-ticket items Trimble sells will be recession-resistant. The CEO told me that his company "sells productivity." Personally, I am more of a skeptic, but if you like the sound of a company that is diversified and sells productivity, then this is the stock for you. I just wish CEO Steven Berglund hadn't been so brusque and understood that a shareholder meeting was also designed for non-employee shareholders to understand his company.
"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
Thursday, May 22, 2008
Shutterfly Shareholder Meeting, May 22, 2008
Shutterfly's (SFLY) meeting was as simple as Netflix's but with a completely different attitude. The first thing you notice is that the employees are happy and actually like being there. The vibe is absolutely wonderful, and if you are looking for a job in Redwood City, CA, you may want to apply at this company. I've never seen so many friendly people at a shareholder meeting. Of course, I was the only person there not on the payroll, so I did look out of place. Rather than ignore me, however, the staff approached me with interest.
The format of the meeting was exactly the same as NFLX's. No presentation, just the company logo in the back. As soon as the formal part of the meeting was over, we went straight to the Q&A session. I was the only one who asked questions.
The formal part of the presentation was well-organized. Specific employees had been trained beforehand to make motions and second them. They even began their motions with "Mr. Secretary," which added to the professional atmosphere. The food was standard--some fruit, some cookies, and coffee. These food items were near some company products, such as children's books, mugs, and other merchandise, showing SFLY's diverse product line.
First, I have to say that I was impressed with SFLY's CEO, Jeffrey Housenbold. Mr. Housenbold is one of the most articulate and prepared CEOs I have ever met. His responses to my questions were detailed and on point. My first question actually combined three issues, and he methodically responded to each issue with statistics and easy-to-understand responses that bolstered the company's image. Not once did I feel as if I was getting a prepared line--he was a breath of fresh air, especially after the NFLX CEO's terse responses. (SFLY's meeting, by the way, was held at 11AM, another indicator that the company wanted to welcome shareholders rather than drive them away by holding the meeting at 3PM.) SFLY's proxy statement also contains pictures and bios of the management team, which is an astute business move, because the pictures personalize the company more.
Some background from the company's Yahoo's Finance profile page: Shutterfly "produces and sells photo books; personalized calendars; greeting cards; photo-based merchandise, including mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets, and keepsake boxes; ancillary products, such as frames, photo albums, and scrapbooking accessories; and photo prints. It also produces customized children's books. "
My first question was what competitive advantage SFLY had over Flickr, whether the company was going to enter into partnerships like Flickr and Yahoo's, and what strategies the company had for growth.
Mr. Housenbold responded that SFLY manufactured its own products and was capitalizing on demand for various products, such as calendars, mugs, scrapbooking, and other merchandise. [from 10K: SFLY owns production facilities in Hayward, CA and Charlotte, NC, and may open more facilities in Charlotte.] He said that SFLY's business model was "permission-based sharing of memories," versus the less personal Flickr model. He indicated that less than 1% of Flickr's users generated about 40% of their content (my number may be incorrect, as I was quickly taking notes--but it was a very high number) and unlike SFLY, Flickr's revenue came from advertising rather than directly from its users and customers. Also, because SFLY controls its own manufacturing, they can enforce high quality standards, while Flickr cannot. The CEO continued to focus on how his company delivered quality. It was a flashback to Peet's vision, where Peet's CEO was basically saying that the company was going to focus on quality and let the product speak for itself through word of mouth.
Mr. Housenbold then talked about "customer centricity," a fun phrase. He said that his company offered 49 combinations of designs and its software and website were easy to use. On the other hand, Flickr did not have a direct e-commerce model and relied on advertising revenue, which implied that Flickr would be more beholden to its advertisers than its actual customers and consumers.
He said that Yahoo/Flickr had achieved [only] around 4 million dollars of revenue from 100 million accounts through ad-based generation (these numbers was be off due to my slow handwriting and attempt to capture all of his responses verbatim). In fact, Yahoo had actually shut down part of Flickr because it wasn't generating sufficient ad revenue. Meanwhile, with respect to growth, in 1999, SFLY started with 2 million customers and now had 9 million customers. The company was benefiting from a "viral marketing effect," where its brand name was entering the public sphere through its reputation and word of mouth on the internet.
As far as partnerships were concerned, his company has partnerships with Amazon.com, Border's, Target, and many other major companies. 78% of SFLY's revenue came from existing customers, which is impressive but indicates that the company isn't growing its customer base very quickly.
My second question was that I now understood how SFLY was different from Flickr (ad revenue business model vs. direct e-commerce model), but how was his company different from Snapfish? (a more similar competitor)
Mr. Housenbold first said that Snapfish (http://www.snapfish.com/) didn't own any manufacturing facilities, a hit on the quality of their products. He said that Snapfish has said they want to be the Walmart of online photos, and they are gearing their services towards consumers who are more "price-conscious." It was a very nice dig, i.e., if you're poor and dislike quality, you go to Snapfish, not us. He also politely attacked Snapfish's loyalty to its customers by saying that after 6 months of non-activity, Snapfish deletes all memory. Basically, SFLY was "Nordstrom," while Snapfish was Walmart. And if that style of polite dismantling of a competitor doesn't impress you, he ended with this riposte: as far as he knew, Snapfish has never been profitable, while SFLY has generated a profit. If I was Snapfish's CEO, I would have felt compelled to commit seppuku after hearing how different the companies were. Snapfish's own website states that it is the "best value in photography," which doesn't sound so great after hearing the comparison to Walmart. One wants a quality product when it comes to memories.
My friend, who has used SFLY's website, said that she was impressed with it. She said that the website, for free, allows users to modify their pictures, making them lighter, darker, etc. She said she was also impressed with the available products, such as the mugs. She hoped that SFLY would allow consumers to continue to keep their photos stored online for free. I indicated that the company had an incentive to allow free photo storage, because it would encourage consumers to buy SFLY's products in the future.
SFLY's 10K was one of the best-drafted 10Ks I've ever read. It had a great explanation of the U.S. Supreme Court ruling that established the principle of non-taxation for internet companies lacking a proper nexus with certain states. The 10K doesn't list any cases by name, but it is referring primarily to Quill v. North Dakota (1992). See the following webpage for more information on the list of other relevant cases, i.e. Oklahoma Tax Comm'n v Jefferson Lines (1995) and Complete Auto Transit v Brady (1977):
http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/
interstatetax.htm
Basically, a company needs to have a sufficient nexus with a state before being able to tax the company. A physical presence, such as a warehouse with employees, is obviously sufficient to form the necessary connection because the company derives benefits from the state, but there are many gray areas. SFLY states that it is collecting sales and use taxes where it has "property and/or employees." (10K, page 25)
If it's not obvious by now, I am very impressed with this company. However, its share price hovers near a 52 week low. Is SFLY a value play? Here is my thinking:
1) Why does this company need to be public rather than private? There are no major liability issues or a need for money to expand or build stores. The CEO never mentioned that he wanted to build retail stores to sell directly to the public. It seems very strange that such a company would prefer to be public and endure Sarbanes-Oxley compliance and other issues that divert resources from serving its customers. I predict that at some point, perhaps within five years, if the stock price remains stagnant, this company will be bought out, merge, or go private.
2) Flickr actually does allow permission-based photo sharing--you can set certain photos to be seen only by your friends and family and can restrict permissions. But that's a minor issue, because Flickr obviously doesn't allow its users to modify photos and is clearly geared towards a different audience, just as the CEO indicated.
3) The majority (52%) of SFLY's revenue comes in the last quarter of the year, probably in X-Mas and Thanksgiving sales. (From 10K, page 14)
4) If it can convince Wall Street that it will be able to grow at double-digit rates, SFLY's stock price will increase. For now, however, I don't see how SFLY is going to achieve a high growth rate. It doesn't really advertise--and it seems like it's taking the Peet's grass roots marketing model, where word of mouth drives growth. But the problem with a company like SFLY using Peet's marketing strategy of "quality + reputation + product-sells-itself = success" (my words, not theirs) is that Peet's has retail stores, making it is easier for others to recognize its products. I am sure you can all recognize a Peet's paper cup instantly if you saw one. But SFLY's products won't enter the mainstream as readily as a food item. Instead, the growth will probably happen as family members, the ones most likely to pay for products like children's books, get introduced to the services and products. If SFLY's strategy is focused on families and grandparents, that's a slower way to grow than trying to get national brand name recognition through general advertising and by directing traffic to its website.
5) SFLY is currently being sued by Fotomedia and Parallel Networks in the Eastern District of Texas. (What's so special about the Eastern District of TX? There's definitely some forum shopping going on there.) I suspect it may be difficult to see future prospects clearly until these lawsuits get resolved.
I will keep my eye on this company. The CEO was friendly and humble and came up to me after the meeting to talk. He indicated that he was a user of SFLY before he became the CEO, which is another plus. Another shareholder came late to the meeting, and the CEO sought him out and went to speak to him. This is a friendly company that should continue to have a great reputation.
See also, Interview with Mr. Housenbold: http://sramanamitra.com/2008/03/20/
shutterflys-strategy-a-conversation-with-ceo-jeff-housenbold-part-1/
The format of the meeting was exactly the same as NFLX's. No presentation, just the company logo in the back. As soon as the formal part of the meeting was over, we went straight to the Q&A session. I was the only one who asked questions.
The formal part of the presentation was well-organized. Specific employees had been trained beforehand to make motions and second them. They even began their motions with "Mr. Secretary," which added to the professional atmosphere. The food was standard--some fruit, some cookies, and coffee. These food items were near some company products, such as children's books, mugs, and other merchandise, showing SFLY's diverse product line.
First, I have to say that I was impressed with SFLY's CEO, Jeffrey Housenbold. Mr. Housenbold is one of the most articulate and prepared CEOs I have ever met. His responses to my questions were detailed and on point. My first question actually combined three issues, and he methodically responded to each issue with statistics and easy-to-understand responses that bolstered the company's image. Not once did I feel as if I was getting a prepared line--he was a breath of fresh air, especially after the NFLX CEO's terse responses. (SFLY's meeting, by the way, was held at 11AM, another indicator that the company wanted to welcome shareholders rather than drive them away by holding the meeting at 3PM.) SFLY's proxy statement also contains pictures and bios of the management team, which is an astute business move, because the pictures personalize the company more.
Some background from the company's Yahoo's Finance profile page: Shutterfly "produces and sells photo books; personalized calendars; greeting cards; photo-based merchandise, including mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-media DVDs, magnets, and keepsake boxes; ancillary products, such as frames, photo albums, and scrapbooking accessories; and photo prints. It also produces customized children's books. "
My first question was what competitive advantage SFLY had over Flickr, whether the company was going to enter into partnerships like Flickr and Yahoo's, and what strategies the company had for growth.
Mr. Housenbold responded that SFLY manufactured its own products and was capitalizing on demand for various products, such as calendars, mugs, scrapbooking, and other merchandise. [from 10K: SFLY owns production facilities in Hayward, CA and Charlotte, NC, and may open more facilities in Charlotte.] He said that SFLY's business model was "permission-based sharing of memories," versus the less personal Flickr model. He indicated that less than 1% of Flickr's users generated about 40% of their content (my number may be incorrect, as I was quickly taking notes--but it was a very high number) and unlike SFLY, Flickr's revenue came from advertising rather than directly from its users and customers. Also, because SFLY controls its own manufacturing, they can enforce high quality standards, while Flickr cannot. The CEO continued to focus on how his company delivered quality. It was a flashback to Peet's vision, where Peet's CEO was basically saying that the company was going to focus on quality and let the product speak for itself through word of mouth.
Mr. Housenbold then talked about "customer centricity," a fun phrase. He said that his company offered 49 combinations of designs and its software and website were easy to use. On the other hand, Flickr did not have a direct e-commerce model and relied on advertising revenue, which implied that Flickr would be more beholden to its advertisers than its actual customers and consumers.
He said that Yahoo/Flickr had achieved [only] around 4 million dollars of revenue from 100 million accounts through ad-based generation (these numbers was be off due to my slow handwriting and attempt to capture all of his responses verbatim). In fact, Yahoo had actually shut down part of Flickr because it wasn't generating sufficient ad revenue. Meanwhile, with respect to growth, in 1999, SFLY started with 2 million customers and now had 9 million customers. The company was benefiting from a "viral marketing effect," where its brand name was entering the public sphere through its reputation and word of mouth on the internet.
As far as partnerships were concerned, his company has partnerships with Amazon.com, Border's, Target, and many other major companies. 78% of SFLY's revenue came from existing customers, which is impressive but indicates that the company isn't growing its customer base very quickly.
My second question was that I now understood how SFLY was different from Flickr (ad revenue business model vs. direct e-commerce model), but how was his company different from Snapfish? (a more similar competitor)
Mr. Housenbold first said that Snapfish (http://www.snapfish.com/) didn't own any manufacturing facilities, a hit on the quality of their products. He said that Snapfish has said they want to be the Walmart of online photos, and they are gearing their services towards consumers who are more "price-conscious." It was a very nice dig, i.e., if you're poor and dislike quality, you go to Snapfish, not us. He also politely attacked Snapfish's loyalty to its customers by saying that after 6 months of non-activity, Snapfish deletes all memory. Basically, SFLY was "Nordstrom," while Snapfish was Walmart. And if that style of polite dismantling of a competitor doesn't impress you, he ended with this riposte: as far as he knew, Snapfish has never been profitable, while SFLY has generated a profit. If I was Snapfish's CEO, I would have felt compelled to commit seppuku after hearing how different the companies were. Snapfish's own website states that it is the "best value in photography," which doesn't sound so great after hearing the comparison to Walmart. One wants a quality product when it comes to memories.
My friend, who has used SFLY's website, said that she was impressed with it. She said that the website, for free, allows users to modify their pictures, making them lighter, darker, etc. She said she was also impressed with the available products, such as the mugs. She hoped that SFLY would allow consumers to continue to keep their photos stored online for free. I indicated that the company had an incentive to allow free photo storage, because it would encourage consumers to buy SFLY's products in the future.
SFLY's 10K was one of the best-drafted 10Ks I've ever read. It had a great explanation of the U.S. Supreme Court ruling that established the principle of non-taxation for internet companies lacking a proper nexus with certain states. The 10K doesn't list any cases by name, but it is referring primarily to Quill v. North Dakota (1992). See the following webpage for more information on the list of other relevant cases, i.e. Oklahoma Tax Comm'n v Jefferson Lines (1995) and Complete Auto Transit v Brady (1977):
http://www.law.umkc.edu/faculty/projects/ftrials/conlaw/
interstatetax.htm
Basically, a company needs to have a sufficient nexus with a state before being able to tax the company. A physical presence, such as a warehouse with employees, is obviously sufficient to form the necessary connection because the company derives benefits from the state, but there are many gray areas. SFLY states that it is collecting sales and use taxes where it has "property and/or employees." (10K, page 25)
If it's not obvious by now, I am very impressed with this company. However, its share price hovers near a 52 week low. Is SFLY a value play? Here is my thinking:
1) Why does this company need to be public rather than private? There are no major liability issues or a need for money to expand or build stores. The CEO never mentioned that he wanted to build retail stores to sell directly to the public. It seems very strange that such a company would prefer to be public and endure Sarbanes-Oxley compliance and other issues that divert resources from serving its customers. I predict that at some point, perhaps within five years, if the stock price remains stagnant, this company will be bought out, merge, or go private.
2) Flickr actually does allow permission-based photo sharing--you can set certain photos to be seen only by your friends and family and can restrict permissions. But that's a minor issue, because Flickr obviously doesn't allow its users to modify photos and is clearly geared towards a different audience, just as the CEO indicated.
3) The majority (52%) of SFLY's revenue comes in the last quarter of the year, probably in X-Mas and Thanksgiving sales. (From 10K, page 14)
4) If it can convince Wall Street that it will be able to grow at double-digit rates, SFLY's stock price will increase. For now, however, I don't see how SFLY is going to achieve a high growth rate. It doesn't really advertise--and it seems like it's taking the Peet's grass roots marketing model, where word of mouth drives growth. But the problem with a company like SFLY using Peet's marketing strategy of "quality + reputation + product-sells-itself = success" (my words, not theirs) is that Peet's has retail stores, making it is easier for others to recognize its products. I am sure you can all recognize a Peet's paper cup instantly if you saw one. But SFLY's products won't enter the mainstream as readily as a food item. Instead, the growth will probably happen as family members, the ones most likely to pay for products like children's books, get introduced to the services and products. If SFLY's strategy is focused on families and grandparents, that's a slower way to grow than trying to get national brand name recognition through general advertising and by directing traffic to its website.
5) SFLY is currently being sued by Fotomedia and Parallel Networks in the Eastern District of Texas. (What's so special about the Eastern District of TX? There's definitely some forum shopping going on there.) I suspect it may be difficult to see future prospects clearly until these lawsuits get resolved.
I will keep my eye on this company. The CEO was friendly and humble and came up to me after the meeting to talk. He indicated that he was a user of SFLY before he became the CEO, which is another plus. Another shareholder came late to the meeting, and the CEO sought him out and went to speak to him. This is a friendly company that should continue to have a great reputation.
See also, Interview with Mr. Housenbold: http://sramanamitra.com/2008/03/20/
shutterflys-strategy-a-conversation-with-ceo-jeff-housenbold-part-1/
Peet's Coffee and Tea Shareholder Meeting, May 21, 2008
I enjoy going to Peet's shareholder meetings because they always give away goodies, and their food and coffee are great (the "Special Offering" coffee, probably the Anniversary Blend, was great--much better than the Pike's Place Starbucks blend). This year, shareholders who attended the meeting in Emeryville, CA received a very sturdy bag made with some kind of recyclable material with "Peetniks" inscribed on it. Inside the bag were a pound of Peet's Coffee, Anniversary Blend, and a 1/4 lb. tin of Peet's Anniversary Breakfast Blend tea (Special Offering, 2008).
Patrick O'Dea, Peet's CEO, provided a lot of information in this 2007 interview:
Interview with O'Dea
This part of the interview was interesting:
Peet's is still true to its roots, when it was just a small company with a few employees. As a result of having many long-time employees, it runs its meetings like a big family event. This year, Gordon Bowker was honored for his contributions. He was one of the founders of Starbucks. As some of you may know, Peet's was the original Starbucks, and back then, Starbucks bought its beans from Alfred Peet. (Peet's first store opened in Berkeley, CA, but Peet's is still incorporated in Washington State, a vestige of the original Starbucks connection.) When Howard Schultz came in and bought the first Starbucks company from the founders, those founders then went on to found Peet's, due to the differences in philosophy at the time about whether consumers would pay 3 dollars for a cup of coffee. Mr. Bowker was ribbed for being the creator of the original Starbucks logo (with the ubiquitous mermaid). He is a soft-spoken man and accepted the award, which was a coffee tryer (looks like a Civil War pistol--it's used to taste coffee when its freshly roasted) mounted on a plaque. He told a story about how Mr. Peet went out of his way to ensure customer satisfaction, even with testy customers.
Here are the meeting's highlights:
The meeting took about two hours. The CEO mentioned that "coffee comes out of roasting like popcorn," and Peet's wanted their customers to be able to smell the coffee (Schultz expressed the same sentiment this year in SBUX's Seattle's meeting). The CEO said that Peet's was a "retailer who happens to sell coffee." Then, he touted the growth of the company. In 2002, Peet's had 1450 employees; now, Peet's has 3750 employees, a sign of how much it has expanded. Peet's emphasized that was upgrading its technology to improve retailing operations. It has an "ERP" system that allows it to coordinate and track not just inventory, but financial information, orders, and other aspects of the retailing operation. CEO O'Dea, after the meeting, even showed me that he had instant access to the Peet's retail managers by pulling out his Blackberry and instantly looking up the particular store I had indicated was not receiving enough vegan chocolate chip cookies.
Peet's touted its stock performance and said it had about 20% annual growth in earnings per share (this was non-GAAP, however), and had done well, especially when compared with the S&P 600 restaurant index. Then, a video was shown about the history of Peet's, broken up into different time periods, from 1966-1983, 1984-1996, etc.
After Mr. Bowker was presented with his plaque, another gentleman, a tall, red-headed male, Doug Welsh, got up to talk about Peet's beans and its efforts to search for the best beans available. This gentleman appeared to be a consummate professional, even more so than the CEO, who is prone to making some off-the-cuff statements (like, "Everything comes to Cincinnati 5 years late," in response to a question about why Peet's wasn't expanding in the Midwest). Mr. Welsh appears to be a vital part of the management team and would be my pick for the next CEO. A video presentation about Peet's in different countries ensued. The presentation focused on activities in Rwanda, Tanzania, and Nicaragua, and how Peet's had helped the local citizens basically become entrepreneurs, and now had exclusive rights to their coffee.
The Q&A session was insightful, but the problem was that no one went around the room with microphones, so it was hard to hear the questions, and the CEO didn't always repeat them.
The first question was about stock options. Peet's is involved in litigation for its stock option grant practices, so this question seemed a bit of a plant. In case you are interested, here is the CEO's salary:
O'Dea Compensation Report
The CEO mentioned that the company was reducing the level of options that the management team would be entitled to, and the goal was not to exceed 2% of the outstanding shares in order to keep it under the 2.8% institutional investor ownership goal. (The CEO's response was confusing, because a quick Yahoo finance search shows that institutional investors own 93.1% of the stock, and insiders own 3.91%.) The CEO said that initially, when new management is hired, option grants are high to attract key talent, but the level of option grants eventually decreases.
There was a mention that the Alameda facility was a gold-certified LEEDs facility, which means that it has achieved the highest level of compliance with environmental best practices.
The CEO said that he was looking forward to the Tanzania Kilimanjaro coffee.
A shareholder asked a question about costs, especially rising fuel costs. The CEO said that fuel wasn't a major cost.
14% of the expenses are related to buying coffee and tea (futures were pricing coffee at 1.38 and tea at 1.70--he didn't elaborate--see Futures Pricing for more)
3% of costs are related to milk.
Peet's buys its coffee 9 to 12 months ahead of time, so it is well-positioned to handle cost increases.
Peet's plans on having a total of 190 stores by the end of 2008. A question was asked about how many they planned on having in 2009. The CEO said he didn't know, but they had 140 stores in California. This is what steered the conversation into Peet's growth strategy. The CEO said that Peet's was focusing on growing its home delivery, office sales, and grocery store business/food services. (For an example of what might be sold to an office, see http://www.associatedcoffee.com/coffee_brands/peets.htm#colibri)
Peet's doesn't plan on television advertising at all. It wants to get the coffee in the consumers' hands and get business through word of mouth and quality. Its marketing campaign is basically a "grass roots" campaign (on the plus side, ad expenses will be low or non-existent). Basically, Peet's feels that its coffee speaks for itself.
I asked a question about whether Peet's planned on expanding internationally. I mentioned that Starbucks was closing some stores in the U.S. and opening stores abroad, and as a result, they might get a head start over Peet's in the huge international market in terms of brand-name recognition and consumer loyalty. Although I did not mention this, having international operations would also serve as a small hedge against inflation if the American dollar continued to plummet. The CEO said that Peet's had no plans to expand internationally.
The best response came from Mr. Doug Welsh about a question relating to Fair Trade coffee. Peet's said that Fair Trade wasn't as reliable anymore as an indicator of fair wages and sustainability. There were even competing certification firms for Fair Trade, implying that the name and Fair Trade "brand" were being diluted and would mean nothing in time. He said that it was better, such as the case of "Las Hermanas," Peet's experience and work in Nicaragua, to "tell the story directly." His response basically indicated that Fair Trade was a fad that would be declining. The real background is that Fair Trade doesn't always mean higher quality beans, and Peet's is interested in actual higher quality, not just a sticker or logo that indicates high quality.
All in all, the meeting was a very enjoyable experience. After the meeting, I spoke with a long time employee (14+ years). He ("Steve," one of the master roasters) was able to enlighten me about why Peet's wanted to go the direct sale route rather than the retail route. First, a new retail Peet's store costs 2 to 3 million dollars to build. A deal with Albertson's obviously doesn't cost Peet's anything. I mentioned that perhaps the profit margins were higher on sales made in the retail store, and he didn't know whether that was true, but he did say that coffee beans are cheaper in the grocery stores. Steve and I got to talking about Starbucks. He said that SBUX makes a profit of about 700K per store, while Peet's makes between 1.2 and 1.8 million dollars per store, twice as much. In addition, Peet's has much more room to grow because it only has about 166 stores, whereas Starbucks has thousands of stores. I mentioned that SBUX would probably become a media-type company focusing on music and other sales (chocolate, etc.) to boost revenue, while Peet's would remain more of a pure coffee operation. We both agreed that the institutional investors would eventually pressure Peet's to expand its retail stores. Because the current CEO, Mr. O'Dea, doesn't seem to favor this kind of quick expansion, there may be a conflict between some investors and the slow but steady growth Peet's currently has in mind. I remain neutral on the shares at the current price (P/E seems a bit high for the slow but steady growth Peet's is contemplating), but recommend that shareholders attend the annual meeting.
I reiterate that Peet's appears to be a great company, and one that is concerned about employee welfare. After my comments about Mr. Doug Welsh and whether he would be staying with Peet's, I received a phone call from Peet's indicating that they hoped Mr. Welsh would be around a long time, and, as he's wont to say, "I'm just getting started." Bravo.
Update on May 23, 2008: I spoke with a Peet's employee who told me that the reason Peet's isn't expanding quickly in terms of its retail stores is because they have only one roasting facility in the Alameda (the Emeryville building was converted into offices). Each roasting facility also requires a "master roaster" to supervise production and roasting of the beans, and currently, she knew of only one master roaster, "Steve," the employee I spoke with after the annual meeting. It is difficult to find and hire master roasters because they require at least 10 years of experience.
She reiterated Peet's main focus on quality, saying that Peet's doesn't want to make larger batches of beans because that would reduce quality (she mentioned Starbucks and how they may have started mixing beans to keep up their supply). That "small batch" strategy makes sense, because in order to preserve quality, you cannot ship more coffee beans cross-country without an extremely efficient shipping line and several major production facilities, and with only one roasting facility, Peet's doesn't have the infrastructure yet to preserve quality and ship beans to too many stores nationally. Therefore, its slow growth strategy seems to revolve around its commitment to quality, i.e. making sure the roasting facility is set up to produce just the amount of beans they currently need and not to increase production until another roasting facility is created. For now, because so many of Peet's stores exist in California (140 out of the planned 190), having one roasting facility is acceptable. If, however, Peet's wants to serve NY and other Eastern states, it will probably have to set up a roasting facility in Ohio, or another place where land is cheap, and use that facility to ship beans to the East Coast.
It is clear that Peet's must expand to the East Coast, because its stores are already present throughout California's high income cities, and in order not to cannibalize its own California sales, it needs to move to other areas where the average resident makes at least 65,000 dollars per year. Outside of California, such areas are present primarily on the East Coast. Thus, Peet's has to expand outside of California. That necessity of expanding to the East Coast makes its business strategy of focusing primarily on grocery store alliances and direct sales rather than more store openings curious. If Peet's wants to ship to grocery stores all over the U.S. and preserve quality, it needs to open another roasting facility near the East Coast anyway. Why not, then, pursue a strategy of opening more stores on the East Coast as well as targeting grocery stores? It seems that the two go hand-in-hand, especially if Peet's doesn't plan on any major advertising.
There is also another issue: because so many East Coast residents use public transportation, they tend to shop at corner markets rather than huge chain supermarkets. Peet's strategy may fail if it tries to target only major grocery stores on the East Coast. Perhaps Peet's has not focused on the East Coast because land is so scarce, and it would need to spend quite a bit of money to open a roasting facility. But such concerns could be alleviated by opening a facility near the East Coast, perhaps near Chicago (Northbrook, IL?), and/or Cleveland (cheaper land, high college student population, which has high disposable income). This is one reason the CEO's comment about Cincinnati seemed ill-advised--why aggravate a huge potential clientele base in the Midwest by casting a large city there in a less-than-complimentary light? In any case, it appears that Peet's may be slowing growth unnecessarily by not pursuing all of its options in terms of creating retail stores as well as alliances with local grocery chains. Peet's curious business strategy of not aggressively pursuing more store openings is why I am currently neutral on the stock, as well as the fact that many American consumers are heavily in debt and may have less disposable income in 2009 than they did in 2007 and 2008. But make no mistake--Peet's coffee is still the best because of its emphasis on quality.
FYI: Peet's Coffee Earnings Call Transcript
Patrick O'Dea, Peet's CEO, provided a lot of information in this 2007 interview:
Interview with O'Dea
This part of the interview was interesting:
How much of Peet's sales come from its stores?
Sixty-seven percent of our sales come from our retail stores. The other 33 percent comes from sales of whole bean coffee and tea through grocery stores, home delivery and foodservice.
There seems to be some strategy shift. Peet's is now trying to move more into grocery stores and based on my understanding, trying to increase its share of coffee bean sales in grocery stores and by direct mail. Apparently, its beans are cheaper when bought in grocery stores vs. its retail stores, probably because Peet's stores offer fresher beans.Peet's is still true to its roots, when it was just a small company with a few employees. As a result of having many long-time employees, it runs its meetings like a big family event. This year, Gordon Bowker was honored for his contributions. He was one of the founders of Starbucks. As some of you may know, Peet's was the original Starbucks, and back then, Starbucks bought its beans from Alfred Peet. (Peet's first store opened in Berkeley, CA, but Peet's is still incorporated in Washington State, a vestige of the original Starbucks connection.) When Howard Schultz came in and bought the first Starbucks company from the founders, those founders then went on to found Peet's, due to the differences in philosophy at the time about whether consumers would pay 3 dollars for a cup of coffee. Mr. Bowker was ribbed for being the creator of the original Starbucks logo (with the ubiquitous mermaid). He is a soft-spoken man and accepted the award, which was a coffee tryer (looks like a Civil War pistol--it's used to taste coffee when its freshly roasted) mounted on a plaque. He told a story about how Mr. Peet went out of his way to ensure customer satisfaction, even with testy customers.
Here are the meeting's highlights:
The meeting took about two hours. The CEO mentioned that "coffee comes out of roasting like popcorn," and Peet's wanted their customers to be able to smell the coffee (Schultz expressed the same sentiment this year in SBUX's Seattle's meeting). The CEO said that Peet's was a "retailer who happens to sell coffee." Then, he touted the growth of the company. In 2002, Peet's had 1450 employees; now, Peet's has 3750 employees, a sign of how much it has expanded. Peet's emphasized that was upgrading its technology to improve retailing operations. It has an "ERP" system that allows it to coordinate and track not just inventory, but financial information, orders, and other aspects of the retailing operation. CEO O'Dea, after the meeting, even showed me that he had instant access to the Peet's retail managers by pulling out his Blackberry and instantly looking up the particular store I had indicated was not receiving enough vegan chocolate chip cookies.
Peet's touted its stock performance and said it had about 20% annual growth in earnings per share (this was non-GAAP, however), and had done well, especially when compared with the S&P 600 restaurant index. Then, a video was shown about the history of Peet's, broken up into different time periods, from 1966-1983, 1984-1996, etc.
After Mr. Bowker was presented with his plaque, another gentleman, a tall, red-headed male, Doug Welsh, got up to talk about Peet's beans and its efforts to search for the best beans available. This gentleman appeared to be a consummate professional, even more so than the CEO, who is prone to making some off-the-cuff statements (like, "Everything comes to Cincinnati 5 years late," in response to a question about why Peet's wasn't expanding in the Midwest). Mr. Welsh appears to be a vital part of the management team and would be my pick for the next CEO. A video presentation about Peet's in different countries ensued. The presentation focused on activities in Rwanda, Tanzania, and Nicaragua, and how Peet's had helped the local citizens basically become entrepreneurs, and now had exclusive rights to their coffee.
The Q&A session was insightful, but the problem was that no one went around the room with microphones, so it was hard to hear the questions, and the CEO didn't always repeat them.
The first question was about stock options. Peet's is involved in litigation for its stock option grant practices, so this question seemed a bit of a plant. In case you are interested, here is the CEO's salary:
O'Dea Compensation Report
The CEO mentioned that the company was reducing the level of options that the management team would be entitled to, and the goal was not to exceed 2% of the outstanding shares in order to keep it under the 2.8% institutional investor ownership goal. (The CEO's response was confusing, because a quick Yahoo finance search shows that institutional investors own 93.1% of the stock, and insiders own 3.91%.) The CEO said that initially, when new management is hired, option grants are high to attract key talent, but the level of option grants eventually decreases.
There was a mention that the Alameda facility was a gold-certified LEEDs facility, which means that it has achieved the highest level of compliance with environmental best practices.
The CEO said that he was looking forward to the Tanzania Kilimanjaro coffee.
A shareholder asked a question about costs, especially rising fuel costs. The CEO said that fuel wasn't a major cost.
14% of the expenses are related to buying coffee and tea (futures were pricing coffee at 1.38 and tea at 1.70--he didn't elaborate--see Futures Pricing for more)
3% of costs are related to milk.
Peet's buys its coffee 9 to 12 months ahead of time, so it is well-positioned to handle cost increases.
Peet's plans on having a total of 190 stores by the end of 2008. A question was asked about how many they planned on having in 2009. The CEO said he didn't know, but they had 140 stores in California. This is what steered the conversation into Peet's growth strategy. The CEO said that Peet's was focusing on growing its home delivery, office sales, and grocery store business/food services. (For an example of what might be sold to an office, see http://www.associatedcoffee.com/coffee_brands/peets.htm#colibri)
Peet's doesn't plan on television advertising at all. It wants to get the coffee in the consumers' hands and get business through word of mouth and quality. Its marketing campaign is basically a "grass roots" campaign (on the plus side, ad expenses will be low or non-existent). Basically, Peet's feels that its coffee speaks for itself.
I asked a question about whether Peet's planned on expanding internationally. I mentioned that Starbucks was closing some stores in the U.S. and opening stores abroad, and as a result, they might get a head start over Peet's in the huge international market in terms of brand-name recognition and consumer loyalty. Although I did not mention this, having international operations would also serve as a small hedge against inflation if the American dollar continued to plummet. The CEO said that Peet's had no plans to expand internationally.
The best response came from Mr. Doug Welsh about a question relating to Fair Trade coffee. Peet's said that Fair Trade wasn't as reliable anymore as an indicator of fair wages and sustainability. There were even competing certification firms for Fair Trade, implying that the name and Fair Trade "brand" were being diluted and would mean nothing in time. He said that it was better, such as the case of "Las Hermanas," Peet's experience and work in Nicaragua, to "tell the story directly." His response basically indicated that Fair Trade was a fad that would be declining. The real background is that Fair Trade doesn't always mean higher quality beans, and Peet's is interested in actual higher quality, not just a sticker or logo that indicates high quality.
All in all, the meeting was a very enjoyable experience. After the meeting, I spoke with a long time employee (14+ years). He ("Steve," one of the master roasters) was able to enlighten me about why Peet's wanted to go the direct sale route rather than the retail route. First, a new retail Peet's store costs 2 to 3 million dollars to build. A deal with Albertson's obviously doesn't cost Peet's anything. I mentioned that perhaps the profit margins were higher on sales made in the retail store, and he didn't know whether that was true, but he did say that coffee beans are cheaper in the grocery stores. Steve and I got to talking about Starbucks. He said that SBUX makes a profit of about 700K per store, while Peet's makes between 1.2 and 1.8 million dollars per store, twice as much. In addition, Peet's has much more room to grow because it only has about 166 stores, whereas Starbucks has thousands of stores. I mentioned that SBUX would probably become a media-type company focusing on music and other sales (chocolate, etc.) to boost revenue, while Peet's would remain more of a pure coffee operation. We both agreed that the institutional investors would eventually pressure Peet's to expand its retail stores. Because the current CEO, Mr. O'Dea, doesn't seem to favor this kind of quick expansion, there may be a conflict between some investors and the slow but steady growth Peet's currently has in mind. I remain neutral on the shares at the current price (P/E seems a bit high for the slow but steady growth Peet's is contemplating), but recommend that shareholders attend the annual meeting.
I reiterate that Peet's appears to be a great company, and one that is concerned about employee welfare. After my comments about Mr. Doug Welsh and whether he would be staying with Peet's, I received a phone call from Peet's indicating that they hoped Mr. Welsh would be around a long time, and, as he's wont to say, "I'm just getting started." Bravo.
Update on May 23, 2008: I spoke with a Peet's employee who told me that the reason Peet's isn't expanding quickly in terms of its retail stores is because they have only one roasting facility in the Alameda (the Emeryville building was converted into offices). Each roasting facility also requires a "master roaster" to supervise production and roasting of the beans, and currently, she knew of only one master roaster, "Steve," the employee I spoke with after the annual meeting. It is difficult to find and hire master roasters because they require at least 10 years of experience.
She reiterated Peet's main focus on quality, saying that Peet's doesn't want to make larger batches of beans because that would reduce quality (she mentioned Starbucks and how they may have started mixing beans to keep up their supply). That "small batch" strategy makes sense, because in order to preserve quality, you cannot ship more coffee beans cross-country without an extremely efficient shipping line and several major production facilities, and with only one roasting facility, Peet's doesn't have the infrastructure yet to preserve quality and ship beans to too many stores nationally. Therefore, its slow growth strategy seems to revolve around its commitment to quality, i.e. making sure the roasting facility is set up to produce just the amount of beans they currently need and not to increase production until another roasting facility is created. For now, because so many of Peet's stores exist in California (140 out of the planned 190), having one roasting facility is acceptable. If, however, Peet's wants to serve NY and other Eastern states, it will probably have to set up a roasting facility in Ohio, or another place where land is cheap, and use that facility to ship beans to the East Coast.
It is clear that Peet's must expand to the East Coast, because its stores are already present throughout California's high income cities, and in order not to cannibalize its own California sales, it needs to move to other areas where the average resident makes at least 65,000 dollars per year. Outside of California, such areas are present primarily on the East Coast. Thus, Peet's has to expand outside of California. That necessity of expanding to the East Coast makes its business strategy of focusing primarily on grocery store alliances and direct sales rather than more store openings curious. If Peet's wants to ship to grocery stores all over the U.S. and preserve quality, it needs to open another roasting facility near the East Coast anyway. Why not, then, pursue a strategy of opening more stores on the East Coast as well as targeting grocery stores? It seems that the two go hand-in-hand, especially if Peet's doesn't plan on any major advertising.
There is also another issue: because so many East Coast residents use public transportation, they tend to shop at corner markets rather than huge chain supermarkets. Peet's strategy may fail if it tries to target only major grocery stores on the East Coast. Perhaps Peet's has not focused on the East Coast because land is so scarce, and it would need to spend quite a bit of money to open a roasting facility. But such concerns could be alleviated by opening a facility near the East Coast, perhaps near Chicago (Northbrook, IL?), and/or Cleveland (cheaper land, high college student population, which has high disposable income). This is one reason the CEO's comment about Cincinnati seemed ill-advised--why aggravate a huge potential clientele base in the Midwest by casting a large city there in a less-than-complimentary light? In any case, it appears that Peet's may be slowing growth unnecessarily by not pursuing all of its options in terms of creating retail stores as well as alliances with local grocery chains. Peet's curious business strategy of not aggressively pursuing more store openings is why I am currently neutral on the stock, as well as the fact that many American consumers are heavily in debt and may have less disposable income in 2009 than they did in 2007 and 2008. But make no mistake--Peet's coffee is still the best because of its emphasis on quality.
FYI: Peet's Coffee Earnings Call Transcript
Netflix, Inc. Shareholder Meeting, May 21, 2008
Netflix (NFLX) had one of the shortest and strangest shareholder meetings I've ever been to. I am now realizing the time and day a company sets its meeting is important in analyzing whether they even want people to show up. Netflix had its shareholder meeting on a day other than Friday; in addition, the meeting was held at 3:00PM, too late after lunch, and too early before getting off work for most people to attend. It looked like less than 10 non-employees appeared at the meeting. While short interest in Netflix is quite high, the stock has done very well compared to the rest of the market. You would think that Netflix would want to show off its comparative stock performance. You'd be wrong. There was no presentation whatsoever. Only the Netflix logo appeared in the background of what appeared to be an auditorium. The food--well, there wasn't any real food. Some sodas and cookies were on a table with napkins. Take all this together, and you've got a PR campaign opportunity missed for what is basically a media company.
The meeting was in Los Gatos, CA, NFLX's HQ. This is not a distribution center, so don't bring your DVDs to the building and expect them to take it. The CEO is Reed Hastings, and he went up to the podium, said that Netflix was a company that offered media content online and through a DVD subscription service. After that short statement, he immediately launched into the Q&A session.
One person asked how Netflix intended to grow, given that all the people she knew already had Netflix. Mr. Hastings replied that in the Bay Area, they had good penetration in the market. 20% of the people in the Bay Area were signed up already. However, in other cities, such as Chicago and Boston, market penetration and brand recognition were still not at high levels. Therefore, there was plenty of room to grow.
The CEO pointed out that NFLX had won a customer satisfaction award.
Another person asked how many distribution centers Netflix had, and their location. Mr. Hastings replied that they had 50 centers located in about the 50 largest cities in the U.S., covering 95% of their current subscribers.
The CEO pointed out that although the company has been around for about a decade, it named itself Netflix, not "DVD-by-Mail" because it knew that eventually, the real market would be online. Nevertheless, the DVD format is still very profitable for companies, who aren't yet completely on board with the online streaming media format. (The underlying current, as I interpreted it, was that media companies make so much money on DVDs that they have no incentive to change their business model.) As a result, Mr. Hastings said that the DVD market should remain in place and be profitable for the next 10 to 20 years. (This would be good news for Toshiba and its Blu-ray format; however, the CEO never mentioned Blu-ray at all.)
NFLX has 100,000 movie titles. One interesting question was about how Netflix would adapt to globalization in an age where anyone could relocate to a lower-cost locale and set up a competing company. This dove-tailed with a later question about whether Netflix had considered selling its service to other countries' citizens because of the scalability of delivering online content. The CEO said that to use each film, each country has to provide you with authorization and rights to use it; in other words, it's a "country by country" analysis, and NFLX was planning on staying in the U.S.
I asked two questions. One, what did Netflix think about the potential merger between Circuit City and Blockbuster, and how did it plan on responding to it? This caught the CEO somewhat off guard, and he said that I knew as much as he did about it, and that when and if it happened, he would take a look at it. My second question was what the company planned on doing with captions as it moved to more online delivery (most online delivery lacks captions, and on many older films, captions are non-existent, even on DVD--if someone is hearing impaired, they wouldn't be able to really enjoy the online delivery service without captions). The CEO replied that the caption was basically another file that had to be incorporated into the online delivery, but that the media companies hadn't yet focused on delivering that file. He expected that the media companies would eventually provide such files for online delivery, but given his earlier statement about media companies being happy with the status quo of DVDs, I'm not sure online content delivery will be accessible to older and/or hearing impaired persons anytime soon.
Almost right before the shareholder meeting, Netflix received publicity for its set-top box player, which allows its subscribers stream videos from the NFLX website into their TVs. This was a device developed with Roku, another company that was apparently founded by some NFLX ex-employees. 10,000 films and TV episodes will be offered for this service at this time. But NFLX may lose money the more people use its box and online service because it probably has to pay a fee or a higher fee to the media companies the more views its online films receive. With a DVD, once NFLX buys it, it belongs to NFLX and there's not much--at least under current laws--that the media companies can do to prevent NFLX from offering it to others. These would be good questions to ask at next year's meeting: Isn't it less profitable for NFLX to move its viewers into its online services? How is the fee structure set up between NFLX and the copyright owner of a film in terms of how the copyright owner gets paid for online delivery? Is it a one-time fee?
After the meeting, the CEO looked very uncomfortable talking to the remaining shareholders but humored us for a while. His main comments related to piracy, and how international expansion would be difficult because of all the piracy outside of the U.S. (However, a shareholder mentioned that online delivery was harder to steal because encryption could be more complex--you can't download an encrypted movie file as easily as you can copy a DVD--and that the encryption could have several layers that were constantly changing.) Another question was how NFLX was going to work with the X-Box and Microsoft. The CEO was very vague on that response. Once he was out of the auditorium, he practically bolted away, even cutting someone off in mid-sentence. I don't mean to say that Mr. Hastings is abusive or mean-spirited. He actually appears quite the opposite, i.e. he appears to be a good-humored, good-natured person, and went out of his way to make an older shareholder who wasn't a subscriber and who didn't quite understand the business feel comfortable.
All in all, a very strange experience. I got to thinking perhaps this company was going to be bought out and needed to keep mum. But given the recent alliance with Roku, a smaller company, and the level of short interest, that appears to be less of a sure thing. Still, a company like Netflix will definitely be one to watch, if only because they appear focused on their business--so focused, in fact, that they don't seem to want to have any shareholders show up and see what they're up to, at least not in person.
Update on May 25, 2008: I read the company's 10K. Here are some interesting highlights:
1. Netflix says it is calculating the value of options under a "lattice-binomial model" rather than the more popular Black-Scholes model. I have no idea what this means, but it's definitely interesting--is NFLX trying to hide something, or does it have cutting-edge economists on its staff?
2. From 2006 to 2007, Netflix grew from 5,083,000 subscribers to 6,718,000 subscribers.
3. Netflix settled some litigation with Blockbuster and received 7 million dollars. I would have liked to see more about the content of that litigation, but it's settled, and so the parties probably have to stay mum.
4. See page 12 of the 10K for some information on the online delivery payment format. "Our ability to provide our instant-watching feature...depends on studios licensing us content specifically for Internet delivery...Unlike DVD, Internet delivered content is not subject to the First Sale Doctrine [where you can do whatever you like with a DVD once you buy one of them]. As such we are completely dependent on the studios providing us licenses in order to access and distribute Internet delivered content. In addition, the studios have great flexibility in licensing content. They may elect to license content exclusively to a particular provider...For example, HBO licenses content from studios like Warner Bros., and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix."
It looks more and more like Netflix has to be bought out by a major producer of content to move towards its goal of being primarily an Internet delivery company.
Update on May 26, 2008: looks like Netflix's meeting wasn't always so brief. See
http://www.hackingnetflix.com/2006/05/netflix_annual__1.html
The meeting was in Los Gatos, CA, NFLX's HQ. This is not a distribution center, so don't bring your DVDs to the building and expect them to take it. The CEO is Reed Hastings, and he went up to the podium, said that Netflix was a company that offered media content online and through a DVD subscription service. After that short statement, he immediately launched into the Q&A session.
One person asked how Netflix intended to grow, given that all the people she knew already had Netflix. Mr. Hastings replied that in the Bay Area, they had good penetration in the market. 20% of the people in the Bay Area were signed up already. However, in other cities, such as Chicago and Boston, market penetration and brand recognition were still not at high levels. Therefore, there was plenty of room to grow.
The CEO pointed out that NFLX had won a customer satisfaction award.
Another person asked how many distribution centers Netflix had, and their location. Mr. Hastings replied that they had 50 centers located in about the 50 largest cities in the U.S., covering 95% of their current subscribers.
The CEO pointed out that although the company has been around for about a decade, it named itself Netflix, not "DVD-by-Mail" because it knew that eventually, the real market would be online. Nevertheless, the DVD format is still very profitable for companies, who aren't yet completely on board with the online streaming media format. (The underlying current, as I interpreted it, was that media companies make so much money on DVDs that they have no incentive to change their business model.) As a result, Mr. Hastings said that the DVD market should remain in place and be profitable for the next 10 to 20 years. (This would be good news for Toshiba and its Blu-ray format; however, the CEO never mentioned Blu-ray at all.)
NFLX has 100,000 movie titles. One interesting question was about how Netflix would adapt to globalization in an age where anyone could relocate to a lower-cost locale and set up a competing company. This dove-tailed with a later question about whether Netflix had considered selling its service to other countries' citizens because of the scalability of delivering online content. The CEO said that to use each film, each country has to provide you with authorization and rights to use it; in other words, it's a "country by country" analysis, and NFLX was planning on staying in the U.S.
I asked two questions. One, what did Netflix think about the potential merger between Circuit City and Blockbuster, and how did it plan on responding to it? This caught the CEO somewhat off guard, and he said that I knew as much as he did about it, and that when and if it happened, he would take a look at it. My second question was what the company planned on doing with captions as it moved to more online delivery (most online delivery lacks captions, and on many older films, captions are non-existent, even on DVD--if someone is hearing impaired, they wouldn't be able to really enjoy the online delivery service without captions). The CEO replied that the caption was basically another file that had to be incorporated into the online delivery, but that the media companies hadn't yet focused on delivering that file. He expected that the media companies would eventually provide such files for online delivery, but given his earlier statement about media companies being happy with the status quo of DVDs, I'm not sure online content delivery will be accessible to older and/or hearing impaired persons anytime soon.
Almost right before the shareholder meeting, Netflix received publicity for its set-top box player, which allows its subscribers stream videos from the NFLX website into their TVs. This was a device developed with Roku, another company that was apparently founded by some NFLX ex-employees. 10,000 films and TV episodes will be offered for this service at this time. But NFLX may lose money the more people use its box and online service because it probably has to pay a fee or a higher fee to the media companies the more views its online films receive. With a DVD, once NFLX buys it, it belongs to NFLX and there's not much--at least under current laws--that the media companies can do to prevent NFLX from offering it to others. These would be good questions to ask at next year's meeting: Isn't it less profitable for NFLX to move its viewers into its online services? How is the fee structure set up between NFLX and the copyright owner of a film in terms of how the copyright owner gets paid for online delivery? Is it a one-time fee?
After the meeting, the CEO looked very uncomfortable talking to the remaining shareholders but humored us for a while. His main comments related to piracy, and how international expansion would be difficult because of all the piracy outside of the U.S. (However, a shareholder mentioned that online delivery was harder to steal because encryption could be more complex--you can't download an encrypted movie file as easily as you can copy a DVD--and that the encryption could have several layers that were constantly changing.) Another question was how NFLX was going to work with the X-Box and Microsoft. The CEO was very vague on that response. Once he was out of the auditorium, he practically bolted away, even cutting someone off in mid-sentence. I don't mean to say that Mr. Hastings is abusive or mean-spirited. He actually appears quite the opposite, i.e. he appears to be a good-humored, good-natured person, and went out of his way to make an older shareholder who wasn't a subscriber and who didn't quite understand the business feel comfortable.
All in all, a very strange experience. I got to thinking perhaps this company was going to be bought out and needed to keep mum. But given the recent alliance with Roku, a smaller company, and the level of short interest, that appears to be less of a sure thing. Still, a company like Netflix will definitely be one to watch, if only because they appear focused on their business--so focused, in fact, that they don't seem to want to have any shareholders show up and see what they're up to, at least not in person.
Update on May 25, 2008: I read the company's 10K. Here are some interesting highlights:
1. Netflix says it is calculating the value of options under a "lattice-binomial model" rather than the more popular Black-Scholes model. I have no idea what this means, but it's definitely interesting--is NFLX trying to hide something, or does it have cutting-edge economists on its staff?
2. From 2006 to 2007, Netflix grew from 5,083,000 subscribers to 6,718,000 subscribers.
3. Netflix settled some litigation with Blockbuster and received 7 million dollars. I would have liked to see more about the content of that litigation, but it's settled, and so the parties probably have to stay mum.
4. See page 12 of the 10K for some information on the online delivery payment format. "Our ability to provide our instant-watching feature...depends on studios licensing us content specifically for Internet delivery...Unlike DVD, Internet delivered content is not subject to the First Sale Doctrine [where you can do whatever you like with a DVD once you buy one of them]. As such we are completely dependent on the studios providing us licenses in order to access and distribute Internet delivered content. In addition, the studios have great flexibility in licensing content. They may elect to license content exclusively to a particular provider...For example, HBO licenses content from studios like Warner Bros., and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix."
It looks more and more like Netflix has to be bought out by a major producer of content to move towards its goal of being primarily an Internet delivery company.
Update on May 26, 2008: looks like Netflix's meeting wasn't always so brief. See
http://www.hackingnetflix.com/2006/05/netflix_annual__1.html
China and Pollution
My neighbor, who is retired, just got back from a trip across China. He enjoyed the Forbidden City (Beijing) and the terracotta warriors in Xian. His major complaint was the pollution in China. He indicated that the sky was basically gray everywhere he went, and the farther west he went, the sky didn't get better--he just ran into sandstorms (China has deserts like many other countries). Many of the tourists with him started wearing mouth-masks and taking cough drops because they were coughing due to the pollution. As China advances, it will have to incorporate good environmental policies to continue sustainable growth. Companies, such as Cypress Semiconductor (CY), who are already wise to the opportunities in China, may be able to keep growing by investing in creating sustainable energy rather than older semiconductor technology. By some measures, China is already doing this; apparently, Shanghai's goal is to be completely electric in terms of vehicles by a certain date.
Friday, May 16, 2008
One-Liner
Mike LaSalle, the SF Chronicle's movie critic, had this great line in his review of "Before the Rains":
The leading character "is excellent as a professional man, no worse than most men, but one embodying the moral carelessness inherent in the blithe assumption of superiority."
An astounding sentence--it tells you everything you need to know about the character.
The leading character "is excellent as a professional man, no worse than most men, but one embodying the moral carelessness inherent in the blithe assumption of superiority."
An astounding sentence--it tells you everything you need to know about the character.
MGM Mirage Shareholder Mtg, May 13, 2008 (and "Star Trek: The Experience" Review)
I recently went to Las Vegas to attend the MGM Mirage annual meeting, which took place at the Luxor. The food spread was fabulous, as you might expect. There were several different kinds of jam, honey, pastries, and fruit juice, in addition to the usual coffee. Kirk Kerkorian was in the audience, and it was fun seeing his cameo appearance on the two large screens used to broadcast the speakers at the podium. The background on the stage used changing colors to highlight the theme this year, "Vision." (The full theme was listed in the annual report: "Vision with action can change the world." -- Futurist Joel Barker)
MGM opened by presenting how well they had done last year in terms of revenue. Of course, the stock was down about 40% this year, so the presentation, while entirely accurate in terms of breaking new records, seemed more historical than future-seeking. The CEO, J. Terrence Lanni, then made his own presentation and answered questions. He emphasized the new City Center project, which looks like a model city, combining retail, housing, and a resort, all in one location on the Strip (http://www.citycenter.com). MGM apparently owns more real estate on the Strip than any other casino operator, and is making good use of it. When asked a question about congestion, CEO Lanni said that he agreed that the project was contributing to the "Manhattanization" of Vegas, but there was no other option because of the limited land available for development near the Strip. He also said that residents should be thankful, because it was projects like these that allowed them not to pay any state income tax.
The presentation also mentioned the DubaiWorld alliance, where DubaiWorld, now a 9% owner, could eventually become a 20% owner. The CEO welcomed the investment and said he looked forward to expanding in Dubai and Abu Dhabi, saying that both countries had substantial experience in attracting tourism and building exquisite resorts. I had welcomed the international diversification of MGM's portfolio, but I had not considered the additional advantage of partnering with Dubai, which does have excellent experience in building luxury properties.
Some mention of an alliance with an Indian reservation in Detroit was mentioned, where MGM would lend its name and expertise to the resort in exchange for revenue-sharing. Another casino was also scheduled to open in Atlantic City, increasing MGM's geographic reach.
The alliance with the Detroit casino was part of an interesting revenue model called "capital-lite." Basically, MGM is willing to license its name to other casinos to give them credibility in exchange for revenue. It appears that such a business model will generate significant cash while involving minimal investment; however, in the long term, if these casinos do not do well or reduce quality, MGM's image may suffer.
The first "question" was from a government official from Detroit, thanking MGM for coming into their city and saying that they had a history of making the cities they entered better (a not-so-subtle request for more charitable donations for Detroit to ensure MGM's status as a cooperative, good neighbor). Some other questions dealt with personal issues, such as someone who was injured over a decade ago at the Excalibur property. The CEO said he couldn't take credit or detriment for whatever happened, because the event occurred before MGM bought out the property, but he was sorry for what happened. It was a very deft answer. Another person bemoaned the high prices for certain services, such as internet access at hotels. The CEO answered this question deftly also, asking whether the speaker had escalated his concerns to a manager at the time (the speaker said he had not). Someone else, apparently not happy with the complaints, got up and said that he had invested in MGM many years ago with Kirk Kerkorian's group, and apparently bought MGM bonds in the 80's and had done very well and encouraged people to stay in the stock for the long term.
That was sort of the theme of the day--that although the economy wasn't doing well, and the situation would be challenging, in the long run, MGM was positioned well, and much better positioned than its main competitors, the Las Vegas Sands (LVS) and the Wynn. Those two stocks were down more than MGM's stock year to date, and apparently, the newest LVS project, the Palazzo, wasn't doing as well as expected. There was some mention of how the federal government and California were taking away certain funds, thereby increasing the cost of building a highway directly from Southern California (Orange County?) to Las Vegas. The CEO mentioned the possible 20 billion dollar deficit was causing the California Governor to dip into other funds to balance the budget, thereby impacting transportation projects.
I asked two questions. One, which casinos brought in the most revenue and profit, and which brought in the least? The CEO mentioned that in terms of both revenue and profit, the top casinos were Bellagio, Mandalay Bay, and Mirage. I wasn't expecting the usual players to be on both lists, and I was hoping that some international resort, like the MGM Macau, would also be among the top producers, but it does make sense that the more established casinos would be the major revenue and profit generators. The CEO facetiously asked if he got a prize for answering correctly, but forgot to answer the question about which were the worst revenue and profit generators.
I also asked the last question, which basically went like this: "I feel there's a missing gap here today. You keep mentioning that there's going to be a recession, but you're spending money and you're not cutting back on expansion. In a recession, you make money by either cutting expenses or increasing prices, and you haven't said anything concrete that makes it sound like you're going to do either one. Some of the people who asked questions here today sounded like nudniks, but perhaps the one gentleman had a point about certain prices, especially internet use prices, being too high. Maybe MGM should reduce certain prices to attract more casual and mid-week visitors. As it stands, you're basically telegraphing that you're going to lose money because you're expanding and spending money while entering a recession."
The CEO responded by saying that the board had gone though several recessions [a dig at my younger age] and had done well eventually after each one. He said that lowering prices wouldn't work, because it would be like the failed strategy that gas stations took in the old days, when one station would lower prices by a penny, causing the competitor across the street to lower his prices, leading everyone to lose money. [This sounded like an anti-trust issue, and it concerns me generally when CEOs say they won't cut prices in any circumstance as a matter of policy.] He ended on a high note saying that MGM had made money in all kinds of economic environments, that its stock price would increase in the long term, that its stock price was too low right now, and he hoped that the investors would stick with MGM, and MGM would stick with its investors. His response received enthusiastic clapping from the audience, and the meeting was done.
I prefer CEOs that are humble (see John Deere's CEO, Robert Lane) and not so much "showman-y," but I am sure Mr. Lanni's colleagues consider him to be charismatic. In addition, Lanni was a former CFO, so he obviously has substance. Overall, I believe MGM will not be able to replicate its record in 2007 and will make less money in the short term, but I will watch its stock price carefully, and if it continues to plummet, at some point, it should make a good value buy.
For those of you who are interested in my Las Vegas accommodations, I stayed at the Las Vegas Hilton, which is different than the Hilton Grand Vacations Club (though both are near each other). The Hilton Vacations Club is on the Strip, though far from the main drag, and is the more traditional Hilton hotel. The LV Hilton is located behind the Rivieria Hotel and takes some physical effort to get there. When deciding where to stay, you should probably use the Hilton website (www.hilton.com) rather than the LV Hilton website (http://www.lvhilton.com). While you can still get Hilton points from either hotel, the LV Hilton is owned in part by a different company.
The LV Hilton hosts "Star Trek: The Experience." If you are staying at the hotel, you get a discount on an all-day pass (at least when I was there). The "Experience" consists of three parts--first is the open restaurant, Quark's Bar and Restaurant; second is the Borg Invasion; and third is the Klingon Encounter.
Quark's Restaurant looks just like the Deep Space Nine restaurant. If you are lucky, you will see an actual Ferengi come by and chat you up, and you can buy the rules of the Ferengi next door at the Star Trek store. When I went to a female Vulcan to ask a question about opening and closing times, she greeted me by saying, "Yes, human?" I started cracking up, but she kept a straight face. All the actors in the events are well-trained. That professionalism alone did it for me, and made me a fan of the "Experience."
The Borg Invasion is basically an invite into a genetic study that goes awry when the ship is attacked by the Borg. Several Borg entities, including the Queen, make an appearance, but I won't spoil it for anyone by saying more. This event is like Michael Jackson's "Captain EO" and Great America's "Days of Thunder," where the show revolves around 3-D effects (in the Borg event, it's actually "4D") and you, as the audience, get to participate in what is occurring.
I preferred the Klingon Encounter, because it is more action-oriented. It involves a roller-coaster type ride and really makes you feel like you are under attack. I enjoyed hearing Captain Picard's voice and actually seeing the interior of the Enterprise. If you can't go to both events, go to the Klingon Encounter, unless you are a bigger fan of Deep Space Nine and the doctor on that show.
There is also a "Behind the Scenes" tour, which I was unable to attend. Two people in line ahead of me went and raved about it. They also received a certificate of attendance, which was high-quality and something a fan would probably frame. Overall, I had a good time in Las Vegas and would recommend a trip there to anyone who is willing and able to walk long distances--the way the Vegas Strip is set up, you have to walk quite a bit to get from attraction to attraction.
© Matthew Rafat (2007)
MGM opened by presenting how well they had done last year in terms of revenue. Of course, the stock was down about 40% this year, so the presentation, while entirely accurate in terms of breaking new records, seemed more historical than future-seeking. The CEO, J. Terrence Lanni, then made his own presentation and answered questions. He emphasized the new City Center project, which looks like a model city, combining retail, housing, and a resort, all in one location on the Strip (http://www.citycenter.com). MGM apparently owns more real estate on the Strip than any other casino operator, and is making good use of it. When asked a question about congestion, CEO Lanni said that he agreed that the project was contributing to the "Manhattanization" of Vegas, but there was no other option because of the limited land available for development near the Strip. He also said that residents should be thankful, because it was projects like these that allowed them not to pay any state income tax.
The presentation also mentioned the DubaiWorld alliance, where DubaiWorld, now a 9% owner, could eventually become a 20% owner. The CEO welcomed the investment and said he looked forward to expanding in Dubai and Abu Dhabi, saying that both countries had substantial experience in attracting tourism and building exquisite resorts. I had welcomed the international diversification of MGM's portfolio, but I had not considered the additional advantage of partnering with Dubai, which does have excellent experience in building luxury properties.
Some mention of an alliance with an Indian reservation in Detroit was mentioned, where MGM would lend its name and expertise to the resort in exchange for revenue-sharing. Another casino was also scheduled to open in Atlantic City, increasing MGM's geographic reach.
The alliance with the Detroit casino was part of an interesting revenue model called "capital-lite." Basically, MGM is willing to license its name to other casinos to give them credibility in exchange for revenue. It appears that such a business model will generate significant cash while involving minimal investment; however, in the long term, if these casinos do not do well or reduce quality, MGM's image may suffer.
The first "question" was from a government official from Detroit, thanking MGM for coming into their city and saying that they had a history of making the cities they entered better (a not-so-subtle request for more charitable donations for Detroit to ensure MGM's status as a cooperative, good neighbor). Some other questions dealt with personal issues, such as someone who was injured over a decade ago at the Excalibur property. The CEO said he couldn't take credit or detriment for whatever happened, because the event occurred before MGM bought out the property, but he was sorry for what happened. It was a very deft answer. Another person bemoaned the high prices for certain services, such as internet access at hotels. The CEO answered this question deftly also, asking whether the speaker had escalated his concerns to a manager at the time (the speaker said he had not). Someone else, apparently not happy with the complaints, got up and said that he had invested in MGM many years ago with Kirk Kerkorian's group, and apparently bought MGM bonds in the 80's and had done very well and encouraged people to stay in the stock for the long term.
That was sort of the theme of the day--that although the economy wasn't doing well, and the situation would be challenging, in the long run, MGM was positioned well, and much better positioned than its main competitors, the Las Vegas Sands (LVS) and the Wynn. Those two stocks were down more than MGM's stock year to date, and apparently, the newest LVS project, the Palazzo, wasn't doing as well as expected. There was some mention of how the federal government and California were taking away certain funds, thereby increasing the cost of building a highway directly from Southern California (Orange County?) to Las Vegas. The CEO mentioned the possible 20 billion dollar deficit was causing the California Governor to dip into other funds to balance the budget, thereby impacting transportation projects.
I asked two questions. One, which casinos brought in the most revenue and profit, and which brought in the least? The CEO mentioned that in terms of both revenue and profit, the top casinos were Bellagio, Mandalay Bay, and Mirage. I wasn't expecting the usual players to be on both lists, and I was hoping that some international resort, like the MGM Macau, would also be among the top producers, but it does make sense that the more established casinos would be the major revenue and profit generators. The CEO facetiously asked if he got a prize for answering correctly, but forgot to answer the question about which were the worst revenue and profit generators.
I also asked the last question, which basically went like this: "I feel there's a missing gap here today. You keep mentioning that there's going to be a recession, but you're spending money and you're not cutting back on expansion. In a recession, you make money by either cutting expenses or increasing prices, and you haven't said anything concrete that makes it sound like you're going to do either one. Some of the people who asked questions here today sounded like nudniks, but perhaps the one gentleman had a point about certain prices, especially internet use prices, being too high. Maybe MGM should reduce certain prices to attract more casual and mid-week visitors. As it stands, you're basically telegraphing that you're going to lose money because you're expanding and spending money while entering a recession."
The CEO responded by saying that the board had gone though several recessions [a dig at my younger age] and had done well eventually after each one. He said that lowering prices wouldn't work, because it would be like the failed strategy that gas stations took in the old days, when one station would lower prices by a penny, causing the competitor across the street to lower his prices, leading everyone to lose money. [This sounded like an anti-trust issue, and it concerns me generally when CEOs say they won't cut prices in any circumstance as a matter of policy.] He ended on a high note saying that MGM had made money in all kinds of economic environments, that its stock price would increase in the long term, that its stock price was too low right now, and he hoped that the investors would stick with MGM, and MGM would stick with its investors. His response received enthusiastic clapping from the audience, and the meeting was done.
I prefer CEOs that are humble (see John Deere's CEO, Robert Lane) and not so much "showman-y," but I am sure Mr. Lanni's colleagues consider him to be charismatic. In addition, Lanni was a former CFO, so he obviously has substance. Overall, I believe MGM will not be able to replicate its record in 2007 and will make less money in the short term, but I will watch its stock price carefully, and if it continues to plummet, at some point, it should make a good value buy.
For those of you who are interested in my Las Vegas accommodations, I stayed at the Las Vegas Hilton, which is different than the Hilton Grand Vacations Club (though both are near each other). The Hilton Vacations Club is on the Strip, though far from the main drag, and is the more traditional Hilton hotel. The LV Hilton is located behind the Rivieria Hotel and takes some physical effort to get there. When deciding where to stay, you should probably use the Hilton website (www.hilton.com) rather than the LV Hilton website (http://www.lvhilton.com). While you can still get Hilton points from either hotel, the LV Hilton is owned in part by a different company.
The LV Hilton hosts "Star Trek: The Experience." If you are staying at the hotel, you get a discount on an all-day pass (at least when I was there). The "Experience" consists of three parts--first is the open restaurant, Quark's Bar and Restaurant; second is the Borg Invasion; and third is the Klingon Encounter.
Quark's Restaurant looks just like the Deep Space Nine restaurant. If you are lucky, you will see an actual Ferengi come by and chat you up, and you can buy the rules of the Ferengi next door at the Star Trek store. When I went to a female Vulcan to ask a question about opening and closing times, she greeted me by saying, "Yes, human?" I started cracking up, but she kept a straight face. All the actors in the events are well-trained. That professionalism alone did it for me, and made me a fan of the "Experience."
The Borg Invasion is basically an invite into a genetic study that goes awry when the ship is attacked by the Borg. Several Borg entities, including the Queen, make an appearance, but I won't spoil it for anyone by saying more. This event is like Michael Jackson's "Captain EO" and Great America's "Days of Thunder," where the show revolves around 3-D effects (in the Borg event, it's actually "4D") and you, as the audience, get to participate in what is occurring.
I preferred the Klingon Encounter, because it is more action-oriented. It involves a roller-coaster type ride and really makes you feel like you are under attack. I enjoyed hearing Captain Picard's voice and actually seeing the interior of the Enterprise. If you can't go to both events, go to the Klingon Encounter, unless you are a bigger fan of Deep Space Nine and the doctor on that show.
There is also a "Behind the Scenes" tour, which I was unable to attend. Two people in line ahead of me went and raved about it. They also received a certificate of attendance, which was high-quality and something a fan would probably frame. Overall, I had a good time in Las Vegas and would recommend a trip there to anyone who is willing and able to walk long distances--the way the Vegas Strip is set up, you have to walk quite a bit to get from attraction to attraction.
© Matthew Rafat (2007)
Thursday, May 15, 2008
Wesco Shareholder Meeting, May 7, 2008
If you're a Berkshire Hathaway shareholder, you know about Charlie Munger, the quick-witted lawyer who sits next to Warren Buffett and usually makes a brief comment that encapsulates in five seconds what Warren just took about three minutes explaining. Mr. Munger has his own company, Wesco (WSC), a subsidiary of Berkshire. To attend the meeting, which takes place after the Berkshire Hathaway meeting in Omaha, you can buy individual shares of WSC, or your ownership of Berkshire Hathaway automatically entitles you to admission. After going to the Berkshire meeting in Omaha, many fans, especially money managers, come to Pasadena, CA to hear Charlie speak. I saw so many money managers and dapper suits, I felt out of place with my jeans and more casual wear. The entire meeting, before it starts, really seems like one big networking event.
This year, the event took place at a special tent set up in the Pasadena Convention Center, about 25 minutes from Burbank Airport, the closest airport to Pasadena. Pasadena is a clean, diverse city that hosts the famous Rose Bowl and Rose Parade. I enjoyed walking around the older downtown area, i.e. the Old Pasadena section, which has several independent stores and old churches. While there, I discovered that President Jimmy Carter would be appearing at Vroman's bookstore to sign his new book about his mother. My friend bought a book, which came with two entrance tickets to see President Carter.
The meeting itself lasted about three and a half hours. Refreshments were basic--just coffee, some lemon bars, and some unsavory cookies. Mr. Munger had some interesting quotes, as always, in his version of "Socratic solitaire":
My favorite: "There will be a lot of chicanery in the new world."
We should expect returns of around 4 to 5% annually in the near future.
When talking about the overbuying of homes, which led to the bubble in housing prices, and the subprime mess, Mr. Munger talked about how investment "activities rely on momentum from self-fulfilling prophecies" and blamed greed, envy, and terrible accounting. Munger's fans were delighted when they heard, "Include me out," a favorite Mungerism.
Mr. Munger told a delightful story about keeping the big picture in mind and being willing to buck conventional thought. He talked about a boy in mathematics class who had to answer the question, "How many sheep are left in the pen when the gate is open and one leaves out of the ten?" The entire class told the teacher, "nine." One student, Billy, said, "ten." "Poor Billy," said the teacher, "you just don't understand math, do you?" Billy said, "No teacher, you don't understand sheep." That story got some uproarious laughs from the crowd.
"In accounting, liabilities are 100% good. It's the assets you have to worry about."
"Greenspan overdosed on Ayn Rand."
Those were some of the highlights of the day. Overall, it was fun listening to Munger speak, and I bought his book, Poor Charlies Almanack. Mr. Munger signed it and took a picture with me.
Afterwards, my friend and I went to see President Carter at Vroman's. Secret Service ushered everyone along very quickly, and people who wanted to take pictures could only do so for a few seconds before being told to move on. President Carter looked healthy and vibrant, and it was fun being in the presence of a former U.S. President, even if only very briefly. One tip: you cannot put your hand in your pocket anywhere near the President. I put my hand in my pocket to take out my camera, and was approached by two Secret Service agents almost immediately, who backed off only when they saw the camera.
I was exhausted when I returned to the airport the same day to head back to San Jose, but all in all, it was a pleasant experience, and one I would do again.
Was Plato a Libertarian?
"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws." -- Plato (427 - 347 B.C.)
In an unrelated note, the DJIA closed at almost 13,000 today. I already sold most of my individual stock holdings last month, but today I sold most of my mutual funds also. I now hold 30% of my retirement portfolio in various ETFs, international bond funds, and preferred shares, and 70% in money market funds. With my non-retirement funds, I have about 90% of my monies in money market funds. I just don't see a good investing horizon with 125 dollar a barrel oil (predicted to go to 200 dollars by Goldman Sachs); a stronger dollar, which will reduce earnings of multinationals, who haven't adjusted earnings guidance downward yet; a possible recession; no Medicare solution in sight; a 12 to 20 billion dollar deficit projected in California, one of the world's largest economies; a possible Democratic Congress and Democratic presidency, which I may support, but which will lead to a higher capital gains tax; and the tapering off of the effects of the Fed's actions.
Given these facts, only those with opaque rose-tinted glasses would be optimistic about the stock market over the next year and a half. But I hope I am wrong.
In an unrelated note, the DJIA closed at almost 13,000 today. I already sold most of my individual stock holdings last month, but today I sold most of my mutual funds also. I now hold 30% of my retirement portfolio in various ETFs, international bond funds, and preferred shares, and 70% in money market funds. With my non-retirement funds, I have about 90% of my monies in money market funds. I just don't see a good investing horizon with 125 dollar a barrel oil (predicted to go to 200 dollars by Goldman Sachs); a stronger dollar, which will reduce earnings of multinationals, who haven't adjusted earnings guidance downward yet; a possible recession; no Medicare solution in sight; a 12 to 20 billion dollar deficit projected in California, one of the world's largest economies; a possible Democratic Congress and Democratic presidency, which I may support, but which will lead to a higher capital gains tax; and the tapering off of the effects of the Fed's actions.
Given these facts, only those with opaque rose-tinted glasses would be optimistic about the stock market over the next year and a half. But I hope I am wrong.
Cypress Semiconductor Annual Shareholder Meeting (2008)
Cypress Semiconductor (CY) runs its meeting professionally. Doors are closed after the meeting time, although a security guard allowed me to enter. Two employees check your proxy card, along with your ID, and write out a name tag before letting you in. CY gave away a nice bag this year to all attending shareholders. Also, the food spread was more than your typical coffee and cut fruit--it was a smallish buffet, with some shish kabob and several selections of cheese and whole fruits. In the back of the room, there are several displays about how CY's technology is used in applications as diverse as timers and solar panels.
CY has one billion dollars in cash-that's the first thing I noticed from its presentation. CY is headed by an engineer (T.J. Rodgers), and he gave us a lecture on how CY's technology is more efficient and creative than its competitors. For example, his PSoC, or Programmable System on a Chip, allows companies to move components on a reference design board to get the result they want. In addition, the PCBs do not require the use of a Cypress proprietary IC chip, allowing more flexibility. By being more flexible about the chips necessary for its software and design boards, CY may be able to charge for its boards and software at some point in the future. In contrast, its competitors typically give away their boards and software because they are only functional with the companies' own IC chip, where the company plans on making sales and profits. CY, however, works with several different companies, including NOK and MOT, which use Cypress chips in some of their phones. With respect to "sideloading," which includes the task of uploading movies or content onto a phone using a USB device, I thought it was interesting that the RIMM and MOT phones were currently among the fastest, while the Sony ERIC phone was the slowest. Apple's iPhone speed was in between.
CY's PSoC design may also be more environmentally friendly, because fewer boards and components are necessary to accomplish several different tasks. The presentation included showing us how one such board could create several different kinds of light in different intensities, all from one board. (We were treated to a fun, small-scale Disney Fantasia show, where the CEO, who was holding a rectangular 8 watts LED light, would tell an associate across the room, "Blue! Now turn it up [in intensity]. Now green. Now white." You get the picture.)
This is where it gets interesting. CY's technology encourages the use of LED lights, which last longer and use less power, and are therefore more environmentally friendly. There are three types of lights: LED, CFL (compact fluorescent), and INCAND (incandescent), in order of most environmentally friendly to least. The LED light required the most upfront investment--around 12 to 20 dollars--but over its life of multiple years, sometimes even as long as 17 years, the buyer would spend less because electricity bills would be lower. Therefore, while the INCAND bulb only cost around 4 dollars initially, it actually cost 300 dollars more than the LED light over the same period of time because of the extra "juice" it requires. The CFL was in between, but the LED light was clearly superior when lifetime costs, not just initial costs, were factored in. The lesson I took was to try to find LED lights whenever possible, despite the higher upfront cost.
However, despite this new angle and method of designing semiconductors, the charts showed that semiconductor sales were decreasing and have been declining for quite some time. Most of CY's growth comes from its earlier acquisition of Sunpower, a solar panel technology company. [Update: CY has spun off Sunpower.] CY focused on the fact that its solar panels are far more efficient than its competitors, especially those using "thin film" or "conventional" solar panels. CY also mentioned that it was going to present the tax consequences of spinning off its Sunpower company to shareholders to the Board that same day.
I was very impressed with the presentation and this company. Few companies present themselves so professionally and are on the cutting edge of innovation.
CY has one billion dollars in cash-that's the first thing I noticed from its presentation. CY is headed by an engineer (T.J. Rodgers), and he gave us a lecture on how CY's technology is more efficient and creative than its competitors. For example, his PSoC, or Programmable System on a Chip, allows companies to move components on a reference design board to get the result they want. In addition, the PCBs do not require the use of a Cypress proprietary IC chip, allowing more flexibility. By being more flexible about the chips necessary for its software and design boards, CY may be able to charge for its boards and software at some point in the future. In contrast, its competitors typically give away their boards and software because they are only functional with the companies' own IC chip, where the company plans on making sales and profits. CY, however, works with several different companies, including NOK and MOT, which use Cypress chips in some of their phones. With respect to "sideloading," which includes the task of uploading movies or content onto a phone using a USB device, I thought it was interesting that the RIMM and MOT phones were currently among the fastest, while the Sony ERIC phone was the slowest. Apple's iPhone speed was in between.
CY's PSoC design may also be more environmentally friendly, because fewer boards and components are necessary to accomplish several different tasks. The presentation included showing us how one such board could create several different kinds of light in different intensities, all from one board. (We were treated to a fun, small-scale Disney Fantasia show, where the CEO, who was holding a rectangular 8 watts LED light, would tell an associate across the room, "Blue! Now turn it up [in intensity]. Now green. Now white." You get the picture.)
This is where it gets interesting. CY's technology encourages the use of LED lights, which last longer and use less power, and are therefore more environmentally friendly. There are three types of lights: LED, CFL (compact fluorescent), and INCAND (incandescent), in order of most environmentally friendly to least. The LED light required the most upfront investment--around 12 to 20 dollars--but over its life of multiple years, sometimes even as long as 17 years, the buyer would spend less because electricity bills would be lower. Therefore, while the INCAND bulb only cost around 4 dollars initially, it actually cost 300 dollars more than the LED light over the same period of time because of the extra "juice" it requires. The CFL was in between, but the LED light was clearly superior when lifetime costs, not just initial costs, were factored in. The lesson I took was to try to find LED lights whenever possible, despite the higher upfront cost.
However, despite this new angle and method of designing semiconductors, the charts showed that semiconductor sales were decreasing and have been declining for quite some time. Most of CY's growth comes from its earlier acquisition of Sunpower, a solar panel technology company. [Update: CY has spun off Sunpower.] CY focused on the fact that its solar panels are far more efficient than its competitors, especially those using "thin film" or "conventional" solar panels. CY also mentioned that it was going to present the tax consequences of spinning off its Sunpower company to shareholders to the Board that same day.
I was very impressed with the presentation and this company. Few companies present themselves so professionally and are on the cutting edge of innovation.
Top 4 Traits for Success
The author of http://www.businesspundit.com/ posted this shorthand list of traits designed for success:
1) the ability to postpone short-term gain for a greater long-term reward;
2) optimism;
3) ability to deal with stress; and
4) initiative.
The discussion referenced whether IQ was genetic or learned, and the author's point was that even large differences in IQ did not matter in the modern world as much as the four traits above. I have always said that delayed self-gratification is extremely important to success, but with so many higher paying careers involving an understanding of mathematics, an ability or willingness to understand mathematics will also be important. As technology slowly eliminates the need for various service careers, those sectors will have to unionize or determine how to move the workers who are displaced into more productive positions. Yet, no IQ test can pinpoint desire (#4 above), which can overcome many inherent flaws.
1) the ability to postpone short-term gain for a greater long-term reward;
2) optimism;
3) ability to deal with stress; and
4) initiative.
The discussion referenced whether IQ was genetic or learned, and the author's point was that even large differences in IQ did not matter in the modern world as much as the four traits above. I have always said that delayed self-gratification is extremely important to success, but with so many higher paying careers involving an understanding of mathematics, an ability or willingness to understand mathematics will also be important. As technology slowly eliminates the need for various service careers, those sectors will have to unionize or determine how to move the workers who are displaced into more productive positions. Yet, no IQ test can pinpoint desire (#4 above), which can overcome many inherent flaws.
Angry Bear
Mr. Houghton has published a fascinating piece on the cost of living in different cities:
http://angrybear.blogspot.com/2008/05/spacial-price-index.html
(This article references http://www.bea.gov/papers/pdf/aten_estimates_state_metro_2005.pdf)
http://angrybear.blogspot.com/2008/05/spacial-price-index.html
(This article references http://www.bea.gov/papers/pdf/aten_estimates_state_metro_2005.pdf)
Tuesday, May 6, 2008
Who wrote this? You'll be surprised...
"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit...But the fact is that there are now more claims outstanding than real assets...In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value...Deficit spending is simply a scheme for the confiscation of wealth."
It's not Ron Paul. But it is another well-known libertarian, speaking in 1966.
Speaking of changing values, "Seanbaby," a local columnist for a free San Jose local magazine, writes a humorous column. This is from his most recent column: "What our parents wouldn't dream of doing until they were married and strapped into safety equipment is how children say hi to each other today. Hell, I couldn't believe what 15-year-olds did when I was 16. We're less than a generation away from Baby Gap selling thong panties." (The Wave, Vol. 8, Issue 10) Absolutely hilarious.
It's not Ron Paul. But it is another well-known libertarian, speaking in 1966.
Speaking of changing values, "Seanbaby," a local columnist for a free San Jose local magazine, writes a humorous column. This is from his most recent column: "What our parents wouldn't dream of doing until they were married and strapped into safety equipment is how children say hi to each other today. Hell, I couldn't believe what 15-year-olds did when I was 16. We're less than a generation away from Baby Gap selling thong panties." (The Wave, Vol. 8, Issue 10) Absolutely hilarious.
SIRF Meeting --Canceled
When I went to the Doubletree Hotel in San Jose to attend the SIRF shareholder meeting, three people informed me that the meeting had been re-scheduled to August 19, 2008. Apparently, because SIRF is a Delaware corporation, the meeting has to be done within a strict time period after providing notice to shareholders of record, and SIRF had the record date a few days too early. They wouldn't tell me what law firm failed to do the research and due diligence, but at least I learned some new tidbits on incorporating in Delaware.
I won't be able to attend the upcoming Google shareholder meeting, but I did read the annual report and letter from Larry Page. It's not a Warren Buffet letter, i.e., a comprehensive letter that touches on national and international issues as well as investing, but it's pretty darn good. I wouldn't mind hanging out with Mr. Page, based on the tone and enthusiasm he seems to have.
Most interesting in Google's annual report are the risk factors, which all annual reports have, but Google's risks seem more detailed and realistic than other reports. Google talks about more than just the IP and legal risks commonly found in other company reports. Google talks about how anti-spamming filters, ad blocking software, and copyright protections may affect its ability to find data. Google struck me as moving towards the direction of "free information" in an era where everyone is trying to protect information and make it more onerous to copy anything online. Google also listed a risk factor of not being able to control bandwidth providers and data centers, meaning that Google's growth is ultimately reliant, like most online companies, on the Baby Bells and other internet service companies to ensure that consumers get internet access at a reasonable cost. This reliance struck me as somewhat odd, because I thought I heard a while back that Google had purchased some wireless spectrum in an government auction, but perhaps I am confusing two different issues. Google also reiterated its anti-dividend philosophy.
I will be going to Wesco's shareholder meeting tomorrow in Pasadena to see Buffett's right-hand man, Charlie Munger. The Berkshire Hathaway meeting is over in Omaha, and Mr. Munger is back in California.
I won't be able to attend the upcoming Google shareholder meeting, but I did read the annual report and letter from Larry Page. It's not a Warren Buffet letter, i.e., a comprehensive letter that touches on national and international issues as well as investing, but it's pretty darn good. I wouldn't mind hanging out with Mr. Page, based on the tone and enthusiasm he seems to have.
Most interesting in Google's annual report are the risk factors, which all annual reports have, but Google's risks seem more detailed and realistic than other reports. Google talks about more than just the IP and legal risks commonly found in other company reports. Google talks about how anti-spamming filters, ad blocking software, and copyright protections may affect its ability to find data. Google struck me as moving towards the direction of "free information" in an era where everyone is trying to protect information and make it more onerous to copy anything online. Google also listed a risk factor of not being able to control bandwidth providers and data centers, meaning that Google's growth is ultimately reliant, like most online companies, on the Baby Bells and other internet service companies to ensure that consumers get internet access at a reasonable cost. This reliance struck me as somewhat odd, because I thought I heard a while back that Google had purchased some wireless spectrum in an government auction, but perhaps I am confusing two different issues. Google also reiterated its anti-dividend philosophy.
I will be going to Wesco's shareholder meeting tomorrow in Pasadena to see Buffett's right-hand man, Charlie Munger. The Berkshire Hathaway meeting is over in Omaha, and Mr. Munger is back in California.
Sunday, May 4, 2008
SJ Mercury News: Personnel Costs = 2/3 of City Budget
The San Jose Mercury News has published on its front page the scandal that has been occurring local government--see April 15, 2008, "$200,000 club." The article by John Woolfolk states, "Personnel costs [salaries and benefits] account for two-thirds of the city's operating budget, which has been plagued by multimillion-dollar deficits...salaries have grown 38 percent..."
So 2/3 of the taxes we pay that go to the city get put into government workers' pockets. What happened to spending money on private citizens and their children by buying them books, computers, new classrooms, etc.? If we use this money wisely, perhaps we can give every single high school student a laptop at school that is locked to a desk, with different passwords for different students to use. Also, why not implement high-tech security systems to protect children?
There ought to be a law requiring that any government salary increase be voter-approved above certain numbers, say, $99,000, or anything that is more than the consumer price index (CPI) (the downside to setting a specific percentage like a 5% annual target is that by doing so, we'll probably guarantee annual raises of 4.99%). Let us know what we're paying for with our own money, or we'll be hostage to government unions, who seem to increase their salaries year after year, without regard for budgetary constraints.
So 2/3 of the taxes we pay that go to the city get put into government workers' pockets. What happened to spending money on private citizens and their children by buying them books, computers, new classrooms, etc.? If we use this money wisely, perhaps we can give every single high school student a laptop at school that is locked to a desk, with different passwords for different students to use. Also, why not implement high-tech security systems to protect children?
There ought to be a law requiring that any government salary increase be voter-approved above certain numbers, say, $99,000, or anything that is more than the consumer price index (CPI) (the downside to setting a specific percentage like a 5% annual target is that by doing so, we'll probably guarantee annual raises of 4.99%). Let us know what we're paying for with our own money, or we'll be hostage to government unions, who seem to increase their salaries year after year, without regard for budgetary constraints.
Five Short Blasts, by Pete Murphy
Five Short Blasts (Open Window Publishing, Clarkston, MI (2007)) is a very interesting economic book from a non-economist. Mr. Murphy is actually a former engineer who was laid off and began studying economics on his own. His book is well-researched and uses his technical background to analyze charts and statistics from several government websites. His major points are these:
1. We need to reduce population and immigration, even legal and family-based immigration, to have a better quality of life.
2. Reducing population would allow us to preserve more of the environment and bring us closer to nature.
3. We should have higher tariffs on products from densely-populated countries.
4. The more densely populated we become, the less we are able to afford and buy larger products; larger products such as cars and boats include major commodities, such as timber, steel, and other items that require more processing or more refining; the nature of the materials put into heavier and larger consumer items requires more people and therefore more jobs; thus, as we become densely populated and live in smaller spaces, our ability to buy larger items diminishes, causing a loss of jobs, especially in manufacturing. [This is his unique point--not too many economists have explored the relationship between consumption of heavier, larger items and a reduction in available land.]
5. When less densely populated countries trade with densely populated countries, the less populated country always loses, because the higher population in the other country creates more competition and therefore lower wages, thereby bringing down the standards of the less dense nation. [In other words, Murphy doesn't believe in Ricardo's "comparative advantage" principle.]
6. On page 189, Murphy comes up with a great idea to preserve our food supply--he says that rather than rely on imports or an unstable supply of immigrant workers, we should establish a "Farm Corps," like the Peace Corps, "for high school and college students to earn decent wages working the fields during the summer." I think this might actually work, assuming the wages were high enough to attract at least high school students. I'm not so sure college students would be involved, unless there was some loan forgiveness included. I am also skeptical of yet another farm subsidy program, but this one seems more innocuous than paying farmers not to grow food.
Having summarized Murphy's ideas, his book suffers from a fatal flaw: he doesn't account for poorer nations ever becoming affluent or getting a middle class. If only 10% of the Chinese population enters the ranks of the middle class, that's 120 million people who can buy our products and who might appreciate the higher value and safety that they provide in a more regulated environment. Murphy seems to think that even as these countries get more dollars to spend, they will all somehow continue to remain permanently poor. His thinking is that because there is a much higher supply of labor in more densely populated countries, there will always be more people willing to work for meager wages, so a country like the U.S. can never really be an equal trading partner with a country like China or India. But again, the entire country doesn't have to get rich in order to balance the trade deficit--if only 20% become middle class, that's enough to create a population that will hopefully want to buy iPhones and Dell laptops and Brooks Brothers suits.
That's another flaw in Murphy's thinking--even if larger items become less attractive as available land decreases, there are plenty of high margin products that are in demand, such as iPhones. The real problem is the regulatory environment in less developed countries, which hurt U.S. revenue by not protecting IP rights. That issue has nothing to do with population.
Also, the U.S. isn't anywhere near optimal population yet--almost the entire Midwest needs more population, not less, and is projected to lose even more population in coming years. With the Medicare deficit, we need more immigrants, not fewer, to help support these entitlement programs. The key issue is what kind of immigrants we want, and how to get immigrants who are law-abiding and who will pay taxes. So far, the family-based and company-based programs have seemed to work just fine in attracting hard-working immigrants. Yet, Murphy wants to reduce almost all immigration, even legal immigration.
Overall, Murphy has a unique perspective by including demographics with an economic analysis. If you want to read a Malthusian who laments the good old days, when lines were short and people could drive easily on sparsely populated roads on cheaper gas, you'll love Murphy's book. If, however, you believe that this country needs more people to cover the entitlement programs and debt we've run up, and that we're not densely populated yet, you might not be converted to his ideas. Yet, his overall point is correct--the smaller the population, the more you can control growth in a steady progression that leaves fewer people behind. But if that's the main goal, there are other ways of achieving it.
I'm not sure if job displacement and income inequality can be solved by changing immigration or population rather than analyzing how to further women's rights. If you really want to reduce population and reduce the trade deficits between countries, you have to give women jobs and contraception in more densely populated countries. Countries that promote a woman's right to work provide more options for women, who then have access to more money and more power, and usually choose to have fewer children. This creates two benefits: one, the brains of about half of the population get utilized more in such countries, leading to more stability; and two, by having fewer kids and another income, families can invest more in their children, which makes society more stable. To his credit, Murphy makes the same point I do about limiting births by talking about contraception and education at the end of his book, where he also talks about his Catholic faith. But he continues to stick to his idea that if we want to have a better quality of life, we need to take affirmative steps to reduce population by limiting immigration. See page 198: "[Y]ou only have three choices when addressing immigration: a) balance it with emigration, b) tell U.S. citizens they can have fewer children in order to make room for immigrants, or c) drive the death rate higher. The first of these is the only logical choice." In that context, Murphy is clearly anti-immigrant, but in true engineer form: "I know that the things I've proposed may sound like the rantings of a xenophobic madman.. [But] [i]t's a simple matter of math and the need to stabilize our population." That's probably not the right path to take in an era of massive public debt. Providing more jobs and funds to women in all countries, especially less developed countries, would reduce population more effectively. Still, you have to give Murphy credit for trying to sound five warning blasts about what he feels is the denigration of the way of life he used to know, when this country was smaller, more manageable, and seemingly less harsh to its citizens.
1. We need to reduce population and immigration, even legal and family-based immigration, to have a better quality of life.
2. Reducing population would allow us to preserve more of the environment and bring us closer to nature.
3. We should have higher tariffs on products from densely-populated countries.
4. The more densely populated we become, the less we are able to afford and buy larger products; larger products such as cars and boats include major commodities, such as timber, steel, and other items that require more processing or more refining; the nature of the materials put into heavier and larger consumer items requires more people and therefore more jobs; thus, as we become densely populated and live in smaller spaces, our ability to buy larger items diminishes, causing a loss of jobs, especially in manufacturing. [This is his unique point--not too many economists have explored the relationship between consumption of heavier, larger items and a reduction in available land.]
5. When less densely populated countries trade with densely populated countries, the less populated country always loses, because the higher population in the other country creates more competition and therefore lower wages, thereby bringing down the standards of the less dense nation. [In other words, Murphy doesn't believe in Ricardo's "comparative advantage" principle.]
6. On page 189, Murphy comes up with a great idea to preserve our food supply--he says that rather than rely on imports or an unstable supply of immigrant workers, we should establish a "Farm Corps," like the Peace Corps, "for high school and college students to earn decent wages working the fields during the summer." I think this might actually work, assuming the wages were high enough to attract at least high school students. I'm not so sure college students would be involved, unless there was some loan forgiveness included. I am also skeptical of yet another farm subsidy program, but this one seems more innocuous than paying farmers not to grow food.
Having summarized Murphy's ideas, his book suffers from a fatal flaw: he doesn't account for poorer nations ever becoming affluent or getting a middle class. If only 10% of the Chinese population enters the ranks of the middle class, that's 120 million people who can buy our products and who might appreciate the higher value and safety that they provide in a more regulated environment. Murphy seems to think that even as these countries get more dollars to spend, they will all somehow continue to remain permanently poor. His thinking is that because there is a much higher supply of labor in more densely populated countries, there will always be more people willing to work for meager wages, so a country like the U.S. can never really be an equal trading partner with a country like China or India. But again, the entire country doesn't have to get rich in order to balance the trade deficit--if only 20% become middle class, that's enough to create a population that will hopefully want to buy iPhones and Dell laptops and Brooks Brothers suits.
That's another flaw in Murphy's thinking--even if larger items become less attractive as available land decreases, there are plenty of high margin products that are in demand, such as iPhones. The real problem is the regulatory environment in less developed countries, which hurt U.S. revenue by not protecting IP rights. That issue has nothing to do with population.
Also, the U.S. isn't anywhere near optimal population yet--almost the entire Midwest needs more population, not less, and is projected to lose even more population in coming years. With the Medicare deficit, we need more immigrants, not fewer, to help support these entitlement programs. The key issue is what kind of immigrants we want, and how to get immigrants who are law-abiding and who will pay taxes. So far, the family-based and company-based programs have seemed to work just fine in attracting hard-working immigrants. Yet, Murphy wants to reduce almost all immigration, even legal immigration.
Overall, Murphy has a unique perspective by including demographics with an economic analysis. If you want to read a Malthusian who laments the good old days, when lines were short and people could drive easily on sparsely populated roads on cheaper gas, you'll love Murphy's book. If, however, you believe that this country needs more people to cover the entitlement programs and debt we've run up, and that we're not densely populated yet, you might not be converted to his ideas. Yet, his overall point is correct--the smaller the population, the more you can control growth in a steady progression that leaves fewer people behind. But if that's the main goal, there are other ways of achieving it.
I'm not sure if job displacement and income inequality can be solved by changing immigration or population rather than analyzing how to further women's rights. If you really want to reduce population and reduce the trade deficits between countries, you have to give women jobs and contraception in more densely populated countries. Countries that promote a woman's right to work provide more options for women, who then have access to more money and more power, and usually choose to have fewer children. This creates two benefits: one, the brains of about half of the population get utilized more in such countries, leading to more stability; and two, by having fewer kids and another income, families can invest more in their children, which makes society more stable. To his credit, Murphy makes the same point I do about limiting births by talking about contraception and education at the end of his book, where he also talks about his Catholic faith. But he continues to stick to his idea that if we want to have a better quality of life, we need to take affirmative steps to reduce population by limiting immigration. See page 198: "[Y]ou only have three choices when addressing immigration: a) balance it with emigration, b) tell U.S. citizens they can have fewer children in order to make room for immigrants, or c) drive the death rate higher. The first of these is the only logical choice." In that context, Murphy is clearly anti-immigrant, but in true engineer form: "I know that the things I've proposed may sound like the rantings of a xenophobic madman.. [But] [i]t's a simple matter of math and the need to stabilize our population." That's probably not the right path to take in an era of massive public debt. Providing more jobs and funds to women in all countries, especially less developed countries, would reduce population more effectively. Still, you have to give Murphy credit for trying to sound five warning blasts about what he feels is the denigration of the way of life he used to know, when this country was smaller, more manageable, and seemingly less harsh to its citizens.
Saturday, May 3, 2008
Barry Goldwater
Earlier, I quoted Barry Goldwater's most famous quote, about vice and virtue. What follows is an excerpt from Barry Goldwater's 1964 speech at the 28th Republican National Convention, where he accepted the nomination for president and made the famous statement. Even back then, Senator Goldwater was dismissed as a loony, much like Ron Paul is being dismissed today. But his words ring true and make me wistful about how far we've fallen since the 1960's:
Now, my fellow Americans, the tide has been running against freedom. Our people have followed false prophets. We must, and we shall, return to proven ways-- not because they are old, but because they are true. We must, and we shall, set the tide running again in the cause of freedom. And this party, with its every action, every word, every breath, and every heartbeat, has but a single resolve, and that is freedom - freedom made orderly for this nation by our constitutional government; freedom under a government limited by laws of nature and of nature's God; freedom - balanced so that liberty lacking order will not become the slavery of the prison cell; balanced so that liberty lacking order will not become the license of the mob and of the jungle.
Now, we Americans understand freedom. We have earned it, we have lived for it, and we have died for it. This Nation and its people are freedom's model in a searching world. We can be freedom's missionaries in a doubting world. But, ladies and gentlemen, first we must renew freedom's mission in our own hearts and in our own homes.
During four futile years, the administration which we shall replace has distorted and lost that faith... [Oh what I would give to hear the new 2008 president say those words...]
Those who seek absolute power, even though they seek it to do what they regard as good, are simply demanding the right to enforce their own version of heaven on earth. And let me remind you, they are the very ones who always create the most hellish tyrannies. Absolute power does corrupt, and those who seek it must be suspect and must be opposed. Their mistaken course stems from false notions of equality, ladies and gentlemen. Equality, rightly understood, as our founding fathers understood it, leads to liberty and to the emancipation of creative differences. Wrongly understood, as it has been so tragically in our time, it leads first to conformity and then to despotism.
Fellow Republicans, it is the cause of Republicanism to resist concentrations of power, private or public, which enforce such conformity and inflict such despotism. It is the cause of Republicanism to ensure that power remains in the hands of the people. And, so help us God, that is exactly what a Republican president will do with the help of a Republican Congress... [As we can see, the Republican Party is a mere chimera of its former self in the new millennium.]
The beauty of the very system we Republicans are pledged to restore and revitalize, the beauty of this Federal system of ours is in its reconciliation of diversity with unity. We must not see malice in honest differences of opinion, and no matter how great, so long as they are not inconsistent with the pledges we have given to each other in and through our Constitution. Our Republican cause is not to level out the world or make its people conform in computer regimented sameness. Our Republican cause is to free our people and light the way for liberty throughout the world. [This key issue--diversity--will become more important as the U.S. becomes more diverse, and the Democrats have taken away this issue from the Republicans, which has led to their success. Senator Obama's speeches show that it is his Democratic platform that seeks to "unite diversity with unity," which should be the first goal of any politician.]
Ours is a very human cause for very humane goals.
[Sigh. One day, I hope we all wake up and remember again what America stands for.]
Now, my fellow Americans, the tide has been running against freedom. Our people have followed false prophets. We must, and we shall, return to proven ways-- not because they are old, but because they are true. We must, and we shall, set the tide running again in the cause of freedom. And this party, with its every action, every word, every breath, and every heartbeat, has but a single resolve, and that is freedom - freedom made orderly for this nation by our constitutional government; freedom under a government limited by laws of nature and of nature's God; freedom - balanced so that liberty lacking order will not become the slavery of the prison cell; balanced so that liberty lacking order will not become the license of the mob and of the jungle.
Now, we Americans understand freedom. We have earned it, we have lived for it, and we have died for it. This Nation and its people are freedom's model in a searching world. We can be freedom's missionaries in a doubting world. But, ladies and gentlemen, first we must renew freedom's mission in our own hearts and in our own homes.
During four futile years, the administration which we shall replace has distorted and lost that faith... [Oh what I would give to hear the new 2008 president say those words...]
Those who seek absolute power, even though they seek it to do what they regard as good, are simply demanding the right to enforce their own version of heaven on earth. And let me remind you, they are the very ones who always create the most hellish tyrannies. Absolute power does corrupt, and those who seek it must be suspect and must be opposed. Their mistaken course stems from false notions of equality, ladies and gentlemen. Equality, rightly understood, as our founding fathers understood it, leads to liberty and to the emancipation of creative differences. Wrongly understood, as it has been so tragically in our time, it leads first to conformity and then to despotism.
Fellow Republicans, it is the cause of Republicanism to resist concentrations of power, private or public, which enforce such conformity and inflict such despotism. It is the cause of Republicanism to ensure that power remains in the hands of the people. And, so help us God, that is exactly what a Republican president will do with the help of a Republican Congress... [As we can see, the Republican Party is a mere chimera of its former self in the new millennium.]
The beauty of the very system we Republicans are pledged to restore and revitalize, the beauty of this Federal system of ours is in its reconciliation of diversity with unity. We must not see malice in honest differences of opinion, and no matter how great, so long as they are not inconsistent with the pledges we have given to each other in and through our Constitution. Our Republican cause is not to level out the world or make its people conform in computer regimented sameness. Our Republican cause is to free our people and light the way for liberty throughout the world. [This key issue--diversity--will become more important as the U.S. becomes more diverse, and the Democrats have taken away this issue from the Republicans, which has led to their success. Senator Obama's speeches show that it is his Democratic platform that seeks to "unite diversity with unity," which should be the first goal of any politician.]
Ours is a very human cause for very humane goals.
[Sigh. One day, I hope we all wake up and remember again what America stands for.]
Friday, May 2, 2008
Demographics and Future Economics
The WSJ published one of the most comprehensive articles I've ever seen on modern U.S. demographics on May 1, 2008 (page A3: "Surge in U.S. Hispanic Population Driven by Births, Not Immigration"). Here is one section from the article:
According to the Pew Research Center, whites are projected to make up only 45% of the working-age population in 2050, down from 68% in 2005. The center projects that the share of Hispanics in the working-age population will rise to 31% from 14%. The ratio of senior citizens to working-age people age 25 to 64 will grow to 411 seniors per 1,000 working-age people in 2030 from 250 per 1,000 in 2010, according to Dowell Myers, a demographer at the University of Southern California.
"If you are pro-economic growth, you must be pro-immigration and pro-Hispanic, because we don't have the workers," says Donald Terry, a senior official at the Inter-American Development Bank in Washington.
I won't pass up this opportunity to paraphrase Julian Bond, the most inspiring civil rights leader living today. He has said that integration and more cross-cultural understanding are essential, because today, benefits like Social Security are paid by people with names like Smith, Blake, and McAllister. In the future, however, they will be covered by people with names like Sanchez, Akeem, and Priya. Therefore, the children of the Smiths, Blakes, and McAllisters have a direct stake in seeing that the Sanchez families do well so everyone can continue having a cohesive financial net.
One issue not discussed is that many immigrants do not learn English, which limits their earning and career potential. In some neighborhoods in San Jose, I have knocked on a client's door, and will see about five people watching Telemundo in a small apartment. It is the six year old daughter, not the parent, that comes to me asking whom I want to see in English. Our ability to integrate that six year old girl is crucial to California's success, because she will have a difficult choice when she is older. Will she move away from her family into a more affluent neighborhood as her earning capacity increases, or will she stay in a poorer, less integrated neighborhood so she can assist her family? The decision to seek economic opportunities in society sometimes entails leaving the neighborhood in which you grew up. That's an easy choice if you know your parents can take care of themselves. But what if they don't speak English?
There is another, more troubling issue--any country that guarantees gun rights must ensure that its entire population is sufficiently optimistic about the future. Intuitively, people who have access to guns but no belief in a better future will pose problems.
At the end of the day, most governments "bribe" their citizens to avoid being overthrown--the question is whether such bribery takes place in the form of a promise of an unbridled, open future that leads to innovation, or in the form of enforcing a re-distributive income policy that provides expensive benefits like subsidized housing, free health care, and even free food (some governments pay for bread lines for the poor). In a capitalist system with a Second Amendment, this policy preference is no small question. If there continues to be widespread income inequality, the winds will inevitably shift to benefits and bigger government rather than less government and more freedom. And if that's the case, why not just accelerate the process and adopt European-style governance, which has more experience with administering this kind of large government? (The EU, of course, is imitating the U.S., indicating that it doesn't believe its system is working perfectly, either.)
U.S. Population Map: http://www.usgcrp.gov/usgcrp/Library/nationalassessment/images/PopMap-o.jpg
Scott Burns and Taxes
Financial journalist Scott Burns used to work for the Dallas Morning News, and now he has his own website. His most recent column explored taxes and had some interesting facts:
http://assetbuilder.com/blogs/scott_burns/archive/2008/05/02/the-truth-about-income-taxes.aspx
Here is an excerpt (published under fair use guidelines in good faith under 17 USC 504(c)(2)--these excerpts also incorporate facts publicly available)
Only 953,000 taxpayers--- about 1 percent of the total who paid taxes--- paid at the top 35 percent tax rate in 2005. They paid $315.4 billion in taxes on their $1,094 billion in income.
http://assetbuilder.com/blogs/scott_burns/archive/2008/05/02/the-truth-about-income-taxes.aspx
Here is an excerpt (published under fair use guidelines in good faith under 17 USC 504(c)(2)--these excerpts also incorporate facts publicly available)
Only 953,000 taxpayers--- about 1 percent of the total who paid taxes--- paid at the top 35 percent tax rate in 2005. They paid $315.4 billion in taxes on their $1,094 billion in income.
The most common marginal tax rate is 15 percent. That’s the rate paid by 54.4 million taxpayers...The second most common marginal tax rate is 10 percent. About 25.5 million taxpayers pay taxes at that rate...So of the two-thirds of all households that pay anything in income taxes, about three-quarters pay at 15 percent or less.
Another 22 million, 3.7 million and 1.5 million households pay income taxes at marginal rates of 25, 28 and 33 percent, respectively. In the year 2000 this top 25 percent of all taxpaying filers paid a whopping 83.6 percent of all income taxes. By 2005 they paid 85.6 percent of all taxes...
You were in the top 25 percent of taxpayers in 2005 if your taxable income exceeded $61,055.
Millions of Americans have no idea what fat cats they are.
Copyright: Scott Burns, "The Truth about Income Taxes" (2008), www.assetbuilder.com blogBarry Goldwater
Mr. Goldwater is known as a true conservative. Here is one of his famous quotes:
I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue.
It's a sad day when the Democrats appear to be pro-war, while the Republicans appear to be against fiscal responsibility. The two-party system is failing America.
I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue.
It's a sad day when the Democrats appear to be pro-war, while the Republicans appear to be against fiscal responsibility. The two-party system is failing America.
Monday, April 28, 2008
CA Demographics, 2008 Population Growth
Some people were contesting my earlier statement that California, for the first time in years, was losing population. They were technically correct--it appears that CA is still experiencing population growth, but at a reduced rate. My overall point remains the same--with fewer people, California will most likely receive less tax revenue. See this link:
http://www.ebudget.ca.gov/BudgetSummary/ImagePages/FG-DEM-01.html
The budget website is quite interesting to review. Tax dollars are being sent into K-12 education services more than any other area:
http://www.ebudget.ca.gov/agencies.html
http://www.ebudget.ca.gov/StateAgencyBudgets/6010/6110/spr.html
So the next time California teachers ask you for more money, keep in mind that most of your tax dollars already go to their schools, especially if you pay property taxes. As a result of these outlays, which are very hard to reduce, California is one of the few states projected to have budget gaps between two and eleven billion dollars in 2009. The only other states in this ignominious category? Florida, Nevada, New Jersey, and Arizona. See
http://www.ncsl.org/bookstore/productDetail.htm?prodid=0151010153pdf
Something must be done about our K-12 schools. Vouchers, anyone? (At least for a start...)
http://www.ebudget.ca.gov/BudgetSummary/ImagePages/FG-DEM-01.html
The budget website is quite interesting to review. Tax dollars are being sent into K-12 education services more than any other area:
http://www.ebudget.ca.gov/agencies.html
http://www.ebudget.ca.gov/StateAgencyBudgets/6010/6110/spr.html
So the next time California teachers ask you for more money, keep in mind that most of your tax dollars already go to their schools, especially if you pay property taxes. As a result of these outlays, which are very hard to reduce, California is one of the few states projected to have budget gaps between two and eleven billion dollars in 2009. The only other states in this ignominious category? Florida, Nevada, New Jersey, and Arizona. See
http://www.ncsl.org/bookstore/productDetail.htm?prodid=0151010153pdf
Something must be done about our K-12 schools. Vouchers, anyone? (At least for a start...)
Thomas Paine
So many people have mangled Thomas Paine's famous saying, I feel the need to quote it properly. See Rights of Man (1791):
When it can be said by any country in the world, my poor are happy, neither ignorance nor distress is to be found among them, my jails are empty of prisoners, my streets of beggars, the aged are not in want, the taxes are not oppressive, the rational world is my friend because I am the friend of happiness. When these things can be said, then may that country boast its constitution and government. Independence is my happiness, the world is my country and my religion is to do good.
Actually, the incorrect quotation does sound better: "The World is my country, all mankind are my brethren, and to do good is my religion."
When it can be said by any country in the world, my poor are happy, neither ignorance nor distress is to be found among them, my jails are empty of prisoners, my streets of beggars, the aged are not in want, the taxes are not oppressive, the rational world is my friend because I am the friend of happiness. When these things can be said, then may that country boast its constitution and government. Independence is my happiness, the world is my country and my religion is to do good.
Actually, the incorrect quotation does sound better: "The World is my country, all mankind are my brethren, and to do good is my religion."
Sunday, April 27, 2008
The Anti-Imperalist League
Yes, such a group actually existed back in the day, and Mark Twain was a member. Below is part of the Anti-Imperialist League's mission statement, which refers to the American annexation of the Philippines and the Philippine-American War:
We deny that the obligation of all citizens to support their Government in times of grave National peril applies to the present situation. If an Administration may with impunity ignore the issues upon which it was chosen, deliberately create a condition of war anywhere on the face of the globe, debauch the civil service for spoils to promote the adventure, organize a truth suppressing censorship and demand of all citizens a suspension of judgment and their unanimous support while it chooses to continue the fighting, representative government itself is imperiled.
We hold, with Abraham Lincoln, that "no man is good enough to govern another man without that man's consent. When the white man governs himself, that is self-government, but when he governs himself and also governs another man, that is more than self-government--that is despotism." "Our reliance is in the love of liberty which God has planted in us. Our defense is in the spirit which prizes liberty as the heritage of all men in all lands. Those who deny freedom to others deserve it not for themselves, and under a just God cannot long retain it."
Boston, 1899
We deny that the obligation of all citizens to support their Government in times of grave National peril applies to the present situation. If an Administration may with impunity ignore the issues upon which it was chosen, deliberately create a condition of war anywhere on the face of the globe, debauch the civil service for spoils to promote the adventure, organize a truth suppressing censorship and demand of all citizens a suspension of judgment and their unanimous support while it chooses to continue the fighting, representative government itself is imperiled.
We hold, with Abraham Lincoln, that "no man is good enough to govern another man without that man's consent. When the white man governs himself, that is self-government, but when he governs himself and also governs another man, that is more than self-government--that is despotism." "Our reliance is in the love of liberty which God has planted in us. Our defense is in the spirit which prizes liberty as the heritage of all men in all lands. Those who deny freedom to others deserve it not for themselves, and under a just God cannot long retain it."
Boston, 1899
Subscribe to:
Posts (Atom)