Dollars and Jens
Wednesday, March 31, 2004
MSN on international outsourcing:
A study released today by the Information Technology Association of America (ITAA) says that outsourcing white-collar jobs has thrown some Americans out of work, but predicts that the trend will ultimately lower inflation, create jobs and boost productivity in the United States.


Savings from outsourcing allowed companies to create 90,000 new jobs in 2003, with more than one in 10 of them in Silicon Valley or elsewhere in California, researchers said. The report predicts that in 2008, outsourcing will create 317,000 jobs -- 34,000 in California.

Meanwhile, Fed governor Ben Bernanke, tackling an issue that has resonated in the U.S. presidential campaign, said there has been undue focus on the movement of U.S. jobs abroad.


David Butler's book, "Bottom-line Call Center Management," examining the job that employs 7% of the American work force, hits print just as the topic becomes a political hot potato.

"What CEOs don't tell reporters is that outsourcing is still experimental and the experiment may not be working," said Butler, who heads the international economic development doctoral program at the University of Southern Mississippi in Hattiesburg. "Overseas call centers can cost more in customer goodwill than they save in staff salaries."

Many corporate executives who outsourced call centers to Asia confided to Butler that they are plotting quiet moves back to U.S. soil. They don't want to lose face by admitting errors. But they don't want to lose American clients who resent having customer service calls answered on the other side of the world.
Meanwhile, Hot Topic is reported to enjoy a competitive advantange over other fashion retailers by virtue of its buying American, and thus receiving inventory more quickly after placing the order; other retailers are seeing inventory go out of style while it's still crossing the ocean.

There will continue to be jobs for Americans, and more if we don't handicap our economy by forgoing opportunity to do things more efficiently than international competitors. Sometimes that will mean doing things ourselves; sometimes it will mean hiring someone else to them for us. If the people with money at stake are making the decisions, more likely than not they will make the right ones.

I think I'll point out that anyone interested in I-bonds in the near future should be advised to make their purchases within the next month; the real rate on those purchased by April 30 will be 1.1%, while those purchased thereafter will be at a rate to be announced then, but almost certainly lower (my best guess is .9%, but I wouldn't be surprised to see it at .8%).

Radio Flyer moves wagon manufacturing to China
Radio Flyer Inc. will stop making its famous red metal wagons in Chicago by the fall, halting its final manufacturing operation and releasing nearly half of its 90 employees.

Although Radio Flyer has resisted this move since it exited the steel-wheelbarrow business 15 years ago, the 87-year-old company finally succumbed to low-cost production overseas after determining its Chicago plant was too expensive to maintain.
That's the report from the Tribune, which requires registration; I first heard the story on WBBM 780, and the Washington Times clarifies that
Radio Flyer moved production of steel wheelbarrows offshore in 1989 because of the high cost of making the wheelbarrows in the United States, but kept production of the icon red wagon, beloved by generations of American children, at home.
I should clarify that this is only the metal wagons that are going to China; the plastic ones are still made in Wisconsin. That's in the WBBM story.

Tuesday, March 30, 2004
On the occasion of an OpinionJournal foray into current oil prices and Strategic Petroleum Reserve management, I thought I'd point out that this isn't a short-term price spike or at least not exceptionally so; we can't simply wait a few months for oil to go to $25 (or at least that's what informed people with their livelihoods on the line believe). Oil futures go down somewhat as one takes delivery into the future, and perhaps it would be worth purchasing forward contracts for delivery in September to save a few dollars a barrel if we feel it's worth the chance that we'd need it before then, but after the tragedy in Spain two weeks ago this past Sunday, I'm not sure the administration believes it would be wise to postpone it past then.

A very important point made by the article is easy to forget in our short-term search for solutions:
If every President turned to the oil reserve when prices shoot up, companies would reduce the amount of inventory they are willing to carry and exacerbate the supply problem. ... The oil reserve was not designed, nor should it be used, to relieve consumers at the pump for a few weeks.
Occasional short-term shortages in oil are what make storage worth building, and the accompanying steepness in the oil futures prices is what makes building that storage profitable. For the government to regularly try to import oil from the future is ultimately for it merely to take over a role properly played by the private sector.

CME sues CBOE's new futures arm over VIX contract
The Chicago Mercantile Exchange has sued the Chicago Board Options Exchange, claiming contracts on the CBOE's new futures exchange violate the CME's exclusive right to trade futures on the S&P 500 and other Standard and Poor's stock indexes.


The CME questioned the legality of CFE's volatility index, or VIX, futures which started trading on Friday, and futures on variance, another aspect of stock index volatility, which are expected to launch in the next few months.

Monday, March 29, 2004
Textiles, Trade, and Journalism
Check out this Virginia Postrel post about Scalamandre, a textile company, moving operations from New York to South Carolina. She points out the difference between the coverage in the New York Times and the coverage in the Greenville [, South Carolina] News.

My friend David Trumbull happens to be the Director of Member Services at the National Textile Association. He sent me the following (with emphasis added by me):
Regarding Scalamandre's jacquard weaving operation relocating from New York to South Carolina, the [New York Times] got the story wrong. The wage difference between New York and South Carolina was not the reason for moving South. Scalamandre is a successful company in an extremely high-end niche market in a capital (not labor) intense industry. And Scalamandre is growing and paying rather good wages, despite foreign competition and a general weakness in the domestic textile industry. In fact Scalamandre's growth is exactly what prompted the move. Land is very expensive in New York, taxes are very high in New York, and (likely the biggest factor in the decision to move) it is all but impossible to get the needed environmental okays and other government permits required to expand a manufacturing operation in the metro region.

I do not know the management at Scalamandre, but I do speak frequently with other textile executives with plants in the New York metro area and have heard comments is that there is an unwritten government policy of eliminating manufacturing jobs from the metro area.

Incidentally, the president of the NTA is scheduled to be on CNBC tomorrow at 9:15 eastern time.

J&J to Give Away New AIDS Drug
From Monday's Journal (link requires a subscription):
In a move to get an experimental medicine to impoverished developing-world markets, Johnson & Johnson will give away a promising AIDS drug to a nonprofit organization.

Today, the International Partnership for Microbicides plans to announce it has reached a royalty-free agreement with Tibotec Pharmaceuticals Ltd., a Belgian subsidiary of J&J, to develop the drug for use in poor countries. The announcement will be made at the Microbicides Conference 2004 in London.
The Financial Times appears to have a free version of the story.

I know Merck has given away drugs in the past (the one that sticks in my memory is a river-blindness drug). Merck has justified this, in part, as a way to please its researchers -- they had gone into drug research to cure sick people, and Merck had gone into business to cure sick people, so they were going to cure sick people. The Mectizan program cost them a little money, but I doubt it's a coincidence that Merck continues to have the most respected R&D department in the industry, their recent pipeline problems notwithstanding.

Friday, March 26, 2004
Can Flash Gordon defeat the mighty Zithromax?
In class this last Tuesday, we had a guest-speaker, an emerging-markets bonds manager who has been consistently beating his benchmark. His strategy is quite different than I had expected. I thought he'd come in and talk about assessing political situations, but the first thing he said is that he doesn't make credit/country bets -- if 5% of the index is in Brazil, 5% of his exposure will be in Brazil. So, he must make interest rate bets within countries, right? No, he avoids that, too. Most of what he does amounts to arbitrage -- he'll find a Brazilian bond which is underpriced relative to an other Brazilian issue, and he'll long-short, taking care to avoid many of the inherent problems (the biggest being, as Keynes put it, that the market can stay irrational longer than you can stay solvent; c.f. Long-Term Capital Management). He actually manages to have less exposure to many countries' credit risks than the index, while having as much or more exposure to their interest rates. When Venezuela defaults, he'll win. On the off chance that Venezuela doesn't default, he'll win then, too.

The week before, we had a guest from a venture capital fund which invests in drug companies. The subject of product naming came up in a digression, so I asked him a question that's been nagging at me since at least last summer: why do drugs always have names that sound like comic-book villians? He said I'd have to ask someone in marketing. Which I had kind of expected.

Thursday, March 25, 2004
Has Buffett Lost It? Or Has Marketwatch?
I just ran across this week-old article. It's funny, in an Ed-Wood-movie kind of way.
Last year, his investment vehicle Berkshire Hathaway underperformed the Standard & Poor's 500 Index by nearly 8 percentage points.
That happens with the share price once in a while, depending on the mood swings of the market. Much less often does it happen with the intrinsic value, or -- more objectively -- book value.
He sidestepped the bubble (and all those gains too).
I'll just let that speak for itself.
He barely participates in the technology sector (besides a reported throw-away personal ownership of 100 shares of Microsoft).
And Microsoft has no exposure to insurance...
And his biggest claim to fame is: buy and hold, otherwise known as value investing.
I hope nobody who read this piece learned the term "value investing" from it. Value investing means valuing stocks as pieces of companies, which they are. One can hold forever, or sell when a company gets overvalued. Similarly, a growth manager -- who looks for a company with good growth prospects, and buys it at whatever price (s)he can get -- could hold a stock for a week or a decade.

Anyway, have a good laugh.

Wednesday, March 24, 2004
Oil Inventories
Oil inventories were up higher than expected last week. This is good news if you're hoping for lower gasoline/oil prices.

Remember the Sanofi effort to buy Aventis? If not, here's a little reminder.

Well, Novartis is interested in Aventis, too, but only with the backing of Aventis management, and only if the French government stays out of it. So, will the French pass up a good opportunity to keep quiet? Apparently so.
France signalled its opposition to a Novartis deal last week as Prime Minister Jean-Pierre Raffarin declared "the construction of a large European pharmaceutical group that is profoundly marked by Franco-German relations is strategic for France." He also invoked France's national interest in concern over the fate of vaccines that would be useful to fight against terrorism.
Sanofi is French, which is why the French are backing them. Aventis is mostly German, with a lot of French as well. Novartis is Swiss.

Tuesday, March 23, 2004
Drug Discovery and Diminishing Returns
Derek Lowe is discussing diminishing returns to investment in the pharma industry. I particularly liked this anecdote:
A special case, perhaps, is Alexander Fleming. One time in his later years, he was being given a tour of a more up-to-date research site, and someone exclaimed "Just think of what you might have discovered here!" Fleming looked around at the gleaming work surfaces and said "Well, not penicillin, anyway."
He continues, though:
I'm not arguing for poverty. I think that a certain minimum level of funding is necessary for good science - below that and you spend too much time in grunt work, the equivalent of digging ditches with kitchen spoons and mowing the lawn with scissors. But once past that, I don't think the correlation of budget and results is all that good. There's perhaps a broad trend, but nothing you'd want to stake your career on.
He offers explanations, too.

Thursday, March 18, 2004
Initial claims at 336,000, which to my recollection is the lowest number ever, though my recollection only goes back several months. Seriously, this may be the lowest in more than a year, possibly a few, though it's a volatile number and that fact is largely a curiosity.

Royal Dutch/Shell
I didn't know until reading Wednesday's Journal that Royal Dutch and Shell are not the same company, but two separate companies with merged operations. They've had combined operations since 1907, but Shell is still a British company, while Royal Dutch is, I believe, Swedish. The WSJ article is still available to subscribers online. Here's a taste:
Royal Dutch/Shell Group's admission in January that it overstated petroleum-reserve data has stung investors in both stocks of the Anglo/Dutch oil concern. But not in exactly the same way.

In the week following the news, shares of Royal Dutch Petroleum Co. fell, in dollar terms, 9.6% on the Amsterdam Stock Exchange. Shares of Shell Transport & Trading Co. in London fell a little more -- 10.1%. At the end of January, the relationship flipped, with Royal Dutch's stock having lost more ground than Shell following the reserve announcement. As of Tuesday, the tally had flipped back, with Royal Dutch down 8.1% and Shell down 8.7% from the January announcement.

This divergence isn't, strictly speaking, supposed to happen. In 1907, Holland's Royal Dutch and Britain's Shell agreed to combine their interests on a 60%-40% basis while remaining separate entities. Because they share the same profits and dividends, the two companies should trade lock step with one another.
I'm told that Shell is typically trading at a discount, as it is now, according to the Journal.

Wednesday, March 17, 2004
international outsourcing
Point 2, Steve, is made in the Economic Report of the President, though without that China graph, which sounds compelling. Some of the decline perhaps is from international outsourcing, but more of it is just improved productivity.

Incidentally, has everyone forgotten in the past year that the term "outsourcing" has been widely used for a long time to refer to a company hiring another company to do tasks it had previously performed itself? The term seems suddenly to have as its primary meaning the movement of jobs from one country to another, often performed by the same company as did them before. To ease my whiplash, I'm trying to prepend the adjective "international" when I use the word in its new manner.

Update Here we go: The procuring of services or products, such as the parts used in manufacturing a motor vehicle, from an outside supplier or manufacturer in order to cut costs. Now "outside" means "outside the country" rather than "outside the company".

Tuesday, March 16, 2004
The other day, I caught a fellow from the Cato Institute discussing outsourcing on CNBC's Kudlow and Cramer. Two interesting points he made:
  1. The number one exporter of services in the world? As you might guess, that would be us.
  2. He showed a chart of the number of manufacturing jobs vs. time. There was a significant decline. The graph, he pointed out, was of manufacturing jobs in China. Outsourcing isn't causing a decline in manufacturing jobs -- productivity is causing the decline, just as it caused a decline in agricultural jobs a century ago.
The answer isn't protectionism -- the answer is to use some of our gains from trade to assist manufacturing employees in adjusting.

Ag futures
Soybeans traipsed above 996 cents before settling for the day at 989. (Prices have typically been about half that.) They could yet make it to $10. November soybeans, i.e. for delivery after this year's harvest, are above 750. (Front month corn's above 300.)

Federal Reserve statement. Looks like the last one to me.

Monday, March 15, 2004
explaining market moves
The major averages are vacillating near their session lows, with no sign of concerted buying emerging... Today's weakness can hardly be tied to a particular corporate event.
Well, they're hardly trying, are they? Not a corporate event, but the Spanish capitulation yesterday certainly raises the risk of future terrorist events.

Sunday, March 14, 2004
Linux Legal Battle -- Still In Discovery
It's been a while since I caught up with the lawsuit between SCO and IBM (if you missed the earlier stories, see below). They're still in discovery. SCO, though, is buying back shares after having seen its price drop -- and why not? There's cash on the books, and the stock is essentially an option, what with limited liability and all. Also, mildly interesting but probably not material is this story:
Investment company BayStar Capital has confirmed ties between two Linux foes, saying Thursday that a Microsoft referral led to $50 million in BayStar funding for the SCO Group.

"Yes, Microsoft did introduce BayStar to SCO," a BayStar representative said

Thursday, declining to share further details and repeating the firm's earlier position that Microsoft did not actually invest money in the deal.
Linux is a competitor with Microsoft's "Windows" product. If you didn't know that, you probably shouldn't be investing in this sector.

Previous References
A Premise Short of a Full Argument
Lawsuit News (continued)
IBM Subpoenas SCO Investors, Analysts
SCO Targets Torvalds, Stallman
Linux Lawsuit Update
SCO Group

Friday, March 12, 2004
On Not Taking Accounting Numbers As Given
There are a couple of stories in Thursday's Wall Street Journal (both of which start on page C1, in case you're following along at home) that highlight the importance of looking behind reported financial numbers. To start with, the newly-out-of-bankruptcy Global Crossing has set a U.S. record, by a factor of three, by reporting $24.879 billion in earnings (roughly $622/share) in the quarter ending December 31. The stock now has a ttm P/E ratio of .029. This does not necessarily indicate a bargain stock. There's a version of the story free on the web:
The telecommunications carrier Wednesday reported net income of $24.879 billion, which included reorganization-related gains that totaled $24.882 billion. The company didn't say what its results would have been excluding the gains. [Subtraction is left as an exercise for the reader. -- SJ]

As part of the reorganization, Global Crossing said it eliminated $8 billion in liabilities. Among other things, the company also recapitalized the business, which included the elimination of $16 billion in common and preferred equity, and $25 billion in accumulated losses as of Dec. 9, the date the company emerged from Chapter 11.
I seem to remember that JDSU took a quarterly loss twice that big a few years back.

The other story in the Journal is titled "Oil Reserves Can Sure Be Slick". You may (or may not) remember that a couple months ago, Royal Dutch/Shell lowered its "proved reserves" estimates. Quoth the Journal:
Every year, under U.S. accounting rules whose origins date to the 1970s energy crisis, publicly traded energy companies must publish disclosures detailing their production activities, estimates of their proved oil-and-gas reserves and estimates of the present value of the future cash-flow streams those reserves are expected to generate.

These aren't easy things to estimate -- as most energy companies readily point out in their annual reports. After all, the crude and natural gas sometimes are buried miles below the ground, often beneath deep water.

Indeed, when accounting regulators set the current disclosure rules in 1982, they decided that the figures only should be reported as "supplementary" information outside companies' official financial statements. The reason they cited at the time: the numbers weren't reliable enough to justify the cost of having them audited independently.

As of 1975,
energy companies had a choice between two types of financial-statement accounting, one called "successful efforts" favored by large multinationals, and the "full cost" approach favored by smaller independent drillers. The Financial Accounting Standards Board initially required the more-conservative successful-efforts approach, which forces companies to record drilling expenses more aggressively than under the other method. But in 1978, the Securities and Exchange Commission ruled that both methods would be acceptable. The commission then launched its effort to begin requiring disclosure of companies' reserves, in part to foster comparability between companies reporting under the different methods. It left the drafting of the disclosure rules to the FASB, which completed them in 1982.

I'm doing an internship with an energy analyst. He doesn't consider earnings to be comparable between companies. EBITDAX (EBITDA before exploration expenses) is more consistent. Cash flow is, at least, precise.

Thursday, March 11, 2004
I have the news that Spanish derivatives market Meff, in Madrid, opened and traded normally today, and lost no personnel.

Incidentally, initial claims this morning came in at 341,000, but nobody cares.

Tuesday, March 09, 2004
Mutual Funds
I promised an entry on mutual funds, in response to Buffett's letter, so here goes.

Buffett's complaint, in a nutshell, is that directors of mutual funds -- even more than directors of companies -- rubber-stamp management teams. In theory, they're supposed to negotiate for shareholders and represent shareholder interests; in practice, shareholders don't have any way to hold management accountable other than to sell their shares.

In my opinion, though, the practice isn't all that bad for shareholders, since the mutual funds are required to cash out their shares at a fair price. When management of a regular company is unaccountable, shareholders have to sell shares to each other -- nobody having an obligation to buy -- and management retains control of a substantial pool of capital that would be better managed by someone else.

I do think it's silly -- at best -- to have a board of directors that doesn't serve a purpose. I'd like to see the industry move either in the way Buffett suggests -- where boards of directors are serious -- or in the opposite direction -- where you entrust your money to, say, Fidelity, to manage, rather than to a fund's board of directors. The problem isn't the system itself so much as the charade.

Monday, March 08, 2004
Buffett's Letter
I do want to complain about Buffett's brief discussion of the tax code, in which he repeatedly conflates taxes on corporations with those on rich individuals, as well as those on Berkshire Hathaway with those on him in particular. In particular, he takes a comment by a U.S. Treasury official noting how little of Buffett's wealth ever has or ever will be seen by the federal government, and he attempts to rebut it by discussing how much Berkshire Hathaway pays in corporate taxes. It seems odd to me that he would do this.

Saturday, March 06, 2004
Buffett's Letter to Shareholders
If you don't care about Berkshire's operations -- or Buffett's comments on the industries in which the operating companies operate -- just read his comments on the dollar (starting with the first full paragraph of the 20th page, which is numbered 21), and on corporate governance and the mutual fund industry (starting toward the bottom of the sixth page, numbered 7).

I'll probably make some comments on mutual funds later. The letter -- available only in PDF format -- is here.

Friday, March 05, 2004
latest numbers
The payroll number this morning was a weak +21,000, and the subsequent bond rally overwhelmed our network. sigh

Market Efficiency
Last weekend, I was driving down to Brockton with a nearly-empty gas tank. I had hoped to make it all the way to Brockton before filling up, but with about 15 miles to go, the gas gauge was making me nervous, so I decided to stop at Braintree. The gas price was $1.759. This seemed high to me, so I only got two gallons. About forty minutes later, leaving Braintree, I filled the tank at $1.589.

Efficiency problems in the stock market are usually different from efficiency problems in the gasoline market -- you'll never find one person selling Cisco at $60/share and an other selling at $50. Inefficiencies are generally probabilistic; I thought it was unreasonable to believe, four years ago, that Yahoo was worth more than Berkshire Hathaway, but I'm sure someone had a (very bad) prediction of cash flows which justified it. I guess my point in telling this story is just that, while the market price of something is usually one of the best estimators of its value, it's not always spot on.

Berkshire Hathaway
Look for Warren Buffett's annual letter to come out this weekend. I assume that link will work by tomorrow morning.

Wednesday, March 03, 2004
Risk Analysis
The article, of course, isn't looking at emotional misappraisal of financial risks, but it's strikingly familiar.

Disney and Eisner
The Wall Street Journal reports that 43% of Disney shares withheld approval of Eisner's reelection to the board. That's worse for him than was expected.

UPDATE: Also from WSJ,
Michael Eisner resigned as Disney's chairman while retaining his CEO post. The company's board named Mitchell non-executive chairman after shareholders withheld about 43% of votes for Eisner's re-election to the board.

Tuesday, March 02, 2004
Social Security
Since we all like arcane CBO publications — I'm just assuming here — I thought I'd make note of interesting data for evaluating the solvency of the Social Security system. Among the data I find most interesting is that to an average person retiring now, the social security obligation is worth about $200,000.

Narnia Movie
Speaking of Disney, there's a new movie coming from them:
[T]he Walt Disney Co. has struck a deal with Denver billionaire Philip Anschutz' Walden Media to co-finance and distribute "The Chronicles of Narnia: The Lion, the Witch and the Wardrobe."

Budgeted at more than $100 million, according to sources, the film is scheduled to begin shooting in the summer, with "Shrek" director Andrew Adamson at the helm.
This could turn out wonderfully for them, and they know their business better than I do, but $100 million sounds like an awful lot of money to have to recoup.

Just as a reminder, Disney's annual meeting is tomorrow. From what I've heard, Eisner is expected to get support from a majority of shareholders, but not two thirds of them.

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