Articles of Interest - November 21, 2010

If you are already feeling information overload, let me make it worse and offer you the following articles ;) As usual, not in any particular order...

• GM changes its logo on its HQ building (The New York Times): Subtle but changes like this are important to motivate the employees and project a new brand image. The IPO was successful; the company has reduced its costs; new leadership; betting big on the Volt... Let's see if it re-invent itself, a la IBM in the 90's, or if it will continue its long decline into oblivion.
• Consulo Mack's Wealthtrack interview with David Einhorn (Wealthtrack; via Gurufocus): David Einhorn is a sharp, up-and-coming, value investor. If I'm not mistaken, he hails from the midwest and is kind of like a young Warren Buffett (less proven than Buffett though; also seems more shorter-term-oriented and doesn't employ strategies of 'Buffett Prime' i.e. 1970's+). He rarely gives interviews worth talking about but I thought I would link to this one. I still don't get Einhorn's bullish view of gold. I am bearish on gold and think Einhorn is going to be wrong in the medium to long term. But then again, I thought he was wrong on Lehman Brothers and he was the one with the right call. Einhorn also has taken a position opposite Bruce Berkhowitz on St. Joe, a real estate/land development company in Florida.
• The Collapse of the Celtic Tiger (Bloomberg Businessweek): Used to be one of the poorest in Europe, but through low taxes, Ireland became one of the wealthiest. Unfortunately—this is where I think a lot of extreme capitalists like Austrian Econ supporters go wrong—few realized how unsustainable it is to run a low-tax country with lax regulation.
• (Recommended) Does Quantitative Easing II necessarily lead to expansion of the money supply? Nope (Alea): IANAE and don't really understand the mechanics well but according to the scenario presented by Alea, it appears that money supply doesn't necessarily increase under QE II. This shouldn't really be surprising given how the original Quantitative Easing was a somewhat similar strategy and all that did was to increase bank reserves (i.e. lending didn't increase). Inflationists have obviously been betting on the expectation that the bank reserves would be lent out into the economy but, interestingly, as QE II gets underway, the US$ has strengthend and gold has weakened in the last few weeks. A few weeks don't make a trend but I still find it interesting how the market has been pricing stuff opposite what many were expecting.
• Muni bond sell-off (Distressed Debt Investing): American municipal bonds have sold off sharply in the last few weeks and it does seem a bit strange. There are a lot of theories floating around but I think investors should remain cautious. During the financial crisis, some were expecting to see higher defaults by municipalities and states yet that story has dissapeared in the last year. I wonder if the risk is starting to show up. After all, has the balance sheets of the states and municipalities improved in the last two years? I suspect not.
• Manulife's bet on China and emerging markets (The Globe & Mail): Manulife is a large Canadian insurer that has faced some problems due to guarantees of insurance products that almost-guarantee stock-market returns (as you know, the market collapsed in the last few years). This is a long in-depth story of how the company seeks to build a business in emerging markets such as China. Since the stock has been beaten-up of late, contrarian-type investors may find it worth checking out. But like all insurance companies, it's a black box and I doubt anyone can truly know of its risk exposure. In the case of markets like China, I also wonder about the regulatory environment and legal outcomes if something bad happens.
• (highly recommended) What happens if China slows down? (China Financial Markets): As usual, a great blog entry by Michael Pettis. In this article, he speculates on what may happen if China slows down, and why it won't be as bad as some imagine (he compares it to Japan's slowdown over the last 20 years.) I agree with Pettis to some degree but I do think that (i) a slowdown in China would be negative for the world economy since, unlike the 90's, other regions aren't experiencing strong growth; and (ii) there is a risk (hopefully it doesn't happen) of political calamity in China during any slowdown because it is a totalitarian regime (whereas Japan was not). The advantage of true democracies is that, even though they are inefficient most of the time, they excel during crises (needless to say, this is completely opposite of totalitarian regimes, which are magnificently run during good times and turn into nightmares during crises).
• Sony attemps to re-make itself (Bloomberg Businessweek): As the article suggests, Sony needs to be more customer-focused. The gap in hardware quality has narrowed to the point that any new entrant can produce a product that is close to Sony's. Reading this article, I get the feeling that Nokia is facing the same problems as Sony.
• Gold mining and the impact on a small town (The Globe & Mail): The dificulties faced by gold mining companies like Gabriel Resources; and the citizens who are impacted by it.
• Tussle over French hotel empire (The Economist): Good thing about reading seemingly irrelevant articles is that you learn something about business. Until reading this article, I never knew that many hotel chains were really franchising businesses... never would have realized how the hotels are run by franchisees.
• China's food inflation problem (The Economist): It's really hard to tell if the food inflation in China is a temporary price inflation or there is an underlying increase in money supply. We have seen similar episodes in the past, including problems in gasoline a few years ago, but they usually dissipated on their own. The government is taking no chances and cracking down on so-called speculators. As The Economist says, this doesn't help the business environment in the long run: "Inflation undermines capitalism, according to Keynes, in part because it discredits entrepreneurs. They become “profiteers” in the eyes of those hurt by rising prices. China’s leaders promise to hunt down and punish hoarders and speculators."
• Book review of Turbulence: Boeing and the State of American Workers and Managers by Edward S. Greenberg, Leon Grunberg, Sarah Moore, and Patricia B. Sikora (New York Times): Haven't read the book but those seeking to climb the corporate ladder should probably check it out. The review makes it sound like Peter Drucker's classic on GM, The Concept of the Corporation. Reviewer Harry Hurt says:

  "ONCE upon a time, major American companies and their employees treated each other as family. The companies provided job security and lifelong benefits; in general, workers were loyal and engaged in their jobs, the occasional strike notwithstanding. But that relative harmony ended with the advent of globalization, according to “Turbulence: Boeing and the State of American Workers and Managers” (Yale University Press, 238 pages), a meticulous and illuminating case study of the nation’s largest manufacturing exporter.
  
  The book has four authors with a combination of academic and private-sector backgrounds: Edward S. Greenberg, Leon Grunberg, Sarah Moore and Patricia B. Sikora. Based on their research and experience, they write: “The very innovations and changes Boeing introduced to remain a leading producer of airplanes — altered management strategies, pervasive technological changes, extensive outsourcing, broad global partnerships, massive layoffs, and drastically altered ways of working — produced stress and turbulence in the lives of workers and managers alike.”

• (recommended) Meet New Jersey Nets' New Owner, Russia's Mikhail Prokhorov (New York Times Magazine): Hard to tell how clean some of these guys are—hard to get ahead in Russia without the support of the Sivoliki—but he certainly seems to have strong business acumen...
  

  YOU MIGHT THINK that Mikhail Prokhorov would have had a not-so-soft case of buyer’s remorse this past spring. Last year, a month before the start of the National Basketball Association season, the 45-year-old Russian billionaire struck a deal to buy the New Jersey Nets from the real estate developer Bruce C. Ratner, who had owned the team since 2004. The price was $200 million for 80 percent of the franchise and 45 percent of the long-delayed Barclays Center arena in Brooklyn, where the Nets will play beginning in 2012. Prokhorov also agreed to cover some $60 million in operational costs and 80 percent of $207 million in debt. When the league owners finally ratified the sale eight months later, in May of this year, the Nets record stood at 12 wins and 70 losses, and Prokhorov’s shiny new team was the laughingstock of the N.B.A.
  
  It was hard to count the low points. Coach Lawrence Frank was fired during the 0-for-18 start. At a snowy night game against the Milwaukee Bucks in February, when the Nets’ record stood at 4 and 47, there were nearly 19,000 empty seats in the Izod Center. By midseason, TV ratings had plunged 45 percent and were the lowest in the league. The franchise that once played to big crowds and made back-to-back trips to the N.B.A. finals in 2002 and 2003 had traded away its stars but was still bleeding $15 million a year. Management was downgrading to cheaper hotels; employees were forgoing pay on Friday furloughs. There wasn’t a budget for the normal complement of secretaries, scouts, videographers or even, at what would seem just the time the organization could have used one, a sports psychologist.
  

  ...

  
  What he does care about is food. He is old enough to remember the Soviet era of barren shelves, rotten vegetables and his mother waiting in long queues to buy whatever was available. After food come work, sports and women, more or less in that order.
  

  ...

  
  Prokhorov belongs, according to his sister, to a uniquely fortunate generation: the last educated under the old order and the first to capitalize on the opportunities of the post-Soviet system. “His generation was very lucky,” Irina said over supper one September night in Moscow. Nine years older than her brother, she had just enough distance to appreciate the history he and his cohort missed. “On one hand they received a good education from the Soviet system, and on the other they were generally ignorant of the repression; they never had a chance to become used to it. They were the beneficiaries of the atmosphere of joy and creativity that came with perestroika.”
  

  ...

  
  “Our father was a really brilliant man,” Irina said. “I think my brother inherited from him the faculties of memory, imagination and audacity — all virtues that were useless under the Soviet system. My father was more or less successful, but I remember his bitter remarks when he came back from trips abroad. He could see the difference between the life in the West and how we lived.”

• (recommended) (non investment-related) The hacking world of Albert Gonzalez (New York Times Magazine): Nicely written, entertaining, article chronicling the story of Albert Gonzalez, a brilliant American hacker.
• (non investment-related) Modern youth - Wired for distraction? (The New York Times): Old-timers may find the behaviour of modern youth—texting on mobile phones; posting on Facebook; wasting time on the Internet; etc—as harmful but the reality is that, like throughout history, humans change.
• (non investment-related) Observations about Wikipedia (The New York Times Magzine): Throughout history, written documents, even those that are considered de-facto references, rarely changed. Even when they did change, it took years to update them. What is different in the modern world is that written documents can change in real-time. Wikipedia is an example of a reference work that keeps changing on the fly. The linked article observes how words in wikipedia change.
• (recommended) What your shirt says about you! :) (Bloomberg Businessweek): ok... who wants to be Gordon Gekko?