December 14, 2006
Does Ben know?

Idiotic headline of the year entrant number 214 from the front page of today's Standard: Latest Fed decision backs Yam theory.

While I'm sure Joseph Yam is a smart (and well compensated) man, I don't think the Fed governors spend a lot of time worrying whether their decisions chime with Yam's views. Given yesterday was one of those rare days where something happened in this town, the SCMP managed to splash a dramatic photo of the Star Ferry fracas over the front page while The Standard manages two 1/4 page columns of nothing on its messy front page. In the race to the bottom in Hong Kong's paper wars, The Standard has managed to slide way past the SCMP at a rapid rate.

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[boomerang] Posted by Simon at 09:40
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July 14, 2006
You don't own me

Today's SCMP reprints an op-ed piece by ex-French PM Michel Rocard on the Mittal takeover of Arcelor. Let's take a look:

The story takes place in France, Belgium and Luxemburg. But it is really a pan-European story, and in economic terms, it encompasses the entire globe. Mittal, the biggest steelmaker in the world, has gained control of Arcelor, the second-biggest, through what initially was a hostile takeover bid.

This is no mere corporate takeover; it is a conflict between business and social models. Arcelor, originally French and Luxembourgian but now predominantly Belgian, has a strong base in Brazil and operates throughout much of the world. It specialises in high-quality, special steel products designed for the most complicated uses. These products are purchased on middle- and long-term contracts, mainly by long-time customers. It depends very little on the highly speculative world market for raw steel, and its workforce is highly qualified and stable.

Mittal, by contrast, is a conglomerate that has come out of nowhere to become the world's leading steel company in a mere two decades. It did so by brilliantly consolidating and rationalising steel plants throughout the world. Its president is Indian, but it has no factory in India.

Like all good stories, we've got a setting and we've introduced both the goodie and the baddie. That mean upstart Mittal, which is lead by an Indian but isn't really Indian (what that has to do with anything is hard to fathom), is grabbing at that grand dame Arcelor, a company that was created through (gasp) a merger only 5 years ago.
Mittal is a strong but fragile company, for it is highly subject to the speculative waves of the global market for raw steel. It tightens costs and outsources work as much as possible, so its workforce is paid less than Arcelor's employees, and is less stable. Moreover, Arcelor represented a perfect takeover target: most of its capital belongs to diverse shareholders. The opposite is true of Mittal, where owner Lakshmi Mittal and his family hold over 60 per cent of the shares.
Can something be "strong but fragile"? Mittal got where it is by making more for less. This is a "bad thing". And poor, defenceless Arcelor was at the mercy of the predatory Mittal because it has lots of money-grubbing capitalists as shareholders. The horror.
The stakes are clear. Mittal has an obvious interest in gaining control of Arcelor to improve its global geographic balance, boost its market share in high-end steel products, and reduce its vulnerability to the speculative jolts that occur in the raw steel market.

Conversely, Arcelor has absolutely no interest in the success of this takeover. If it is led into a more adventurous strategy, its sustained policy of research and heavy investment in upmarket steel products may be weakened. Its workforce faces erosion of its advantages in wages and job security. This explains why the management, most of the workers and the unions of Arcelor refused Mittal's offer.

Actually, Arcelor's management accepted the offer. Why would Mittal's control lead to a decline in research and investment? Steel jobs and wages were under pressure already - the takeover will probably help protect many workers by bringing them into a more diversified, stronger company. Arcelor has every interest in the success of this takeover, just as Mittal does.
But Arcelor's shareholders have made their choice: the immediate profit offered by Mittal was enough. So the shareholders chose to cash in on a temporary bonus, taking a risk on the progressive erosion of the firm, and perhaps the end of its policy of focusing on high quality while treating its workers with respect.

This choice directly concerns more than 150,000 employees. Indirectly, it concerns all of us, for the choice made by Arcelor's shareholders is far from being an exception; on the contrary, it reveals the deep economic and social significance of corporate takeovers of this type.

The Arcelor shareholders made their choice in a legal, legitimate takeover, where Mittal offered them enough money to make them sell their shares. It's not a "temporary bonus" - it is a transaction just like the share trades that happen on every exchange in the world everyday, including in Paris. It is the fundamental right in a market economy that the owner of something has complete control over it. In the same way, each citizen has a right to vote for whomever they choose, temporary bonus or not. I'm not sure how Mr. Rocard has had access to the thoughts of every shareholder when they made their decision, but he was a Prime Minister, so maybe they have ways?
Where are our societies heading if company owners consider that quality is too expensive and that workers must be made insecure in order to make them less demanding? A system governed by such rules is prone to give rise to various social conflicts, and perhaps to violence. Above all, such a system is neither viable nor sustainable in the long run.

For this reason, it is dangerous to maintain the outdated legal concept according to which a company belongs only to its owners or shareholders. Indeed, in reality, the company is a community of men and women who draw their incomes from the same economic and technical venture. It would be prudent to adapt the law to this state of facts, and to give employees, too, a say in their destiny.

In the wake of this takeover, governments must address this gap in the law, as no society can afford to permit the economic system to continue its march towards indifference to the welfare and security of workers.

My emphasis. This "gap in the law" has been the foundation of modern capitalism, the world's most successful economic system. The idea that a company belongs to a shareholder is not just some legal nicety, it's the fundamental building block of the system. If everyone looks after their own self-interest, Adam Smith's "invisible hand" guides us to a place where we're all better off. There is another system where "stakeholders" are all considered owners of the factors of production - Karl Marx wrote about it. It doesn't have a good track record.

Above setting certain basic rights the less a government or economic system is involved in workers' welfare, the better. Ironically France is excellent proof of that.

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[boomerang] Posted by Simon at 09:02
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April 13, 2006
The world isn't flat

Thomas Friedman's The World is Flat is a best-selling look at globalisation on its impact both politically and economically. I've not read it, but I have read an incredibly interesting review of the book by Edward Leamer titled A flat world, a level playing field, a small world after all, or none of the above? It's not just a review; it's an elegant tour of the work economists have done on the topics Friedman discusses, with plenty of intellectually stimulating side-roads along the way. The review also demonstrates several counter-intuative challenges to the conventional wisdom, just like a good economist should. It's very readable for the intelligent layman (and laywoman) as well as those versed in the ways of economics. For example:

“Is a computer more like a forklift or more like a microphone?” It doesn’t matter much who drives the forklift, but it matters a lot who sings into the microphone. Think about the forklift first. You might be a lot stronger than I, but with a little bit of training, I can operate a forklift and lift just as much as you or any other forklift operator. Thus the forklift is a force for income equality, eliminating your strength advantage over me. That is decidedly not the case for a microphone. We cannot all operate a microphone with anywhere near the same level of proficiency. Indeed, I venture the guess that I would have to pay you to listen to me sing, not the other way round. And I seriously doubt that a lifetime of training would allow me to compete with Springsteen, or Pavarotti.

The effect of the microphone and mass media have been to allow a single talented entertainer to serve a huge customer base and accordingly to command enormous earnings. This creates an earnings distribution with a few extremely highly paid talented and trained individuals and with the vast group of slightly less talented working in LA restaurants, hoping someday to hit it big. Thus, opposite to the forklift, the microphone creates a powerful force for inequality. Think Silicon Valley, with ext raordinary riches accruing to some, but with the manual service workers living in their cars.

You'll need to read the review to find out the answer, as well as what Leamer thinks of the book. It's well worth it.

(via MR)

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[boomerang] Posted by Simon at 16:42
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April 08, 2006
Chart of the week

Courtesy of Jake van der Kamp at the SCMP, a chart of which overseas countries have been buying US Treasuries (below the jump) which should turn conventional wisdom on who's buying these securities on its head.

As he concludes:

And China? Well, over the last 10 years China accounted for only 8.1 per cent of total net inflows to the US by way of long-term securities purchases. Even this figure is likely to decline soon as China's overall trade surplus is now narrowing rapidly and it will not have as much money for the game as it previously did.

Do you get the impression from all the protest in the US about China's foreign reserves that people in the US are looking for a convenient bogeyman on whom they can pin the blame for their own profligacy? I certainly do and yellow is a more convenient colour to them than white.

You don't hear much about the rising Saudi menace, do you?


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[boomerang] Posted by Simon at 11:04
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December 05, 2005
The David Webb effect

Once a year David Webb takes a break from his corporate and political governance activities and shares with the world his Christmas stock pick. He only chooses one, and inevitably the picks have given incredible returns. This time around he has recommended Fujikon. Below the fold is the share price chart of Fujikon. On Friday it closed at $1.40, before the report, today it is trading at $1.57. That's a 12% jump, or a rise in HK$63 million in the market capitalisation in the stock. You'll also notice on the graph below a marked increase in trading volume late last week - was that Mr. Webb's purchases or could word have leaked?

More importantly, for all of you students of finance, please explain to me how the efficient markets theory works again? Nothing has materially changed in this stock, except a solo operator put out an independent piece of research. He didn't discover anything new, or any non-public information.


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[boomerang] Posted by Simon at 12:28
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November 15, 2005
Greenspan's Wake-Up Peep

I have been stunned over the last four years as Bush has spent money like a drunken sailor in Washington while giving money back to the rich, with no plans to pay the piper - despite pretending to stand for small government. What I've found even more shocking is the fact that his economics advisers and Fed Chairman Alan Greenspan have stood by and watched the madness alrgely approvingly.

Now that Greenspan is becoming a lame duck and about to hand over the reins of the US (and world) economy over to his successor, perhaps he feels comfortable giving more of a 'reality-based' commentary. He said that the US's soaring trade deficits "cannot persist indefinitely." He added that "at some point, investors will balk at further financing." No kidding, Al. Of course, and certainly if US deficit spending careens along its crazy current trajectory.

Perhaps the other lame duck, the one in the White House, ought to take heed of that fact as he prepares to head out to Asia, home to his biggest bankers. As Bush talks to China, the fastest-growing owner of US Treasuries, and persuades them to drop their fixed exchange rate, I hope the little light goes off in his head that warns him that that would entail them selling off most of their US currency holdings and converting them into Ren Min Bi.

But then Alan backed off in his statement from lecturing his golden boy, saying that there was little "US policymakers can or should do to stem this natural evolution of market forces." Oh really? How about spending less foreign money?

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[boomerang] Posted by HK Dave at 09:22
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November 10, 2005
Outsourcing research

The New Economist points out a piece of Deustche Bank research on Indian outsourcing, which is ironic given equity research is being outsourced to India:

In one of Colombo's few skyscrapers, a battery of analysts is crunching numbers and writing equity research reports. But they won't put their name on them. Ghostwriters of international finance, the young analysts at Amba Research work in complete anonymity for the world's biggest investment banks and for a third or less of the cost of a junior analyst in New York, London or Hong Kong..."At a cost of one third to half of an onshore analyst, our clients get 75 to 80 percent of the functionality," said Amba co-founder Brad West at the firm's marketing office in Singapore.

Amba hires young accountants or MBAs in Sri Lanka and India, puts them through a five-week equity analysis course and then subcontracts its staff on a one-year basis to clients. Firms like Amba pay their analysts US$10,000 (HK$78,000) to US$25,000 per year and charge their clients upwards of US$50,000 per year. That compares with a total cost of US$150,000 to US$250,000 for a junior analyst on Wall Street or in the City of London, West said.

The head of research at a European bank that makes extensive use of firms like Amba said that outsourced analysts typically don't work on deal research, communicate with clients or corporates, or publish under their own name...But the banks are not eager to admit they outsource research, as they worry about perceptions of research quality. "They would rather admit to income tax evasion than to outsourcing," West quipped. The secrecy works both ways. Amba clients have code names, and "to talk about who your client is a firing offence," he said...

Industry players say that equities research outsourcing is part of a third wave of outsourcing known as "knowledge process outsourcing," which focuses on highly skilled jobs such as investment research, medical diagnosis and legal work. Analysts estimate there are only about 1,000 to 1,500 people working in equities research in India and Sri Lanka; half of them for so-called "captive" units of global investment firms...Industry players say that the growth of research outsourcing in South Asia has not yet led to job losses in Europe or the United States.

"Outsourcing has allowed research firms to be more thorough and to cover more companies," said Joseph Sigelman, co-chief executive of Chennai- based OfficeTiger.

Asks West: "The interesting question is what the banks will do during the next sharp downturn in global equity markets: will they cut back on in-house research or outsourced research?"

There are plenty of students slaving away in expensive business schools in the hope of landing those high paid analyst jobs in Wall St and London. Yet it only takes 5 weeks and one-tenth (the article says "third or less" - clearly fractions weren't this reporter's best class) of the wages. And equity analysts are just the beginning. Any enterprising academic could outsource their research in their quest for tenure. Likewise governments could save a fortune by outsourcing chunks of their public service. One day even bloggers could be overtaken by the outsourcing menace.

The future is here, and it's being outsourced.

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[boomerang] Posted by Simon at 14:39
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