Sunday, June 30, 2013

Are there Problems at U.S. State Pension Plans?

Last week, Moody's Investors Service released a report stating that 10 U.S. states have public pension plan obligations that are greater than their annual revenue. The report said that Illinois’ pension cost was equal to 241% of its revenues followed by Connecticut 189%, Kentucky 140%; New Jersey 137%; Hawaii 132%, Louisiana 130%, Colorado 117% and Maryland 99%. Collectively all 50 states have about $0.43 for every $1.00 needed to meet these pension obligations, suggesting that there is a shortfall of at least $980 billion within the state pension plans in the U.S..

While many states has pursued various cost cutting measures in recent years (such as increasing the retirement age, reducing benefits and increasing plan contributions by workers), the Moody’s study suggests that significant underfunding problems remain. It is likely that this problem will persist for many years to come, with some states being forced into a mix of restructuring, bankruptcy and/or default.

Is the Falling Price of Gold Over?

Last week, Gold, once considered among the safest investments, dropped to its lowest price since August 2010 and is down about 26% since the beginning of 2013. The performance of gold mining stocks is worst with many declining by over 45% since the beginning of the year. It is worth noting that India has historically been a leading purchaser of gold. This year, the country’s Finance Minister P. Chidambaram said their “passion for gold” was causing budgetary problems because it is purchased from sources outside of the country. In March, he said, “I’m hoping that the people of India will heed my appeal and will not demand so much gold”. In June, he said “I would once again appeal to everyone: please resist the temptation to buy gold”.

While debates continue about the merits of gold investing, how gold should be valued, and what drives its prices up or down, it is likely drivers of this year’s decline include reduced purchases from India and other Asian regions, as well a change in investor psychology as the price drop continued. While it is hard to pick a bottom, the recent increased focus on this topic suggests that a bottom may be close at hand.

Sunday, June 23, 2013

As the Stimulus Withdrawal Process Begins...

Last Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said the Fed would begin reducing its stimulus efforts later this year and finish the process toward the middle of 2014. This news triggered a strong negative reaction in many global markets. (Note: before the 2007 financial crisis, the Fed held assets of about $877 billion; its stimulus efforts increased this amount to about $3.4 trillion, as an additional $95 billion is added each month.) Also, President Obama announced that Bernanke has stayed “a lot longer than he wanted to or was suppose to” in his current position.

Separately, when transportation and logistics firm Federal Express announced its quarterly earnings, its Chief Financial Officer Alan B. Graf, Jr. said. "FedEx Express will further decrease capacity between Asia and the United States in July." Also, when software firm Oracle announced disappointing quarterly financial results, its Chief Financial Officer Safra Catz said, “I just highlight places like Brazil, which pulled down our growth in the Americas and the number of countries in Asia, especially Australia, are being particularly affected by economic slowdown beyond our expectation.”

  • Regarding reduced stimulus efforts - considering that on May 22, Chairman Bernanke suggested the Federal Reserve would begin to reduce its stimulus efforts, last week’s announcement is not surprising. Investors are likely now wondering 1) are positive moves in real estate and equity prices “too much, too fast”, 2) as stimulus efforts decline, will the risk of deflation increase, 3) how will the Federal Reserve reduce the trillions of dollars of assets it used to “stimulate” the economy and 4) who will be the next Federal Reserve Chairman and will the transition be a smooth process
  • Regarding earnings commentary from two economic bellweather firms – FedEx suggests a short term slowdown in smartphone related shipment activity, while Oracle may be suggesting more fundamental economic weakness (although some impact from “cloud computing” competitors may also be a factor).
  • BOTTOM LINE – in recent years markets have benefited from the stimulus efforts of global central banks. Global markets will likely remain bumpy in the short term as investors adjust to a new set of monetary dynamics and their potential impact on global economic growth.

Sunday, June 16, 2013

The U.S. Supreme Court on Patents and the Nature of DNA

Last week, the U.S. Supreme Court, in a high profile patent case, unanimously ruled against Myriad Genetics and its DNA patents associated with genes that helped identify high-risk breast and ovarian cancer cases.

The court acknowledged that the firm did 1) review massive amounts of genetic code information to identify the genes and 2) this knowledge can be helpful to doctors and medical researchers, but it said, “Myriad did not create anything. To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention.” and “groundbreaking, innovative, or even brilliant discovery does not by itself” warrant a patent.

The court also noted, “scientific alteration of the genetic code presents a different inquiry, and we express no opinion about the application … to such endeavors.”

 While the Myriad Genetic ruling clearly states that naturally occurring DNA is a product of nature and not eligible for a patent, synthetic molecules known as complementary DNA, or cDNA, can be patented because they require significant research and manipulation to create. It is likely that over time, this distinction will blur and other patent and ethics issues will continue to be debated and challenged within the life sciences industry.

The IMF on U.S. Cost-Cutting

Last week, an International Monetary Fund (IMF) report on the U.S. economy included the following comments:
  • deficit reduction in 2013 has been excessively rapid and ill-designed, 
  • automatic spending cuts not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth, 
  • persistent weak labor force participation rates and high levels of long-term unemployment suggest there is room for active labor market policies to complement efforts to boost domestic demand and
  • growth is expected to slow to 1.9% this year owing to an excessively rapid pace of fiscal deficit reduction, before accelerating to 2.7% next year. 
 IMF Managing Director Christine Lagarde said, “The IMF’s advice is to . . . slow the fiscal adjustment this year – which would help sustain growth and job creation – but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.”

It is interesting that the IMF, an organization historically associated with promoted cost cutting strategies, is suggesting that the U.S.’ approach may be too aggressive. At the same time, the report highlights the deficiency in leadership and decision-making by the U.S. Congress.

Sunday, June 9, 2013

On Uneven Global Markets and Income Inequality

Last week, as many global markets had broad swings and investors waited for the U.S. Employment report, Credit Suisse published "Trickle Down QE: Monetary Policy & Inequality" which highlighted the uneven results of stimulus efforts by the U.S. Federal Reserve and said “It is an inconvenient irony that monetary policy may be having the unintended consequence of exacerbating growing inequality [in wealth]”. When the Bureau of Labor Statistics reported on Friday that the U.S. added 175,000 jobs in May (exceeding expectations of 165,000) , equity markets responded positively. for the week, markets were uneven, with U.S. equities up slightly and many other global markets down.

The better than expected employment results provide some good news in an uncertain economic environment, while the Credit Suisse report validates the outcome of limited wage growth and minimal creation of higher paying jobs.

On the NSA and the Organisations It Tracks

The Washington Post and the U.K.’s Guardian reported that the U.S. National Security Agency, as part of its foreign intelligence efforts, had access to customer call records from Verizon, and is monitoring emails, photos, search histories and other data at Microsoft, Google, Yahoo!, Facebook, PalTalk, YouTube, Skype, AOL and Apple. The cited companies have provided varied responses on this topic.

Given that 1) internet firms regularly analyze and sell customer information and 2) the NSA has access to this information under the Foreign Intelligence Surveillance Act (FISA), these actions should not be surprising. However, the non-denial denial responses from the internet firms seem hard to believe.

On Ocean Debris and the Need for Recycling and Reuse

The Monterey Bay Aquarium Research Institute reported, “Over the past 25 years, we have recorded evidence of debris up to 13,000 feet deep and 300 miles offshore from waters off of central and southern California, the Pacific Northwest, Hawaii, and the Gulf of California. We've seen trash everywhere we've looked” and “it is far too expensive and impractical to locate and retrieve debris after it reaches the deep seafloor. The best solution is to reduce our reliance upon single-use, throw away items. Recycling, reusing, and properly disposing of trash items will help to keep litter from ever entering the ocean.” 

  • While the damage to the oceans may be irreversible, there are many opportunities for firms to provide alternative products and services to minimize additional future impact.

Sunday, June 2, 2013

The U.S. Consumer, Eurozone Unemployment and "Disruptive Technologies"

Last week, the U.S. Department of Commerce reported that consumer spending in April dropped by 0.2%, the first decline since May 2012, and income growth remained stagnate. In a separate report, the Thomson Reuters/University of Michigan consumer sentiment index increased to 84.5 during May - the highest level since July 2007. 

In the Eurozone, Eurostat reported that unemployment rate for its 17 member countries was 12.2% for April, up from 11.2% a year ago. With 19.4 million people out of work, there was a broad dispersion within youth unemployment (ages 16-25). In Spain, the rate was 56.4%, in Germany 7.5% and Greece 62.5%. 

Also, McKinsey & Co.’s “Disruptive Technologies” research included an interview with Chamath Palihapitiya (managing partner of The Social+Capital Partnership) which highlighted important technology trends including:
  • Sensor Networks - because “the number of physical sensors are just exploding in scale. They’re in the roads, they’re in the air, they’re on your body, they’re in the phone, what have you.... I think we’re not yet ready to really understand the totality of that impact, but it’s going to touch every facet of our lives,”
  • Automated Transportation - because “it is probably the one thing that I’ve seen that could fundamentally have a high…effect on GDP. You can completely reenvision cities, transportation models, and commerce with all these autonomous vehicles, with the ability to ship goods.” and 
  • Applying big data analysis to Genetic Sequencing - because “to make connections, to find correlations, to hopefully find causality… across a broad population of people, you have the ability to use computer science to solve some of the most intricate problems of biology and life.”
  • the problem with many of the productivity gains that we see in the economy today is they actually leave more people behind, in many ways, than they pull forward” and he suggests an increased focus on computer science related education. 
  • Regarding the U.S. consumer – after many months of stimulus efforts by the Federal Reserve to create a “wealth effect” to drive increased consumer spending, it is likely that improving job and income trends are significant factors for a sustained economic recovery. 
  • Regarding Eurozone unemployment - with these troubling trends, especially among the young, it is likely a focus on austerity efforts will decline, while concerns of social unrest, particularly during the summer months, will increase. 
  • Regarding Chamath Palihapitiya’s comments – with global economic trends remaining weak, his focus on several of “the next big things” to drive economic growth is important. As he and others have pointed out, a technically skilled workforce is an important success factor in these efforts.