Getting paid in Oil barrels

The price of oil is touching $120 a barrel. You fume over rising gas prices. What do the rich Arabs do with all the money?

I look up this Economist story.

“The six nations of the GCC, which also includes Qatar and Oman, earned $381 billion from their exports of oil in 2007 and another $26 billion from gas, according to the Institute of International Finance (IIF). If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020, reckons the McKinsey Global Institute: a vast number relative to the size of the GCC economies, which had a combined GDP of $800 billion in 2007.

Not all these riches are ingested, of course. The Gulf added $215 billion to its stock of foreign assets in 2007, the IIF calculates. This hoard is divided between the region's central banks, its sovereign-wealth funds and its wealthy sovereigns. It added up to $1.8 trillion by the end of last year, by the IIF's estimates, and more like $2.4 trillion, according to Brad Setser of the Council on Foreign Relations and Rachel Ziemba of RGE Monitor.

When an energy exporter converts its petrodollars at the central bank, its domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.”

Now I understand and feel more helpless. I will have to shell out more for gas at the station. Hopefully GCC economists are aware of the damage that rising export realizations do to their economies. I wait for the day when wealthy Arabs run out of options to park their wealth and cut oil price by half.

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If not, I’ll seriously consider working for Abu Dhabhi’s SWF and get paid in barrels of oil !

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Doctors without degrees

If Dentists overcharge, in comes the therapists.

The last bastion that requires a formal degree – medicine – comes tumbling down in distant Alaska.

In places like Alaska where there is an alarming shortage for Dentists, there is a state sponsored program to train non-Dentists to do the basic dental care - filling cavity, cleaning and drilling. The Alaska program is small, with fewer than a dozen therapists practicing so far. But the early results are promising, according to dental health experts who are studying the program. Dentists are objecting because they say these “Dental therapists” as they are called, are low cost competition.

A good case for Doctors to bring down their fees, I guess. I also think such alternate options, at least with most basic features should crop up in every function so that overcharging-because-of-scarcity should end. Think of underperforming MBAs in enterprise, harebrained engineers, overrated pilots – it’s the expensive education that perches them up in society than their cerebral hierarchy or creative mind. If the same training were made available at a low cost to all those that make the cut, several kids from poor families would’ve made it and may even have done their parents and country a lot proud. Hopefully, the patients will go back just with their tooth plucked and not pockets picked.

At debates on relative importance of higher education in achieving success in life or even entrepreneurship, the education advocates buttress their argument with an example of “would you like a quack to cure your disease?” Answer may be “certainly not” – but now it seems there is a middle path. We don’t need Doctors with a degree either – at least for elementary dental care.

SEC follows reverse Robin Hood system?

David Einhorn has often asserted that because the ratings agencies are paid by the issuers, they have every incentive to rate credits in such a way to encourage more business for themselves. His solution to this problem, let users pay rating agencies.

Now he’s back asking - “weren’t ratings agencies on the job to police what was going on in the canyons of Lower Manhattan?”

Mr. Einhorn runs Greenlight Capital, a successful hedge fund. He also isn’t an infallible observer of human lapses and regulatory failures — he invested in and briefly served on the board of New Century, a subprime mortgage lender that later went bust amid accounting problems.

He smirks at the relaxation made by SEC in “Alternative Net Capital Requirements for Broker-Dealers that are part of Consolidated Supervised Entities” that significantly reduced the capital back up that had to underlie assets. After the recent collapse of Bear Stearns, he now calls it “Bear Stearns Future Insolvency Act of 2004” in retrospect.

Another of his favorite moniker referring to the Congress recommended a bail out of Bear Stearns partly by tax payer – “Private profits at socialized risk” or alternatively “reverse Robin Hood system”.

So very apt.

Smart way to debt freedom

The crisis in the global financial markets has raised bond yields to ridiculously high levels. Well that’s known to all. When defaults are likely, bonds quote at a significant discount to their offer price that pushes their yields up.

PE funds raise leveraged debt (on their portfolio firms) to fund their acquisition and the I-banks that lend to them will securitize that debt and issue bonds to recreate liquidity. These bonds mature at a future date and are to be retired by the future cash flows from borrower firms as they repay. This is the normal cycle.

But when you have a liquidity crisis, these bonds quote at a heavy discount owing to lack of demand and not because of credit worries. Now the original borrowers buy back these bonds at a discount and extinguish the debt. In effect, a company repays the debt that it owed to itself - an anomaly of sorts! This allows them to cut their interest bill, boost earnings and reduce their leverage, all on the cheap. Smart, isn’t it?

How does it matter to portfolio firms of PE funds? For private equity portfolio companies, buying back debt is different to the PE firms investing in debt from their own and other deals. The former is a way to retire debt cheaply; the latter is a new investment by private equity. Lender Banks are revolting.

Recently TDC, the Danish telecoms operator that was Europe’s biggest leveraged buyout when bought for €13bn ($20.8bn) by a private equity consortium in 2005, has unsettled its lenders by buying back €200m of loans at a discount of about 90-95 cents in the euro.

In particular, lenders worry that borrowers will choose to use excess cash to buy back debt at a discount rather than repay debt through formal channels at a par, as required by most standard leveraged loan agreements. The frustration of the lenders at the move by TDC, owned by Apax Partners, Blackstone, KKR, Permira and Providence Equity Partners, has caused the London-based Loan Market Association (LMA) to review its loan documentation guidelines.

Now you can’t have capitalism and fairness. Can you?

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Recession, my foot! Lady luck still loves Google

Lady luck may have deserted the whole world. But she still smiles at Google.

Look at the stellar results. Google’s net income for the Q1-08 grew 30 percent, to $1.31 billion, or $4.12 a share, compared with $1 billion, or $3.18 a share, in the first quarter of 2007. Revenue climbed 42 percent, to $5.19 billion, from $3.66 billion a year earlier. The stock price soared to $535.

Excluding commissions paid to advertising partners, a widely followed measure, Google’s revenue was $3.7 billion, slightly higher than analysts expected – a rare occurrence by itself. Its profit, excluding the cost of stock options, was $4.84 a share, handily beating forecasts.

That’s the power of business model. Come inflation or recession, a robust business model could insulate the even the most vulnerable of businesses.

But I like recession for something else. It makes even the smuggest of breeds – marketers – to sit up and revisit their inherent deficiencies. Courtesy Swaminathan of Cequity, I was led to this CMO council study. Quite some candid admissions there. So unusual since CMOs don’t often own up and don’t skip a beat even while flying blind. If something goes wrong, they know it’s the client’s business that crash lands.

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"Honey, you blew the blog"

So Social Media(SM) is the flavor of the month. Everyone and his uncle have a perspective, an opinion. Nothing wrong with that. But how many are relevant?

The venture capital community with which I schmooze is sniffing around for the next big thing. It is always. They don’t know much else. Once it was consumer internet portals, followed by search and social networks, then it was mobile content, gaming and stuff, now it is social media – blogs, wikis, podcasts and all things user generated. Their pet peeve – brands don’t spend much on online initiatives.

How will they? Cheapest computers still come at $500. Developed markets may afford that (not for long though!), but growth is in emerging markets, where millions live with annual median income of $2500. You must be nuts to ask them to spend 20% of their annual income on a computer so that they will see your ad or a mobile phone that has a TCO of $500 over 3 years.

Then there are other pitfalls in SM. B.L.Ochman says “without first-hand knowledge of social media influence building -- which, sorry to say, mainstream media still doesn't have -- blog advertising will fail no matter who's selling the ads.” She goes on bringing out some insights on optimizing blog networks.

Bottomline – SM has a lot of ground to cover. It starts with driving mass adoption of the web. Invest in hardware innovation. Make available low cost (I mean real low, cap it at $10) hardware to access the Net. Break the stranglehold of 10 second TV commercial by serving personalized digital content. Deliver curious content. Do anything that makes the user stick.

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Southwest shouldn't lose lovemarks

Reports NYT. Five Southwest Airlines planes grounded last month because they had not been properly inspected had precisely the kind of cracks that the inspection order was intended to detect.....

Cracks? in airplanes? Yeah, that’s right. Cracks it is!

I am sure Southwest Airlines has worked hard to earn as many fans. Fellow blogger Vinnie Mirchandani, I remember often goes ballistic about them, to the extent of invoking the Bard. I quote from one of his Lovemarks-

“The other airlines can keep saying things ...ideally they should just match Southwest's operational model. Not difficult to match ...just fairly priced, on-time, safe, cheerful.

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A thing of efficiency like that is a joy every time. And allows you to save for the other things of joy - the BMWs and the Four Seasons.”

Airline efficiency – isn’t safety the first hurdle? I want all travelers, not just loyal passengers like Vinnie to be cheerful for a loooooong time…. Airlines shouldn’t let them slip through its many cracks!

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Amazing place, Wall Street!

After taking a $9.4 billion write down, John Mack of Morgan Stanley feels the US financial crisis is getting close to its bottom. As a strategic measure, Mack also vowed Morgan Stanley would “keep its powder dry” and steer clear of large acquisitions to preserve capital and liquidity. He expects the turmoil to stretch thro a couple quarters ahead.

Meanwhile Citigroup is nearing a deal to sell $12bn in leveraged loans at a discount to a group of leading private equity firms, marking another step in new chief executive Vikram Pandit’s efforts to shrink the beleaguered bank’s balance sheet. Although details of the deal were still being worked out, people familiar with the matter said Apollo Management, the Blackstone group and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.

The Citi portfolio includes loans used to finance acquisitions by Apollo, Blackstone and TPG, as well as debt in their rivals’ deals. Apollo would buy about half the portfolio, with Blackstone and TPG taking the rest.

Isn’t that terrific? When times are good, PE firms go ahead and raise leveraged debt from banks. When the banks go bust, they turn around and buy distressed debt including some of their own. Wall Street is full of surprises!

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Creative analyst?

Say that again...?

As far as stock market technical analysis go, they are hopelessly dull. I use them as soporific tranquilizers. On nights I don’t get sleep, I read one and pass out instantly. But this one kept me awake and drew me close. It drew an allegorical reference to Bravehart, the 1995 Mel Gibson movie that won 5 Academy Awards!

Have stock analysts started getting creative? Shakti Shankar Patra of ET certainly shows symptoms.

Oh, no. Not all of them. Some nights I still need a sedative :-)

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Getting the hang of FOM

Fortune 500 marketer Paul Barsch asks “what is the future of marketing (FOM)?”

The open discussion format that he chose throws open the floodgates for comments to pour and pour. I am always intrigued by marketing strategies. Did read a few of those and they were terrific insights. A lot to quote and so I try mashing it up.

FOM ultimately would be something like this –

The integration of data across the entire enterprise so that marketing, finance, R&D, operations, call centers, everyone stop functioning as data silos and are using the same copy of data – could be one of the keys to corporate success in the future. The role of the CIO is changing from technologist to business strategist with IT as a driver of the business. Technology is advancing at rapid clips. CIOs must shed the "I keep the lights on" mentality and move more towards "I help this company innovate and become more efficient with technology".

The same fundamental change in mindset needs to happen for the marketing function as well. Instead of "I make the commercials and run the website" the new mindset will be "I know our customers, I know what they want today, I know what they'll need in the future and this is how we'll make it happen..."

If we want marketing to have a seat at the strategy table, then we have to step up and take ownership of the customer experience. Without this, marketing will, remain queen of the tradeshow. Customers/consumers just aren't impressed anymore with some of the initiatives companies roll out; they expect them. And often, a great service experience in one industry is expected in another--i.e. I had a great dining experience the other night, but why do I put up with the sub-par experience I usually get from the airlines?

As a Chief Relationship Builder, The CMO will need to create opportunities for dialogue with the customer so that he becomes the Voice of Customer (VOC) inside the enterprise. This goes beyond market research into the realm of building communities. [Paul paraphrases Roy Young] when he says, "sales sells, finance finances, R&D designs, what does marketing do?" Owning the VOC and taking more responsibility for the customer experience are two solid strategies for the CMO of the (near) future. Marketing is no longer getting the customers attention, it is engaging the customer. Marketing is no longer “Here’s what we do” its “How we can engage you”.

Marketing will have to embrace the "messiness" and loss of control that will come with a move to social media. If so, marketing may be able to move beyond the "sell one more Britney Spears cd" perspective to one in which marketing is seen by consumers as being honestly concerned with helping consumers solve problems via the creation of product/service solutions and doing so in a way that will create mutually beneficial experiences.

Having a platform for customers to speak to your company is just a tool. Having someone who understands the people speaking, can synthesize trends out of the conversations, and can create plans that meet both customer and business needs will make that tool a powerful part of business.

Future of marketing: A 5th P in the marketing mix. For PARTICIPATION.

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Reviewing a carnage

Excerpts from an excellent article on Wall Street by Shawn Tulley, CNN.

"....So what if investors only dimly understood CDOs, CLOs, and the alphabet soup of arcane instruments that dominated the business, not to mention the super-geek hedging strategies the firm's leaders kept bragging about? ....Wall Street was the black box that worked its own mysterious magic. ....Put simply, Wall Street firms used towering leverage to make lottery-like loot in a long-running bull market that blatantly underpriced risk. When investors think the world is getting safer, they demand less and less compensation for risk (and they begin to believe in magical stories, like bundles of dubious home loans can be transformed into bulletproof securities).

....Half the huge gains in Wall Street's profits from 2003 to mid-2007 could be attributed to increased leverage - otherwise known as gambling with borrowed money - that magnified earnings in a boom. ....Again, it's the curse of too much debt: If a firm's portfolio is leveraged at 33 to 1, it takes a mere drop of 3% to wipe out its entire capital.

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....As long as we have capital markets and as long as it's possible for people to make vast sums taking big risks with borrowed money, we will have the kinds of booms and busts that are a way of life on Wall Street. The big gamblers will most likely work for hedge funds, private equity firms, or some new entity that hasn't been invented yet. We won't see tumbleweeds on Wall Street. Its cowboys may not be geniuses at making money. But they're geniuses at raising it and, above all, at perpetuating Wall Street's black-box mystique."