« April 09, 2006 - April 15, 2006 | Main | April 30, 2006 - May 06, 2006 »
We're going to have to get used to this. Jennifer Huges and Krishna Guha interpret Ben Bernanke's Congressional testimony in the Financial Times:
"Ben Bernanke's testmiony to Congress yesterday suggests that while the markets may have reacted strongly to recent data suggesting the eocnomy is still expanding rapidly, with the risk of higher inflation, the Fed is taking a more relaxed view."
Hear no inflation, see no inflation, speak no inflation.
Posted by dan at 10:28 AM
So Bill Frist and his fellow Republicans in the Senate are proposing a $100 rebate (read: gift) to every taxpayer to help pay for gas. In other words, they want the taxpayers to borrow $20 billion from the Saudis at 5 percent a year, so they can use the case to buy oil from the Saudis at $72 a barrel. Makes sense.
Posted by dan at 10:23 AM
June Kronholz and John Lyons have a great article in the Wall Street Journal on the slow-motion emburgoisement of Mexico. Some choice findings.
U.S. employers have long counted on men like Elizardo Ramírez, who left his concrete-block home and 12 children in Mexicali, Mexico, to spend most of his working life in California picking tomatoes and lettuce. Two of Mr. Ramírez's sons followed him to low-skilled jobs in the U.S.But Americans who are convinced the spigot of workers like the Ramírezes will never run dry might want to visit another of the Ramírez children still in Mexicali: Sandra Ramírez de Llanes. Ms. Llanes and her husband, Osvaldo, have just one child. They're saving for 15-year-old Jose Oswaldo to go to college and become an engineer -- in Mexico.
Unusual for their generation, Ms. Llanes and her husband have themselves risen to the middle class, thanks to jobs at a bank. "We've struggled," says Ms. Llanes. "But through it all, it never occurred to us to go to the U.S."
The Llanes family reflects Mexico's past and present -- and, perhaps, illuminates a future that would have important consequences for the U.S. economy. Thanks to a decades-long family-planning campaign, most Mexicans are having far fewer children than was typical a generation ago. When Ms. Llanes was born in 1968, the average Mexican woman had nearly seven children. Today, the figure is just above two, comparable to the U.S.
This sweeping demographic shift has fostered hope that someday Mexico will produce a healthy middle class of people like the Llaneses. Most Mexicans today are far too poor for luxuries the Llaneses enjoy, such as a computer for Jose Oswaldo. But the new, smaller Mexican family may help change that by allowing parents to invest more in their children's education, finally producing the generation that lifts Mexico into the developed world.
. . .On their $26,000 yearly income, the Llaneses live in a three-bedroom home in one of the new U.S.-style housing developments that have sprung up for the thousands of young, middle-class families in the increasingly prosperous north. They own a second house as an investment.
Young Jose Oswaldo talks of studying engineering in college and, to make sure that happens, his parents are putting $40 a month in his college fund. That kind of investment in children's education could bode well for Mexico and over the long term reduce the incentive to emigrate to the U.S. . . .
Mrs. Llanes is determined that Jose Oswaldo stay in his home country. "I want to prepare my son well enough so he can find opportunities in Mexico," she says.
Posted by dan at 10:20 AM
Patricia Woertz, formerly of Chevron, is named CEO of Archer-Daniels-Midland. As Scottt Kilman and Joann Lublin note in the Wall Street Journal:
"The move makes ADM, a commodity powerhouse with about $36 billion in revenue in its latest fiscal year, the largest publicly traded U.S. company headed by a woman."
Woerz, who lives in California, expressed trepidation about the move to Decatur only because. . . "I don't know where the closest Starbucks is." In fact, there is a Starbucks in Decatur. Here are directions.
Posted by dan at 10:07 AM
Floyd Norris with a good column in the New York Times on Sun Microsystems incredibly poor timing in buying back its own stock:
As its shares rose in the late 1990's, Sun spent more and more money on repurchases. It told shareholders that the share buybacks would offset the dilution from the options it was granting to employees.That strategy worked fine so long as the stock price was rising. To be sure, Sun was buying stock for multiples of the price it was charging to employees cashing in their options, but there was no loss recorded, just as there was no expense recorded when it issued the options.
Mr. McNealy became a vocal critic of efforts to account for options as if they were worth something, and played a role in delaying that rule for a decade. "We can't," he said in 2004, "let this world be run by accountants, for God's sake."
Unfortunately, Mr. McNealy, like more than a few of his peers, believed the hype and was incredulous when the bubble burst.
In February 2001, Sun decided that enough was enough. With the share price down to $20, a third of the peak reached less than six months earlier, the company announced plans to buy up to $1.5 billion of stock — not to offset dilution, but because the shares were cheap. The move, shareholders were told, reflected "our desire to enhance stockholder value."
It did not work. The stock kept falling as Sun spent $1 billion buying back shares in the first half of 2001.
On the business front, Sun announced restructuring after restructuring. In October 2002, it announced plans to cut its work force by 11 percent, and it halted share repurchases just as the stock hit bottom.
Since then, the company has decided that there is no need to repurchase shares. Even as options continue to be exercised, it is happy to accept the dilution, presumably because it has other uses for its cash.
Therein lies the risk. Companies buy and buy when the price is high, in no small part because both optimism and cash are plentiful. But when the stock becomes cheap, there is no money to be spared for share repurchases. And it can look tacky to reward shareholders with cash at the same time a company is pleading the need to fire workers.
Now the stock is around $5, just where it was seven years ago. Since then, Sun has repurchased 300 million shares and has issued 350 million shares to employees cashing in options. They paid less than a quarter of what Sun paid for the shares.
Had the company instead paid out in dividends the money it spent on repurchasing shares, loyal stockholders would have gotten about 90 cents a share. As it is, that money went to shareholders who fled.
Sun's shareholders would be better off if Mr. McNealy had ignored Wall Street's advice to repurchase shares when the price was high.
Posted by dan at 10:05 AM
Where is H.L. Mencken when you need him? This idea of the federal government borrowing money so that it can send $100 checks to citizens that they can use to buy gas is so dumb, so crackpot, so silly--words fail.
If the American people find that gas has become too expensive, they'll do what Wal-Mart is doing: they'll figure out how to use less of it.
Posted by dan at 04:02 PM
China is clearly willing to (a) pay above market prices; and (b) offer related financial inducements to developing countries in exchange for access to oil. I don't think ExxonMobil is. Dino Mahtani and David White report ($ required) in the Financial Times:
Nigeria is finalising a deal to give China preferential rights in bidding for four drilling licences, in exchange for $4bn of infrastructure investment in the world's eighth largest oil exporting country.The deal was high on the agenda as China's President Hu Jintao began a two-day state visit to Nigeria yesterday, during which several co-operation agreements between the two countries were due to be signed.
Over the past few years, energy-hungry China has ramped up its interest in Africa's Gulf of Guinea coastline, seen as one of the world's oil exploration hot spots. The Gulf of Guinea supplies 15 per cent of US import needs, though US officials hope it can supply 25 per cent in a decade.
China's rapidly rising needs have made it the world's second largest oil importer behind the US.
As part of the agreement, China will buy a controlling stake in a Nigerian state-owned refinery and invest in a railway line and power plants.
In return, Nigeria will offer first refusal rights on four oil exploration blocks to the China National Petroleum Corporation (CNPC) in a bidding round scheduled for next month.
Two of the blocks are in the oil-producing Niger Delta region and two in the largely unexplored Lake Chad basin.
China's African foray has accelerated over the past two years, as oil prices have risen on concern over tight global supplies and instability in the Middle East.
Since 2004, China has struck a deal with Gabon to buy oil, and has promised more than $2bn (£1.1bn) in loans to Angola in return for oil concessions favouring Chinese companies.
Nigeria, Africa's largest producer, also agreed last year to provide 30,000 barrels a day to PetroChina in an $800m deal. Last week, CNOOC, China's main offshore producer, finalised a payment of $2.7bn for a 45 per cent stake in a Nigerian oil block that is due to start producing in 2008.
China is also the main partner for oil in Sudan.
Up to now, Nigerian oilfields have been almost the exclusive domain of joint ventures with US and European multinationals. But Nigeria has recently turned to Asian state-run companies, which have backed up their bids with promises of big investment and finance reaching far beyond the oil sector.
In addition to China's interest in Nigeria, both India and South Korea have offered similar multibillion-dollar packages to secure priority oil rights, which have been negotiated outside the latest round of competitive bidding for oil acreage.
China's entry has raised concern about the risk of undermining Nigeria's efforts - backed by western partners - to bring greater transparency and accountability to the industry.
Ngozi Okonjo-Iweala, Nigeria's finance minister, insisted yesterday that any Chinese bid would have to follow open competitive procedures. "Due process will not be thrown out," she said, speaking to the Financial Times from Washington.
She said the proposed deal went much further than a $2.5bn package of infrastructure projects she had discussed at a recent meeting in Beijing.
Posted by dan at 09:46 AM
With the price of commodities rising, more and more companies are seeing the value of recycling and salvaging. Daniel Michales and J. Lynn Lunsford report in the Wall Street Journal that Boeing is looking to the junkyard for profits.
Boeing Co., which posted a 29% jump in quarterly profit thanks to brisk demand for airplanes, is setting up a network of companies to recycle some old jets that its new models are replacing.Scrapping old jetliners and recovering their materials for reuse is increasingly necessary as hundreds of old passenger planes are retired because they are no longer safe or efficient to operate. Many old aircraft are parked in deserts, mainly in the Southwestern U.S., although many planes -- especially old Soviet models -- are simply abandoned in Africa and parts of the former Soviet Union. Some in the industry expect that more than 4,000 airplanes will be retired during the next 20 years.
Meanwhile, Boeing and its rivals are cranking out new jetliners. In its earnings report yesterday, Boeing said it delivered 98 jets in the quarter, up 40% from the year before.
Boeing isn't going to recycle planes itself. Instead, it has organized eight U.S. and European companies that disassemble planes, salvage parts and recycle materials into a trade body called the Aircraft Fleet Recycling Association, or AFRA. The creation of AFRA is expected to be formally announced today.
Billy Glover, director of environmental strategy at Boeing and head of the recycling project, said the primary goal is to better serve Boeing's customers when they need to dispose of aircraft. He said the participants in the association will also help Boeing recycle scrap materials from its own manufacturing.
Until now, a variety of companies have worked separately in storing, dismantling, salvaging and scrapping old planes. Boeing's goal is to help them work together to cover the entire process. The creation of AFRA offers an opportunity to "properly recycle used aircraft materials," said Paul Worthington, director of marketing at Evergreen Air Center, in Tucson, Ariz., a major participant in the project.
Boeing's approach contrasts with that of its rival Airbus, which is getting directly involved in aircraft recycling. Airbus is leading a project partially financed by European Union environmental funds. Airbus and other industrial partners have established a center at Tarbes Airport, in France, and recently began dismantling their first aircraft, an old Airbus A300. Airbus is 80%-owned by European Aeronautic Defence & Space Co. and 20%-owned by Britain's BAE Systems PLC.
Posted by dan at 09:28 AM
Rebecca Buckman and Kara Scannell report in the Wall Street Journal that venture capitalists are carping that Sarbanes-Oxley is inhibiting their ability to cash in by taking firms public.
A venture-capital trade group says government regulations and other market obstacles are hindering start-up companies from going public and driving others to consider listing shares overseas. But it is unclear what kind of relief, if any, venture capitalists will get from regulators.Regulations such as the 2002 Sarbanes-Oxley law, which includes tougher requirements for internal auditing and executive certification of financial statements, are particularly burdensome to small companies and "threaten to make the U.S. less hospitable to company creation," said Robert Grady, the chairman of the National Venture Capital Association.
The Arlington, Va., trade group, holding its annual meeting in San Jose, Calif., yesterday announced a lobbying effort to try to get changes in the Sarbanes-Oxley law and to address other issues related to U.S. competitiveness.
Promising young companies that can't go public could expand more slowly and create fewer jobs, said Mr. Grady, who is a managing director of the Carlyle Group investment firm. He said companies may simply sell out to large firms, or list on foreign stock exchanges such as the London Stock Exchange PLC's Alternative Investment Market, known as AIM.
If large U.S. companies such as Dell Inc. or Google Inc. hadn't pursued initial public offerings, they likely wouldn't have contributed so much to the U.S. economy, Mr. Grady and other venture capitalists said here yesterday at a news briefing.
Venture capitalists invest in closely held companies, often hoping for a payoff through a stock offering. In the U.S., IPOs for venture-backed companies declined 40% last year to 56 from 93 in 2004, and 10 venture-funded companies went public in this year's first quarter, according to the trade association.
Not all venture capitalists and entrepreneurs blame new regulations for the IPO slowdown. Jim Breyer, a partner at Accel Partners in Palo Alto, Calif., says one networking company backed by his firm, Riverbed Technology Inc., this month filed for a Nasdaq IPO despite having to comply with the Sarbanes-Oxley law. Although concerned about the reduced number of venture-backed stock offerings, Mr. Breyer says he is "cautiously optimistic" the market will improve this year and isn't recommending any of his portfolio companies consider listing on London's AIM.
Hmm. Isn't it just possible that the market looks askance at venture-backed IPOs because the members of the NVCA unleashed so many stink bombs on the public in the peak years of 1999 and 2000? Sure, Google was a venture-backed company that went public and contributed a great deal to the economy. But what precisely did Webvan contribute?
Posted by dan at 09:23 AM
Kris Hudson reports in the Wall Street Journal on the ripple effect of Wal-Mart's efforts to reduce inventory.
If Wal-Mart Stores Inc. just sniffles instead of sneezes, its suppliers sell fewer tissues.The world's largest retailer by sales is pushing to cut its inventory costs, and many of its suppliers are reining in their quarterly sales and earnings forecasts to reflect the change. Ultimately, suppliers say, the retailer wants to pare $6 billion in inventory costs, or 20% of its year-end total, to boost its margins and returns. Wal-Mart denies setting such a target.
The inventory-slashing effort has jolted some of the biggest names in the household-goods and personal-care industries, many of which rely on Wal-Mart for 10% to 30% of their sales. Among those that have responded by lowering their quarterly goals before reporting their results in the coming weeks: consumer-goods titan Procter & Gamble Co.; trucking firm YRC Worldwide Inc.; and battery maker Spectrum Brands Inc. Feminine-products company Playtex Products Inc. yesterday indicated that Wal-Mart's cuts have affected it, and analysts anticipate that others, such as Clorox Co. and Chattem Inc., a maker of beauty products, fragrances and other household goods, will follow suit.
The adjustments momentarily spooked investors. P&G's stock sank more than 3% on March 14 after it blamed inventory reductions in cutting its quarterly projections for organic growth -- meaning sales growth outside acquisitions -- to a 5% to 6% range from 5% to 7%. The stock has since fallen an additional 3.3%. In 4 p.m. composite trading yesterday on the New York Stock Exchange, P&G's shares were up 74 cents to $58.01.
The stock of Spectrum plummeted 28% on April 6 after it blamed inventory reductions, skyrocketing zinc prices and slumping battery sales in chopping its forecast for second-quarter earnings to three cents to six cents a share from 35 cents to 40 cents. The stock has since recovered by about 4.1%, closing yesterday on the Big Board at $16.14, up 10 cents. Wal-Mart accounts for 18% and 16%, respectively, of sales by Spectrum and P&G.
"We've talked at length about the fact that we had a significant miss in [second-quarter] revenue in North America related to very tight control over inventories by some of our customers," Spectrum's president and chief operating officer, Kent Hussey, said at an investor conference earlier this month.
The reverberations of Wal-Mart's inventory cuts underscore the retailer's heft in the U.S. economy and with its suppliers. The Bentonville, Ark., company slashed its inventories in the mid-1990s, leaving its suppliers scrambling for several quarters to recover.
Even if Wal-Mart's latest cuts mean the retailer will order only 4% more merchandise from a given supplier this year instead of an anticipated 5% increase, that seemingly minor cut could significantly change the supplier's outlook. "Since Wal-Mart is such a big customer for these guys, that can move the dial for them in terms of their [quarterly] plan," said Tom Swoffer, a portfolio manager at investment-management firm Wentworth, Hauser & Violich in Seattle whose funds include shares of Wal-Mart suppliers PepsiCo Inc., P&G and Estée Lauder Cos. Wentworth manages $8 billion
Posted by dan at 09:20 AM
Are consumers tired of gigantic caesar salads? Or are they just seeking to pinch pennies? Either way, same-store sales at the Cheesecake Factory surprisingly fell in the most recent quarter.
Posted by dan at 09:10 AM
Aux barricades! Foodies unite, you have nothing to lose but your cholesterol count! Gretchen Reuthling reports in the New York Times that:
"The City Council voted Wednesday to make Chicago the first city in the country to outlaw the sale of foie gras, the fatty livers of geese and ducks that many consider a delicacy but animal rights advocates describe as a product of inhumane treatment."The ban, adopted on a vote of 48 to 1, makes 'food dispensing establishment' -- restaurants and retail stores -- subject to a fine of $500 for selling foie gras. The ordinance, which takes effect in 90 days, will be enforced by means of citizne complaints, said Joe Moore, the alderman who sponsored it."
How long before a dangerous black market springs up, with people slanging foie gras out of the backs of Volvos and Saabs in Evanston and Oak Park?
Posted by dan at 09:03 AM
A solar farm in Portugal, that is. Claudi Deutsch reports in the New York Times.
The sheep that have long grazed on 150 acres of farmland in Serpa, Portugal, will soon have to share their space with the world's largest solar energy plant.Next month the PowerLight Corporation, using $75 million of the General Electric Company's money, will begin installing the first of what will be 52,000 solar panels, capable of generating 11 megawatts of electricity — enough to light and heat 8,000 homes.
GE Energy Financial Services, the conglomerate's energy financing arm, will own the plant, while PowerLight will continue to run it. The companies expect it to be fully operational in January.
Both companies concede that it remains far more expensive to produce energy from sunlight than from fossil fuels, or even wind, and that the plant may not make money right away.
"Solar is not yet highly profitable, but we know we'll get a good payback from this project," said Andrew Marsden, managing director of European Operations for GE Energy Financial Services.
The Portuguese government, seeking to reduce greenhouse gas emissions and dependence on fossil fuels, has introduced legislation that forces utilities to pay 0.31 euro a kilowatt hour for solar energy.
Spain and Germany have similar programs, and Italy recently introduced one as well.
"It takes a huge amount of work to develop these projects, to get the permits, to find the modules, and solar energy still costs more than fossil fuels or wind," Mr. Marsden said. "So we are only going to invest in countries with supportive regimes."
That list does not yet include the United States. Richard King, a team leader in the Energy Department's photovoltaic research group, said that many homeowners, particularly in California, had installed rooftop panels, as had some Wal-Mart stores and other businesses. But Mr. King conceded that American economics did not yet favor solar energy. He said that people in Portugal and many other parts of Europe were already accustomed to paying 25 cents to 30 cents a kilowatt hour for electricity.
Posted by dan at 09:01 AM
Whoa, Nelly!!! He seems to have lost ABC college football announcing legend Keith Jackson. Richard Sandomir reports in the New York Times.
Keith Jackson, the storied voice of college football, is calling it quits, declining offers from ESPN officials to keep him at ABC Sports.I'm finished with play-by-play forever," Jackson said yesterday by telephone from his home in Sherman Oaks, Calif. "I'm going out to learn to be a senior citizen and find a president I can vote for and believe in." He added, "I'm not angry, I'm just going off like an old man and sitting by the creek."
And as Micheline Maynard reports, also in the New York Times, count General Motors vice chairman Robert Lutz among the shrill.
After Ford announced its cutbacks in January, Mr. Bush said the solution to reversing the automakers' problems lay in developing "a product that's relevant." Rather than having the government bail them out, as Congress did in 1979 to save Chrysler from bankruptcy, "I think it's very important that the market should function," Mr. Bush added.Robert A. Lutz, the vice chairman of G.M., who is known for his candor, criticized Mr. Bush's comments this month. Speaking in New York, Mr. Lutz said: "I'm a lifelong Republican, by the way, but next time around, Hillary, here I come. I'm a protest vote."
Posted by dan at 08:57 AM
OK, Glenn Hubbard, former head of the Council of Economic Advisers and current Dean of the Columbia Business School, just went up a few notches in my estimation.
Go here, and click on "Every Breath You Take." (Thanks to Marginalrevolution for flagging this.)
Posted by dan at 11:22 AM
Here's a subject you'll be hearing more about in this space: booms lead to excess capacity. The Associated Press reports, via the Wall Street Journal:
SHANGHAI, China -- A surge in the number of vacant, newly built apartments suggests China's real-estate market may be facing a financial fallout, reports said.China had 123 million square meters (1.3 billion square feet) of unsold and unleased space in new buildings at the end of March, a rise of about 24% from a year earlier, the Shanghai Daily and other state-run newspapers reported yesterday.
That figure doesn't include property purchased for speculative reasons, much of which also remains unoccupied, the reports said, citing figures released by the National Bureau of Statistics.
"Last year's figures in Shanghai showed that up to half of the new housing sold was not used," the China Daily cited Yin Zhongli, a real-estate specialist with the government-run Chinese Academy of Social Sciences, as saying.
Beijing, Shanghai and other major Chinese cities are evicting millions of residents as they raze older housing in the city centers to make way for urban renewal, luxury housing and commercial projects. Meanwhile, low- and middle-income families are increasingly priced out of the market, despite government pledges to make more affordable housing available for ordinary families.
The China Daily cited a report by Beijing Normal University's Finance Research Center showing that at least 70% of city dwellers can't afford to purchase new apartments. Investment in apartments meant for low- and medium-income families rose by less than 3%, compared with a 23% rise in total spending on residential property, it said. Almost 60% of the unrented and unsold property is in the residential sector, it said, meaning an estimated 700,000 apartments are unoccupied. . .
Shanghai boosted taxes on real-estate transactions and ordered banks to limit credit for property deals, among other measures.
But prices have continued to surge, with housing prices in China's 70 largest cities rising an average of 5.5% in the first quarter of this year compared with a year earlier.
Total investment in property surged about 25% from a year earlier in the first quarter, to 564 billion yuan ($70.4 billion), the National Bureau of Statistics said.
The government has warned that heavy investment in property and other construction, as well as some industries, is keeping China's economic growth at unsustainably high levels and raising risks for banks that are financing the spending.
The rush by foreign investors into the property sector, however, appears to have slowed. Investment in real estate fell 4% in the first quarter, the bureau reported.
Posted by dan at 09:03 AM
The solutions to the problems of high energy costs are going to come from those who have the most to lose from high energy costs--gigantic companies. James Covert reports in the Wall Street Journal on Wal-Mart's efforts to use less fuel:
NEW YORK -- Wal-Mart Stores Inc.'s effort to increase the efficiency of its trucking fleet -- a key part of the its plans to cut costs and portray itself as more environmentally friendly -- is running ahead of schedule.In October, the Bentonville, Ark., retailer unveiled plans to make its trucking fleet 25% more fuel-efficient within three years. The fleet of 7,100 trucks already is on track to become 18% more efficient over the next year alone, said Johnnie Dobbs, Wal-Mart's executive vice president of logistics. "At this point, we feel pretty comfortable we can make the 25% goal," Mr. Dobbs said.
The high-throttle progress is a boost to Wal-Mart's recent efforts to curb its operating expenses amid soaring prices for energy and health care. Last fall in an interview with The Wall Street Journal, Chief Financial Officer Tom Schoewe singled out Wal-Mart's trucking fleet along with work-shift management as a top priority for reining in costs.
By increasing its trucks' fuel-efficiency by one mile a gallon from their recent average of 6.5 miles a gallon -- a 15% improvement -- Wal-Mart could add $50 million a year to its income, Mr. Schoewe said.
The effort comes as the price of fuel is again soaring. The Energy Department said this week the U.S. price of diesel fuel averaged $2.765 a gallon, more than 50 cents higher than the year before.
Mr. Dobbs said the bulk of the savings for Wal-Mart's trucking fleet thus far have come from the installation of auxiliary units that power the air conditioning when a truck is parked, eliminating the need to run the engine. Wal-Mart's trucks also are benefiting from wider tires that can carry bigger payloads, aerodynamic skirts and cowlings that cut wind resistance, and new additives that give diesel more bang for the buck.
Wal-Mart executives said they are surprised to be exceeding their near-term goals so early. The company also has set a longer-term goal to double the efficiency of its truck fleet in 10 years. While the early gains have come from "low-hanging fruit," meeting the 10-year target "will be the real stretch," as most of the energy savings are to come from technology that is still being developed, Mr. Dobbs said.
Future improvements may come from lighter truck designs, more efficient engines and transmissions, and hybrid technologies that use electricity and hydrogen power, Mr. Dobbs said. Researchers also are testing "biodiesel" manufactured from animal and vegetable oils, but "the jury is still out on that," Mr. Dobbs said.
The plans are a pillar of an environmental initiative that Wal-Mart announced with much fanfare in October. In addition to slashing transportation costs, the program also seeks to reduce greenhouse gases from existing stores and distribution centers by 20% over the next seven years.
As for new stores, Wal-Mart aims to introduce a design within four years that is at least 25% more energy-efficient. Those developments could also pay off, as the price of electricity and natural gas have soared along with the price of oil.
In addition to upgrading its truck fleet, Wal-Mart this year has purchased 100 hybrid cars for the company's market managers, who typically oversee eight to 15 stores each. "They tend to do a lot of driving in between stores, so that could be a real savings," Mr. Dobbs said.
Posted by dan at 09:00 AM
James Hagerty writes in the Wall Street Journal on the changing dynamics of the U.S. housing market.
As home sales cool on the East and West coasts, some cities that missed out on the real-estate boom are becoming the strongest markets.A look at inventories of unsold homes, prices and employment trends points to generally positive signs in Houston, Dallas and Atlanta -- cities that have seen only modest home-price gains in recent years.
Metropolitan areas whose housing markets look less healthy, at least in the short term, include Boston, Los Angeles, Miami, Minneapolis, New York, Philadelphia and San Francisco. All of them have growing inventories of homes and relatively weak job growth. As a result, houses that a year or two ago might have sold in hours now are languishing on the market for months, and some sellers are cutting prices.
To produce a snapshot of residential real-estate prospects for 18 major metro areas, The Wall Street Journal examined inventories of homes for sale at the end of the first quarter from a variety of local sources; pricing trends based on surveys of real-estate agents by Daniel Oppenheim, an analyst at Banc of America Securities in New York; and projections of job creation by Moody's Economy.com, a research firm in West Chester, Pa. Inventory data provide a broad picture of the overall supply of housing, while job trends are the biggest driver of demand. The pricing data show how markets are adjusting to recent shifts in supply and demand.
Texas has been a laggard in recent years, partly because job markets were weak in some cities and land for new houses is plentiful. Now, the state's job market is strong, as cities there are benefiting from the oil boom and an influx of people from abroad and elsewhere in the U.S., and housing demand is keeping up with the relentless spread of new subdivisions as Texas cities sprawl. Investors, many from California, are adding to the demand.
Texas home prices could rise 6% to 9% annually over the next several years, up from an average of 4.5% over the past 15 years, says James P. Gaines, an economist at Texas A&M University's Real Estate Center in College Station. He says the state is attracting residents and employers because its housing remains very affordable by national standards.
"I don't see a slowdown coming," says Lorraine Abercrombie, chairwoman of the Houston Association of Realtors and director of marketing for Greenwood King Properties. Last week, Greenwood listed a five-bedroom home in Houston's Wilchester West neighborhood. Within three days of the first showing, the home was under contract for $465,000, well above the asking price of $449,000.
Atlanta also benefits from a healthy job market, due partly to the city's role as a regional hub and a magnet for immigrants and conventions. J. Lewis Glenn, president of Harry Norman Realtors, says the total value of homes sold by the big local firm in March was up more than 10% from a year earlier. Unlike Dallas and Houston, though, Atlanta's inventory also is up substantially -- 15% -- from a year earlier, according to SmartNumbers LLC, a local research firm. That bulge should restrain price increases.
The scary stuff is in a chart in the middle of the article that details inventory in different markets.
Boston--up 91% from a year ago.
Miami--up 236% from a year ago. (!)
Los Angeles--up 149% from a year ago.
Posted by dan at 08:57 AM
Intellectual laziness is par for the course at magazines like the Weekly Standard and National Review. So it's no surprise that when writers for such journals sit down and write books, the results are often less than satisfying. Alan Ehrenhalt reviews Matthew Continetti's The K Street Gang in the Wall Street Journal
Matthew Continetti presents an instructive narrative of corruption and double-dealing, most notably on the part of Jack Abramoff, the lobbyist who used his connections to carve out a position of influence with Congress, extracting modest favors on behalf of his clients while keeping millions of dollars of clients' money for himself, in exchange for very little. Regrettably, the book's sloppiness undermines its credibility and the case it wants to make about Washington's political culture.On the first page, Mr. Continetti seeks to draw a contrast between the youthful Republican insurgents bent on capturing Congress in 1994 and the ossified GOP establishment, typified by Robert H. Michel, the 80-year-old House Republican leader. I don't doubt that after nearly four decades in the minority, Bob Michel was looking a little tired by 1994. But he wasn't 80 years old -- not even close. Mr. Continetti gets that simple fact wrong by a full decade.
A small problem, perhaps, but there are worse ones. Mr. Continetti thinks that Nelson Rockefeller was a U.S. senator. He mixes up the constitutional amendment that created direct Senate elections with the one that gave women the vote. It is enough to make even a sympathetic reader want to dismiss "The K Street Gang" out of hand. But the book has a message that the author manages to convey almost in spite of himself.
It is not a message that comes through by virtue of skillful reporting, though, or any apparent reporting at all. If Mr. Continetti interviewed a single human being in the course of writing "The K Street Gang," there is no evidence of it. The book is a compilation of excerpts from newspaper and magazine articles, congressional testimony and court documents, all available through Lexis-Nexis and other digital search instruments. Mr. Continetti may have produced the first example of a new journalistic genre: the Nexposé.
Ouch.
Posted by dan at 08:51 AM
If I didn't know any better, I might think that the private equity geniuses behind Burger King's recent turnaround are intentionally trying to sandbag the chain's upcoming IPO. Sending out more than $400 million in cash just before selling stock to the public doesn't exactly inspire confidence.
Janet Adamy and Henny Sender report in the Wall Street Journal:
Burger King Corp. became the latest company to write its private-equity owners a generous dividend check -- a whopper of $367 million in this case, ahead of its planned initial public offering.The company also is giving its owners a one-time fee totaling $30 million, according to a filing the company made with the Securities and Exchange Commission on Monday. The payments come with the disclosure that the restaurant chain racked up a $12 million loss in the quarter ended March 31, compared with a $1 million profit in the year-earlier period.
This is the first time the three owners, which include Texas Pacific Group, Bain Capital and Goldman Sachs Group Inc.'s Goldman Sachs Capital Partners, have paid themselves such a dividend. The three bought the Miami fast-food giant in December 2002.
Burger King said it made the payment in part "based on our strong business performance" and "cash generation in excess of our business needs," according to the filing. Also, the company paid out $33 million to holders of unvested options and restricted stock-unit awards, which primarily include members of senior management, the company said. Burger King called the awards a "make-whole" payment and said the board decided to make them because the dividend payment, along with new financing in February, would decrease the value of those holders' options and restricted-stock shares.
The board believed those holders "had significantly contributed to the improvement in our business performance and equity value over the past two years," the filing said. Burger King had an agreement to pay the private-equity firms about $9 million a year, the filing said. The board is terminating those payments as a result of the planned public offering, the filing said.
Burger King's Chief Executive Greg Brenneman unexpectedly stepped down this month after a two-year tenure in which he helped lift the burger chain's results. Burger King disclosed this week that it plans to pay Mr. Brenneman his base salary of $1.03 million for three years starting in July, as well as his annual bonus of $2.06 million for fiscal 2006. Burger King plans to complete its public offering before June 30. A Burger King spokesman didn't return a call seeking comment.
Texas Pacific Group, the lead investor, declined to comment, citing the quiet period before the public share offer.
Posted by dan at 08:48 AM
Jon Boone reports in the Financial Times that Sarbanes-Oxley and the heightened demand for financial controls is good news for young accountants.
Corporate America's greater demand for financial transparency means that accountancy graduates in the class of 2006 will enjoy the best jobs market in four years.Figures released this month showed that graduates who studied accounting were the third most popular group among US employers.
Ernst & Young plans to boost the number of graduates it recruits with an accountancy degree by 13 per cent to 5,380 this year. Its intake has risen by 47 per cent from 3,645 in 2004.
The sellers' market is highlighted by data published by the National Association of Colleges and Employers (Nace). Its Job Outlook 2006 showed accounting was the third most popular university degree among employers. Starting salaries are also on the rise, with Nace showing a 5.4 per cent increase to $46,188 since last spring.
Dan Black, campus recruitment leader for Ernst & Young, said it was not just the growth in financial reporting that had led to soaring demand for graduates, but also the varied career options in financial services.
He said America's brightest were not just attracted by the relative ease with which they could land an increasingly well paid accounting job.
"Rather than just seeing accounting as a necessary evil, the majority have seen some of the business scandals in recent years and look at accounting as a way to make a difference in the business world."
The company has also been working hard to try and offer future employees benefits that it believes differentiates it from other firms, such as a summer flexibility programme giving staff five four-day weekends around traditional holidays.
The demand for more accountants is not expected to slow down. The Bureau of Labor Statistics predicts that employment of accountants and auditors is expected to increase by between 10 and 20 per cent for all occupations until 2012.
According to the American Institute of Certified Public Accountants, both enrolment in accounting courses and the number of graduates rose 19 per cent from 2000 to 2004.
This has to be the first time the words "accountants" and "third most popular group" appeared in the same sentence.
Posted by dan at 08:45 AM
Martin Wolf writes, with typical intelligence, about U.S. income inequality in the Financial Times ($ required).
Between 1997 and 2001, the top 10 per cent of US earners received 49 per cent of the growth in aggregate real wages and salaries, while the top 1 per cent received an astonishing 24 per cent. Meanwhile, the bottom 50 per cent received less than 13 per cent. Why is this happening? And should non-egalitarians care?The data I have cited come from a remarkable paper from two economists at Northwestern University.* The authors ask a simple, but telling, question: if the US economy is becoming more productive, why have most of its citizens not become better off?
The answer, it turns out, is that the normal link between productivity and real earnings is broken. Thus, between 1966 and 2001, real median earnings (the earnings of those half way up the distribution) rose by only 11 per cent. Over the same period, the earnings of those at the 90th percentile (10 per cent from the top) rose by 58 per cent, of those at the 99th percentile by 121 per cent, of the top 0.1 per cent by 236 per cent and of the top 0.01 per cent by 617 per cent. . . .
The rising importance of earned incomes to those at the top of the income distribution is also shown in an analysis of still longer-term shifts.** A paper published by the National Bureau of Economic Research shows that income inequality in the US is returning to where it was almost a century ago, after a steep decline in the mid-20th century (see chart). The share of the top 0.01 per cent in the US income distribution fell from close to 4.5 per cent in 1916 to around 0.5 per cent in 1971, before rising to 3 per cent in 1998. The greater part of the decline in the early part of the century was due to a collapse in income from capital. The greater part of the increase since 1971 is due to the rise in earned income.
In consequence, conclude the authors, “top wage earners have replaced capital income earners at the top of the income distribution”. Moreover, this is also true of other English-speaking countries, though to a smaller extent, but not of Japan and continental European (see chart).
So why is this happening? The classic explanation is “skill-biased technical change”, reinforced by the impact of globalisation on incomes of the unskilled. Yet the pattern that emerges is hardly consistent with this, since there has been such a huge increase in the dispersion of earnings even among the already very skilled.
More plausible answers are the “superstar” phenomenon in sports and entertainment and the ability of corporate bosses and investment bankers to extract vastly higher relative salaries than before. The authors from Northwestern university conclude that top corporate executives account for more than half of the incomes in the elite 0.01 per cent of the US income distribution.
So are they worth it? That is a controversial question. I, for one, doubt it. The ratio of the pay of US chief executive officers to average wages rose from 27 in 1973 to 300 in 2000. But this jump is largely limited to the US. While average performance of US CEOs may well be better than anywhere else, it is easy to find non-US CEOs whose performance has vastly outshone that of their US peers, without close to commensurate rewards. Executive pay is, in fact, a game of leapfrog, in which every compensation committee tries to pay its CEO more than the average, with the inevitable results.
This raises a bigger question: do these changes in the US distribution of incomes matter? I would suggest that they should do so even to non-egalitarians, for three reasons.
First, income mobility does not offset the rising inequality. As the two Northwestern university authors note, “not only are half the penthouse dwellers still there a decade later, but the differential opulence of the penthouse keeps increasing relative to the basement”. The chances of leaving the basement are low. Moreover, intergenerational opportunity is also adversely affected.
Second, the failure of an economy to generate rising incomes for a majority over decades causes frustration. US individualism may contain this reaction. Most cultures cannot.
Third, politics inevitably become more populist: the US “right” has become “pluto-populist” – an alliance of free-marketeers, nationalists and social conservatives – and the “left” is increasingly “protecto-populist” – an alliance of protectionists, dirigistes, social liberals and anti-nationalists. This endangers both intellectual coherence and sensible policymaking. . .
* Ian Dew-Becker and Robert Gordon, “Where did the productivity growth go?”, National Bureau of Economic Research working paper 11842, December 2005, www.nber.org; ** Thomas Piketty and Emmanuel Saez, “The evolution of top incomes”, NBER working paper 11955, January 2006
Posted by dan at 08:40 AM
The efforts of Republicans to "respond" to the high price of gas are by turns comical and pathetic. They're demanding and promising action!!!! John D. McKinnon, John Fialka and Jackie Calmes report:
WASHINGTON -- With rising gasoline prices spurring calls for action among worried congressional Republicans, President Bush will respond with a series of measures today aimed at curbing possible market manipulations.In a speech to a renewable-fuels group, Mr. Bush is expected to instruct the Justice Department, the Federal Trade Commission and the Energy Department to vigorously enforce laws relating to price gouging. And the attorney general and FTC chairman will send a joint letter to all 50 state attorneys general calling on them to use their broader investigative powers to pursue illegal gouging, according to a senior administration official. They also will offer assistance to states that need it.
The steps are among several short-term measures to address energy worries that Mr. Bush is likely to discuss, as his administration confronts yet another second-term political flare-up.
The moves come a day after the top two Republicans on Capitol Hill asked Mr. Bush to order investigations of potential price gouging in the oil-supply chain and in the futures and derivatives markets. "We believe that protecting American consumers in these unprecedented market conditions is of paramount importance," House Speaker Dennis Hastert and Sen. Majority Leader Bill Frist wrote in a letter to Mr. Bush.
So, what, when oil was rising to $50 and $60 a barrel, the federal law enforcement types who are supposed to guard against price gouging were asleep on the job? Look, there may be some isolated instances of price gouging, whatever that is. But at root, oil trades at $75 per barrel and gas is $3.00 a gallon in large part--not entirely, but in large part--because there's a lot of global demand for the product (and concern about growing future demand) coupled with concern about current supplies ( and concern about future supplies). If people and the government are concerned about the high price of oil and gas they should try to figure out ways to use less of it. That may not do anything about the price of the commodity, but it will hurt us less.
And why won't reductions in U.S. consumption in oil and gas do much to affect the global price of oil? Because the Indians and the Chinese are just beginning to drive, in their millions. As Shai Oster reports in the Wall Street Journal:
BEIJING -- China's President Hu Jintao is making clear with visits to Saudi Arabia and Nigeria, two of the world's biggest oil producers, that securing his country's energy needs is a top priority.Yet energy analysts say China is working hard to send signals that Mr. Hu has a broader agenda. Hard on the heels of his first Washington visit as president, he wants to avoid further arousing U.S. suspicions by seeming to make a grab for oil, the analysts say.
Politicians in Washington accuse Beijing of trying to lock up energy resources, partly by courting governments shunned by the West, including Iran and Sudan. Political tensions are rising just as China's energy quest is being given urgency by record oil prices as the nation's economy quickly expands. . . .
As recently as the early 1990s, China was a net oil exporter. It is now the world's second-biggest oil consumer after the U.S., and its oil demand this year is expected to grow 5.5% from 2005, reaching just under seven million barrels a day. While that is still only about 8% of total world oil demand, China's consumption is expanding rapidly. As Chinese become richer and buy more cars, some analysts predict its oil consumption could reach 12 million barrels a day -- three times more than China produces."
Chinese imports from Nigeria are still erratic, but several deals, including the $2.3 billion purchase by China's state-owned Cnooc Ltd. of a stake in an offshore oil field could change that.
China is using government-aid and infrastructure projects to woo big oil producers like Angola and Nigeria, where Western oil companies have the advantage of years of experience and better technology. In the first two months of this year, Angola surpassed Saudi Arabia as the top oil exporter to China.
"They're going anywhere they can grab oil. That's the bottom line," said K.F. Yan, Beijing-based energy analyst for consultancy Cambridge Energy Research Associates.
African nations have welcomed China and other Asian countries, such as Korea, India and Malaysia, as a counterbalance to dependency on the West. "The Nigerians see it as a point of leverage; they can play one off the other," said Anthony Goldman, a London-based business-risk analyst.
Posted by dan at 10:19 AM
Some amazing stuff in Deborah Ball's front page article in the Wall Street Journal on Italian resistance to convenience-creating cleaning products. In 2004, Italy was the seventh-largest economy in the world. And yet, Ball reports:
MILAN -- Italian women keep some of the cleanest homes around.They spend, on average, 21 hours a week on household chores other than cooking -- compared with just four hours for Americans, according to Procter & Gamble Co. research. Italians wash kitchen and bathroom floors at least four times a week, Americans just once. Italians typically iron nearly all their wash, even socks and sheets. And they buy more cleaning supplies than women elsewhere do.
All that should make them the perfect customers for the manufacturers of cleaning products.
But when Unilever launched an all-purpose spray cleaner about six years ago, the product flopped. And when Procter & Gamble tested its top-selling Swiffer Wet mop, which eliminates the need for a clunky bucket of water, the product bombed so badly in Italy that P&G took it off the market.
What the world's biggest consumer-products companies failed to realize is that what sells products elsewhere -- labor-saving convenience -- is a big turnoff here. Italian women want products that are tough cleaners, not timesavers.
The Italians "are not ready for convenience in the way Americans are," says Elio Leoni Sceti, chief marketing officer at Reckitt Benckiser PLC, maker of Lysol cleaner and Woolite laundry detergent. "It's perceived as a step back."
The truly amazing stuff is in a small chart that shows the following.
80% of Italians iron all their own laundry
31% of Italians have dishwashers
2% use cleaning wipes.
1% have dryers.
Posted by dan at 10:15 AM
My latest in Slate, on the inability of Halliburton unit KBR to show big profits off its massive Iraq contracts.
Meanwhile, James Glanz reports on the front page of the New York Times on how KBR monumentally screwed up a pipeline project in Iraq.
Posted by dan at 09:43 AM
Christophers Elliott reports in the New York Times on "standing" seats on airplanes. Can this really be less comfortable than a regular seat on Northwest?
Posted by dan at 09:42 AM
How precocious is Harvard novelist Kaavya Viswanathan? Well, the sophomore is already conversant with the sort of post-modern dodges generally confined to graduate seminars. Dinitia Smith reports in the New York Times:
Kaavya Viswanathan, the Harvard sophomore accused of plagiarizing parts of her recently published chick-lit novel, acknowledged yesterday that she had borrowed language from another writer's books, but called the copying "unintentional and unconscious."The book, "How Opal Mehta Got Kissed, Got Wild and Got a Life," was recently published by Little, Brown to wide publicity. On Sunday, The Harvard Crimson reported that Ms. Viswanathan, who received $500,000 as part of a deal for "Opal" and one other book, had seemingly plagiarized language from two novels by Megan McCafferty, an author of popular young-adult books.
In an e-mail message yesterday afternoon, Ms. Viswanathan, 19, said that in high school she had read the two books she is accused of borrowing from, "Sloppy Firsts" and "Second Helpings," and that they "spoke to me in a way few other books did."
"Recently, I was very surprised and upset to learn that there are similarities between some passages in my novel, 'How Opal Mehta Got Kissed, Got Wild and Got a Life,' and passages in these books," she said.
Calling herself a "huge fan" of Ms. McCafferty's work, Ms. Viswanathan added, "I wasn't aware of how much I may have internalized Ms. McCafferty's words." She also apologized to Ms. McCafferty and said that future printings of the novel would be revised to "eliminate any inappropriate similarities."
Michael Pietsch, publisher of Little, Brown, said that Ms. Viswanathan planned to add an acknowledgment to Ms. McCafferty in future printings of the book.
In her e-mail message, Ms. Viswanathan said that "the central stories of my book and hers are completely different." But Ms. McCafferty's books, published by Crown, a division of Random House, are, like Ms. Viswanathan's, about a young woman from New Jersey trying to get into an Ivy League college — in her case, Columbia. (Ms. Viswanathan's character has her sights set on Harvard.) Like the heroine of "Opal," Ms. McCafferty's character, Jessica Darling, visits the campus, strives to earn good grades to get in and makes a triumphant high school graduation speech.
And the borrowings may be more extensive than have previously been reported. The Crimson cited 13 instances in which Ms. Viswanathan's book closely paralleled Ms. McCafferty's work. But there are at least 29 passages that are strikingly similar.
Meanwhile, it turns out that several of Raytheon CEO William Swanson's "Swanson's Unwrittten Rules of Management," were in fact written before--in 1944. Leslie Wayne reports in the New York Times:
The chief executive of the Raytheon Company, William H. Swanson, acknowledged yesterday that he did "not properly credit" a 1944 engineering text when he wrote a book of management advice that included passages from the earlier text.Mr. Swanson said in a statement that the similarities between his book, "Swanson's Unwritten Rules of Management," and a 1944 text, "The Unwritten Laws of Engineering," were "beyond dispute."
The engineering text was written by W. J. King, an engineering professor at the University of California, Los Angeles, and is a collection of folksy wisdom that later appeared in Mr. Swanson's book.
"I regret that over the course of the years and in the process of compiling the 'Unwritten Rules', any reference to Professor King's work was not properly credited," Mr. Swanson said yesterday. His book, which contains 33 rules for management, has been distributed free by Raytheon, with over 250,000 in circulation.
As a result of the book, Mr. Swanson has gained the reputation of a management guru and his rules have gained a wide following as pithy common-sense aphorisms. A total of 17 of Mr. Swanson's rules — rules No. 6 to 22 — are also in the 1944 text, with either similar or identical language. As an example, Rule No. 16 — "Don't overlook the fact you are working for your boss" — appears in both books.
In his statement, Mr. Swanson said that in writing his book, he drew from many "unnamed" sources who "over the course of my life, contributed a thought or an idea relevant to the compiled work."
"For me, the originality of the material was never the rules themselves," Mr. Swanson said, "but my expression of them in terms of my own experience over the years."
Great, another post-modernist in the executive suite.
Posted by dan at 09:33 AM
The housing boom will likely go on much longer than expected in part because the mortgage industry won't let it. Danielle Reed reports in the Wall Street Journal:
Is this the solution for the cash-strapped home buyer: take out a mortgage loan and pay it back about half a century from now?The 50-year home mortgage doesn't exist yet, though the idea is being seriously batted around among lenders as home price increases continue to far outpace income gains, making monthly payments on more traditional loans less affordable.
The once-rare 40-year mortgage has already surged in popularity and at least one lender is offering a mortgage five years longer.
Ownit Mortgage Solutions, Agoura Hills, Calif., has rolled out a 45-year loan, mostly with variable rates, that it calls "the perfect alternative" to interest-only loans "for borrowers who desire affordable monthly payments."
Going the 45-year route isn't for everyone. Some analysts are skeptical that longer loans are necessarily beneficial to borrowers.
Neil Garfinkel, partner and real-estate specialist with law firm Abrams Garfinkel Margolis Bergson in New York and Los Angeles, says borrowers pay much more in interest with longer amortization mortgages than they save.
For a $300,000 loan at 7%, he said, the monthly payment for a 30-year schedule would be $1,995.91, and for a 45-year would be $1,829.10, for a savings of about $166.81 a month or a little over $2,000 a year. But the interest paid over the full term would be $418,526.69 for a 30-year loan and $687,714.82 for the 45-year loan.
"Will it help consumers get into bigger houses? I don't really know," Mr. Garfinkel said. "But if a client is asking me would you do this, I would probably tell them no."
Posted by dan at 02:07 PM
Two interesting pieces for money-minded readers in the current edition of Foreign Affairs ($ required.) IBM CEO Samuel Palmisano on the evolution of the multinational corporation into the globally integrated enterprise, and Martin Feldstein's optimistic take on the return of U.S. savings.
Posted by dan at 01:46 PM
Generally speaking, Fortune 500 companies have not been at the forefront of social change. But these days, the nation's biggest companies are far more progressive than its government, in many ways. For example, Jessi Hempel reports in Business Week:
"Supported by increasingly friendly environments, 74% of gay and lesbian employees say they are completely out at work, according to a survey of Lambda Legal's online community members. . . . In a 2003 survey conducted by the Human Rights Campaign and Harris Interactive, only 47% of respondents reported being out at work. The growing openness parallels a shift in corporate attitudes and policies. Of the 500 largest U.S. companies, for example, 249 offer domestic-partnership benefits today, up from 28 a decade ago."
Posted by dan at 01:41 PM
Business Week has two good articles on the latest Bush domestic policy cock-ups--both behind the subscription firewall. First, Howard Gleckman reports on the Medicare drug coverage boondoggle.
Suffering from asthma, emphysema, and a bad back, Barbara Slawson eagerly signed up for the new Medicare Part D drug benefit. For a premium of $69 a month, she bought a Blue Cross policy that let her buy generic drugs for just $5 and brand-name medications for $38.Then in late March, the Macedon (N.Y.) resident fell into what congressional staffers dubbed the "doughnut hole," and her insurance was cut off. Under Part D, once patients spend $2,250 on drugs, their coverage ends, and they must pay for their medicine themselves. Their benefits resume only after they shell out $5,100 -- a $2,850 gap.
Although policymakers were aware of the doughnut hole when they passed the law, many seniors are stunned. "It came up all of a sudden," Slawson says. "My medications were covered. Then I hit the hole, and they weren't."
About 38% of Medicare beneficiaries are at risk, reckons Bruce Stuart, director of the Peter Lamy Center on Drug Therapy & Aging at the University of Maryland. This means 7 million to 10 million seniors and disabled could lose coverage for part of this year.
Many will stumble into the gap in late summer or early fall -- just before the November elections. This could be bad news for Republicans, who pushed the Medicare drug law. According to an Apr. 6-9 Washington Post/ABC News poll, just 41% of seniors approve of the program today. If many face a gap in coverage, that support could plummet. "There will be a lot of angry people -- and they'll be very negative toward the politicians," says Robert J. Blendon, a professor at Harvard University School of Public Health. . . .
Why did Congress invent such a mess? Lawmakers first decided they wouldn't spend more than $400 billion over 10 years. Then they wanted to cover those with high drug costs. They also wanted to do something for ordinary seniors. That left nothing for those whose spending falls in the middle. "They had to make it look good for people who don't use many drugs, and with that $400 billion limit, they pretty quickly ran out of money," says Joseph R. Antos, a health economist at the American Enterprise Institute, a conservative Washington think tank.
Not everyone is at risk. Very poor seniors get full insurance. So do most of those covered by former employers. And insurers can fill in the gap, though usually only with generic drugs. About 13% of Medicare plans offer coverage in the hole. But seniors pay for that extra protection. In Maryland the monthly premium for Humana Inc.'s (HUM ) basic drug plan is $6.44. A policy that fills the gap costs $52.88.
Many health experts worry that those who lose coverage, even temporarily, will skip dosages or not fill prescriptions at all to save money. That could make them sicker in the long run. "It is pretty clear that people are going to cut back when they are in the doughnut hole," Stuart says. Others may try to buy cheap drugs from Canada or shop for lower prices online or at chain discount stores. But that can be a bad idea, because if they buy from a pharmacy that doesn't take their insurance, the spending doesn't count toward the $5,100 level that gets them out of the hole again.
Major drugmakers, smelling a round of bad publicity once seniors start falling into the gap, are considering special discounts for those who lose coverage. But they have not yet figured out a way to offer them. So for now, millions of unsuspecting seniors, who thought they were buying a full year's worth of drug insurance, are about to have a nasty surprise.
Second, John Carey reports on the administration's pathetic energy policy.
After years of research, Charles Bates is close to perfecting a more energy-efficient method for casting engine blocks, a technique that industry would love to put into wider use. The University of Alabama engineer, who uses X-rays to monitor the shaping of molten metal, says only one big technical hurdle remains in refining a process that uses 30% less energy than traditional casting methods. "We've been making progress by leaps and bounds," he adds.But Bates may be stopped short. The U.S. Energy Dept. wants to slash funding for the efficiency program that supports his work. This perplexes the foundry industry. "It's a great program, and we'd be sorry to see it go," says Bryan Baker, vice-president of Vulcan Engineering, which supplies casting equipment to General Motors (GM ), BMW, and others.
Across the board, federal funding for energy efficiency is taking a major hit. In the White House's proposed 2007 budget, efficiency spending is down 17% overall from 2006 appropriations, and 25% from levels in 2002. The cuts are deeper for individual programs. Research to help industry reduce energy use is slated for a 30% decrease, and some programs are being shut down.
As a result, "we would be leaving a lot of energy on the table," says Peter Molinaro, vice-president of Dow Chemical.
Bush Administration officials profess support. "Efficiency is among my highest priorities," insists Assistant Energy Secretary Alexander Karsner. But an increasing share of research money is going to biofuels and hydrogen instead. "They talk the talk but are pulling the rug out from under these programs just when they are needed most," says R. Neal Elliott of the nonprofit American Council for an Energy-Efficient Economy.
The Administration has already had one embarrassing moment in its drive to ease the energy crisis. In his State of the Union speech on Jan. 31, President George W. Bush called for investment in technology to break our "addiction" to oil. Just before a follow-up Presidential visit to the National Renewable Energy Laboratory in Golden, Colo., the White House found that the lab had just laid off 32 workers because of budget cuts. Funding of $5 million was restored before the trip.
Now, efficiency advocates are lobbying Congress to limit the damage to their cherished programs. With energy prices high and supplies tight, they argue, a mere 1% drop in demand causes prices to plunge 20%, easing cost pressures for both consumers and businesses.
Plus, these government efforts pay big dividends. Setting efficiency standards for refrigerators alone is saving nearly $20 billion a year, the California Energy Commission estimates. But the Bush Administration has so far failed to update appliance standards. In another federal program, university engineering students help small and medium-size companies reduce energy use. The $6 million per year effort brings $40 million in annual savings and trains new efficiency experts. But the number of universities involved is slated to be cut in half. And a threatened program to develop energy-saving processes for heavy industries has brought advances in everything from metal casting to glassmaking. "I can't think of another program in government where the results are so great," says Lawrence W. Kavanagh, vice-president of the American Iron & Steel Institute.
Posted by dan at 01:35 PM
Anjan Sundaram reports in Fortune on how Congo's tin slips into the world's electronics supply chain.
Posted by dan at 01:33 PM
Check out Adam Lashinsky's cover story in this week's Fortune on the new net boom. Not all bubbles end badly--in the long run.
Posted by dan at 01:28 PM
Interesting article in Forbes by Monte Burke on Enernoc, a company that feeds electricity into grids.
Posted by dan at 01:24 PM