The Global Perspective - Market Leading Commentary On The World Economy

Time To Play, Not Politicize

Some people are just impossible to please. With oil prices headed towards the $50 threshold (and that’s just the start off this massive decline which will probably bottom out around $35), private equity booming, IPO markets up across the world and tech staging a massive comeback, there are still those who aren’t satisfied right now.

Hugo Chavez’s “socialist revolution”, the threat of North Korea, more troops headed out to Iraq, even – unbelievably – a declining oil price: the list goes on of negative indicators market bears are conjuring up as reasons to be pessimistic about the outlook for 2007. It’s time to dispel the myths and the bears which tout them like second-hand concert tickets.

First of all, Chavez’s socialist Venezuela is nothing new, and although high on the U.S. republican administration’s worry-list, that’s about all it is – political propaganda. In fact, in the cases of surrounding Latin American countries, whether the Bush administration wants to admit to it or not, Chavez’s heavy-handed administering of the country’s oil market has provided the much-needed economic reprise for these countries to get their finances in order. Argentina fared dismally when exposed to the distinctly one-sided battle with powerful American market capitalism only a decade ago - trade with Chavez’s Venezuela over the past year has put some money back into the cavity made by traders from New York and London back then; Cuba finally has a trading partner rich enough to strike something resembling a good deal with; and Bolivia, Ecuador and Brazil are all beneficiaries.

This is not to support Chavez whatsoever, but economic reality is often vastly different from its political interpretation. Richer countries are less of a geo-political threat than poorer ones, and that old adage goes for Latin America as much as anywhere else. Politically sanctimonious foreign policy from the republican administration is obsolete now the global economy is in better shape, and should be ignored.

And what about North Korea? “North Korea will not cause too much trouble for the region,” one hedge fund manager in Hong Kong told me last week. That seems to sum up the general consensus over there well. If North Korea isn’t even an issue in South East Asia, it shouldn’t be one for anyone else, either, Washington included.

In short, the political agenda which sent oil prices surging upwards for five years finally seems to be fading away as oil speculators realize that the game of crying wolf in order to justify big profits from commodities has finally come to an end.

This is not to disparage republican policy per se: most of it, such as early-century tax breaks and responsible rate handling has been economically intelligent and has brought about the liquidity the economy has needed to get to this stage of powerful growth. But it’s time to accept that the cache of war on terrorism has had its day, and like it or not, it’s become terribly passé.

The massive hit the price of oil has taken is evidence of this and it’s almost impossible to see how this is a negative thing for the economy. Sure, oil exporters like Russia, Venezuela, Malaysia and Norway will feel the negative effects, but this will only help industry there which uses oil as a cost stream rather than a revenue stream to grow over the long term. High oil prices generally mean good news for one industry, and one industry only: oil companies. By contrast, low oil prices mean good news for multiple industries. This is a good time for U.S. companies.

A low price of oil does not gel logically with the idea that countries like Iran and Iraq will become more dangerous, either. The irony was that as the “war on terror” ensued, oil prices were being pushed up as a result, empowering the military in those places who relied on a big price in the black liquid to fund their expensive guerilla wars. Low oil prices can only mean less power to those perceived as global threats.

Most of all however, the extra capital most major corporations who see oil as a cost will now have more money to play with, which means more money to invest, which means a stronger economy and a stronger market. 2007 is set to rock and roll for U.S. markets, and it’s high time this was made the focus of the republican administration.

Otherwise, just as with his father before him, President Bush risks handing all the republicans’ economic success over to the democrats. And, just as with investors in the 1990’s, investors this time round will wait until the point where another bubble is about to burst before joining in the big gains of a surging market.

Big Media and The Black Liquid in 2007

Shamefully, it's been a month to the day since I last blogged. It's been one of those tough, grueling months, indispersed with a transatlantic trip to New York, hectic reporting deadlines on top of the usual Christmas-time mayhem, along with a couple of London visits which puts me in the family countryside home now in the south of England.

During advent I've had some time to reflect on what I see as the significant trends and events in the coming year. There are two big sectors I'll kick-off with in this post: media and oil.

The state of the media and what 2007 holds for it seems to be the big question on everyone's minds and topic for discussion recently. In a piece I wrote for the Wall Street Journal recently (Free Newspapers in a Contest), I uncovered a variety of contrasting opinions over the question of news free-sheets when I began asking around:

"We have been able to reach a younger audience with the free press," says Peter Jorgensen, marketing director for Telenor ASA's Sonofon, a leading mobile-telephone provider in Denmark that advertises in Danish freesheets Metro and Urban.

These free newspapers and Web sites, cheaper to buy space in than traditional broadsheets and tabloids, are attracting both classified and full-page corporate-ad deals at a much faster rate.

But distribution is a huge problem for the freesheets, Mr. Lichtenberg says, which raises the question of whether the advertising is effective. "They are all over the streets, in trains and in coffee shops," he says. "It's annoying and it adds another meaning to the word junk-news. There have been many incidences of entire truckloads of free newspapers left at parking lots."

... Readers such as Fredrika Falkestav, a receptionist at the five-star Rica Hotel in Stockholm, find the freesheet format easily digestible. "In my job it's important to know a little bit about everything that's going on in the world, and the freesheets are better at giving me a quick summary of everything," she says. "And it's free."

I have to say, I think the era of newspapers in general is over, free or not; by contrast, the era of free news online is at a thrilling cusp. For a start, the print business model is completely defunct. Secondly, it's hardly an effective medium with which to 'break' news stories. Someone in New York put it to me like this: "Hundreds of reporters in all locations go out and compile stories. A group of editors then sits at a desk, lays out those stories, edits them, and prepares them for publication. The blueprint then goes out to a large printing factory, the papers printed then get delivered to lots of regional depots; the papers in those regional depots go out to more subregional depots where they're delivered to shops or direct to someone's home. The reader picks up the paper in the morning, reads three articles, and throws it out." Absolutely.

If you're in the newspaper business right now, let me give you a piece of friendly advice: make it your New Year's resolution to get out and get online, because 2007/8 is probably the last chance you'll get before everyone starts rushing towards the internet door (indeed, the migration is already starting to happen, but like anything, the quality has been slower to come than the initial quantity).

This brings me to a further, reflexive prediction: one or more of the big blogs will be offered a huge sum of money as news corporations continue their obsessive search to discover those ever-elusive but too-good-to-resist online advertising bucks. I said a little while ago - to much subsequent debate - that Instapundit may be able to fetch up to $35.1 million. Expect a few exaggerated offers like this for the big blogs this year: they are the next logical step on from social networking sites and internet news sites. If your a skeptic, consider the potential: if the New York Times or the Los Angeles Times acquired some of the big personality-driven blogs it would give them the ammunition (in terms of increased reader volumes and interactivity) to fuel that crucial push into online-only publishing (recalling the defunct-business-model hypothesis).

I'm looking forward to Yahoo!'s Panama - at a fraction of Google's price this upcoming media giant is an exciting buy this January. Yahoo! boasts more daily visitors than Google and has a great media distribution platform. Ironically, it's the easiest stumbling block of all that's weighing down on the company's $35-billion valuation: figuring out how to boost margins, and the chances are good that Panama, with its customized advertising, will serve this purpose.

The next big dinner-table topic this Christmas-time is the price of oil. Last week, I covered the Norsk Hydro-Statoil merger in Norway for thestreet.com (Norsk Hydro Scores Coup). As I pointed out in the article, this was less a merger than a buy-out:

"On paper it's a so-called merger among equals, but it's fair to say that Statoil is paying with its own shares" for Norsk Hydro's oil and gas assets, says Morten Normann, a senior research analyst at Kaupthing AS, noting that Statoil's reserves and production facilities double those of Norsk Hydro's.

Norsk Hydro will end up owning 32.7% in the newly combined company, while Statoil will hold a 67.3% stake.

What led me to this line of investigation was actually Norsk Hydro's own beguiling reaction to my questioning about whether this was really a merger or a disguised take-over. "It's a merger among equals and I don't have any more time for this call," Hydro's press spokesman Kama Strand told me abruptly.

Although this is definitely a big deal for shareholders in Hydro, I'm afraid I'm not so bullish on this deal. The deceiving announcement, along with the fact that Norway's two largest oil companies are getting in bed together (albeit very much one on top of the other) when the government rejected this exact same deal only three years back, all smacks to me of a hugely defensive maneuver designed to shore up these two companies' regional and international assets in the wake of a commodity price which is dancing on the edge right now. As one analyst noted in the article:

While bullish on the deal, Molsater points out that if oil prices continue to decline, investors in both companies have more to lose now that the plans have been announced. "What we'll see now with this transaction is that the decline will start from a much a higher level than before the merger plans were announced," he says.

And there is your real story. Oil prices are going to be under some serious pressure this year and you'll probably see a bunch of big declines across-the-board and shareholders scrambling to the doors of the regulators crying about unfair treatment as profits fail to live up to over-inflated 2006 forecasts. It's the same old story, and it happens time and time again. This type of deal should sound big warning signals to shareholders. Hydro investors would be best off taking the cash and putting it into something with a traditionally higher P/E ratio this year, like technology.

And here's why. There are no big global elections this year, geo-political risk is in line to hit a five-year low, and the worst of the middle east  action seems to have passed us, with troops pulling out slowly but surely. In short, there's little to fuel a big push behind the black liquid. Conversely, there's a lot to be bullish about speculatively - particularly considering the euphoric and undiminishing rise of private equity venture capital this year - which is why traditionally higher risk-reward stocks like tech will pick up lots of the excess cash.

I'll write again shortly with some more predictions for 2007; for now, a very happy New Year.

Looking Good?

I have to confess, I'm not usually the first to jump on the animal rights bandwaggon - despite having had family pets throughout my life - but when it comes to the fashion industry, the arguments over business ethics are a lot tougher to justify than in the realms of science.

Hong Kong blog Flagrant Harbour has posted a video of a minx being stripped of its fur for the lucrative retail mark-up value from stores in Bond Street to Fifth Avenue. Here is the blog's accurate description of the video:

It shows a mink being stunned with a blow to the head then stripped of its skin from its hind legs to its snout and then left to die.

Looking like something out of a horror movie you see it lying there, at one point looking directly at the camera lens, clearly in unimaginable terror and agony.

Even though I was warned I was not prepared for the impact this video clip would have on me. I only watched it once. I can never watch it again. If you watch this (and I must seriously warn you, it is obscenely graphic) and you are not affected by this then you need mental help.

The fashion industry, time and time again, gets away with what in any other industry would be considered disgusting, unnaceptable or downright fraudulent practices. The stripping of animals' furs like the Minx in this video is no exception. In society's mutated Victorian value system, it's perfectly glamorous to wear a fur coat whilest simulataneously shunning the big energy conglomerates which now go to enormous lengths to protect the environment for what are usually quite unintentional and accidental hazards anyway.

This is not the only fault with the fashion industry: there is no regulation in place on the marketing, development or product endorsement levels, with many of the big brands being run on practices barely a cut above 1950's Brooklyn numbers' rackets. This does no service to the long-term viability of the industry as a whole or to society's perception of corporate standards, and a sharp overhaul and review is what's required if we're to keep things efficient.

Flagrant Harbour posts a disclaimer before the video saying:

PLEASE BE WARNED - THIS VIDEO IS VERY DISTRESSING

along with the following addendum:

If you wear fur, watch this. If you know someone who wears fur, show them this. Know what you paid for.

This video is indeed distressing, but assuming you are a perfectly healthy, intellectually agile person, I encourage you to watch all of it, because it's the reality of an industry which continually flaunts rule after rule, and receives audacious aplause for it while providing so little of any use to society in return. And I second the above notion; if you do wear fur, you will throw it away after this. You won't even have the temerity to sell it on e-bay.

Video.

Risk Return

You can find quite a good round-up of globalisation and U.S. market forces over at Immodest Proposals, linking to some of my commentary this week (there are some links to other good posts too there):

At The Global Perspective, Daniel Harrison has a series of posts that celebrate the economy and take the fools who talk it down to task. First, Greed is Good, then a lengthy post explaining the core strength of the current market run-up, finally, a post showing how ridiculous Daniel Gross is being in Slate.

... Things could be better, but the way to greater prosperity isn't greater government control and isolation. Cutting bureaucracy and encouraging global trade will continue to fuel both prosperity, and an increasing quality in the goods available.

Imagine how crappy cars would be if our markets had been "protected" from non GM/Ford/DaimlerChrysler vehicles for the past 30 years (as many wanted to do in the late 70s)? I shudder at the thought of that world.

The globalization of production, and the increasingly direct communication between suppliers and demanders has improved the quality of life for everyone.

Our economy is far from perfect, but it's still the least protected, most global market in the developed world.

Some would claim that our prosperity and dynamism are unrelated to the relative lack of protectionism and isolation (compared to Europe or Japan anyway), but those folks are fools.

This is how I, and many rational business people the world over, think about the American spirit of embracing economic changes in the face of political risk. It's heartening to see. Growth in the economy has to start from the grass-roots level, and that means putting aside innacurate journalistic political bias and vote-hungry one-liners which instill false fear into the general population, and instead carry out a meaningful analysis of the potential returns. There's a good explanation of that up over at Fredd Kambo's blog:

So how do people, industries, and economies become productive? They do so by competing. When someone is out to have your lunch, there is an incentive to do things better, faster and cheaper. It was ever thus ... It is a counterintuitive truth (at least to those of us who are non-economists), but to prosper, it appears that we have to open ourselves up to threats.

Otherwise known as risk-return.

Somone Has To Pay For It All

It's not always just consumers who can't pay their bills. At least, according to a Reuters newsflash today on Zimbabwe, this seems to be the case. "Internet traffic in Zimbabwe has come close to a standstill after an international satellite firm slashed its bandwidth because the cash-starved government failed to pay the bill," the wire reports.

Government-owned TelOne, which owns the country's main satellite Internet link, said satellite firm Intelsat had cut its international bandwidth because it failed to pay the $700,000 fee.

"The link is slow because they reduced the megabits on our satellite link until the payment is made," TelOne spokesman Phill Chingwaru told Reuters on Wednesday.

... "It is a nightmare because of the congestion and we are getting calls from desperate clients, some of them who can't even access the Internet," said an official from a private ISP, which uses TelOne's satellite link.

As the report further points out, Zimbabwe's 1200% rate of inflation and 70% unemployment are the principal drivers behind such calamaties. The story is a great reminder that technology - and indeed any scientific development - is not free of charge, even when its infrastructure has already been implemented. Too often in developed economies we tend to think that no matter what happens, as long as we remain relatively protectionist and guard our assets sufficiently, the chances of any kind of real reversion of development is minimal.

Zimbabwe is a great counter-example to this over confidence. It is precisely liberalised trade that has brought us the technological developments which improve our lifestyles, and all asset guarding tends to do is create a barrier towards growth of commerce. Granted, Zimbabwe is also run by a dictator who hoards many of the country's assets himself, but even then, was the country open to foreign trade it is highly unlikely it would be in the kind of mess it finds itself in now.

The key difference between the world of the twenty-first century and the one of the centuries before is our high degree of interdependence. Intelsat - the company which cut off Zimbabwe's connection - is a Bermuda-based global providor of satelite communication, a whole two oceans away from Africa. It's a story worth remembering - especially in light of current talks of protectionism in response to other fast emerging  powers, which again, are a couple of leaps of the pond away.

Geopolitical WHAT?

From The Street:

Wednesday's drop in crude oil -- and the metals -- came after the Energy Department reported an unexpected rise in U.S. inventories of gasoline and oil in the latest week. In recent action, crude oil for June delivery was dropping $1.46 at $73.15 a barrel.

But the standoff between Western countries and Iran, the world's fourth-largest producer of crude oil, continue to provide support both for crude oil and gold. The precious metal acts as a hedge against inflation and as a safe-haven asset amid geopolitical uncertainties.

Someone tell me, WHAT genuine geopolitical uncertainty is there in the world today that hasn't been around for the last fifty or so years, since the Iran-contra affair? It's not as if the world is any less safe today because of terrorism: terrorist networks have just been replaced by other terrorist networks which have become dormant. Has everyone forgotten about the USSR "standoff" too? This was a lot more serious than the standoff between Iran and the west: if western countries really needed to, they have the military power to shut Tehran down overnight.

All-time-high commodity prices in light of geopolitical uncertainty is ludicrous when you think about the reality of it. If this is genuinely a major driver for the rally in commodity prices (and I don't think it is as much as China's growth, and even here there are strong signs that this is only being kept at its current rate by foreign investment) then it's only a matter of time before we'll start seeing bargain-basement prices for raw metals and oil.

Flying High, Long Haul

Via New York Times Dealbook, British Airports Authority (BAA) chief executive Mike Clasper advises shareholders not to accept an  £8.75 billion bid from Spanish operator Grupo Ferrovial:

"My message to shareholders is: Don't sell your shares. It's not the right time. It's not the right price," BAA Chief Executive Mike Clasper said in a statement.

BAA said it planned to spend 9.5 billion pounds on its London airports over the next 10 years and expected passenger traffic to increase 3 percent a year at these airports over the next decade.

BAA has hardly inspired confidence or trustworthiness in anyone over the past decade, but Clasper is probably right here. One of the ironies with the airline industry is that, despite all its woes, it shows no long-term shortage of growth in customer demand. BAA's figures are also compatible with independent research carried out which shows a growth last year in frequency and capacity of three and five percent respectively - which amounts to more than 920,000 fights and 146 million passanger seats.

This kind of growth is impressive in light of the troubles the industry has experienced with high fuel prices and terrorism scares: taking into account that confidence is picking up again in global security and oil prices are now starting to look inflated, as well as the fact that airports are not really affected by airline price wars if there's still a high demand and necessity for flights, and this could start to look like a very healthy business again fairly soon.

"Technical" Creative Accounting & Investment Psychology

From Enron Trial Watch:

Call it an Enron "metadata" moment -- that's when the testimony gets so dull the courtroom clears. In the Nigerian barge case an expert testifying on metadata -- the stuff encoded on computer files that show its origins and other details -- set the standard for dullness. Eyes glazed and attorneys joked about it the rest of the trial.

Accounting professor and million-dollar consultant Jerry Arnold rivaled that this afternoon. The guy's an easy act to follow. His discussion of accounting rules and opinions FAS 121, FAS 5 and APB 18 left only one journalist in the courtroom that typically has one dozen to two dozen. The jury panel, a remarkably alert bunch as always, did spend some time pulling on their lips, checking their nails, staring at the ceiling, staring at the wall and staring into space.

"I'm surprised there are as many people still in the courtroom," said Arnold, who has done this 50 times and knows the mesmerizing power of accounting rules.

There have been other Enron-related low points in trials. The Arthur Andersen case had some dull moments. There were a lot of accountants talking about accounting. But they did talk about shredding too.

The first Broadband trial was so tedious for weeks on end the judge said she started drinking coffee and jurors, lawyers and journalists alike napped.
One jargon-prone witness in that case actually enthusiastically said "Whether it be MPLS over ATM, whether it be precedent bit over IP..." Believe me, you don't want to know.

Lay lawyer Shawn Cleveland Tuesday gave a nod to the lack of excitement. "I'm sure they're enjoying your fine work," Cleveland said to Arnold of the jury's pleasure. Arnold's experienced response: "Thank you counselor but I'm not sure I'd use the word enjoy."

This type of testimony bodes well for the defense of Ken Lay and Jeff Skilling. In cases of immense technical complexity, unless there's a strong emotional reason for people to care, much of the time the jury feel they either do not understand the case well enough to pass a guilty verdict or that the nature of the case is so obscure it would be unjust to pass one.

Had the prosecution been able to try Lay and Skilling four years ago, with the crash of the equity markets still very fresh in the mind of many people, the above testimony would not have seemed nearly as boring - instead, most would be trying to make sense of it, picking it apart and analysing what they could.

But there has been a critical change in the mindset of many over the last five years: wheras previously the mentality was very much that it was the fault of chief executives of bankrupt companies for losing their many shareholders' once multitudinous paper net worths, there is almost a resignation today in public thinking that everyone, in some way or another, ended up getting a little to greedy and that we all got what we deserved.

This subtle transfer and sharing of the blame could well end up being the wild card for Lay and Skilling.

Religious Legislation

New claims by a Jewish academic that one can quite properly have sex out of wedlock and still remain pious are causing outrage in Orthodox religious circles:

According to an article by Professor Tzvi Zohar of Bar Ilan University, which has aroused fervent debate in religious Zionist circles, the answer is yes, but only if the relationship is based on mutual respect and the woman immerses herself in a mikve [ritual bath].

... In the arrangement, sanctioned by Jewish law according to these opinions, the woman becomes a pilegesh, or concubine. Neither the man nor the woman has any obligations or rights. Both must adhere to family purity laws in accordance with halacha.

Very often people tend to get wound up in the sacrimental implications of religious doctrine, without acknowledging that it is written as simply law, in much the same way political legilslation is drafted today, and hence inevitably full of loopholes. This is not to criticise the verity of religious law to those who hold it personally close to their lives: it is just that by far the majority of it is necessarily suject to inerpretation.

Google, Trolltech and Globalisation

Eirik Chambe-Eng of Trolltech on China:

"At first we started out in Oslo with one other small office in Palo Alto, but our business is increasingly moving towards Beijing today. One of our biggest clients, Motorola, now tests its products out in China before anywhere else in the world - a massive strategic change from only a few years ago."

The quote from this presentation, which is taking place today at the Norwegian School of Management, illustrates perfectly how markets shift with incredible alacrity. Once large organisations move the key operations of their businesses in different directions, the small ones whose revenues are more sensitive shift their locations of operations too.

Think about that from an economic perspective and it's difficult not to defend globalisation as a means to greater global economic prosperity. The recent move by Google may well be their greatest - albeit inadvertent - philanthropic move yet: by entering China, they have encouraged a whole series of businesses whose revenues depend crucially on their own to inject a range of new jobs into this developing economy who would have otherwise kept operations warpped up in highly developed and saturating markets.