Monthly Archives: February 2008

Going public is not magic

Just came across this and was reminded of a class I took this summer on corporations.  I had a good realization in that class that really public markets afford a specialization or division of labor that focuses on capital allocation and leaves management to someone else.  If you don’t need that specialization of capital allocation from someone else, and you don’t want to be beholden to that, you really shouldn’t be going public.  There’s lots of excitement around IPOs and public companies, so a lot of people assume that’s the only route to go.
It’s also not clear trading publicly in the market is so great anymore.  There is so much regulation, that now we’re seeing lots of private acquisitions.

Copyrights, patents and taxes

Interesting write up in Slashdot about patents:
This might be the first time in a long time I’ve read something I agreed with in Slashdot that wasn’t out and out capitalism bashing.  While I hate the notion of property taxes for your home (since it means your home is constantly on rent from the government), I actually thing the notion of requiring payment for legal protection of intellectual property is intriguing.  It would be a source of reveneue without requiring force since you could always choose whether to get the legal protection.  You do not need the legal protection to live (unless we allow stupid stuff like ovelry generic patents or patenting DNA).  It also has the happy side effect of limiting frivilous patents from people who camp on ideas, but do nothing productive with them.
I need to think more about this.  But wanted to flag it as interesting.

McCain insults business

From the January 5, 2008 Republican Debate:
McCain: Why shouldn’t we be able to reimport drugs from Canada? It’s because of the power of pharmaceutical companies…

Romney: Don’t turn the pharmaceutical companies into the big bad guys.

McCain: Well, they are.

Romney: No, actually, they’re trying to create products to make us well and make us better, and they’re doing the work of the free market. And are there excesses? I’m sure there are, and we should go after excesses. But they’re an important industry to this country. But let me note something else, and that is the market will work. And the reason healthcare isn’t working like a market right now is you have 47 million people that are saying, “I’m not going to play. I’m just going to get free care paid for by everybody else.” That doesn’t work. Number two, the buyer doesn’t have information about what the cost or quality is of different choices they could have. If you take the government out of it to a much greater extent, you’d get it to work like a market and we’ll rein in costs.

Going to have to swallow hard to vote for this guy.

401(k) participation

In my argument about Exxon, I talked about the profit sharing that goes on in 401(k) plans.  At the time I didn’t know how many people actually have 401(k)s.  There’sa  good article at that says:

The unanimous decision has implications for 50 million workers with $2.7 trillion invested in 401(k) retirement plans.

That’s not quite as many people as I would have hoped, but certainly a ton of capital.  That’s on average $54,000 in each 401(k) account.
For my own 401(k) I am going to reduce my small cap exposure.  I think they had a great 5 year run after the dot com bust, but I wonder whether they’re well positioned to cash in on the flattening global economy.  My father in law who work’s as a consultant in this field suggested beefing up on the Fidelity Contrafund, saying it’s very well run.

More on the petroleum industry

I wrote last month about Exxon’s record annual earnings.  It got me interested in the petroleum industry, since it’s ultimately a big chunk of the energy that rest of the world.  I read more today about a company called Schlumberger (what a boring name!), and it piqued my interest.
Schlumberger appears to eschew direct ownership of oil fields, and instead targets where to inject itself in the value chain.  It partners with nationalized petro companies like Saudi Aramco, Mexico’s Petróleos Mexicanos (Pemex), Gazprom and Rosneft from Russia:

The company is increasing its cooperation with Big Oil’s most prominent rivals, state-owned oil companies, and it’s helping a group of smaller upstarts that are seeking to get into the business, such as hedge funds and private equity outfits. Just outside a suburban neighborhood near Dallas, for instance, it has drilled a half-dozen gas wells financed by New York hedge fund Och-Ziff. While the majors typically want to own rights to oil reserves in the fields they operate—and take a share of the profits—Schlumberger has long been happy to work on a contract basis, getting paid a fixed fee for its services. “Schlumberger is the indispensable company,” says J. Robinson West, chairman of PFC Energy, a Washington consulting firm. “They are involved in every major project in every important producing country.”

This makes sense given rise of nationalization in the oil industry, where as much as 90% of the oil supply is run by governments.  Ultimately, the profit is to be found in the human assets and involvement.
Comparing Exxon and Schlumberger is interesting.  Schlumberger gets a return on invested capital of 27.12% and a return on assets of 20%.  Exxon has done about 28% over the past 12 months, which is similar, but it’s return on assets is 17%.  Exxon’s income per employee is $494,640.  Schlumberger does $73,950 of income per employee.  So Schlumberger ties up less capital equipment in assets to produce its profits, which is admirable.  However, they are not as effective at turning their employees’ efforts into profit.  I am just getting famliar with using ROIC and ROA as a measuring stick, so for reference I looked up Microsoft.  It does 51% and 26% respectively.  Not surprisingly, software burns less money to product it’s profit.


Note to self for future… this is a good site for compiling stats:
I need to get smarter about what GDP really means.  It’s interesting that it discounts housing, which is a huge part of the economy (it’s my biggest monthly expense).  I don’t get why this is discounted.
I read up a bit from Salsman who rightly points out a lot of GDP is bunk:

The $1.2 Trillion Secret

As mentioned in my last post, I think the most interesting news going on in business is getting burried in the press.  Burried on page 73 of Business Week in an article titled $1.6 Trillion. Now We’re Talking Stimulus, to be precise.
Here are some select quotes:

  • “But before you get stoked over just $150 billion in tax aid, forget not the huddled, cuff-linked masses, those with millions of fiduciary mouths to feed but who are too scared to spend. American CEOs, with hundreds of billions at their disposal, could make more of a stimulative difference than all of our shopping sprees combined.”
  • “According to Moody’s Investors Service, a record $1.6 trillion in cash sits on the books of nonfinancial U.S. companies, $600 billion more than was there five years ago.”
  • “”Management is admitting that they just see no opportunities,” says Ivan Feinseth, chief investment officer of AlphaWorks, a Manhattan hedge fund that screens investments for how efficiently they use capital.”
  • “Prediction: This passivity will not stand. In a hyperglobalized, weak-dollar economy, U.S. balance sheets have never been so prone to international scrutiny. Cash is fungible and speaks all languages. It appeals to every constituency, from employees and shareholders to lawmakers and creditors, from Wall Street analysts to labor unions. Leave too much of it out there, and you will be told what to do with it.”

What does this mean in the short term?  I consider it a huge insurance policy against a crash in the market.  Companies who see their stocks dips are very likely to buy back their own stock at discounted prices.
What does it mean in a historical sense though?  This is the real question that interests me.  It’s alarming to hear this surplus has grown 60% in 5 years.  I wish I could dive deaper into the Moody’s report, but their website doesn’t list much stuff that you can get for free.  That aside, the numbers in the BW article tell me that companies don’t have great ideas on where to put their new found profits.
I will go out on a limb and guess they also don’t have the staff to charter new endeavors.  And if that’s right it means we have billions of dollars of opportunity cost queued up behind finding a class of workers that can seize working capital and launch into new businesses, even create whole new industries.  It’s ironic that at this very time Republicans are hell bent on selecting a presidential candidate that will close down our borders and want to spend billions upwards of $80 billion on fencing and law enforcement.  What if we spent just $100 million in ads around the world attracting college graduates to come to the U.S. to work?
I think this is also an indicment on MBA programs.  While Gross National Income is certainly one measure of their success, this $1.6 trillion is a measure of opportunities management and leadership could not harness.
It’s a great time to be a manager and leader, because there are more than a billion people from Brazil, Russia, India and China coming into the world marketplace.  This has been well reported by Thomas Friedman.  And now we find their is hundreds of billions of dollars waiting to be spent sitting in the pockets of corporate America.

Thoughts from Business Week

I just got through reading this weeks Business Week and wanted to make sure to capture some things I thought were interesting so I can chew on them.
The splashy cover story “Credit on the Edge” details what BW thinks is a coming crisis in consumer credit.  The most interesting stat to me is the mean household credit card balance–$7,000.  That would be a lot for me to carry even on my salary.  I can’t imagine that on the median income in the U.S. of $44,389 where more than half of those homes support 1 kid (based on a median household size is 2.57)–see Wikipedia for details.
I was curious what the total dollar figure of consumer debt is.  The BW article didn’t include this so far as I could tell.  The Motley Fool takes a crack at this.  Their numbers don’t add up though if you  assume there are 114 million households in the U.S.  The Motley Fool number would get you a mean debt of $14,912–a full 86% more than both the BW number and Motley’s own $8,562 number.  So I think folks are either counting what constitutes “consumer credit debt” differently or are using spurious numbers for the number of households.
In any event, if you take the low number of $8,562 that’s really high.  In the short term I would invest in companies like Pay Day Loans and Money Tree, because they will make a fortune trying to provide liquidity for families.  Interestingly, the BW article points out these same companies are now building stores in more affluent neighborhoods they wouldn’t have touched 5 years ago.  In the medium term, I am sadly resigned that congress will step in trying to solve the problem and of course end up making it a bigger mess.  I would not want to be in the banking industry, because there’s so much uncertainty what regulation will do.  And certainty is exactly what the industry needs, since it’s the only way investors will get back in the game.  And that’s why I am sad about what our politicians will likely do.
So does this mean the U.S. is horribly unhealthy and in deep danger?  Part of me instinctively says no, because I know what’s really happening here: companies like Citi, Capital One and Chase in exchange for providing liquidity to consumers reap large profits.  They don’t stuff that money in their mattress, but instead either invest in new business by handing out loans or return that money to shareholders in dividends and stock buy backs.  So far America is doing just fine.  The one problem I see though is that we’re tying up a lot of human energy (and probably capital assets) spining our money around  in ways that could be easily avoided if we all just spent our money more wisely and saved enough so that we didn’t cary credit card balances month to month.  How much energy is spent on this?  It’s hard to say, but I’ll take a very crude stab.  Capital One employes 31,000 people.  They certainly do more than credit cards, but this is easily the bulk of their business providing about 75% of their net income.  That’s 31,000 people that could have been employed building other cool products or delivering fantastic service.  Those 31,000 people are put in probably dozens if not hundreds of office buildings; space tied up that could be used for something better.
On the balance, I think the macro economy is just fine.  I am very happy to have those 31,000 people at Capital One, because it means I don’t have to make extra trips to the cash machine.  I just plunk down my Visa and get a cup of coffee at Starbucks.  And I pay one single bill for the whole thing at the end of the money.  It’s a huge time saver for me and no doubt thousands of other people. 
The real news in BW was burried on page 73.  I think it’s so important I am going to give that news its own blog entry.

Business Opportunities in Personal Finance

Part of my goal with this blog is to keep better track of ideas I have on businesses I could start down the road.
One of the huge opportunities is personal finance.  Here are some observations:

  • The national savings rate is getting a lot more attention, and I think people are paying more attention to consumer credit debt
  • I meet a lot of people who don’t understand how to make their money work for them and truly appreciate what it’s doing
    • One friend owns a condo and is reluctant to take out a home equity loan to pay for improvements in their kitchen
    • One friend thinks they should pay down their home loan faster
    • Another follows the news in the stock market and feels powerless amidst all the bad news in the press
  • Internationally lots of new people are coming onto the playing field of capitalism with little training from their parents who grew up in a totally different political situation
  • Lots of boomers are going to start cashing out their 401k and pensions
  • It’s hard to see the forest from the trees, a lot of the tools out there today are for paying bills and managing the tactics of finance–not helping me see the big picture
    • Apps like Money and Quicken make it seem like the goal is to get things balanaced and accurately account for everything–that’s basically a giant waste of time!
  • I have to log into Fidelity, Bank of America, Amex, and Chase all separately to make transactions.  Money or Quicken will aggregate data in a one-way approach, but that doesn’t really help me take action
  • Whenever I listen to the radio, there is a deluge of ads for refis.  This has got to be artificial.  There really cannot be that much human value in this.  We’ve started to see a correction in this, and we’ll see more I think.

Some companies I want to explore more: Geezeo, Yodlee, Mint, Voyant, BoulevardR, Quicken, Wesabe.

Another way to think of it: what would it mean to “zillow”-ify the finance space.

Finally, and perhaps most interestingly, the advertising industry is going to grow hugely.  No one seems to be really cashing in on the notion of pay-per-spend advertising.  It’s all about pay-per-click.  There are clearly privacy issues, but utlimately their is a HUGE goldmine of information in people’s spending habits.