Computer World is reporting that students are considering changing from finance to IT and software development. There is also specultation that many of the unemployed from Lehman, Meryll and WaMu will be sending their resumes to IBM, Microsoft, Google and Oracle. This is a small sign that the economy is starting to right itself. The sooner labor is put where it can best generate profit, the sooner we can get back to growing GDP.
This development underscores, why we need to reach a faster valuation of these so-called “toxic assets”. The faster money flows out of unproductive investments and into productive ones, the better off our day-to-day lives will get. Money invested in great companies yields cheaper and better products for consumers. For investors it means higher profits, dividends and stock valuations. The longer money is tied up in this bad investments, the longer we delay these fruits by holding back money from people in the economy ready to create new ventures.
Two things will help us get to faster valuations. First and foremost, the government can stop injecting itself into the equation and showering money on worthless assets. Secondly, we can eliminate the up-tick rule on shorting stocks. When stocks are shorted someone makes a profit on the drop, once they make that profit, they can invest that money in something more productive. Instead, regulators like Barney Frank and Christopher Cox would prefer money is left in withering investments.
Interesting write up in Slashdot about patents: http://yro.slashdot.org/article.pl?sid=08/02/27/0018224&from=rss
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.
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.
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 http://www.msnbc.msn.com/id/23255937/ 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.
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: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=299&FirstYear=2002&LastYear=2004&Freq=Qtr
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: http://forums.4aynrandfans.com/index.php?showtopic=679
The Seattle Times published a version of my Exxon write up from last week today. You can see it at http://seattletimes.nwsource.com/html/opinion/2004163444_tuelets05.html
With Exxon reporting record profits, count me as one of the few that thinks this is a good thing. If you have a 401k, chances are you own shares of Exxon’s stock and have benefited. The company’s largest shareholders are companies like Barclays, Vanguard and Fidelity that manage mutual funds owned by you and me. Last year alone, Exxon returned $35.6 billion to investors. If you wrote that as a check to each of the 113 million household in the U.S. it would be $314–talk about a real economic stimulus package! Meanwhile our government is causing rampant inflation, with its funny money backed stimulus package. Blame our government, not Exxon, for higher gas prices. For those paying with U.S. Dollars, oil has quadrupled in price over the past four years. Four years ago an ounce of gold would buy you roughly 12 barrels of oil; an ounce today would get you roughly 10.
Some observations worth pointing out and concretizing:
- Exxon reported net income of $40.6 billion over the past year. In the past year alone, they have grown profits by $900 million. To put just the $900 million of income growth in perspective, that’s the entire profit from a company like Safeway that operates more than 1,700 stores and works all year to make that much.
- Over the past 5 years, the company has more than doubled its overall value (i.e. market capitalization), creating over $200 billion in value to investors. Discounting PetroChina, which is a nationalized company, Exxon is the most valuable company in the world.
- The company produces on average 6.5 million barrels of oil daily. After refining, this is enough gas to fuel the average daily driving of some 63 million people.
- 5 years ago, the company was already one of the world’s largest. In the past 5 years, they have managed to take an incredibly large company and double its revenue. During the same time, profits have quadrupled. Words alone could not convey how difficult it is to take a mega cap business like this and grow it. General Electric, another mega cap, has tried and grown revenues just 25% and income 56%–fantastic numbers, but pale in comparison.
- Exxon is also fantastically efficient, employing 106,100 people. This sounds like a lot, but let’s put that in perspective. McDonalds employs more than 4 times as many people, yet has less than a 10th the profit to show for it. Comparing inside the petroleum refining industry, it operates at a higher profit margin than most of its competitors–including BP, Chevron, Conoco, and Shell. Average revenue per employee is a staggering $3.8 million. Again to put this in perspective, Google–now famous for hiring geniuses–harnesses just 25% as much revenue from each employee.
There is an excellent speech by their CEO, Rex Tillerson, from a few years ago that crystallizes how their business works and the role they play in the industry. Some of my favorite quotes:
- “By the year 2030 – less than twenty-five years from now – the world’s energy needs will be almost 50 percent greater than they were last year, driven mostly by growth in developing countries.”
- “Such growing demand for energy reflects a growing demand worldwide for escaping poverty, attaining higher standards of living and achieving greater prosperity. Energy use correlates directly with economic development, and in the hierarchy of human needs, energy ranks high.”
- “So the real question is not whether we will soon reach peak oil, but whether we can reach peak performance in the responsible production and use of oil and other fossil fuels.”
- “Every day, consumers around the globe use 230 million barrels of energy, measured in terms of ‘oil equivalent’, from all sources. Oil alone is consumed at a rate of 40,000 gallons a second. Put another way, in the time it takes me to deliver these remarks, people worldwide will have used over 50 million gallons of oil.”
- “About 55 percent of U.S. oil supplies originate in North America. No other region – including the Middle East – meets more than 15 percent of U.S. oil needs. It may surprise some to learn that the United States imports more oil from Mexico than we do Saudi Arabia.”
- “Federal and state governments in this country have ruled off-limits an estimated 31 billion barrels of recoverable oil and 105 trillion cubic feet of natural gas. And the majority of those amounts are not found in the Arctic National Wildlife Refuge. They are found in the Rockies and off many of the coasts of the continental United States.”
I am in the midst of reading Thomas Friedman’s book The World Is Flat. I should have read it months ago when it first came out. It’s the rare book that I can go for long stretches reading, but this is one. I was up until 5 AM last night and into this morning read it.
I have never felt so optimistic about where the world is going. There is unprecedented development in East Asia where literally another 1.5 billion people are coming onto the free market playing field the west has been enjoying for decades. Furthermore, they’re joining at a point where there are a whole new host of tools that Friedman so aptly details–not the least of which is the Internet, workflow and supply chain innovation, new devices and skyrocketing computing power and storage capability. This isn’t just new technology; it’s a shift where people are no longer constrained by the nation/state they happen to be born in (or at least less and less so). Individuals drive economic development with their own ideas and innovations.
That is really the great story behind this, and also one of the disappointments of Friedman’s book. He makes all these great observations, and then almost completely ignores them in his next chapter “America and the Flat World” where he gives policy advice for the United States. In one breath he’s saying you have all these new tools and opportunities and then in the next he’s saying George Bush needs to champion energy independence. Well to some extent he already has, but regardless: don’t wait for him to do it! Anyone who wants to make a difference and enjoy wealth has to make their own choice to get in the game, engage and add value. Waiting for congress or the president to act is a waste of time. If anything, their focus should be on getting out of the way.
Anyway, Friedman is redeeming himself in my mind now, because in the next chapter he talks about how simply advocating capitalism wholesale isn’t enough, as a country you have to create the stability and environment where people can succeed. If it takes 6 months to start a business in your country and 2 weeks in China, guess who’s going to win. If it takes 2 years to recoup losses from a breach of contract in your country and 3 months in America, guess who’s going to be more competitive. This is so dead on, and why it’s more than just lip service to free markets that is needed. Ironically, I took a break from reading to see an interview with Milton Friedman on Charlie Rose from last night, and he was saying the very same thing: that for all of America’s problems, this is still a great place to do business because of the stability of an investment here.
I sat down for breakfast this morning after plunking down $1.50 for a copy of the Seattle Times. I usually find myself more distressed than encouraged after reading the paper. So I was pleasantly surprised when I flipped to the local news section today to read a column titled Woman works to find work by Nicole Brodeur.
The column introduced a local woman, Jennifer Ryan, who’s searching for work. Apparently she had put an ad in the paper under the section “Work Wanted.” Interestingly, she was the only person to put an ad in that particular section, which floors me given how much I hear about unemployment. Her ad read:
West Seattle mom will clean, shampoo carpets, do yardwork, clean gutters, drive errands, detail autos/campers, haul & dump, paint, sm. repairs, baby/pet sit, etc. bldg. maint. background, hard worker, strong, able to lift, honest worker w/eye for detail — rsnbl. rates. Need to Make Ends Meet.
At the end of the column Ryan speaks to her dismay, “They are more willing to help people who don’t want to help themselves. The more you try, the less help you get, and the less you try, the more help you get.” She sums up her attitude by saying, “I want my mother to be proud of me, whereever she is.”
I have never met this woman, but I am proud just reading this little bit about her.