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Monthly Archives: February 2012

How Capitalism Kills Companies

Felix Salmon

As Mitt Romney cruises to his inevitable coronation as the Republican presidential candidate, increasing amounts of attention are being focused on his history at Bain Capital, where he made his fortune. Did he create 100,000 jobs, as he claims? Or is he a vulture and asset stripper?

Glenn Kessler has the definitive take on the job-creation claim, which he says is “untenable”; as he says, Romney’s method of counting jobs created when he wasn’t at Bain or when Bain wasn’t managing the companies in question doesn’t even pass the laugh test. Meanwhile, as Mark Maremont documents, Bain-run companies — even the successful ones — have an alarming tendency to end up in bankruptcy. And I think it’s fair to say that bankruptcy never creates jobs, except perhaps among bankruptcy lawyers.

The reality is that Romney would have been in violation of his fiduciary duty to his investors had he concentrated on creating jobs, rather than extracting as much money as he possibly could from the companies he bought. For instance, Worldwide Grinding Systems was a win for Bain, where it made $12 million on its initial $8 million investment, plus another $4.5 million in consulting fees. But the firm ended up in bankruptcy, 750 people lost their jobs, and the US government had to bail out the company’s pension plan to the tune of $44 million. There’s no sense in which that is just.

Romney’s company, Bain Capital, was a “private equity” firm — the friendly, focus-grouped phrase which replaced “leveraged buy-outs” after Mike Milken blew up. But at heart it’s the same thing: you buy companies with an enormous amount of borrowed money, and then dividend as much money out of them as you can. If they still manage to grow, you can make a fortune; if they don’t grow, they’ll likely fail, but even then you might well have made a profit anyway.

Private equity companies need growth, because they’re built on the idea of buying, restructuring, and then selling. They’re never in any business for the long haul: instead, they want to make as much money as they can as quickly as possible, sell out, and keep all the profits for themselves and their investors. When you sell, you want to maximize the price you can ask — and the way to do that is to show healthy growth. No one will pay top dollar for a company which isn’t growing.

Read the rest here.

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Current Housing Bust Much Worse Than Great Depression

Via Global Macro Monitor

Great chart from the recently released Economic Report of the President.  We suspect the Great Depression housing bust didn’t have the government props to soften the blow as we do today,  which,  therefore, on a relative basis,  makes the current bust much worse.   The prior conditions to the current bust must have been much worse than those before the Great Depression.

The Council of Economic Advisers (CEA) do note,

…during the Great Depression, the only other instance of nationwide price declines since WWI, much of the comparably-sized decline in nominal home prices was offset by a concurrent drop in general price levels, so the decline in real housing values was only about one-quarter as large as the one we recently experienced.

Thus the current collapse in housing prices is a relative price shift whereas the housing bust of the Great Depression was more a symptom of general price deflation in the economy.

Read the rest here.

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S&P 500 Gets 9% Cheaper as Profit Restores $3.2 Trillion (You are Underinvested!)

Profits in the Standard & Poor’s 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 0.1 percent of last year’s high.

The S&P 500 rose 0.4 percent to 1,363.46 today following a rally since October that added as much as $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is just shy of its 2011 peak of 1,363.61, expanding income has pushed the price-earnings ratio to 14.1 from 15.4 in April.

Economic growth that has been slower than any post- recession period since at least the 1940s is keeping investors from paying more for earnings even after stocks doubled in three years. The best January for the S&P 500 in 15 years has coincided with a decline in New York Stock Exchange trading volume to the lowest level since 1999 and record deposits with investment-grade bond funds.

“The world is profoundly underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. “The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen.”

Read the rest here.

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Dear Investors: Prepare For The Market To Rip Out Your Hope, And Consume It In Front Of Your Eyes

Joe Weisenthal

Well this is going to be the hot read of the day.

SocGen’s Albert Edwards blasts the recent stock-market rally, and says there’s still way too much “hope.” Only when the hope is totally gone will we know the great ice age is over.

One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when buyers-on-dips become sellers-on-rallies. It is when volume dries up to almost nothing. It is the loss of hope.

In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.

The market is once again in a hope phase hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone. These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors’ eyes. Only then can the bull market begin.

As evidence that the current hope will be quashed again like last year, he posts this chart…

Read the rest here.

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The Stomach Flu Bug is Going Around, Big Time

 

 

via

It has been a busy season for the “stomach flu,” that nasty, highly contagious bug that has led officials from California to Washington, D.C., to close schools, issue alerts and launch massive cleaning efforts.

The microbial culprit, norovirus, affects one in 15 Americans every year, causing sudden vomiting, diarrhea and stomach cramps that continue for a very unpleasant 24 to 48 hours, usually requiring no medical intervention.

The U.S. Centers for Disease Control and Prevention in Atlanta says about half of cases of food poisoning are caused by norovirus, which has gained infamy as the cause of outbreaks on cruise ships, college campuses, nursing homes and other gathering places.

This month, at least 85 students fell ill at George Washington University in Washington, D.C., plus 186 atRider University and about 100 at Princeton University, both in New Jersey. It also has hit hundreds of students in elementary, middle and high schools, and passengers on at least three cruise ships.

Norovirus-tips

Wash hands. Passing your hands under a few sprinkles of water won’t do it. Wet hands with clean running water, hot or cold, apply soap and work into a lather. Scrub all parts of hands for 20 seconds (two rounds of the Happy Birthday song). Rinse and dry with air or a clean towel.

Avoid touching contaminated surfaces.Be aware that elevator buttons, door knobs, water fountain handles, all could potentially be contaminated.

Be careful in the kitchen. Wash fruits and vegetables, cook shellfish before eating. Don’t prepare food if you’re sick and for three days after you recover.

Alcohol gels. Their efficacy against norovirus is uncertain, but between hand-washings, they might help. They shouldn’t be a substitute for soap and water.

Clean surfaces. Use bleach-containing disinfectant wipes or a solution of 5-25 tablespoons of household bleach per gallon of water to wipe down bathrooms, kitchen and “high-touch’’ surfaces such as doorknobs, phones, light switches, hand rails.

Wash laundry. Immediately remove clothing or bedding that might be contaminated with vomit or fecal matter. Handle carefully to avoid spreading the virus. Wash in detergent at the longest cycle length and machine dry.

If you get sick, stay hydrated. Drink plenty of fluids and if you can’t, get medical help.

The best offense against norovirus illness, health officials say, is a good defense. Tips to reduce risks:

Sources: Centers for Disease Control and Prevention

“It’s everywhere,” says Jan Vinje of the CDC, who spoke about norovirus last week at a meeting of the American Association for the Advancement of Science. “Basically, January through April is high season for norovirus activity,” he says, adding with a quip: “And now it’s February — Norovirus Appreciation Month.”

Norovirus is estimated to affect more than 20 million Americans every year, causing about 800 deaths, usually a result of dehydration in the very young or the elderly.

There is no vaccine and no treatment, and if you get infected by one strain, you can get walloped by another strain, or even re-infected a few months later by the one that got you first time around. People are contagious from the moment they feel ill to at least three days — and possibly two weeks — after they recover, the CDC says.

But there’s hope. An antiviral medicine is in early development, and significant progress is being made toward a vaccine.

Charles Arntzen of Arizona State University, who also spoke at the AAAS meeting, reports that a vaccine could be ready in a few years. LigoCyte Pharmaceuticals of Bozeman, Mont., is testing its nasal spray vaccine in human volunteers, and a second research group, coordinated through ASU, is moving toward human trials of a slightly different nasal vaccine.

They’re likely to require annual booster doses because of the potential for changes in the virus or for new strains to emerge, Arntzen says.

Norovirus is a hardy bug, says Natalie Prystajecky, an environmental public health microbiologist at theUniversity of British Columbia, the third presenter at the AAAS symposium. “It can survive in cold water as long as 61 days and be infectious,” she says, and it’s detectable for two weeks on hard surfaces, though it’s not clear that it could still cause illness at that point. Cooking destroys it, but foods eaten raw, such as produce washed with contaminated water or foods prepared by cooks with unclean hands, can carry the virus.

Oysters, which are nourished by filtering water on the ocean floor, are the single food most likely to be contaminated, and many restaurants post warnings to consumers to be aware of the risk, especially the elderly, very young or those with weakened immune systems.

At George Washington University, Lynn Goldman, a physician and dean of the GW School of Public Health, says the outbreak there temporarily overwhelmed the health clinic. Crews have been called in to disinfect areas where the virus could lurk on surfaces, such as dorms, bathrooms, student lounges and study halls, and hand-washing is being promoted.

“One of the unusual things about norovirus is that one person who is ill can infect a lot of other people,” Goldman says. “As few as 18 viral particles are enough to cause infection. With many other infections, you need to be exposed to hundreds of them.”

Students on the campus of 25,000 are “taking it seriously,” she says, but “they realize that for young, healthy adults, it’s not any reason for alarm, as long as they don’t get dehydrated.”

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DIA DIRECTOR: CHINA PREPARING FOR “SPACE WAR”

via

Army Lt. Gen. Ronald L. Burgess, director of the Defense Intelligence Agency, disclosed new details of China’s space weapons programs last week, including information regarding China’s anti-satellite missiles and cyber warfare capabilities.

Burgess stated in little-noticed written testimony prepared for an appearance before the Senate Armed Services Committee that Beijing is developing missiles, electronic jammers, and lasers for use against satellites.

Much of the space warfare activity is being carried out under the guise of China’s supposedly non-military space program, he said.

“The space program, including ostensible civil projects, supports China’s growing ability to deny or degrade the space assets of potential adversaries and enhances China’s conventional military capabilities,” Burgess said.

“China operates satellites for communications, navigation, earth resources, weather, and intelligence surveillance, and reconnaissance, in addition to manned space and space exploration missions,” he said.

“China’s successfully tested a direct ascent anti-satellite weapon (ASAT) missile and is developing jammers and directed-energy weapons for ASAT missions,” he said. “A prerequisite for ASAT attacks, China’s ability to track and identify satellites is enhanced by technologies from China’s manned and lunar programs as well as technologies and methods developed to detect and track space debris.”

China’s January 2007 anti-satellite missile test involved a modified DF-21 missile that destroyed a Chinese weather satellite. The blast created a debris field in space of some 10,000 pieces of space junk that could damage both manned and unmanned spacecraft.

For the U.S. military, the successful 2007 ASAT test represented a new strategic capability for China. Analysts estimate that with as many as two-dozen ASAT missiles, China could severely disrupt U.S. military operations through attacks on satellites.

Burgess said China rarely admits that its space program has direct military uses and refers to nearly all satellite launches as scientific or civil.

Additionally, Burgess said Chinese state-run enterprises “continue to proliferate space and counter-space related capabilities,” including some with direct military applications.

For example, China’s Beidou global positioning system satellites will be available for regional users this year and globally by 2020, he said.

The satellites will provide foreign militaries with precision targeting capabilities through purchases of Chinese Beidou receivers and services.

The system will provide foreign militaries with “greater redundancy and independence in a conflict scenario that employs space assets,” he said.

The Chinese, as well as the Russians, are also developing space capabilities that interfere with or disable U.S. space-based navigation, communications, and intelligence satellites.

Moreover, North Korea has demonstrated its ability to disrupt U.S. navigational capabilities through Soviet-made electronic jammers placed on vehicles near the North-South demarcation line that, when activated, were able to disrupt U.S. Global Positioning System signals up to 62 miles away.

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Market Update

Financials have run higher in recent trade, resulting in a 0.8% gain for the sector. Led by the likes of diversified financial services players, Financials are now today’s top performers.

Despite leadership from the financial sector, the broad market is having difficulty building on its gains. Instead, resistance continues to cap its climb.

The improved tone among stocks has prompted some to rotate out of Treasuries. In turn, the benchmark 10-year Note is under modest pressure. Treasuries could see an increase in activity with results from an auction of 7-year Notes at the top of the hour.

Market Update

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Michael Jordan Sues a Chinese Company for Mispronunciation of His Name

“BEIJING—Basketball star Michael Jordan sued a Chinese sportswear chain, saying it improperly uses the Chinese pronunciation of his name—the latest dispute over intellectual property in China.

Qiaodan Sports Company Ltd. has been profiting by illegally using “Qiaodan,” the Chinese version of his name, on its marketing materials and products since the 1980s, Mr. Jordan said in a prepared statement Thursday. Qiaodan is pronounced roughly as cheow-DEN. The suit, filed in China, also says Qiaodan Sports has improperly used his jersey number, 23.

Qiaodan Sports, based in the coastal province of Fujian, sells athlete-branded basketball shoes and jerseys in its 5,715 retail outlets in China and is preparing to raise 1.1 billion yuan ($175 million) in a public listing in Shanghai.

The company said it has the exclusive right to the Qiaodan trademark and is operating “in accordance with Chinese laws.” A Qiaodan Sports spokesman declined further comment.

“I feel the need to protect my name, my identity, and the Chinese consumers,” Mr. Jordan said in a video on a website devoted to his claims against Qiaodan Sports. “It’s not about the money. It’s about principle—protecting my identity and my name,” he said. Any damage award would be invested in promoting basketball in China, he said….”

Full article

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General Electric Reinforces its Political Ties By “Forcing” Employees Into Chevy Volts

General Motors and General Electric are two companies that have been in the political crosshairs lately. GM stands accused of “crony capitalism,” while GE is under fire for paying no Federal income taxes in 2010. The two companies share more than that though, with GE placing an order for 12,000 Chevy Volts and other hybrid vehicles.

A memo leaked to Green Car Reports lays out GE’s plans for their new fleet of Volts, and as expected, it has some people crying foul.

The memo, sent to employees of GE Healthcare Americas team explains that all sedan, crossover, and minivan purchases in 2012 will be replaced by the Chevy Volt. Only field engineers are exempt from having to drive a company Volt.

GE will offer estimates for installation Level 2 Charging Stations, though all-gas use will be allowed when there is no electric option. Any employees who opt out of the Volt program will not be compensated for their expenses. Those who do choose to drive the Volt will be reimbursed for public charging and home charging costs, in addition to gas uses.

While some people are probably put off by having to drive a Volt, GE claims to have crunched the numbers and believes that in the long term, this will save the multi-national company big bucks. More than that though, GE is positioning itself as a big player in the EV charging market.Getting employees into Volts also means getting charging stations into homes.

It’s a bold move to be sure, and it will hopefully prove to be a boon to the Volt’s flagging sales numbers. GM had hoped to sell as many as 60,000 Volts in 2012, before dropping that number to 45,000. Will they even make that number though? Hard to tell, though GE’s business will go a long way towards giving the Volt some sales momentum.

Source: Green Car Reports

Source: Gas 2.0 (http://trade.cc/aovw)

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