*michael parekh on IT*

ON WORDS FROM THE ORACLE

THE LONG VIEW

As a Berkshire Hathaway investor, I like many had been looking forward to Warren Buffett's letter to shareholders, out today.  The news as one might expect in these unprecedented times, was not good, but the long-term perspective as usual, was most welcome and refreshing. 

The Wall Street Journal provides some context of the letter in this report:

"Warren Buffett's Berkshire Hathaway Inc. reported Saturday morning that 2008 was the legendary investor's worst year ever. It also reported a grim fourth quarter, though it eked out a slight gain. (Berkshire's annual letter to shareholders.)

A common metric Berkshire uses to track performance, book value per share, fell 9.6% in 2008, its biggest decline since Mr. Buffett took over the company in 1965.

It was only the second year in more than 40 years that Berkshire posted negative results. In 2001, Berkshire's book value per share fell 6.2%. The company's performance in 2008 still far outpaced the Standard & Poor's 500-stock index, which fell 37% last year, including dividends."

If pressed for time, I'd also recommend the WSJ's summary of the Highlights.  A couple of sobering ones that they highlight is the following:

"In poker terms, the Treasury and the Fed have gone 'all in.' Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects..."

"Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year's report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.

• Read more in Real Time Economics"

A highlight I'd add is his current view on how risk is being priced:

"The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc.

A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s.

But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

One of my favorites from this year's letter was the following:

"Approval, though, is not the goal of investing.

In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. 

Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

Here's to more yawns for all of us, large and small.

The whole letter (PDF) is worth reading in it's entirety, especially this year over all others.

ON LUXURY BRANDS IN JAPAN

GILDED CANARIES

Japan may be in the midst of a secular change in it's consumption of Global luxury brands.  The Atlantic provides the context:

"Japanese shoppers, at home and abroad, account for about half of the global luxury-goods market. But according to a study released last fall by Bain & Company, the luxury market here was expected to shrink by 7 percent in 2008, after falling by 2 percent the previous year."

It's not just the global recession, which is obviously having an effect, as it is worldwide.  The Atlantic piece goes on to explain:

"...observers believe Japanese people have changed their attitude toward luxury consumption. In the bubble years of the 1980s and early 1990s, many Japanese aspired to own the same Western brands—not to stand out, but rather to fit in. Some 40 percent of Japanese consumers reportedly own a product from Louis Vuitton, whose parent company derives almost 10 percent of its revenue from Japan.

The collapse of the bubble economy in Japan and the “lost decade” of decline that followed left everyone a little wiser..."

What sells today is value. When the Swedish discount fashion retailer H&M opened its first Japanese outlet in September, more than 5,000 people waited on line."

The Economist a few months ago highlighted some of the longer-term trends here:

"There is also a longer-term trend at work. Japan overflows with “parasite singles”—adults living with their parents—who are flush with money that would otherwise go on rent. As fewer women marry and have children, they have more cash to spend.

All of this fuelled Japan’s strong demand for luxury goods. But as the population ages, there are fewer young, wealthy and fashion-mad customers.

Buyers’ tastes have also become more sophisticated. The days of simply slapping on a logo and charging a ridiculous price are gone, says Fiona Wilson, the Asia editor of Monocle, a style magazine."

It goes on to add the global significance:

"The big question is whether Japan is an isolated example, or signals a broader shift in demand. Perhaps it is a bit of both. If customers in other developed countries are no longer so dazzled by labels, the big brands will come to rely even more on fast-growing emerging economies, where the new rich go gaga over glam at any price."

If so, this may be more than a cyclical thing worldwide.  Remains to be seen.

ON CANADIAN LESSONS

DIFFERENT STROKES

Our northern neighbor may be doing one or two thing right, as this Newsweek piece by Fareed Zakaria observes:

"Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world.

America's ranked 40th, Britain's 44th.

Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn't grown in size; the others have all shrunk.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north.

In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian home ownership? It's 68.4 percent."

They're not doing better just on the financial front, but also in terms of how they grow their pool of contributing residents:

"The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal "permanent residents" in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities."

Canadians don't need to say "Yes we can".  They can simply say "Yes, we did".

ON THE SECRET OF WEIGHT LOSS

JUST DOING IT

Alright, so the secret to losing weight consistently was finally revealed today, and it's a surprise.  Ready? Here's the LA Times teeing it up:

"Two decades after the debate began on which diet is best for weight loss, a conclusion is starting to come into focus. And the winner is . . . not low-carb, not low-fat, not high protein but . . . any diet.
That is, any diet that is low in calories and saturated fats and high in whole grains, fruits and vegetables -- and that an individual can stick with for a lifetime -- is a reasonable choice for people who need to lose weight. That's the conclusion of a study published online Wednesday by the New England Journal of Medicine, research that represents the longest, largest and most rigorous test of several popular diet strategies."

OK, so maybe not too much of a surprise, but at least it tries to settle it once and for all.  And reveals a couple more tidbits to boot:

"The study refutes the notion that any one nutrient has a special power to accelerate weight loss, said Dr. Frank M. Sacks, lead author of the study and a professor of cardiovascular disease prevention at Harvard. "We used to think there could be a biological effect of certain diets. That is probably not true."
There may be a strong behavioral effect in the success of a diet, however. The people who attended two-thirds or more of the counseling sessions over the two years lost an average of 22 pounds, compared with the average loss of 9 pounds.
The study was highly anticipated because previous research on diets over the last two decades has come to dramatically different conclusions."

As someone who has lost and gained weight so many times over time can attest to, the piece lays out what it takes in a common sense way.  Having worked down this familiar path once again over the last few months, and lost a third of my previous body weight, there's only one other thing I'd add to the article:  don't forget to exercise, even modestly, at least three times a week.  There are no secrets here, just changing one's habits, staying positive and being consistent.

ON THE NETBOOK REVOLUTION

THEY'RE HERE...

Wired magazine has a piece worth reading on how Netbooks became a force for incumbent PC and laptop vendors to reckon with over the last couple of years.  As the article explains it, Asustek, a Taiwanese company that's the world's 7th largest notebook maker, was just trying to create an inexpensive laptop for the Chinese market:

"When Asustek launched the Eee PC in fall 2007, it sold out the entire 350,000-unit inventory in a few months. Eee PCs weren't bought by people in poor countries but by middle-class consumers in western Europe and the US, people who wanted a second laptop to carry in a handbag for peeking at YouTube or Facebook wherever they were.

Soon the major PC brands—Dell, HP, Lenovo—were scrambling to catch up; by fall 2008, nearly every US computermaker had rushed a teensy $400 netbook to market..."

"...By the end of 2008, Asustek had sold 5 million netbooks, and other brands together had sold 10 million. (Europe in particular has gone mad for netbooks; sales there are eight times higher than in the US.) In a single year, netbooks had become 7 percent of the world's entire laptop market. Next year it will be 12 percent."

It's not the hardware vendors that are seeing their business models shaken and stirred, but also software giants like Microsoft, as ChannelWeb goes on to elaborate:

"All of this has come on the heels of some fairly disappointing product introductions for Microsoft.

Following the widespread non-adoption of its Windows Vista operating system in commercial settings, Microsoft couldn't have been pleased to see Linux-based netbooks like the Eee PC from Asus start to really take off. So the company did move relatively quickly to get Windows XP onto newer versions of the Eee PC and other netbooks.

The problem -- Windows XP Home for netbooks brings Microsoft only $32 per license from local OEMs, compared to $65 for the desktop version of Windows XP Home. And Microsoft is in a tricky position, because if it tries to charge too much for XP or for its upcoming Windows 7 SKU for netbooks, customers may opt for Ubuntu Linux configurations already available from many netbook manufacturers."

Indeed, Microsoft is going as far to restrict netbook vendors from shipping systems with more than 1GB of RAM in order to protect it's licensing model on regular laptops. 

Given that Vista doesn't run well at all on netbooks, and XP is on it's way out, Microsoft is pulling out all the stops to get Windows 7 out the door by as early as April this year.  The company has tried to make sure Windows 7 plays well on netbooks.

Both articles are well worth reading in full.

ON A DASH OF ART

BREAK IN THE CLOUDS

Amid all the doom and gloom in so many markets around the world, it's nice to see some good news in an asset class, any asset class.  The New York Times reports:

"Despite the global economic crisis, a lot of money seems to be left over.

On Monday, the private collection of Yves Saint Laurent and his partner became the most expensive one ever sold at auction, bringing in more than $264 million on the first night alone."

As the Wall Street Journal goes on to explain:

"The evening sale in Paris surpassed its presale high estimate of $232 million, a reassuring result indicating that the world's billionaires are willing to compete for blue-chip artworks that they consider a bargain..."

"...The rousing kick-off marks a dramatic turnabout for a global art market that's been ailing since last fall. Art sales at the two chief houses, Sotheby's and Christie's, totaled $10.4 billion last year, down 16.8% from 2007."

Nice bit of news while stock markets worldwide test ten-year lows.  Let's hope it lasts.

ON SUNDAY NIGHT "SURPRISES"

HERE WE GO AGAIN

Just in case we were all getting too comfortable with Sundays without a cliff-hanger of a government bailout for an ailing institution, the government seems to be obliging tonight with a dramatically increased stake in Citigroup.  The Wall Street Journal reports:

"Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said."

Apparently a lot about the transaction is still to be finalized, and we'll likely hear about it as the markets open tomorrow.

But what's notable about this Sunday, is  we're not the only ones doing this sort of thing tonight.  Here's a sampling from headlines from around the world:

• U.K. Government Plans Northern Rock Revival (Another $8.5 billion)
  
• Dubai gets a $10 Billion Bailout to ease debt (from the U.A.E)
• Western Europe Leaders want to Double IMF Fund to Help Eastern Neighbors (doubling the "war chest" to $500 bilion)

Everyone's starting to do this trick.

Of course as expected the Asian markets seem to be trading up tonight like clock-work on the Citigroup news, and the U.S. markets will likely respond similarly tomorrow.

But one can't but help wonder when the markets around the world will get too used to seeing these rabbits pulled out of a hat on so many Sunday nights.  Oscar night or not.

ON SIGNING OFF ONLINE

THE BIG FADE

You knew it was only a matter of time, in a world where millions are more comfortable sharing their lives with strangers online.  Someone was going to share their death.  The New York Post reports:

"An aspiring actor and model hanged himself on the monkey bars of a Brooklyn playground early this morning - hours after hinting at his plans to friends on Facebook, police said..."

"The cryptic suicide note, left in the form of his "status update" on the social-networking site, said only that he was "born in San Francisco, became a shooting star over everywhere, and ended his life in Brooklyn . . . And couldn't have asked for more."

Ironically, the 30-year old may have been following the sad steps of his father many years ago:

"When Zolezzi was 8, his father, Mark, threw himself off the Golden Gate Bridge, his mother said."

Apparently, the status updates on Facebook had been building up to the event:

"His short postings on Facebook depict the terrible lead-up to his suicide.

"Paul is wondering, what unspeakable act did I do in a previous life to deserve this one?" he posted in late January.

"Paul is going to be the first person ever to hang himself on the way out of Portland!" he wrote before moving back to New York. "Everything here sucks!"

Shortly after Zolezzi left his Facebook suicide note, one of his friends replied with a post that read: "Are you dying? or just staying brooklyn? I hope it's the latter."

Guess it's only a matter of time before someone uses Twitter for something similar.  The tools and methods change over time, the sad drivers generally remain the same around the world.

* Image source.

ON RE-DEFINING COMMUNITIES ONLINE

TEAM-MAPPING

The Los Angeles Times is doing something online that's notable for being both innovative and a potentially useful service for it's community.  As their article explaining the initiative notes:

"The Los Angeles Times is unveiling the new map of neighborhoods today on its website at www.latimes.com/mappingla. Years in the making, it is designed to be a tool that will allow reporters and editors to be consistent when describing neighborhoods in news stories in a city that sometimes seems to change the names like most people change socks.

Dorothy Parker famously said Los Angeles was "72 suburbs in search of a city," so it's not surprising that residents take their neighborhood names so seriously. Those designations are part tradition and history -- but also part economic and political. Many residents see big differences in property value if you live in tony Hancock Park as opposed to more working-class Mid-City."

This sounds really cool not only for area residents, but visitors and new-comers looking to find their way around a new city.  How often have you just visited a new city and wondered how the various neighborhoods shake out?  More often than not that information is only available by finding and talking to long-time residents and tour guides.  Or occasionally available in a cool map or poster as the one shown above.

And of course in guide-books...some times.  But being able to see it on an interactive map, that is guided not by an editor or two, but by the residents themselves, Wikipedia-style, seems to be a really useful move forward.

Something more newspapers across the country should think about, even in these touch economic times.  It's also something that could be really interesting to see as a Google initiative with Google Maps.  We'll see.

ON CALIFORNIA'S FISCAL STEPS

RUNNING IN PLACE
That's probably on the minds of many Californians, as they the state legislature passed a critical budget full of new tax increases in the nation's largest state.  As the Wall Street Journal reports:

"California's legislature approved a plan Thursday to close a $42 billion budget gap, saving the state from insolvency but falling short of curing its financial troubles.

California residents now face tax increases and spending cuts after getting hit hard over the past year by falling real estate prices and the recession. Under the new budget, they will be asked to give as much as $13 billion in new taxes. State spending, meanwhile, will be cut by $15 billion over the next 17 months, including $8.6 billion from public education."

What's particularly interesting is this bit:

"For a household earning $150,000, the tax increases will almost wipe out the $800-per-couple tax credit in the stimulus package signed by President Barack Obama this week, according to California's Legislative Analyst's Office. The state taxation plan and the federal credit "work against each other," said Legislative Analyst Mac Taylor."

This likely won't be just limited to California, as the piece goes on to discuss:

"Eight other U.S. states face major budget gaps in the current fiscal year, according to the National Conference of State Legislatures, and more than half will face serious budget shortfalls in their next fiscal years, most of which begin in July."

For the bare-knuckles politics behind the arduous budget negotiation between Democrats and Republicans, take a look at this piece from the LA Times. 

It's a slightly faint echo of the machinations we're likely to see continue at the Federal level, when both the House and Senate continue to figure out what to do (and not to do) about the many fiscal challenges in front of us.

President Obama may have proclaimed this week's $787 billion dollar stimulus bill signing as the "beginning of the end".  But it looks like it's going to be one heck of a beginning before it ends.

* Image source.