Friday, August 31, 2007

Evil label has a weak glue

This Evil label is a funny thing. Hollers are quick to paste it on an enterprise that gets nifty and dominates a space. Earlier it was Microsoft, now it’s Google. I am now tempted to ask what will they do tomorrow when we have hundreds of them? People write books on innovation and there’s a seminar every day in some corner of the world, where some eminent speaker lectures liberally on its desirability and inevitability. But when it gets real....Grrrrr….it’s an evil empire unfolding!

Google’s worth $160 billion and the company has not yet had its tenth birthday. Together with its near complete domination of internet and widespread apprehension of its holding too much of your data, could well be the reason why lately it’s being perceived as “Evil” despite its corporate logo that says “Don’t be Evil”. Yet investment bankers expect it to have revenues of $16 billion and profits of $4.3 billion this year. With so much money pouring in, skeptics say it is easy to ignore shareholders and talk about doing “good” instead of doing well inside the Googleplex. But what happens when earnings fall short of Wall Street expectations or some other disaster strikes? Yahoo! and other rivals have gone through such crises and been humbled. Google has not.
Call yourself naive if you believed that all its “goodness” stems less from all that guff about corporate altruism than from Adam Smith's invisible hand. No point in being afraid of Google because it amounts to grudging innovation led dominance. Take heart that there will always be someone else coming along to down the dictator.
Evolution will take care of all asymmetry, the way it should be.


Copy left becomes copyright

If you don’t know, the terms of copyright for posts in YouTube are - what's yours is yours, but YouTube has a carte blanche over your clips. And that's the devil's bargain with all social and sharing sites - they're great fun, but you always need to remember that you are the raw material of their business.

Not getting the hang of it? Loosen up. Here’s something (not so) hilarious.

This chap Christopher Knight from NC posted a video in YouTube so that he could point to it from his blog. Few days later, a friend tells him that his video was included in a show called "Web Junk 2.0" on Viacom's VH1 channel. The show compiles wacky clips from the Web and host Aries Spears adds some suitably comedic commentary. "Well, that's pretty cool", thought Knight, who proudly posted the video of that segment on YouTube for the benefit of his blog audience.

That’s when shit hit the ceiling. YouTube tells him that his clip is being pulled down following a copyright complaint from Viacom….!

The bottom line, as Knight writes: "So Viacom took a video that I had made for non-profit purposes and without trying to acquire my permission, used it in a for-profit broadcast. And then when I made a YouTube clip of what they did with my material, they charged me with copyright infringement and had YouTube pull the clip. Folks, this is, as we say down here in the south, 'bass-ackwards."


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Wednesday, August 29, 2007

What cost, leadership ?

What could anyone conceivably do to earn $1.5 billion in a year?

That's how much James Simons, founder of New York hedge fund Renaissance Technologies, took home last year, according to a study released today on the growing compensation gap between business leaders and everyone else.

CEOs of large U.S. companies last year averaged $10.8 million in total compensation, over 364 times the pay of the average U.S. worker, claims this analysis by Fair Economy based on survey of 386 Fortune 500 companies. The top 20 private equity and hedge fund managers, pocketed an average $657.5 million, Forbes magazine estimates.
That’s 22,255 times the pay of an average U.S. worker.... Well, many aspiring hedge fund managers would like that, but then New York cops will first have to deal with rising instances of subway mugging.


Tuesday, August 28, 2007

Vendor swindle

Another case of IT vendors ripping off unsuspecting clients like Federal Governments with high cost, low quality software.
The Australian government spent almost $85 million on a filter to block children's access to porn on the Net. Tom Wood, a 16-year-old from Melbourne, cracked it in 30 minutes, all the while heaping nationalist scorn on the imported product. The government responded by adding an Australian designed filter. Boom... Tom cracked that one in 40 minutes flat.

The filters are designed to stop access to sites on a national blacklist, bar use of chat rooms, and can be tailored by parents to stop access to sites. Tom’s technique ensures the software's toolbar icon is not deleted, leaving parents under the impression the filter is still working. Given its $85 million tab, how did the product pass muster? What kind of quality systems do these vendors have?
Ah...that gives me a new business idea. I'd name the on-demand service - a Rip & Tear alert...!


Sunday, August 26, 2007

The old man gets it right, yet again

Remember the dot com bubble? One of the very few to come out of it unscathed was Warren Buffet - because he never got in. He said he never understood the business and so did not invest a cent. He was the lone wise voice then.
The lone noise that isn’t a wail from amongst all of subprime clamor is from – you guessed it – Buffet's stable again.

“"I don't want to sound holier-than-thou, but it was irritating when there were all kinds of players out there in the market offering all kinds of products that were questionable," says Ron Peltier, CEO of HomeServices of America, the real estate arm of Berkshire Hathaway (BRKA, BRKB) and the nation's second-largest residential brokerage firm.

So what’s keeping Peltier busy now that the market has tanked? Again, no marks for guessing it right. It's Peltier's task to scope out deals with high-quality, but beaten-down, realty firms that might be ripe for acquisition.
It reinforces my faith in common sense over sophisticated financial modeling anyday.


Friday, August 24, 2007

Try giving us better roads, Mr.Karat

Courtesy the Left sponsored nuclear impasse, as a value demanding citizen of India, I suggest a constitutional amendment to help our future governments from being held to ransom by quirky coalition partners.

I don’t debate on the nuclear deal itself. The issue here is whether we want a mid-term poll and if so, who can demand it; the electorate or the elected representatives? Having elected them once every 5 years at a huge cost, shouldn’t we, the tax payers that fund this jamboree, expect them to run the full term? I worry for the billions that would get spent on an all too avoidable mid-term poll by the Government for deployment of security personnel and polling staff, setting up polling stations (some 800,000 throughout the country for a general election), purchase of electronic voting machines, and issuance of photo identification cards.

Taste this. The 1999 election cost the exchequer Rs.8.80 billion ($212 m). It grew at a CAGR of 21.37% since 1967, when its cost was Rs.17.9m. On that basis, the 2008 mid-term poll if it occasions, would cost us Rs.50 billion ($1.2 b). Remember the money is all what you and I have paid as taxes and we still are making do with the pathetic (conditions of power, water, roads and other soft infrastructure like healthcare and education) infrastructure that we have. Wouldn’t these billions be better spent on laying better roads than elections?

This is what I have in mind. When any elected government faces a mid-term crisis because of the tail wagging the dog (minority coalition partners that act up and threaten to withdraw support), the legislative process should be automatically funneled to a permanent body that lasts for the remainder of the term. This will cut the Mamata Banerjees, Prakash Karats of the world down to size or at least wouldn't tempt them to precipitate a crisis, as there's nothing in it for them, no arms to twist. Since that delegation is authorized by the ruling coalition, petty prejudices would not short circuit policy making. Wouldn't you agree...?

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Tuesday, August 21, 2007

A fine balance

If global financial markets emerge from this round of turbulence with only minor scratches and bruises, much of the credit will undoubtedly go to the quick response of the European Central Bank and the US Federal Reserve. However, their intervention always raises the question of moral hazard. Are central banks, by repeatedly showing their willingness to bail out the financial system in such situations, creating incentives amongst both investors and financial service companies to engage in practices that heighten the risks to the system? If so, is the global economy better off without this guarantee of safety?

Theoretically speaking, the merits of non-intervention are strong. The ability of modern financial systems to efficiently price risk and quickly eliminate, through arbitrage, all opportunities for investors to earn higher returns for relatively lower risk is indeed its hallmark. Investors looking for ways to break through this barrier do succeed for a while, but soon the rest of the market catches up. In this context, the safety net that a central bank bail-out provides investors only serves to distort their risk-return calculations. Bets that, if wrong, could cost them their fortune now become that much easier to make. When a large number of investors abandon prudence and discretion to make such bets, we have the makings of a crisis. The certainty that central banks will not bail them out of one should be enough incentive for many of them not to make these bets.

A practical benchmark for effective regulation is that no two crises have the same cause. By that token, the balance between regulation and intervention has worked reasonably well. Your thoughts...?


Friday, August 17, 2007

Skype outage overkill

The recent Skype outage experienced by some of its users (count me out) drew a lot of flak at least in the blogosphere. Some were quick to question the scalability and robustness of a P2P network, even warning VCs to rethink their P2P investment plans owing to its fragility. Others were conciliatory; the buck stopping at authentication servers, since the outage didn’t affect those who were already logged in.

Ethan Kaplan gave it back to them all so sweetly. He bristled at all those who wanted P2P dead – “Are these people for real? P2P is inherently a scale-free network, which, if designed properly is logically immune from disruptions because of its own inherent complexity. The only danger to P2P is when it exists as a derivation of a process that is not inherently complex. Meaning: an airplane is a complex system, but such a system is dependent on lift overcoming drag and gravity. When lift no longer overcomes drag and gravity (i.e. engine failure, wing popping off), the complex system collapses.” That was smart and in-the-face to those (knee) jerks…

I am yet to find one other new age application that ported so much utility for so less. I love Skype for the way it revolutionized cross border communication, drove down communication costs and knocked the hell out of carriers that plundered subscribers all these years. When they let me make an overseas call at $0.08 per minute (only the bandwidth cost) to the peers in my network, I don’t even mind a few outages a month. Now this is just once in a couple of years….and that’s terrific, not just par for the course. What the hell, it’s a far better record than the call drops that I experience over my mobile network that charges me $0.17 per minute for a US call… I don’t think even a leased line direct link is free from occasional snaps.

Keep going, Skype… We love you…!


Wednesday, August 15, 2007

Why does BI miss the mark often ?

Most corporations with major Business Intelligence (BI) deployments create large data warehouses or collections of data marts whose incoming data must be cleansed to ensure integrity and consistency — and whose relationships must be clearly defined in data cubes to ensure that analysis tools can run queries embedded in standard reports.

But if you start with that sort of architectural model, you’re likely to fail, says Scott Sognefest, a partner in Deloitte Consulting’s BI practice. “There’s a growing realization that you can’t put BI technology on top of a big pile of data. It’s expensive and inefficient,” he says. “You wouldn’t build a factory and then decide what products you want to produce after it’s built, but that’s what people do in the BI space.”

It’s an elusive goal one seeks between complex IT requirements that are expensive and practical user empowerment that’s fairly elementary. Interesting article from Infoworld here.

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Bankruptcy democracy

When hedge funds go belly up, the fund managers are forced to explain why their funds are shutting down, losing money hand over fist, and freezing investors' funds. When they do so, however, they frequently lapse into a strange euphemistic dialect. Dan Gross of Newsweek has brought out a glossary of some hedge funds speak inside out.

Here’s how he ribs French bank BNP Paribas that last week froze redemptions of three funds that held mortgage-backed securities.

“Declining performance frequently leads investors to withdraw their funds, which can, in turn, force hedge funds to sell securities to raise cash. To forestall the ensuing death spiral, funds sometimes lock the door. BNP said it was limiting the liberté of its investors for the sake of protecting the Gallic virtues of égalité and fraternité. Locking up the funds temporarily is the best way "to protect the interests and ensure the equal treatment of our investors.”

Democratizing bankruptcy, shall we say…?

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Tuesday, August 14, 2007

Wall Street sausage flattens the world

Some of my friends that are not conversant with financial world, have often poked me for cluing them in on this subprime situation. They all know it’s got to do with home loans turning bad in the US and wonder how the hell it matters to them living here in India. I had explained how financial markets operate, what happens after loans are made, the process of securitization of loans and marketing of high yield junk bonds that put liquidity back into the system. Few of them got the message, many just nodded. It bodes well to liken it to a sausage making business as this Bloomberg article suggests and would leave me with less and less to explain. Excerpts -

“In the case of subprime loans, which were packaged into mortgage bonds and sliced and diced into collateralized mortgage obligations, there was just enough real meat for the securities to be certified as kosher (AAA) by the rating companies. Eventually the knockwurst and bratwurst started to make people sick. Upon testing, the sausage was found to contain too little meat and too much by-product. It wasn't kosher after all. [In fact], the entire sausage production and distribution chain -- from homebuyers to mortgage lenders, from mortgage brokers to securitizers -- was found to be operating under unsanitary conditions and pretty much shut down until further notice.

And it wasn't just the wurst that was declared unfit for human consumption. Anything suspected of containing meat by- products was shunned by investors in favor of food with a federal government guarantee.”

That sums it up nicely, I guess…


Friday, August 10, 2007

A multibagger hunch

Frankly it didn’t take me long to become a fan of virtualization software. I admit being carried away by its utility. You can check out my frenzy here and here.

Now I hear VMware, the maker of virtualization software, currently owned by storage company EMC, now hopes to raise as much as $1.1 billion, more than any technology company since Google went public in 2004, and could easily spawn the year's hottest IPO as investors lust for a piece of its fast-growing business.

"It certainly does indicate it's a hot issue," says Jay Ritter, a professor of finance at the University of Florida. "The buzz on Wall Street is . . . it will jump at least 20 percent" during its first day on the market.

Boy, I do have a hunch for multibagger ideas. You’d better admit.


Thursday, August 09, 2007

Truly globalized

It's indeed a flat world.

Whether our city planners’ dream of turning Mumbai into Shanghai comes true or not, London and New York are beginning to look seriously like Mumbai – courtesy Rainstorms.

That’s exactly how I felt as I read this report in New York Times – “Deluge Brings New York to Its Knees”. A brief but fierce storm drenched the New York region just before the morning rush yesterday, paralyzing the transit system, flooding major thoroughfares, cutting off electricity to thousands of homes and causing confusion that lingered through a humid, sweaty day. It began with already-soggy commuters trudging to the subway, only to discover there was none. They trudged to bus stops and tried to crowd onto buses any way they could, through the front door or the back door. Some settled for the bus after that. Or the next or the next. As the day went on, crowds and unusually long lines persisted at some bus stops in Manhattan and Queens. Those who managed to squeeze in witnessed little tiffs, like, ‘Hey, buddy, there’s no room.” How do we say it in Mumbai ? – “Chodna yar, yahi gaadi mili ghusne ko, doosri pakad le”

A few days back London took it in the chin.

I just hope our town planners don’t see these parallels, or they’ll say – “Dekha, sab jagah aise hi hai…!” ([Don’t just blame us.] “Look, everywhere it’s the same”).


Wednesday, August 08, 2007

Flood relief

External Commercial Borrowings (ECB) by M&A bug bitten Indian businesses have been partly responsible for the dollar deluge that drove up the Rupee to phenomenal 6% in a short period of 6 months.

To induce growth, RBI had earlier raised overseas borrowing and investment limits earlier. Now it’s altering its stance, giving in to the persuasion from domestic businesses that suffer the surging Rupee. The overall goal is to prevent the external borrowing window from weakening the financial discipline in India’s economy.

The government has announced fresh restrictions on external commercial borrowings (ECBs), capping the Companies to raise only up to $20 million abroad for rupee expenditure and only with prior RBI approval. Exemption shall only be for expenditure in foreign currency. For the rest, they will have to look for local financing. The funds raised abroad will have to be parked overseas till the actual requirement in India.

Despite Finance Minister’s warning, the effect was this.

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Tuesday, August 07, 2007

Shed that margin fixation

Stung by the sharp rise of rupee against dollar, Infosys Technologies Ltd for the first time ever reduced its profit and revenue outlook for the fiscal 2008. But, the company raised its dollar-term guidance marginally for the year.

Infosys expects its earnings per share (EPS) to rise as much as 14 per cent to Rs. 79 for year-ended March, 2008 compared with the earlier estimate of Rs. 80.29. Revenues are expected to rise as much as 18 per cent to Rs 164.33 bn, as against the earlier forecast of Rs.170.38 bn. [1$=Rs.40.50] On a sequential basis, Infosys’ net profits saw a negative growth of 5.7 per cent, while its revenues were flat.

“Business parameters have been strong if you look at the growth both in revenues and volumes,” said Mr. S. Gopalakrishnan, CEO, adding “the impact due to rupee rise was beyond my control”.

Yet behind this show of supreme confidence lurks deep unease. A confluence of adversities is at play. Besides an appreciating rupee, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats. Add to that the end of certain tax benefits and the growing success of multinational competitors such as Accenture and IBM on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term.

Gartner estimates over the next two years, Indian companies in the private and state sector, from banks to the railways, are expected to spend an estimated $5 billion on new technology, all of which will need to be serviced. Save for Tata Consultancy, 9% of whose business is domestic, the Indian players have largely focused on exports and missed the big opportunity in their own backyard.

The future lies in doing things the multinational way: embracing innovation, consulting, and geographical expansion. To get there, Indian companies must get over their 25% margin fixation. Those continuing high margins mean they are probably under-investing for the future.


Monday, August 06, 2007

Higgs boson or God particle...

Denis Overbye has an interesting article in NYT on "God Particle" or more earthly `Higgs boson' - as it is called technically.

With Einstein, we always knew where he stood in relation to “God” — it was shorthand for the mystery and rationality of nature, the touchstones of the scientific experience. Cosmic mystery, Einstein said, is the most beautiful experience we can have, “the fundamental emotion that stands at the cradle of true art and true science.”

If we didn’t already have a name for the object of Einstein’s “cosmic religion,” we would have to invent one. It’s just too bad that the name has been tainted and trivialized by association with the image of a white-bearded Caucasian-looking creature who sits in the clouds attended by harp-strumming angels....

Interesting read… Check it out.

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Friday, August 03, 2007

Samurai runs the Yen

Despite Japan's 2.6 percent growth and its trade surplus, the Yen is down 6.4 percent versus the dollar during the past 12 months. By contrast, the Thai baht is up 20 percent; the Philippine peso is up 14 percent; the Indian rupee is up 13.8 percent; and the ringgit is up 5.7 percent.
Isn’t that strange? The common economic sense is that the currency of a country that has a trade surplus should be stronger than those having a deficit – unless it’s artificially kept depressed by its government like China does. Hence the global pressure on china to let Yuan fly loose. In that commotion, not many noticed what Japan has been upto.

William Pesek in his Bloomberg column, has explained it as he sees it.

"Anytime the Yen does rise, Japanese officials begin talking about “unnatural moves'' in markets. Then comes the “watching trends closely'' warning: In other words, “back off'' to anyone tempted to buy the Yen. Having raised verbal intervention to an art form, Japan no longer needs to intervene.

China, of course, does -- as evidenced by its more than $1.3 trillion of currency reserves. The difference is that China makes no bones about its desire for a competitive exchange rate; Japan disingenuously claims it lets market forces set the yen's value. If that's the case, Tokyo should just shut up and prove it. Then, China would have fewer excuses to hold down its own currency."

Dr.Y.V.Reddy can sure take a leaf – my IT portfolio could look a lot better.

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Thursday, August 02, 2007

The hedge attraction

Excessive supervision over their weekly returns is the greatest risk faced by a fund manager than the market risk itself. Poor fellow, can never take a longer term view or be a contrarian and buy stocks that come cheap (now in India, IT/sugar stocks) because peer pressure forces him to ape his counterpart in another fund house or worse, the one that sits next to him. He has no choice but to play the momentum that becomes the fundamental instead of intrinsic value. As a result, investors are exposed to the vagaries of the market sentiment even though they are inherently momentum averse and have a longer term appetite.

But why blame supervision that eggs on weekly performance – any attempt to mitigate risky element from investment avenues like stocks is sure to dent returns together with risk that it seeks to reduce. Think of CAPM, that suggested non-market risk should be eliminated through diversification, and hence market risk should be the only risk that an investor should be exposed to.

Warren Buffett says the only reason people diversify their stock positions is because they don't know what they are doing. This makes them use the "spray and pray" approach -- buying a lot of stocks and praying that some of them go up. Market guru Peter Lynch calls diversification "di-worse-ification," highlighting the fact that concentrated portfolios are better.

Perhaps that explains why investors flock to hedge funds even as many fold up…

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It happened one night

Interesting opinion on restarting pre-market trading in stock exchanges.

They say it acts as a good gauge of demand and supply, helps market making with better price discovery for a stock (as in book-building), factors in aftermarket/overnight newsflow etc. In effect, it’s being seen as a framework for an efficient market.

Better still. Why close the market at all?

Scary. Imagine a trader that got lucky earlier during the day getting back to the dealing room and punch in orders at will... What would you call that brokerage/ fundhouse that was a billion plus the day before that goes bust overnight ?

One night stand…? No, that’s already taken.

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