Saturday, June 11, 2005

Welcome Back! And SAL

Welcome back, Cranky Friends. Since last we spoke, more than a month ago, I've been busy getting set up at my new job, elsewhere in the media world but at a publication that publishes a little more often than once every three months. So I haven't had time to post. And I'm still not sure that I do. But I'll try anyway. So, without further ado, a welcome back SAL.


Scott Carson.
The Boeing chief salesman has been working miracles (subscription only), on track to surpass Airbus in new orders this year. After falling behind the state-subsidized European aircraft maker in recent years, Boeing is making a comeback, aided by a compelling new model (the long-range, mid-sized B787) and important changes to the structure of Boeing's sales team, empowering more people to make decisions in dealings with clients. Contrast that with Airbus, who's competing A350 is a disaster with wings (rather than doing intensive pre-design customer research a la Boeing, Airbus has opted to tinker throughout the design process; no wonder the plane is already behind schedule and over budget), and whose sales team is dependent on sales chief John Leahy (which is why it ground to a halt for a time when he went into the hospital for an appendectomy). No wonder no one wants the A350.


Eliot Spitzer.
The over-reaching New York state attorney general got a well-deserved slap from a jury in the case of Theodore Siphol, a former Bank of America broker who allegedly broke the law by engaging in "after-hours" trading of mutual funds. Except that, as the jury noted, the activity in which Siphol engaged (he didn't deny that he had done it) wasn't actually illegal. Mutual funds are only priced once a day, and although that occurs late in the day, the law is ambiguous about whether that time should mark the end of the day. Many brokers had thought that it didn't, and "after-hours" trading was quite common until Spitzer decided that he wanted to run for governor, er, I mean until an observant crusader for the little guy realized that small investors were being taken advantage of. As the Wall Street Journal noted in an editorial yesterday, this case is also significant because it marks one of the few times Spitzer has actually had the balls to take a case to a jury, and that jury saw right through him. I say, if he wants to run for governor, more power to him. But he shouldn't clog up the courts (and ruin reputations and shareholder value) to do it.

Tuesday, April 19, 2005

Surprise, surprise

I know I'm off to a late start today, but I'll try to make it up to all you FOCEs with somewhat more vigorous posting than you've seen over the past few days.

I'll start with the news that General Motors posted a $1.1 billion net loss for the first quarter, and announced that it won't release an earnings forecast for 2005.

As Reuters reports it, the company blames this loss mainly on several one-time charges, although a mounting crisis traceable to union compensation (especially health care costs) and thinning sales in the face of neglected product development form the backdrop for this announcement.

All well and good, although I really don't buy the explanation that attributing the result to one-time charges makes things any better. Just look at the one-time charges described in the article -- reorganizing European operations (because the company has been failing there) and idling a plant in Michigan. They may be one-time expenses, but they point to a longer-term decline if something doesn't happen to turn the company around soon.

Monday, April 18, 2005

What a relief

Also in your newspapers this morning, a report of the G-7 meetings held over the weekend in Washington. The main story seems to be that they are still not supporting debt relief for third-world countries. Which is actually good news.

It's not that the Cranky Economist supports trapping poor nations in obscene piles of foreign debt. Quite the contrary -- I'm deeply suspicious of the World Bank/IMF method of "development financing." Why, you ask? Well for starters, after fifty years of doing it that way, where's the development? These loans have a nasty habit of propping up despots who then embezzle the money for their own purposes (worth remembering lest anyone think Oil-for-Food was an isolated event). And under the loan regime, officers at the Bank and IMF have perverse incentives to make loans without any consideration for whether the country will be able to repay. Just read Tropical Gangsters, the account of a World Bank officer in Equatorial Guinea. It climaxes with a long meeting at the end when Bank officials gather and start fudging numbers to be able to give the counry a loan. No wonder there's a debt problem.

But the debt wouldn't necessarily be a problem if the countries were growing fast enough to pay it off. They aren't doing so because the developed world finds plenty of other ways to keep them barefoot, pregnant and in the kitchen, as it were. Such as blocking agricultural trade with them.

I'm uneasy about the idea of debt forgiveness because a.) it's a dodge that keeps the first world from tackling the root causes of third world poverty, and b.) because it will only help the bad political leaders who benefited from the loans in the first place.

Don't get me wrong -- the debt is a big problem. But erasing it might not be the best solution.

Monday morning M&A

Good morning, faithful FOCEs. I know you've been distraught by my sparse posting the past few days, and there's bad news -- the problem will get worse before it gets better. The Cranky Family is in town today, so I'll be doing some Cranky Sightseeing. But before I leave, a couple stories that merit comment:

First, Adobe is buying Macromedia. This strikes me as a noteworthy event for several reasons. Principally, it's a big deal. As excited as we have all been about the MCI story, it is only one of many mergers and acquisitions that have been launched in the past few months. And that's good news. The uptick in M&A activity is a sign of business optimism.

This particular merger is also worth noting from an excited-tech-geek perspective because it holds out the promise of all sorts of innovations to come from the new company. As suspcious as I usually am about the rationale for mergers and acquisitions, this one seems to make sense. It could just be opening the door to a variety of new Internet document technologies we can't even imagine today.

Saturday, April 16, 2005

Saturday Assets & Liabilities

Although I feel somewhat like a liabiliity myself for not having posted as much over the past couple days, I present this week's assets and liabilities as a way of getting myself back on track:


The U.S. House of Representatives, who this week voted to repeal the estate tax. The theory is that this tax redistributes wealth from the rich to everyone else. If that's true, I'm still waiting for a check for my share of the Rockefeller fortune. In reality, at "best" it double-taxes assets in the estate, and at worst it provides ample incentive for the outrageously wealthy to shunt their money into a variety of tax shelters so as to cleverly avoid any tax. Three cheers to Congress for trying (again) to remedy this situation.


The Europea Union (of course), this time for blocking imports of American genetically modified (GM) animal feed. I've posted already on the GMO issue below, so for here is merely suffices to say that this is a load of Belgian-cow manure. There is no actual scientific evidence that these genetically modified organisms are dangerous. The furur in Europe over this issue has been stirred up by a coalition of eco-weenies and cynical pols. At least the U.S. economy can absorb the hit from this ban. Third-world countries dependent on agricultural trade with the EU can't. So three jeers to the EU for perpetuating a costly myth.

Friday, April 15, 2005

On a fast train to nowhere

My apologies, dear FOCEs, for not blogging today. It was a busy and eventful 24 hours, and for better or worse I was too busy to blog. But no fear -- I'm back. I leave this post for all you poor sods with nothing better to do on a Friday night, with perhaps more after I get back from dinner because I have nothing better to do on a Friday.

In honor of my Cranky Travels to the Big Apple yesterday, I bring you this Bloomberg report about the latest trials and tribulations of Amtrak's high-speed Acela Express service (which I did not use, to ease the Cranky Budget). The brakes, it appears, are cracking.

So is the veneer on the idea that this high-speed rail idea was a good one. Sure, the Northeast Corridor between Washington, New York and Boston is the only profitable part of the rail network. And I'm willing to believe that high-speed trains are the best way to compete effectively with the airline shuttles. And I'm sure with proper marketing, careful schedule and reliable service, the train could do just that.

But how you get from those suppositions to the notion that it would be wise to design the trains from scratch (instead of borrowing bullet-train designs already used for years in Europe and Japan) is beyond me. Should we now be surprised that the trains were rolled out late and have been plagued by one technical problem after another? Of course not. Did anyone think that this process would not end in eternal litigation as Amtrak and the manufacturers sue each other to the Chattanooga Station and back? If you though we'd avoid that scenario, here's the bridge link. Should we be appalled at the waste of our taxpayer money? I sure am.

I ride Amtrak periodically, but have not enjoyed the Acela Express experience yet. My main experience with the service is seeing it flagged as "delayed" on the boards in stations every time I ride a regular train. Amtrak is presumably embarassed about this latest episode. Well, they should be. Surely we ought to be able to make the trains run on time.

Thursday, April 14, 2005

While we're on the subject of taxes...

This particularly obnoxious column from the BBC decries, among other things, tax avoidance -- the practice of exploiting legal loopholes in the tax code.

Again, let's consider this for a minute. "Exploiting legal loopholes." The loopholes are perfectly legal! Why are we lambasting big corporations and rich individuals for plying their lawyers' knowledge of the tax code to reduce the tab on April 15? I'm not angry, I'm jealous!

The tax loophole is a creation of (largely liberal, although sometimes conservative) efforts to manipulate the tax code for social engineering. Not very often are these things explicitly written into the code. They are frequently unintended consequences of other incentives and penalties that are written into the tax code.

So if we're unhappy that folks are using these perfectly legal means to reduce their tax bills, and those perfectly legal means arise from efforts to perfectly fine-tune the tax code, what again makes us think that more "fine tuning" will close the loopholes?

Maybe we'll let Granny see 2011 after all

Good morning, FOCEs. The Cranky Economist is in Cranky New York today, so I will not be posting during the day. Instead I give you a veritable feast of items that I prepared last night. Or two. Let it not be said that I'm a stingy opinionist.

We turn first to the estate tax, which the House voted yesterday to repeal permanently. A hot-button political issue in recent years, the estate tax was repealed temporarily in 2001, with the intent that it would re-appear in 2011. Which created a perverse incentive for greedy heirs across the land to off their ancestors before ringing in 2011 (hence the brilliant title on this post).

So let's have us a little discussion of why Congress is finally doing the right thing here, shall we:

First, dispense with the notion that a temporary tax cut can accomplish anything. Time was when I would have said that it was a foolish idea because people would just adjust their behavior to account for their expectation of higher taxes in the future. However, there is now mixed evidence on this. As a friend of mine in high school used to say, "Never underestimate the stupidity of the masses." Mine isn't an empirical objection but a theoretical one. To accept the "stimulus when it's needed" argument requires a couple of assumptions. First, you have to believe that the government can move deftly enough to engineer the economy. Horse hockey.

But the second is the funniest. Democrats who trumpet this line are implicitly accepting the claim that tax cuts are stimulative. Let's follow this line to its logical conclusion. You therefore have to accept that a tax increase will slow the economy, even if you try to argue that the benefits of the government spending are an offset. But how can you argue for the offset if you have already conceded in another circumstance that the tax cut would be more effective than the spending?

But that's just academic. How about the reality of the estate tax? It's just a money grab. Remember, almost all of the assets previously subject to estate taxes had already been taxed amply before. Congress has had one bite at the apple; our elected representatives don't deserve more.

Wednesday, April 13, 2005

At least one Vioxx suit looks set to bite the dust

Bad news for a plaintiff in Alabama: Merck purports to be able to prove that the suing widow's husband can't possibly have taken Vioxx before he died of a heart attack a couple years ago.

This New York Times (yeah, I know) article is correct to point out that if this suit is dismissed it will be more a moral victory than anything else. After all, the facts of this particular case are just so bizarre. Although I will venture to add that, from my safe and uninformed distance low these many hundreds of miles away, this case appears to have all the ingredients of the litigation mess to come -- grieving widow, grasping lawyers and groundless charges.

As I have said before, Merck's "crime" was not that it marketed a drug that could have serious cardiac side effects. It was that the company marketed the drug to the wrong people. As sympathetic as we must be towards those who have lost loved ones to heart attacks while taking Vioxx, surely part of the blame lies with doctors who were too quick to prescribe the drug instead of over-the-counter alternatives that are safer for all but the small subset of arthritis patients for whom Vioxx-esque Cox-2 inhibitors really were a Godsend. And I suspect that in many cases we will never be able to sort out how much of a heart attack was caused by Vioxx and how much by deep-fried chicken and Burger King's Enormous Omelet Sandwiches.

All in all, good news from Alabama. But unfortunately, the rest of these lawsuits don't look set to go nearly so quietly into that good night.

Is it you?

A milestone in Cranky Economistdom is fast approaching: my 100th hit since installing the counter last week. Will it be you? Check the counter at the bottom right-hand column. If it says 100 when you load the blog, let me know who you are so I can congratulate you.

A GM post

The Cranky Economist is normally reluctant to link to Wall Street Journal content because only Cranky Subscribers can access it. But this week's Business World column from Holman Jenkins is just too good to pass up.

In a nutshell, his argument is that GM is in especially serious trouble because the compounded weight of decades of excessively generous labor contracts is sapping money from R&D. GM has now reached a point where it is cancelling promising new programs because it has to pour so much cash into pensions and health care expenses.

A good point, that, and worth reading in full. If you don't subscribe to the Journal, you should.

An MG post

Remember MG Rover? Well, if you own a Rover don't count on your warranty -- there may not be enough cash to cover repair bills as promised.

But that's not the kicker in this article (and here you should prepare yourself for some more Airbus bashing): The punchline is that the European Commission is raising a stink about the prospect that the British government will pour money into MG to keep the doors open. Quoth AP (via
Trade Secretary Patricia Hewitt said the government will review a 6.5 million pound (US$11.7 million, euro3.2 million) loan it granted Rover's administrators earlier this week after production was shut down at the company's Longbridge factory. The loan enabled PwC to pay workers for a week, but the administrator has warned that without further assistance mass layoffs are likely.
However, strict European Union rules regarding government subsidies to private companies could prevent any extension of the loan. The European Commission said Wednesday that regulators needed more information from the government about its plans for Rover.
So let's get this straight. The Commission is perfectly content to allow subsidies for a bloated but competitive company (remember, Airbus actually surpassed rival Boeing in orders filled last year). But when it comes to assistance for a bloated but failing company, something has to be done to stop the market distortion.

The issue here isn't even the subsidy -- it's probably a bad idea in both cases. While we all need to be sympathetic for the plight of MG Rover's workers (and as a soon-to-be-displaced worker myself, I certainly am), the fact is that it's probably better to help them by working out direct income transfers via an unemployment compensation program than it is to prop up a company that will go bankrupt either sooner or later.

The real issue is the weird decisions emanating from Brussels. Really, did I accidentally wake up in some Bizarro World this morning? How can they go to the mat for Airbus subsidies but deny the same assistance to Rover? Some things I will just never understand.

More Snow

Treasury Secretary John Snow has repeated his assertion that Fannie and Freddie should reduce their portfolios.

Today's news is in most respects a House-side reprise of testimony the secretary offered to a Senate committee last week. It's notable principally because it demonstrates that the White House seems to be committed to GSE reform. Always a good thing.

What we need is robots

Or at least computers to execute our trades on the floor of the New York Stock Exchange. Although at this point I'm sure a lot of people would settle for "specialists" who don't engage in shifty trading of the sort charged against 15 floor traders yesterday.

The real significance of this story is not that there are allegedly criminals gaming the markets. That's old news. This story is interesting because it comes at a very awkward time for the NYSE. Under assault from electronic markets such as the NASDAQ, the NYSE has been fighting to preserve its antiquated but highly profitable specialist system, in which living, breathing (and now, apparently, cheating) human beings manage continuous auctions for shares in listed companies. Antiquated because in the face of the NASDAQ system and others like it, the NYSE is slow and inefficient. Highly profitable because the specialists take a cut of every transaction in fees, so those positions are very lucrative and brokerages are willing to pay the exchange a lot for the privilege of holding them.

The argument, a growing body of evidence to the contrary, is that human specialists are somehow better at matching up buyers and sellers quickly. But this sounds ever more dubious in the face of NASDAQ's ever more sophisticated technology. Meanwhile, the NYSE's trade-through rule, only recently extended to other markets, deprives traders of the level of choice about execution that NASDAQ offers.

Faced with these shifts in the market, any company listed on the NYSE would have to adapt or die. Which makes the exchange's resistance to change somewhat ironic. And as good a place to start on this Wednesday morning as any.