Monday, June 30, 2008

U.S.-North Korea Nuclear Deal: Who Wins?

U.S.-North Korea Nuclear Deal: Who Wins?

When President George W. Bush announced on June 26 that he was removing North Korea from a U.S. list of terrorism-sponsoring nations, it seemed that Pyongyang had deftly played its nuclear card. After years of escalating threats, North Korea seemed to be ready to compromise, publicly acknowledging its nuclear plants and materials, and agreeing to resume stalled six-nation talks with the U.S., China, Japan, South Korea, and Russia, in a process that would lead to the dismantling of its Yongbyon nuclear facility. The reward: coveted access to Western capital and technology, which Pyongyang needs to shore up its shaky economy. South Korea's former Unification Minister Lim Dong Won hailed the deal as the biggest step forward in U.S.-North Korean relations since the Korean War ended in 1953.

But the benefits for Pyongyang won't kick in right away. Sure, Washington has lifted restrictions on trade and released Pyongyang's assets that were frozen under the Trading with the Enemy Act. And it has already begun the 45-day period required to erase North Korea from the terrorism blacklist, which makes the country eligible to receive aid from international financial institutions. Yet real improvements in its economy and its trade ties with the West will be a long time in coming.

Consider Pyongyang's access to foreign aid. To start receiving low-cost loans from the World Bank or the Asian Development Bank, North Korea must first become a member state of the International Monetary Fund. Joining the IMF would require that Kim Jong Il adopt reforms promoting transparency and openness; hardly anybody believes the dictatorial leader will do so.

"Made in North Korea" Lacks Consumer Appeal

Don't expect North Korea's trade with the U.S. to suddenly surge, either. In theory, Pyongyang can start doing business with U.S. firms. But the reality is that North Korean goods would face import tariffs as much as 100 times higher than countries with a most-favored-nation status. And how many American consumers would buy a product sporting a "Made in North Korea" tag?

Trade would certainly help an economy that's been barely functioning for nearly two decades. Until the 1970s, the North's economy was comparable in size to that of the South. Now it's about 1/36th the size, South Korea's central bank figures. Last year, North Korea's economy likely contracted 2.3%, following a 1.1% decline in the previous year, according to the Bank of Korea. Says Choi Soo Young, a senior researcher at the Korea Institute for National Unification, a Seoul state-funded think tank: "With the economy reduced to an empty shell, you wouldn't call it a win for the North."

Does Washington gain anything from dealing with an unpredictable dictator? After all, this could be Kim's latest ploy to coax U.S. officials to the negotiating table. In 1994, North Korea agreed to freeze its nuclear program in exchange for U.S. promises of economic aid. That arrangement fell apart when Pyongyang reneged on its part of the deal. In October 2006, the regime's underground nuclear-detonation test aggravated tensions. The problem with talking to a pariah like Pyongyang is that the U.S. could embolden other so-called rogue regimes to ratchet up the rhetoric to win similar concessions.

Unresolved Issues Linger

North Korea has yet to fully relinquish its nuclear ambitions. Its declaration, which came six months after a December deadline set by Washington, only relates to nuclear weapons that use plutonium. The North still hasn't explained how many weapons it has built, whether it exported nuclear technology to countries such as Syria, or whether it has a backup program to enrich uranium. There are other problems, including the threat of an attack—either from troops or ballistic missiles—on South Korea, Japan, or other Asian neighbors, and the unresolved kidnapping of Japanese citizens decades ago.

Not long ago a U.S. deal with North Korea, which Bush named in an "axis of evil," seemed a long shot. Washington has stressed symbolism more than anything else in the recent agreement.

  • Nuclear’s Tangled Economics
  • What I Did at VC Camp

    What I Did at VC Camp

    In the spring of 2007, Michael Sullivan was trying to figure out how to add some mojo to his startup, Affine Systems. As a graduate student in applied mathematics at Harvard University, Sullivan had co-founded the company in the fall of 2006 with classmate Bobby Impollonia. Working out of their homes, the two computer whizzes had whipped up a software program to let media companies know if their copyrighted videos show up on the Internet. But like many engineers, they didn't know much about business, and they hadn't yet put together a business plan.

    Then they heard about an unusual summer program that had just been started by Highland Capital Partners, a venture capital firm with offices in Boston and Silicon Valley. The program was designed as a sort of summer camp for entrepreneurs. Open to undergraduate and graduate students, it offered aspiring entrepreneurs a $7,500 stipend, free office space, and access to Highland's staff and outside contacts. Sullivan applied and got in. Last May, he and Impollonia started the 10-week program.

    They ended up with a lot more than a rsum booster. Highland's partners helped Affine craft a business plan, land their first test customers, and hire two senior executives. Ultimately, last winter, Highland put venture money into Affine, one of two companies in the program to get funding. "They give you full access to their entire network," says the 27-year-old Sullivan. "I don't think there's anything else like it."

    Participants with Potential

    Venture capital firms have long had traditional internship programs, like those at law firms and investment banks. College kids spend the summer tagging along to meetings and listening to presentations. But VCs have never been comfortable giving students real responsibility for making investments.

    Highland's summer camp, which started its second year with the arrival of 10 new students this month, is a practical compromise. VCs focus on their business and maintain control over investment decisions, but they get an injection of new ideas from bright youngsters—with no strings attached. Highland's program isn't unique. A handful of other venture firms run similar summer camps, including Lightspeed Venture Partners, which is offering 19 students office space, mentoring, and up to $15,000 in grant money to help them jump-start their business. "We are trying to connect with high-potential people," says Michael Gaiss, a senior vice-president at Highland who runs its program.

    For this summer's camp, the firm received 140 applications from students at Stanford, Harvard, Northwestern, and other top schools before choosing four teams. In return for its efforts, Highland asks one thing: If the startup raises venture capital within 180 days from the end of the program, the firm gets an option to co-invest up to 50% of the total financing. Highland didn't launch the effort thinking it was going to fund a lot of companies, but last year it ended up financing two of the eight teams, including Affine.

    For the budding entrepreneurs, the proposition is clear: Besides the free space and a modest stipend that covers the rent, Highland's participants get to work side by side with professional business builders. Highland's full-time staff is a stairwell away on the second floor, while the teams occupy a first-floor space with the feel of a grad school dorm room. To blow off steam, there's a putting green in one office and a basketball hoop in another. Every so often, the teams will kick back on a patio, drink some beers, and fire up the barbecue.

  • A Tepid Welcome for AIG’s Boss
  • Tips for Homeowners on the Brink

    Tips for Homeowners on the Brink

    Mortgage rates are skyrocketing. Credit is locked up. Economic pressures are rising. Time to bail on that McMansion?

    Some homeowners who are three months to a year behind on their mortgages have chosen to leave their homes altogether. Anyone can walk away from a house—even a retired baseball great, Jose Canseco, who abandoned his Encino (Calif.) property earlier this year.

    But attractive as "just walking away" may seem to a homeowner at the end of his or her financial tether, leaving a property to the mortgage-holder or other interested parties carries a serious credit risk and significant legal responsibility.

    "The first thing you should think about is where you are going to live," says Benjamin Bradley, a partner at law firm Cohen Milstein Hausfeld & Toll. "You can always move back in with your parents, but it is better to just make an arrangement with a lender."

    Forbearance Vs. Forgiveness

    It is a good idea to call the person you may least want to talk to: The lender. Cash-strapped homeowners can get forbearance from their lender if they act early. This agreement reduces or suspends the mortgage payment for a limited time, giving homeowners a temporary reprieve.

    A forbearance is not the same as loan forgiveness. Ultimately the mortgage payments have to be reinstated, and anywhere from three to six months of missed payments have to be accounted for. The very lucky—and reasonably well-off—can pay off the amount accumulated during forbearance in one lump sum. But for those who still find themselves in short-term financial trouble, most lenders offer specialized payment plans in which the borrower agrees to add a portion of the missed payments to the mortgage until the account is current.

    "Lenders want to have borrowers tell them what is going on," says Traci Rollilns, partner at law firm Squire, Sanders & Dempsey. "It is cheaper to work with borrowers than it is to foreclose."

    Speaking directly to a lender seems logical enough. But surprisingly, homeowners who struggle and fail to meet their mortgage payments month after month rarely contact their lenders. And the further they fall behind, the less likely they are to reach out for help. "Some people ignore their lenders if they cannot make their payments," says Brian Sullivan, a spokesman for the Housing & Urban Development Dept. (HUD). "They do not answer their phone. They throw the notices away. And then the house is in foreclosure."

    By then, just walking away becomes much more attractive than trying to pay a loan for more than a house is worth.

    A Drastic Step

    Walking away has not reached epidemic proportions yet. A survey released in June by You Walk Away, a Los Angeles company that advises people whose homes are in foreclosure, shows that fewer than 1% of homeowners nationwide have abandoned their foreclosed properties rather than make arrangements to pay off the mortgages. While Jon Maddux, principal and co-founder of the company, acknowledges that abandoning a home is not always in the best interest of cash-strapped homeowners, he argues the long-term rewards for doing so far exceed the risk.

    "Walking away from a mortgage severely damages your credit," Maddux says. "But if you pay off your credit cards, get debt-free, and rebuild your credit that way, the foreclosure is gone after seven years. We've seen some of our clients' credit scores improve by 100 points after foreclosure."

    Perhaps such a drastic step may help some homeowners. But even in the current housing market, those cases are few and far between.

    "We are seeing more and more people who blame the market," says Anthony Casareale, an attorney with Akerman Senterfitt's distressed property practice. "There are those who abandon their homes and think 'I'll live to fight another day.'" But chances are, the people who are desperate enough to walk away from a house will never be financially secure enough for that brighter day to come."

    Preventive Measures

    Tighter lending practices and new legislation directed toward mortgage lenders could help revitalize the flagging market. But in the meantime, there are some quick and easy ways for homeowners to prevent mortgage difficulties from ruining their financial future:

    • Contact either an FHA-sponsored or independent loan counselor to help you negotiate with your lender.

    • Ask your lender about loan modification or changing the terms of the home loan.

    • Find out if you are eligible for a partial claim, a one-time interest-free loan that will allow you to bring your account current.

    Homeowners across the country are struggling to hold onto their investments amid a weakening labor market, rising inflation, and a sluggish economy. They may not always succeed, but by maintaining contact with lenders—and seeking out assistance from private and government entities—at least they have a chance.

    "There are always options for homeowners," says Meg Byrne, director of HUD's Office of Single Family Program Development. "Nobody wants to see a neighborhood made up of boarded-up houses. And nobody wants to see anybody thrown out of their home."

  • When Builders Go Broke
  • Builders: Give Home Buyers a Tax Credit
  • Sunday, June 29, 2008

    The War Over Offshore Wind Is Almost Over

    The War Over Offshore Wind Is Almost Over

    Wind farms are springing up in Midwestern fields, along Appalachian ridgelines, and even in Texas backyards. They're everywhere, it seems, except in the windy coastal waters that lap at some of America's largest, most power-hungry cities. That's partly because the first large-scale effort to harness sea breezes in the U.S. hit resistance from an army led by the rich and famous, waging a not-on-my-beach campaign. For almost eight years the critics have stalled the project, called Cape Wind, which aims to place 130 turbines in Nantucket Sound about five miles south of Cape Cod. Yet surprisingly, Cape Wind has largely defeated the big guns. In a few months it may get authorization to begin construction. Meanwhile, a string of other offshore wind projects is starting up on the Eastern Seaboard, in the Gulf of Mexico, and in the Great Lakes.

    Much of the credit—or blame—for this activity goes to Jim Gordon, the man who launched Cape Wind in 2000. His goal is to provide up to 75% of the electric power on Cape Cod, Nantucket, and Martha's Vineyard by tapping the region's primary renewable resource: strong and steady offshore breezes. He has methodically responded to every objection from Cape Cod property owners and sometime-vacationers, ranging from heiress Bunny Mellon and billionaire Bill Koch to former Massachusetts Governor Mitt Romney and Senator Edward M. Kennedy (D-Mass.). "This is like trying to put a wind farm in Yellowstone National Park, as far as we're concerned," says Glenn Wattley, CEO of the Alliance to Protect Nantucket Sound, the opposition's lobbying arm.

    Since 2000, Cape Wind's Gordon has burned through $30million of his own wealth, much of it to pay for studies of the site. The result is a four-foot-high stack of environmental reports, including three federal applications looking at the wind farm's potential impact on birds, sea mammals, local fishermen, tourism, and more. "We've gone through a more rigorous evaluation process than any prior energy project in New England," says Gordon, who built natural-gas-fired power plants before starting Cape Wind.

    Victory is by no means certain. Cape Wind could yet bog down in litigation or be nixed by the feds, Gordon concedes. Even if Washington O.K.'s the project, he must find a way to finance it. Expected costs have more than doubled in the last eight years, to over $1.5billion, by some estimates. And assuming the funding comes through, engineering and construction could drag on for three or more years.

    Regardless of how this all plays out, Gordon has secured his spot as one of U.S. wind power's pioneers. When it comes to building natural gas and oil rigs in federal waters, energy companies must follow clear government rules. But until Cape Wind floated its first proposal, Washington had never spelled out how to develop an offshore wind farm. Gordon's plan prodded the Minerals Management Service, the federal agency that oversees energy extraction from public lands, to take action. The regulators hope to release detailed rules for utilizing wind, wave, and tidal power by yearend, at which point the path will be cleared for applications from a dozen or so wind projects in federal waters, with nearly as many under way in state areas. "We'll see an incredible flurry of proposals to tap ocean resources for clean and renewable energy," says Maureen A. Bornholdt, program manager at the MMS's Office of Alternative Energy Programs.

    It's easy to understand why entrepreneurs are rushing in. Winds at sea blow stronger and more steadily than on land, where they are slowed by forests, hills, and tall buildings. Unlike terrestrial winds, sea breezes also tend to keep blowing during the hottest times of the day, when the most power is needed. Within a few miles of much of the U.S. coastline, in almost any direction, wind resources are more abundant and dependable than anywhere outside the Great Plains. Exploiting this resource could supply about 5% of all U.S. electricity by 2030, says the National Renewable Energy Laboratory.

  • Investing: Playing the Brazil Boom
  • Wind: The Power. The Promise. The Business
  • A Second Wind for Aging Wind Turbines
  • Nuclear's Tangled Economics

    Nuclear's Tangled Economics

    To power America's future, Senator John McCain (R-Ariz.) has an energy plan with a distinctly French accent. "The French are able to generate 80% of their electricity with nuclear power," the presumptive Republican Presidential nominee points out. "There's no reason why America shouldn't."

    In a mid-June speech, part of a continuing blitz on energy issues, McCain laid out his vision for 100 new nuclear plants—45 of them to be built by 2030. They would help meet America's energy needs, and because nukes don't emit greenhouse gases, they would fight global warming as well. McCain also wants to borrow from the French playbook by reprocessing and reusing spent nuclear fuel and by providing government incentives to get all this done. Nukes now produce 20% of U.S. electricity, says McCain senior policy adviser Douglas J. Holtz-Eakin: "To move north of that, we have to be aggressive."


    But McCain may not want to follow the French example too closely. While France's existing 59 atomic plants are relatively trouble-free, its largest nuclear company, Areva, has run into difficulties building next-generation reactors in France and Finland. The Finnish project is two years behind schedule and more than $1.5 billion over budget, while construction of the other plant, in Normandy, was temporarily halted in late May because of quality concerns. And while France has the world's biggest fuel-reprocessing program, it still hasn't found a permanent home for a growing pile of highly radioactive waste that's left over. The waste sits in heavily guarded storage at Areva's La Hague reprocessing plant.

    The U.S. nuclear industry believes that delays and cost overruns, which helped kill new plant construction in the late 1970s, are less likely today, thanks to now-standardized reactor designs and a streamlined U.S. government licensing process. That process has yet to be tested, though, and costs for new plants are climbing. Two years ago, the price of a 1,500-megawatt reactor was pegged at $2 billion to $3 billion. Now it's up to $7 billion and rising, as the cost of concrete, steel, and other materials and labor soars. MidAmerican Energy Holdings (BRK), a gas and electric utility owned by Warren Buffett's Berkshire Hathaway (BRK), shelved its own nuke plan earlier this year, saying it no longer made economic sense. "The country badly needs new nuclear plants to deal with the climate issue," says John W. Rowe, chief executive officer of Exelon (EXC), currently the largest nuke operator, and chairman of the Nuclear Energy Institute, the industry's trade group. "But they are very expensive, very high-risk projects."

    So risky and expensive, in fact, that building new ones won't happen without hefty government support. NRG Energy (NRG), Dominion (D), Duke Energy (DUK), and six other companies have already leaped to file applications to construct and operate new plants largely because of incentives Congress has put in place. The subsidies include a 1.8 cents tax credit for each kilowatt hour of electricity produced, which could be worth more than $140 million per reactor per year; a $500 million payout for each of the first two plants built (and $250 million each for the next four) if there are delays for reasons outside company control; and a total of $18.5 billion in loan guarantees. The latter is crucial, since it shifts the risk onto the federal government, making it possible to raise capital from skittish banks. "Without the loan guarantees, I think it would be very difficult for the first wave of plants to move forward," says David W. Crane, CEO of NRG.

  • Job One for McCain or Obama: Jobs
  • Soros-Backed Chinese Airline Hangs Tough

    Soros-Backed Chinese Airline Hangs Tough

    These are certainly not the best times for an upstart Chinese airline to be spreading its wings worldwide. With the price of oil pushing $140 a barrel, carriers around the globe are cutting back on the frequency of some flights, cutting others altogether, and imposing new fees on passengers (BusinessWeek, 5/29/08).

    Until recently, Chinese carriers enjoyed some protection from oil's dizzying rise, thanks to government subsidies for fuel oil. But on June 19, Beijing's National Development & Reform Commission announced it was curtailing support, resulting in a sudden 8% increase in fuel costs for airlines.

    It's not just oil that's causing headaches for Chinese airlines. While many carriers have been hoping this would be a boom year because of the Beijing Olympics in August, so far 2008 has been one to forget. The bad news started with some of the worst winter weather in decades, followed by the unrest in Tibet in March. The May 12 Sichuan earthquake killed tens of thousands and sent the whole country into mourning. More recently, floods have hit southern China. These catastrophes have led to depressed air travel.

    Continental Drift

    And with the global economy weakening, traffic numbers for China's airlines are declining. The number of domestic air travelers shrank 3.3% last month, the first such drop since the SARS epidemic in 2003, according to the Sydney-based Center for Asia-Pacific Aviation. While airlines hope for a lift thanks to the opening of direct charter flights (BusinessWeek, 6/23/08) between the mainland and Taiwan for the whole year, traffic is likely to grow just 10%, compared with a 16% increase in 2007.

    Still, Hainan Airlines is pushing ahead with expansion plans. The fourth-largest carrier in China, Hainan is named after the island province in the South China Sea near Vietnam that is China's answer to Hawaii. Outside the country, Hainan Airlines is best known as George Soros' favorite carrier. The billionaire investor paid $25 million for a 15% stake in the airline in 1995 and invested another $25 million in 2005. But the airline stuck largely to China, with just a few international flights in Asia.

    Now Hainan is branching out. Last month it launched its first route to the U.S., a nonstop service from Beijing to Seattle. The company has also expanded to Europe, flying to Brussels, St. Petersburg, and Budapest; a Berlin flight will begin in September. A Hainan executive says the airline isn't going to be deterred by the inauspicious moment. "We have a long-term strategy," says Joel Chusid, general manager for North America. "It's like a train going on the tracks."

    The Cathay Pacific Challenge

    Hainan is making moves closer to home as well. The company owns 45% of Hong Kong Express Airways (HKE), a six-aircraft airline controlled by Macao casino tycoon Stanley Ho's family. (They also control a sister carrier, Hong Kong Airlines.)

    The Hong Kong market is dominated by Cathay Pacific and its affiliate, Hong Kong Dragon Airlines, but through HKE, the Ho family and Hainan are hoping to win passengers looking for an alternative way of flying to China's commercial hubs of Beijing and Shanghai. HKE has recently started flying the Hong Kong-Beijing route and on June 11 launched service between Hong Kong and Shanghai.

  • Fly the Shrinking Skies
  • Chinese M&A Goes Global
  • Saturday, June 28, 2008

    Wall Street Takes Aim at Itself

    Wall Street Takes Aim at Itself

    The shares of big Wall Street brokers and banks tumbled to new lows on June 26, and the firms had only each other to blame.

    Many have pointed to Wall Street's love affair with ultra-risky mortgage securities as a major factor in the yearlong financial crisis, but the more immediate culprit for financial shares' plunge was the brokerages' own research arms, which have spent the past week mercilessly training their analytical firepower on each other.

    The Street's analysts have produced a barrage of reports painting ever-gloomier pictures of the health of key industry players, making the big banks and brokers look increasingly like a circular firing squad.

    Gravest Insult for Citigroup

    On June 26, Goldman Sachs (GS) analyst William Tanona downgraded the entire U.S. brokerage industry from attractive to neutral. Goldman slashed 2008 earnings estimates for Merrill Lynch (MER) from a positive 8 a share to a loss of $3.55 per share. But the gravest insult was reserved for Citigroup (C), which was placed on Goldman's conviction sell list.

    "We are hard pressed to find a catalyst that will move the group significantly higher over the next few months as fundamentals continue to deteriorate," Tanona wrote. The Goldman note appeared to be a major factor in the stock market's big sell-off on June 26.

    On the same day, however, Goldman Sachs was itself downgraded by Wachovia (WB) analysts, from outperform to market perform. Goldman may be the "top name" in its industry, but analyst Douglas Sipkin points out that Wall Street firms are entering slower summer months amid rising commodity prices and new worries about the economy.

    But that's only part of the recent wave of internecine opinion-mongering.

    Earlier this week, Morgan Stanley (MS) was downgraded by a JPMorgan (JPM) analyst.

    Downgrading the Giants

    Analysts from both Credit Suisse (CS) and Bank of America (BAC) recently took aim at Merrill Lynch and UBS (UBS). On June 23, Bank of America's Michael Hecht, who previously thought the two firms would report positive earnings in the second quarter, said he now expects losses of $1 per share for Merrill and $1.70 for UBS.

    On June 19, Credit Suisse downgraded its fellow Swiss rival UBS from outperform to neutral. "Management faces the challenge of rebuilding the franchise," Daniel Davies wrote. "We expect this to be a difficult job." Another Credit Suisse analyst, Susan Roth Katzke, slashed 2008 earnings estimates for Merrill on June 23 while warning the firm may have to sell its stakes in Bloomberg or BlackRock (BLK) to raise capital.

    She also cut earnings estimates for Citigroup on June 24, predicting it could see losses on risky assets of $6 billion to $10 billion this quarter.

    It seemed as if Merrill Lynch's rivals were ganging up on it: Amid a tidal wave of worry about the giant broker, smaller firms Sanford C. Bernstein (AB) and Buckingham Research Group also issued negative options on Merrill this week.

    Street of Gloom

    Yet a Merrill analyst, Edward Najarian, arguably kicked off the current wave of negativity on June 20, when he slashed earnings estimates for large banks including Bank of America, Wachovia, and Wells Fargo (WFC). He predicted Wachovia's earnings would be 50% lower than previous estimates.

  • Energy Stocks with Room to Run
  • Wind: The Power. The Promise. The Business

    Wind: The Power. The Promise. The Business

    It's an ordinary day on Pete Ferrell's 7,000-acre ranch in the Flint Hills of southeastern Kansas. Meaning, it's really windy. When he drives his silver Toyota Tundra out of the canyon where the ranch buildings nestle, the truck rocks from the gusts. Up on top of a ridge, surrounded by a sweeping vista of low hills, rippling grass, and towering wind turbines that make you feel like a mouse scampering underfoot, Ferrell carefully navigates into a spot where the wind won't damage the doors when they're opened. Then he points to an old-style windmill, used for pumping water, which was erected by his father decades earlier when the ranch was in the throes of a drought. "That's the windmill that saved us in the '30s," he explains, his voice growing husky with emotion.

    Ferrell, 55, is a fourth-generation Kansan who looks the part. He's slim with gray hair, squint-lines, and a cowboy hat. His great-grandfather established Ferrell Ranch on the high plains east of Wichita in 1888, and it has nearly failed several times over the years. Ferrell has held the place together through cattle grazing, oil wells, and, now, wind. He owns the land under 50 of the 100 turbines of the Elk River Wind Project, a 150-megawatt wind farm that opened in 2005.

    Ferrell is one of the fathers of Kansas wind farming. He ran through three different developers before getting the operation going on his land. There was stiff opposition to wind farming in the Flint Hills from preservationists concerned about marring the landscape and from politicians tied to the coal industry, but, finally, Ferrell had his way. He now travels the state as an evangelist. "He has been a great spokesman for wind in Kansas," says Mark Lawlor, project manager in the state for Horizon Wind Energy, a wind farm developer. "He has lived off the land, and he's found something new he can tap into."

    For centuries, the wind has been the enemy of the farmer. It blows away soil, dries out crops, and the howling makes some people crazy. So it's a twist of fate that wind is now emerging as an ally. Some call the vast American prairie the Saudi Arabia of wind, capable of producing enough electricity to meet the entire country's needs—assuming there's the will to harness it.

    Wind power, while still just a speck in America's total energy mix, is no longer some fantasy of the Birkenstock set. In the U.S., more than 25,000 turbines produce 17 gigawatts of electricity-generating capacity, enough to power 4.5 million homes. Total capacity rose 45% last year and is forecast to nearly triple by 2012. Right now, only 1% of the country's electricity comes from wind, but government and industry leaders want to see that share hit 20% by 2030, both to boost the supply of carbon-free energy and to create green-collar jobs.

    Such a transformation won't come easily. While much of America's wind energy is in the Midwest, demand for electricity is on the coasts. And the electrical grid, designed decades ago, can't move large quantities of electricity thousands of miles. There's plenty of wind off the coasts, but it's both expensive to harness and controversial; not-in-my-backyard sentiment has slowed some of the most high-profile projects.

    Kansas, in the middle of the wind belt, has become a battleground for the wind revolution. Advocates of alternative energy are pitted against defenders of the status quo, which in Kansas means coal. The flash point: a proposal by Sunflower Electric Power to build two 700-megawatt, coal-fired power plants in western Kansas. State regulators denied permits on the basis of CO2 emissions, the Republican-controlled legislature passed bills to overturn the ruling, Democratic Governor Kathleen Sebelius vetoed the bills, and the legislature has narrowly sustained her vetoes. So ferocious is this fight that Sunflower and its allies placed ads in newspapers suggesting that because Sebelius is against their coal project she's playing into the hands of Iranian President Mahmoud Ahmadinejad. The poisoned atmosphere helps explain why Kansas has only 364megawatts of wind power capacity from about 300 turbines, despite having some of the hardest-blowing wind in the country, while Texas produces more than 10 times as much.

  • Solar Energy ETFs: Don’t Get Burned
  • Can the U.S. Bring Jobs Back from China?
  • A Second Wind for Aging Wind Turbines
  • Who's Afraid of a Feverish Economy?

    Who's Afraid of a Feverish Economy?

    Ho Chi Minh City - Michael J. Pease has a problem Ford Motor (F) executives in the U.S. can only dream of. Demand in Vietnam, where Pease runs Ford's operations, is so strong he can't make cars fast enough. "We are capacity-constrained," says Pease, who saw sales double in the first five months of the year. To put enough Focus sedans, Everest SUVs, and Transit vans in showrooms, he plans to cut the ribbon on a newly expanded factory near Hanoi in July. "This is our best year ever," he says.

    Wait a minute. Isn't Vietnam's economy having one of its worst years ever? Well, the stock market is down more than 60% since January, and housing prices are off by a third. Inflation is raging at 25%, the trade deficit is ballooning, and the currency, the dong, is headed south as people buy dollars and gold. "Vietnam is facing its most difficult time since the beginning of economic reforms" in the late 1980s, says Le Dang Doanh, a senior fellow at the Institute of Development Studies, a private think tank in Hanoi.

    Yet Ford isn't the only company doubling down. Taiwanese heavy industry giant Formosa Plastics just got approval from Hanoi to invest $7.8 billion in a steel mill, power plant, and port. And in March, Samsung unveiled plans for a $670 million mobile-phone assembly plant outside Hanoi. "Regardless of the economic situation, Vietnam is still very attractive," says Chi Yong Cho, Samsung's handset strategy chief. So far this year the government has approved $21 billion in foreign direct investment, just over the amount given the green light in all of 2007.

    How to reconcile the optimism among foreign companies with the dire economic forecasts? Foreigners are looking at long-term fundamentals, which few would deny seem attractive. While the government has revised its projections downward, it's predicting gross domestic product growth of 7% this year, compared with 8.5% in 2007. "We still see a lot of investors talking about plans to set up manufacturing," says Le Trong Hieu, manager of Saigon Hi-Tech Park, where Intel (INTC) expects to open a $1 billion plant next year. "They all believe the economic turmoil Vietnam is going through is short-term."


    Vietnamese consumers show few signs of slowing down, either. Auto sales are up by 162% this year. PC sales increased 21% in the first quarter, to 360,000 units, researcher IDC reports. VinaGame, the country's leader in online gaming, says it has 50% more users than a year ago. "We have no evidence that people have stopped going to Internet cafs, chatting online, or playing games," says VinaGame co-founder Bryan Pelz.

    No one, however, is downplaying the macroeconomic problems, most of which stem from Vietnam's popularity among investors. Billions of dollars from multinationals, hedge funds, and private equity groups poured into the country last year. Rather than sell bonds to soak up those billions, as China has done, the government printed money to buy dollars, creating a wave of cash that led to a 54% increase in bank lending. That fueled a spending spree by state enterprises, while investors piled into stocks and snapped up apartments and condos. "This is a pretty serious speed bump," says Peter R. Ryder, co-chairman of Indochina Capital, which raised $500 million on the London Stock Exchange in March, 2007 for an investment fund that has since lost more than 50% of its value.


    Vo Minh Hoang Phat hit that speed bump hard. On a recent morning the construction consultant sat staring glumly at a sea of red on the trading screen in MHB Securities, a brokerage in downtown Ho Chi Minh City. Phat says his $70,000 portfolio has lost 70% of its value since he started buying stock in developers and builders in March, 2007, near the peak of the market. "I'm stuck, and want to sell all my shares, but there is nowhere to run," says the 32-year-old.

    How fast Vietnam can tame inflation and restore confidence in the stock market depends on the success of government efforts to rein in the exuberance without slowing growth. In recent weeks the central bank has hiked interest rates to 14%, from 12%, allowed the dong to fall more rapidly, and clamped down on lending at state-owned banks. The government has announced spending cuts and is starting to lift the veil of secrecy that long has shrouded its thinking on the economy. In June, Vietnam published its first-ever quarterly figures on the balance of payments, and Finance Minister Vu Van Ninh chaired a videoconference where he invited foreign investors to ask questions.

    If the government makes good on its promise to administer the tough medicine the economy needs, consumer spending will likely suffer—something Ford's Pease is bracing for. Despite his optimism, he expects things to slow a bit in the second half and is keeping a tight lid on supplies to avoid being caught out if sales suddenly slump. Still, he says, "The government is doing the right things...and we remain confident in the overall economy."

    LinksCambodia on the Rise

    While Vietnam sputters, neighboring Cambodia is in the midst of a real estate boom. All across the dilapidated capital, Phnom Penh, shantytowns and old villas are being razed to make way for high-rise apartments, office buildings, and shopping malls, reported on June 2. One Korean group is working on the country's first skyscraper, a 42-story apartment tower that's 80% sold already.

  • Investing: Playing the Brazil Boom
  • Kicking the Tires at Ford Motor
  • Why So Long to Call a Recession?
  • Friday, June 27, 2008

    When Builders Go Broke

    When Builders Go Broke

    When Patrick and Betty Ann Wagner moved 50 miles from Chicago's Northwest Side to suburban Antioch, Ill., a year ago, they figured their five kids would delight in the three swimming pools and sand volleyball court of their new subdivision's community center. Sitting at a large pine table in the kitchen of their four-bedroom home, Patrick opens a glossy map. "This is where they said the clubhouse would be," he jabs at the paper. But the rec center is just an open pit, and their neighborhood is eerily quiet. Across the street, two homes are still swathed in housewrap behind mounds of dirt; two others are finished but empty, with "For Sale" signs in front.

    Welcome to Clublands, a 600-acre development conceived by Neumann Homes, which in 2004 had plans to build as many as 950 homes selling for $300,000 and $400,000 in this suburb less than a mile from the Wisconsin border. But it never happened, and probably never will. Today the Warrenville (Ill.), company, once ranked the 35th-largest homebuilder in the nation, is bankrupt. A court-approved auction is liquidating all its property. Among the assets on the block are two-thirds of the Clublands sites that were never sold—and the tract for that promised clubhouse.

    Bankrupt Builders

    Despite sales of $518 million in 2005, Neumann is one more casualty of the national housing bust that has driven hundreds of thousands of homeowners into foreclosure, shaken the foundations of America's biggest banks, and knocked the entire economy for a loop. At least a half-dozen homebuilders have filed for bankruptcy in the past several months. They include Levitt & Sons, the famed builder that created Levittown, the archetype for suburban planned communities, on New York's Long Island; Tousa of Hollywood, Fla.; and Kimball Hall, a suburban Chicago outfit.

    Although the major publicly traded builders are all still operating, industry leaders DH Horton (DHI), Pulte Homes (PHM), Lennar (LEN), and Centex (CTX) are losing money, too. Any turnaround seems far off. On June 17, the government reported that home starts in May fell 32% from a year earlier. Builders, buyers, and investors will get their next take on the market on June 25, when the government reports new home sales for May; they're expected to be down 43% year-over-year.

    The fact that so many other homebuilders are struggling provides little comfort to Neumann's creditors, who may never get their money back, subcontractors forced under by the failure of their biggest client, villages like Antioch that can no longer bank on property taxes from Neumann developments, or home buyers who had hoped for a suburban community and instead find themselves in limbo. Wagner, a 39-year-old electrician, feels burned. "This is one of the worst experiences of my life," he sighs.

    Neumann's Dream

    The man in many ways responsible for the situation in which Wagner and many other frustrated homeowners find themselves is Kenneth P. Neumann. A mining engineer and sometime outdoorsman from Wisconsin, Neumann, now 51, started his eponymous company in 1992. Within two years, he had made a name for himself by building starter homes in outlying suburbs with amenities such as recreation centers and pools. Intense and hard-driving, Neumann had visions of becoming the biggest homebuilder in the U.S.

  • Builders: Give Home Buyers a Tax Credit
  • There Will Be Water
  • A (Fire) Sale for Circuit City?

    A (Fire) Sale for Circuit City?

    Investor Mark Wattles, who holds a 6.5% stake in Circuit City (CC), wants to see the beleaguered electronics store chain sold as soon as possible. What's more, according to Wattles, there's more than one interested party that has emerged as a potential bidder. "You will see an announcement within four weeks," he says. The big question: Will the troubled company fetch any sort of respectable price?

    Wall Street certainly doesn't think so: Circuit City's shares sit at $3.35—a 52-week low. And Wattles, who paid between $4 and $30 per share for his 11 million-share stake, will almost certainly not reap large gains. But Wattles is an activist, determined shareholder who on June 24 succeeded at installing three of his five nominees on Circuit City's board. The three directors are Elliott Wahle, a former executive at Toys 'R' Us; Don Kornstein, interim chairman of Bally Total Fitness; and James Marcum, who has worked at retailers like Hollywood Entertainment, which Wattles helped to found in the 1980s. Circuit City will now have 15 directors.

    "My nominees will ensure that the company completes the sale at the highest possible price," Wattles said in a telephone interview after the company's annual meeting in Richmond, Va. He says he has talked with those in the negotiations process, and that it has been narrowed down to a list of three possible bidders—Blockbuster (BBI) and at least two private equity firms. Wattles wouldn't provide any names.

    No Timetable Yet

    Circuit City, which has hired investment bank Goldman Sachs (GS) to explore a sale, will not comment on any specifics of the negotiations. "There's been no timetable established, and nothing has been set," Circuit City spokesman Bill Cimino says. So far, only Dallas-based video rental chain Blockbuster, with the backing of billionaire investor Carl Icahn, has publicly offered to buy Circuit City. In April, Blockbuster offered $6 a share; the bid was greeted with deep skepticism and prompted Icahn to state his personal financial backing for any final offer. Blockbuster is now "conducting due diligence, which will help us determine if we will make a formal offer and at what price," spokeswoman Karen Raskopf says.

    In recent weeks, Circuit City has increasingly lost battles with strident shareholders. After first ignoring Wattles' nomination of board members, Circuit City finally capitulated (, 5/9/08). The electronics chain also initially disregarded Blockbuster's takeover offer and attempts to peer into its books. However, the company came under intense pressure from Wattles and HBK Investments, which is Circuit City's largest shareholder, with a 9% stake. HBK sent a letter to Circuit City Chief Executive Philip Schoonover urging him to allow Blockbuster to examine its finances. Within two weeks, Circuit City opened its books to Blockbuster and hired Goldman to explore alternatives.

  • Circuit City: Due for a Change?
  • Kicking the Tires at Ford Motor
  • Doctors Under the Influence?

    Doctors Under the Influence?

    Editor's note: For a CBS Evening News report on medical conflicts that was made in collaboration with BusinessWeek, go

    In April, four experts on smoking cessation published a paper espousing an unconventional plan for helping hard-core nicotine addicts quit. They proposed treating smokers as if they have a chronic disease akin to diabetes. Such patients should take prescription drugs for years to curb tobacco cravings, the researchers advised.

    The article, published in the prestigious Annals of Internal Medicine, might have slipped quietly into the vast body of antismoking literature were it not for its two closing paragraphs. There, authors Dr. Michael B. Steinberg and Dr. Jonathan Foulds disclosed that they are paid by manufacturers of smoking-cessation products for speaking and consulting. Among those companies is Pfizer (PFE), whose controversial drug Chantix the researchers mentioned favorably, along with other treatments. Use of Chantix has led to reports of suicidal thoughts and other psychiatric symptoms.

    To some, the Annals paper smelled suspiciously like disease-mongering to boost pharmaceutical sales. "There's an advantage to the drug companies selling their products to smokers for a lifetime rather than for six weeks," says Adriane J. Fugh-Berman, a Georgetown University scholar who co-wrote a scathing online attack on the paper for The Hastings Center, a health-ethics research group in Garrison, N.Y. "Medicine can be a useful adjunct to quitting [cigarettes], but the goal should be quitting," she says.

    The Annals paper appeared around the same time that Pfizer, at the urging of the U.S. Food & Drug Administration, was strengthening warnings on Chantix's label. This timing has fueled concern that company-paid experts are trying to protect a drug with U.S. sales of more than $680 million in 2007.

    The researchers deny that. They say they follow only their independent judgment when recommending Chantix, a pill, and other drugs. They emphasize that they don't necessarily urge lifetime use of any medicine. But they don't routinely reveal their Pfizer pay to hundreds of patients they've steered to Chantix. That has thrust Steinberg and Foulds into the middle of a raging debate about proselytizing by medical researchers and how corporate relationships should be disclosed to patients. "When [Chantix] goes wrong, it can go terribly wrong," says Dr. Daniel Seidman, director of the smoking cessation clinic at Columbia University. "These guys may think [industry money] doesn't affect their opinions about the drug, but it does. When someone pays you, there's a bias." (Seidman receives no pay from manufacturers.)

    Pfizer hasn't taken a formal position on whether doctors should disclose funding sources to patients. Cathryn M. Clary, vice-president for external medical affairs, says she fears too much transparency will create confusion. "The more information that's out there, the more difficult it will be for patients to process," she says. Pfizer instructs the researchers it pays to disclose their compensation when speaking at professional conferences. It also recently began disclosing grants for medical education on its Web site.


    The smoky-smelling clinic at the University of Medicine & Dentistry of New Jersey (UMDNJ) run by Steinberg, an internist, and Foulds, a PhD psychologist, is one of eight such centers in that state originally funded by the tobacco litigation settlements of the late 1990s. More than 500 smokers come through the clinic each year. It boasts a 30% success rate helping patients to quit for six months or more. "The goal is to get more people not smoking," Steinberg says. "The medication is just a tool to increase their chances of being successful." Adamant that his work for Pfizer and other drug companies poses no problem, he adds: "We look at the data, and we look at our own clinical experience." Both doctors stress that it's not standard practice to tell patients about potential conflicts.

  • Bulking Up: Japan’s Drugmakers
  • Cancer’s Cruel Economics
  • Thursday, June 26, 2008

    Obama's Secret Digital Weapon

    Obama's Secret Digital Weapon

    Since Senator Barack Obama announced that he would forgo public financing for his Presidential bid, even more is being made of his campaign's prowess at raising record sums on the Web. Obama seems to have an almost magical ability to generate a spontaneous upwelling of political and financial support.

    In fact, the presumed Democratic nominee has a secret weapon. It's a small, obscure firm called Blue State Digital, a market research-New Media hybrid that has played an instrumental role in fostering Obamamania. The campaign declined to discuss Blue State, but the firm says its handiwork and technology can be seen in the more than $200 million Obama has raised online, the 2 million phone calls made on the candidate's behalf, and in's social network of 850,000 users, who have organized 50,000 campaign events.

    Besides Obama, Blue State has attracted more than 100 clients, including such widely known corporate names as AT&T (T) and Stonyfield Farm. There is also talk that the firm could continue playing a role as a contractor in an Obama White House. "Blue State is using technology to give people a chance to become involved, whether it's a voter or a customer," says film marketer Lisa Smithline. While director of creative marketing at independent film company Focus Features in 2006, Smithline hired Blue State to promote the Iraq war documentary The Ground Truth through a vigorous Web campaign that generated 500 screenings in churches and community centers. "They cross over and really reach those who have never been reached before," she says.

    Blue State was founded in 2004 by four former members of Howard Dean's Presidential campaign. Other firms were already selling software to help candidates raise money online. But Thomas Gensemer, a former venture capitalist who, at 31, is now Blue State's managing partner, says he and his associates wanted to use such tools to mobilize grassroots support for progressive candidates, causes, or products. "The idea has always been to engage the citizenry, make them feel part of the process," Gensemer says.

    In 2005, Blue State began working with AT&T, which was attempting to launch a TV service to compete with cable companies. The telecom declined to comment, but Gensemer says that in one project, Blue State used the Web and other media to organize community groups and citizens to mobilize against Connecticut's rigid cable franchise laws. Some 30,000 letters were sent to state legislators, who eventually enacted a new law making it easier for AT&T to take on the cable guys.

    Financier-philanthropist George Soros hired Blue State in the fall of 2006 to work on two projects. The firm created a Web site for a fellowship-like program that sends journalists to New Orleans to document the city's rebirth. Blue State also has made Soros' European Council on Foreign Relations think tank more Web-friendly, and has taught academics how to blog effectively about business and economics.

    Obama retained Blue State nine days before launching his candidacy in February 2007. It was a shrewd choice because the firm can do a lot with a little: According to filings, the Obama campaign has paid Blue State not much more than $1.1 million so far.

    One of Blue State's greatest contributions to the campaign has been MyBO, the social networking dimension of the candidate's Web site. MyBO allows Obama supporters to communicate directly with each other, organize their own events, and swap ideas. Obama staffers monitor the exchanges as a way to help them make their own communications with supporters as timely and personal as possible. Hughes Rhodes, a 58-year-old garment industry executive and, until now, a lifelong Republican, has hosted salonlike meetings in his New York City apartment to spread the word about Obama and his policies. "It's remarkable how they've used the Internet as an organizing tool," says Rhodes, who checks Obama's site several times a day. "It's voter-to-voter."

    Today, Blue State has a staff of 38 and offices in Boston, New York, San Francisco, and Washington. The firm keeps its profile so low that it doesn't even put "powered by Blue State Digital" at the bottom of Obama's Web page. But it is tightly entwined with the campaign. Joe Rospars, a 27-year-old partner, attends all of the Obama campaign's senior staff meetings, says Gensemer. Campaign insiders suggest privately that Blue State has so impressed Obama that, if he wins in November, the company could be in the unique position to play a role inside the White House.

    Gensemer won't talk about a possible future with an Obama Administration, but others say it wouldn't be a stretch. "Instead of just having 'check box' polling, just think about what Blue State could do to help you in terms of developing and refining policy," says Clay Shirky, a New York University professor who consults and lectures about New Media. "You could drive the conversation down to the body politic."

    The challenge for Blue State (which, as a private company, does not disclose financials) is to ride the Obama wave while diversifying its business—particularly overseas, where it sees opportunities. As the firm pushes deeper into the corporate world, Blue State may also need to rethink its politically loaded name. Gensemer acknowledges this, but adds: "We will always maintain a progressive idealism." Sounds a lot like a certain senator from Illinois.

  • Job One for McCain or Obama: Jobs
  • A Second Wind for Aging Wind Turbines

    A Second Wind for Aging Wind Turbines

    The 100 or so inhabitants of the Isle of Gigha, off the west coast of Scotland, aren't your typical trendsetters. Yet when this small island community spent $870,000 for three secondhand Vestas (VWS.CO) back in 2004, it became one of the first buyers to tap Europe's blossoming market for used wind turbines.

    Now churning out enough power to meet almost all of Gigha's annual electricity needs, the 675-kilowatt wind farm has significantly cut the island's carbon dioxide footprint while generating an annual $150,000 profit for Gigha Renewable Energy, the locally owned company that operates the turbines. "To be honest, we bought them for financial reasons," says Jacqui MacLeod, manager of the Isle of Gigha Heritage Trust.

    The success of Gigha's reconditioned turbines—known locally as the Dancing Ladies—highlights a fast-growing new market created by the global boom in wind-generated power. The almost two-year waiting period (, 2/27/08) for new turbines from the likes of General Electric (GE) and Siemens (SI) is forcing some buyers into the secondhand market to meet the European Union's CO2 reduction targets (, 1/23/08). Moreover, used turbines cost 40% less than new turbines, and their typically smaller size makes it easier to get local approval for their installation.

    Strong Demand from Corporate Customers

    While secondhand turbines have been sold in Europe for almost 15 years, the slow trickle now reaching the market will soon turn into a flood. Utilities such as Germany's E.ON (EONG.DE) and Spain's Iberdrola (IDRO.F) plan to upgrade their existing renewable capacity (, 2/25/08) over the next five years. That means more than 5,000 secondhand machines are expected to go on the market by 2013. At roughly $230,000 each, that's more than $1.1 billion worth of Dancing Ladies.

    Who's likely to buy them? Windbrokers, a turbine dealer based in the Dutch city of Maarsbergen, says it has already sold more than 350 to companies such as GlaxoSmithKline (GSK) and Nissan Motor (NSANY), which installed them to generate electricity for their plants across Europe. Utility companies in emerging markets also are buying. "We're seeing huge demand from Eastern Europe, Asia, and Latin America," says Dick Vermeulen, Windbrokers' managing director.

    Besides their relatively low cost, secondhand models are attractive to companies and utilities that are just getting into the wind-power business, giving them a chance to gain a few years' experience with smaller turbines before upgrading to newer models.

    A Boon for Big Utilities

    The emergence of this secondary market also is a boon to big utilities looking to dismantle outdated wind farms. Although wind turbines usually can operate for 20 years, many utilities retire them after 10 years and install more-efficient equipment. "If you can recycle the turbines, then that's a cost you don't have to incur," says Juliet Davenport, chief executive of British renewables firm Good Energy.

    Reconditioned turbines may not be right for everyone. They're frequently not covered by manufacturers' warranties, and repair costs on aging equipment can mount quickly. Those expenses, along with investment needed to connect turbines to the electrical grid, puts them out of reach for some customers.

    Even so, Windbrokers reckons demand for used turbines will continue to outstrip supply. The company, founded by Vermeulen in 2002, has seen revenues soar from $3.1 million in 2004 to an estimated $108.6 million this year. It's now starting to sell new turbines, as well as offering services such as guarantees on reconditioned equipment.

    View of a Cleaner Future

    With soaring energy prices and increasing pressure to reduce carbon emissions, analysts say the economics of secondhand turbines are likely to look better and better in the next few years. For the Isle of Gigha, those Dancing Ladies are already looking very good indeed.

  • American Idol’s Ads Infinitum
  • RIM Shares Hammered

    RIM Shares Hammered

    Fighting Apple comes with a heavy cost. Research in Motion (RIMM), the Canadian maker of the popular BlackBerry devices, continues to sign up new subscribers at an impressive clip, even in the face of growing competition from Apple's (AAPL) snazzy iPhone and other devices. But in a first quarter earnings report on June 25, the company disappointed investors by saying it would sacrifice profits in the short term to improve its competitive position in the future. Its stock plummeted 12% on June 26, as the overall stock market slid.

    On the surface, RIM's earnings appeared plenty impressive. The company reported revenues of $2.24 billion, up 107% from the year-earlier period. And it generated $483 million in net income, or 84 a share, compared with net income of $223 million in the same quarter last year, or 39 a share. It also said that wireless operators added 2.3 million new BlackBerry subscribers in the quarter, bringing its industry-leading total in the smartphone market to more than 16 million subscribers.

    "A Land-grab Game"

    But RIM fell short of the financial community's high expectations. Analysts were expecting the company to report $2.27 billion in revenue, and 85 a share in net income, according to a poll by Thomson Financial. Profits were light because operating expenses came in higher than expected. RIM is ramping up its investments to capture more market share, with operating costs rising 22%, instead of the expected 17%.

    "The quarter was good but it wasn't better than expected," says Ken Smith, senior portfolio manager of Munder Capital Management, which owned 90,000 shares of RIM as of the end of March. "There was no positive surprise."

    On a conference call following the announcement, analysts expressed concern about RIM's growing expenses. The company attributed the rise to an increase in prices of components and a more aggressive investment strategy. But RIM co-CEO Jim Balsillie said the company must boost investments in infrastructure, research and development, and sales and marketing to capitalize on surging demand for smartphones—and beat back competition from Apple, Nokia (NOK), Microsoft (MSFT), Palm (PALM) and others. "It's a bit of a land-grab game now," he said. "We're pretty excited by the growth prospects."

    Launch Delays

    The guidance for the second quarter offered by the company was also a mixed bag. RIM raised its revenue guidance from $2.44 billion to a range of $2.55 billion to $2.65 billion. But it lowered its profit forecast from 90, to between 84 and 89 per diluted share. It plans to ramp up its capital expenditures from the $190 million in the first quarter to an average of $250 million over the next two quarters.

    The results clearly disappointed investors who have been driving the company's stock ever higher. In the last five months, Research in Motion's stock has soared 70%. It hit an all-time high in the last week. But in mid-day trading on June 26, the stock price nosedived $17 to $125. RIM's stock had soared after its previous four earnings reports.

    RIM is betting that two new handsets, the Bold and the Thunder, will ignite a new round of growth. The Bold, a BlackBerry device that uses speedier third-generation wireless technology, has already been delayed from its initial target date of June or July. RIM execs would not specify a specific launch time frame, only saying it will be released this summer. "We expect shipments of BlackBerry Bold to really start ramping [in the third quarter]," said Edel Ebbs, RIM's vice-president of investor relations.

    Room for both BlackBerry and iPhone

    The Thunder, expected to be a touch-screen version of the BlackBerry, has not even been announced by the company. But smartphone watchers expect it will be rolled out later this year in time for the holiday shopping season. "They are really well positioned for the end of the year," says Munder's Smith.

    The Thunder is a clear counterattack against Apple's iPhone, which dazzled consumers with its innovative touch-screen interface and easy-to-use software. Some analysts have expressed concern that the existing iPhone and a new faster model coming out in July could eat into RIM's market share and profits.

    But so far it appears that both companies can succeed, since the smartphone category is gaining share from the traditional cell phone market. Smartphones made up 10% of total phone sales last year but are expected to capture 31% of the market by 2013, according to research shop ABI. "RIM and Apple are in the catbird seat," says Smith. "They are both well positioned. I think they will find different audiences."

  • Marcial: Strong Signals for Qualcomm
  • iPhone 2.0 Takes on the World
  • Exxon Mobil: A Great Big Buy
  • Tuesday, June 24, 2008

    Solar Energy ETFs: Don't Get Burned

    Solar Energy ETFs: Don't Get Burned

    With sky-high oil prices hitting new records seemingly every week, interest in solar energy burns bright. But investors have found shares of companies that provide solar-power gear to be among the most volatile in the entire stock market.

    Shares of leading players like First Solar (FSLR) and SolarWorld (SRWRF.PK) routinely trade up or down by more than 10% in a day. On June 19, shares of Evergreen Solar (ESLR) surged 20% on news that the solar wafer maker had signed two long-term contract deals. But the next day, they dropped 8% when there was no significant news to drive the stock.

    All that volatility had many investors welcoming the April introduction of two exchange-traded funds focusing on solar energy indexes, the Claymore MAC Global Solar Energy Index ETF (TAN) and Van Eck's Market Vectors Solar Energy ETF (KWT). The Claymore fund is already up to $163 million in assets, while the Market Vectors offering is yet to hit $25 million.

    No Safe Haven

    Unfortunately for investors, the ETFs have turned out to be almost as volatile as the individual stocks. Both were down more than double the Standard & Poor's 500-stock index's 1.7% drop on June 20. "Just buying the whole [solar] market means you just follow its ups and downs," says Morningstar (MORN) analyst Rick Hanna, who follows solar energy stocks. "If you do your homework, you should be able to do better than that."

    That's because both funds are made up of mostly the same group of small- and mid-cap stocks. As of Mar. 31, First Solar was the largest holding in the indexes underlying both ETFs, comprising 9% of the Claymore fund and 11% of the Van Eck fund. Large-cap stocks generally don't meet the qualifications for the indexes underlying either fund, which require at least 33% of revenue from solar activities in the case of Claymore and 66% for the Van Eck fund. Index Universe Editor Matthew Hougan posted an in-depth comparison of the ETFs in April.

    Much of the current solar business comes from Europe, where governments are giving generous subsidies and tax breaks to companies and individuals who install alternative energy equipment. The entire solar sector was roiled in May by rumors that Germany would cut back the subsidies. Many of the shares then had double-digit percentage gains when the German cuts, announced May 30, weren't as deep as expected.

    Sky-High Valuations

    Valuations of many solar stocks remain in the stratosphere—SunPower (SPWR) trades at a price-to-earnings multiple of more than 300, for instance—leading analysts to suggest that investors may be better off picking and choosing individual stocks to find the best opportunities.

    Kaufman Brothers analyst Theodore O'Neill favors Akeena Solar (AKNS), which installs residential solar panels in the U.S. The stock has been excessively beaten down on fears that Congress won't do much to encourage solar usage, he wrote in a May 28 research report. Regardless of what legislators ultimately do, O'Neill thinks the growth rate in the company's underlying business makes the stock a buy.

    Most solar panels used to generate electricity are made using large amounts of crystalline silicon, a substance much in demand. Morningstar's Hanna favors First Solar and Evergreen, which use a different technology to manufacture so-called thin-film panels using far less of costly raw materials like silicon wafers.

    Playing the Suppliers

    Another way to play the coming solar boom is by investing in top suppliers to the solar panel makers, Hanna notes. Applied Materials (AMAT) and MEMC Electronic Materials (WFR), which supply assembly materials to the solar panel outfits, "are like the people selling picks and shovels during the gold rush," Hanna says. Regardless of who finds the gold, investors who choose carefully in the solar energy segment could strike it rich.

  • Energy Stocks with Room to Run
  • Entrepreneurs Reinvent the Funeral Industry

    Entrepreneurs Reinvent the Funeral Industry

    These trailblazers come from all sorts of businesses—automotive, design, technology—unburdened by the conventions of their new industry. They introduce products some consider shocking. Traditionalists scoff at them. But these outsiders are revolutionizing one of the world's oldest professions: the funeral industry.

    It's a good time to deal in death. The first baby boomers are entering their mid-60s, and the death rate in the U.S. is expected to rise from 8.1 people per thousand in 2006 to 9.3 in 2020, according to the National Center for Health Statistics. Yet the traditional funeral industry is hardly healthy: The Federated Funeral Directors of America, an accounting firm for independently owned funeral homes, found that in the past 20 years, its clients' profit margins have been cut nearly in half. Some 44% of funeral home directors, up from 28% in 2006, blame the increasing popularity of cremations and alternative burials for sinking profits, according to consulting firm Citrin Cooperman. Some funeral homes have responded by offering themed funerals, such as backyard barbecues, while others diversify by hosting weddings and other events.

    Yet the $11 billion industry has been slow to change, with multi-generational family and private companies commanding 89% of the business. A few major vertical corporations, which control everything from choice in caskets to burial services, and often provide products to small mom-and-pops, make up the rest.

    Enter the entrepreneurs. Clint Mytych, founder and CEO of Eternal Image (ETIM), was running a luxury car rental company in 2002 when it dawned on him that he'd like a car-themed funeral, and a casket shaped like a 1967 Ford Mustang (F). But not only could Mytych not find his Mustang casket, he didn't find anything that he thought had any personality at all. "I mean, nobody says, I am so excited about the Batesville #22 casket' because it's made of their favorite wood," says Mytych. He saw an opportunity in idiosyncratic funeral products that would reflect the customer's personal taste. In 2006 his Farmington Hills (Mich.)-based company introduced the country's first licensed urn—a twisted bronze spire topped with a cross, licensed from the Vatican Library Collection. Mytych has since signed licensing agreements with the American Kennel Club, Major League Baseball, more than a dozen universities, and most recently, CBS Corp., for the rights to the Star Trek brand. His urns cost about $800, compared with $3,000 for a traditional marble one.

    Selling to funeral homes wasn't easy. "In the beginning, one of the major players patted us on the head and said, Good luck, but our caskets and urns are the only ones used in the industry,'" says Mytych. Not anymore. Eternal Image, with 10 employees, hit $600,000 in sales in 2007, and several funeral companies have approached Mytych about partnerships.

    For Esmerelda Kent, the dive into death began with the HBO show Six Feet Under. Fascinated by the funeral business and inspired by the show, the costume designer started an apprenticeship in 2004 at Forever Fernwood, a cemetery in Mill Valley, Calif., that focuses on sustainable burial practices. In keeping with its green goals, Forever Fernwood was burying people in shrouds. "It was a really cumbersome and ridiculous process," says Kent. "We had no idea what we were doing with these long pieces of cloth, and it was really undignified trying to lower the shrouds into the ground." So in 2005 she started San Francisco-based Kinkaraco Green Burial Shrouds, a collection of more practical shrouds with thoughtful touches such as pockets for mementos and a stiff backboard and handles. Kent's next project is a line of high-end shrouds—"mort couture," she deadpans. She had a warm reception at a recent industry convention, and rang up about $30,000 in sales last year. But Kent says change is barely crawling along. "This is the last industry to be dragged kicking and screaming into the 21st century," she says. "Myself and others like me are completely reinventing the business."

    John Carmon, past president and spokesperson for the National Funeral Directors Assn., agrees that the industry has to be more forward-thinking, at least in terms of technology and personalized service. But he doesn't think the newcomers are going to bring any sort of radical change. "You won't see most families shooting cremains in the air," he says. "Cremains" is industry-speak for cremated remains,' and yes, Angels Flight of Castaic, Calif., founded in 1996, will happily disperse yours via one of its fireworks displays.

    Regardless of what the Old Guard thinks of them, entrepreneurs are happy reshaping the industry from the outside in. Says Mytych: "No matter how hard a funeral director might put his foot down and think that a Star Trek casket or whatever is tacky, the fact is, the public likes it."

    Back to BWSmallBiz June/July 2008 Table of Contents

  • Can the U.S. Bring Jobs Back from China?
  • The iPhone’s Impact on Rivals
  • Bulking Up: Japan's Drugmakers

    Bulking Up: Japan's Drugmakers

    JAPAN - Big Western drugmakers sometimes duke it out over a tasty acquisition target, but they don't usually worry that a much smaller rival will run off with the prize. Few lesser players have the multibillion-dollar cash hoards needed to compete—except in Japan.

    On June 11 midsize Japanese drugmaker Daiichi Sankyo announced it would pay $4.6 billion for control of Ranbaxy Laboratories, India's largest maker of generic drugs. In doing so, Daiichi seems to have beat Pfizer (PFE) and GlaxoSmithKline (GSK) to the punch, gaining instant access to double-digit growth in India, China, Russia, Brazil, and Mexico. If the deal goes forward, it will be a coup for the little-known Japanese company. "All the big pharmaceutical companies are talking about emerging markets as the next growth opportunities," says Stewart Adkins, head of London-based consultancy Stewart Adkins Advisors.

    It looks like they'll have to get used to a more competitive field. The Ranbaxy deal is the third multibillion-dollar overseas acquisition by a Japanese drugmaker in the past seven months. Eisai (ESALY) paid $3.9 billion in December for MGI Pharma of Bloomington, Minn. And Takeda shelled out a hefty $8.8 billion for Cambridge (Mass.)-based biotech Millennium Pharmaceuticals (MLNM) in early April.

    Until this year, there were hardly any such tieups. Why? Because, strange as it seems in the land of Sony (SNE), Toyota (TM), and Mitsubishi, Japan's drugmakers weren't that keen on being huge.

    Now, analysts say other cash-rich Japanese pharmaceutical companies could follow Daiichi Sankyo. The top seven have billions of dollars in reserve. Rather than holding on to the cash and becoming takeover targets, they could use it to purchase generic drugmakers or buy their way into diagnostics or biotech.

    Coming regulatory changes in Japan's universal health-care system may further fuel the trend. For years, policymakers have protected the domestic drug industry. By setting medication prices relatively high and erecting clinical trial hurdles for foreign drug products, the government set the stage for one of the world's most crowded, least international markets. At last count, there were 1,200 drugmakers.


    The government also has failed to encourage patients to enroll in clinical trials or to increase its number of drug reviewers. Getting a new drug approved often takes up to 22 months, vs. an average of 10 months in the U.S.

    Regulatory reforms would allow more low-cost generic drugs into the market and make it easier for foreign drugmakers to get their products cleared. But that means Japan's domestic companies will have to work a lot harder—and for that, they will need some bulk. Takeda, the biggest in the group, ranked 17th in global sales last year, according to researcher IMS Health. Each of the world's Big Three—Pfizer, Glaxo, and Novartis—posted revenues that were more than double Takeda's. And all the Japanese drug companies combined account for just 10% of the $700 billion global industry. Ranbaxy won't level the field. But it won't be the last deal.

  • Japan’s Banks Are Shopping Around
  • Monday, June 23, 2008

    Pro Sports Are Starting to Score in Russia

    Pro Sports Are Starting to Score in Russia

    Russia hasn't seen anything like it for years. In Moscow and other cities, the streets reverberated with the sound of cars honking their horns, while thousands of ecstatic revelers poured outside. They celebrated throughout the night, waving Russian flags, punching the air, and chanting "Russia! Russia! Russia!" Such was the euphoric reaction on June 18, when Russia's national soccer team defeated Sweden 2-0 in Innsbruck, qualifying for the European quarterfinals for the first time in 20 years.

    The historic win is just the latest sporting triumph to have delighted Russia. There was similar rejoicing on May 14, when Russian club Zenit St. Petersburg defeated the Glasgow Rangers to win the UEFA Cup Final. Just four days later, Russia also won the World Hockey Championship, beating Canada to gain the title for the first time in 15 years. Russians reflect that the string of sporting triumphs is symbolic of a new zeitgeist, coming at a time when the country's economy is booming and its national prestige and self-confidence are at post-Soviet highs. "Russian sport is on the rise," says Alexander Razuvaev, head of research at Russian bank Sobinbank. "Of course, if there are achievements, you can turn them into a business," he adds.

    In fact, the link between sporting success and wider economic trends is more than just a happy coincidence. Russia's recent prowess on the sports field reflects huge investments in sports made over recent years by large Russian corporations and wealthy tycoons. Many are now flush with cash because of high global commodity prices, allowing them to plow hundreds of millions of dollars into buying clubs, renovating stadiums, and rewarding players and trainers. "A lot of companies have invested in sports, and what you're seeing now is a result of those investments," says Alexei Krasnov, president of the sport marketing agency Sportima.

    Rolling in Cash

    Russia's national soccer team is a case in point. Over the past two years the team has received tens of millions of dollars in funding from the National Football Academy, an organization financed by tycoon Roman Abramovich (best known in the West for his ownership of top English club Chelsea). That has included money for a new stadium, a new training complex, players' fees, and a €4 million ($6.24 million), two-year contract for the team's star trainer, Dutchman Gus Hiddink.

    It's a similar story at Russia's leading soccer club, UEFA Cup winner Zenit St Petersburg, which was acquired by national gas concern Gazprom (GAZP.RTS) in December, 2005. Since then, Gazprom has splashed out on everything from new players to a new stadium. Thanks to the energy company's largesse, the club's budget is $120 million this year, up from just $25 million in 2005. Although still a far cry from the $400 million budgets of the top European clubs such as Manchester United or Real Madrid, Zenit is already in the same financial league as second-tier European clubs such as Stuttgart or Everton.

    Other leading Russian clubs have also been acquired by large corporate owners and have budgets in the tens of millions of dollars. For Russian business, the fashion for investing in sport stems from various motives. Many top Russian businesspeople, such as Abramovich and Gazprom boss Alexei Miller, are keen soccer fans who are to some extent indulging personal fancies.

  • Million-Dollar Babies
  • Big Oil Tiptoes Back into Iraq
  • Big Oil Tiptoes Back into Iraq

    Big Oil Tiptoes Back into Iraq

    By all rights, Iraq should be a world-class oil power in the same league as Saudi Arabia in OPEC. That Iraq isn't owes much to political division and security risks that have kept foreign experts and investment out of the nation's critical oil sector. Now, there may be reason for some optimism. A top Iraqi Oil Ministry official, Natiq al-Bayati, head of contracts and licensing, has been meeting executives from foreign oil majors in the Jordanian capital of Amman in recent weeks. He hopes to hammer out so-called technical support agreements that could improve Iraqi oil output over time.

    Differences over payments need to be ironed out. Still, the hope is that by summer's end foreign companies will help renovate rickety oil fields in perhaps the most important development for the nation's oil industry since the 2003 overthrow of Saddam Hussein. "This shows Iraq has turned a corner," says Vera de Ladoucette, Paris-based senior vice-president of Cambridge Energy Research Associates.

    True, only now is Iraqi oil production coming back to prewar levels of 2.5 million barrels per day. And Iraqi Prime Minister Nouri al-Maliki's government still hasn't created a legal framework for exploiting the huge oil reserves that would attract and protect the investments of international oil concerns. So Oil Minister Hussain Al Shahristani has designed the new technical support contracts as an interim step until Iraq is safer and laws governing foreign oil contracts get fully sorted out.

    Iraq isn't a hard sell, given its 115 billion barrels of oil reserves. Oil executives say Iraq could pump 6 million barrels per day, which today would make it the No. 2 OPEC player, though well behind Russia. That would require billions in investment. Baghdad's more modest goal of 3 million barrels per day by 2009 would put annual oil revenues at some $110 billion at today's prices. "We find it hard to see a future in which production of these [Iraqi] reserves does not play an important role" globally, says Ian Bromilow, Shell's country chairman for Iraq.

    Until recently, oil majors such as BP (BP), Shell, and ExxonMobil (XOM) have kept a low profile. To establish good will with Baghdad, they have flown Iraqi engineers to Amman and elsewhere for training. Now the government wants to go a step further with two-year technical support agreements that will likely concentrate on boosting output at existing wells rather than kick off a massive new drilling program. Monitoring equipment, now mostly lacking, to track production will be installed at the wells—as will improved water injection systems to boost efficiency.


    Contracts valued at about $2.5 billion are expected to be awarded. BP is working on Rumailah, a ramshackle field that runs beneath date palm plantations near Basra. ExxonMobil has focused on Zubair, also in the South. Shell is taking on Kirkuk in the North and another field called Missan in partnership with BHP Billiton (BHP). Until security improves substantially, international technicians outside the country will work with Iraqi employees via computer and by phone.

    The majors hope that these modest contracts will turn into much larger ones later. Granted, in Iraq things can quickly change for the worse. Now, though, Iraq seems ready to get back into the great global oil game.

  • Critics of the Bud Buyout Are Frothing
  • Fly the Shrinking Skies
  • How to Bet on Oil_Whether Bull or Bear
  • Can the U.S. Bring Jobs Back from China?

    Can the U.S. Bring Jobs Back from China?

    Christina Lampe-Onnerud has a long-lasting, fast-charging battery for notebook computers that she believes will revolutionize the industry. Her company, Boston-Power, would like to make the batteries in the U.S., which she says is feasible despite high American wages.

    But Lampe-Onnerud has had trouble finding anyone in the U.S. even to make a prototype, let alone manufacture the battery in bulk. China, by contrast, is home to more than 200 battery manufacturers. On visits to the mainland, Lampe-Onnerud toured dozens of factories with ample staff and laboratories, and none wanted the millions of dollars up front that one contract manufacturer in the U.S. had demanded. She recalls a negotiating session last year that started at 9 a.m. and ended with a midnight dinner. Despite parting with 30 unresolved questions, "at 9:00 the next morning, the entire management team was there with pressed white shirts and a PowerPoint presentation addressing every issue," she says. "That's how badly they wanted the business." In six months, Boston-Power was ramping up production in a 400-worker factory in Shenzhen.

    This would seem to be a good time for an American manufacturing renaissance. The economics of global trade are starting to tilt back in favor of the U.S. to a degree unseen in a generation. Since 2002 the dollar has plunged by 30% against major world currencies and is falling against the yuan. Wages in China are rising 10% to 15% a year. And spiking oil prices are driving up shipping rates. The cost of sending a 40-foot container from Shanghai to San Diego has soared by 150%, to $5,500, since 2000. If oil hits $200 a barrel, that could reach $10,000, projects Toronto financial-services firm CIBC World Markets.

    But as the experience of Boston-Power and countless companies like it shows, the map of global commerce can't be redrawn overnight. American factories and supplier networks in many industries have withered in the era of globalization, so it will take lots of time and capital before the U.S. can become a big player again. In electronics, for instance, there has been a mass migration of component makers to China in the past decade. Ditto for suppliers to Midwest heavy-equipment makers and North Carolina's furniture industry.

    The bulk of goods made in China—clothing, toys, small appliances, and the like—probably won't be coming back, because they require abundant cheap labor. If anything, their manufacture will go to other low-wage nations in Asia or Latin America. And in industries from machinery to motorbikes, China's productivity gains nearly offset rising wages and fuel prices.

    In areas where the U.S. is at the forefront of innovation—renewable energy, nano materials, solid-state lighting—the U.S. must compete with Asian and European nations willing to lavish entrepreneurs with start-up capital, cash grants, and cheap loans. Similar help may be needed to persuade U.S. companies to build capacity.


    The global industrial landscape certainly appears to be in the early stages of a realignment. The euro's breathtaking rise against the dollar has spurred European makers of cars, steel, aircraft, and more to shift production to the U.S. Now the soaring cost of fuel is making it pricier to send goods across the Pacific. Consider Japan's steel industry, which depends on imported iron ore and coal to create high-end metal for Japanese automakers in the U.S. In 2003 it cost $15 to ship a ton of iron ore costing $30 from Brazil to Japan. By last fall, while the ore had jumped to $80 per ton, shipping costs had risen to $90. Shipping of raw materials now accounts for 13% of the price of rolled steel used in car bodies, estimates CLSA Asia-Pacific Markets. The finished steel must then be sent to factories in the U.S., pumping up the price even further.

  • Job One for McCain or Obama: Jobs

  • Job One for McCain or Obama: Jobs
  • Sunday, June 22, 2008

    Japan's Banks Are Shopping Around

    Japan's Banks Are Shopping Around

    A feature of the subprime-fueled financial crisis that has engulfed many of world's banks in recent months has been the stability of Japan's banks. Unlike Western rivals, Japan's banks have posted relatively small subprime-related losses, prompting some skeptics to suggest the Japanese were repeating the sins of the 1990s and hiding losses (, 2/21/08).

    Yet rather than sitting on hidden losses, Japan's banks—shielded from the worst of the subprime blowout by conservative lending strategies and painful memories from the '90s—are emerging as rivals to sovereign wealth funds in bailing out troubled Western rivals. According to June 20 reports in Japan's Nikkei newspaper, the country's leading business daily, Sumitomo Mitsui Financial Group (8316.T), one of Japan's three "megabanks," is to invest $927 million in Barclays (BARC.L), the third-biggest bank in Britain, in return for "several percent" of the British bank's stock through a private placement of new shares. The Nikkei says Barclays will also receive cash from Middle Eastern and Asian sovereign wealth funds, and that Barclays and Sumitomo Mitsui will deepen cooperation between their Asian operations.

    Analysts broadly welcome such a move. "Assuming the report is correct, we see the news as positive. While the capital stake is not all that large, we think SMFG could easily see synergies with Barclays' core banking business," JPMorgan (JPM) analyst Katsuhito Sasajima wrote in a note to clients. In Tokyo trading, Sumitomo Mitsui's stock price slipped 1.4% on the news—roughly in line with the Nikkei 225 benchmark index's drop on the day. The bank has made no comment on the reports.

    More Overseas Deals Could Follow

    Sumitomo Mitsui's move looks to be part of a trend. It follows a similar deal by a unit of Mizuho Financial Group (MFG), Japan's second-largest bank by assets, in January. At the time, Mizuho Corporate Bank took a $1.2 billion stake in Merrill Lynch (MER) after the U.S. financial group issued $6.6 billion of preferred stock. Hironari Nozaki, a bank analyst at Nikko Citigroup in Tokyo, thinks more overseas deals could follow. After a meeting with Mitsubishi UFJ Financial Group (MTU), Nozaki thinks Japan's largest banking group could also be lining up foreign acquisitions. "We got the impression from our meeting that the bank is targeting the U.S., looking for a commercial bank rather than an investment bank, and thinking about something smaller than Union Bank of California, its U.S. subsidiary," he wrote to clients. Following the June 20 development he added: "It is looking as if it is still early in the game for these kinds of moves."

    In the meantime, Sumitomo Mitsui's deal looks like a smart move for both parties. The British bank has booked just over $5 billion in subprime losses and has been seeking to increase its capital case by about $8 billion. By forming a capital alliance with the Japanese bank, it gets some of the funding it needs and the possibility of closer ties with a large Japanese bank.

    From Sumitomo Mitsui's side of the deal, it's unlikely to be overpaying for Barclays stock. Its share price is at its lowest level since November, 1998. What's more, the Japanese bank may see parallels with a deal it did with Goldman Sachs (GS) five years ago. In 2003, Goldman bought $1.3 billion worth of Sumitomo Mitsui's preferred shares. Within a few months, the Japanese bank's stock traded as low as $1,360 a share. By late 2005, its shares were hitting 10-year highs of more than $10,000.

    Playing It Too Conservative?

    Still, not all analysts are satisfied with Sumitomo Mitsui's reported acquisition strategy. One gripe is that the bank isn't being aggressive enough at a time when rivals overseas are weak. Critics say that if Japanese banks want to raise their long-term profitability they need to invest more heavily overseas, particularly as earnings-growth opportunities in Japan are hampered by the current economic slowdown.

    While that argument may be valid, Japan's bank chiefs can point out that their relatively small subprime exposures are partly because they ignored advice to be more aggressive in the recent past. Haunted by the collapse of the nation's real estate bubble in the early 1990s, Japan's big lenders showed relatively little appetite for the kinds of risk offered by subprime investment.

    Indeed, Japan's banks, preoccupied with multiple mergers and huge systems integrations, have been criticized for being too risk-averse. Mizuho, arguably the most aggressive of the Big Three—and the bank with the biggest subprime losses—had won plaudits for showing a desire to increase its earnings power. For the financial year that ended in March, total subprime losses for Japan's roughly 50 banks, insurers, and brokers were $17.6 billion, with Mizuho losing around $6 billion. Combined losses at Citigroup (C), UBS (UBS), and Merrill Lynch exceed $100 billion.

  • Stashing Cash at Higher Rates