Saturday, May 31, 2008

A Mideast Valley of Peace

A Mideast Valley of Peace

Itzhak Tshuva was born into a poor family of 11 who crammed into a single room after immigrating to Israel from Libya in the 1940s. He went on to build a global real estate empire that includes New York's Plaza Hotel, as well as a recently announced $8 billion luxury hotel, retail, residential, and casino complex on the Las Vegas Strip. Now the 60-year-old billionaire, one of the world's richest men, is spearheading an ambitious plan to bring another desert project to life.

This time Tshuva has set his sights on the Arava, an arid valley along the southern portion of the border between Israel and Jordan. If his vision comes to pass, the private sector will build a $3 billion canal that not only connects the Red Sea to the Dead Sea but also links Israelis, Jordanians, and Palestinians—possibly helping bring about peace through greater economic integration.

This so-called Valley of Peace is part of a 520-kilometer (323-mile) corridor being proposed by Israeli President Shimon Peres for regional economic development. About 420km of the corridor runs along the Jordanian border—with no fences, walls, or minefields—and another 100km touches on the Palestinian territories. Other projects envisioned by Peres involving the German, Japanese, and Turkish governments are meant to create up to a million new jobs in Israel and the West Bank. "People are sick and tired of peace conferences because they don't see the results," says Peres. "Here they can have jobs and make a living."

An Ambitious Vision

The 166km (103-mile) Red-Dead Sea canal is only the beginning. Both sides of the waterway would be developed to include convention and cultural centers, up to 200,000 beds of hotel space, restaurants, parks, artificial lakes and lagoons, waterfalls, and one of the largest botanical gardens in the world. Greenhouses would produce winter fruits and vegetables to be sold in the region and abroad. A high-speed train line and highway would run along the canal, transporting people and goods between the Dead and Red Seas within an hour. The area also could be made into a free-trade zone, attracting investment from around the world.

It's an audacious vision, to be sure, but the question is whether it will ever happen. Engineers have talked about building a canal from the Dead Sea to the Red Sea since as far back as 1858. Some 30 years ago when Menachem Begin was Prime Minister, plans were floated to link the Dead Sea to the Mediterranean, and in the 1990s, after Israel and Jordan signed a peace treaty, a Red-to-Dead Sea canal plan blossomed again. But progress has been excruciatingly slow.

The difference this time is the private sector is getting on board in a big way. Peres has long championed the project as a path to peace through regional economic cooperation. Now people like Tshuva—who owns the El-Ad Group real estate empire and a controlling interest in Delek (DELKG.TA), Israel's second-largest oil and gas company—and Carnival (CCL) cruise line heiress Shari Arison are throwing their support behind it.

Arab Support for the Project

Joining them are Nochi Dankner, chairman and chief executive of IDB Holding, which has interests in telecommunications, real estate, and insurance; Stef Wertheimer, founder of Iscar Metalworking, which sold 80% of its shares to Warren Buffett's Berkshire Hathaway (BRKA) in 2006 for $4 billion; and Israeli businessman Benny Steinmetz, who owns interests in diamonds, high tech, real estate, and African mines.

  • Pricey Oil’s Ugly Spillover
  • Will Clients and Brokers Bolt?

    Will Clients and Brokers Bolt?

    As if Citigroup (C) didn't have enough of a mess from its parade of writedowns, the bank must now deal with the fallout from blowups at a series of hedge funds. Some of its high-net-worth clients, whose losses in the funds approach $2 billion, are threatening to move their money to rivals. That's prompting some of Citi's top brokers to consider leaving the bank as well.

    Citigroup is in damage-control mode, scrambling to stave off the exodus. The bank recently pumped $661 million into six troubled hedge funds and devised a restructuring plan that would allow investors potentially to recoup some of their money. The company is also arranging weekly conference calls with its sales force. "I don't want any of you to think that we have underestimated the impact of this on you or your clients," Sallie L. Krawcheck, chief of Citi's Global Wealth Management, told brokers in a call on Apr. 2. "This is the most important issue we have been dealing with [in the group]."

    Muni Meltdown

    The latest drama stems from six hedge funds—sold under the brand names ASTA and MAT—that used huge piles of leverage to buy municipal bonds. The funds borrowed approximately $8 for every $1 raised. When the muni market went haywire in February, the funds tanked. Even after Citi's emergency cash infusion this year, they are down 60% to 80%. The funds' rapid demise came on the heels of a plunge at the $1 billion Falcon Strategies, another group of highly leveraged funds run by Citigroup. Late last year, the Falcon funds dropped more than 30% after making a bunch of bad bets on the mortgage market—declines that have continued into this year.

    It's not clear that Citi's recent moves will appease the two constituencies, who have claimed that the municipal bond funds were pitched as low-risk. One broker referred to them as a "failed product" in the Apr. 2 call. Another asserted that the restructuring plan will probably be a "nonstarter with investors."

    Already, at least one broker with a number of clients in the funds has jumped ship to Morgan Stanley (MS). Sources familiar with the situation say others have hired lawyers to negotiate separation agreements from Citi or to represent them if the bank tries to block them from defecting to another firm. Some brokers are referring frustrated clients to lawyers. David A. Weintraub, a securities attorney who represents two Citi clients, says the bank is trying to "sweep the mess under the mat" by requiring investors to agree that they won't sue as part of the restructuring plan.

    A Bright Spot Dims

    Citi isn't the only bank facing the wrath of investors and brokers. Bear Stearns (BSC) was quietly settling with some of its wealthiest clients who had invested in two failed hedge funds in the weeks before JPMorgan Chase (JPM) agreed to buy the firm. Bear also recently sued a broker who bolted amid the bank's collapse. A spate of failures in the $300 billion market for short-term investments known as auction-rate securities has sparked investor lawsuits at UBS (UBS), Merrill Lynch (MER), and Lehman Brothers (LEH).

    But the revolt is especially troubling for Citi. The brokerage business has been one of the few bright spots. Profits in global wealth management jumped 37% last year, to $1.4 billion. It was the only division to show growth.

    The problems started earlier this year when the municipal bond market got spooked by woes at the big insurers. Prices on bonds, in turn, tumbled. The volatility wreaked havoc on the funds, which sold short-term debt and used the proceeds to buy higher-­yielding, longer-term municipal bonds—an arbitrage strategy that profited on the spread between the different yields. The funds owned some of the hardest-hit muni bonds, those guaranteed by Financial Guaranty Insurance Co. (FGIC); when the insurer lost its AAA rating, the prices on FGIC-backed muni bonds dropped precipitously.

    'Unprecedented Volatility'

    The portfolios might not have been decimated if it weren't for all the leverage. At their peak, the funds controlled some $15 billion worth of municipal bonds although they only had $1.9 billion in investors' money. But the mayhem in the munis triggered a round of margin calls, which forced the managers to sell assets to come up with cash to pay the funds' lenders. Internal bank documents reviewed by BusinessWeek show that the largest of the municipal bond funds had lost almost all of its value by the end of February. Alexander I. Samuelson, a spokesman for Citi, says the funds suffered from "unprecedented volatility."

    Citi moved quickly to shore up the municipal bond funds with a huge cash infusion. As part of the restructuring plan, the bank has agreed to give up much of the future gains on that capital to investors. At the same time, Citi has structured the deal so clients won't suffer any further losses. Even so, more than 2,000 of the bank's wealthiest clients are out the majority of their initial investment.

    Some investors say the risks of the funds weren't apparent. Despite written materials that outlined the use of leverage and other red flags, Weintraub, who represents several Citi investors in the ASTA and MAT funds, says brokers pitched the products as a "conservative" alternative to traditional bond funds, prompting some to pile into the funds aggressively. He adds, "I've seen significant portions of investors' net worth tied up in these products."

  • Are Pension Funds Fueling High Oil?
  • Speculation_but Not Manipulation

    Speculation_but Not Manipulation

    Speculation. Manipulation. As politicians, business leaders, and ordinary consumers try to grasp the causes and effects of the historic surge in oil prices, attention turns to dark notions of exploitative financial maneuvering.

    Are savvy traders cashing in—or even cornering some portion of the market—and thereby contributing to the painful runup that's shaking everyone from airlines to commuters at the gas pump?

    Sounding a populist note on the Presidential campaign trail, Senator Hillary Clinton (D-N.Y.) has called for "cracking down on speculation by energy traders and market manipulation in oil and gas markets." ExxonMobil (XOM) Senior Vice-President J. Stephen Simon, trying to deflect criticism of oil company profits, told a Senate panel on May 21 that speculation, along with geopolitical instability and a weak dollar, have created a "disconnect" between past price patterns and the current gusher to $131 a barrel. Motivated by a similar desire to direct outrage elsewhere, OPEC Secretary General Abdalla El-Badri also has stressed the role of traders in driving prices higher.

    When oil jumps as much as it has, doubling since May, 2007, it's natural to assume that something striking must have changed. Some say the world is running out of the stuff; others blame market manipulation. The search for a culprit is understandable.

    But persuasive evidence of manipulation by traders is, so far, lacking. Speculation—placing bets on future prices—is another matter. There's plenty of that, and it's generally legal. In fact, there's a good argument, if not conclusive proof, that sharply escalated trading in oil futures has contributed to price increases. But it's important to remember that the nature of the oil market—specifically, the extreme inflexibility in both supply and demand—is amplifying whatever influence traders exert on prices.

    For there to be real manipulation, financiers somewhere would have to hold substantial amounts of oil off the market, planning to unload it in the future. Jeff Bingaman (D-N.M.), chairman of the Senate Energy Committee, has suggested that a recent trend of institutional investors acquiring oil storage capacity creates "concerns regarding potential market manipulation strategies." In a letter on May 27, he scolded officials with the Commodity Futures Trading Commission for "glaringly incomplete" testimony during recent hearings on oil speculation. He demanded more information about how the agency tracks trading.

    But suspicion isn't the same as substantiation. To date, no one has pointed to particular examples of hoarding. CFTC experts testified that market forces are driving prices. The agency says it's working on a response to Bingaman's letter.

    What can be corroborated is vastly increased trading levels as hedge funds, investment banks, pension funds, and other professional investors have poured money into oil and other commodities, seeking a hedge against inflation and alternatives to a shaky stock market. In the past five years investment in index funds tied to commodities has grown from $13 billion to $260 billion. More than 630 energy hedge funds are placing bets, up from just 180 in 2004, according to Peter C. Fusaro, founder of the Energy Hedge Fund Center, a trading information Web site.

    Futures contract traders on the IntercontinentalExchange (ICE) made bets on oil with a total paper value of $8 trillion in 2007, up from $1.7 trillion in 2005, according to U.S. Securities & Exchange Commission filings. Over the same period the volume of futures contracts traded on the New York Mercantile Exchange more than doubled, although dollar figures aren't available. The over-the-counter market is even larger but difficult to measure.

    With energy demand in China escalating and world supplies static, the influx of money has helped chase prices higher. "The hedge funds and speculators have run it up way beyond where it should be," says Malcolm M. Turner, chairman of Turner, Mason & Co., a refining consulting firm in Dallas.

    In most markets, skyrocketing prices would result in increased supply and decreased demand. That would cause prices to ease. But the oil market isn't working that way. Supply is essentially fixed in the short term because it takes years to find new fields and bring them online. Demand, meanwhile, is also essentially fixed, since there is no ready substitute for gasoline, diesel, and jet fuel. Flush with cash from investors of all stripes, traders observing these conditions have bid prices up and up.

    It's hard to calibrate the influence of speculation because most of the oil market is unregulated. That murkiness almost guarantees that conspiracy theories will continue to proliferate.

  • Are Pension Funds Fueling High Oil?
  • Thursday, May 29, 2008

    Welcome to the Weekend Web

    Welcome to the Weekend Web

    There's only one Web. At least that's been the standard response in many tech circles to the emergence of the wireless Web. The point? No matter how you get online, be it by PC or smartphone, you'll still do the same things on the Web, using roughly the same sites and services. Really?

    David Witkowski missed that memo. Witkowski, an executive at a Silicon Valley startup, behaves very differently when he uses the Web on a PC compared with when he's surfing via cell phone. From the office computer, "I pretty much live on Google," Witkowski says. But from his Research In Motion (RIMM) BlackBerry, the amateur radio enthusiast spends a lot of time searching for gadgets for sale on Craigslist, especially when he travels and on weekends. He also checks local weather forecasts and airline schedules.

    Welcome to the weekend Web, where people are spending a bigger slice of time online via wireless devices—and using a different set of sites than during the workweek. "At Google, we see the majority of our desktop traffic [in the U.S.] during weekdays," says Matt Waddell, chief of staff for Google (GOOG) Mobile. "On mobile, the situation is completely reversed." Mobile browsing surged 89% in the past year, with mobile page views increasing by 127%, according to researcher M:Metrics. The increase reflects growing availability of all-you-can eat data plans and increasingly sophisticated handheld devices such as the Apple (AAPL) iPhone.

    On Saturday, Classifieds Rule

    Of course, most Web surfing still happens via PC, but M:Metrics' research shows that when it occurs by way of mobile, much of it takes place on the weekend. The number of unique visitors to the mobile Web spikes on Saturdays, according to March figures compiled by M:Metrics. The number surged to 4.17 million on Saturdays, an 8% increase from Fridays and 4% more than on the next busiest day, Monday, according to the study, which tracked behavior by 1,861 U.S. smartphone owners.

    And like Witkowski, lots of U.S. cell phone users flock to a different set of sites via handheld. Many swarm Craigslist, the local classified ad site. In March, users spent more time on Craigslist than on any other site. "Very few Web sites are inherently local; ours is the exception," says Craigslist CEO Jim Buckmaster. When it comes to sites visited from a PC, Yahoo! (YHOO) properties hold the No. 1 spot, while Craigslist is way down in ninth place, according to researcher comScore Media Metrix.

    Electronic commerce site eBay (EBAY) is No. 2 in time spent on mobile, while it's only No. 8 on the PC Web, according to M:Metrics and comScore. The Weather Channel gets the fourth-highest number of unique visits on the mobile Web, according to Nielsen Mobile, but it's way down the rankings at No. 26 on the PC Web, according to Amazon's (AMZN) Alexa traffic monitoring service. Map provider MapQuest, owned by AOL, is the eighth-most visited mobile site, according to Neilsen, but ranks 35 on the PC Web, according to Alexa.

    "Personal Concierge"

    During the week, Americans run Google and Yahoo searches at work and compose blogs on MySpace and Facebook. The PC Web's fastest-growing site categories include pharmacies, food, cosmetics, and job search, according to comScore. During weekends, we fire up our smartphones for fun. The fastest-growing mobile-Web categories relate to weather, entertainment, games, and music, according to comScore.

  • Where Portals and Social Networks Collide
  • Let’s Grab Google’s Gazillions
  • LG Will Clean Up, With or Without GE

    LG Will Clean Up, With or Without GE

    Ever since General Electric (GE) revealed plans to put its appliances business on the block May 16, Korea's LG Electronics has been on most everybody's short list as a potential buyer. While visiting Seoul on May 28, GE Chief Executive Officer Jeffrey Immelt further fueled the speculation by praising the Korean company as a potential buyer of GE Appliances. LG is "clearly one of the leading candidates," he said during his short visit. Calling LG "a great company," Immelt said "there are many things to be admired about a combination of LG and GE Appliances."

    Best known as the maker of cheap microwave ovens and toasters a decade ago, LG has emerged as the world's No. 3 manufacturer of white goods after Whirlpool (WHR) and Electrolux (ELUX). It's also a top name in mobile phones (, 4/30/08). It won't get GE Appliances without a fight, of course. Others on Immelt's list are China's Haier Group, Mexico's Controladora Mabe, Turkey's Arcelik and Stockholm-based Electrolux. Even if one of those other companies ultimately wins GE Appliances, LG is poised to challenge Whirlpool for the top spot in the global households business for years to come.

    The Korean company has had the world No. 1 title in its sights for a while. Until Whirlpool took over Maytag in 2005, giving the Americans a big boost, LG had plans to seize the leadership in the industry by 2010. The Maytag deal put Whirlpool out of reach, but LG now could come close to realizing that ambition by acquiring the GE unit. LG's global appliances sales last year of $12.6 billion, when combined with GE's $7 billion or so, would roughly match Whirlpool's $19.4 billion and place it well ahead of Electrolux' $15.6 billion. "The GE unit will certainly whet LG's appetite," says Michael Min, electronics and tech specialist at fund manager Tempis Capital Management. "The question is pricing and terms."

    GE's Move Will Be a Game-Changer

    GE put the appliances business on the block earlier this month in the face of calls to speed up divestitures of slower-growing units. Last week, Immelt told investors that the Fairfield (Conn.)-based company may also bundle more slow-growing businesses into a possible spinoff of the century-old appliances division.

    LG acknowledges that GE's divestiture could shake up the industry. "We are closely following the situation as it will have a significant impact on the global appliances industry," LG Chief Executive Officer Nam Yong told reporters on May 27. The next day, when the authorities of the Seoul bourse queried, LG responded that it had not decided whether to bid for the GE unit.

    GE's well-established brand name could be appealing to LG, which is campaigning to break into the big leagues in the U.S. While exports account for 77% of the Korean company's overall sales of refrigerators, air conditioners, washing machines and other household appliances, it only began selling those goods under the LG brand in the U.S. in 2003. In contrast, GE's appliances division is the biggest provider of refrigerators, ovens, and dishwashers for newly built U.S. homes.

  • Why HP’s Deal Is a Head-Scratcher
  • Pricey Oil's Ugly Spillover

    Pricey Oil's Ugly Spillover

    Niko Bellic, the main character in the best-selling video game Grand Theft Auto IV, spends a lot of time driving around the virtual world of Liberty City—but he never has to stop to buy gas. That, in a nutshell, is the difference between the digital economy and the oil economy.

    The digital economy is a culture of abundance. It's virtually costless to duplicate something online, whether it be music, software, or even news. Google (GOOG), Microsoft (MSFT), Facebook, and MySpace (NWS) all vie to attract customers to their plentiful free offerings. By comparison, the oil economy embodies the culture of scarcity, wherein traders try to figure just how much petroleum is left in the world and just how high the price of oil can go.

    Digital Substitutions

    Until recently, the digital and oil economies coexisted in peace. Oil prices were low enough that total spending on crude paled next to the economy's expenditures on technology. For example, at the bottom of the tech bust in 2002, U.S. businesses spent $400 billion on information processing equipment and software. That same year, U.S. refineries spent only $131 billion acquiring crude oil. Between 1995 and 2002, the acquisition cost of crude oil averaged only 30% of spending on tech.

    But that has changed, and the oil economy has caught up with the digital economy. By BusinessWeek's calculations, in the first quarter of 2008, U.S. refineries bought up crude oil at an astonishing $504 billion annual pace. That comes close to the $534 billion annual pace of U.S. business spending on information technology.

    The U.S. has reached an important turning point in the development of the digital economy. If oil prices remain high, we will see whether the culture of abundance can survive an encounter with the culture of scarcity.

    One possibility is that the high cost of oil actually accelerates the shift into the virtual world, as people and businesses substitute digital connections for physical interactions. Managers will rely on videoconferencing instead of flying across the country or the world to meet in person. Newspapers, faced with rising energy costs for production and delivery, will make the big decision to drop their print versions and go completely online. Socializing will shift increasingly to the Web from pricey evenings out. And teenagers will do more of their driving online rather than spend $40 to fill the tank of the family car.

    Purchasing Slowdown

    Alternatively, the culture of abundance could falter under the weight of energy costs. The data centers underpinning the digital economy are prodigious users of electricity. If oil prices stay high, electricity prices should soon follow—and how long will it be before the data centers become expensive drains on corporate profits?

    Anticipating this problem, Google and other major tech companies have built some of their data centers in areas such as the Pacific Northwest, where cheap hydropower is available. Nevertheless, most of their digital infrastructure around the world has no such immunity from rising energy costs.

    Similarly, we've grown used to spending relatively small sums to purchase sophisticated routers, laptops, and smartphones. But this cornucopia of cheap electronics is based in part on making the gear 10,000 miles away in Asia and shipping it to the U.S. However, the price of inbound air freight has risen by 15% over the past year. If transport costs continue to rise, will the price of tech equipment have to rise as well?

    These questions can't be answered until we know whether oil prices are going to fall or soar to even higher levels. But here's one thing we do know: Unlike Niko Bellic, we do have to stop for gas sometime.

    LinksWeighing in on bubbles and shortages, and the possible rise of Brazil as a leading producer

    A May 26 article in London's The Daily Telegraph quoted George Soros as saying that "a weak dollar, ebbing Middle Eastern supply, and record Chinese demand could explain some of the increase in energy prices" but that "the price of oil has this parabolic shape which is characteristic of bubbles." However, the billionaire investor doesn't see a steep correction in oil prices until the U.S. and Britain fall into recession--a scenario he also predicts.

    Crude-oil supplies over the next couple of decades are likely to be far tighter than previously forecast, according to a May 22 report in The Wall Street Journal. The Paris-based International Energy Agency is expected to significantly lower its oil-supply forecast. Previously the IEA had predicted that supplies of crude and other fuels would stay roughly in alignment with demand through 2030. Instead, a production gap could emerge in the middle of the next decade.

    Brazilian President Luiz Incio Lula da Silva is thinking big. In a May 9 interview with Der Spiegel, the German newsweekly, Lula indicated that Brazil is interested in joining the cartel. Last year a huge oil reserve was discovered off the coast of Rio de Janeiro that the government believes could eventually boost the country's oil reserves by 40%. If so, Brazil could emerge as a top-10 petroleum-producing nation during the next 10 years or so.

  • Energy Stocks with Room to Run
  • Wednesday, May 28, 2008

    Making Sure Your Art Is Yours

    Making Sure Your Art Is Yours

    On May 8 the champagne was flowing at the Manhattan galleries of Bonham's auction house in anticipation of the upcoming spring sales. The mood was confident, as both buyers and sellers anticipated a successful season. While many of the guests were members of long standing in the close-knit art world, there were also some newcomers, and it's not quite clear how welcome some of them will be.

    "Here come the ARIS people!" is how Lawrence Shindell says he and his team were greeted when they arrived. Unlike most of the other attendees, Shindell deals not in art, but in insurance. The former lawyer is chairman and CEO of ARIS Title, which he founded in 2000 with Judith Pearson, his sister, who has an extensive insurance background. Based in Manhattan, ARIS offers a new product called "art title insurance," which is similar in concept to real estate title insurance. Both protect the policyholder against loss in the event of an ownership dispute.

    The global art market is flush with cash, having grown by 95% between 2002 and 2006, from $25.3 billion to $54.9 billion, according to a survey by the European Fine Arts Foundation reported in ARTnews magazine. Annual private art sales alone total $25 billion to $30 billion, according to the magazine, and despite global economic insecurity, auction houses continue to set records. A 1976 triptych by Francis Bacon sold on May 14 for $86.3 million and became the most expensive work of modern art ever sold at auction.

    Aesthetic Passions vs. Brass Tacks

    For buyers, art isn't just about making money. It's a place for investors to have a good time, socialize, and indulge their aesthetic passions. But this rosy atmosphere, says Shindell, can also lead to reckless investing practices, such as the purchase of a work with a questionable title.

    "The problem of art title has existed for some time. It was first illustrated in the context of claims of art seized during World War II, and over time as each title dispute presents itself the art market becomes more aware and risk-averse," Shindell says. "This is combined with the increasing complexity of art transactions that involve investment funds, lending against art, people generally regarding art as an asset, and the increasing value of art. Today, the financial risk of transaction is much more acute and much more in need of risk management."

    Last year's highly publicized title dispute involving director Steven Spielberg has become a cautionary tale for collectors. In 1989, Spielberg purchased a Norman Rockwell painting, Russian Schoolroom, that, unbeknownst to him, had been stolen from a Missouri gallery 16 years earlier. If Spielberg had had art title insurance, Shindell argues, he would have been able to avoid the whole mess because either his company would have uncovered the painting's origins during due diligence or it would have reimbursed the director the full cost of the painting. Without it, Spielberg was not only out the $700,000 value of the painting but also his legal fees.

    The FBI estimates that $6 billion worth of art is stolen each year. But Jane Jacob, a board member of the Appraisers Association of America, a nonprofit organization based in New York, estimates the number to be even higher, somewhere between $7 billion and $9 billion.

    Private and Unseen

    "The stolen art industry is second only to gun trafficking and drug-running. They say it's tied into that, and I believe that's exactly true," says Jacob, who is also president of Jacob Fine Art, an art appraisal and advisory firm in Chicago. She added that because the majority of art sales are private, many stolen artworks disappear for years and reappear only when they enter the public sphere as part of an auction, exhibition, or publication.

    For years the best defense for a buyer was hiring experts to trace a work's history, but it was often just as easy to forge a provenance as it was a painting.

  • Exit Bharti, Enter Reliance in MTN Tango
  • Marcial: Yahoo’s Endgame
  • Let’s Grab Google’s Gazillions
  • A Wake-Up Call for Global Tax Cheats

    A Wake-Up Call for Global Tax Cheats

    The May 13 indictment of UBS (UBS) private banker Bradley Birkenfeld, accused by federal prosecutors of helping a U.S. billionaire hide some $200 million overseas to avoid U.S. taxes, might seem like an isolated case. But attorneys and Washington insiders say it's likely to be the first of many. "They're getting some momentum going, and they're going to keep going," predicts tax lawyer Edward M. Robbins Jr., a former assistant U.S. attorney who is representing Igor Olenicoff, the billionaire in the UBS case.

    Three developments point tax watchers to that conclusion: the advent of more robust tools for authorities to track bank transactions, stiffer penalties, and a climate shift that has made politicians around the world eager to catch tax cheats.

    After the September 11 terrorist attacks, law enforcement, banks, and regulators started sharing more information about possible tax evaders as Washington focused intently on tracking global money movements. The Patriot Act, for example, allows the IRS to peer more easily into offshore bank records. And former IRS commissioner Mark W. Everson, who left last year, beefed up enforcement, which his successor has continued to do. "We're better positioned than ever to tackle these things," says an official at the IRS.

    Other nations around the world are ramping up their enforcement efforts, too—and coordinating more with each other. As of 2005, any European Union nation can obtain bank records and prosecute a tax evader from another country in the EU. Crackdowns by authorities in Germany and Britain have recovered more than $1.5 billion from outside their borders since January, according to the countries' tax authorities. In 2006, Brazil, India, and South Africa began helping each other identify suspect transactions. Says Grace Perez-Navarro, a deputy director of tax policy at the Organization for Economic Cooperation & Development in Paris: "There's strength in numbers when countries start to cooperate."

    Cross-border collaboration is humming in Washington and London. Since 2004, tax shelter sleuths from five countries—the U.S., Britain, Australia, Japan, and Canada—have shared workspace, tactics, and real-time information from a joint office at IRS headquarters. The groups expanded last year, opening a London-based multinational unit. Says Oakland (Calif.) tax lawyer Karen L. Hawkins: "As the world has become smaller and costs have become bigger, everybody appreciates [that] when you have tax scofflaws on your hands it doesn't matter what country they're from."


    It's not just blatant tax cheats who have reason to worry. The IRS has also focused increased attention on the more than 700,000 U.S. taxpayers thought to be concealing assets in overseas accounts. Some may be doing so unintentionally, like expatriates living abroad and banking locally. A law dating back to 1970 requires a U.S. taxpayer with an overseas account of $10,000 or more to disclose it to the IRS. Until 2004, people who failed to file that special form received a maximum fine of $100,000, and the law was rarely enforced. Now they can face penalties that amount to as much as half the balance in the cloaked accounts, along with prison terms of up to 10 years.

    Meanwhile, the recent developments have unsettled wealth managers, who are paid in part to help minimize clients' tax hit. Says Ted Wilson, a senior consultant at London-based Scorpio Partnership: "There's a certain amount of dread in the industry."

  • How Japan Helped Ease the Rice Crisis
  • Marcial: Yahoo's Endgame

    Marcial: Yahoo's Endgame

    Yahoo! finally looks ready to do a deal, according to people familiar with the situation. Pressure from large shareholders has persuaded Yahoo to work out a transaction with Microsoft, or alternatively, with Google. "Something will definitely happen soon" says one of the people involved in solving Yahoo's conundrum.

    "As it now stands, Microsoft is no longer expected to meet fierce opposition from Yahoo's top decision makers on its initial bid to buy Yahoo, albeit at a price slightly better than its initial offer of $44 billion, or $31 a share, on Jan. 31," says one of the people acquainted with the behind-the-scenes negotiations involving Yahoo (YHOO), Microsoft (MSFT), and Google (GOOG). Microsoft abruptly backed out of talks with Yahoo on May 3, after withdrawing its latest offer of $33 a share, or $47.5 billion.

    Search-ad plans

    Sources familiar with the situation say that Microsoft is still very interested in buying Yahoo outright. Spokespersons for Yahoo and Microsoft declined to comment on any negotiations. Several big shareholders are in on the talks. Microsoft said on May 18 that it is talking with Yahoo about a "transaction" that would be short of a full buyout, which sources say involves a purchase of Yahoo's search-ad operation.

    But if Microsoft and Yahoo can't agree on a full buyout, Yahoo is prepared to go ahead with an alternative deal with Google that is also favored by some of the big investors: a nonexclusive outsourcing partnership on Yahoo's search-ad business. As described by one of the people involved in the talks, Yahoo is expected to save close to $1 billion in costs and, at the same time, increase revenues from search ads.

    Other sources close to the situation describe a possible Google deal differently. They say the search giant would participate in an open auction for Yahoo's search ads, the proceeds of which could be worth hundreds of millions for Yahoo. But the deal would not involve all of Yahoo's search ads, they say, and Yahoo would retain much of its search and search-ad infrastructure, lessening its savings.

    Icahn effect

    Among the big shareholders that are said to have applied heavy pressure on Yahoo to work out a deal are Robert Lovelace, chairman of Capital Research Global Investors, which owns a nearly 10% stake; Carl Icahn, who owns a 4.3% stake; hedge fund Paulson & Co., with 3.6%; T. Boone Pickens, who recently purchased 0.73%; and Steven Cohen's S.A.C. Capital Advisors, with 0.6%. "There has been a lot of headway in talks about a deal because of strong pressure from some of the large stakeholders," according to a source familiar with the situation. They declined comment.

    Since Icahn announced his purchase of Yahoo shares on May 15, at an average price of $25 to $26 a share, the stock has climbed to more than $27. Icahn has threatened to wage a proxy fight to oust board members and formed a slate of 10 nominees of his own to replace them. Yahoo has delayed its annual meeting from July 3 to the end of July.

    "We believe the push-back of the meeting will allow Yahoo to continue negotiations related to potential corporate transactions, and possibly preempt or minimize unpleasant developments that could come to a head at the meeting," says Scott Kessler of Standard & Poor's. Kessler has a price target of $33, which he explains is "equal to the last proposed offer Microsoft made to acquire the company, and the amount on which Carl Icahn indicated he is focused on." He believes Microsoft continues to be interested in acquiring Yahoo and that Icahn will ultimately be successful in bringing the parties together and helping consummate a deal.

    Second time is the charm

    Mark May of investment firm Needham upgraded Yahoo to buy from hold, based on his belief that "significant positive change is more likely to happen at Yahoo" because of actions and statements by Icahn, Microsoft, Yahoo, and others over the past few days. "We believe a Microsoft acquisition is the most likely outcome, with an assumed 50% probability of an acquisition, either at $33, $35, or $37 per share," says May. In Needham's analysis, "we give greater weight to a compromise price," he adds.

    The second most likely outcome, according to May, is a search-outsourcing agreement with Google, Microsoft, or both. But he believes that an outsourcing-search agreement would be the "wrong long-term strategic move for Yahoo."

    From how it looks right now, Icahn may not get the chance to wage a proxy fight. Although a deal is never a deal unless it is formally approved and signed by all the parties concerned, it appears that Microsoft is closer to buying Yahoo than at any time since it first made its unsolicited buyout bid in January. Meanwhile, Google is anxiously waiting in the wings, still hoping it can get a slice of Yahoo's search-ad business.

  • Let’s Grab Google’s Gazillions
  • Where Portals and Social Networks Collide
  • Tuesday, May 27, 2008

    Energy Stocks with Room to Run

    Energy Stocks with Room to Run

    The surge in energy prices has been so rapid and relentless—particularly since the beginning of this year —that investors may think it's too late to grab a piece of the action. Of course, they may have thought that when oil was at $80, or $100, or $125 a barrel. But now many forecasters think that oil prices could be headed higher than the low $130s reached in the past week—maybe toward $200 a barrel over the next year. On May 16, Goldman Sachs (GS) raised its average price estimate for the benchmark West Texas Intermediate grade of crude for the second half of 2008 to $141 from $107 per barrel.

    There are dissenters, however, such as a Bloomberg analyst composite forecast of $97 per barrel for WTI crude. Some economists think the prices aren't sustainable, as they are being driven more by speculation among traders than a worsening supply-and-demand outlook. Mark Gilman, an analyst at the Benchmark Co. in New York, attributes the price runup to money flows from big institutional investors who have suddenly decided that commodities are a valid asset class.

    One thing everyone on Wall Street can agree on: The gains in prices of energy-sector stocks have lagged far behind the underlying commodities, due to prevailing skepticism in the market that the energy price hikes can be sustained. Valuations in the energy sector are considerably below historic medians, says Rob Mackenzie, an oilfield service analyst at Friedman Billings Ramsey (FBR) in Arlington, Va.

    Goldman Sachs Raising Forecasts

    That's good news for investors who think fuel prices will continue to push higher and are eager to participate in those gains.

    In a May 5 research note, Goldman Sachs analyst Arjun Murti raised his earnings forecasts for the integrated oil producers—the big outfits that have soup-to-nuts operations in oil exploration, production, and refining—and trimmed his estimates for refiners, although he said he'd continue to buy industry players Valero Energy (VLO) and Frontier Oil (FTO) at their current prices.

    Tim Guinness, chairman and chief investment officer of Guinness Asset Management in London, pointed out that energy equities, as represented by the MSCI World Energy Index, are up just 25% since the end of June, 2007, while the WTI crude price has jumped 84%, from $70 to $130, over that same period.

    Gauging the Impact of a Correction

    Based on the supply-and-demand evidence, Dan Rice, who co-manages the $1.47 billion BlackRock Global Resources Fund (SSGRX), believes $100 oil is defensible but says there isn't enough information yet about demand at higher prices for him to gauge whether or not they can be sustained.

    If there was a substantial decline in oil prices, integrated oil stocks would certainly get hit, probably harder than the oil price correction might warrant, given the oversized reaction in equities to significant downward moves in corresponding commodity prices in recent months, says Clay Hoes, subadviser of the $145 million AmEx Global equities Energy Fund.

    But since it takes a few months for oil price hikes to flow through to earnings, integrated oil producers will certainly revise their earnings higher, which "could make for another leg of investable opportunity if prices go up," says Minneapolis-based Hoes. Any pullback in oil stocks would also scare out the momentum players—those whose invest based on price moves—giving longer-term investors the chance to buy on the dip, especially if they expect a positive earnings surprise, he says.

  • Are Pension Funds Fueling High Oil?
  • Oil’s Murky Math
  • Exit Bharti, Enter Reliance in MTN Tango

    Exit Bharti, Enter Reliance in MTN Tango

    A year ago, Anil Ambani, chairman of India's Reliance ADA Group, was vacationing in South Africa. While in the country, he was invited for dinner by Phutuma Freedom Nhleko, president of MTN Group, South Africa's leading telecom player. (The two had earlier met at an international forum, say Reliance insiders.)

    That dinner didn't lead to any immediate relationship between the companies. However, it may have planted the seed for the surprise announcement on May 26 that Ambani's Reliance Communications had begun "exclusive negotiations" with MTN for a "potential combination of their businesses."

    Making the news even more dramatic in India was the timing. Not only had the Reliance conglomerate—with $29 billion in assets, and interests in power, telecom, financial services, and entertainment—previously said it had no interest in MTN, but the South African company's talks with Indian company Bharti Airtel had only 48 hours earlier collapsed (, 5/15/08).

    Potential $63 Billion Juggernaut

    What attracted Reliance, India's No. 2 telecom operator, to the MTN deal, just when it soured for rival Bharti? The chance to become a leading global telecom player. "Africa has been on the radar for both Bharti and Reliance, as it's the last of the underpenetrated telecom markets," says Madhusudan Gupta, senior research analyst in Singapore for Gartner (IT), a global IT research and advisory firm. A Reliance-MTN combination would create a $63 billion telecom juggernaut with 116 million subscribers across India, Africa, and the Middle East, larger than AT&T (T) and many European players.

    That, of course, was what had attracted Bharti to MTN (BusinessWeek, 5/15/08). Only a week earlier, on May 16, Bharti—backed by bankers Standard Chartered (STAN.L)—was the favored suitor, all set to pick up a controlling stake in the South African telco. The Bharti proposal went to the MTN board on May 21. The deal floundered, analysts say, because of a regulatory hurdle. A not-so-ebullient debt market would have forced Bharti to cough up huge equity in a cash-and-shares deal that was expected to be around $20 billion. This would have increased the foreign stake in Bharti beyond the 74.5% limit set by Indian law.

    MTN, it appears, was uncomfortable with that. "We knew that the MTN deal wasn't worth it for Bharti," says Hitesh Kuvelkar, associate director for research at Mumbai brokerage First Global Securities. His calculations showed that Bharti would not be able to "enjoy the same low-cost economies of scale in Africa like it does in India."

    Colonial Past Complicates Matters

    There were also political calculations on MTN's part. South Africa's leading telecom player wanted to soft-pedal the takeover aspect of the deal, a reflection of the sensitivity of a deal involving a company from India. (When both countries were under British colonial rule, many Indians moved to South Africa, and later the apartheid system classified Indians as a group separate from both whites and blacks.) MTN didn't want to be seen as selling out to an Indian company, say deal insiders. "It wasn't a question of who merged into whom, but who was seen to take over whom," says an investment banker close to the deal.

    So the drama heightened. On May 22, MTN spurned Bharti's offer of a buyout with a counterproposal to make the Indian telco its subsidiary.

  • Why HP’s Deal Is a Head-Scratcher
  • How Japan Helped Ease the Rice Crisis
  • Sunday, May 25, 2008

    The Mac in the Gray Flannel Suit

    The Mac in the Gray Flannel Suit

    Soon after Michele Goins became chief information officer at Juniper Networks (JNPR) in February, she decided to respond to the growing chorus of Mac lovers among the networking company's 6,100 employees. For years, many had used Apple's (AAPL) computers at home and clamored for them in the office as well. So she launched a test, letting 600 Juniper staffers use Macs instead of the standard-issue PCs that run Microsoft's (MSFT) Windows operating system. As long as the extra support costs aren't too high, she plans to open the floodgates. "If we opened it up today, I think 25% of our employees would choose Macs," she says.

    Funny thing is, she has never received a single sales call from Apple. While thousands of other companies scratch and claw for the tiniest sliver of the corporate computing market, Apple treats this vast market with utter indifference. After a series of failed offensives by the company in the 1980s and 1990s, Chief Executive Steve Jobs decided to focus squarely on consumers and education customers when he returned to Apple in 1997. As a result, the company doesn't have ranks of corporate salespeople or armies of repairmen waiting to respond every time a hard drive fails. Nothing that could divert his minions from staying focused on Apple's core calling: creating the next cool thing for the world's consumers.


    And why not? In the March quarter, Mac sales blew away all forecasts, soaring 51% over the previous year, or more than three times the rate for the personal-computer industry. Throw in the iPod and iPhone, and Apple's total sales have surged from $5.2 billion in fiscal 2002 to $24 billion last year. Its share price has risen 2,300% over the past five years, giving the company a market capitalization, at $154 billion, that tops those of tech giants Hewlett-Packard (HPQ), Dell (DELL), and Intel (INTC).

    Millions of consumers are seeing the Mac in a new light. Once an object of devotion for students and artists, the Mac is becoming the first choice of many. Surging demand for the machines led Apple to predict revenues will rise 33% in the second quarter, to $7.2 billion, even in the face of an economic slowdown.

    What's less obvious is that the enthusiasm is starting to spill over into the corporate market. It's a people's revolution, of sorts, with workers increasingly pressing their employers to let them use Macs in the office. In a survey of 250 diverse companies that has yet to be released, the market research firm Yankee Group found that 87% now have at least some Apple computers in their offices, up from 48% two years ago. "There's always been this archipelago of Macintosh use" among graphic artists and advertising managers, says Scott Teissler, chief information officer of Turner Broadcasting System (TWX). "My sense is that CIOs are more willing to see that expand without putting up as much resistance as in the past."

    Mac fanboys have been singing Apple's praises for years, of course. But now the call is coming from mainstream users, people who may have started off with an iPod, then bought a Mac at home and no longer want a "Windows-by-day, Mac-by-night" existence. At Sunnyvale (Calif.)-based Juniper, CEO Scott Kriens is one of the people with a new MacBook laptop. "Everybody told me I should get one," he says. "It's not anything to do with negative perceptions about Microsoft. It's just that Macs are cool." IBM (IBM) and Cisco Systems (CSCO) are running similar tests on whether to let Macs into the office. Google (GOOG) has allowed employees pick their machine of choice for years.

  • Closing the Door to Microsoft Vista
  • American Idol's Ads Infinitum

    American Idol's Ads Infinitum

    It was Beatles night at American Idol. At least, that was how a recent episode was billed. But sometimes it looked more like Apple (AAPL) night. Or maybe Coke night. Before Ryan Seacrest introduced a contestant warbling Lennon and McCartney, he cradled an Apple iPhone and, for nearly a minute, waxed on about how perfect it was for voting the guy off the show. The judges seemed to approve of Seacrest's Apple plug because when he was done, they raised red Coca-Cola (KO) cups in salute.

    Seven years into a monster ratings run, Fox Entertainment's (NWS) American Idol has become as much a marketing showcase as musical slugfest. Contestants cavort in rock videos to pitch Fords (F), troop off to Apple to record iTunes tracks, and answer questions brought to you by AT&T (T). Now, as America's top show reveals mounting signs of weakness—ratings before the May 21 finale were off about 10% from last year—it seems fair to ask: Will product placement kill the video star?

    O.K., so Idol is hardly dying. With an average of about 26 million folks tuning in to each telecast, the show clobbers its closest rival. The writers' strike drove off many network viewers, and most shows lose some pop after seven years. Still, Idol's ratings decline has been unusually steep. "I'm satisfied creatively, but not necessarily with the performance," says Fox Entertainment Chairman Peter Liguori. "[We] want to...inject [Idol] with new levels of energy, unpredictable twists and turns, and greater levels of storytelling."


    The producers might also look at the clutter of in-show ads. "I know they want to make money," says Caitlin Knott, an 18-year-old from Brownstown, Mich. "But no one wants to see Ryan Seacrest selling stuff." Knott watches Idol these days only because her mom is a fan. That's another issue: The show is aging faster than a '70s rock act. The median viewer age is 43—about the age when advertisers start to recoil. "Idol is still the one place where an advertiser can reach a huge audience," says Andrew Donchin, an executive at ad agency Carat North America. "But if there are too many ads, the kids will be the first to notice." One danger, says Brad Adgate, senior vice-president of ad firm Horizon Media, is that young viewers will simply watch the show on YouTube.

    Three years ago, Idol scaled back its sponsors from five to three to limit ad clutter. But this year it added Apple, figuring it fit the show's demographic. Meanwhile, advertisers like Ford Motor, which on May 14 unveiled a sportier Focus in a weekly 45-second rock video, became omnipresent. It's a lot of plugs to get through. Idol showed 4,151 product placements in its first 38 episodes this year, according to Nielsen Media Research. That's up just 4% from '07, but the time on screen jumped nearly 19%, to a total of 545 minutes.

    Overload? "We haven't heard that from any of our focus groups, and the advertisers are pleased with the results," says Keith Hindle, who heads up licensing for FremantleMedia, which produces Idol with CKX's 19 Entertainment, which owns the show. "We spend most of our time turning people away." Ford general marketing manager John Felice expects to be back next year: "If we didn't, [the slot] would be snapped up by a competitor in a heartbeat."

    Even with viewers aging, industry watchers say Fox gets $700,000 for a 30-second spot on Idol. CKX, meanwhile, reports making $63.3 million from Idol in 2007. This year, it says, net profit already is up 63%. Yet CKX says Fox has guaranteed Seacrest and the gang just one more season. So it may be some time before America speaks and Idol is voted off.

  • The Mac in the Gray Flannel Suit
  • Closing the Door to Microsoft Vista
  • How Japan Helped Ease the Rice Crisis
  • Meet Your New Recruits: They Want to Eat Your Lunch

    Meet Your New Recruits: They Want to Eat Your Lunch

    Thirteen young men and one woman meet in a drafty medieval-style room in a campus residence hall at Yale University. Thick exposed beams cross the ceiling above a large fireplace. A stained-glass panel in the heavy wooden door is decorated with a cobalt "Y." "Anyone interested in finance wants to join the Globalfund," says Philip Uhde, 22, the group's founder and president. "And the smartest of those people are here."

    A cross between Yale's secretive Skull & Bones society and a young tycoons club, the Globalfund is one of a growing number of exclusive business groups cropping up at elite colleges across the country. The organizations, fueled by a mix of youthful ambition and careerist anxiety, have become an increasingly important part of the competition for the most lucrative jobs at investment banks, hedge funds, and consulting firms. For many students, it's a race for money and prestige that's starting earlier and earlier. The slumping economy and tens of thousands of layoffs on Wall Street have only aggravated the angst.

    Launched in 2006, the invitation-only Globalfund calls its undergraduate members "partners" and evaluates candidates based on their investment ideas. Even among hand-picked aspirants, the partners reject three out of four. Partners pool earnings from summer internships at financial firms to make real, if modest, investments backed by research the students do themselves. One Monday evening in March, Harry Greene (video of Greene), another founding partner, rattles off statistics about China Natural Gas (CHNG), a small distribution company based in the city of Xi'an that trades over the counter. Glancing periodically at his BlackBerry, Greene, a 23-year-old senior majoring in economics and mathematics, describes to his colleagues how he called a company investor-relations representative from his dorm room and grilled her—in Mandarin, which he mastered after extensive classroom study and a year off from college spent in Beijing.

    Most Globalfund partners speak a second language, Greene explains later. "We can often do more-thorough due diligence than Wall Street analysts because we can interview management in their native language." The fund's initial $800 stake in the gas company nearly tripled over four months last year, and the students sold their shares for a profit. A more recent $2,300 position in China Natural Gas has slipped slightly in value, but Greene assures the group it will bounce back soon. After graduation in May, he plans a short stint with a software company before heading to an investment banking job.

    Once, merely graduating from an Ivy League college or similarly prestigious rival like Stanford or Swarthmore qualified students for a choice entry-level perch on Wall Street. No longer. "The whole idea of smart people just falling into banking is becoming rarer," says Lance LaVergne, a vice-president and global head of diversity recruiting at Goldman Sachs (GS). "Clubs are essential to preparation, especially for students who are not majoring in traditional disciplines like finance or accounting."

    Blue-chip employers are looking for substantive experience and signs of early commitment. Wall Street internship programs that used to seek out students after their junior year now invite motivated freshmen and sophomores. Students feed the frenzy themselves, some showing up at college having already attended summer business-prep camps while still in high school.


    Now the credit crunch is chewing up many of the jobs hyper-directed undergraduates yearn for. As the contest for junior analyst and novice trader slots intensifies, unlikely rumors keep some awake at night. "I have been hearing that a lot of these banks are only taking one student from Harvard," says Anthony Genello, a 21-year-old junior and president of operations of the Harvard Financial Analysts Club. "It definitely hit home and makes everyone more crazed." Desperate to distinguish themselves, students on at least two dozen top campuses have lately formed or expanded high-powered clubs, some of which offer eye-popping opportunities to invest and network. "As markets become more difficult and hiring needs are reduced, it will likely become more difficult for students to just wind up in our business," Goldman's LaVergne says.

    Some veterans in business and finance worry that increasing student fascination with pre-professional clubs bespeaks a lack of appreciation for the perspective afforded by a liberal arts education. Etched high on the stone wall of the grand room where Yale's Globalfund holds its weekly meetings, a quote from poet Edgar A. Guest urges the precocious partners to value life's intangible joys:

    The thing that we call living isn't gold or fame at all,
    It is laughter and contentment and the struggle for a goal,
    It is everything that's needful to the shaping of a soul.

    But these words seem lost on the Yale students, most of whom look elsewhere for inspiration. "We are followers of Warren Buffett," explains Greene, who says he studies the famed Omaha investor's letters to shareholders as if they were sacred texts.

    In dollar terms, the Globalfund is relatively small. At any given time, it has about $25,000 from students' pockets to deploy. The partners liquidate it at the end of the school year and distribute the proceeds on a pro-rata basis. Their counterparts at a cross-campus competitor, the Yale College Student Investment Group, manage no less than $280,000. That money remains within the university's endowment, having grown from seed funds donated by alumni such as investment guru James B. Rogers Jr., who earmarked cash years ago to improve undergraduate investment acumen at the New Haven campus.

    As students sense tougher times setting in, many seek to "front-run the process," says Chris Borrero, president of the Yale College Student Investment Group. "People are taking a step back and trying to get a [Wall Street] internship earlier so they have a better rsum for the junior internship." Membership in a finance club is seen as a boost up the career ladder. Borrero, a 21-year-old junior from Westford, Mass., says he began reading The Wall Street Journal aloud to his father in the second grade. He notes that 40% of the investment group's 250 members are freshmen, far more than in the past.

    High-revving students scoff at advice they sometimes hear about intellectually browsing before settling on a narrow employment path. "Many of my fellow classmates have been planning out their college choices since middle school, so to tell them not to plan for a future career during freshman year is illogical," says Janet Xu, 22, a senior at Yale and editor of the undergraduate magazine Yale Entrepreneur. She is heading off soon to be an analyst for Sears Holdings (SHLD) in Chicago.

    Driving some of the credentials-mania is the impression that campus clubs open doors to summer internships many firms are relying on more heavily for full-time hiring. JPMorgan Chase (JPM), for example, says 90% of its entry-level hires last year were former interns, up from 60% five years ago. At the big consulting firm Accenture (ACN), "these clubs help us identify the best people for our internship program," says John Campagnino, global recruiting director.

    Some of the organizations aim to broaden opportunities for women and minority students. At Columbia University, sophomore Anastasia Alt (video of Alt), 19, helped raise nearly $30,000 from Fidelity, Goldman,

  • Are Pension Funds Fueling High Oil?
  • Let's Grab Google's Gazillions

    Let's Grab Google's Gazillions

    Tough times we live in. Gas is at $3.80 a gallon, with milk not far behind. Mortgages and consumer confidence are curdling, while public coffers underfloweth: The city of Vallejo, Calif., just went broke. Whatever is a Presidential candidate to do?

    Channel your inner Hugo Chvez, I say. The Venezuelan strongman has been blissfully expropriating the profits of oil companies. But back here in the U.S., even amid the embarrassing riches of $130 crude, Big Oil is no easy target. Just ask Valdez, Alaska, where all its Exxon oil spill money is.

    So I hereby propose we smack a windfall-profits tax on, yes, Google (GOOG). A cartel unto itself, the Internet megaplayer wields a $180 billion market cap, has boatloads of cash, and enjoys Pablo Escobar-ian profit margins. Moreover, Google's "don't be evil" credo is an expired link. Its profiteering, in fact, brings pain to many—and cries out for the healing and justice of a targeted fiscal transfer. A results-minded taxpayer, I proffer this bill of particulars:

    Google Promotes a Too-Free Press. As the ultimate dot-com toll collector, Google is the ultimate enemy of the journalism that we constitutionally cherish.

    Digital convergence and Internet migration are certainly great phrases to stick in an annual report. But as far as journalism goes, these are utterly bankrupting ideas. "The notion that the enormous cost of real newsgathering might be supported by display advertising, or by the revenue-sharing of a Google search box on the side of the page, is idiotic on its face," says Craig Moffett, vice-president and senior analyst at Bernstein Research. Not that Google needs to care: By next year, it will either run or broker half of the world's $55 billion in online advertising. For every dollar of traditional ads it displaces, Google's intermediation kicks back mere nickels to content providers.

    Although Google profits wildly in the process, it won't pony up the money to station and protect correspondents in Baghdad, nor will it pick up the martini tab when a reporter interviews a hedge fund manager's whistleblowing mistress.

    Last year saw the largest cut in U.S. news staffs in three decades, with the online-only side failing to grow sufficiently to absorb all the jobs lost from print. The ad revenues and market values of U.S. newspapers and magazines have effectively been annexed by Google. Explains an investor at a large tech hedge fund: "They siphon it off everyone else but only spritz it back out every now and then." Case in point—Google's $1.7 billion purchase of YouTube cost more than half the value of the New York Times Co. (NYT) and twice that of McClatchy (MNI), owner of 80 papers. The waste. The insult.

    Pity me, too. Thanks to Google, my professional destiny is to end up blogging in my bathrobe about, well, Google. Surely the inveterate fat cat could spring for my unemployment insurance.

    Google Thumbs Its Nose at Soaring Food Costs. There are maize mobs in Mexico and rice riots in the Philippines. I've downgraded to USDA subprime beef. Google's staff, meanwhile, enjoys unlimited helpings of soy milk shakes, macrobiotic salad greens, and risotto-porcini omelets adorned in gold foil. Who says there's no free lunch (or breakfast, dinner, and all-day snackroom access)?

    According to Silicon Alley Insider's Vasanth Sridharan, Google spends somewhere between $70 million and $75 million annually on feeding its 9,600 already well-paid employees at its Mountain View (Calif.) and Manhattan headquarters. Even the word "headquarters" does little justice to the in-your-face West Coast Googleplex, a campus of funhouses decked out with fitness equipment, a massage room, a baby grand piano, foosball and pool tables, free washers and dryers, and more entitlement than seen in all 73 years of the Social Security program.

    How can Google afford its food tab? "Easy, of course," writes Sridharan. "Last year Google earned $4.2 billion."

    Unless we tax away such profligacy, famished, price-gouged swing voters could storm the Googleplex—and the only thing awash in milk shakes would be that baby grand.

    Google Stifles Innovation. All this largesse might be understandable if Google weren't so nefariously bent on snuffing out progress. As Google hoards 70% of the lucrative U.S. search market, the company is using its heft and excess cash to promote free for free's sake—a nihilist m.o. if there ever was one. We're all the worse for it.

    Poor Microsoft (MSFT) has devoted decades and billions to bequeathing us Word, Excel, and the indispensable Vista. It repelled Netscape's pesky onslaught and beat back regulatory apparatchiks. In thanks, Google ate Microsoft's search lunch, flooded the system with its free, open-source Office alternative, and giggled diabolically when the house that Gates built failed to land Yahoo! (YHOO)

    And have you seen YouTube lately? If Google is indeed the torchbearer for free, why hasn't it put some of its billions toward defending the site's once-glorious cache of pirated clips, instead of letting lawyers water it down? Maybe it's that Google is too busy partnering with Chevron (CVX) and BP (BP) on some solar-power project. Well, it takes a windfall profiteer to know one.

    Ever the callous monopolist, Google has more money than it knows what to do with. I say that it's high time we took a chunk of it back.

    Stay tuned to C-Span and look for me on Meet the Press.

  • Where Portals and Social Networks Collide
  • The Mac in the Gray Flannel Suit
  • The Escalator Pitch
  • Friday, May 23, 2008

    Are Pension Funds Fueling High Oil?

    Are Pension Funds Fueling High Oil?

    If you're wondering why driving to work has gotten so expensive, you might want to peruse your pension fund's investments. That's because speculation by institutional investors pouring money into the commodities market may be largely to blame for spiking oil prices, according to testimony on May 20 before the Senate Committee on Homeland Security & Governmental Affairs. Crude oil, a so-called hard asset, is viewed as a buffer against inflation—a foe of longer-term investment returns. At the hearing, "Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?," senators heard from those defending the role of speculators in oil and commodities markets as well as those who argue that excessive speculation is the root of global price surges.

    "[Commodities] are experiencing demand shock from a new category of speculators: institutional investors like corporate and government pension funds, university endowments, and sovereign wealth funds," said Michael Masters, managing member of Masters Capital Management, a Virgin Islands-based hedge fund. "Index speculators are the primary cause of the recent price spikes in commodities."

    On May 20, crude oil prices settled at a record $129.07 on the New York Mercantile Exchange (NMX) after touching a new high of $129.60. The national average for a gallon of gasoline hit a record of $3.80 per gallon the same day.

    Light CFTC Hand

    The explosion in the number of financial players in the energy markets has occurred particularly in the past two years—also a period of soaring energy prices. That's why speculators are now under fire from Congress and the public as potential culprits (, 5/15/08).

    But in the hearing, Masters distinguished between traditional speculators and what he calls index speculators, or passive investors who enter the commodities markets as a long-term hedge against inflation. Commodities exchanges limit the number of positions an investor can take in the market, but Masters says the Commodity Futures Trading Commission has allowed unlimited speculation in these markets through a loophole. This so-called swaps loophole exempts investment banks like Goldman Sachs (GS) and Merrill Lynch (MER) from reporting requirements and limits on trading positions that are required of other investors. The loophole allows pension funds to enter into a swap agreement with an investment bank, which can then trade unlimited numbers of the contracts in futures markets.

    Some experts fault the CFTC, charged with regulating commodities markets, for allowing such loopholes. "Congress has provided the CFTC the power to control this unlimited [speculation]; the law is very specific about establishing position limits," says Steve Briese, author of The Commitments of Traders Bible and, a site that focuses on U.S. futures markets. "The problem is they have abdicated this role." The dramatic surge in energy prices has helped to spark inflation across the economy and, as others at the hearing testified, has cut into profits of most in the supply chain. Briese points to Treasury reports that the top five users of swap agreements are investment banks, four of which dominate swap dealing in commodities and commodities futures: Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), HSBC North America Holdings (HBC), and Wachovia (WB).

  • Circuit City: Due for a Change?
  • Cancer's Cruel Economics

    Cancer's Cruel Economics

    Editor's note: For a CBS Evening News report on the challenges confronting new cancer drug approvals, which was made in collaboration with BusinessWeek, click here.

    Dr. Oleg Loran treats kidney cancer, but he doesn't have much to offer his patients. They have a 60% chance of surviving five years if the disease is caught early, but more than a third are diagnosed after the cancer is well advanced, when their chances of reaching the five-year mark drop as low as 11%. So Loran was relieved in April when a radically new treatment for kidney cancer was approved. Oncophage, developed by Manhattan-based startup Antigenics (AGEN), is a vaccine that recruits the patient's immune system to fight off cancer cells. It may keep the cancer from recurring for up to two years. "This is undoubtedly a major victory," says Loran.

    Perhaps, but not for Americans. Dr. Loran practices in Moscow, and Russia is the only country that has approved Oncophage. The data was not conclusive enough to convince the U.S. Food & Drug Administration; Antigenics will have to mount another clinical trial before the agency will consider approving it for stateside applications. Such a trial would likely take 8 to 10 years and cost at least $500 million, well beyond the means of Antigenics, which has no other products and a stock trading at just over $2 a share. And that, in a nutshell, illustrates the quandary of cancer drug development.

    Death and Disappointment

    The U.S. government has doled out more than $75 billion for oncology research since President Nixon declared his War on Cancer in 1971. Outlays by the pharmaceutical industry have been far greater. Yet the death rate from cancer has dropped only about 7% in the past three decades, with most of the progress in the last few years. The disease continues to strike 1 in 3 Americans, and it kills 1 in 4. That averages out to 1,500 deaths every day, at an annual cost to the nation of $210 billion and climbing. Cancer is expected to become the nation's biggest killer within a decade, surpassing heart disease.

    There are many plausible reasons for so much disappointment, not least the complexity of the disease. But more and more researchers, companies, and patients lay part of the blame on the FDA. They complain that the agency is using outmoded and overly rigorous methods for evaluating a new generation of cancer treatments, rather than doing everything possible to get better drugs to sick patients.

    The Vioxx Effect

    Since 2005 the FDA has approved 18 new cancer drugs, many of them breakthrough products. But the pipeline contains hundreds more that will never get to market because corporate developers aren't able, or willing, to come up with the money, time, and patients necessary to establish acceptable data. A Tufts University review found that only 8% of experimental cancer drugs end up receiving FDA approval, compared with 20% of medicines for all other diseases.

    The FDA knows there's a problem. In 2004 it announced with much fanfare an effort, dubbed the Critical Path Initiative, to make clinical trials more productive. But the initiative never got much funding and little has been heard since. Outside the agency, academic and industry researchers who come up with creative ideas for evaluating drugs routinely complain that the FDA is too conservative to embrace new methods.

    The agency's caution may be prudent. But its critics say regulators are too wary of congressional scrutiny in the wake of the debacle involving Merck's (MRK) painkiller Vioxx. Ever since that drug was pulled off the market in 2004 amid safety concerns, the FDA has come under withering attacks in Washington, and overall drug approvals have plummeted. "It's always far easier to say no to a drug than yes,"says Dr. David Kessler, director of the FDA from 1990-97 and now a professor at University of California at San Francisco. "But there are times when the public interest requires that the agency step out of its role solely as a policeman and put into practice those things that might advance the public health."

    Kessler believes the agency should overhaul its methods for reviewing cancer drugs much as it did in the late 1980s and 1990s for AIDS drugs. Protease inhibitors and other breakthrough treatments were rushed through the approval process under a new expedited review process put in place to improve patients' access to potentially life-saving medicine. We ended up with a class of drugs that changed the face of the disease," says Kessler. "Even I was struck by how fast it happened, and I was living it."

    Kessler and others want a similar push for new cancer drugs, one that would include major changes in human testing. The clinical trial process now is a three-part, years-long effort that effectively kills off all but a handful of once-promising drugs. Medical journals and conferences regularly report on alternative approaches, such as altering a trial's criteria once the first results are in, using mathematical models to predict safety and efficacy, and setting targets that take months to reach instead of years. Pharmaceutical companies would especially like to be able to break down drug-trial results into subsets of participants, so they can establish which groups responded best.

  • Where Portals and Social Networks Collide
  • Oil’s Murky Math
  • How Japan Helped Ease the Rice Crisis
  • How Japan Helped Ease the Rice Crisis

    How Japan Helped Ease the Rice Crisis

    With prices now falling, the global rice crisis seems to be subsiding. That's thanks in part to a policy announcement by a Japanese bureaucrat. On May 19, Japan's Deputy Agriculture Minister, Toshiro Shirasu, said that Tokyo would release some of its massive stockpile of rice to the Philippines, selling 50,000 tons "as soon as possible" and releasing another 200,000 tons as food aid. The first shipment could reach the Philippines by late summer. Shirasu also left open the possibility of using more of its reserves to help other countries in need.

    To understand Japan's role in deflating the rice market, it helps to visit the warehouses rimming Tokyo Bay. It's here in temperature-controlled buildings that Japan keeps millions of 30-kilogram vinyl bags of rice that it imports every year. Tokyo doesn't need rice from the outside world: The country's heavily subsidized farmers produce more than enough to feed the country's 127 million people. Yet every year since 1995, Tokyo has bought hundreds of thousands of metric tons of rice from the U.S., Thailand, Vietnam, China, and Australia.

    A Rice Imbalance

    Why does Japan buy rice it doesn't need or want? In order to follow World Trade Organization rules, which date to 1995 and are aimed at opening the country's rice market. The U.S. fought for years to end Japanese rice protectionism, and getting Tokyo to agree to import rice from the U.S. and elsewhere was long a goal of American trade policy. But while the Japanese have been buying rice from farms in China and California for more than a decade, almost no imports ever end up on dinner plates in Japan. Instead the imported rice is sent as food aid to North Korea, added to beer and rice cakes, or mixed with other grains to feed pigs and chickens. Or it just sits in storage for years. As of last October, Japan's warehouses were bulging with 2.6 million tons of surplus rice, including 1.5 million tons of imported rice, 900,000 tons of it American medium-grain rice.

    It's one of the cruel ironies of global trade that poor countries have been paying through the nose for rice while Japan has been sitting on reserves (BusinessWeek, 5/1/08). The imbalance is a cause for concern because half the world's population depends on rice as a staple food. Following Shirasu's announcement that Japan is putting its reserves to good use, U.S. trade officials have sent word to Tokyo that they back the move. The two sides will meet in Washington on May 23 to discuss the details.

    That's good news for poor nations like Bangladesh and the Philippines that either import rice or get handouts. The Japanese gesture has helped to rein in rice prices. On the Chicago Board of Trade (CBOT), rice futures have fallen almost 20% since reaching an all-time high of $25.07 per 100 lb. on April 24. But they are still nearly three times their levels from a year ago.

    WTO Rules Act as a Safety Valve

    What started the panicky buying? Worries about a scarcity of rice after major exporters banned or drastically cut back their overseas shipments (, 4/28/08). Since last fall, countries such as India and Vietnam—among the world's top rice-exporting nations—have curbed shipments to keep a lid on domestic inflation caused by soaring food prices. That forced many countries to dip into their own inventories. The U.S. Agriculture Dept. estimates that such stockpiles are now at their lowest levels since the early 1980s. The recent cyclone that devastated Myanmar's rice crop, hoarding by consumers, and speculative buying at the CBOT added to the panic. In Haiti and parts of Africa, food riots erupted.

    This time, the WTO rules—formally known as Minimum Market Access—acted as a safety valve for the market. Japan's 1.5 million tons of imported rice reserves amount to roughly 5% of the 28 million tons that are traded globally ever year, which explains why Tokyo's announcement had a sizable and immediate impact.

  • Home Depot and Lowe’s Get Hammered
  • Are Pension Funds Fueling High Oil?
  • Wednesday, May 21, 2008

    Why HP's Deal Is a Head-Scratcher

    Why HP's Deal Is a Head-Scratcher

    When Hewlett-Packard (HPQ) announced its $13.9 billion acquisition of tech services giant Electronic Data Systems (EDS) on May 13, pundits heralded it as a bold move by HP CEO Mark Hurd. In one stroke, it seemed, he had put HP on a stronger footing with market leader IBM (IBM) in the fiercely competitive tech services business. Together, HP and EDS will create a services giant with $38 billion in revenues, compared with IBM's $54 billion.

    Yet a closer look at the deal raises questions about Hurd's strategy and choice of dance partner. EDS, which was founded by H. Ross Perot in 1962 and pioneered the practice of taking over corporations' computing operations, was slow to respond in the early 2000s to the threat of nimble Indian rivals offering services at sharply lower prices. Revenues stagnated, and EDS racked up huge losses. Eventually, the company increased its overseas hiring, and bought control of an Indian company, MphasiS. But even now MphasiS operates independently, with its own sales force and customer base.

    So this deal may not change the game when it comes to one of the most important factors in tech services. The top-tier services companies need large, low-cost, global workforces, and their operations need to be tightly integrated so employees with diverse skills collaborate smoothly. IBM, Accenture (ACN), and Indian companies such as Tata Consultancy Services lead in this effort, while EDS and HP have lagged. "The services sector is going through a shift, and this merger doesn't address the global service-delivery challenges that HP faces," says N. Venkat Venkatraman, chairman of the Information Systems Dept. at Boston University's School of Management.


    During a conference call after the deal was announced, Sanford C. Bernstein (AB) analyst Toni Sacconaghi questioned Hurd's choice of EDS. "You could have bought a smaller, faster-growing company with the offshore characteristics." Later, in an interview, Hurd rejected suggestions that an Indian company such as Cognizant Technology Solutions (CTSH) or Satyam Computer Services (SAY) might have made a better match. "We thought this made sense," he said.

    For Hurd, the logic is simple. He prizes EDS' giant outsourcing business because it has a large number of customers producing annuity-style revenues. There isn't much overlap between the companies. And he says there will be considerable cost savings. EDS CEO Ronald Rittenmeyer will run the services subsidiary.

    EDS, late to the offshoring trend, had only a smattering of employees in low-cost locations when Rittenmeyer joined in 2005. The company now has 45,000 people working offshore, and plans to hire more. Rittenmeyer says MphasiS will continue to operate independently, but adds, "We'll look at integrating all of these things over time, and we'll do it efficiently and effectively."

    Hurd, who excels at cost-cutting, had a choice between buying a big racehorse seemingly past its prime or a young colt with lots of potential. He bought the mature horse. Now we'll see if he can whip EDS back into shape.

  • Circuit City: Due for a Change?
  • Microsoft Joins One Laptop per Child
  • Home Depot and Lowe's Get Hammered

    Home Depot and Lowe's Get Hammered

    It was already clear that Home Depot (HD) and Lowe's (LOW) would get pummeled by the drop in new-home construction and housing sales. But now even consumers who are resigned to staying in their existing homes are pulling in their horns, as rising oil and food prices team up with credit woes to eat into their disposable income.

    The combination has proved deadly for the two giants of home improvement. Investors took one look at their dismal sales and earnings reports on May 19 and 20 and began dumping shares. Home Depot's stock price fell almost 6% over the two days, while Lowe's shares lost more than 4%.

    Little matter that analysts think Home Depot and Lowe's are doing a good job managing through the tough environment, cutting costs, and slowing the opening of new stores. Their earnings numbers mostly met low expectations. Home Depot saw net income of 41 per share, excluding a one-time charge, vs. 53 a year ago. Same-store sales fell 6.5%, while total sales fell 3.4%, the company said. One day earlier, Lowe's reported an 8.4% drop in same-store sales as it earned 41 per share, vs. 48 a year ago. Thanks to an increase in store count, total sales for Lowe's rose 1.3%.

    Further to Fall?

    Both chains are hoping the federal stimulus checks mailed this month can slow the slide in same-store sales this quarter, but the effect is likely to be limited. "There will be some offset there from the stimulus package," said Lowe's Chairman and Chief Executive Robert Niblock, though he still predicts same-store sales will fall another 6% to 8% this quarter.

    A far bigger factor: There are no signs the housing and mortgage crisis is lifting. "In fact, conditions worsened in many areas of the country," Home Depot Chairman and Chief Executive Frank Blake said in a prepared statement.

    The housing downturn set off a dismal chain reaction for the home-improvement industry. New home purchases often inspire construction of a new patio, wallpapering a bedroom, or other remodeling. The pop of the real estate bubble has called a halt to much of that. But even for those homeowners who are resigned to staying put, falling home values make them feel less enthusiastic about launching home-improvement projects. And even if they're so inclined, the evaporation of home equity and tightening of credit lines makes money harder to come by.

    A Pileup of Woes

    Lowe's Niblock told analysts that his chain has broader troubles, as well. "We've had ongoing pressures from housing, we've had tight credit markets," he said, "but now all of a sudden you've got a couple of other variables … on top of those." Consumers are spending less because of high food and fuel prices, and because they're worried about the economy and the job market, Niblock said.

    There was some good news. Lowe's was widely praised for cutting expenses. "Management buttressed investor confidence in its ability to manage costs and profitability against near gale-force market headwinds," said Budd Bugatch of Raymond James (RJF).

    Customers and investors have criticized Home Depot for weak customer service, especially compared with Lowe's. Home Depot says it is making strides reorganizing operations while improving service. Some analysts praised management for cutting back on promotional activity that wasn't working. Home Depot "is taking advantage of the slowdown to reinvest in the business," said Credit Suisse (CS) analyst Gary Balter. He says the chain should be "well-positioned once the housing recovery comes," better than Lowe's.

    Downturn Squashes Small Rivals

    Both chains say they're gaining market share through the housing downturn, because it puts many smaller, independent competitors out of business. This points to the strength of the Home Depot-Lowe's "duopoly," said Bank of America (BAC) analyst David Strasser. "This industry should only get stronger the longer the downturn lasts, as more independents go out of business," he said.

    The key to watch for is a rise in housing turnover—if Americans start buying, selling, and moving again, home-improvement stores will get busy. "Really, it's about [the duration], not depth, of the slowdown at this point," said David Schick of Stifel Nicolaus (SF). So far, there is "no macro evidence of business picking up."

    A check from the government might inspire the purchase of a couple more plants or the painting of a room, but it will take a true revival of the housing market before Americans feel confident enough to redo the kitchen or finish the basement. Only then can Home Depot and Lowe's start humming again. "Many consumers remain hesitant to begin big-ticket projects," Niblock said.

  • Circuit City: Due for a Change?
  • Why So Long to Call a Recession?
  • Why HP’s Deal Is a Head-Scratcher
  • Circuit City: Due for a Change?

    Circuit City: Due for a Change?

    There is no question that Philip Schoonover's job, as CEO of electronics store chain Circuit City (CC), is in jeopardy. On Feb. 29, Wattles Capital Management, which recently bought 6.5% of the company's stock, proposed replacing Circuit City's entire 12-member board of directors with at least five of its own nominees. "Phil's actions in the past year show that he doesn't understand retail; he's completely mismanaged the company, and it's time for him to go," says Mark Wattles, principal of the investment firm, in an interview with

    Under Schoonover's leadership in the past couple of years, Circuit City's performance has been dismal. The company, which is the second-largest specialty consumer electronics chain behind Best Buy (BBY), has posted net losses every quarter in the past year. That follows a $12 million net loss in its fiscal year that ended Feb. 28, 2007. Schoonover has told shareholders that management is dissatisfied with the results. Since Schoonover took over the top job in March, 2006, he has talked of a turnover plan to relocate underperforming stores and improve customer service, which seemed to give a lift to the company in the first few months. But two years and many quarterly losses later, Schoonover's plans sound hollow. "Our current focus is to rebuild our selling culture," said Schoonover to analysts on Dec. 21, after reporting third-quarter losses totaling $207.3 million.

    That focus might be too little, too late. Especially since almost all analysts who cover the company blame its current woes on Schoonover's decision last March to fire 3,400 of Circuit City's most experienced employees. At the time the company said those workers were making too much money and could be replaced with cheaper workers. Analysts say the move led to a devastating loss of morale and a decline in customer service. "Obviously, if customers prefer to walk into a Best Buy rather than a Circuit City, which carry almost exactly the same things, the only point of difference is customer service," says Bob Bacarella, portfolio manager at the Monetta Funds, based in Wheaton, Ill., and a shareholder of competitor Best Buy.

    Circuit City's stock, trading at 4.50, has declined 77% in the past year. Despite annual sales of $12 billion, the company's market capitalization today is a mere $760 million, making it a ripe target for shareholder actions like the one from Wattles Capital Management, as big investors can buy huge chunks of stock on the cheap.

    The Wal-Mart Effect

    To be fair, not all of Circuit City's problems are self-inflicted. A lot of them can be traced to 2006 holiday sales (, 4/23/07), when a dramatic shift took place in the hottest selling flat-panel TV category. A calculated decision by giant retailer Wal-Mart Stores (WMT) to break the below-$1,000 barrier for 43-in. TVs triggered a financial meltdown among several consumer-electronics retailers. Tweeter Home Entertainment Group (TWTR), the high-end chain, shuttered 49 of its 153 stores before filing for bankruptcy. So did regional retailer Rex Stores (RSC), which boarded up dozens of its outlets.

    Circuit City subsequently closed 70 stores in the U.S., put its 800 Canadian stores on the block, and then laid off the 3,400 workers. To many of his critics, that move demonstrated Schoonover's lack of experience in running stores. "Nobody who has worked in the field would have made the kind of firing decision that Phil made last year," says investor Wattles. "Phil didn't realize that you cannot cut costs and save your way out of deterioration. He didn't have a plan, and that crushed the stores."

  • Home Depot and Lowe’s Get Hammered
  • Why HP’s Deal Is a Head-Scratcher