Posts Tagged ‘New York Times’

Capturing the Making of a Bridge

Sunday, July 29th, 2012

 

July 26, 2012

The bridge at Hoover Dam is a fantastic example of breathtaking infrastructure built in the U.S. Linking Phoenix and Las Vegas, a 2,000 foot long bridge now arches over the Colorado River, shaving as much as two hours off a driver’s commute between the cities.

Nearly halfway completed in this photo, it’s the first concrete-steel composite arch bridge built in the U.S., named after decorated Korean War veteran and governor of Nevada Mike O’Callaghan, and Pat Tillman, who gave up a multi-million dollar football career to enlist in the U.S. Army and fight in Afghanistan where he was killed by friendly fire.

Construction for the $114 million arch began in 2005 as part of the Hoover Dam Bypass Project and was open for traffic on October 19, 2010. The photographer of the image is Jamey Stillings from Santa Fe, who was in between assignments when he took a road trip to capture Lake Mead’s mineral deposits. Heading home, Hoover Dam’s infrastructure caught his eye and compelled him to return to the area by helicopter and car to photograph the infrastructure and surrounding area. The New York Times Magazine featured an incredible slideshow showing the tremendous scale of Stillings’ project.

See the Slideshow.

According to an article in The New York Times about Stillings, his passion was fueled by “the wider historical significance of the construction. The Empire State Building, the Eiffel Tower, the Hoover Dam—the imagery their births created is burned into the collective memory.”

We believe the bridge underscores the ongoing need for natural resources. You’ll find more awe-inspiring stories like this one in the latest Shareholder Report, as we cover what you need, what you want and how much it will cost.

Click on the link below to see the online version now. If you’d like to read it in print, call us at 1-800-873-8637 or email at editor@usfunds.com.

Download the Report

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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Unmasking the Asian Giant

Monday, July 2nd, 2012

Unmasking the Asian Giant

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Unmasking the Asian GiantChinese operas have been keeping audiences enthralled for hundreds of years with mythical characters, enchanting stories and elaborate masks that add drama and mystery. While this fantastical treatment is appreciated in the theatre, it isn’t in global markets. Investors don’t like mystery—think of how uncertainty has spooked markets in recent years.

Global investors are rarely privy to every detail about the economy; that’s why it’s necessary to rely on multiple data and research to make decisions and be cautious of extreme views that unnecessarily arouse suspicion, skepticism, and criticism. These opinions may grab headlines, but rarely do they help investors’ portfolios.

A recent article in The New York Times raised doubts about the quality in China’s macroeconomic reporting. The Times pointed to evidence from “prominent corporate executives in China and Western economists” who say that “local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.” The author alarmed many of our readers, so we immediately contacted numerous analysts—many of whom have front row seats to Chinese economic data—to get their reaction.

Some analysts preempted our request by independently sending out a rebuttal, including CLSA’s China Macro Strategist Andy Rothman, in his Sinology report titled, “Lies, Damned Lies…” Since 2006, global investors have come to rely on this company’s coverage of China because of its ability to “independently monitor mainland economic activity.” See Andy’s insightful views on China from a recent webcast.

Don Straszheim from ISI also emailed his view on the veracity of Chinese data. (We note that Don was correct on a recent call on China. When he visited our office at the beginning of June, he correctly predicted the interest rate cut, which China made two days after his visit.)

We’re all influenced by emotions, of course, and when used to our advantage, can help guide how we invest. However, we need to be aware of how outside biases can influence our judgment. In Thinking, Fast and Slow, Daniel Kahneman writes about a mechanism through which biases flow called an “availability cascade,” a term coined by Cass Sunstein and Timur Kuran. Kahneman says the availability cascade is a “self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action.” The vicious cycle goes like this: As people begin to worry, they seek more information and are attracted to similar news reports, which encourages additional coverage. The “availability entrepreneurs” are the ones who deliberately want to keep the negative news flowing.

This may not have been the intention of the Times—and other China bears—but its business is selling newspapers.

Kahneman focuses his discussion on how policies should take into consideration a combination of “experts’ knowledge with the public’s emotions and intuitions.” This thinking also relates to investment decisions, which is why our SWOT model is designed to help us review a variety of sources, along with emotion and intuition, and categorize the results in terms of strengths, weaknesses, opportunities and threats.

We encourage our readers to take this approach: Read the Times article and analyze it alongside what analysts are saying:

It’s not breaking news that China’s data is less-than-perfect. Analysts have been saying this for years. CEBM says simply that the Times article is “a true but not new story,” while ISI believes “the shortcomings of China data is a topic every China macro journalist writes on every year or so – with small variations and supporting anecdotes.”

Part of the reason the topic of China’s “disguise” keeps coming up stems from the fact that the country has not had a very long history of “professional independence from the political machinery in Beijing,” says ISI.  Unlike developed countries, ISI believes China’s data system continues to be opaque and primitive. The countries’ inadequacies are relatively common among emerging markets, as numerous analysts have pointed out.

This fact does not release China from its responsibility to make sure that investors have accurate information. Rather, because the country has become an economic powerhouse, it is under greater scrutiny, which means it needs to improve its checks and balances. CLSA says the central government has been aware of how local officials inflate their data and “has been taking steps to mitigate the problem.” For example, more than 700,000 companies now report their data directly to the National Bureau of Statistics, rather than the local governments. NBS data is typically used to forecast consumption of key commodities, says CLSA.

The Times discussed how electricity production and consumption is “a telltale sign of a wide variety of economic activity” and is a “gold standard” for finding out how the economy is doing. A few months ago, U.S. Global’s analyst, Xian Liang talked about how important electricity consumption was as a measure of activity—some commercial banks that lend to small companies would physically check the meters themselves.

As shown in the chart below, over the last few years, China has reported electricity consumption that was much more volatile than real GDP data. Noting the extreme at the end of 2008, it’s likely that GDP fell more than was reported, and at the end of 2009, GDP likely rose more than publicly reported, says ISI.

China's Electricity Consumption and GDP

However, the logic of the Times article to think that local officials are “overstating” data seems misguided. According to Bank of America-Merrill Lynch, China’s local officials have little incentive to over-report the use of energy because “Beijing imposes increasingly restrictive regulations on energy use per unit of GDP on local governments.” Also, since 2011, many local officials have been trying to encourage the government to ease tightening measures, so it is not in their interest to over-report power data to mask a slowdown.

What’s needed before investing in any emerging market is an ability to decipher the mountain of data and use informed judgment.  Because “all data in China are not created equal,” ISI bases its opinion on data, giving more credibility to data that is independent and discounts data that is confusing or biased. Data including purchasing managers’ index, export and import volumes, auto and vehicle sales and production, transportation and People’s Bank of China are generally high-quality and credible, says ISI.

There’s no denying the importance of China. Take a look at McKinsey’s map showing the rapid shift in the world’s economic center of gravity. Beginning in AD 1, for nearly 2,000 years, the economic center of gravity was in Asia because population growth and migration were slow. Industrialization and urbanization in Europe and the U.S. quickly shifted the economic power west for the next century. Now, “China is urbanizing on 100 times the scale of Britain in the 18th century and at more than ten times the speed,” says McKinsey.

Evolution of the Earth's Economic Center of Gravity

In fact, in the past three years, a combination of lower growth in the developed countries, combined with the fast urbanization of the emerging world, the economic power has reverted back toward the east at the “fastest rate of change” in history.

Here’s another way to visualize China’s reversion to the mean, which we showed a few days ago:

Economic History of Major Powers

All the World’s Not a Stage
China is far from perfect: While actors can perfect their lines and use masks to captivate an audience, smart investors know better to use a wealth of information across numerous sources to guide investment decisions. Weigh the evidence and judge for yourself. As my friend, Investment Strategist Keith Fitz-Gerald recently said in an interview, “A powerful China is coming, and we have two choices. Either we’re at the table, or we’re on the menu.” To him this means, “Good news from China is good news for the U.S.; bad news from the Chinese economy is bad news here.”

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The Value of Sentiment Polls (Smead)

Wednesday, April 4th, 2012

 

by William Smead, Smead Capital Management

We (at Smead Capital Management (SCM)) have made the case that the poor performance of the US stock market from the end of 1999 to the end of 2008 has caused most institutional and individual investors to dramatically shorten the duration of their equity investments. In many cases, we are hearing that institutions and individuals want their advisors to help them insulate or “prevent” them from having another 2008. In a world of short duration common stock investing, sentiment polls have an increased importance. We like to say that an eye on the crowd is important if you have one foot out the door at all times. Professional investors have been forced by the power of the rebound in the stock market since March 9, 2009 to get invested, but they haven’t trusted the durability of this rebound along the way.

Individuals and financial advisors practice short duration through go-anywhere managers, exchange-traded funds and low-cost trading of individual common stocks. Institutional investors have done this by allocating a large part of their asset base to equity managers who attempt market timing and alternative investments in the hedge fund world. Studies show that the money in “alternative strategies” now dwarfs what is held in US long-only equity. See the chart below:

 

In a wonderful April 1, 2012 article in the New York Times, Julie Creswell presents the facts about pension fund performance in relation to how committed plans are to alternative investments:

“Searching for higher returns to bridge looming shortfalls, public workers’ pension fund across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds.

But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.”

What Julie describes as “riskier” investments have also contributed to these very low levels of participation in long-only US stocks and especially long-only US large capitalization strategies.

When you breakdown the long-only participation, it is spread between US large cap, US mid cap and US small cap. Since small and mid-cap strategies have outperformed since the peak of the US stock bubble in 1999, it is safe to assume that institutions are the most committed to small-cap and mid-cap long-only strategies relative to the total equity long-only mix as at any time since the 1990’s. You can see this in Request for Proposal (RFP) mandate notices for small cap managers in periodicals like Emerging Manager Monthly. Institutional investors seem to like to close the barn door after the animals have run out. After ten years of outperformance by small-mid strategies, they are vigorously looking to increase their participation. Since small and mid-cap strategies are historically more volatile than large-cap strategies, this triggers an additional urge to time the market and has increased the importance of sentiment polls.

The Investor’s Intelligence (II) poll of investment newsletter writers is the oldest of the major sentiment polls and is the one I have followed during my nearly 32 years in the investment business. Our general view at SCM, as long-term investors by nature, is to not be interested in changing what we own based on 6-12 month stock market gyrations. For this reason, our view is that the sentiment polls are only useful at extremes. Therefore, everything that happens in between the extremes is just noise.

This week’s II poll showed that those writers who are bullish total 50.5% and those that are bearish equal 22.6% of the newsletter writers. Our observation is that it is very meaningful historically when the bullish sentiment reaches 60% or greater. In August of 1987, at the end of a run up in the Dow Jones Industrial Average from below 800 in August of1982 to over 2700, bullish sentiment broke 60%. By October 19th of the same year, the Dow fell to 1738. In February of 1999 and in February of 2001 at around 1240 on the S&P 500 index, bullish sentiment exceeded 60%. The S&P 500 index fell to 761 in October of 2002, a decline of 38.6%.

If history is any guide, it would take a large additional spurt to the upside in today’s US stock market to trigger a 60% bullish reading. We feel this could only come through a dramatic increase in long-only institutional large-cap US stock market participation and/or an end to the massive move into bonds made by US individual investors over the last four years. The bond market devotion would have to be replaced by a very meaningful move into US equities.

In 1987, institutions got heavily committed because of the comfort that derivative -related “portfolio insurance” provided many of them. The insurance was designed to protect against “normal” bear markets, not a drop in the Dow Jones average from 2700 to 1700 in 78 days! Both of these instances (August 1987 and February 1999), where the 60% bullish sentiment marker hit an extreme, saw price-to earnings (PE) ratios at historic highpoints. Warren Buffett, in his Allen and Co. talk at Sun Valley in the summer of 1999 mentioned that the Fortune 500 traded at 30 PE.

In our opinion, those who are very bearish about the US stock market need a substantial price increase to trigger historically extreme newsletter writer sentiment. Those who are optimistic should prefer a temporary correction or sideways movement to reinforce fear on the part of the crowd. This would cause the bullish and bearish readings to gravitate to toward each other and remove the risk of having some temporary “hell to pay” for those of us who seek to practice long-duration common stock investing.

Best Wishes,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

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Greed is Indeed Good at Goldman?

Thursday, March 15th, 2012

Scandal and headlines seem to perpetually follow Goldman Sachs (GS), a firm that’s simply doing “God’s Work“.  On Wed. March 14, Goldman’s name once again burnt up the Internet, and social media.  This time it was from a resignation letter by one of its top executives published as an op-ed at the New York Times.

The op-ed entitled “Why I Am Leaving Goldman Sachs” blasting GS culture of greed was written by Gregg Smith, a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa, according to the Times.  The letter and its link has immediately gone insanely viral and trending worldwide.  That was probably one factor that sank GS stock by 3.5% on the day while the broader market was essentially flat (see chart below).

You can hardly blame the enthusiasm of the 99% around the globe.  After all, it’s been over two years since Matt Tabbi at Rolling Stone turned “Vampire Squid” and “Goldman Sachs” into synonyms.

Here are some of the most revealing tidbit Smith wrote

“It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.”

According to Smith, the three quickest ways to climbing the corporate ladder at Goldman:

  1. Execute on Goldman’s “axes,” – Persuading your clients to invest in the stocks or other products that Goldman is trying to get rid of.
  2. Hunt Elephants.” – Get your clients–some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman.
  3. Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Of course, Goldman immediately came out with a three-sentence rebuttal:

“In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.”

There are some people questioning the motive and the exact position level of Smith.  Goldman, reportedly,  tries to downplay Smith as just one of 12,000 company vice-presidents, a more junior rank, implying frustration could be Smith’s motive since he’s been at the firm a decade and is still a low man on the totem pole.

Regardless, Goldman’s own track record supports Smith’s statement.

Just less than two weeks ago, Delaware Chancery Court Judge Leo Strine citing “the disturbing nature of some of the behavior” of Goldman leading to the terms of pipeline operator Kinder Morgan Inc.’s $21.1 billion purchase of El Paso Corp.  Goldman Sachs’s biggest takeover deal last year.

The bottom line?  Total conflict of interest!

Bloomberg reports that Goldman stands to make $20 million in fee from El Paso, but GS also has a $4 billion stake in Kinder Morgan. Two of GS employees also sit on Kinder Morgan’s board, although both recused themselves from negotiations.

Judge Strine wrote,

“I cannot readily accept the notion that Goldman would not seek to maximize the value of its multibillion dollar investment in Kinder Morgan at the expense of El Paso, but, at the same time, be so keen on obtaining an investment banking fee in the tens of millions,”

And who can forget the SEC fraud suit in April 2010 against Goldman for unloading risky subprime mortgage packages to clients while betting against them the whole time?

So this Goldman Letter by Smith is simply stating the obvious of what’s been going on at Goldman as well as on Wall Street for years.  Will this lead to some much needed moral and ethical reform at Goldman and on Wall Street?  I certainly won’t hold my breath.

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Three Reasons LTRO Will Not Get Banks to Lend

Thursday, February 2nd, 2012

The LTRO may have ignited the bond markets and the stock market but it did not do anything for bank lending. The New York Times reports Survey of European Banks Shows a Sharp Cut in Lending

Banks in the euro area cut lending sharply at the end of 2011, according to data published Wednesday, raising concern that Europe was on the verge of a credit crisis that could lead to a deeper recession than expected.

A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.

“It is obvious that we see a deleveraging, a retrenching process unfolding,” Thomas Mirow, the president of the European Bank for Reconstruction and Development, said in an interview last week. He said the figures from the Bank for International Settlements showed “this is not just perception but reality.” The reconstruction bank provides credit to support the development of free markets in the former Soviet bloc.

Banks tightened their lending standards for businesses as well as for individuals, according to the central bank. Of the banks surveyed, 35 percent said they were applying stricter criteria to business loans compared with 16 percent in the previous quarter. Banks also became more reluctant to provide mortgage loans. And they said they expected credit to become more scarce in months to come.

Germany was an exception. Lending there remained steady, according to separate data published Wednesday by the Bundesbank, the German central bank.

One reason banks in the euro area are reluctant to lend is that they have their own problems raising money. About half said they were still having trouble getting access to money markets, the central bank said. Funds in the United States and elsewhere that lend large sums to banks remain wary of the health of many euro area institutions because of their holdings of European government bonds.

A fifth of banks surveyed said that the need to raise their capital reserves had forced them to restrict lending. But twice that many banks said the flagging euro area economy was the main reason for tighter credit standards.

Three Reasons LTRO Will Not Get Banks to Lend

Contrary to popular belief the LTRO is not going to do much if anything to get banks to lend. Here are the reasons.

  1. Banks are capital impaired if not outright insolvent
  2. There are few credit-worthy borrowers
  3. Banks have three years guaranteed profits by speculating in government bonds

There is much ongoing debate about whether or not LTRO funding will be used to speculate in government bonds and if so how much. The bulk for the money so far as been to rollover debt, but the temptation to borrow from the ECB at 1% and buy 3-year Spanish bonds yielding 2.89%, 3-year Irish bonds yielding 5.43%, or 3-year Italian bonds at 3.8% is extremely high.

Note that even 2-year bonds are in play. For example, 2-year Italian bonds yield 3.17%. Thus, the idea that none of the LTRO will go into government bonds is unlikely to hold up under scrutiny.

Indeed banks are salivating to double or triple the €489bn they borrowed in December. For details please see You Ain’t Seen Nothin’ Yet; Another Trillion (or Two) Euro LTRO Coming Next Month

The LTRO is good for bank profits, for now, but please remember that speculation in government bonds is what got European banks into trouble in the first place.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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The New York Times Continues to Hammer at Apple (AAPL)

Friday, January 27th, 2012

Yet another eye opener via the New York Times utilizing Apple (AAPL) as an example in describing the Chinese supply chain, especially via Foxconn.  Foxconn if you recall suffered from a spate of suicides about 12-24 months ago, and was prominent in the news.  While many will argue that even the worst job at Foxconn is a step up from many opportunities in China, these stories are interesting from the perspective that many of Apple’s consumers are of the ‘higher end’ type, some of which supposedly make purchasing decisions not just on price point but a broader range of reasons.  While I doubt these stories will put much of a dent (if any) into the unwavering demand for the latest cool electronic gadget they are quite interesting reads.

  • …the workers assembling iPhones, iPads and other devices often labor in harsh conditions, according to employees inside those plants, worker advocates and documents published by companies themselves. Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.
  • Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.
  • More troubling, the groups say, is some suppliers’ disregard for workers’ health. Two years ago, 137 workers at an Apple supplier in eastern China were injured after they were ordered to use a poisonous chemical to clean iPhone screens. Within seven months last year, two explosions at iPad factories, including in Chengdu, killed four people and injured 77. Before those blasts, Apple had been alerted to hazardous conditions inside the Chengdu plant, according to a Chinese group that published that warning.
  • Apple is not the only electronics company doing business within a troubling supply system. Bleak working conditions have been documented at factories manufacturing products for Dell, Hewlett-Packard, I.B.M., Lenovo, Motorola, Nokia, Sony, Toshiba and others.
  • Some former Apple executives say there is an unresolved tension within the company: executives want to improve conditions within factories, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products.    Executives at other corporations report similar internal pressures. This system may not be pretty, they argue, but a radical overhaul would slow innovation. Customers want amazing new electronics delivered every year.
  • “We’ve known about labor abuses in some factories for four years, and they’re still going on,” said one former Apple executive who, like others, spoke on the condition of anonymity because of confidentiality agreements. “Why? Because the system works for us. Suppliers would change everything tomorrow if Apple told them they didn’t have another choice.”
  • “We’re trying really hard to make things better,” said one former Apple executive. “But most people would still be really disturbed if they saw where their iPhone comes from.”
  • Apple typically asks suppliers to specify how much every part costs, how many workers are needed and the size of their salaries. Executives want to know every financial detail. Afterward, Apple calculates how much it will pay for a part. Most suppliers are allowed only the slimmest of profits.  So suppliers often try to cut corners, replace expensive chemicals with less costly alternatives, or push their employees to work faster and longer, according to people at those companies.
  • “The only way you make money working for Apple is figuring out how to do things more efficiently or cheaper,” said an executive at one company that helped bring the iPad to market. “And then they’ll come back the next year, and force a 10 percent price cut.”
  • “You can set all the rules you want, but they’re meaningless if you don’t give suppliers enough profit to treat workers well,” said one former Apple executive with firsthand knowledge of the supplier responsibility group. “If you squeeze margins, you’re forcing them to cut safety.”
  • Many major technology companies have worked with factories where conditions are troubling. However, independent monitors and suppliers say some act differently. Executives at multiple suppliers, in interviews, said that Hewlett-Packard and others allowed them slightly more profits and other allowances if they were used to improve worker conditions.
  • “You can either manufacture in comfortable, worker-friendly factories, or you can reinvent the product every year, and make it better and faster and cheaper, which requires factories that seem harsh by American standards,” said a current Apple executive.  “And right now, customers care more about a new iPhone than working conditions in China.”

 

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

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How U.S. Lost Out on iPhone Work

Sunday, January 22nd, 2012

I’d like to point out to readers a very good article in the New York Times on one of the major challenges for the new era economy.  Unlike past eras, many of our major corporations are no longer major employers in the U.S.  This story examines this trend via the lens of Apple.  It also shows the challenges of competing with China, as armies of workers at companies like Foxconn have a very different perspective on working conditions than Americans.  Where this is really striking Americans is the mid level jobs – we are seeing expansion of low level (paying) jobs in services, and to a smaller degree high level (paying) work.  But many of the “rungs” Americans used to climb to get from low to high (or at least middle class) are now overseas.

  • Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.  Why can’t that work come home? Mr. Obama asked.  Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.
  • The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.
  • ….what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.   Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.
  • Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight. A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.  “The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”
  • For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.
  • ….nothing like Foxconn City exists in the United States.  The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day.
  • “They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”
  • Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.  In China, it took 15 days.

 

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

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“The Oath” (Saut)

Tuesday, November 29th, 2011

“The Oath”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

November 28, 2011

Here is the oath that House and Senate Members take:

I do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter: So help me God.

Dereliction of duty is a specific offense under United States Code Title 10 § 892, Article 92, which applies to all branches of the U.S. military. A service member who is derelict has willfully refused to perform his duties (or follow a given order) or has incapacitated himself in such a way that he cannot perform his duties.

Last week, certain members of Congress were guilty of dereliction of duty when they “willfully refused to perform their duties” by failing to cut government spending. While the focal point was the “dirty dozen” (aka the Super Committee), by our count there are some 68 members of Congress that also qualify for dereliction of duty. No wonder a recent New York Times poll found that more Americans approve of polygamy than they do of Congress. Indeed, with a 9% approval rating Congress has the lowest rating ever! And, while we can’t vote them out quite yet, the D-J Industrial Average (INDU/11231.65) has certainly voted with the worst Thanksgiving week decline (-4.78%) since 1932. Last week’s wilt brought the “selling stampede” to session 19, and punctuated the now ~8.2% decline by the senior index since the Industrials’ closing reaction high of October 28, 2011 (12231.11). Recall that such stampedes typically last 17-25 sessions with only one- to three-session pauses, or rally attempts, before they exhaust themselves. In addition, the S&P 500 (SPX/1158.67) has experienced seven consecutive sessions on the downside, and markets rarely go that many days in a row in one direction. Moreover, as of last Friday the selling skein left the McClellan Oscillator as oversold as it was at the August 8-9, 2011 “lows.” Therefore, the stage was set for some sort of tradable bottom; last week certainly felt like capitulation to me.

Quite frankly, when I wrote the strategy report titled “Crescendo” on October 31, 2011 where I suggested a trading top was “in,” I really didn’t think the ensuing decline would violate my long-standing pivot point of 1217 on the SPX, nor did I think some of our core investment positions such as EV Energy Partners (EVEP/$63.22/Strong Buy) and LINE Energy (LINE/$35.19/Strong Buy) would decline by the amount they have. Still, we like the MLPs and think 2012 will have some interesting twists for the group. As our energy analyst Kevin Smith writes:

“Recently there have been several high-profile takeouts of C-corps with pipeline assets by master limited partnerships (MLPs), with at least one transaction sparking a bidding war. You are probably thinking: E&P companies don’t have pipeline assets – this won’t affect our E&P investments. Don’t be so sure. The gates have been opened and the sharks have been let loose in your pool too. While Upstream MLP acquisition activity has picked up, the partnerships have generally lacked the need, the financial firepower, or desire to significantly ramp up C-corp acquisitions. That is changing. We believe the question should not be if, but when will the flood of C-corp acquisitions by MLPs manifest itself?”

Interestingly, most MLPs trade at 8-9x EBITDA, while E&P C-corps trade at 4-5x EBITDA. The implication is that an MLP could acquire a C-corp and the acquisition would be earnings accretive. Though neither the company nor our covering analyst have given any indication that a tie-up is in the picture, if this line of reasoning proves correct, one potential acquisition candidate would be Berry Petroleum (BRY/$36.93/Outperform) given its valuation metrics and our analyst’s positive view of the company’s fundamental outlook.

Another theme applicable for this time of year is the correlation between a decent stock market and good Christmas sales. Up until the past few sessions we have experienced a pretty good stock market. Said correlation is about 89%, so our sense is that this Christmas selling season is going to be good. Speaking to this, our softline retail analyst, Samantha Panella, said that Black Friday looks like it is going to be better than last year but that it is extremely promotional with heavy price discounting. Sam’s observations at the Roosevelt Field Mall on Friday caused her to suggest the clear “winner” is Express Inc. (EXPR/$20.14/Outperform), while the clear loser is Gap Stores (GPS/$17.62/Market Perform). Yet, there is another player that has come to the fore over the past 15 years.

Indeed, according to www.ftportfolios.com:

“A survey from Shop.org found that over 50% of all workers plan to do some of their holiday shopping online on Cyber Monday (November 28), according to CNNMoney.com. Eight out of 10 online retailers plan to offer special promotions on that day. Some 75.9 million workers in the U.S. have access to the Internet. Sales are expected to set a record at $1.2 billion, according to comScore. Internet stocks have performed quite well since the market bottomed on March 9, 2009. From 3/9/09-11/21/11, the Dow Jones Internet Composite Index posted a cumulative total return of 149.8%, compared to gains of 106.0% for the S&P Information Technology Index and 86.5% for the S&P 500.”

As our Internet analyst Aaron Kessler writes, “Through the first three weeks of the 2011 holiday season, e-commerce sales remained robust as indicated by ChannelAdvisor (same-store sales up 28% y/y) and the Chase Holiday Pulse Index (31% y/y). While still early in the holiday period (first three weeks represented 22% of the 2010 holiday season), the strong initial data increases our confidence in the 2011 e-commerce holiday season outlook.” In addition, while I think it is a stretch to call it an e-commerce company, Shutterfly (SFLY/$31.28/Outperform) is one of Aaron’s favorites.

The call for this week: The week before Thanksgiving has been “up” eight of the past nine years … that is up until last week. While many pundits cited the failed German Bund auction, China’s slowing PMI Index, another bank “stress test,” a downwardly revised GDP report, Euroquake, etc.; my hunch is the real reason for the recent swoon is our own dysfunctional government. To be sure, the breakdown of the Super Committee has clarified the differences between the two parties. Hence, it is pretty clear that Americans must now decide to accept either serious reductions in their healthcare and pension programs, or substantially higher taxes, and probably both. Whatever the reason, my sense is that the November weakness has burned itself out and consequently I look for a continuation of the traditional year-end rally that began on our “buy ‘em” call of October 4th. That belief is based on the fact that trading volume has contracted so sharply it reveals the public is g-o-n-e from the investing scene (read: bullishly), the economy is NOT slipping into recession (our recession indicator has the odds down to 11% from 35% in September), Euroquake will be resolved, earnings will continue to surprise on the upside (like they did in the 3Q10), that last week’s reduction in real GDP was because of inventory adjustments that should actually boost growth in 4Q11, that Domestic Final Sales accelerated to 3.1% in the third quarter (versus 1.4% and 0.4% in the previous two quarters), and the “bull list” goes on despite all of the negative nabobs rants. And this morning Germany and France are rumored to be exploring “radical” methods to solve Euroquake, which has the preopening futures up more than 30 points.

P.S. I am in New York City all week; these will be the only strategy comments of the week.

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Buffett for President? (Ronalds)

Wednesday, August 17th, 2011

Buffett for President?

August 16, 2011

By Scott Ronalds

One of the richest men in the world wishes he was taxed more. Warren Buffett paid $7 million in federal taxes last year, which equated to 17% of his taxable income. Surprisingly, this was the lowest rate of any of the 20 employees in his office.

In a rare plea in the New York Times, Buffett is asking Congress to stop pampering the super rich. “My friends and I have been coddled long enough by a billionaire-friendly Congress”, he notes. His advice to Washington is to leave rates unchanged for 99.7% of taxpayers and raise taxes on Americans making more than $1 million, with an additional increase in rates for those making $10 million or more.

As for the potential backlash, he believes the super-rich will take it in stride:

“I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them … Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.”

America needs to reduce its deficit, urgently. Its second richest citizen is willing to do his part, and feels that his bridge and poker buddies wouldn’t mind sharing in the sacrifice either. If nothing else, it’s an interesting message to Congress.

Copyright © Steadyhand Investment Funds

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The World According to Malcolm Gladwell

Tuesday, June 28th, 2011

Malcolm Gladwell, one of the best storytellers of our generation, is the author of four books, including “The Tipping Point: How Little Things Make a Big Difference,” (2000) , “Blink: The Power of Thinking Without Thinking” (2005), and “Outliers: The Story of Success” (2008) all of which were number one New York Times bestsellers. His latest book, “What the Dog Saw” (2009) is a compilation of stories published in The New Yorker.

(Hat tip: Barry Ritholtz, The Big Picture)

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