Flood of labor from finance to tech

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.

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Steve Ballmer and the meaning of money

I am Objectivist and fan of Ayn Rand’s writings.  One of the great heroes in her books is a man Francisco d’Anconia.  He gives a speech that makes Michael Douglas in Wall Street seem impish in comparison.  dAnconia not only explains why profit is great, but the underlying source of its greatness.  One of the exciting things in my life is finding great heroes like d’Anconia that exist in real life, not just books or movies.  My boss Steve Ballmer is one of those gems.

My guess is that outside the sphere of business and technology, most people don’t know the man by name.  If you ask someone in the world of business who he is, they’re likely to tell you he’s served as the CEO of Microsoft during the time the company’s stock has been flat.  In the technology industry, he is pilloried.  His wikipedia article while silent on his accomplishments inside Microsoft besides passively profiting from its stock, hastens to point out:

Steve Ballmer has been known to be very passionate in expressing his enthusiasm. [...] His wild screaming and dancing on stage at an employees convention was caught on a widely-circulated video known as “Dance Monkeyboy.” A few days later at a developers’ conference, a sweat-soaked Ballmer repeatedly chanted “developers” at least 14 times in front of the bemused gathering.

Despite what the business and technology communities might have you believe, Ballmer is not a crazed lunatic nor has he sat idle at the controls driving Microsoft into the depths of irrelevance.

Under his tenure as CEO Microsoft has tripled its revenue from $19 billion to $60 billion.  Operating income has doubled from $10 billion to $22 billion.  Net-income has more than doubled from $7.7 billion to $17.6 billion.  All of this has occurred amidst a crippling persecution by the United Stated Department of Justice and European Union on antitrust charges.  During this same time, the company has endured the commoditization of large swaths of the software industry at the hands of the open source software movement.  The company went from being virtually unused at enterprise scale, lagging far behind Oracle and Sun Microsystems, to the dominant player.

All of that is fantastic.  But my favorite thing about Ballmer isn’t that he guided the company to achieve these fantastic results, but that he takes pride in it and wants you to be just as proud.  I feel a bit privileged every year as an employee at Microsoft to get to attend our company meeting where 30,000 of us pack into a stadium.  It’s impossible to describe just what a spectacle that is.   The best I can say is that it’s kind of like a giant high school pep rally, except with a bunch of wealthy nerds.

Without fail Ballmer comes out at the end of every meeting to loud music, cheering, applause and meets it with the sort of high fives and tenacity that you might expect from a basketball player not a CEO.

He’s so exasperated after running around the floor of the stadium that he has to stop any catch his breath for a moment.  After he caught his breath, I listened as he started in:

I have to say a couple things.  You know everybody likes to focus on the thing they consider the most important thing that they hear and I sit backstage the whole meeting just listening, listening.  What do people really love?  What do they applaud for?

And everybody’s got their own thing.  You mention their group they go nuts.  You show them their product, they go nuts.  You mention [the Entertainment Devices Division] went from profitable to unprofitable, and they go super nuts.

But the one thing that actually makes me go most nuts barely even got a ripple.

My friend over here Kevin Turner, he put up a slide that showed our growth in revenue and our growth in profit.  And I admit that the numbers are so big and so crazy that they’re so hard to understand.  There’s no reason people should go crazy about them.

Yes, I want to remind you how impressive your work is.  60 billion dollars in revenue.  22 billion dollars in pre-tax operating income.

There is no company on the whole planet, on the whole planet!  — that doesn’t sell oil — [laughs] –there’s a foot note–there’s no company on the whole planet now that makes 22 billion.  It’s Exxon and it’s the world’s oil companies and it’s us.

And the growth that we posted in profit, going on 4 billions dollars in one year.  You can say those are just numbers and you can’t relate to them, and maybe you never should.  But you should be able to take the pride in knowing your work is having big broad impact and it’s being valued by people around the globe–valued by people aorund the globe.

And to all of you, to the most amazing success in the history of world business, for that I want to say thank you, give yourselves a round of applause.

I sat listening to him, as a smile broke across my face.  I am proud to have this man as my boss.  And I feel like I am witnessing a part of history that only the 30,000 people around me will get to see.  A record level of success being achieved in business, and observed for what it is by the man without guilt or shame.

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$4 Trillion in market cap gone

There is a great post that helps concretize the lost value over the past year at TechCrunch: The Mess on Wall Street Four Trillion Dollars Down the Drain.

Where did this money go though?  It didn’t all just vanish.  Yes, some is the result of people simply buying for less, but they didn’t buy it for $0.  Some of it flowed into other capital markets where investors thought it was better spent.

This capital retraction will also affect IT spending as pointed out by Valleywag.  Ironically, this is the very time that the finance sector should be bullish on IT investment, but I am willing to believe they in fact will not be.

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Offshore drilling

I’ve been writing a little bit about Exxon and Schlumberger lately.  I got interested in these companies and the petroleum industry in general because it they are such a gigantic part of the economy (a huge chunk of the top 10 most profitable companies are in the industry).
 
Most of my blogging so far has been to explore the financial statements from Exxon and Schlumberger.  I like knowing the numbers, but I also wanted to have some sense of what’s really going on at the ground level.  There was a great article called Dispatch from the Oil Frontier in Popular Mechanics.  The article focused on off shore drilling, which I saw quite a bit of from a distance on my cruise in the Carribean.  Not surprisingly, much of the oil on solid ground has been excavated and companies like Shell have moved underwater.  The author estimates there might be as much as 56 billion barrels of oil.  For comparison, Exxon last year produced about 4 billion barrels of oil in 2007.  So there’s a lot to be had, but by no means an unlimited supply.
 
Some quotes and impressions from the article…

There have already been successes.  In 2004 Shell broke the record for the deepest producing field–the Coulomb, at 7570 ft.–when it tapped a formation 144 miles southeast of New Orleans.  Tow years later, in 7,000 ft. of water 270 miles southwest of the city, Chevron successfully tested its Jack No. 2 well in a field that may hold 15 billion barrels.

That’s a staggering depth when you think about getting the equipment to dig and pump when you’re hundreds of miles out in the ocean on a relatively tiny oil rig. 
 
I was curious how you get down that deep when you’re in the middle of no where, and the article helped me start piecing it together.

At this point the Boudreaux has already installed a 90-ft-long steel casing into the seabed and capped it with a wellhead and a 48-ft-high tower of controls and hydraulic valves known as the blowout preventer.  Then, nearly 8,000 ft. of aluminum-alloy pipe in 75-ft. sections, known as the riser, was connected to the seafloor assembly.

I also figured you can’t really have humans down there at that depth, given the pressure.  Indeed this is the case:

This automation is in sharp contrast to the technology of earlier rigs, which required roughnecks on the drill floor and in the derrick to disconnect and connect sections of drill pipe by hand, a laborious, dirty and dangerous process.  Ten years ago it would have taken 75 days to drill a well 18,000 ft. deep; the Boudreaux’s crew can do it in two weeks.
 
[...]
 
In deep water a rig can’t stand on the bottom, which means it either has to be anchored with dozens of miles of chain and cable, or float freely, held in place by GPS-guided thrusters.
 
[...]
 
And then there’s the ocean itself.  At a depth of 8,000 ft. the pressures are enormous–3,500 psi.  no human hands can operate equipment on the seabed.  That means remotely operated vehicles (ROVs) have to be able to work in those pressures, day in and day out.  And the range of temperatures plays havoc with drilling mud.  “it’s 44 degrees at the seabed and 275 at the drill bit,” says Ricketson, keeping an eye on the turning drill, “So that mud has to function at extremely high and low temperatures–only new synthetic mud can do that.”

I had already seen a little bit on TV about life on these rigs, and it was interesting to read more about it.

There’s a gym onboard and a flat-screen TV in every room, but the crew members mostly do just one thing, and that’s work.
 
[...]
 
Day or night seems the same; you lose track of time–at 3pm or 3am there’s always someone pumping iron in the gym, a few guys sipping coffee in the mess hall.  You forget where you are, until you step out onto the smoking deck–a flat, steel pace witha  few aluminum benches–remove your hard hat and safety glasses and realize you’re standing on a huge spigot in the middle of nowhere.

I can picture some guy on the smoking deck looking back at the cruise ships, each lit up like a Christmas tree against the dark horizon, going through the shipping lane in the Gulf of Mexico.
 
Financially, it would be no surprise if the price of oil was going up, because this stuff is expensive.  That made it easier to understand why you’d want the Schlumberger approach of low capital investment and high human investment.

All this tech doesn’t come cheap.  A typical offshore development in 100 ft. of water costs $100 million; just the test well for Chevron’s Jack No. 2 cost $100 million, and the U.S. Minerals Management Service estiamtes the cost of developing a deepwater field can exceed $1 billion.  Shell won’t say what the Perdido regional development will cost, but Noble is charging Shell hundreds of thousands of dollars a day for its rig.  Shell has already spent $554 million on leases in the gulf–that’s just for the right to drill.

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Going public is not magic

Just came across this http://www.jacksonfish.com/blog/2008/02/04/and-this-is-why-going-public-is-a-non-goal/ 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.

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Copyrights, patents and taxes

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.

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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.
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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 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.

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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.

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GDP

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

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