MULE VARIATIONS: June 2008

Monday, June 30, 2008

China's Export Machine Threatened by Rising Costs - The Wall Street Journal

Summary:
Manufacturers in China are seeing their profits dwindle. Raw materials and energy are more expensive, the yuan has strengthened almost 20% against the dollar, and there is tougher protection for workers and the environment as the government tries to make the economic growth more sustainable. Price of Chinese goods in US have surged 4.6% in May from the previous year. Manufacturers of low-cost products, which have been a key engine of China's economic miracle, are hardest hit. Growing realization in China that the country has relied too much on cost-cutting and simple production models to boost exports. China entering a more mature phase in its economic development? Will nevertheless remain an export powerhouse for many years, as the country also supplies industrial machinery and other higher-value products (less vulnerable to factors such as rising wages), and possesses infrastructure that few other developing countries can match. (Published: 30/06/08)

Notes:

Manufacturers in China say their profits have dwindled

they pay out more for raw materials and energy

China's strengthening currency has made products more expensive for important markets such as the U.S.

In July 2005, China bowed to pressure from global trading partners to ease its rigid grip on the yuan's exchange rate

currency had been effectively pegged to the dollar for a decade, despite China's bulging trade surplus
had created stability for exporters and their foreign buyers
but: also angered Western critics who felt it gave Chinese factories an unfair advantage by keeping their prices low in dollar terms
yuan's appreciation was slow at first, but last year it accelerated

currency has now risen 20% in value against the dollar
yuan has been losing value against the euro, on the other hand, making Chinese goods more affordable in Europe

but: the advantage hasn't been enough for many manufacturers to offset other difficulties.

price of Chinese goods in US surged a record 4.6% in May from the previous year

Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.

government's tougher protection for workers and the environment has also made it more expensive to do business

part of Beijing's plans to support economic growth that is sustainable and modern, not merely fast.
introduced this year: labor law that capped factory overtime, limited temporary employment and raised the minimum working age two years, to 18

blow to small operations that traditionally hired and fired with each production cycle

environmental oversight tightened: dyeing companies must now pay to dispose of the chemicals they use, instead of dumping them into the creeks that run through town

Foreign buyers say tighter visa policies have made it harder for them to visit Chinese factories or attend trade shows

none have been hit harder than the companies that feed the vast global appetite for inexpensive goods such as toys, household goods, shoes and clothes

manufacturers of low-cost products have been a key engine of China's economic miracle

helping to turn the country into the world's No. 2 exporter after Germany

for years, these companies continued to grow by expanding their volumes and trimming margins to undercut the competition
as material and labor costs rise and China's currency strengthens, these manufacturers are among the least able to absorb the costs.

many manufacturing centers have seen hundreds if not thousands of factories and workshops close in recent months

While painful, such difficulties could usher in a more mature phase of China's economic development.

e.g. country's sweater industry, like many others, is arguably overbuilt
In such low-cost sectors, analysts predict a coming wave of consolidation that could boost efficiency.
They say companies will also be forced to innovate so they can compete on factors other than price.

Many Chinese economists and officials think the country has relied too much on cost-cutting and simple production models to boost exports

high dependence on foreign trade is not good for China
for the U.S. and Japan, trade is equivalent to around 20% the value of gross domestic product.

For China, it is about 75% of GDP.

However: China is sure to remain an export powerhouse for many years.

Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages.
Plus, the country's roads and ports, and its spectrum of suppliers and businesses that support manufacturers, are a draw that few other developing countries can match.

China's domestic market of 1.3 billion people is attractive for companies that want to both export and sell within China

survey late last year by the American Chamber of Commerce in Shanghai and consulting firm Booz Allen Hamilton:

83% of the responding companies said they planned to keep their production in China.
But: with rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries

e.g. India and Vietnam

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Bleak VC Quarter? Why? - abovethecrowd.com

Summary:
VC Bill Gurley's reaction to the New York Times article on the IPO drought. Based on conversation with mutual fund managers, disagrees with gist of article that says that the buyside doesn’t want the companies being backed by VCs. Many of the leading large capitalization technology companies have seen flat stock prices for as many as seven or eight years. Without a robust IPO market, these investors are not able to balance this lack of growth in their current portfolios. Gurley thinks the problem is with the supply side: as opposed to 1995, today no one wants to manage a public company anymore. Reasons are understandable: Sarbanes Oxley; 12b1 trading rules; shareholder litigation; option pricing scandals; personal liability on 10-Q filing signatures. (Published: 30/06/08)

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Carbon standard 'to renew trust' - BBC News

Summary:
The Carbon Trust has introduced a new benchmark, the "Carbon Trust Standard", for companies that show "real reductions in carbon footprint year-on-year." The goal is to rebuild public trust in the green claims made by firms as well rewarding companies that can demonstrate ongoing improvements. Companies that paid a third party to offset emissions on their behalf do not qualify. Three rules underpinning the standard: measurement, management and reduction of the carbon footprint. Trust is looking to see that an organisation has the appropriate governance, senior management involvement, appropriate policies and good carbon accounting processes. (Published: 24/06/08)

Notes:

new Carbon Trust benchmark

goal: to rebuild public trust in the green claims made by firms

in response to the public's growing mistrust of companies' claims to be cutting their greenhouse gas emissions

by highlighting businesses which have made genuine cuts in emission

Carbon Trust Standard will only be issued to UK organisations that show "real reductions year-on-year"
companies that paid a third party to offset emissions on their behalf would not qualify

Tom Delay, CEO Carbon Trust

"What businesses and consumers both share is a desire for one, credible way to prove that an organisation has not only measured, but actually reduced their carbon emissions year-on-year without the use of offsetting."

offsetting industry

has become a key player in the effort to reduce emissions

businesses or individuals wanting to offset their emissions pay a third party, who then invests the money in clean energy projects or tree planting programmes
In theory: the payment ensures that the emissions are offset by an equivalent carbon saving
But: a number of schemes were criticised for failing to deliver on their promises

Harry Morrison, Carbon Trust: "We want businesses to focus on taking action themselves and reducing their own emissions"

standard was underpinned by three rules:

measurement of the carbon footprint
management of the carbon footprint
reduction of the carbon footprint

Harry Morrison:

"In order to pass the scheme, you need to have an actual numerical and quantified carbon footprint."
"The second thing is that you need to be reducing the footprint over time."
"Management is important because it shows whether an organisation actually has the processes in place to drive the reductions over the coming years."
"So we are looking to see that an organisation has the appropriate governance, senior management involvement, appropriate policies and good carbon accounting processes."
"All of that has to happen in-house."

Twelve organisations have been awarded the Carbon Trust Standard to date

six companies and six public bodies

Once accredited, holders of the standard have to deliver year-on-year reductions in carbon emissions.
Harry Morrison:

"We think it is the first scheme in the world that rewards companies that can demonstrate ongoing improvements."
"It is true that this is robust, and it will become even more challenging for organisations, but we are living in a time where we have to keep driving down emissions."

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Human genome changes with age - AFP

Summary:
Researchers at Johns Hopkins University found that the epigenetic marks on the sequence of a person's DNA modify over the course of their life and the extent of such changes is similar among family members. Epigenetic changes, unlike DNA sequence which is the same in every cell, can occur as a result of dietary and other environmental exposure. Epigenetics may play a role in diseases like diabetes, autism and cancer. Inappropriate methylation levels can contribute to disease: too much might turn necessary genes off, too little might turn genes on at the wrong time or in the wrong cell. (Published: 24/06/08)

Notes:

Andrew Feinberg:

"We're beginning to see that epigenetics stands at the center of modern medicine because epigenetic changes, unlike DNA sequence which is the same in every cell, can occur as a result of dietary and other environmental exposure. Epigenetics might very well play a role in diseases like diabetes, autism and cancer."

team analyzed the DNA sequences from 600 people taking part in the AGES Reykjavik Study

formerly called the Reykjavik Heart Study in Iceland
participants supplied DNA samples in 1991, and then again between 2002 and 2005
measured the variations in the levels of methylation in 111 samples.

main epigenetic modification

in about a third of cases, the methylation levels had changed over the years

Vilmundur Gudnason, professor of cardiovascular genetics, University of Iceland

"Inappropriate methylation levels can contribute to disease -- too much might turn necessary genes off, too little might turn genes on at the wrong time or in the wrong cell"

Daniele Fallin, John Hopkins:

"What we saw was a detectable change over time, which showed us proof of the principle that an individual's epigenetics does change with age."

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Experimental quantum chip produces unknown molecule - R&D Magazine

Summary:
Researchers at Purdue, Delft and Melbourne have created a new, hybrid molecule in which its quantum state can be intentionally manipulated, a required step in the building of quantum computers. The device consists of a single donor atom (arsenic) in a gated nanostructure. By controlling the voltage, the researchers found that they could make an electron go to either end of the molecule or exist in an intermediate, quantum, state. Measurements on the device could only be interpreted by considering the dopant to be made of two parts. One end comprised the arsenic atom embedded in the silicon, while the 'artificial' end of the molecule forms near the silicon surface of the transistor. A single electron was spread across both ends. (Published: 27/06/08)

Notes:

Gerhard Klimeck, prof. electrical and computer engineering at Purdue Univ.

"Up to now large-scale quantum computing has been a dream. This development may not bring us a quantum computer 10 years faster, but our dreams about these machines are now more realistic."

Quantum computers

would harness the strange behaviors found in quantum physics to create computers that would carry information using quantum bits, or qubits.
would be able to process exponentially more information

If a traditional computer were given the task of looking up a person's phone number in a telephone book, it would look at each name in order until it found the right number.

A quantum computer could look at all of the names in the telephone book simultaneously.

could take advantage of the bizarre behaviors of quantum mechanics in ways that are hard to fathom

e.g. two quantum computers could, in concept, communicate instantaneously across any distance imaginable, even across solar systems

challenge until now had been to create a computer semiconductor in which the quantum state could be controlled, creating a qubit.

Klimeck: "If you want to build a quantum computer you have to be able to control the occupancy of the quantum states. We can control the location of the electron in this artificial atom and, therefore, control the quantum state with an externally applied electrical field."

single donor atom in a gated nanostructure

observed evidence for a new hybrid molecule in the solid-state
Hollenberg: "Measurements only made sense if the molecule was considered to be made of two parts. One end comprised the arsenic atom embedded in the silicon, while the 'artificial' end of the molecule forms near the silicon surface of the transistor. A single electron was spread across both ends."
"What is strange about the 'surface' end of the molecule is that it occurs as an artifact when we apply electrical current across the transistor and hence can be considered 'manmade.' We have no equivalent form existing naturally in the world around us."
By controlling the voltage, the researchers found that they could make an electron go to either end of the molecule or exist in an intermediate, quantum, state.

Sven Rogge, Delft Univ. of Technology:

"Our experiment made us realize that industrial electronic devices have now reached the level where we can study and manipulate the state of a single atom. This is the ultimate limit, you can not get smaller than that."

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Oily Speculations - The New Yorker

Summary:
James Surowiecki believes speculators are being used as the scapegoat for high oil prices because the real reasons are either out of their control or are not palatable in an election year. Speculators could in principle directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, but a look at oil inventories shows no sign that this is happening. The real reasons are simple: boom in global demand, the inaccessibility of certain oil fields, prospect of war in the Middle East, our dependence on foreign oil and the weak dollar. In addition, "shortage psychology" plays a role: the price of oil isn’t based solely on current supply and demand, but also on people’s expectations about future supply and demand. This is not sinister speculation, but people's current reading of the future. (Published: 07/07/08)
Notes:

Senator Joseph Lieberman: "Excessive market speculation has inflated the price of oil and other commodities beyond reason"

Curb speculation, as a raft of proposed laws intend to do, and oil prices will soon return to earth.

but: speculation has been a favorite target of politicians looking to mollify anxious voters since the time of ancient Greece

orator Lysias protested that wheat traders had reduced Athens to a “state of siege.”

suspicion not unreasonable: the past century is full of examples of avaricious selfishness leading to the manipulation and corruption of market

In the twenties, speculators banded together in “stock pools,” trading a particular stock among themselves to create the illusion that its value was rising

in March, 1929, a stock pool succeeded in pushing up RCA’s stock price by almost fifty per cent in less than two weeks—and then dumping the stock when outside investors bought in

In the late seventies, a speculators’ pool led by the Hunt brothers mounted an attempt to corner the world’s silver market

at one point controlled an amount equivalent to an entire year’s global production

However: there’s little convincing evidence that the oil market is being significantly manipulated

Whatever chicanery is occurring—and we can assume there is some—has only a marginal effect on prices at the pump.

Congress is not just attacking illegal market manipulation, it’s also taking aim at perfectly legal speculation

i.e. the buying and selling of futures contracts, which are effectively bets that oil prices will go up (or down)

Futures contracts: oil sellers and buyers

futures contracts can be used by oil sellers (like OPEC ) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price.

Futures contracts: speculators

mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil
These gambles can be tremendously lucrative, but they don’t directly determine the real (or “spot”) price of oil.

That’s set by the people who are buying and selling actual barrels of petroleum.

Although speculators could directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, a look at oil inventories shows no sign that this is happening.

If speculators aren’t at fault, why have oil prices spiked so high?

Fundamental reasons not hard to find:

Between 2000 and 2007, world demand for petroleum rose by nearly nine million barrels a day, but OPEC has been consistently unable, or unwilling, to significantly increase supply, and production by non-OPEC members has risen by just four million barrels a day.
The prospect of military action against Iran, which would disrupt global supply, seems greater than it did a few years ago.
And the plunging value of the dollar has meant that the cost of oil has jumped more in the U.S. in the past year than it has in countries with healthier currencies.

Another reason: “shortage psychology” (oil guru Daniel Yergin)

The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand.

It’s also based on people’s expectations about future supply and demand,

because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later

Currently, the market is assuming that oil will become scarcer, and that global demand will keep rising,

especially in rapidly developing countries like China and India. As a result, producers are asking very high prices to pump their oil.

it could be that these assumptions are all wrong

i.e. that the supply of oil will not be constricted going forward, that concerns about the Middle East are exaggerated, and that higher prices will lead people to cut back on energy consumption, shrinking demand.
In that case, oil would turn out to have been hugely overpriced.

But that won’t be because of sinister speculators;

it will be because oil producers and oil users collectively misread the future.

difficulty for Congress is that none of the problems that have driven up the price of oil lend themselves to a quick fix

most, like the boom in global demand and the inaccessibility of certain oil fields, aren’t under our control at all
makes speculators a perfect target:

by going after them, Congress can demonstrate to voters that it understands their pain, and at the same time avoid doing anything that might require real sacrifice from Americans.

Our dependence on foreign oil, together with the fiscal fecklessness that has helped reduce the value of the dollar, means that there is no easy way out of where we are.

in an election year that’s hardly a message that anyone in Washington is going to deliver

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Sunday, June 29, 2008

Saving Resources to Save Growth - Project Syndicate

Summary:
Jeffrey Sachs: reconciling global economic growth, especially in developing countries, with the intensifying constraints on global supplies of energy, food, land, and water is the great question of our time. Investments in new resource-saving technologies are not being made at a sufficient scale, because market signals don’t give the right incentives, and because governments are not yet cooperating adequately to develop and spread their use. Cannot leave fate to the markets and leave governments to compete with each other over scarce oil and food. We we will be able to continue to achieve rapid economic progress only if the world cooperates on the research, development, demonstration, and diffusion of resource-saving technologies and renewable energy sources. (Published: 28/06/08)

Notes:

great question of our time:

Reconciling global economic growth, especially in developing countries, with the intensifying constraints on global supplies of energy, food, land, and water

commodity prices soaring worldwide

not only for headline items like food and energy, but for metals, arable land, fresh water, and other crucial inputs to growth
because increased demand is pushing up against limited global supplies

worldwide economic growth is already slowing under the pressures of $135-per-barrel oil and grain prices that have more than doubled in the past year

new global growth strategy is needed to maintain global economic progress

basic issue is that the world economy is now so large that it is hitting against limits never before experienced

many poor countries have achieved extraordinary economic growth in recent years by harnessing cutting-edge technologies

As a result, the world economy has been growing at around 5% per year in recent years.

continuation possible only if the key growth inputs remain in ample supply, and if human-made climate change is counteracted

if the supply of vital inputs is constrained or the climate destabilized, prices will rise sharply, industrial production and consumer spending will fall, and world economic growth will slow, perhaps sharply

free-market ideologues:

ridicule the idea that natural resource constraints will now cause a significant slowdown in global growth
say that fears of “running out of resources,” notably food and energy, have been with us for 200 years, and we never succumbed

Indeed, output has continued to rise much faster than population

view has some truth.

better technologies have allowed the world economy to continue to grow despite tough resource constraints in the past

simplistic free-market optimism is misplaced for at least four reasons:

history has already shown how resource constraints can hinder global economic growth

After the upward jump in energy prices in 1973, annual global growth fell from roughly 5% between 1960 and 1973 to around 3% between 1973 and 1989

the world economy is vastly larger than in the past

demand for key commodities and energy inputs is also vastly larger

we have already used up many of the low-cost options that were once available

Low-cost oil is rapidly being depleted
same is true for ground water
Land is also increasingly scarce

our past technological triumphs did not actually conserve natural resources, but instead enabled humanity to mine and use these resources at a lower overall cost

thereby hastening their depletion

world economy will need to introduce alternative technologies that conserve energy, water, and land, or that enable us to use new forms of renewable energy (such as solar and wind power) at much lower cost than today

Many such technologies exist, and even better technologies can be developed
key problem: the alternative technologies are often more expensive than the resource-depleting technologies now in use.

with greater investments, it will be possible to raise farm yields, lower energy use to heat and cool buildings, achieve greater fuel efficiency for cars, and more

with new investments in research and development, still further improvements in technologies can be achieved.

Yet investments in new resource-saving technologies are not being made at a sufficient scale

because market signals don’t give the right incentives
and because governments are not yet cooperating adequately to develop and spread their use.

cannot leave fate to the markets and leave governments to compete with each other over scarce oil and food

global growth will slow under the pressures of resource constraints
But: if the world cooperates on the research, development, demonstration, and diffusion of resource-saving technologies and renewable energy sources, we will be able to continue to achieve rapid economic progress

rich world should commit to

financing a massive program of technology development at current climate change negotiations

renewable energy, fuel-efficient cars, and green buildings

and to a program of technology transfer to developing countries

such a commitment would also give crucial confidence to poor countries that climate-change control will not become a barrier to long-term economic development

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Quote of the Day

"Finance is the art of passing money from hand to hand until it finally disappears." - Robert W. Sarnoff

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Saturday, June 28, 2008

Venture Investors Wrap Up an Unusually Bleak Quarter - The New York Times

Summary:
Article on the Q2 '08 IPO drought. Causes being suggested are the general weakness in the financial markets; the shift, starting about 3 years ago, to cleantech and alternative energy sectors which needs more time to develop; and the VC industry still struggling to find its direction, never having fully recovered from the dot-com bust. One VC said there are two overriding factors: 1) Wall Street is being very selective in taking companies public, and blessing only those with particularly high revenue and growth projections. And 2) venture capitalists are wary because they worry that their returns will be limited in a depressed market. Another view is that part of the problem is that the VCs have been backing companies that lack widespread investor appeal. The VC industry is hanging by its fingernails. There is no VC industry if there are no IPOs. (Published: 28/06/08)

Notes:

second quarter of this year not a single company backed by venture capitalists has gone public

first time that has happened since 1978
offering drought is being taken very seriously by the venture capital industry

Public offerings serve a critical role for venture capitalists

by giving them a way to sell, at huge profits, stakes in the start-up companies they invest in and build.

Cause?

General weaknesses in the financial markets

have kept many companies from taking the plunge

VCs say they have started to back technologies like alternative energy

take relatively long to gestate before they are ready for the public market.

Other VCs say the industry is struggling to find its direction and has never fully recovered from the dot-com bust

Nancy Pfund, VC at DBL Investors, San Francisco

two overriding factors:

Wall Street is being very selective in taking companies public, and blessing only those with particularly high revenue and growth projections.
And venture capitalists are wary because they worry that their returns will be limited in a depressed market.

“It’s not a good time to go out. No one’s going to appreciate the value you’ve created, and it’s such a high bar.”

a lot of energy start-ups still too early in their development to go public

some venture capitalists are arguing that the pipeline for public offerings has dried up in part because of the considerable shift in the industry’s interest in the last three years into “green” technologies, which was taking time to bear fruit
Paul Kedrosky, author

deeper, more systemic problems for venture capitalists in addition to the cyclical challenges
part of the problem was that the industry was backing companies that lack widespread investor appeal

e.g. YouTube clones and dating and social networking sites.

“There is nothing that the industry is producing that investors want. The stuff they’re investing in is idiosyncratic — it’s fun and appealing to them but Wall Street doesn’t care. The Valley is operating in its own little world, and the capital markets don’t care about the things that are getting the Valley excited.”

“Here’s an industry struggling in a big way to hang onto its investors, let alone find new ones. They’ve been hanging on by their fingernails. The lack of a good way to cash out just makes things worse. There is no venture industry if there is no I.P.O. market.”

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Thursday, June 26, 2008

Major Progress In Technology Needed For 25 Percent Renewable Energy Use To Be Affordable - ScienceDaily

Summary:
A RAND Corporation study finds that dramatic progress in renewable energy technology is needed if the United States desires to produce 25 percent of its electricity and motor vehicle fuel from renewable sources by 2025, without significantly increasing consumer costs. Finds that biomass resources and wind power have the greatest potential to contribute toward reaching the 25 x '25 goal. A large, inexpensive and easily converted biomass supply is essential if it is to be used as a renewable resource and still have a limited impact on consumers' wallets. Developing such a supply would require harvesting energy crops at a scale that greatly exceeds current production. Significant increases in the use of wind power are possible, but only with substantial technical advances to facilitate greater use of less-productive locations. (Published: 26/06/08)
Notes:

currently renewable energy provides:

9.5 percent of total U.S. electricity supply

mostly hydroelectric power

and 1.6 percent of motor vehicle fuel

study by the RAND Environment, Energy and Economic Development program

requested by the Energy Future Coalition, a nonprofit environmental organization
study considered technological and economic factors that would affect the costs of renewable energy as well as non-renewable fossil fuels

provides a "snapshot" of the nation's potential energy expenditures if a requirement was imposed that 25 percent of electricity and motor vehicle fuels used in the United States by 2025 would come from renewable resources

a goal activists have described as "25 x '25"

finds that biomass resources and wind power have the greatest potential to contribute toward reaching the 25 x '25 goal

Michael Toman, director of the RAND Environment, Energy and Economic Development program:

"Expanding the use of renewable fuels will lower the long-term price of crude oil and reduce carbon dioxide emissions that are contributing to global warming."
"However, to reap these benefits will require a major investment in improving and increasing the use of renewable energy technology."

Biomass resources

e.g. stalks from food crops, wood material and grasses
can be turned into ethanol or gasoline that can power motor vehicles.

study finds, however, that a large, inexpensive and easily converted biomass supply is essential if it is to be used as a renewable resource and still have a limited impact on consumers' wallets
Developing such a supply would require harvesting energy crops at a scale that greatly exceeds current production.

Toman: "Without increased biomass availability, expanded renewable energy use could impose economic burdens and result in environmental setbacks due to land conversion."

Among the study's other key findings:

Renewable energy technology will have to improve at the very significant pace envisioned by some renewable energy supporters in order to enjoy low-cost impacts.
Significant increases in the use of wind power are possible, but only with substantial technical advances to facilitate greater use of less-productive locations.
More moderate renewable energy targets -- such as 15 or 20 percent -- reduce expenditure impacts more than proportionately, though carbon dioxide reductions also are less significant.
The federal government's policy approach to pricing of renewable motor fuels will significantly affect fuel demand and society's total energy expenditures.

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Tuesday, June 24, 2008

Strange financial physics of the inverse bubble - FT.com

Summary:
John Kay in search of a word to describe the opposite of a bubble, i.e. when prices become disconnected from values because short-sellers believe that, whatever the fundamentals, they will soon be able to buy back at a lower price what they have sold earlier. Short positions called immoral. Why is it more immoral to speculate by selling something you do not have than by buying something you do not want? Much of the objection is fuelled by resentment that the market is not as susceptible to spin as spin doctors would like. Influence of hedge funds spreads bad and good news through the market more quickly. (Published: 24/06/08)

Notes:

bubble

prices become disconnected from values because purchasers believe that, whatever the fundamentals, they will soon be able to sell what they have bought at a higher price
bubble must burst eventually because the supply of new people willing to buy at ever higher prices will be exhausted

generally bursts sooner than that because people come to realise this

inverse-bubble

prices become disconnected from values because short-sellers believe that, whatever the fundamentals, they will soon be able to buy back at a lower price what they have sold earlier

anti-bubble must also eventually collapse because the supply of new people willing to sell at ever lower prices will be exhausted

in the world of perfectly efficient markets

everything that might be known is already in the price
but: there is a difference between the way good news and bad news affects prices.

long positions are easier to acquire than short

companies are anxious to get good news out, while bad news has to be dragged from them.

however: this asymmetry between ups and downs is less than it was

even for the small investor, short-selling is now easy and common.

short positions still carry some opprobrium:

somehow, it is more immoral to speculate by selling something you do not have than by buying something you do not want.
But: much of the objection is fuelled by resentment that the market is not as susceptible to spin as spin doctors would like!

managers fume as their share prices display the truths they did not wish to acknowledge

analysts are less relentlessly upbeat than they used to be

companies are under more regulatory pressure to give up-to-date trading information
influence of hedge funds spreads bad and good news through the market more quickly

the very speed with which the market assimilates information creates problems and paradoxes

both the bubble and its opposite gain momentum from the difficulty of believing that everything that is expected is already in the price

Surely the announcement of a new product will lift the value of a start-up company?
Surely a terrible trading statement from a housebuilder will depress the share price?

Paul Samuelson proved that perfectly anticipated prices fluctuate randomly, but less than perfectly anticipated prices may fluctuate wildly.

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Beating the Oil Barons - Thomas Palley Blog

Summary:
Thomas Palley disagrees with economists like Paul Krugman (faith in markets) that the high price of oil is due to fundamentals and believes speculation is to blame. The inventories argument ignores the extreme price insensitivity of oil. The only way demand can be lowered is by reduced economic activity (no recession yet). Furthermore, inventories should be down (incentive to sell), whereas they are up slightly. Financial markets' ability to mobilize tens of billions of dollars for speculative purposes has enabled traders collectively to hit upon a strategy of buying oil and quickly re-selling it when end users accommodate higher prices. Current oil price spike will be broken only by a recession that exhausts consumers’ capacity to buffer higher prices. Calls for new licensing regulations limiting oil-market participation, limits on permissible trading positions, and high margin requirements where feasible. (Published: 24/06/08)

Notes:

proving that speculation is responsible for rising oil prices is difficult

because speculation tends to occur during booms

price increases easily masquerade as a reflection of economic fundamentals

most economists dismiss the idea that speculation is responsible for the price rise

reflects their faith in markets

argue that if speculation were really the cause, there should be an increase in oil inventories

because higher prices would reduce consumption, forcing speculators to accumulate oil
the fact that inventories have not risen supposedly exonerates oil speculators.
see e.g. Krugman

picture is far more complicated than that

because oil demand is extremely price insensitive

In the short run, it is technically difficult to adjust consumption.

e.g. the fuel efficiency of every automobile and truck is fixed
most travel is non-discretionary.

fundamental point: in the short run, reduced economic activity is the principle way of lowering oil demand.

Thus, absent a recession, demand has remained largely unchanged over the past year.

furthermore: relatively easy to postpone lowering oil consumption

Consumers can reduce spending on other discretionary items and use the savings to pay higher gasoline prices.
Credit can also temporarily fill consumer budget gaps.

Although the housing boom in the United States – which helped in this regard – ended in 2006, consumer debt continues to grow

America’s Federal Reserve has been doing everything it can to encourage this.

Consequently, for the time being the US economy has been able to pay the oil tax imposed by speculators.

contrary to economists’ claims, oil inventories do reveal a footprint of speculation

inventories are actually at historically normal levels and 10% higher than five years ago
with oil prices up so much, inventories should have fallen, owing to strong incentives to reduce holdings
Wall Street Journal has reported that financial firms are increasingly involved in leasing oil storage capacity

root problem is that financial markets can now mobilize tens of billions of dollars for speculative purposes

has enabled traders collectively to hit upon a strategy of buying oil and quickly re-selling it when end users accommodate higher prices
situation that has been aggravated by the Bush administration, which has persistently added oil supplies to the US strategic reserve

further inflating demand and providing additional storage capacity

Absent a change in trader beliefs, the current oil price spike will be broken only by a recession that exhausts consumers’ capacity to buffer higher prices

or when the slow process of substitution away from oil kicks in
thus, economic fundamentals will eventually trump speculation, but in the meantime society will have paid a high price

whereas oil speculators have gained, both the US and global economies have suffered and been pushed closer to recession

This sobering picture calls for new licensing regulations limiting oil-market participation, limits on permissible trading positions, and high margin requirements where feasible.

Sadly, given the conventional economic wisdom, implementing such measures will be an uphill struggle.

some unilateral populist action is possible

a major form of gasoline storage is the tanks in cars.
If people would stop filling up and instead make do with half a tank, they would immediately lower gasoline demand.
Given lack of storage capacity, this could quickly lower prices and burn speculators

Expand notes

The nature of ownership - FT.com

Summary:
FSA's new short selling regulation raises questions about the nature of ownership of firms. Is it okay for investors to lend stocks to short-sellers? When shares are no longer an asset to be bought, held or sold, but also a handy device for high-speed financial engineering, it becomes harder for managers to focus on the job in hand. Business may have changed for good. More and more like Chelsea football team, assembly of talent, rarely stays together for long. Nature of ownership changing. Today very fragmented and confusing. How should managers respond? McKinsey advised companies to concentrate on what it called "intrinsic" shareholders, leaving traders and "mechanical" owners to the investor relations department. (Published: 24/06/08)

Notes:

new FSA regulation

from now on any investor holding short positions in more than 0.25 per cent of stock in a company conducting a rights issue would have to own up to it

"no more lurking in the shadows, unloading shares in a cash-strapped business that you planned to buy back soon at a much lower price"

hedge fund outcry

FSA reforms have brought bigger questions into focus:

Why are institutional investors so relaxed about lending stock to the hedge funds to allow this shorting to take place?

It may be profitable, but is it proper - especially if you have any regard for that company's management and your relationship with them?
What sort of ownership do shareholders now provide, and how should managers respond?

owners of any asset can pass on all or any of their rights to someone else ("the rights of transmissibility")

i.e. stock lending is not illegal, nor wrong in any strict moral sense

but: when managers get the message that their companies' shares are not merely an asset to be bought, held or sold, but also a handy device for high-speed financial engineering, it becomes harder to focus on the job in hand.

Building and improving a business takes time. You cannot be judged hour by hour on your performance.

Richard Sennett (LSE):

"we need to update our classic view of the way markets, companies and their employees interact."
"It's not capital versus labour any more, it's the operation of the firm versus the investment in the firm."

is familiar phenomenon in the world of start-ups and IPOs

company founders have a business idea, get it up and running, bring in new sources of capital and then, quite frequently, leave
but then employees no longer feel answerable to the people in the office and managers lose a sense of control.

Richard Sennet:

"this kind of evolutionary process, writ large, is what we see in public companies today. How can managers get back to being in control of the companies they manage?"

may be futile question, based on a nostalgic view of what companies should be

business may have changed for good
companies are now barely even semi-permanent organisations, with their own ethos and identity
"we are all financial engineers now"

Anthony Hilton:

"Tomorrow's company will be like the Chelsea or Arsenal football teams - an assembly of talent which comes together but rarely stays together for long. Managing businesses like that, and indeed choosing those in which you should invest, will require a range of skills which we have as yet barely begun to appreciate."

Mark Goyder, director of Tomorrow's Company, a think-tank

points out that the roots of the word "company" are Latin - con panis - the people you break bread with
analysing the changing nature of ownership
argues that today there are perhaps as many as seven different types of owners that businesses may have to reckon with, all of them laying claim to assets in different ways
fragmented and confusing world

How should managers respond?

McKinsey advised companies to concentrate on what it called "intrinsic" shareholders

leaving traders and "mechanical" owners to the investor relations department

i.e., do not waste management time on people who do not really understand you and will never make the effort to get to know you properly.

Expand notes

Monday, June 23, 2008

Diverging Interests: Company and Country at a Crossroads - Global Strategy Watch

Summary:
Gomory and Baumol argue that globalization is not always a win-win proposition for developed countries. Key argument is that globalization is not simply free trade, but trade plus shifting productivity. Similar to Larry Summers' closed versus open economy idea. Simply trade: e.g. selling semiconductors to China, buying t-shirts from it. Benefits both parties. Complication: in properly pursuing the interests of its shareholders, a company may decide to set up a high-tech manufacturing plant in China. I.e. we have not sent China consumer goods, but the capability to produce more effectively. At some point, the ongoing productive progress of the newly developing partner becomes harmful to the more industrialized country. Ultimately due to a misalignment between the interests of the company and those of the country (see also Summers' 'stateless elites' idea). Authors propose measures realign these. E.g. tax rate reduction for companies having high value-added jobs in the United States. (Published: 23/06/08)
Notes:

Charlie Wilson, Chairman GM, 1953: "What is good General Motors is good for the country"

then, close to the truth

American workers could indeed hope to see their wages rise as their employer companies invested and prospered
Ccompanies gave American workers the tools that enabled them to out-produce the rest of the world.
Companies thrived by having the best plants, equipment and information processing, and the American people shared in the productivity and prosperity.

but: that was before globalization created huge business opportunities for companies to increase profits by shifting production of both goods and services abroad

standard analyses of trade

economists assign fixed values to a country’s productive capabilities
define trade as the exchange of the goods and services
each country supplying those items in which its productive capabilities are relatively greatest
With this definition: trade offers benefits to both parties
Hence: economists emphatically reject tariffs and other forms of protectionism as impediments to those benefits
for the assumed scenario, this is the valid conclusion
e.g. US trading semiconductors for Asian t-shirts

trade in the narrow sense
concur with the most basic theoretical conclusion that this exchange clearly benefits both countries

reality: productive capabilities may change, i.e. not fixed

world enters whole new ball game

e.g. Intel builds a multi-billion dollar semiconductor plant in China rather than the United States

properly pursues the interests of its shareholders
but: a shift in comparative productive capability suddenly occurs

Globalization is not simply free trade; it is trade plus shifting productivity.

We have not sent china consumer goods, but the capability to produce more effectively.

Paul Samuelson

shown that end result of that productivity change, even after the period of adjustment, may be better for one’s country or it may be worse, depending on circumstances
cfr. Larry Summers' quote of Paul Samuelson:

the valid proposition that trade barriers hurt an economy does not imply the corollary that it necessarily benefits from the economic success of its trading partners

Productivity shift and degree of development of trading partner

Increases in a trading partner’s productivity can favorably affect the home country if those increases occur in a highly undeveloped country

under these circumstances, both countries benefit from globalization

But: this mutual benefit becomes less certain as the developing nation acquires greater capabilities and assumes a larger share of world production

After a certain point the further development of the formerly undeveloped trading partner becomes harmful to the more industrialized nation.

globalization is not always a win-win proposition

at some point, the ongoing productive progress of the newly developing partner becomes harmful to the more industrialized country
analysis shows clearly that the people of this country cannot count on some benign outcome, even in the very ong run

If steps are not taken to realign the interests of companies with those of the country, that day may never come.

measures can be taken to help realign the interests of company and country

One answer lies in what other nations are doing

e.g. adopting tax benefits and other economic incentives that make it attractive for companies to invest in their country

tax rate reduction for companies having high value-added jobs in the United States

Expand notes

Negative sentiment: Short-sellers under ever closer scrutiny - FT.com

Summary:
Short-sellers are being accused of deliberately "bear raiding" financial services firms with the aim of push the price lower in the hope of triggering a raft of further selling and extending their profits. These accusations (typically by executives seeing their share price drop) are heard often in declining markets. Banks particularly susceptible to loss of confidence. Governments are introducing regulation to limit the practice. Evidence that practice has shifted from being merely a hedging strategy to a full-fledged investment activity.Short-sellers decry double standards: okay to buy company long and go on TV and ramp the shares all you like without anyone saying anything, but as soon as you short you're allegedly spreading false rumours and a danger to the whole financial system. (Published: 22/06/08)

Notes:

short selling

borrowing shares, selling them immediately, when price falls they are bought back and returned to the owner; difference between revenue from sale and price of buying them back is profit
risky: if prices go up, however, a loss is incurred
practice has long been used as a hedging strategy aimed at protecting "long" investors against the risk that prices fall and they lose money

long investors: those who own stock in a company
"Longs" take out small short positions so they can profit whichever way the market goes.

others - mostly hedge funds - may "short" a stock simply because they see it as overvalued and due for a correction

Short-selling is the single most popular hedge fund strategy, with long/short funds accounting for more than 40 per cent of the total $2,800bn invested in hedge funds.

Over the past 10 years, long/short funds have produced slightly higher returns than the average hedge fund, according to Hedge Fund Research.

technique has been around for about 400 years

has been blamed for almost every market decline since and many difficulties encountered by individual companies; short-sellers were accused of

bringing about the crash of the Dutch tulip market in the 17th century
the Wall Street crash of 1929
this year, for helping to bring down Bear Stearns, the New York investment bank

concern about short-selling tends to escalate when markets decline

executives blaming short-sellers for spreading inaccurate rumours that caused their shares to plunge

issue is particularly sensitive right now because the most popular targets are banks

banks are susceptible to a loss of confidence in a way that industrial companies are not

Bear Stearns collapsed largely because other institutions stopped doing business with it, fearing it might be in trouble

In the months before its fall, levels of short-selling in the company hit a record high - and this fact was widely known

In recent weeks, financial services companies on three continents have been under siege from short-sellers.

e.g. in London, shares in HBOS, the UK's largest mortgage lender, have dipped below its planned rights issue price of 275p

prompted suspicions of a deliberate "bear raid" by short-sellers aiming to push the price below that level in the hope of triggering a raft of further selling and extending their profits

Many countries are introducing tighter regulation

moves come partly in response to a sharp increase in the practice as it has shifted from being merely a hedging strategy to a full-fledged investment activity

late 2007 the US Securities and Exchange Commission introduced rules prohibiting short-selling during a company's initial public offering

this month: UK's Financial Services Authority unexpectedly announced disclosure rules for anyone shorting stock in a company while it undertakes a rights issue

any investor holding short positions in more than 0.25 per cent of stock in a company conducting a rights issue would have to own up to it

India and several other Asian countries have restricted short-selling this year

Arturo Bris (IMD):

"This is the concern of regulators. Once short-selling becomes a profit-making strategy, it brings new risks to the market."

Although more than 90 per cent of the world's stock can technically be shorted, in practice only a certain proportion of shares in a company is usually available to be borrowed.

complaints about short-sellers fall roughly into two camps:

specific allegations about their motivations
an inchoate unease about the very idea of betting against a company's success.

shorters are accused of preying on companies and driving down their stock through collusion, issuing negative research to manipulate the stock and spreading rumours

these activities are in any event illegal

short-sellers complain of a double standard:

why should a view that a company's shares are likely to fall be inherently less valid, and more worthy of suspicion, than a view that the shares will rise?

Arturo Bris: "This sort of market manipulation is no more characteristic of short-sellers than of bullish investors."

typical short-seller: short-seller says: "I can buy GE long and go on TV and ramp the shares all I like and no one says anything, but as soon as I short I am spreading false rumours and a danger to the whole financial system? It doesn't add up."

Short-sellers are frequently more rigorous and detailed in their research than long-only fund managers.

That is in part because they need to be clever stock-pickers.
Because markets rise over the long term, a short-seller needs to go against the tide.

Expand notes

Green energy push planned for UK - BBC News

Summary:
As many as a quarter of British homes could be fitted with solar heating panels under new government plans for a "green revolution". Solar panels, wind turbines and household energy efficiency central. Price tag: £100b. Plan acknowledges green energy will cost more, will have transform large areas of British landscape and may have negative impacts on living standards. Plans due to be unveiled in coming week. (Published: 21/06/08)
Notes:

plans due to be unveiled next week
Malcolm Wicks, energy minister:

the new proposals are "the most ambitious" such strategy that Britain has seen

goal is to meet the EU target of 15% of energy from renewables by 2020
call for 3,500 new wind turbines to be erected across the UK

30-fold increase in off-shore wind power generation

quarter of British homes to be fitted with solar heating panels
new loans and grants for businesses to increase green energy supply
compulsory measure on households to boost efficiency
total price tag: £100 billion.

plan concedes that green power will cost more

at a time of consumer anger over fuel prices

plans recognise that the new energy policy could transform large areas of Britain's landscape and have a "significant impacts on all our lives...not all of these positive"
Wicks:

there is now a "huge momentum" in renewable energy provision;

government would ensure that carbon emission reduction was the "core concept behind our energy strategy

Britain currently gets less than 5% of its electricity from renewables, mainly wind.
John Sauven, Greenpeace:

"the plans for solar panels on seven million roofs and other steps to reduce the use of fossil fuels make sense regardless of the price of oil or the state of the climate"
"We'll create jobs, reduce our dependence on foreign oil and use less gas, and in the long run our power bills will come down. Even if climate change didn't exist these proposals would be sensible."

Expand notes

Business chiefs urge carbon curbs - BBC News

Summary:
A coalition of 99 companies is for the Kyoto protocol's successor to include targets for cutting greenhouse gas emissions and to establish a global carbon market. Coalition argues that cutting emissions must be made to carry economic advantages. Following Stern review and IPCC data, CEOs conclude that a responsible risk management approach to the issue requires political and business leaders to take action now. Government needs to create right environment. Environmentalists criticise lack of short-term targets and aspirational nature of targets, rather than being set in stone. Some companies are clearly in it for economic opportunities arising from climate change solutions. (Published: 20/06/08)

Notes:

coalition of 99 companies

includes: Alcoa, British Airways (BA), Deutsche Bank, EDF, Petrobras, Shell and Vattenfal
companies involved span all of the G8+5 countries and virtually every major industrial sector

ask political leaders to

set targets for cutting greenhouse gas emissions and
to establish a global carbon market

argue that cutting emissions must be made to carry economic advantages.

coalition believes that taking climate action now would be prudent

based on scientific and economic evidence assembled by the Intergovermental Panel on Climate Change (IPCC) and the Stern Review

"While recognising that there are still some uncertainties in the scientific and economic evidence available, these CEOs conclude that a responsible risk management approach to the issue requires political and business leaders to take action now"

some key recommendations:

All major economies, including developing ones such as China and India, should be included in the post-Kyoto deal, with richer countries committing to deeper and earlier emissions reduction

Governments should aspire to halve global greenhouse gas emissions by 2050

Governments and businesses should urgently explore bottom-up approaches to reducing emissions

A global carbon trading system should be established as soon as possible

Emissions caps should be applied flexibly across industry, with some sectors allowed leeway to preserve competitiveness.

Willie Walsh, CEO BA

"It's important that the business community demonstrates a desire to work with governments to tackle the challenge that climate change represents. But the report makes it clear that business can't operate in a policy vacuum - we need strong leadership from governments."

Environmentalist criticisms

EU's ambition is to make cuts of 20% from 1990 levels by 2020

shorter term targets are needed

progress towards them is easier to gauge and backsliding more obvious

business coalition decided against setting a short term figure

promoting a 2050 target that is "aspirational," not set in stone

will allow wiggle-room for high-emitting industries
may lead to a relatively weak post-Kyoto deal

Steve Lennon, managing director of the South African energy giant Eskom

"Creating an environment that will encourage people to do things differently is more important than setting a global target."

some of the companies see economic opportunities arising from climate change solutions

Caio Koch-Weser, vice chairman of Deutsche Bank

"We see enormous opportunities for the financial industry, beyond the challenge we face as global citizens. If leadership is there to create a Kyoto successor that is based on cap and trade, then it creates a global carbon market - and then we are in business."

blueprint for tackling climate change handed to Japanese Prime Minister Yasuo Fukuda

ahead of next month's G8 summit in Japan

aim of which is to produce a successor to the Kyoto Protocol
current targets expire in 2012

Expand notes

The Incredible Shrinking Venture-Capital Industry - Wall Street Journal

Summary:
US Venture industry is still downsizing as a result of the tech bubble in 2000. Of the remaining funds, many only did a few deals, and 27% didn't back any new companies. It takes about a decade for fund to die (long after they have run out of capital to back new companies). The NVCA foresees a 15% decline in the next two years in the total number of venture firms investing in the U.S. (Published: 19/06/08)

Notes:

2007: 844 venture firms investing in U.S. companies

2006: 884
2000: 1200
i.e. down 30% from the bubble year of 2000

source: VentureSource

Many of the active investors in 2007 did only a few deals.

45% completed four or more investments.
29% made just one investment.
About 550 firms have made at least one investment in a U.S. company this year, according to VentureSource

224 (27% of the total) didn’t back any new companies last year

indication that the ranks of active investors will continue to thin

list of firms who made only follow-on investments

contains some well-known players who have disbanded

e.g. as St. Paul Venture Capital,

or who have dropped plans for a new fund

e.g. Worldview Technology Partners

along with small firms who have not raised a new fund in years

National Venture Capital Association (NVCA) is starting to see member firms drop out because they aren’t raising another fund

Mark Heesen, president: “We are finally seeing what in our view is the beginning of the impact of the bubble.”
Venture funds typically have a life of at least a decade and firms can soldier on long after they have run out of capital to back new companies.
Heesen foresees a 15% decline in the next two years in the total number of venture firms investing in the U.S.

many of them too small to meet the NVCA’s membership threshold of $5 million under management.
NVCA has about 470 member firms representing 90% of the venture capital under management in the U.S

Comments

"Unless the retail sucker market is there to allow for the fabled Exit Strategy, or perhaps the dumb money of a corporate acquirer, the VC is frozen in place. So as the macro market is reduced, the VC market attracts less and does less."
"I think as growth is slowing in the developed world and is increasing in India, China, other Asian countries and Africa, VC’s are better off investing there. It does not make much sense to invest in a slow market."
Did the change in options accounting or SarBox (Sarbanes-Oxley) have any impacts on the VC’s inability to drive an exit strategy?
This subject merits more attention and I’d suggest the journalist focus on a firm such as Worldview to understand and report what’s really going on in the venture industry. Partner conflicts, pressure to ride with the herd (of other VCs all pouring money into the same companies), lack of respect for entrepreneurs, assuming “we know better than the entrepreneur”, killing the golden goose, hubris, etc. [...] That’s the Worldview story–most general partners left and are still leaving, most entrepreneurs were sold down the river and scarred, limited partners heard about all this and when performance lagged they refused to invest anymore. Talk to GPs that left, founders and founding CEOs of companies like Force10, Mirapoint, Cemaphore, PostPath, OnStor, CommVerge, ...

Expand notes

British biotech struggles with the quickening onset of decline - FT.com

Summary:
UK biotech sector in dire shape. High-profile drug failures and share prices plunges. Companies being bought up rather than listed. Does not create a sustainable sector. Problem is lack of financing, management and commercial savvy, combined with deteriorating macroeconomic environment. Not enough venture capital around and people taking risks in UK. Makes it difficult for companies to move to the later, more expensive stages of drug development. By the time economy picks up again, biotech may be eclipsed as a favoured high-risk investment by other sectors. Incentives by the government needed, but this might encourage academics to spin out more companies to add to the already large number that have yet to gain critical mass. (Published: 22/06/08)

Notes:

past 12 months have been miserable for the UK's biotech industry

sector has witnessed a string of high-profile drug failures
share prices have plunged
have been almost no public listings
sector is shrinking as private biotech companies are bought by cash-rich pharmaceutical companies, most of which are based abroad

Glyn Edwards, CEO Antisoma:

"While there are some very strong companies developing - including Oxford BioMedica, Acambis and Protherics - the sector is really in dire shape"
"We really need a biotechnology success. We have had some but in general they have been bought up"

Celltech by UCB for GBP1.53bn ($3.03bn, C1.93bn)
Cambridge Antibody Technology and KuDos Pharmaceuticals by AstraZeneca, for GBP702m and $210m ( GBP106m, C134m) respectively
Piramed by Roche for $160m this year

quality of British science not in question

UK is currently producing more than one-third of the European Union's total drug pipeline

Commercial biotech's perennial problem is a lack of financing, management expertise and commercial savvy

on top of this comes a weakening macroeconomic climate in which fund managers are increasingly risk-averse

William Powlett Smith, partner at Ernst & Young:

"The UK has always laboured under the yoke of not having enough venture capital around and not having the people prepared to take risks"

UK must create a better environment for companies to get their products to market and stay visible

Aisling Burnand, chief executive of the BioIndustry Association:

"There is a role for government to be doing more to support things at an early stage and getting companies investor-ready. Venture capital should be encouraged to come in earlier. There should be an incentive, from a tax perspective for example."

Biotech companies are characterised by their high risk and cash burn.

Drugs can cost $350m-$800m to develop.
Operations must endure a series of financing rounds - from seed funding to venture capital - to move through this process.
While many have come to the Alternative Investment Market, London's junior stock exchange, few have been successful.
Returns have generally been so bad that investors are unwilling to finance early-stage listings.

has made it difficult for companies to move to the later, more expensive stages of drug development
Thus the sensible exit for private biotechs is to be acquired by a larger group.
Aisling Burnand:

"The trade sale route should be seen as a sign of the strength of the UK in terms of science. But it is a short-term fix that does not necessarily fit with creating a sustainable sector."

can be argued that the only way for the industry to grow is to build up its own companies
money from trade sales not being recycled back into the sector

returned to their investors while others put into lower risk sectors

Paul Cuddon, analyst at KBC Peel Hunt:

"The UK's most prized biotech assets are being sold off to foreign companies because we cannot afford to retain them. That is not acceptable. The foreign companies get the UK science and labour force. The early-stage investors make money. But this is short term. The UK loses the ability to develop a greater labour force and profit from potentially blockbuster drugs."

i.e. lack of commitment to commercialise has meant Britain has become a supplier of low-cost biological intellectual property to other countries

UK biotech sector remains the largest in Europe

second place in the world after the US

almost 500 companies
earnings of GBP2.6bn in 2005

sector will no doubt stabilise when the state of the financial markets improves

but: some analysts say it is being eclipsed as a favoured high-risk investment by other sectors

e.g. emerging markets and commodities

"If the market rebounds there will be a general uptick but I do think people are weary of management and weary of business models not delivering"

UK could learn from the US experience

biotech in US has been much more commercially successful
US biotech companies have produced nine drugs that each sell over $1bn annually
Liquidity is deeper, the investment community is considered to be more sophisticated and the talent pool wider
Glyn Edwards: "In the UK we need to be able to raise substantial amounts of money when the IPO window is open. Unlike in the US, the UK tends to do smaller amounts of fundraising that allow companies only to get to the next milestone. When the window closes, they can run into real trouble."

other initiatives Britain could consider

Belgium has earmarked C260m ($406m, GBP206m) for early-stage research

to nurture IP so a company is ready for the commercial process by the time it is formed
"[In Belgium] companies are nurtured and given extensive mentoring before even reaching the public markets. As such they present a much more attractive investment proposition" (KBC's Mr Cuddon)

danger in UK is that additional incentives might encourage academics to spin out more companies to add to the already large number that have yet to gain critical mass

What is needed instead, say some observers, is sectoral consolidation
This would create entities that were potentially more attractive to financiers.
"We must make these companies more robust, so they can move along. Otherwise we are building a cycle of failure," says Ms Burnand.

Expand notes

Sunday, June 22, 2008

Exploding commodity prices, lax monetary policy, and sovereign wealth funds - VOX EU

Summary:
Guillermo Calvo (Columbia) argues that the high commodity prices are not the result of speculation, but of fundamentals. Disagrees with Krugman however on the nature of these fundamentals, and instead believes it is due to a portfolio shift against liquid assets by sovereign wealth funds, partly triggered by lax monetary policy, especially in the US. This could be a harbinger of higher CPI inflation if interest rates stay low. An effective anti-inflationary battle will involve a sharp rise in interest rates, which will enhance the risk of deepening recession. Policy makers should start worrying about inflation and stop chasing imaginary destabilising speculators. (Published: 20/06/08)

Notes:

rise in oil, metals and food prices

hard to rationalise on the basis of world output growth

not even on the basis of China's and India's fast growth, let alone the expected global slowdown

phenomenon has been accompanied by much higher transaction volumes in the forward markets
analyst and policy makers pointing accusing finger at speculators

Calvo's thrust:

we are not going through another self-fulfilling bubble
today's explosion of commodity prices is the result of a very real financial storm associated with large excess liquidity in several non-G7 countries and nourished by low G7 central banks' interest rates
this price explosion could be a leading indicator of future inflation driven by fundamentals

Wolf, Krugman: absence of substantial increase in physical commodity inventories is evidence of absence of speculative activity

Calvo: this is not valid

incentives to stockpile commodities stem from the combination of low central bank interest rates (esp. in the US) and the growth in sovereign wealth funds

SWFs have been created partly with the intent of switching the composition of government wealth from highly liquid but low-return assets to more risky but much more profitable investment projects
Fed's rate has been sharply lowered and market does not expect expect that it will be raised with equal impetus within a year

must add to SWF's determination to switch away from US treasury bills

portfolio switch implies higher prices

not all prices have same degree of flexibility

commodity prices are at the high end of the flexibility spectrum
wages at the low end
i.e. price rise phenomenon will bring about a change in relative prices in favour of commodities
however: eventually the slow-moving prices will catch up and these sharp differences across prices will disappear

a much more uniform price rise phenomenon will materialise

when analysed from the perspective of some future time, this whole episode will look very much like a bubble in the commodity market, even though what is behind it is a fundamental factor

i.e. lower demand for liquid assets by sovereigns like China, Chile or Dubai

conclusion

high commodity prices are not the result of speculation, but of fundamentals

namely a portfolio shift against liquid assets by sovereign wealth funds,

partly triggered by lax monetary policy, especially in the US.

this could be a harbinger of higher CPI inflation if interest rates stay low

an effective anti-inflationary battle will involve a sharp rise in interest rates, which will enhance the risk of deepening recession.

Policy makers should start worrying about inflation and stop chasing imaginary destabilising speculators

Expand notes

The Oil Nonbubble - New York Times

Summary:
Paul Krugman denouncing the idea that speculators are behind the rise in oil prices. Evidence for this is that there is no physical hoarding: inventories have remained at more or less normal levels. Instead, it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. Doesn't mean that prices won't fall again (they probably will, as demand adjusts), but era of cheap oil is over. The claims that speculation is the cause is largely wishful thinking on the part of the political right, i.e. that we can somehow return to the good old days of abundant oil. (Published: 12/06/08)

Notes:

many voices declaring that rising oil price is a bubble, unsupported by the fundamentals of supply and demand
two questions:

Are speculators mainly, or even largely, responsible for high oil prices?
If they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble?

speculators do sometimes push commodity prices far above the level justified by fundamentals

but: when that happens, there are telltale signs that just aren’t there in today’s oil market

what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100

would have major consequences in the material world

Faced with higher prices, drivers would cut back on their driving;
homeowners would turn down their thermostats;
owners of marginal oil wells would put them back into production.

As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand.
This excess supply would, in turn, drive prices back down again

unless someone were willing to buy up the excess and take it off the market

i.e. the only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk

this actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling

stockpiling hasn't happened this time:

all through the period of the alleged bubble, inventories have remained at more or less normal levels
tells us that the rise in oil prices isn’t the result of runaway speculation;
it’s the result of fundamental factors

mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China.

The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.

Saying that high-priced oil isn’t a bubble doesn’t mean that oil prices will never decline

a pullback in demand, driven by delayed effects of high prices, may send the price of crude back below $100 for a while
it does mean that speculators aren’t at the heart of the story

Why, then, do we keep hearing assertions that they are?

Part of the answer may be the undoubted fact that many people are now investing in oil futures

feeds suspicion that speculators are running the show, even though there’s no good evidence that prices have gotten out of line

also a political component

Traditionally, denunciations of speculators come from the left of the political spectrum.
In the case of oil prices, however, the most vociferous proponents of the view that it’s all the speculators’ fault have been conservatives

people whom you wouldn’t normally expect to see warning about the nefarious activities of investment banks and hedge funds

explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology

realistic view of what’s happened over the past few years suggests that we’re heading into an era of increasingly scarce, costly oil

but: they want to believe that if only Goldman Sachs would stop having such a negative attitude, we’d quickly return to the good old days of abundant oil

Expand notes

Saturday, June 21, 2008

Sustainable Energy: Without the Hot Air - David J.C. MacKay

Summary:
Book on the scale of the energy channels. Not sufficient to know that a source of energy is "huge". We need to know how it compares with another "huge", namely, our huge consumption. Comparing numbers for demand with numbers for supply using renewables. Because renewable energy is so diffuse (between 0.1 and 14 W/m^2), it takes an enormous area of land (or sea) to provide the required 125 kWh/day per person. Provides four different energy plans to meet this need, each with different emphases (no carbon emissions, strong nuclear, no nuclear, etc.).

Currently reading.

Notes:

Preface

Three different motivations drive today’s energy discussions

fossil fuels are a finite resource

seems possible that cheap oil (on which our cars and lorries run) and cheap gas (with which we heat many of our buildings) will run out in our lifetime
given that fossil fuels are a valuable resource, useful for manufacture of plastics and all sorts of other creative stuff, perhaps we should save them for better uses than simply setting fire to them

security of energy supply
using fossil fuels changes the climate

Climate change is blamed on several human activities, but the biggest contributor to climate change is the greenhouse effect produced by carbon dioxide (CO2).
Most of the carbon dioxide emissions come from fossil-fuel burning.

main reason we burn fossil fuels is for energy. So to fix climate change, we need to sort out a new way of getting energy

climate change motivation runs in three steps:

one: human fossil-fuel burning causes carbon dioxide concentrations to rise;
two: carbon dioxide is a greenhouse gas;
three: increasing the greenhouse effect increases average global temperatures.

fact: the burning of fossil fuels is the principal reason why CO2 concentrations have gone up

critics: burning of fossil fuels sends about seven gigatonnes of CO2 per year into the atmosphere, but biosphere and the oceans send about 1900 gigatonnes and 36 000 gigatonnes of CO2 per year into the atmosphere!
misleading because only quantifies the natural flows of CO2 into the atmosphere, not mentioning that approximately the same amount flows back out of the atmosphere into the oceans and biosphere

the natural flows cancel themselves out; burning fossil fuels creates a new flow that is not cancelled

consensus of the best climate models seems to be that doubling the CO2 concentration would have roughly the same effect as increasing the intensity of the sun by 2%, and would bump up the global mean temperature by something like 3 deg C

there is no doubt that such a rise is a bad thing
such temperatures on earth have not been seen for at least 3 million years

conceivable that the ecosystem will be so significantly altered that the earth stops providing some of the goods and services that we currently take for granted

In the year 2000, world greenhouse gas emissions stood at about 34 billion tons of CO2 equivalent per year

about 5 or 6 tons per year per person

equivalent to every person burning one and a half tons of coal per year

but: We don’t all emit 6 tons per year
US: ~25 ton/year/person; UK: ~12 ton/year/person; China: ~ 4 ton/year/person

i.e. US: ~4 times average; China

Historical cumulative emissions

UK nr. 2!

Some countries like Britain have committed to a 60% reduction in greenhouse-gas emissions by 2050

with such a reduction, climate scientists reckon it’s more likely than not that global temperatures will rise by more than 2 deg C
global emissions need to fall by 70% or 85% by 2050 to avoid such a rise

means Britain needs to get down from its current 10 or so tons of CO2 per year per person to roughly 1 ton per year per person by 2050

This is such a deep cut that the best way to think about it is ‘no more fossil fuels’

Yardstick #1: average current emissions are 1 ton of carbon per year per person

or roughly 4 tons of CO2
note: a round-trip intercontinental flight emits nearly two tons of CO2 per passenger (which is about half a ton of carbon), i.e. half of the average person’s annual carbon emissions

Yardstick #2: we need average emissions to be 1/3 ton of carbon per year per person

i.e. more than one intercontinental round-trip

Debates about energy policy are often confusing and emotional because people mix together factual and ethical assertions

1. The balance sheet

energy and power - units used in book

energy: kWh

aka ‘one unit’ on electricity bills
cost ~10p in 2007
individuals typically use a few kWh/day

power: kWh/d; occasionally Watt or kiloWatt

rate at which we use or produce energy
1 kWh/d is roughly the power you could get from one human servant
40 W ~ 1 kWh/d

i.e. a 40W light bulb left switched on all day uses about 1 kWh/d, costing the consumer about 10p/day
i.e. a 1000W toaster uses 1 kWh/h, or costs about 10p/hour, or 240p/day

1kW ~ 25 kWh/d

Joule: standard international unit of energy

too small to work with: 1 kWh ~ 3.6 MJ
1 W = 1 J/s

most commonly used units in public documents

terawatt-hours per year (TWh/y)

1000TWh/y per United Kingdom is roughly equal to 45 kWh/d per person

gigawatts (GW)

2.5GW per UK is precisely 1 kWh/d per person

million tonnes of oil equivalent per year (Mtoe/y)

2 Mtoe/y per UK is roughly 1 kWh/d per person

2. Cars

power consumed by daily car user

energy used (50km) = 40 kWh/d

km travelled per day * energy per litre of fuel / km per litre of fuel

energy per litre of fuel, or calorific value of petrol

10 kWh per liter

km per litre of fuel

12 km/l (33 mpg)

km travelled per day

e.g. 50 km

3. Wind

maximum conceivable wind power per person = 200 kWh/d

assuming 100% coverage
= wind power per area x area per person
power per unit area of windfarm is about 2W/m^2

for average windspeed of 6m/s (22km/h)

population density

4000 m^2 per person

8 kW per person = 200 kWh/d per person

more realistic: maximum conceivable wind power = 20 kWh/d per person

assuming 6m/s and 10% filling

conclusions:

if we covered the windiest 10% of the country with windmills, we might be able to generate half of the energy used by driving a car 50 km per day each
Britain’s onshore wind energy resource may be “huge,” but it’s not as huge as our huge consumption

windmills required to provide the UK with 20 kWh/d per person are

fifty times the entire wind hardware of Denmark;
seven times all the windfarms of Germany;
double the entire fleet of all wind turbines in the world

Whitelee windfarm being built near Glasgow in Scotland

has 140 turbines with a combined peak capacity of 322MW in an area of
55 km2
that’s 6W/m2, peak
if we assume a capacity (load) factor of 33% then the average power production per unit land area is 2W/m2

4. Planes

assuming one intercontinental round-trip per year (2 x 10,000 km):

average energy consumption per person per day = 30 kWh per day

i.e. flying once per year has an energy cost slightly bigger than leaving a 1 kW electric fire on, non-stop, 24 hours a day, all year

would air travel consume much less energy if we travelled in slower propellor-driven planes?’

no: planes are already almost as efficient as they could possibly be

5. Solar

Expand notes

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Monday, June 30, 2008

China's Export Machine Threatened by Rising Costs - The Wall Street Journal

Bleak VC Quarter? Why? - abovethecrowd.com

Carbon standard 'to renew trust' - BBC News

Human genome changes with age - AFP

Experimental quantum chip produces unknown molecule - R&D Magazine

Oily Speculations - The New Yorker

Sunday, June 29, 2008

Saving Resources to Save Growth - Project Syndicate

Quote of the Day

Saturday, June 28, 2008

Venture Investors Wrap Up an Unusually Bleak Quarter - The New York Times

Thursday, June 26, 2008

Major Progress In Technology Needed For 25 Percent Renewable Energy Use To Be Affordable - ScienceDaily

Tuesday, June 24, 2008

Strange financial physics of the inverse bubble - FT.com

Beating the Oil Barons - Thomas Palley Blog

The nature of ownership - FT.com

Monday, June 23, 2008

Diverging Interests: Company and Country at a Crossroads - Global Strategy Watch

Negative sentiment: Short-sellers under ever closer scrutiny - FT.com

Green energy push planned for UK - BBC News

Business chiefs urge carbon curbs - BBC News

The Incredible Shrinking Venture-Capital Industry - Wall Street Journal

British biotech struggles with the quickening onset of decline - FT.com

Sunday, June 22, 2008

Exploding commodity prices, lax monetary policy, and sovereign wealth funds - VOX EU

The Oil Nonbubble - New York Times

Saturday, June 21, 2008

Sustainable Energy: Without the Hot Air - David J.C. MacKay

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