*michael parekh on IT*

ON A NEW PLAYBOOK FOR CHRYSLER

SOMETHING BORROWED

Normally a story on how one auto company plans on turning around another post a merger would not be head turning in the current environment where all auto companies, especially US ones, seem to be driving in only one direction.  But Time magazine's story on how the CEO of Fiat, Sergio Marchionne, plans on making it's investment in Chrysler a success, caught my eye with this bit:

"Since he took over as chief executive of Italy's Fiat in 2004, the chain-smoking Canadian Italian has used Apple as a model, focusing on the way Steve Jobs transformed it from an also-ran computer company into a global icon of cool. 

He encourages Fiat managers to take a close look at Apple's branding prowess and even asks them to benchmark their activities against the company. 

His biggest success at Fiat is the 500 — a tiny, very cool 21st century version of a 52-year-old Italian icon once driven by movie stars such as Marcello Mastroianni and Sophia Loren — which Marchionne calls "our iPod."

Apparently, Mr. Marchionne intends on using a similar playbook at Chrysler, where his company starts with a 20% stake, that could go as high as 35% depending on how the turnaround goes:

"Marchionne is likely to hew closely to the playbook he used to revive Fiat. On June 10, the day Fiat sealed the deal, he announced a thorough organizational revamp. From now on, each of the four individual brands — Chrysler, Jeep, Dodge and Mopar (which makes parts) — will be distinct business units responsible for profit and loss. He also reached deep into the ranks, bypassing the engineers and putting a younger, energetic generation of managers with marketing experience in charge of the brands. "That's a mirror image of what he did at Fiat," says a longtime Fiat executive. Next up: installing Fiat production platforms at Chrysler plants and using Fiat's sales network to sell Jeeps and other Chrysler models around the world."

Who knows, Mr. Marchionne may even come up with a way to make a car dealership as fun to go to as an Apple store.

ON RISKS OF A DOLLAR CARRY TRADE

SLIP-SLIDING AWAY

Barron's this weekend has a piece that may make one's head hurt at first reading, but is important enough to read twice.  Appropriately titled "Money for nothing and bucks for free", the piece makes the following point:

"The dollar could become the main funding source for the carry trade. To review, the carry trade consists of borrowing cheaply to invest in something with a higher return. ("Carry" in this instance refers to the cost of holding or "carrying" an inventory, be it a commodity or a security, which mainly consists of financing charges.)

The preferred way to fund the carry trade had been to borrow in yen, where the cost is near zero. Those yen could be converted into anything with a higher yield, such as U.S. mortgage-backed securities, to garner the spread.

The key risk -- aside from the loss of value of the asset being bought, as with any purchase on margin -- was that the cost of the liability would increase. That would happen with a rise in the yen in this case. And, not coincidentally, the yen rose in tandem with the dollar as carry traders had to unwind their positions during the crisis.

Now, with the Fed pinning the federal funds rate near zero and market rates -- such as the Libor, the London interbank offered rate, a money-market benchmark -- returning to their pre-Lehman collapse relationships versus the Fed's target, borrowing in dollars to fund carry trades looks tempting.

Remember, one of the big risks of a cross-border carry trade is if exchange rates bite you. But what's the risk of borrowing dollars at less than 1% if the U.S. currency's trend is down? Then you're effectively paid to borrow."

Why is this something to potentially worry about?  Well, it puts the Fed in a bit of a difficult position:

"America...still has a substantial current-account deficit that has to be financed with capital inflows. Outflows, as to finance dollar carry trades, would increase the need to attract capital inflows, which would put added downward pressure on the greenback.

Pomboy posits this could potentially lead to the return of such contrivances as the interest-equalization tax, a levy introduced in the 1960s to deter such outflows of capital.

Stanching the free flow of capital would be 21st century equivalent of the infamous Smoot-Hawley tariff, which importantly contributed to the contraction of global trade in the Great Depression..."

In choosing between the lesser of two evils, they may opt to allow the dollar to fall rather than impose draconian measures to curb dollar selling or deflating the economy to defend the exchange rate, the traditional medicine.

Then the response of other countries will be key. Do they permit an appreciation of their currencies, which would hurt their export competitiveness? Or do they follow the dollar's decline?

So far, equity markets have viewed the dollar's slide benignly. Stock investors haven't looked beyond the positive impact of exchange-rate moves on earnings of the Standard & Poor's 500.

But as the world sees a lower dollar as a one-way bet, it will be hard to stop."

Good point to keep in mind, especially for financial worry-warts.

* Image source.

ON LIGHTS GOING GREEN

SLOW AND STEADY

The New York Times has a good piece outlining the promise and challenges of LED lighting (Light Emitting Diode) to change things for the better for users and the planet.  First the promise:

"Studies suggest that a complete conversion to the lights could decrease carbon dioxide emissions from electric power use for lighting by up to 50 percent in just over 20 years; in the United States, lighting accounts for about 6 percent of all energy use. A recent report by McKinsey & Company cited conversion to LED lighting as potentially the most cost effective of a number of simple approaches to tackling global warming using existing technology..."

"LEDs are more than twice as efficient as compact fluorescent bulbs, currently the standard for greener lighting. Unlike compact fluorescents, LEDs turn on quickly and are compatible with dimmer switches. And while fluorescent bulbs contain mercury, which requires special disposal, LED bulbs contain no toxic elements, and last so long that disposal is not much of an issue."

And then some of the challenges:

"Though the United States Department of Energy calls LED “a pivotal emerging technology,” there remain significant barriers. Homeowners may balk at the high initial cost, which lighting experts say currently will take 5 to 10 years to recoup in electricity savings. An outdoor LED spotlight today costs $100, as opposed to $7 for a regular bulb.

Another issue is that current LEDs generally provide only “directional light” rather than a 360-degree glow, meaning they are better suited to downward facing streetlights and ceiling lights than to many lamp-type settings.

And in the rush to make cheaper LED lights, poorly made products could erase the technology’s natural advantage, experts warn."

The technology driving this innovation is changing rapidly, so that we may see some of these metrics change markedly for the better in the near-term.  In the meantime, LED lighting does seem to be the low-hanging fruit in going green.

ON UNSTRESSFUL STRESS TESTS

PASS PASS
One of the best explanations of the recent Bank "Stress Tests" by the U.S. Treasury, comes not from a mainstream new outlet, but a mainstream TV comedy show. 
Specifically, Saturday Night Live hits it out of the park with it's take and analysis of these stress tests.  Check it out here, and see what you think:
Now CNNMoney took a similar approach with it's story on the stress tests titled "Bank Stress Tests:  Everybody gets an A!". 
But somehow SNL's take doesn't make one cry as much.

ON POLITICS OF CAP & TRADE

HORSE TRADING

This New York Times piece asks some timely questions about one of the most popular tools in the government's tool chest to address global warming:

"How did cap and trade, hatched as an academic theory in obscure economic journals half a century ago, become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?"

And goes on to provide a not too surprising answer:

"The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics.

Many members of Congress remember the painful political lesson of 1993, when President Bill Clinton proposed a tax on all forms of energy, a plan that went down to defeat and helped take the Democratic majority in Congress down with it a year later.

Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.

The bill is poised to win committee approval this week, although with virtually no support from Republicans."

Ironic since the whole thing really got going in a Republican administration:

"If there was a single moment when cap and trade crossed the threshold from relatively untested economic concept to prevailing government policy, it came in May 1989 in the West Wing office of C. Boyden Gray, counsel to President George H. W. Bush."

The piece makes for compelling reading on the unintended consequences of some initially far-fetched ideas.  Especially since it looks like it'll be even more of a reality for all of us in not too long.

* Image source.

ON ANECDOTES OF A TRADE WAR

IT'S BEGUN
One of the scariest headlines of the week has nothing to do with unrest in a nuclear Pakistan, rising challenges for the U.S. in Afghanistan, or increasing violence in Iraq.  Instead, it's this story in the Washington Post, titled "Trade Wars launched with ruses, end runs", indicating that the global race to the bottom in a back-door trade war may have begun:

"Is this what the first trade war of the global economic crisis looks like?

Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects."

The piece goes on to tell tales of unintended consequences unleashed by the politics of government bank bailouts across the world:

"The United States is not alone in throwing up domestic policies assailed by critics as protectionist. Britain and the Netherlands, for instance, are forcing banks receiving taxpayer bailouts to jump-start lending at home at the expense of overseas clients. French President Nicolas Sarkozy initially insisted that his nation's automakers move manufacturing jobs home in exchange for a government bailout, but backed down after outrage surged among his peers in the European Union, of which France is a central member."

These trends seem to be accelerating, at least in an anecdotal form.  It shouldn't be too long before we see the consequences of our best intentions in national and international economic statistics start to pile up.

ON THE FOUNDATION OF GREEN SHOOTS

HOPE SPRINGS ETERNAL

Long-time former editor of Barron's, Alan Abelson, has always had a way with words.  This weekend he does it even better than usual, talking about the current  ebullience in the stock markets, in a piece entitled "A Surge in Botanists":

"...not only are things getting worse more slowly, but equally as important in the remarkable revival of euphoria is that investors en masse, taking a leaf from Federal Reserve Chairman Ben Bernanke, have become budding botanists, able to espy green shoots of recovery in virtually every compost pile..."

He then goes on to add,

"PERHAPS THE MOST ELOQUENT expression of how delusional Wall Street has become was its response to Friday's report on what happened to employment -- or, more importantly, unemployment -- in April. Payrolls shriveled by 539,000, less than the 550,000 to 600,000 guesstimates of the seers as well as March's initial tally of 633,000. That was enough for the choristers to start humming Happy Days Are Here Again.

A slightly more careful look suggests rather emphatically that they're not. The unemployment rate extended its doleful rise, hitting 8.9%, the highest level since 1983. The jobless ranks have swollen by 5.7 million since the recession got underway in December 2007, and there are now 13.7 million people out of work.

Moreover, our favorite measure of unemployment -- favorite because we think it a truer gauge -- is the Bureau of Labor Statistics' U-6, which includes the likes of workers laboring part-time because they can't land full-time jobs, rose to a fresh peak of 15.8%. That means 24.7 million people are effectively unemployed. It's a figure that doesn't get too much notice -- maybe it's just too depressing -- but it should.

For that matter, bad as it is, 539,000 doesn't do justice to the severity of the payroll shrinkage. For one thing, it was puffed up by the 72,000 federal census takers signed on by Uncle Sam. And for another, it includes 226,000 supposed jobs, or 60,000 properly adjusted, courtesy of what David Rosenberg calls the Alice-in-Wonderland birth/death model. Ex this pair of extraordinary items, he points out, the headline number would approach 670,000.

In one of his valedictory scribblings (David's leaving Merrill Lynch and returning to the glories of his native Canada and money management), he also notes that private-sector employment sank by 611,000 in April, and did so across a wide swath. "The data," he contends, "just don't square with the conventional wisdom permeating the investment landscape."

And then finishes it off with this bit on another way to look at "green shoots" going forward:

"Looking ahead, David scoffs at the idea that the "jobs data are about to get better because the markets have enjoyed a nice two-month rally." Among the reasons he's skeptical: the still record-low workweek, at 33.2 hours; the 66,000 downward revision to the back data (which, he avers, tends to feed on itself); the 63,000 slide in temp-agency employment; and the high levels of both initial and continuing jobless claims.

All of which, he believes, foreshadow a further 550,000 payroll plunge when the May data roll out early next month.

To David, as to us, the present buoyant mood on the Street is obviously more the result of rose-colored glasses than of green shoots."

One must always try to be an optimist, but not forget to also be a bit of a pragmatist, and not over-shoot on green shoots.

* Image source.

ON MEDICINE GOING DIGITAL

SHARP CURVES AHEAD

The Economist recently had a Special Report on healthcare, with a focus on medicine going digital.  It frames the current place we find ourselves particularly well:

"Menno Prins of Philips, a Dutch multinational with a big medical-technology division, explains that, “like chemistry before it, biology is moving from a world of alchemy and ignorance to becoming a predictable, repeatable science.

” Ajay Royyuru of IBM, an IT giant, argues that “it’s the transformation of biology into an information science from a discovery science.”

It goes on to introduce the piece itself:

"This special report will ask how much of this grand vision is likely to become reality. Some of the industry’s optimism appears to be well-founded. As the rich world gets older and sicker and the poor world gets wealthier and fatter, the market for medical innovations of all kinds is bound to grow. Clever technology can help solve two big problems in health care: overspending in the rich world and under-provisioning in the poor world.

But the chances are that this will take time, and turn out to be more of a reformation than a revolution."

This reader is a bit more optimistic than it will be more of a revolution than a reformation, particularly because once technology starts to get into the driver's seat of the business model of a particular industry, a slow roll quickly becomes a land-slide.  Notice how business models have already changed in media and telecommunications, for instance.
Here's to big changes in the right direction in a timely manner, for all our sakes.

ON A KEY LEHMAN RIDE

PUNCHY TIMES

Reading this article titled "How Lehman Brothers got it's real estate fix", one gets a clearer sense of how companies can be caught up in the thrill of a chase, just like people.  The New York Times piece chronicles the up and down cycle of Lehman's real estate infatuation, lead by 49-year old Mark Walsh:

"Many factors, of course, contributed to Lehman’s demise last fall. Near the end, it carried $25 billion in toxic residential mortgages.

It was wildly overleveraged. And the federal government made the fateful decision not to rescue Lehman from its mistakes. But when real estate overheated in the years before Lehman’s implosion, Mr. Walsh made billions of dollars in loans and equity investments that also ultimately helped bring down the bank."

There are compelling anecdotes that make up the story, including how premier Manhattan buildings like the Chrysler building were bought and sold at ever increasing prices.  The whole piece needs to be read to get the full impact, but here's one that hits home:

"Developers also loved the fact that Mr. Walsh was willing to lend them enormous sums. In 1997, Barry Sternlicht, then the chief executive of Starwood Hotels and Resorts, needed $7 billion to buy ITT.

“I called up Mark and Goldman Sachs and said, ‘Would you be interested?’ ” he recalls. “Goldman said they were. They came to see us. But we needed to get it done really quickly. Mark said, ‘Yeah, we’ll do it.’ I said, ‘Really? You are going to do it yourselves?’ He said, ‘Yup.’ ”

Mr. Sternlicht says Mr. Walsh brought Mr. Fuld (then Lehman CEO) himself to a meeting at the hotelier’s home to assure him that Lehman would back his acquisition. “Dick Fuld sat there in my living room and said: ‘You have our word. We’ll get this done,’ ” Mr. Sternlicht recalls.
“We paid a $20 million fee. I was never so happy paying a fee.” Mr. Fuld declined to be interviewed for this article."

And then one much later:

"SOON after Lehman’s bankruptcy, a former executive who declined to be identified because he wasn’t authorized to speak publicly about his time at the firm went to Mr. Walsh’s office to talk. But they sat in silence. After two minutes, the executive left. “It became clear that neither one of us was going to say something that the other didn’t already know, or that we were going to actually have a new idea or bring greater clarity to the situation,” he recalls."

That's going to make one heck of an ending scene in the movie. 
Fade to black.

ON EDUCATION IN PAKISTAN

ROOT CAUSES

There is an eye-opening story in the New York Times today on the state of education in Pakistan.  It matters to us for a whole host of reasons, not the least of it being that we may bear some responsibility for it.  First the context:

"...the state has forgotten the children here, the mullahs have not. With public education in a shambles, Pakistan’s poorest families have turned to madrasas, or Islamic schools, that feed and house the children while pushing a more militant brand of Islam than was traditional here.

The concentration of madrasas here in southern Punjab has become an urgent concern in the face of Pakistan’s expanding insurgency. The schools offer almost no instruction beyond the memorizing of the Koran, creating a widening pool of young minds that are sympathetic to militancy.

In an analysis of the profiles of suicide bombers who have struck in Punjab, the Punjab police said more than two-thirds had attended madrasas."

Bear in mind that the word "Madrasa" used in the piece simply means "School" in Arabic.  It's being used incorrectly here to refer to Islamic schools.
That aside, the piece does make some sobering points:

"President Obama said in a news conference last week that he was “gravely concerned” about the situation in Pakistan, not least because the government did not “seem to have the capacity to deliver basic services: schools, health care, rule of law, a judicial system that works for the majority of the people.”

He has asked Congress to more than triple assistance to Pakistan for nonmilitary purposes, including education. Since the Sept. 11 attacks, the United States has given Pakistan a total of $680 million in nonmilitary aid, according to the State Department, far lower than the $1 billion a year for the military.

But education has never been a priority here, and even Pakistan’s current plan to double education spending next year might collapse as have past efforts, which were thwarted by sluggish bureaucracies, unstable governments and a lack of commitment by Pakistan’s governing elite to the poor.

“This is a state that never took education seriously,” said Stephen P. Cohen, a Pakistan expert at the Brookings Institution. “I’m very pessimistic about whether the educational system can or will be reformed...”

"...Literacy in Pakistan has grown from barely 20 percent at independence 61 years ago, and the government recently improved the curriculum and reduced its emphasis on Islam.

Failures in Education

But even today, only about half of Pakistanis can read and write, far below the proportion in countries with similar per-capita income, like Vietnam. One in three school-age Pakistani children does not attend school, and of those who do, a third drop out by fifth grade, according to Unesco. Girls’ enrollment is among the lowest in the world, lagging behind Ethiopia and Yemen.

“Education in Pakistan was left to the dogs,” said Pervez Hoodbhoy, a physics professor at Quaid-e-Azam University in Islamabad who is an outspoken critic of the government’s failure to stand up to spreading Islamic militancy."

"This impoverished expanse of rural southern Punjab, where the Taliban have begun making inroads with the help of local militant groups, has one of the highest concentrations of madrasas in the country.

Of the more than 12,000 madrasas registered in Pakistan, about half are in Punjab. Experts estimate the numbers are higher: when the state tried to count them in 2005, a fifth of the areas in this province refused to register.

Though madrasas make up only about 7 percent of primary schools in Pakistan, their influence is amplified by the inadequacy of public education and the innate religiosity of the countryside, where two-thirds of people live.

The public elementary school for boys in this village is the very picture of the generations of neglect that have left many poor Pakistanis feeling abandoned by their government."

And to the point of our bearing some of the blame:

"The phenomenon began in the 1980s, when General Zia gave madrasas money and land in an American-supported policy to help Islamic fighters against the Soviet forces in Afghanistan."

The whole piece is worth reading in it's entirety, since at the minimum, it illustrates the multi-generational nature of this state of affairs.