• Algae-based fuel for Navy makes some lawmakers angry

    photo by MC3 Ryan Mayes, US Navy, via AP: ship at left is delivering biofuel during Great Green Fleet demo

    At the Great Green Fleet demo, the US Navy proved that bio-fuels work on existing military vessels--without modifications and without operational problems.  This sounds like good news to those concerned both about environmental issues, and to those who wish to rid ourselves of dependence on Middle Eastern Oil. The news was met with anger, however, by lawmakers in Congress whose primary concern is too-much government spending.

    The bio-fuel cost about $27 per gallon.

    Why is this so expensive, compared to the costs you and I might pay?  First of all, these biofuels were produced in small "artisanal batches" solely for the military tryout, rather than for mass production and consumption, as is the case with conventional petroleum-based fuels. Also, the diesel fuels were made from waste chicken fat and algae, rather than the corn-based ethanol that eats into food sources.

    Entrepreneurial businesses need a large, stable consumer of biofuel products like the military in order to lower the risk of investing in the research and development of volume production techniques to bring the price per gallon down. A "guaranteed" military customer would help create the incentive to develop these sustainable fuels. Once the price was reasonable, individual consumers would expand the market.

    Finding a user like the military can rapidly help to scale technologies that then are used in the civilian marketplace — it becomes a catalyst,” said Bob Johnsen, chief executive of Primus Green Energy, which is developing fuels from biomass and natural gas. “If the military becomes a buyer, that becomes a means by which the production facilities can be financed.”

    Source: "Running on Algae, Drawing Anger," by Diane Campbell, NYT Business, August 28, 2012

    Follow up:

    • Read the article.  What groups are in favor of green technologies in the military, and why?  What groups are opposed to green technologies in the military, and why?
    • Which position do you support? Delineate your reasons.
  • U.S. auto companies doing GREAT!

    image from Detroit News link; photo by Charles V. Tines for The Detroit News

    Maybe the economic recovery is a little "iffy" as reported in the political press, but, according to Marketplace, the US auto companies are doing really well.  What a comeback! Factories are operating at greater than 100% capacity!

    Wait a minute--How can something operate at greater that 100% capacity? That sounds crazy.  But, using the principles of managerial accounting and standard costing, there is a "normal" capacity for operations for every business, and, really, every operation. For example, if you are a student, the "normal" number of units per semester is probably 15. But, you are still full time if you are taking 12 units, so a lot of students are in that zone.

    If you are a human being, the "normal" number of hours of sleep per night is eight. The "normal" amount is what is labeled "100% capacity." But it is totally possible to operate at above that level at any point. You can take more than 15 units. You can sleep more than 8 hours.

    The "over capacity" rating for the auto plants is based on a standard of two-eight hour shifts per day and and 5 day work week. Over capacity is anything more than that...i.e,: more than 80 hours of factory labor. 

    Follow up:

    • Check out the article in The Detroit News. What is the level of operations that the auto industry is striving for?
    • Why is the auto industry important to the American economy?
  • Cloudy with a chance of Amazon

    image from resources.avg.com.au

    A few days ago, I wrote about BOX, a company that was providing cloud storage for businesses and mobile device users. That company saw themselves on the precipice of a huge revolution in computer use.  Well, as it turns out--they need to join the club.  Amazon is also a CLOUD enthusiast. [click link for NYT article]

    Companies who hope to provide up-to-date weather prediction [Climate Corporation] or to act as your personal concierge [Cue], utilize Amazon's cloud broadband width to analyze more data than they could ever hope to host on their own. The vehicle is AWS, Amazon Web Services Division. Says Andrew R. Jassy, the head of AWS: "We are on a shift that is as momentous as the shift to the electrical grid...It is happening a lot faster than any of us thought."

    So, the message is the same as the one I put forth the other day: Something really, really big is happening with respect to cloud computing. How do we jump on the bandwagon?

    Follow up:

    • Where does Amazon house its cloud operations? This will require some serious research...
    • Are there any IPO opportunities on the horizon for investing in cloud storage companies? Please elaborate.

  • Impact of Hurricane Isaac

    image from article linked below

    The Business Insider did an analysis of the impact of Isaac vis-a-vis Katrina, in terms of physical characteristics and financial impact.   While it is too soon to tell the full impact of Isaac, the storms have many similarities, including their unusually large size--about 400 miles in diameter.  They both will hit land at approximately the same place, but the paths after landfall are expected to digress.

    Hurricane Katrina did about $125 billion in damage and killed 1,800 people. Hurricane Isaac has already damaged 2,346 homes and has caused 24 deaths in Haiti. The evacuation efforts in the United States have improved since Katrina, and it is expected that the loss of life among the poor will not follow the same trajectory. It is too soon to say what kind of damage will be done to local business operations.

    One business has already been affected by Isaac: the oil and gas industry, according to the Oil and Gas Financial Journal. As of last Sunday, Shell, BP and Anadarko have begun shutting down operations. Nevertheless, according to this article, there is a "small expected impact on commodities."

    Follow up:

    • Does government have a role in protecting businesses when natural disasters occur? Why or why not?
    • What natural disasters occur where you live? Are you insured against them?  Is the insurance cost prohibitive? What is the point at which you would find it cost effective to insure against whatever likely local natural disaster your area might experience?
  • The Cloud in the Box: a once-in-a-lifetime business opportunity

    image from article linked below quote: this is a photgraph of Aaron Levie taken by Peter daSilva, NYT

    Says Aaron Levie, the entrepreneur who started BOX:

    If you think about the market that we’re in, and more broadly just the enterprise software market, the kind of transition that’s happening right now from legacy systems to the cloud is literally, by definition, a once-in-a-lifetime opportunity,” he says. “This is probably going to happen at a larger scale than any other technology transition we’ve seen in the enterprise. Larger than client servers. Larger than mainframes.”

    The business potential, he adds, seems limitless: “We think we are just 1 percent into that transition.

    --from NYT "Bits" article by Nick Bilton, August 26, 2012

    So what the heck is he talking about?  What is this business, and why has it attracted the interest of so many high-powered venture capitalists?

    Levie started his business with Dylan Smith while at the University of Southern California. Levie was the programmer; Smith raised capital by playing poker online (read the article to find out his secret). Seven years later, his Silicon Valley company, BOX, supplies cloud storage services to 125,000 businesses and 11 million people. Business customers are attracted to Box because of the company's responsiveness and flexibility in meeting their needs.

    But Levie and his company see the shift from mainframe storage to cloud storage as only a small piece of the revolution. The real business revolution is in the vast numbers of mobile device users who rely on cloud storage because their mobile devices are so small. They need the services of cloud computing to switch between devices seamlessly and securely.

    One of the tenets of Levie's business plan is to "fight" for the consumer and provide secure and easy-access storage for use-anywhere mobile devices--which are increasingly part of the way even corporation employees are doing business.

    Follow up:

    • Where is "the cloud" anyway? [Hint: check out this LINK]
    • What is "enterprise software"? Is this the most important part of the business to Aaron Levie?  Why or why not?

  • Chevy Volt: lease, buy or forget it?

    I am seriously considering buying or leasing a Chevy Volt. For 10 years, I have been driving a Honda Odyssey, and we are keeping that vehicle in the family because of its outstanding capacity for road trips.  But, it's time for me to get at new car for daily driving.

    Why would I consider a Volt?

    • It is a hatchback sedan, which meets my driving needs at this time.
    • It is an electric car, which has about a 35 mile radius on electricity, but also has a gas engine, so it has the same driving radius as any car with a gasoline engine.
    • Almost all of my driving is local, and my commute to work is less than 35 miles round-trip.
    • I drive about 9,000 miles per year.
    • I have solar panels installed on my roof at home, which reduces my electricity consumption to "Tier one" billing, at most, so my car would really be solar-powered most of the time.
    • I also can charge my car at the college where I work, where solar charging stations have been installed.
    • I live in southern California, where many cities have charging stations--making it even more likely that I will be able to run my car for free most of the time.
    • I love the interior appointments: bluetooth, convenient storage and cupholders, rear camera, free navigation...
    • Its drive is peppy and responsive.
    • I would feel happy to be seen in a sustainable electric car, even though most of my neighbors choose Prius or hybrid Lexus or Highlander models.


    What are disadvantages of a Volt?

    • OUCH! the price! Well over the price of a comparable car.  It is mitigated by big tax credits, but still...pricey
    • the payback period of the savings on the gas would be more beneficial if I drove more miles per year
    • the technology may change, and something even better might come out--or a different manufacturer might make a similar car that I would prefer
    • Volts have only been around for a few years...who knows how long they will last? And since I usually keep my cars 10 years or more...

    I always buy my cars; I've never leased one, since the cost benefit always came out in favor of buying over leasing, considering my personal habits.  Nevertheless, leasing a Volt, while more expensive, would mitigate the downside risks of ownership.

    Follow up:

    • Which of the factors in my decision to purchase are Quantitative factors?
    • Which of the factors in my decision are Qualitative factors, having to do with my perceptions or feelings of satisfaction?
    • What factors would you consider in this type of decision?
  • Result of an audit of auditors: EPIC FAIL

    [image from the article linked below]

    "Bad Grades Are Rising For Auditors" addresses a recent review done by the Public Company Accounting Oversight Board (PCAOB).  It reviewed 23 audits that had been done at brokerage firms by CPA firms. NONE of the audits that were examined by the PCAOB were found to meet generally accepted auditing standards.

    This result is particularly alarming because the ONLY reason that public accounting firms exist is to provide assurance that corporate entities are producing honest financial statements.  If public accounting firms can't even follow the rules themselves, then dishonesty and misleading information will be allowed to be published...and relied upon by third party investors and analysts.

    The CPA firms involved were not published by the PCAOB, but, as you can see from the graphic at the top of this post, the Big Four accounting firms are trending toward sloppy audits as well.  The author gives the firms the benefit of the doubt, suggesting that maybe the PCAOB is doing a better job of finding errors and omissions. But--the PCAOB can't find what isn't there--real problems have to exist, and the rates of problem audits show substantial failures.

    One of the areas that was found to be deficient was that auditing firms did not do enough testing to determine if the valuation of investments was correct. The valuation issue was the key problem underlying the mortgage crisis and other failures involving derivative investments. It is interesting to note that the PCAOB was formed as a result of the Sarbanes-Oxley act. Corporations have fought the implementation of provisions of this Act, and these types of findings may well be one of the reasons.

    Source:  NYT, linked article by Floyd Norris, August 24, 2012

    Follow up:

    • What do you think that "most people" assume about audited financial statements? What do you think it means when an auditor says that a set of financial statements are "clean"?
    • What would happen if audits were not required of corporations?
    • What sanctions should be applied to the auditors who are not following the rules?

  • Individualism: an ideal situation, or a delusion?


    image from organizationsandculturesstefanyalvear.blogspot.com

    Entrepreneurs and other creative individuals experience changing the world through risk-taking and substantial individual effort. They must overcome fears, hurdles and setbacks. They must persevere with tenacity. It is a different experience from that of an employee. Nevertheless, no entrepreneur succeeds in a vacuum. The question explored in "Deluded individualism," is: Why do we, particularly as Americans, focus on the portions of our accomplishments that are self-reliant, and ignore the social network of police, firefighters, safety markers, roads, railroads, media, and national security that provide the business environment on which all of us rely?  Can business thrive in the midst of crime and abject poverty?

    drawing by Leif Parsons, from article linked above

    The essay addressed how easy it is to ignore how much government support we take for granted: 

    "Thanks to a decades-long safety net, we have forgotten the trials of living without it. This is why, the historian Tony Judt argued, it's easy for some to speak fondly of a world without government; we can't full imagine or recall what it's like."

    Source: NYT, article linked above by Firmin Debrabander, August 18, 2012

    Follow up:

    • Have you, or any member of your family, ever benefited from local safety support systems such as police, firefighters or ambulance services? Do you know anyone who has?
    • Any family member in the armed services? Public school teachers? Receiving Social Security, Medicare or Medicaid? How has this made a difference in their lives, or in the lives of people who would otherwise have to take care of them?
    • Do you live in a house or apartment that is built to city and state building codes for safety? Do you travel on state or federally built roads? Do you grow your own food locally, or do you rely on food safety standards regulated by governments? Have you traveled in areas where the food or water was not safe?
    • List all the ways you benefit from government.
    • List all the ways that government intervention annoys you.

  • The Hype Report: what cool new technology is almost here?

    image, from linked article, by Lorika13, Creative Commons:  image is from the TV show "The Jetsons"

    Gartner, a research company, has released its latest "Hype Cycle Report," which tries to predict when new technologies will be available for all of us to use. [by John Moe, Marketplace Tech Report, August 20, 2012--podcast available at link].  When I was a kid, the cartoon show pictured above, The Jetsons, gave us a fictional glimpse of what life would be like now.  It had several things right (video phones, eReaders, robots), but food preparation, jet-packs, and personal vehicles haven't caught up yet.

    Each year, Gartner prepares several Hype Cycle Reports, in different technological areas.  Here are some of the predictions, according to Hung LeHong, a spokesperson for Gartner, and one of the authors of the Reports:

    • smartphone payments will be mainstream 2-3 years from now
    • 3-D printing--about 5 years from now
    • total mapping of parking meters, with analytics on the internet--giving us data about open meters and best times to park--10 years from now
    • Jetsons-style jet-packs: not in the foreseeable future

    I didn't purchase any of the reports from the site, so I didn't get to see the details about variance kinds of voice recognition and speech-to-speech translations, but it looks as though Gartner has some predictions in that area. 

    Meanwhile, if I could just remember the sequence of buttons to push on these remotes so that I could watch something on Netflix...

    Follow up:

    • What new inventions or technologies do you want to see become a reality?
    • What technology that is in your life right now do you find annoying?  Why?

  • Robots making a global impact

    photo by Paul Sakuma: Associated Press:  multi-tasking robots in a Tesla factory

    Robots are doing work the work of humans.   While some factory labor is being outsourced to China, robots in the Netherlands are using video cameras to do the same delicate work, with better precision. Plus they work 24/7. Every day of the year. Philips Electronics Corporation, manufacturing electric shavers, is managing both operations, according to "New Wave of Deft Robots Is Changing Global Industry" [by John Markoff, NYT, August 18, 2012].

    The factory in the Netherlands employs less than a tenth the number of employees as the factory in China.  And robots don't form unions, don't need healthcare or pensions, and don't complain.  They also don't buy any of the company's products, but that is concern requiring a broader vision. Ironically, the jobs that were outsourced to low-wage countries, might find themselves turning to a "no-wage" population--either in China, or in North American and Europe.

    "Returning jobs to America" is one stated goal of Flextronics, a solar panel and electronics manufacturer in northern California.  But their factory has more robot workers than human workers.

    image by Lianne Milton, NYT: robot stacking solar panels in Milpitas, CA

    What impact will the robotization of the industrial workforce have on the global economy and on the way we live? According to Erik Brynjolfsson and Andrew McAfee, Massachusetts Institute of Technology economists, "The pace and scale of this encroachment into human skills is relatively recent and has profound economic implications.” [from their book, Race Against the Machine.]

    Robots have been making inroads in several sectors, including logistics, grocery operations, and airplane manufacturing, according to the article. Unskilled and semi-skilled laborers are becoming less and less important to the workforce.

    Economists predict that robotization will have an impact as profound as the Industrial Revolution.

    Follow up:

    • What is the dollar impact, according to the article, of employing a robotic machine instead of two workers, over the useful life of the machine?
    • How are robots changing manufacturing of automobiles?

  • Talking Trash and the GDP

    image by Peter Macdiarmid, Getty Images: Shelford Landfill, Recycling and Composting Centre

    What can our garbage tell us about our Gross Domestic Product [GDP]? Kai Ryssdal of Marketplace interviewed Bloomberg economist Michael McDonough to see what correlates [link to podcast at Marketplace, American Public Media, August 16, 2012]. According to McDonough, these are the factors that arise in measuring trash and correlating it with GDP:

    • trash isn't just about what individuals toss out, it's also about demolition and remodeling
    • half of this waste is iron and steel, so there is an industrial component
    • trash is not a "leading" indicator of GDP; in fact it lags a bit
    • measuring trash involves getting data from railroad companies that ship one state's trash to another's dump

    Here is a graph of trash collection measured against Gross Domestic Product from 1994 to 2012:

    It looks as though we will have to wait for the next quarter's GDP data to fill in the chart...but it doesn't look good.

    Follow up:

    • What does Gross Domestic Product measure?
    • What happened between 2008 and 2009 to cause the big dip in the graph?


  • UBS losses on bungled Facebook IPO larger than anticipated

    image from WSJ research; panels are explained below in bullet points

    The Nasdaq OMX Group, Inc. had set aside $62 million to cover losses for brokers and investors due to "mishaps" regarding the Facebook IPO.  But one Swiss banking company, UBS AG, now accuses Nasdaq of "gross mishandling" of the May 18, 2012 IPO.  [WSJ, "Facebook Losses Slice UBS Profits," by Jenny Strasburg, Telis Demos and Jacob Bunge, July 31, 2012].  UBS calculates its losses alone at $356 million, which substantially cut into its quarterly profits. Here's how it happened:

    • UBS entered orders to buy 800,000 shares of Facebook
    • the Nasdaq computer problem snarled the UBS order, and the orders of several other investors
    • Because it did not receive acknowledgement that the order was received and the shares were purchased, the UBS computer automatically re-sent the order dozens of times. It was important that the order go through, because UBS was acting as a fiduciary for their own clients wishing to purchase Facebook shares. When things finally played out, UBS was stuck with about 40 million shares
    • UBS then sold the excess shares at a loss of $8 to $9 each.

    There are new facts coming to light that may indicate that UBS will have to share part of the blame, for not monitoring the transactions.  They may also have to share the blame for the way its own computers were programmed--to re-send orders that were not confirmed. This is called a "fail-over" in the trading business. Human intervention was required to stop it.

    Nasdaq's CEO, Robert Greifeld, has says that its plan to compensate for losses is "definitive," (whatever that means), and that it did not include legal costs for battling out settlements. On the other hand, Nasdaq has conceded that it failed to send out confirmations to brokers for about three hours, so no one knew where they stood.

    It seems as though the courts might be the only place to settle this matter.

    Follow up:

    • According to the article, what other companies experienced losses such as the ones experienced by UBS, and what were the magnitudes of those losses?  How are they handling the problem?
    • What internal problems for UBS were generated by the Facebook debacle?
    • Chart the price of Facebook stock from its IPO date (May 18, 2012) until today.
  • The present and future of Solar Power

    image from solarpowerhouse.wordpress.com

    Solar energy has a bad reputation, but Sungevity is out to change that, according to "The Secret to Solar Power" [by Jeff Himmelman, NYT Magazine, August 9, 2012; print 8/12/12]. Sungevity's CEO, Danny Kennedy, has the "true believer" spirit, which he confirms by always wearing the color orange. He brings idealistic thinking and self-generated motivation from his background as an activist to the business of bringing residential solar power into the mainstream.

    image from gigaom.com

    According to Kennedy, solar energy's bad reputation is fueled by:

    • its image as being for "hippies"
    • perception that "green" technologies are inefficient
    • the financial disaster resulting from the federal funding of Solyndra, whose vacant buildings off the freeway near San Francisco are regular reminders of a solar failure.

    Nevertheless, solar energy, according to this article, has some "no-brainer" good qualities going for it:

    • "enough sunlight falls on the earth’s surface every hour to meet the entire world’s energy needs for one year";
    • "a plot of roughly 100 miles by 100 miles in the American Southwest, if covered with today’s industry-standard 15-to-20-percent-efficient solar panels, could generate enough power for the entire United States";
    • solar power installed through lease arrangements simply results in lower energy bills--no risk, no downside, just bills that are at least 15% lower
    • residential installations can generate excess daytime power that can be used by (maybe even sold to) businesses during their peak use periods, preventing brown-outs and black-outs.

    Kennedy puts it more vividly: "We’re killing people in foreign lands in order to extract 200-million-year-old sunlight. Then we burn it . . . in order to boil water to create steam to drive a turbine to generate electricity. We frack our own backyards and pollute our rivers, or we blow up our mountaintops just miles from our nation’s capital for an hour of electricity, when we could just take what’s falling free from the sky.”

    This sounds pretty compelling. But how will the shift to routine installation of residential solar happen? What are the barriers to solar installation?  One of the marketing issues has been the hurdles that local zoning ordinances place in front of wanna-be solar installers. Sungevity and other companies attempt to mitigate the issues by dealing with permitting from their own call centers.

    My family installed solar panels on our home three years ago.  At the time, solar lease plans were just getting started, so we purchased our panels, and took advantage of federal and state tax credits.  Still, it was expensive (about $19,000 after tax credits). We calculated that our "payback period" would be about 8 years. Fortunately, we have been pleasantly surprised.  Three factors have made it a better deal than we originally imagined:

    • the productivity of the panels was estimated conservatively, and we have had better-than-predicted efficiency
    • there have been more sunny days that predicted, so that has also contributed to energy generation
    • the price of electricity has increased faster than anticipated--and the increases have been to the higher tiers of usage, so we have saved even more (about 2/3 of our usage had previously been in the highest billing tier).

    We have been very happy with our decision to go solar. But will the rest of the country respond to the changes in solar marketing, and get on the band wagon? We'll see...

    Follow up:

    • Do you or anyone you know have solar panels installed on their residence?  If so, how much does it save on electricity bills?
    • Do some internet research. What global factors contributed to the failure of Solyndra?
    • Who are the other major players in the solar residential market? Which of these companies might you invest in? Why or why not?  Which company has an upcoming IPO?

  • One more for the booklist: Atlas Shrugged

    image from standupforamerica.wordpress.com

    It looks as though I left an important business book off of my list: Atlas Shrugged by Ayn Rand.  It seems that Paul Ryan, the presumptive nominee for Vice President on the Republican ticket has been influenced by the philosophy that is the theme of this book.["Paul Ryan's Dangerous Obsession with Ayn Rand," by Jamie Stiehm, US News and World Report, August 14, 2012 and "Five Reasons Paul Ryan is the Right Choice for Mitt Romney" by Ron Bonjean, ibid. and "Paul Ryan Does An About Face On Ayn Rand," by Husna Haq, Christian Science Monitor, August 14, 2012]

    Ayn Rand espoused the "selfishness ethic" of "objectivism," which embodies positive values such as hard work and perseverance.  Paul Ryan has used these values to bring the best out in himself, and he has had much success. 

    These principles may be at odds, however, with effectively governing a nation and civilizing large corporate interests.  Alan Greenspan, another devotee of Ayn Rand, believed more in laissez-faire capitalism than regulation while he was supposed to be overseeing the Federal Reserve.  The dot-com bubble and crash happened on his watch.

    Other American values such as fairness and civic-mindedness might mean more to Americans--particularly small businesspeople and those on Medicare. Paul Ryan may be back-pedaling on his devotion to Ayn Rand--he recently told the National Review:  “I, like millions of young people in America, read Rand’s novels when I was young. I enjoyed them,” he said. “…[but] I reject her philosophy.” [from the Christian Science Monitor article] It could be that the atheist views espoused by Rand fit neither Ryan's personal views nor the views of the voters he wishes to attract. And there are political stances Ryan has taken that don't seem to be aligned with her views as well. But Paul Ryan still seems to be aligned with her economic views, which is one of the reasons I am adding this book to the list.

    image from Politifake.org

    Moreover,  Atlas Shrugged is the story of business interests vs. government regulation, which are key themes in modern life as well. It is also a love story and a mystery, so it makes for good reading. I recommend it.

    Follow up:

    • Have you read any books by Ayn Rand? Are you familiar with her philosophy, Objectivism? Compare and contrast the major tenets in this philosophy with your own.
    • What does does the "Atlas Shrugged" metaphor mean?

  • Google charged the biggest fine ever...for snooping on you and me.

    image by Justin Sullivan for Getty Images

    Google was assessed a $22.5 million fine by the Federal Trade Commission for illegal practices associated with "cookies"--tracking software that reports cyber activity of users clicking on URLs.  [report by John Moe for Marketplace Tech Report, American Public Media, August 10, August 6, 2012--link includes radio podcast].

    Here is how it happened, according to Jonathan Mayer, the grad student from Stanford who reported the problem:

    "Google was setting cookies in Safari web browsers associated with their advertising service, Double Click. And they'd made a representation on their website that, if you were a Safari user, you wouldn't be tracked by Google. So they breached that representation."

    No one knows whether Google did this on purpose, or whether it was an oversight.  Nevertheless, the fine, although large, is small compared with Google's revenues: "Roughly equivalent to someone making $50,000 a year being fined $29.50."

    The value of information gleaned from cyberspace traffic is a new frontier for marketers and programmers responsible for delivering tailored ads. 

    Follow up:

    • Given Google's revenue, do you think this fine was adequate? Why or why not?
    • Do you have good internet hygiene? How often do you clear your cache and your cookies? Right now, look at your browser history detail and see how many cookies are on your hard-drive. What are your thoughts about the use of this information?



  • "A financial plan for the truly fed up"


    "A financial plan for the truly fed up" by Ron Lieber outlines some financial planning strategies for small investors who are fearful of investing in today's markets because of the headlines of corruption and hopelessness [NYT , August 3, 2012].  First, however, the article delineates some of the debacles that have led to mistrust, for example:

    • Last week's Knight Capital glitches that messed up trading of several major stocks
    • JP Morgan's trading problems
    • the Libor-fixing scandal
    • the botched public offering for Facebook
    • the restitution required from Capital One for credit card deception

    But, according to the article, even people who want to "opt out" of the greed establishment need to save about 15% of their income on a regular basis, and invest it in a balanced set of vehicles that produce a "reasonable rate of return" if they have any hope of ever retiring. Here are some investment entities to consider for a "model investment portfolio":

    • Money storage: Get an cash account at a credit union for day-to-day business, and store "investments" at a company like Vanguard, USAA, or TIAA-CREF, which keep fees low.
    • Bonds: Municipal bonds provide funds that are reinvested in the community, and often provide tax advantages as well.  Vanguard's Long-Term Tax-Exempt Fund is another choice, as is the Community Reinvestment Act Qualified Investment Fund.
    • Real Estate: Buying property to rent out to farmers or other tenants can produce steady investment income, although it comes with risks.  An advantage to this type of investment made in mid-life is that the mortgage may be paid off in mid-retirement, when other income sources may be drying up. 
    • Peer-to-Peer Lending Clubs: This is a new vehicle, so the long term success has yet to be determined, but annual return rates over the last few years have been 7%.
    • Slow Money Movement: This is the "nurture capital" movement, where reinvestment is with local sustainable farmers, first.  The returns in straight money terms is in the low single digits, but there are less tangible returns as well, or so the proponents believe...

    Follow up:

    • Have you thought seriously about your lifetime investment plan? Do these suggestions fit in with your goals?
    • Read about the Peer-to-peer and slow money companies that are in business. What types of investments do each make? What do you see as the pros and cons of each investment vehicle?

  • Small businesses go to new sources for CA$H

    image from watrust.com

    "When Banks Won't Lend, There Are Alternatives, Though Expensive," addresses the difficulties that small businesses are facing to borrow money. [by Ian Mount, NYT Small Business, August 1, 2012]. Money is still tight, and commercial banks seem more interested in making their money like investment banks than in performing their traditional role, making money on the spread between interest rates for money on deposit and money lent.

    Small businesses still need cash.  They turn to sources other than banks.  Some of these sources have been available for years; others have only become available recently.  These financing alternatives include:

    • Asset-based lending, usually "factoring receivables":  Companies can get 80-90% of their funds up front, and the remainder when the receivables are collected. The least expensive of these, purchase order financing, might cost 4% or 5%, but traditional factoring of receivables can cost 18% to 30%.
    • Lease-back: Companies sell real estate or equipment, then immediately lease it back for 20 years or more.  Downside costs of this method of getting cash include the capital gains taxes that may have to be paid on the sale, and the monthly lease payment that will depress net income and cash flow.
    • Cash advances: Restaurants and retail businesses can get an upfront loan, in return for paying a percentage of their daily receipts, PLUS an additional fee.  This can cost 20% or more.
    • Non-bank loans: Companies that have seasonal businesses or are too small cannot usually meet the bank loan "bright line" tests. They turn to special financing companies that specialize in lending to businesses that have high gross margins.
    • Peer-to-peer loans: Companies borrow from "clubs" that are set up to lend to small businesses.

    Follow up:

    • Read the article.  What companies operate as the lenders in each of these cash solutions? Research one of the companies and report on its size and prospects as an investment.
    • Explain how "nonbank" loans really work
    • Explain how "Kickstarter" works.  Which type of alternative loan systems does it most closely resemble?

    Filed under:

  • Electronic Trading Glitches hit Wall Street

    image by Richard Drew for the Los Angeles Times

    Knight Capital Group acknowledged this week that its technology products were responsible for the trading glitches that affected about 150 stocks trading early Wednesday morning. [Video and article are linked at Wall Street Journal, August 2, 2012]

    Three of the affected companies were Berkshire Hathaway, Bank of America and General Electric, all of which experienced higher than usual number of trades and wider fluctuations in trades. Knight Capital Group was vague regarding the nature of the "technology issue."  According to the WSJ, Knight may have to absorb an $80 million loss related to these glitches.

    Erosion of trust in Wall Street may be exacerbated by this technological problem.  Some observers have posited that the withdrawal of $305 billion in funds since May 2010 is an indication that an erosion of trust is already evident, and this could make things worse.

    Follow up:

    • What do you think are appropriate sanctions for Knight Capital Group to compensate others for these glitches?  Who do you think should be compensated?
    • According to the article, how did some traders profit from the glitches?
    • How did the glitches affect the market as a whole for Wednesday?  What may be the long term consequences of these glitches?