July 2005 Archives

Paul Kedrosky has an interesting graphic on weblog post Skewness in Venture Capital Returns. It reminds me of when I used to look at junior oil and gas companies in Calgary. Arc Financial did and probably still does release a monthly publication on oil and gas companies. In its list of the top 40 companies, only the top quartile actually earned their cost of capital. And equally interesting--at least to me--is that very few companies managed to stay within the top quartile for a five year period. More often than not top quartile performers became mediocre performers after only a couple years.

Today's environment is much different from that of the mid-90s. Today oil and gas prices are much higher and royalty trusts are much more prevalent. Once a company discovers a pool or become of "critical size," one of the royalty trusts, with its lower cost of capital, typically pounces and gobbles up the junior. Or the junior itself decides to become a royalty trust and enjoy the subsequent pop in its stock price.

I suspect the top quartile in most businesses earn the outsized rewards while the rest suffer. In some businesses, the top quartile leads to a virtuous circle where the company attracts better talent with better opportunities and better pay. The better talent creates even more opportunities and on goes the cycle. With oil and gas companies, often their spike into the top quartile was connected to having found a good sized resource to exploit for a few years. Once the resources were depleted, the companies often had difficulty duplicating their earlier successes. Often they decided to spread their focus from a tight group of assets in the Western Canadian Sedimentary Basin (WCSB) to the far flung corners of the earth. More often than not, those diversification efforts fizzled.

I am curious if the top quartile venture capital companies are able to sustain their status over a long duration or if their status is the result of a few hit wonders?

I encourage you to read Dr. John Rutledge's weblog article, China Revaluation Will Lower Chinese Wages, Prices.

With regard to wanting a higher valuation of the Yuan, be careful what you wish for.

The New York Times has an interesting article Cameras in Britain Record the Criminal and the Banal (free registration required) that discusses how Britons are monitored almost constantly by cameras.

The police did not identify the men, but Assistant Police Commissioner Andy Hayman said, "It is crucial that detectives are able to question them about yesterday's events."

How did the images appear so quickly?

"It's very easy," said a spokesman for the London transportation system, who spoke on the condition of anonymity under British civil service rules. "We have 6,000 cameras across the network," with 9,000 planned by 2010. About 1,800 are installed in London's train stations, and some on its buses as well.

They constitute a small portion of the estimated 4.2 million closed-circuit television cameras, or CCTV, across the country. It is commonly estimated that the average Briton crosses the line of sight of a security camera 300 times each day.

Benjamin Franklin once said, They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety. Given today's circumstances, I wonder what he would say now?

Today's Wall Street Journal has an interesting article Ford May Go Deeper With Job Cuts (subscription required) that discusses further cuts at Ford Motor Co.

Ford Motor Co. is looking to make deeper cuts in its North American salaried work force than it has disclosed thus far, and some employees say they have been told reductions over the next few years could eliminate as much as 30% of the current white-collar work force.

A company spokesman declined to comment on specific figures but confirmed management is considering more-aggressive measures to reduce costs that could include further jobs cuts. A cut of 30% of white-collar jobs in the auto maker's North American auto operations would translate into an elimination of about 10,500 salaried positions from the current total of about 35,000.

Again, we see the North American producers continuing to reduce costs. However, those savings are likely to be passed directly to the consumers in the form of incentives and lower costs. Similarly for GM, while I believe its health care issues will likely be addressed, I also believe that the resulting savings will be passed directly to the consumers.

The auto industry is in a difficult position with no easy way out. One only has to think back a few years to the appliance manufacturers.

I remain short GM shares.

There are articles abound regarding China's revaluation of the Yuan: Financial Times China ends renminbi's decade-old peg to dollar; Wall Street Journal China Drops Yuan's Dollar Peg, Will Let Currency Float in Band; and New York Times China Floats Free From the Dollar. The Financial Times and Wall Street Journal require paid subscriptions and The New York Times requires free registration.

I am curious to learn if China's initial 2% currency move becomes much larger in the coming months, and I am curious to learn which basket of currencies and in which proportions China decides to use for its peg.

In earlier posts, I discussed commodities. With China's revaluation, it will gain an advantage in purchasing commodities because of the increased value of the Yuan. Thus, I am watching for renewed or continued upward pressure on commodities as China continues to expand its economy.