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Tuesday, December 20, 2011

Biotech investment trend in Europe and Asia for 2012

The normal perception will be that Eu companies are usually finally following US and also Japanese organizations in improving their purchase in agro-biotechnology inside Asia. Both press and take factors give rise to this progress. However, it really is difficult to have an accurate breakdown of the genuine investment styles by Eu agro-biotechnology inside Asia. According to literature review and additional interviews, this informative article draws the initial preliminary results.

Although simply no precise figures can be obtained, estimates coming from different options indicate in which biotechnology purchase by Eu firms inside Asia provides increased coming from US$ 230 million inside 1993 to be able to US$ 270 thousand in 1995. The growing investment is combined with an increasing variety of business projects. While inside 1994, Asia accounted for 7 % of the whole deals signed from the European organizations. This discuss grew to be able to 9 % in 1995. Incredibly, Japan could be the leading target with the European purchase in Parts of asia. Japan is the reason 53 % of the whole alliances.
European investors may be divided directly into two teams. The first contains well-established organizations in Asia which can be branching directly into biotechnology. The next group are usually relatively fresh companies which were established only for biotechnology. The initial group regarding companies invests more inside Asia compared to the second party.
With consider to agriculture, European organizations have typically entered in to the seeds and also floriculture areas. In the particular seed market the participants are few nevertheless the volume regarding investment will be large, and also mainly focused towards superior technology. Inside floriculture several players discuss the comparatively smaller purchase.

Seed market
Asia is among the most world’s greatest seed consumer inside the 1990s. Inside 1994, intake was 43. a couple of million tonnes. The particular consumption fee is growing at 1. 3 % per yr. While US ALL companies will be the largest overseas investors inside the Asian seed starting sector, European organizations are quickly catching around the massive market prospective of Parts of asia. Most of the European buyers are huge agro-chemical companies which can be expanding directly into seeds to help expand secure their particular positions inside the Asian industry. For illustration, while still looking forward to the Eu market acceptance, Ciba-Geigy, Swiss plans to be able to launch the Bacillus thuringiensis (Bt) maize, Maximizer, around the Asian industry in 1997.
One more example will be S&G Seed, the Netherlands, which could be the operational business of Europe Sandoz. Inside 1992, any time Sandoz reorganized the seed enterprise, S&G Seed took on the Asian functions. It has generated offices inside countries for instance China, Singapore, Taiwan and also Japan. Although company have not disclosed the market discuss in Parts of asia, Sandoz’s twelve-monthly reports suggest a growth in revenue from 2 % in 1993 to be able to 5 % in 1995 inside the Asian seed starting sector. S&G Seed has started several breeding courses for Parts of asia. Research is targeted on disease level of resistance, increased productiveness, transportability, stability of nutritional value and climatical changes. In inclusion, in 1991 Sandoz agreed upon an agreement with all the Dutch business Mogen International to produce fungal resistant kinds of horticultural and also agricultural crops for instance tomato. S&G Seed will industry these kinds in Parts of asia.
Many Eu companies are usually actively searching for joint projects with Cookware firms. The particular 50: 50 alliance with all the Indian Cigarette Company (ITC) is probably the many shared ventures regarding Zeneca, BRITISH with Cookware companies. The particular joint routines include study, development, creation and marketing and advertising of cross seeds inside India. Zeneca-ITC conducts a mating programme inside India, mostly for cereal vegetation and acrylic seeds.
Besides expanding agro-chemical organizations, European biotechnology organizations are in the same way establishing shared ventures together with Asian organizations. For illustration, Belgian biotechnology company Plant Innate Systems (PGS) will be entering the particular seed business and contains a huge germplasm number of oil seed starting rape (OSR). PGS provides chosen Of india to input the Cookware market. The business established any 50: 50 jv with the particular Indian business ProAgro, referred to as ProAgro-PGS Of india Ltd. PGS’s investment inside the Indian venture has exploded from US$ 1 thousand to US$ 3 thousand, a go up of 200 %, in the past three decades. The alliance aims at combining PGS’s Seedlink engineering (any genetically manufactured pollination method, see Keep an eye on No. 19) together with ProAgro’s study expertise and also germplasm collection to produce hybrid OSR. Furthermore, ProAgro-PGS Of india Ltd. continues to be conducting industry trials inside India about transgenic mustard, and garden greenhouse trials regarding Bt tomato for your past couple of years. The company in addition has been offered permit to check Bt eggplant inside India.
A number of the emerging alliances tend to be focused about marketing as compared to on R&D. As an example, Bejo Zaden BV with the Netherlands and its particular partner Bejo Sheetal regarding India are already marketing cross seeds which is why biotechnology was utilized to overcome troubles in time-honored breeding strategies.

Industry experts roughly appraisal floriculture purchase at concerning US$ 45 million inside Asia. Inside 1994, total investment from the European floriculture organizations in Of india alone has been US$ 20 million. This kind of grew to be able to US$ 12 million inside 1995, a growth of 28 %. Rough quotes show in which India is the reason the largest investment regarding European companies using a total regarding 40 %, followed simply by China (20 %), Thailand (25 %), and Malaysia (15 %).
A lot of the increase inside investment will be through shared ventures. Among 1993-95, up to 64 deals were agreed upon. Although these types of joint projects involve the particular mere transfer with the production engineering, 60 % of the particular Dutch CMO Holland’s share in the joint venture with all the Chinese Shanghai Donghai Express Farm requires technology exchange. Virus-free sowing materials are usually of fantastic importance. As an example, its tie-up with all the Dutch business West-Stek BV supplies the Indian business SPA AGRO usage of ELISA diagnostic technology. Additionally, other organizations use biotechnology to aid in their particular conventional place breeding, for instance in increasing colour and also fragrance regarding flowers.
The purchase strategies inside Asia vary amongst the different organizations. For floral marketing companies for instance Flodac bv, the netherlands, Asian alliances help to ensure the production and offer of top quality flowers regarding worldwide syndication. As section of these alliances, Flodac provides greater than marketing and also distribution companies. It provides carved fresh niches inside the Indian market with the help of technical help. This empowered Flodac to access over 25 joint projects within 1993-95. Many of these joint projects included the particular provision regarding 100 % buy again arrangement, directed at ensuring any ready market for your Indian spouse firms, and also consistent offer for Flodac. Nonetheless, only a number of the Indian lovers have chose this provision. The absence of such any provision offers them a way to market a few of their goods at perfect prices. This open-ended arrangement is always to the downside of Flodac, which desires to retain its hold on tight marketing. Consequently, it provides required stringent partners’ compliance for the buy-back set up.
Other Eu companies inside the flower sector work with a different purchase strategy. As an example, the Dutch Skillco and also CMO Netherlands, first produced a ideal alliance to be able to supplement each and every other’s part of specialization just before they mutually entered Parts of asia, particularly Of india. Skillco gets the technical experience in place breeding, marketing and advertising and education, while CMO Holland can be a manufacturer/supplier regarding greenhouses together with advanced overseeing facilities. The business has came into a collaboration with Muti Shade Flora, Warm Floritech and also Venus Floriculture inside India to be able to upgrade floral cultivation and also standardize sowing materials move.

Motivation regarding agricultural purchase
The move towards Parts of asia is encouraged by several factors:
Fresh economic procedures. Just such as other enterprise sectors, biotechnology purchase is enticed by liberalizing purchase policies and also expanding Cookware economies. As an example, the improving purchasing power in lots of Asian countries contributes to the requirement for a lot more perishable goods for instance vegetable and also flowers.
Boundaries to importance. Contrary for the liberalization procedures, some barriers remain in destination for a discourage the particular import regarding products, and so stimulate neighborhood R&D changes. The boundaries to importance capital and also intermediate items, as well because the rising travel costs to be able to Asia enhances the demand regarding manufacturing being based inside Asia.
Mental property legal rights (IPR) program. Many Eu firms need the implementation with the IPR program in Parts of asia. However, many Asian countries have not necessarily yet totally endorsed place breeders’ legal rights, for illustration by not necessarily adopting the particular international Union for your Protection regarding New Kinds of Plants (UPOV). Even so, PGS has been motivated to buy India, as opposed to licensing deals, due for the weak IPR regime with the country. In accordance with O’Brien, PGS provides directly entered in to a joint opportunity, instead regarding licensing their particular technology, considering that the latter will be difficult to guard under any weak IPR program. Nevertheless, PGS aspires to gain again after the IPR method is applied. By the period, the IPR wil manage to protect the newest PGS goods.
Low expense skills regarding research and also production. In comparison to Europe, most Asian countries have reduced costs regarding production, especially as a result of low income levels. As an example, Zeneca locates it less expensive to foundation its R&D inside India. In accordance with them, India features a high amount of well-trained technologists. Moreover, the cozy climate inside Asia supplies a cheap way to obtain energy in comparison with heated greenhouses inside Europe. Several place breeders inside the Netherlands are thinking about basing their particular plantlet creation abroad.
Inducement policies. Some Cookware governments have got initiated routines to entice foreign investment also to develop neighborhood expertise. An illustration is Singapore Bio-Innovations (SBI), an organization funded from the Singaporean Ministry regarding Trade and also Industry. SBI tends to make equity purchase in overseas companies which may have opted regarding alliances together with Singaporean organizations, for R&D, producing, marketing and/or syndication. SBI incentives have tax holiday seasons and education grants. Because of this, some overseas biotechnology companies want to make Singapore any base for Asian routines. Since the establishment inside 1990, SBI provides invested US$ 15 thousand in explains to you in 3 Eu, 5 Cookware and 15 US ALL based organizations. The Eu companies are typical British: Oxford GlycoSystems, Xenova LTD, and also International Biotechnology Rely on. Some regarding SBI’s collection local organizations are Smell Biotech, and also Plantek Global.
Tailor-made goods. There can be a need to be able to adapt biotechnological products for the local surroundings. For illustration, specific study needs take into consideration the determination of biopesticides beneath local ailments and distinctions in sponsor organisms. New successful viral and also bacterial strains must be specially developed for many geographical locations. For illustration, Sandoz, one of many major dealer of Bt biopesticide inside Asia, is creating novel ranges targeted towards a certain pest. This kind of research venture requires collaboration with Cookware universities or perhaps research organizations.
European press factors. Inside Europe, the expenses of creation are large, and there is certainly an improving competition regarding tapping garbage, such since germplasm, coming from Asia. Stringent European enviromentally friendly legislation, for instance pesticide utilize, motivate companies to go to Parts of asia where you can find less restrictions and/or vulnerable enforcement regarding legislations. In addition, some organizations seek to boost their purchase abroad due to European policy to cut back the terrain area beneath crop cultivation. According to be able to Zeneca, the decline in land cultivation in The european union was the primary reason for the particular 4 % decline with the European agro-chemical industry.
The Cookware economies are usually expanding swiftly and over the following five decades its blended Gross Countrywide Products are usually predicted to be able to represent one-third with the world economic system. For many Asian countries, biotechnology gets the potential regarding diversifying enterprise with large value-added goods. Despite too little published info, it may be observed in which European biotechnology organizations are giving an answer to these Cookware trends. Nonetheless, while the particular Asian industry is huge, it stays fragmented, together with different nations around the world implementing diverse liberalization procedures, with various capacities regarding R&D and also financial purchase. So significantly, the purchase trend is bound to several countries, for instance Japan, Singapore and also India. Amongst the investment activities inside the areas regarding research, tests, production and also marketing, investment remains dominant inside marketing.

The particular biotechnology industry moved through any challenging several years and we've seen several new styles emerge. Decreasing is the particular venture buyers are simply no longing ready to assume in which new investors will probably be identified in the foreseeable future to share the main city requirement to adopt a product to advertise or to succeed in a milestone that may enable the particular sale with the company. New investments don't complete except if their enterprise plans are usually “fully funded”. We have observed syndicates who have raised $20 thousand fall over because they're $5 million in short supply of their $25 thousand target – a thing that would not need occurred 5 years back. Fully funded business ideas, strong purchase syndicates and also “pay to be able to play” are becoming the usual. However, these syndicates tend to buy later period deals and also early period investing provides struggled.

It really is pleasing to find out the introduction of company venture buying biotechnology. Within the last few two quarters we've seen equally Merck and also AstraZeneca (by means of MedImmune) devote funds to be able to corporate venturing out – US$600 thousand in fresh capital is a great boost with a biotechnology industry which is starved regarding capital. Some great benefits of corporate venturing isn't only the money, but usage of advice and also guidance from other R&D and also corporate routines. We are usually confident in which MedImmune Ventures is a great purchase partner with us in Neuprotect and offer invaluable assistance and guidance because the company movements its direct product in to the clinic.

Saturday, December 17, 2011

Bank And Broker Default Possibility Remains Very High

Through the financial problems, we developed our Lender and Dealer CDS (credit rating default change) list to observe the default risk with the major economic firms around the globe, and we always track the particular index to this day. Below can be a chart individuals CDS list (glowing blue line) in comparison to a chart with the S&P 500 Economic sector (environmentally friendly line) heading back to Summer 2008.

Financial market default risk was able to remain comparatively low coming from mid-2009 to be able to mid-2011, but for recent months, it's got skyrocketed returning to levels not necessarily seen considering that the financial problems. The a couple of recent peaks inside our CDS list came inside early March and overdue November with this year. The list has taken back some considering that the end regarding November, but default chance still remains quite high. Weakness inside European banks is a huge key contributor to the current spike, but the particular big financials here in the usa have noticed default chance spike really significantly at the same time.

Wednesday, December 12, 2007

Population Growth Trends of Countries and Global Investing Strategy

“Demographics is destiny,” is a phrase that is way overused and abused. Demographics isn’t necessarily destiny, but it does play a major role in the rise and fall of civilizations. For example Rome the city at its height of power had over a million residents and controlled 100 million subjects. When Rome fell to the Germanic raiders it had only 50,000 residents left and its control did not extend much outside the city. Demographics is important, which in turn may influence where you choose to invest.

Monday, December 03, 2007

Six Winners with Oil at $100

As oil flirts with $100, there are certain sectors that will benefit while others cringe at the thought of a triple-digit price per barrel.

Top 20 VIX Correlated ETFs: All ProShares

I've covered the VIX and the best way to own a pseudo "VIX ETF" in the past, and given the high-volatility regime we've seen over the past few months, I figured it would be a good time to update this data.

Thursday, November 22, 2007

China Automotive Systems: Revving Up For Growth

China Automotive Systems (CAAS) has posted a couple of strong quarters lately, but the stock price has been inconsistent.

Tuesday, November 13, 2007

Solar stocks no longer the favorite of the people

Solar stocks have been hit Monday by news that Senate and House Democratic leaders are considering a plan to leave renewable energy out of a pending U.S. energy bill. An alert posted Friday by the Solar Energy Industries Association on its web site says that “there are widespread reports that a decision has been made, at least provisionally, to move energy legislation without a tax title that extends the Solar Investment Tax Credits.”

Thursday, November 08, 2007

Housing Bubble and Real Estate Market Tracker

Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can have this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Two Reasons To Buy Sallie Mae Before Everybody Else Does

Two reasons to buy Sallie Mae ((SLM) $42.86):

Current Dollar Decline Longer, More Severe Than Historical Declines

With the US Dollar index falling even lower today, below we highlight the historical bull and bear markets of the currency.

Friday, November 02, 2007

Comparing Bubbles: China vs. Nasdaq and Homebuilders

On Monday we compared the rises and crashes of the Nasdaq and the Homebuilders during their respective bubbles. A Bespoke reader asked if we could overlay the current rise in China's Shanghai Composite on the chart to see where its bull run currently stands in comparison.

The Nasdaq and Homebuilders rallied for around 2,000 calendar days, while the Shanghai has currently only been in rally mode for 560 days. However, the gains in China of 488% are fast approaching the max gains that the Nasdaq saw of 639% at its peak.

The most interesting data points here are the starting dates of the bubbles. The Homebuilders began their enormous rise on March 14, 2000, just four days after the Nasdaq peaked. Interestingly, the Shanghai started its meteoric rise on July 11, 2005 -- just nine days before the Homebuilders peaked. Investors have seemingly flocked from one bubble to the next.

Monday, October 29, 2007

Airbus A380 - the complete guide and review

For Stephen Bleach, being a part of the inaugural A380 flight on Thursday was revolutionary... but not for all the right reasons

The monstrous A380 prepares for takeoff

I’ve always been pretty middle of the road, politically speaking. But whenever Gordon Brown deigns to call the next election, I’m voting Socialist Worker’s Party. Eight hours on a plane has turned me into a Marxist.

Not just any plane. I’ve just stepped off the first commercial flight of the A380 superjumbo, the largest passenger aircraft ever built. Yes, it’s impressive: taller than five double-decker buses, wider than a football pitch, 37 times the length of Peter Crouch in his socks, that sort of thing. And yes, it’s an amazing piece of engineering, a staggering technical achievement: but it’s also the best advert for Bolshevism since the tsar said, “Stuff that Lenin chap, let’s build another palace.”

Never has the gap between the haves and the have-nots of the air been more evident. At the front of the plane (business is on the top level, the “super-first” Suites at the front of main deck, economy at the back on both levels), the elite have unparalleled luxury and space. Further back, the proletariat have to... well, let’s not get ahead of ourselves. I’ve just spent eight hours in the cheap seats: here’s a blow-by-blow account.

Takeoff: it just shouldn’t. It doesn’t seem credible that something this size should get into the air at all. Our takeoff weight today was 468 tonnes, which is the equivalent of 12 very surprised sperm whales. And when it finally comes, 50 minutes after we started boarding today’s 455 passengers (they’ll need to speed that up a touch), takeoff is a revelation.

Where other planes crank up the engines to a mighty howl and go for a death-or-glory charge to get airborne, the A380 feels more like an inter-city train leaving a station: silent, gentle, almost imperceptible. There’s a moment of anxiety when the lack of any roar, or bumping, makes you think something is terribly wrong. Then finally, after 40 seconds of smooth, quiet acceleration, this unlikely behemoth leaves the ground with a whisper and drifts quietly into the skies as if it were the most natural thing in the world. After a moment’s collective sigh, everyone breaks into applause. Taking to the air with the A380 does, genuinely, feel like a miracle.

One hour in: as well as kind, civilised folk who’ve bid in a charity auction to be on the first A380 flight, the plane is full of rude, selfish, jostling journalists like me, and the moment the seat-belt sign is turned off, it’s the cue for all of us to leap to our feet and interview mercilessly anyone within notebook distance. We do tend to make a bit of noise, but I didn’t realise we’d actually drown out the engines. That’s how quiet this plane is. In the momentary lulls between hacks barking questions, you can hear the gentle conversations of real people four rows back.

Two hours in: journalistic frenzy over, time for lunch. It’s terrific, produced by a couple of celebrity chefs I’ve never heard of, but will look out for in future. Sam Leong’s fillet of bass with fungi is the best economy-class food I’ve ever had on an airline.

Three hours in: distractions done with, there’s time to take in the surroundings. And when I do, a question occurs. If this is really the most luxurious plane ever built, why am I still shoehorned into a 32in seat?

Here, I have a confession to make. Last week, when the press were first allowed to see the inside of this plane at the Airbus factory, I – along with every journalist there – got a bit overexcited about the double beds in first and the huge business-class seats; all newer, bigger and swisher than anything we’d seen before. As a result, we didn’t spend too much time in the ominously familiar-looking economy area. A sin of omission, for which the hour of judgment has just come. Or rather hours: I’ve got five more to go.

Some passengers say the economy area is much lighter and airier than we’re used to. I don’t see it – though the large windows do provide a better view. The seat is pretty comfortable... for cattle class. My knees don’t touch the seat in front, and it’s an inch or so wider than a standard 747 equivalent. But it’s still not the ideal place to spend eight hours or more of your life, especially when you know that the real high rollers are just a few feet away, in the Suites. Time to see how the other half live...

Four hours in: the airline people are standing close guard on the curtain that separates economy from first, but for an instant they take their eyes off it, and bingo: an advance party of journalists plunges through the gap.

It’s another world. Hushed, spacious, all the seats are in cabins a little like those you’d find on a cruise ship, although the partitions only reach to about eye level. The champagne flows incessantly, and there are normally unobtainable bottles of Château Cos d’Estournel 1982 being poured. In a few of the 12 elite suites, the inhabitants have had their flat beds made up, and sprawl languorously under Givenchy duvets in front of their 23in TVs. Nobody sleeps, though. Having paid up to £25,000 at auction for a ticket, they want to savour every minute.

Upstairs, the improvement in business class, with its colossal 34in-wide seats, is arguably even greater. With just four abreast as opposed to economy’s 10, it feels both communal and spacious. The lucky ones try hard not to look smug. I try hard not to be jealous. We all fail. Five hours in: back in the cheap seats, I ruminate on what might have been. When we were shown the first A380 back in 2003, we were promised the following: boutiques, self-service restaurants, duty-free shops, children’s play areas, casinos, pubs, libraries, gyms (with treadmills to prevent DVT), showers, 18-hole golf courses. (Okay, I made the last one up, but it was going that way.) So why am I sitting here, unexercised, unshowered and unshopped, with the nearest pub in the outback five miles down? Why do we only have a slightly better version of what every long-haul holidaymaker knows and loathes – rank upon rank of sardine-tin seats, with no room to circulate or socialise? Only one conclusion: they were having us on.

Aviation enthusiasts make up the bulk of the clientele today, and they’re determined to enjoy themselves, so I’m in a disgruntled minority (see below). And, to be fair to Singapore Airlines, they never made any of those extravagant claims anyway. But right now I don’t want to be fair. This feels like a missed opportunity.

Six hours in: the real test of a long-haul seat is: Can you sleep in it? I try for 40 winks. Not a chance. The buzz all around means it’s not a fair trial, but I suspect that even on a calmer flight, it wouldn’t be easy. One bonus point: that dried-out, sinusy feeling is noticeably absent. Higher pressurisation is apparently the reason. Seven hours in: time to test the much-vaunted entertainment system. In a stab at egalitarianism, everybody gets the same stuff (economy has a smaller screen, but it’s still a healthy 10+ inches). It’s cracking: 100 on-demand films, 150 TV programmes, 700 CDs. New films, too. There are USB ports and laptop power to every seat. No internet access, though it might come.

Eight hours in: we’re preparing to land, so I’ll sum up. If you’re planning a trip down under when the plane starts flying from London next spring, should you choose an A380? Yes. It’s fabulous in first and business, a touch more comfy than we’re used to at the back. Revolutionary? No – not for the huddled masses, anyway. Vive la révolution. Business class

Business class

Andy Odgers, 39, and Hazel Watt, 43, bagged seats together in business class. Here they are sitting in just one of them. “It’s fantastic, far better than any business class I’ve seen in a 747,” said Andy, “right down to the picture quality on the big TV screen.” The couple, from Richmond in Surrey, paid US$14,200 (£6,922) for the trip, but reckoned it was worth it. “My parents are in Sydney,” said Andy, “and they don’t know anything about us being on this flight. We’re just going to walk into their hotel and surprise them. They’ll be so jealous.” “It’s better than a lot of first-class seats,” said Hazel. “You could argue it’s a bit hot, but it’s the best flight I’ve ever had.”

First class

Julian Hayward, 38, paid top dollar for two seats on the inaugural A380 flight – literally: the one-way trip in the first-class Singapore Suites for himself and a friend set Julian back US$100,380 (£48,936). The entrepreneur invited The Sunday Times in for a cosy chat in his bijou suite. Was it worth it? “Absolutely – all the money goes to charity, so it’s ending up in the right place. And this flight really is a piece of history, the first outing for the biggest plane ever built.” Would he do it again? “Perhaps not for quite so much money! But yes, the standard is something you won’t find elsewhere. I’m very impressed by their wine list. Would you care for a glass?”

Economy class

Richard Killip, 45, bought three tickets for the economy cabin of the A380, and brought along his daughters, Sophie, 12, and Ellie, 10. All three – who hail from Liverpool, but now live in Singapore – loved the flight. “The most impressive thing was the takeoff,” said Richard. “It was so quiet, it was almost spooky.” “I’ve already shown off a little to my schoolfriends,” admits Sophie. “They’re all dead jealous that I’m on the first flight!” Who else will fly the A380?

- PLENTY MORE airlines are queuing up to get the biggest passenger plane on earth. But will they go where you want to fly? When will they start? And – crucially – what will the experience be like on board? Anxious to keep a commercial advantage, most are being cagey with the details. But here’s what we know so far...


Start date: August 2008

Routes: “The US and the UK,” says the airline – which is expected to mean Sydney to London (via Singapore or Hong Kong), plus direct flights from Australia to Los Angeles.

What’s on board?Suites in first class, though not as enclosed as Singapore’s cabins, and no double beds as yet. Lounge with sofas in business. Four self-service bars in economy, and seats by Recaro (which makes seats for Aston Martin). Plus internet access for all.


Start date:August 2008

Routes:Dubai-London looks certain. Dubai to New York, Australia and India also likely.

What’s on board?Top secret, but there are clues. The airline is installing first-class suites with doors on its fleet of 777s, with styling based on the Orient-Express train, and is expected to go even more luxurious with its A380s – president Tim Clark said: “You ain’t seen nothing yet.” But on flights to India, Emirates will cram in 644 passengers.


Start date:spring 2009

Routes:Paris to New York and Japan.

What’s on board?Questions bring nothing more than a Gallic shrug.


Start date:summer 2009

Routes:20 being considered, from Frankfurt to Asia and North America.

What’s on board?A complete redesign for all three areas, but no details as yet.


Start date:2012

Routes:Los Angeles, Singapore, Hong Kong and Johannesburg are likely to be first. New York “would be considered if customer demand were strong enough”.

What’s on board?BA only ordered the planes a month ago, so they haven’t decided yet. Don’t expect many gimmicks, though – for that, look to...


Start date:2013

Routes:Los Angeles, Dubai.

What’s on board?More double beds for sure, plus a casino – chairman Richard Branson says: “There’ll be two ways to get lucky on our A380s.”

Showers and gyms have been mentioned too.

Thursday, October 25, 2007

Four Problem Traders; Four Trading Strengths

A while back I posted on the topic of trader strengths, and readers offered worthwhile perspectives on some of the factors that distinguish successful from unsuccessful traders. After much consideration, I decided to approach the topic a bit differently: by outlining four kinds of problem traders I frequently encounter and by identifying the strengths that help people deal with these problems.

Problem Trader #1: The Frustrated Trader - The frustrated trader deals with frequent angry reactions during trading. Sometimes the anger may be vented outward; other times it is turned inward. For example, many rigidly perfectionistic traders are also frustrated traders, because they cannot live up to their impossible standards and thus artificially create failure experiences for themselves. Frustrated traders are often impulsive traders and will make trades to either compensate for prior losing trades or to make up for missed opportunities. Frustrated traders will often ignore position-sizing rules and undergo occasional blowup losses as a result. It's easy to identify the frustrated trader by their physical cues: yelling, cursing, complaining, and gesturing when they should be focused on the screen. The key strength that combats frustration: self-acceptance and being supportive of oneself. Key techniques for combating frustration: setting reasonable goals; using biofeedback for building self-control and calm focus; and mentally rehearsing trading plans/rules to make them more automatic during the trading day.

Problem Trader #2: The Anxious Trader - The anxious trader is consumed with fears of loss, missing out on objective opportunity either by not taking signals or by sizing positions too conservatively. In a sense, the anxious trader is more concerned about not losing than about winning. This risk aversion can lead to analysis paralysis, as the trader waits for the perfect setup that never quite materializes. Sometimes the anxious trader is one who has been traumatized by prior losses. It's too painful to relive memories of those losses, and so the anxious trader exits positions too quickly and is too reluctant to get into positions. A very common feature is cutting profits rapidly out of fear of losing those. Signs of the anxious trader include muscle tension, worry, relief over getting out of positions (or away from the screen), and inability to trade reasonable size. The key strength that combats anxiety is confidence and an ability to accept loss as a natural part of trading. The techniques most helpful in combating anxiety include cognitive methods for replacing worry talk with constructive problem solving; behavioral techniques to calm oneself and reprogram stress responses; setting process rather than outcome goals; and regaining confidence by trading successfully in simulation mode and gradually building one's size.

Problem Trader #3: The Overconfident Trader - Overconfident traders approach trading like a casino--and they're not the house! The overconfident trader typically overtrades, which means trading size too large for their account and trading more often than opportunity dictates. Very often the overconfident trader is attracted to action in markets, rather than consistent profits and sound discipline. As a result, the overconfident trader can be identified by winning periods punctuated by unusually large and damaging losses. Sometimes the overconfident trader is also a desperate trader, hoping to strike it rich. A common feature of overconfident traders is their lack of preparation: they think that anyone can make it with simple methods and a gut feel. The problem is that they never spend enough time reviewing markets and intensively watching screens to develop that feel. The key strength that combats overconfidence is humility, a respect for markets and risk, and conscientiousness in crafting and following trading rules. Techniques that combat overconfidence include mental rehearsal and self-hypnosis to instill trading rules and support rule-governance; mechanical position sizing to avoid risk of ruin; and cognitive techniques to intercept and challenge grandiose thoughts following winning periods.

Problem Trader #4: The Defeated Trader - Defeated traders are ones who, in trader parlance, have "lost their mojo". Their thought patterns are negative and this blinds them to opportunity. Very often they will be filled with shame, remorse, and guilt over past losses and very often they enter new trades expecting the worst. As a result, they don't often enter new trades and will miss out on opportunities that are genuinely present. They often stop working at their trading, as anything trading-related is associated with emotional pain. Defeatism thus becomes a self-fulfilling prophecy. It's easy to recognize defeated traders, not only by their depressed mood, low energy, and lack of enthusiasm, but also by their "yes, but" rejection at helping efforts. Very often the defeated trader will focus on losses and mistakes and gloss over progress that's been made: they see the trading cup as half empty, rather than half full. The key strength that combats defeatism is emotional resilience and the ability to use losses as learning experiences. Techniques that combat defeatism include cognitive methods for reprocessing negative thought patterns; structuring of the learning process to emphasize strengths and solutions rather than mistakes; and a focus on attainable goals and the creation of success experiences.

Most of us can identify elements of these four traders in ourselves. If I had to choose, I'd say that I am most like the Anxious Trader. I am quick to step away from markets when my setups aren't there--sometimes too quick! Many of the traders I work with fit into the Frustrated Trader category: they're aggressive, achievement-oriented, and hard on themselves.

Knowing your patterns does not, in itself, enable you to change them, but it's a necessary step. Indeed, I find that, regardless of the patterns, the first step of progress a trader makes is interrupting old patterns that aren't working and trying something different. The ability to stand outside oneself as an observer of patterns is a core self-coaching skill.

Saturday, October 20, 2007

SAP: SAP Should Follow Oracle’s Lead

There has been plenty of hot air expelled this week over whether SAP’s (SAP - Annual Report) acquisition of Business Objects (BOBJ) is a sign that it is adopting Oracle’s (ORCL - Annual Report) big acquisition strategy or whether it is a simply a larger part of SAP’s existing strategy of using small “tuck-in” acquisitions. I’ll leave others to bloviate on those issues.

I am less interested in whether SAP is following Oracle’s strategy than whether they ought to be. And I think the answer to that question is a resounding “yes.”

For one thing, corporate IT buyers’ main concerns tend to be reducing costs and reducing complexity. Much better to have Oracle and SAP tie together the applications from a number of vendors (by directly integrating them) than to devote in-house IT staff to doing it. Research 2.0 criticizes the Business Objects acquisition for this reason, saying “SAP now faces many of the same incompatible architectural challenges faced by Oracle with its many acquisitions.” I think their customers would rather have SAP deal with the incompatibilities than to have to do it themselves. Since when is making life easier for customers a bad thing?

More importantly, however, there are just too darn many application software manufacturers out there. While consolidation in some industries occurs because the weaker businesses fail, software balance sheets are generally too strong to for this to happen. The only way to fix the problem of too many customers chasing a relatively fixed amount of dollars is for an industry leader to soak up the excess capital by leveraging its own balance sheet to acquire other companies - for cash, not shares. Oracle has been pursuing that fix.

Software companies tend to generate significant cash flow, and Oracle has been able to use this cash flow to fund the acquisitions while both maintaining a healthy balance sheet and avoiding dilution to existing shareholders. As an example, consider its first large acquisition – that of PeopleSoft in January 2005 for $11.1 billion in cash. Prior to the acquisition Oracle held more than $9.5 billion in cash and marketable securities on its balance sheet, and had virtually no debt. The company used this cash and a $7 billion bridge loan to complete the acquisition, and by the end of its fiscal year in May, 2005 it had reduced the loan value to $2.6 billion while still maintaining nearly $5 billion in cash and marketable securities and actually reducing its share count.

By May, 2006 the company had made another $4 billion worth of acquisitions (net of the cash held by the acquired companies) and increased its cash and marketable securities to $7.5 billion while restructuring its debt load to $5.7 billion in long-term debt. Even though the debt was $3 billion more than the prior year, most of that was offset by the increase in cash – meaning that the $4 billion in acquisitions was made possible almost entirely through cash flow from operations.

Speaking of cash flow, in the year ended May 2007 Oracle generated $5.5 billion of it from operating activities, and spent only $320 million of it on capital expenditures. That turns out to be a free cash flow yield of 4.5% from the existing businesses. Most of that continues to be invested in new acquisitions for new growth opportunities. The free cash flow has increased 55% since FY2005.

Meanwhile, SAP is generated approximately $2.0 billion in free cash flow last year, giving it a 3.0% free cash flow yield. Its acquisition avoidance has left the free cash flow essentially unchanged over the last three years (though arguably the change in the Euro/dollar exchange rate is providing growth.)

A higher yield and growing free cash flow compared with a lower, flat one is not much of a choice in my book.

If any doubt remains over which strategy is working better, one need only turn to a price chart. Since Oracle closed the PeopleSoft acquisition in January 2005, its shares are up 70% (mostly driven by rising cash flow), compared to just more than 30% for SAP over the same time. To me, it seems like that is exactly the type of “challenge” SAP would want to adopt.

oracle vs sap price chart

Thursday, October 18, 2007

Top 10 Most Fuel Efficient Cars


Here's the top 10 most fuel efficient cars, according to the 2008 Environmental Protection Agency and Department of Energy's fuel economy guidebook, published this Saturday. Prius tops the charts.

2008 Model Year Overall Fuel Economy Leaders

Class Model City/Highway MPG

10. Honda Fit (manual) 28/34
9. Toyota Corolla (manual) 28/37
8. Ford Escape Hybrid 4WD 29/27, Mercury Mariner Hybrid 4WD ", Mazda Tribute Hybrid 4WD "
7. Toyota Yaris (automatic) 29/35
6. Toyota Yaris (manual) 29/36
5. Toyota Camry Hybrid 33/34
4. Ford Escape Hybrid FWD 34/30, MazdaTribute Hybrid 2WD ", Mercury Mariner Hybrid FWD "
3. Nissan Altima Hybrid 35/33
2. Honda Civic Hybrid 40/45
1. Toyota Prius (hybrid-electric) 48/45

If you want to save on gas, hybrids are the way to go.

Lowest Fuel Economy by Vehicle Class for 2008 Model Year

Class Model City/Highway MPG

Two Seater Lamborghini Murcielago (manual) 8/13
Minicompact Car Aston Martin DB9 Coupe, Volante (manual) 10/16
Subcompact Car Bentley Continental GTC 10/17
Compact Car Bentley Azure 9/15
Midsize Car Ferrari 612 Scaglietti (auto) 9/16
Large Car Bentley Arnage RL 9/15
Small Station Wagon Audi S4 Avant (manual) 13/20
Midsize Station Wagon Mercedes-Benz E63 AMG Wagon 12/18
Sport Utility Vehicle* Mercedes-Benz G55 AMG 11/13
Minivan* Toyota Sienna 4WD 16/21
Pickup Truck* Rousch Performance Stage3 F150 11/15
Van (Passenger and
Passenger Chevrolet G1500/2500 EXPRESS 2WD 12/16
" Chevrolet H1500 EXPRESS AWD "
" GMC G1500/2500 SAVANA 2WD "
Cargo Chevrolet G15/25 VAN CONV 2WD "
" Chevrolet H1500 VAN CONV AWD "

*Trucks over 8500 pounds gross vehicle weight rating are currently exempt from federal fuel economy requirements

Highest Fuel Economy Models by Vehicle Class for 2008 Model Year

Class Model City/Highway MPG

Two Seater Audi TT Roadster (2 liter engine,auto) 22/29
Minicompact Car Mini Cooper Convertible (manual) 23/32
Subcompact Car Toyota Yaris (manual) 29/36
Compact Car Honda Civic Hybrid 40/45
Midsize Car Toyota Prius (hybrid) 48/45
Large Car Honda Accord 4Dr Sedan (manual) 22/31
Small Station Wagon Honda Fit (manual) 28/34
Midsize Station Wagon Passat Wagon (manual) 21/29
Sport Utility Vehicle Ford Escape Hybrid FWD 34/30
Mazda Tribute Hybrid 2WD "
Mercury Mariner Hybrid FWD "
Minivan Dodge Caravan 2WD 17/24
Chrysler Town & Country 2WD "
Pickup Truck Ford Ranger Pickup 2WD (manual) 21/26
Mazda B2300 2WD (manual) "
Van (Cargo&Passenger)Chevrolet G1500/2500 Van 2WD 15/20
(4.3 liter engine)
GMC G1500/2500 Savana 2WD Cargo "
(4.3 liter engine)

Lowest Overall Fuel Economy Models* for 2008 Model Year

Rank Manufacturer/Model City/Highway MPG

1. Lamborghini Murcielago (automatic) 8/13
2. Bugati Veyron 8/14
3. Lamborghini Murcielago (manual) 9/14
4. Bently Azure/Arnage RL 9/15
5. Ferrari 612 Scaglietti (automatic) 9/16
6. Lamborghini Gallardo Spyder (manual) 10/15
Ferrari Ferrari 612 Scaglietti (manual) "
Bentley Arnage (auttomatic) "
7. Lamborghini Gallardo Spyder 10/16
Aston Martin DB9 Coupe "
Aston Martin DB9 Volante "
Mercedes-Benz Maybach 57 "
Mercedes-Benz Maybach 57S "
Mercedes-Benz Maybach 62 "
Mercedes-Benz Maybach 62S "
8. Lamborghini Gallardo Coupe (manual) 10/17
Bentley Continental GT (automatic) "
Bentley Continental GTC (automatic) "
Bentley Continental Flying Spur (automatic) "
9. Mercedes-Benz G55 AMG 11/13
10. Jeep Grand Cherokee 4WD 11/14
Mercedes-Benz Ml63 AMG "

Tuesday, October 16, 2007

US Foreclosures Nearly Double

Foreclosure filings across the U.S. nearly doubled last month compared with September 2006, as financially strapped homeowners already behind on mortgage payments defaulted on their loans or came closer to losing their homes to foreclosure, a real estate information company said Thursday.

A total of 223,538 foreclosure filings were reported in September, up from 112,210 in the same month a year ago, according to Irvine-based RealtyTrac Inc.

The number of filings in September was down 8 percent from August's 243,947, the firm said.

Despite the sequential decline, the September figure represents the second-highest total for filings in a single month since the company began tracking monthly filings two years ago.

"August was an extraordinarily high month for foreclosure activity, so some falloff was almost predictable," said Rick Sharga, RealtyTrac's vice president for marketing.

The filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.

Typically, borrowers must be 60 to 90 days past due on their mortgage payments before their lender will consider them in default, the first stage of the foreclosure process. If a homeowner can't find a way to get current on payments, the home is then often put up for auction, and if it doesn't sell, it eventually goes back to the bank.

In all, 39 states saw a decline in foreclosure filings, the firm said.

Sharga noted that there was a spike in the number of bank repossessions in August that did not occur in September.

It's likely that the sequential decline in foreclosure activity between August and September was just a blip, not a bellwether of lessening foreclosure filings.

"We don't see September as the beginning of the end in this cycle of foreclosures," Sharga said.

The foreclosure rate for the nation in September was one foreclosure filing for every 557 households, the firm said.

The U.S. housing market has seen sales decline and home prices fall or remain flat, making it harder for homeowners who can't afford to make mortgage payments to sell their homes or seek refinancing.

Many of those troubled homeowners were among those who took on adjustable-rate mortgages that are now adjusting to a higher interest rate, translating into payments they cannot afford to make.

The rising delinquencies and foreclosures this year have led the mortgage industry to tighten lending standards, further narrowing options for homeowners struggling to pay their mortgage.

Nevada, Florida and California had the highest foreclosure rates in the country last month, the firm said.

Nevada reported one foreclosure filing for every 185 households, earning the state the highest foreclosure rate in the nation for the ninth month in a row. The state had 5,504 filings in September, down 11.1 percent from August and more than triple from September 2006.

Florida had one foreclosure filing for every 248 households. The state reported 33,354 foreclosure filings in September, down just less than 2 percent from August, but more than three times greater than September 2006's total.

California's foreclosure rate was one filing for every 253 households. The state reported the most foreclosure filings of any single state with 51,259, down 11 percent from August but a fourfold increase from September of last year.

Rounding out the states with the top 10 foreclosure rates last month were Michigan, Arizona, Georgia, Ohio, Colorado, Texas and Indiana.

Saturday, October 13, 2007

Income inequality worst since 1920s, according to IRS data

Half of US senators are millionaires

The superrich are gobbling up an ever larger piece of the economic pie, and the poor are seeing their share of earnings shrink: new IRS data shows the top 1 percent of Americans are claiming a larger share of national income than at any time since before the Great Depression.

The top percentile of wealthy Americans earned 21.2 percent of all income in 2005, up from 19 percent in 2004, according to new Internal Revenue Service data published in the Wall Street Journal Friday.

Americans in the bottom 50 percent of wage earners saw their share of income shrink to 12.8 percent in 2005, down from 13.4 percent.

"Scholars attribute rising inequality to several factors," the Journal reports, "including technological change that favors those with more skills, and globalization and advances in communications that enlarge the rewards available to 'superstar' performers whether in business, sports or entertainment."

The data could cause problems to President Bush and Republican presidential candidates, who have played up low unemployment and a strong economy since 2003, crediting Bush's tax cuts for contributing to both. In an interview with the Journal, Bush downplayed the significance of the income gap, saying more education is the answer to narrowing it.

"First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps," Bush told the Journal. "And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids. That's why No Child Left Behind is such an important component of making sure that America is competitive in the 21st century."

The Journal notes that many Americans fear the economy is entering a recession, and the IRS data show income for the median earner fell 2 percent between 2000 and 2005 to $30,881. Earnings for the top 1 percent grew to $364,657 -- a 3 percent uptick.

Scholarly research suggests that top earners did not have such a large share of total income since the 1920s, the Journal reported.

The Journal reports that a recent stock boom likely contributed to higher earnings among those in the top income bracket, with hedge fund managers and Wall Street attorneys seeing their incomes skyrocket in recent years.

Another prominent pool or wealthy Americans gathers regularly on Capitol Hill to write the nation's laws. The Center for Responsive Politics, which tracks campaign spending and politicians' wealth, says more than a third of Congress members are millionaires, with at least half the Senate falling into the millionaires club.

Forbes reported that last year's incoming class of new Senators did "little to shake the Senate's image as a millionaires club," with half of the newly elected members having seven- eight- or nine-figure personal fortunes.

Freshman Sen. Bob Corker (R-TN) is worth between $64 million and $236 million, and newly elected Sen. Claire McCaskill's (D-MO) fortune is between $13 million and $29 million. R

Roll Call estimates Sen. John Kerry (D-MA) is the chamber's richest member with an estimated net worth of $750 million; another Democrat, Wisconsin Sen. Herb Kohl, is among the chamber's richest with between $220 million and $234 million in personal assets.

Thursday, October 11, 2007

SBUX: Is Starbucks doomed or an excellent opportunity to invest?

So, after 50 years of selling hot mud, McDonald’s (MCD - Annual Report) continues to awaken to the notion that its customers might enjoy coffee that tastes good. According to Crain’s Chicago Business, “McDonald’s Corp. plans to sell lattes, cappuccinos and other specialty drinks in all of its 14,000 U.S. restaurants next year. McDonald’s predicts the new drinks will add more than $1 billion a year to sales.”

Not surprisingly, the anti-Starbuck’s (SBUX) crowd has latched on to this announcement as proof the company is doomed. 24/7 Wall St. even called it a “coup de grace,” which is defined as a “death blow intended to end the suffering of a wounded creature.” Although Starbuck’s the stock is certainly suffering, down about a third from the high reached earlier this year, it is hard to argue the company is wounded, or in need of a merciful end to its suffering.

It’s time for the doubters to face some facts. First, McDonald’s is not planning to match Starbuck’s “product for product.” In a Bloomberg article published just last month, McDonald’s President Ralph Alvarez said McDonald’s has no plans to offer the breadth of Starbuck’s beverages such as raspberry latte with soy milk and half the caffeine. Instead, they intend to compete for the plain-Jane cappuccino, offering it at about a 25% discount to the equivalent Starbuck’s model.

Secondly, Starbuck’s doesn’t need to concede the future market growth to others. For one thing, McDonald’s is already selling the cappuccinos in two thirds of its stores, according to the Bloomberg article. That potential market share loss has already been baked in, and it doesn’t seem to be hurting too badly. Starbuck’s same store sales growth is running at 4%, below its historical norm but above that of most retailers. If anything, the fact that most of McDonald’s rollout will be complete next year could ease the pressure on comp sales.

If further convincing is necessary, just look at the expected sales numbers. McDonald’s wants specialty drinks in 14,000 stores to add $1 billion to sales. In 2006 Starbucks had an average store count of approximately 6,500 and produced $6.5 billion in sales from them. In other words, they are still selling 14 times as much coffee per store as McDonald’s. The further incursion from the remaining one-third of McDonald’s expansion, even under the generous assumption that 100% of those sales would have otherwise gone to Starbuck’s, amounts to about 4% of Starbuck’s trailing twelve month company-owned retail sales – about one year’s worth of same store sales growth at worst.

Meanwhile, over the last 12 months Starbucks has generated $1.2 billion in cash flow from operating activities, and used just $1 billion to expand those operations by 15%. Assuming that two thirds of the capital expenditures went to open new stores and the rest was routine maintenance, the free cash flow from their existing store base is approximately $700 million per year, for a 3.5% free cash flow yield on the $20 billion enterprise value. It isn’t what I would call cheap, but it is much less like a wounded animal than a healthy tiger pouring its energy into a continued pounce by opening still more stores. At its current expansion rate, in two years the free cash flow yield would exceed that offered by treasuries, and Starbuck’s would still be only halfway through its expansion plans.

I would consider the stock cheap if it went down another 15% to $22.50, or if it just stayed at about the current price for another year. Since neither of those outcomes is certain, Starbuck’s fans will have to pick their own entry point. In the meantime, my favored strategy of writing put options may be worth considering. The April 2008 $27.50 puts are selling for about $2.30 right now. By writing those options you could earn an 8.5% 6-month return if the stock goes up, or buy the stock for an effective price of about $24.25 (which by April would probably meet my “cheap” criteria) if it goes down.

I think it is great that McDonald’s is offering its customers good coffee, and think the two companies can coexist much in the same way that McDonald’s has coexisted with, for example, hamburgers sold at ballparks. The two companies have very different customers and serve different purposes for them throughout the day. As for “coups de grace,” I don’t expect either company will need one any time soon.

Disclosure: Author is long Starbucks (SBUX) at time of publication. - by stockmarketbeat

An interesting list of fastest growing companies:
1 NutriSystem 433% 225% 244%
2 Hansen Natural 145% 80% 139%
3 Arena Resources 140% 165% 100%
4 Intuitive Surgical 123% 62% 94%
5 Titanium Metals 151% 48% 140%
6 Apple 149% 48% 96%
7 RTI International Metals 225% 43% 68%
8 Dynamic Materials 127% 45% 173%
9 Southern Copper 83% 67% 83%
10 Global Industries 159% 48% 67%
11 Frontier Oil 291% 33% 105%
12 Allegheny Technologies 250% 36% 81%
13 Ceradyne 105% 85% 46%
14 VASCO Data Security International 75% 54% 120%
15 Perficient 59% 77% 73%
16 Holly 89% 42% 101%
17 SEACOR Holdings 198% 59% 29%
18 Pioneer Drilling 262% 58% 25%
19 Freeport-McMoRan Copper & Gold 127% 51% 44%
20 Kansas City Southern 178% 52% 34%
21 Ladish 198% 28% 70%
22 Grey Wolf 248% 51% 25%
23 Allscripts Healthcare Solutions 138% 38% 48%
24 XTO Energy 83% 60% 42%
25 Grant Prideco 300% 33% 43%
26 Hornbeck Offshore Services 157% 38% 44%
27 Dawson Geophysical 97% 54% 41%
28 National Oilwell Varco 69% 61% 49%
29 Helmerich & Payne 202% 37% 40%
30 Dril-Quip 116% 32% 69%
31 Knot 155% 26% 72%
32 First Acceptance 105% 277% 13%
33 CB Richard Ellis Group 88% 33% 79%
34 Gulfmark Offshore 306% 28% 48%
35 Helix Energy Solutions Group 96% 53% 38%
36 Valero Energy 87% 37% 60%
37 General Cable 76% 32% 107%
38 Hologic 74% 39% 68%
39 Lufkin Industries 98% 33% 61%
40 American Science & Engineering 169% 35% 40%
41 Joy Global 141% 27% 65%
42 Range Resources 66% 50% 57%
43 Palomar Medical Technologies 119% 51% 27%
44 Patterson-UTI Energy 136% 52% 17%
45 Unit 91% 58% 26%
46 Netflix 180% 49% -19%
47 Gardner Denver 59% 57% 45%
48 Akamai Technologies 123% 39% 39%
49 Psychiatric Solutions 76% 50% 43%
50 F5 Networks 69% 51% 45%
51 Rowan Cos. 532% 36% 20%
52 RPC 106% 30% 55%
53 Atwood Oceanics 155% 27% 49%
54 Superior Energy Services 87% 32% 58%
55 W-H Energy Services 100% 33% 47%
56 First Marblehead 83% 79% 13%
57 TETRA Technologies 75% 40% 47%
58 Cognizant Technology Solutions 55% 56% 43%
59 Cleveland-Cliffs 72% 31% 78%
60 ImClone Systems 87% 65% -26%
61 ValueClick 47% 81% 35%
62 Allis-Chalmers Energy 54% 118% 33%
63 Nucor 118% 27% 50%
64 Chesapeake Energy 58% 65% 34%
65 Celgene 33% 48% 59%
66 Tesoro 82% 29% 61%
67 Precision Castparts 73% 31% 65%
68 Miller Industries 145% 30% 37%
69 Oneok 34% 72% 37%
70 Reliance Steel & Aluminum 75% 40% 42%
71 Southwestern Energy 37% 35% 84%
72 Lam Research 132% 37% 24%
73 Penn National Gaming 81% 28% 54%
74 Jones Lang Lasalle 73% 28% 61%
75 Radiant Systems 115% 28% 41%
76 Steel Dynamics 66% 38% 45%
77 Oil States International 71% 42% 39%
78 Layne Christensen 76% 38% 35%
79 Pinnacle Financial Partners 46% 81% 17%
80 Concur Technologies 165% 27% 29%
81 Avatar Hldgs. 82% 45% 23%
82 inVentiv Health 57% 51% 33%
83 Noble Energy 58% 47% 35%
84 A.M. Castle 74% 28% 50%
85 Encore Wire 84% 43% 17%
86 Commercial Metals 63% 27% 62%
87 American Capital Strategies 31% 62% 25%
88 Team 35% 48% 41%
89 WMS Industries 109% 35% 13%
90 First Advantage 43% 74% 7%
91 Deckers Outdoor 47% 32% 51%
92 OYO Geospace 56% 29% 58%
93 Pantry 101% 29% 28%
94 Cameron International 70% 30% 43%
95 Jackson Hewitt Tax Services 61% 50% 18%
96 Dress Barn 100% 28% 34%
97 World Fuel Services 32% 57% 24%
98 Regal Beloit 55% 44% 30%
99 Swift Energy 64% 43% 25%
100 Berry Petroleum 46% 40% 38%

Tuesday, October 09, 2007

The Worst Recession in 25 years?

On September 18 the Fed cut its target for the fed funds rate by 50 basis points (0.5 percentage points), from 5.25% to 4.75%. The move surprised many analysts who had been expecting a more modest cut of 25 basis points.
For those versed in the Austrian theory of the business cycle, as developed by Ludwig von Mises and elaborated by Friedrich Hayek, the aggressive Fed "stimulus" is ominous indeed. Not only will it pave the way for much higher price inflation than Americans have seen in decades, but it will also exacerbate what could be the worst recession in twenty-five years.

How the Fed "Sets" Interest Rates

Before discussing the history of interest rate manipulation by the Fed, a primer will be useful. When people say the Fed did such-and-such to "interest rates," they are specifically referring to the Fed's target for the federal funds rate. The Federal Reserve itself is neither a borrower nor a lender in this market; the fed funds rate is the interest rate that banks charge each other for overnight loans of reserves. Recall that in our fractional reserve banking system, the Fed mandates that banks keep a certain amount of reserves (either cash in the vault or deposits with the Fed itself) in order to "back up" their total outstanding deposits. At any given time, some banks have more reserves than they need, while others have less. The banks with excess reserves can thus loan them to those with deficient reserves, and the (annualized) interest rate is the fed funds rate.

Now a further complication: the Fed itself does lend reserves to banks, but it does this at the so-called "discount window," and the relevant interest rate is the discount rate. In recent years the Fed has traditionally maintained a margin between the fed funds target and the discount rate, in order to encourage banks to borrow from each other, rather than coming hat in hand to the (more expensive) Fed. Some readers may recall in mid-August that the Fed slashed the discount rate (not the fed funds rate) and encouraged banks to borrow from it in an effort to restore liquidity and calm to the credit markets.

It is clear enough how the Federal Reserve can set the discount rate: since the Fed is the one loaning these reserves, it can insist on any rate it wants. (Of course, if the rate were too high it might not get any takers.) But how does the Fed influence the federal funds rate, if it doesn't directly participate in this market? Is the target enforced the way, say, the government in some areas controls apartment rents or minimum wages?

The process is much more complicated. Very briefly: the Fed can control the quantity of reserves held by banks, and thus indirectly can control the price the banks charge each other for lending out reserves. If the Fed thinks banks are charging each other too much for reserves — in other words, if the actual fed funds rate is higher than the target — then the Fed will engage in an "open market operation," buying assets such as US Treasury bonds from banks. The Fed pays for these purchases by adding numbers to the accounts the selling banks have with the Fed.

This is the precise point of entry for the new money that the Fed creates out of thin air. To repeat: When the Fed buys (say) $1 million in bonds from Bank XYZ, Bank XYZ surrenders ownership of the bonds but sees that its deposits of reserves at the Fed go up by $1 million. But the Fed didn't transfer this money from some other account. No, it simply increased the electronic entry representing Bank XYZ's total reserves on deposit. There is no offsetting debit anywhere in the banking system. Bank XYZ now has $1 million more in reserves, while no other bank has less. Bank XYZ is now free to go out and loan more reserves to other banks, or to make loans to its own customers. (In fact, due to the fractional-reserve system, the bank could make up to $10 million in new loans to customers.) The money supply has increased, putting upward pressure on prices measured in dollars.

But back to our original theme, the injection of reserves obviously increases their supply and thus (other things equal) pushes down the rate Bank XYZ will charge other banks who might want to borrow reserves from it. The open market operation has thus achieved the Fed's goal of pushing the actual fed funds rate down to the desired target. Of course, going the opposite way, if the actual fed funds rate were too low, the Fed would sell assets to the banks, thereby destroying some of the total reserves in the system.

Austrian Business Cycle Theory

According to Ludwig von Mises and his followers, the boom-bust cycle is not inherent in the free market, but is rather caused by the government's interference in the credit markets, specifically its manipulation of interest rates. The government causes the boom period when it injects new credit into the system (pushing down rates), and then the unsustainable, non-economic investment projects put into motion necessitate a bust at some future date. (Here is a reading plan for this topic.)

The following chart illustrates the Misesian explanation. Note the chart does not include the recent September cut.

Real Yr/Yr GDP Growth (blue, right)
vs. Real Effective Fed Funds Rate (red, left)

Generally speaking, the chart indicates an inverse relationship between the two series. This accords with the commonsense view that cutting interest rates provides a stimulus while hiking them is contractionary. However, what the Austrian approach provides is the understanding of the real forces behind the boom-bust cycle. In other words, most financial commentators think that today's interest rates affect today's economic growth, end of story. But if a previous boom period has led to massive malinvestments, there must be a bust period to liquidate the various projects (for which there is an inadequate capital structure to complete).

To put it another way, many commentators seem to believe that if the Fed held interest rates low indefinitely, then we'd never have high unemployment, just rampant price inflation. And yet, the recent experience shows that this is dead wrong. The Fed didn't cause the recent problems by "responsibly" hiking interest rates. No, rates had been steady at 5.25% for some time, and then the housing bubble burst and the mortgage market faltered, thus "forcing" the Fed to take action.

Looking back at the chart above, we can see why the worst may be yet to come. In (price) inflation-adjusted terms, the early-2000s levels of the actual fed funds rate is the lowest since the Carter years. And many readers may recall the severe recessions of 1980 and 1982 that followed that period.


In the Austrian view, the boom-bust cycle is caused by the Fed's maintenance of artificially low interest rates, which causes businesses to expand, hire workers, buy other resources, and so forth, even though these projects are not justified by the true supply of savings in the economy. The greater the "stimulus" the worse the malinvestments.

From 2001–2004, the Fed kept (real) rates at the lowest they've been since the late 1970s. One of the consequences that has already manifested itself is the housing bubble. But a more severe liquidation seems unavoidable. The recent Fed cut may postpone the day of reckoning, but it will only make the adjustment that much harsher.