Sunday, April 19, 2009

Time Warner Backs Away From Pricing Change

Time Warner Backs Away From Pricing Change

Time Warner Cable caved—for now. In the face of widespread consumer outrage over its plan to change its pricing for Internet access, the company said it will shelve plans to implement the new price formula in several new markets.

The about-face comes just two weeks after first reported that Time Warner Cable (TWC) would roll out usage-based pricing to four cities. The No. 2 U.S. cable operator hoped to begin charging high-speed data subscribers for the amount of bandwidth they used in Rochester, N.Y., Austin and San Antonio, Tex., and Greensboro, N.C.

Time Warner Cable CEO Glenn Britt said the consumption-based model was needed to maintain an expensive, burdened broadband network, citing other countries that for years have had broadband-metering models, including Canada. But the plan unleashed a firestorm among the public and politicians who say the new method is discriminatory and would stifle innovation. Some politicians called for congressional hearings.

Surprised by Backlash

Britt and his executive team appear to have been unprepared for the pushback from consumers and are putting the plan on ice. On Apr. 16, Britt issued a statement saying: "It is clear from the public response over the last two weeks that there is a great deal of misunderstanding about our plans to roll out additional tests on consumption-based billing." Time Warner won't broaden its testing of the plan "until further consultation with our customers and other interested parties, ensuring that community needs are being met," Britt said.

What's more, Time Warner Cable said it would be working to make measurement tools available as soon as possible so consumers can learn just how much bandwidth they consume on average. For Britt, the episode was not exactly an auspicious start at the helm of a newly independent Time Warner Cable, fully spun off from parent Time Warner on Mar. 30. Shares of the company rose 2.7% to 29.58 on Apr. 16.

From the moment the news broke on Mar. 31, the blogosphere was filled with vitriolic posts and e-mails from Internet users slamming Time Warner Cable's plans. Within days, hearings were being held in Rochester and Austin. Rochester Congressman Eric Massa threatened to introduce legislation aimed at bringing more broadband competition to his home city. Massa also said he wouldn't rule out imposing price limits on Time Warner Cable, which he called a "functioning monopoly."

On Apr. 16, U.S. Senator Charles Schumer (D-N.Y.) and founders of a Web site called Stop The Cap! stood on the steps of Time Warner's Rochester offices to celebrate the company's decision to abandon broadband metering for now. Among the rally cries posted on Stop The Cap! over the past two weeks: "Caps are for bottles, not broadband, in the United States of America."

Larry Summers on Whether Those Rays of Economic Daylight Are Real

Larry Summers on Whether Those Rays of Economic Daylight Are Real

No one in Washington is saying flat-out that the economy has turned a corner, but the Obama Administration is busily making the case that encouraging signs are starting to pop up. On Apr. 9, Larry Summers, director of the National Economic Council, pointed to positive indicators in a speech before the Economic Club of Washington, and five days later at Georgetown University, the President did the same. Is this more than a cheerleading exercise to boost public confidence? I talked with Summers after Obama's speech.


The President today talked about glimmers of hope in the economy, though he added that we are in for some tough news ahead when it comes to unemployment. Where has the growth been coming from most recently and where are the weak spots that remain?


Two months ago, you couldn't find anything positive. Every statistic was running negative, and you had a sense of an economy in free fall. I think today the picture is more mixed. There are obviously still problems in the financial market and weakness in housing. But production is now pretty clearly running below sales…which will be followed by an inventory cycle that can be a source of strength. You have a more mixed picture in terms of consumer spending, in part because the stimulus in the Recovery & Reinvestment Act is coming into people's paychecks. You have the fiscal policy coming online. You know, government almost never gets a positive surprise in how much things cost, but it's actually turning out that we're going to be able to do a lot of these infrastructure projects—and 2,000 have already been started—cheaper than we'd expected. That means more employment, more ability to do things.

The budget the President put forth suggests the economy will see 4% growth in 2011. Are you expecting that?
The President made the forecast several months ago in the context of the budget. It was pretty much a consensus forecast at the time. We will revisit the forecast, as governments always do, a couple times a year, and at that point, we'll be in a position to discuss a new forecast.

So if we were to see the economy not grow at 4%, would you be prepared to suggest that perhaps he should pull back his plans to raise taxes on the highest earners?
Let's just be clear here because what you said is not quite correct. The President isn't taking any action to raise taxes. Current law calls for [the Bush tax cuts for high-income earners] to expire [in 2011]. And the President does believe—and he is surely right in this conviction—that given the magnitude of the debt problems the country faces, we can no longer afford those tax cuts for a very small fraction of the population. If you look at the long-run fiscal burden imposed by those tax cuts, it's as great or greater than the entitlement programs that generate so much discussion, and the evidence suggests [the cuts have] very little stimulative benefit. So yes, we are prepared to let those tax cuts expire.

Mall Titan General Growth Cuts Itself Down

Mall Titan General Growth Cuts Itself Down

The nation's second-largest shopping mall operator, General Growth Properties, which filed for Chapter 11 bankruptcy on Apr. 16, fell victim to the credit crunch and overambitious managers. But it is not likely to be followed into ruin by other big mall competitors, analysts and industry insiders say. Indeed, the bankruptcy filing by General Growth, which owns more than 200 malls in 44 states along with residential real estate and master planned communities, could make for an efficient way for rivals to pick up trophy properties.

Simon Property Group (SPG), the Indianapolis-based leader in the industry with 386 mall properties worldwide, has already been in touch with General Growth about snapping up some of the company's holdings. General Growth's properties include the Fashion Show Mall in Las Vegas and Chicago's trendy Water Tower Place, as well as master planned communities in areas in Maryland, Nevada, and Texas. General Growth also has joint ventures in shopping centers in Brazil and Turkey. "They have been marketing a handful of assets over the last several months. They have not sold any to date," says Stephen Sterrett, Simon Property Group's chief financial officer, confirming that contacts between the companies so far haven't led to a sale. He adds that Simon isn't interested in swallowing all of General Growth. "We have regular conversations with all kinds of people in our business."

For their part, managers at General Growth say they plan to hang onto most of the properties and to emerge someday from Chapter 11 reorganization. Thomas H. Nolan Jr., General Growth's president and chief operating officer, told reporters in a midday conference call on Apr. 16 that creditors and company executives alike want to keep the "strategic platform" together. He recognizes buyers might be especially interested in some of the 25 biggest properties—Boston's Faneuil Hall, for instance—but he said selling off the trophy properties or others in toto is not in the company's plans. "Could we sell off one of those, or two? I guess," Nolan said. "As part of a restructuring strategic review, we would consider looking at that."

To industry watchers, Chicago-based General Growth's fall came as no surprise. The real estate investment trust has been in tumult since early last year when the credit crunch began jacking up the cost of refinancing its staggering debt. John Bucksbaum, a son of the company founder, levered up the once cautiously run outfit with splashy purchases from the time he took over as CEO in 1999 until last year. He was forced out in October, as the company tried to negotiate with creditors to ease payments on a debt load that it reported in its bankruptcy filing to total $27.3 billion. General Growth valued its assets at just $29.6 billion, far less than the $40 billion- plus figures analysts had bandied about as recently as last fall. Bucksbaum remains chairman.

Vegas Shopping Spree

Under Bucksbaum, a hard-charging bicycling aficionado who palled around with racer Lance Armstrong and routinely went on rides in Europe's mountain countryside, General Growth was an anomaly in the world of big real estate investment trusts. While the others carefully tended to their balance sheets and kept debt under control, Bucksbaum had no fears about putting his company deep into debt. He rolled the dice heavily in Las Vegas, for instance, picking up shopping arcades in the Venetian and Palazzo casino complexes and buying Rouse, the big developer, in a debt-heavy $14 billion deal in 2004.

Architecture in Recession: U.A.E.

Architecture in Recession: U.A.E.

In recent years, architects descended upon Dubai, eager to capitalize on its feverish building boom. But while the Persian Gulf city's sprawling skyline is still dotted with cranes, the market here has fizzled.

As of early February, more than half of Dubai's real estate projects were on hold or canceled, from the 3,281-foot-tall Nakheel Tower designed by Woods Bagot to the Hydropolis, a 220-suite underwater hotel envisioned by designer Joachim Hauser. Analysts predict that Dubai property values, in total, will decline up to 60 percent in 2009 after years of record growth. Given this drastic turn of events, architects are being forced to reconsider their prospects in the region.

"Everyone is taking a real wait-and-see approach," says Wayde Tardif, an American designer who in 2007 co-founded POSIT Studio in Dubai. Tardif remains optimistic, noting that the slowdown will normalize the market and allow architects to catch their breath. He predicts a rebound in 16 to 18 months; he doesn't foresee a forgotten city full of empty towers. "Dubai has too much pride for that," he says.

In the past decade, Dubai, located in the United Arab Emirates (UAE), has embarked on ever-grander projects at breakneck speed in hopes of becoming a major world metropolis. Today, its economy relies on tourism, real estate, and financial services; oil revenues contribute less than 10 percent to its GDP.

Initially some thought the desert boomtown could skirt the global financial crisis. By October, however, foreign investors were vanishing, local lenders were retrenching, and oil prices were taking a dive. In recent months, The National, a UAE newspaper for expatriates, has been peppered with reports of mass layoffs. "There are many instances of consultant firms reducing staff by more than 50 percent, or closing their Dubai office altogether," says Scott Hyndman, a development manager at a Dubai-based property company. Some stories claim that hundreds, if not thousands, of cars sit abandoned at the Dubai airport, presumably left there by foreigners fleeing the country.

While holding faith in Dubai, many architecture firms are shifting their focus 70 miles to the southwest, to oil-rich Abu Dhabi. The capital of the UAE, Abu Dhabi has evolved gradually over the decades and often is regarded as a more livable—and more stable— urban center. "Where Dubai has been a speculative market, I think Abu Dhabi is a much more serious, play-by-the-rules market," notes Steven Miller, FAIA, managing director of FXFOWLE's Dubai office. His firm is actively pursuing work in Abu Dhabi, where major developments such as Saadiyat Island—a $27 billion multi-use project with buildings by Jean Nouvel, Zaha Hadid, and Frank Gehry—are reportedly still on schedule.

Guy Source, a UAE-based employment recruiter for the architecture industry, agrees that Abu Dhabi seems less affected by the financial crisis than Dubai. He adds that other Middle Eastern markets hold promise as well, noting that there are jobs waiting to be filled in Qatar, Kuwait, and Saudia Arabia.

FXFOWLE's Miller is no stranger to Saudi Arabia; he first worked there during the recession of the mid-1970s. Now, as he hunts for work beyond once-fertile Dubai, he is returning to familiar territory. "Saudi Arabia is off the charts right now," Miller says. "We're very busy there."

Architecture in Recession: SpainArchitecture in Recession: JapanArchitecture in Recession: IndiaArchitecture in Recession: GermanyArchitecture in Recession: ChinaArchitecture in Recession: Brazil

Wednesday, April 15, 2009

Intel Says PC Demand 'Bottomed'

Intel Says PC Demand Bottomed

The worst of the damage that has beset the PC industry is over, says Paul Otellini, chief executive of the world's biggest chipmaker, Intel (INTC).

Reporting first-quarter earnings that beat analysts' expectations, Otellini boldly said PC sales had "bottomed out" in the first quarter, adding that the industry is "returning to normal seasonal patterns."

Intel reported a profit of $647 million, or 11 a share, on sales of $7.1 billion for the three months that ended in March. Analysts had expected a profit of 3 a share, and sales of $6.98 billion.

Otellini's comments are one of the earliest signals that tech is poised to rebound from a several-quarter slump. A maelstrom caused by the mortgage market meltdown and financial crisis sliced demand for everything from chips and computers to consumer electronics and enterprise software and hardware; even Internet advertising dropped. In response, tech companies across the board curtailed production, reset sales forecasts, and eliminated tens of thousands of jobs.

Falling Inventories

Intel's results also suggest the company adjusted well to the drop in demand. "PC manufacturers saw that orders weren't materializing, and so they acted accordingly and stopped ordering new chips," says Dean McCarron, an analyst at Mercury Research, a chip industry consulting firm based in Cave Creek, Ariz. Intel and No. 2 chipmaker Advanced Micro Devices (AMD) reported disappointing earnings in January.

To cope, Intel slowed production and controlled other expenses. "While the global economy continues to be weak and uncertain, our execution this quarter was outstanding," Otellini said on a conference call. "We have adjusted quickly to this new environment where demand remained difficult to predict, and order lead times have contracted." One result: Inventories dropped by $700 million.

Wafer starts, a key metric of manufacturing activity, were reduced by a "significant" level, resulting in a 19% drop in inventory levels from the fourth quarter, Otellini said. Intel chose to forgo the cost of carrying more chips than it could expect to sell and opted instead to bear the costs of idling some of its factory lines. "Management sent the message that they were going to keep their powder dry and that is exactly what they have done," says Doug Freedman of Broadpoint AmTech Research in San Francisco. Chief Financial Officer Stacy Smith said six percentage points of gross margin were lost because of the underutilization of manufacturing capacity.

More Job Cuts

As hopeful as Intel may be about demand, the company refrained from issuing a profit forecast for the current quarter and said sales would be "flat" compared with the first quarter. And its results, while better than expected, showed that the recession continued to take a toll in the first quarter. Profit tumbled 55% from a year earlier and gross margin dropped 7.5 percentage points, to 45.6%, from the fourth quarter. This quarter, gross margin will remain in the "mid-40s," Intel said.

Reflecting the unease over Intel's outlook, the stock dropped in extended trading after the results were released. Intel shares declined 90, or more than 5%, after closing at 16.01, up 3. Shares of AMD fell more than 3% after hours. Freedman rates Intel a "buy" with a price target of 17. "The numbers are going to move higher through the balance of the year," he says.

To make sure it meets such expectations, Intel is pushing full speed ahead with a revision of its manufacturing technology, which will let it build chips with features of 32 nanometers in size, a leap from its previous generation of 45-nanometer technology. Costs associated with that transition are contributing to the decline in gross margin. Smith said he expects the costs of the manufacturing transitions to peak during the second quarter. Then gross margins will return to what he called a "normal" range of 50% to 60% in the second half.

Additionally there will be more cost cuts. Otellini said the company reduced headcount by 1,400 during the quarter, and expects to cut more jobs this year in line with the large-scale restructuring he announced in 2006.

Despite the lack of a concrete profit forecast, analysts were encouraged by the prospect that PC demand has hit a trough. It won't be easy to chart the "slope of growth…going into the recovery," says Ashok Kumar, an analyst at Collins Stewart (CLST.L). "At least it can be said that the worst is over."

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  • How to Make Acquisitions in a Down Economy

    How to Make Acquisitions in a Down Economy

    Impulse shopping is rarely a good idea—especially if you're buying a business. But you shouldn't overlook the importance of serendipity, either. The declining economy has left a raft of formerly solid businesses in distress, making it the right moment to consider whether an acquisition might make sense for you. With company performance—and therefore valuations—suffering, a recession can be an opportune time to buy. "It's a great time to be a careful buyer, which is not an oxymoron," says Eric Siegel, president of advisory firm Siegel Management in Bryn Mawr, Pa.

    Just ask Larry Browne, chief executive of Houston-based freight forwarder Diligent Delivery Systems. In March, Browne closed on the acquisition of a four-person courier business in Memphis, opening up a new market for his own company. Acquisitions aren't new to Browne—he's made nine since taking over Diligent in 2001. He's still raring to go. "The opportunities were there last year and are here now," Browne says. "I'm feeling good about '09. We're going to do some deals." His company now has 72 employees and about $40 million in sales, up from less than $1 million in 2001. Browne attributes 25% of his company's growth to acquisitions.

    There's more to successful deals than price and timing, of course. Any purchase needs to complement your business strategy and your plans for internally generated growth. Whether you're actively seeking out a deal or one falls into your lap, you'll need to know how to maximize and integrate the new assets before moving forward.

    In the best-case scenario, an acquisition would improve your company's profitability and margins and provide dramatically better return than you would get plowing the same money and sweat into organic growth. You should be able to wring some cost savings out of the integrated operation—rarely as easy as it sounds. Alternatively, an acquisition could be a good defensive move, or could raise barriers to entry for competitors.

    It's vital to understand exactly what you will need to get out of a purchase, whether it be cash flow, employees, customers, real estate, equipment, or technology. Be wary of buying a business that you suspect will complement yours but that you don't fully understand. Just because you make a great peanut butter doesn't mean you can successfully produce jelly.

    And while many stellar companies may be temporarily cheap, the reverse isn't necessarily true. If the seller is desperate to get out, there's probably a good reason. Likewise, if the reputation of the company has been battered, or if it's difficult to get good financial information, walk away. Then there's this catch-22: While the recession has made plenty of companies newly available, it has also made it much harder to find financing. If you don't have cash on hand, you'll need to find a seller willing to accept a lengthy payout or shares in the merged company.

    For the ready buyer, though, options abound. Nearly every industry has been affected by the recession, and those that rely on discretionary spending—real estate, luxury goods, and restaurant companies—may make for particularly rich prospecting.

    Sound good? First, confirm that you have both the dollars and the management resources to tackle an acquisition. Once you have a target, you will need to scrutinize the other company's finances, customers, legal standing, and employees. Then consider the structure of the deal and whether it should be an asset or a share sale, which can significantly affect the price. And remember: Just because it's on sale doesn't mean it's a good deal.


    An acquisition will put significant pressure on both management and finances, so evaluate yours before going on the prowl. "Your own operations should be very routine so that management has the flexibility to focus on the deal," says Siegel. You don't want to leave your core business struggling while you're playing wheeler-dealer.

    Making certain that your balance sheet is solid is critical. The best tactic for a strategic buyer, experts believe, is simply to rely on cash.

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  • Goldman, Give It All Back

    Goldman, Give It All Back

    If Goldman Sachs CEO Lloyd Blankfein wants to put his money where his mouth is, he won't stop with just giving back the $10 billion in federal bailout money the investment firm got last autumn. He'll also offer to return some of the $13 billion Goldman (GS) got from the U.S. government by way of the bailout of American International Group (AIG).

    Goldman's decision to sell shares and raise the necessary cash to repay the government is being seen by some as a show of strength. That's especially so after the firm posted a better-than-expected profit for the first quarter of $1.81 billion—largely driven by its proprietary trading desk. That's the same group of bond and commodity traders responsible for much for Goldman's outsized profits during the credit boom. So everything old is new again at Goldman. Right?

    But more than anything, the move to repay the TARP money is being motivated by Blankfein's desire to free his firm of all those nettlesome government mandates on executive compensation and bonuses. Now there's nothing wrong with Goldman giving back the TARP money if it really doesn't need it. After all, government officials have always said they expected the banks to repay Treasury at some point.

    AIG's CDOs: How Different from TARP?

    Still, if Blankfein really wants to help U.S. taxpayers out, he can go the extra mile and give back some of that AIG money the firm got, too. If the government had allowed AIG to file for bankruptcy, Goldman likely would have incurred an even bigger fourth-quarter loss than it reported. So Blankfein owes a bit of gratitude to Uncle Sam. And as my BusinessWeek colleague Roben Farzad pointed out on CNBC on Mar. 27, Blankfein can thank taxpayers by forking over its AIG largesse.

    Now we know Goldman will object that the AIG bailout money is different from TARP. The firm will argue that the dollars that passed through AIG were nothing more than money it was owed on all those credit default swaps it had purchased to insure some of its portfolio of collateralized debt obligations, or CDOs. In Goldman's world, all the government was doing was allowing AIG to live up to its contractual agreements.

    But, as we have seen in this financial crisis, some contracts can be broken. Maybe it was a smart move for the government to indirectly bail out AIG's trading partners to prevent a systemic financial collapse. But the government didn't have to make firms such as Goldman completely whole by paying face value for the CDOs that AIG had insured.

    If nothing else, maybe Goldman should now take the haircut it probably should have taken on those CDOs at the time of the AIG bailout. The bank could start by offering to give some of that $13 billion back, too.

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  • The Fragile Flight of the Twitterlings

    The Fragile Flight of the Twitterlings

    Twitter executives don't disclose much about their plans to make money from the microblogging site. But that's not stopping scores of other companies trying to build their own businesses on the back of the increasingly popular communication tool. Take Tweetie, whose downloadable software makes Twitter available on Apple's (AAPL) iPhone. Sales of the $2.99 application have been climbing "exponentially," says developer Loren Brichter.

    Twitter has inspired the creation of hundreds of third-party products and services, Twitterlings that make up a vibrant ecosystem reminiscent of those growing up around other devices and tools such as the iPhone and social network Facebook. San Francisco-based Twitter makes its code available to outside developers, who in turn use that knowhow to build tools that help people search, organize, or otherwise make better use of the millions of brief messages known as tweets sent over Twitter each day. "It's a symbiotic relationship," says Boris Veldhuijzen van Zanten, who created a site for Twitter analytics.

    A variety of business models are emerging among these Twitterlings. Some, like multimedia-upload site Twitpic, rely on ads; others, like TwitterHawk, charge fees for information about potential customers on Twitter. Among 18 app developers contacted by BusinessWeek, almost half said they were drawing significant revenue. Almost all said they were still experimenting with different models.

    Suddenly, Obsolete or Impossible to Find

    While alluring, Twitterpreneurship carries risks. The site's sporadic service outages can hurt a company's reputation, and changes to its coding platform can have adverse effects on tools. With no notice, Twitter itself could replicate features found on some apps, rendering them obsolete. And the looming prospect of Twitter's acquisition by a larger Internet player with a different strategy further complicates any developer's long-term plans. "What happens when you wake up one morning and your application doesn't work anymore?" asks Oren Michels, founder of Mashery, a consultancy that helps companies, including Best Buy (BBY) and the New York Times Co. (NYT), open their own platforms to third-party developers.

    Makers of Facebook-related tools and apps have learned the hard way the risks of hitching one's fortune too closely to a fast-rising social media property. Many third-party developers were left in the lurch last year when Facebook design changes relegated outside apps, or widgets, to harder-to-find locations on the site.

    Few third-party Twitter developers need to invest in expensive technology like servers, but their sites suffer when Twitter's own servers get bogged down by the many millions of messages posted to the site each day. "One of the big challenges we face is when Twitter is slow or goes down," says Misty Lackie, CEO of Go Smart Solutions. Her Twitbacks service offers free custom backgrounds for Twitter profiles. "When this happens, our users can't post their backgrounds and oftentimes assume it is an issue on our end," she adds.

    Some Twitter offshoots may ultimately find themselves vying with Twitter. "There is already an element of competition from Twitter as it improves," says Iain Dodsworth, the creator of Tweetdeck, a tool that lets users view and send tweets from the desktop. In December, Twitter CEO Evan Williams said at an event that the company is working on adding the ability to sort friends into groups, a feature available on Tweetdeck.

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  • The Worries Facing Russia's Banks

    The Worries Facing Russias Banks

    Is the financial crisis in Russia coming to an end? Or is it just beginning? That seems to depend on who you listen to.

    In recent weeks, senior government ministers and officials have been striking an increasingly optimistic note amid signs the economic situation in Russia has stabilized. Russia's Prime Minister Vladimir Putin has been especially keen to emphasize the government's achievements in the banking sector. "Thanks to the actions of the authorities, the imminent threat of a banking sector collapse has been averted," he boasted to Russia's Parliament on Apr. 6.

    Indeed, it's no small achievement that, despite the financial turmoil of recent months, no major Russian bank has gone bust, and there have been minimal signs of depositor panic. But in recent weeks, a chorus of doomsayers has been warning the stability won't last. A "second wave" of the crisis is about to hit Russia, they argue—and the epicenter of this coming shock wave will be the Russian banking sector.

    The government now appears to be taking the threat seriously. It can hardly ignore the likes of German Gref, the chairman of Russia's largest bank, state savings bank Sberbank (SBER.RTS). In a conference presentation on Apr. 8, Gref pulled no punches when he warned of the scale of Russia's banking woes. "The banking crisis in Russia is in its very beginning," he said, accusing the government of "slow decision-making" in tackling the problem.

    Gref's comments echo similar remarks by Petr Aven, president of Alfa Bank, Russia's largest commercial bank, who has also caused a stir by warning that hundreds of Russian banks could face bankruptcy this year.

    More Bad Loans

    At the root of these worries is mounting evidence that, as the recession bites, Russian borrowers are struggling to repay bank loans. As a result, the share of nonperforming loans appears to be mushrooming. "A month ago, 15% seemed like a negative figure. Now people are talking about [the share reaching] 20% to 30%," says Natalia Orlova, banking analyst at Alfa Bank. She estimates that around 10% of loans are already bad, but expects the figure to reach at least 15% to 20% by the third quarter.

    The precise figure makes a huge difference, with the cost of recapitalizing the banks rising exponentially as the share of bad debts grows. According to estimates by Sberbank, if 10% of loans go bad, the government will need to inject some $6 billion to recapitalize the sector. But that figure skyrockets to $35 billion if the share of bad loans doubles to 20%—and no less than $80 billion if the share reaches 30%.

    True, it's still far from clear whether the bad loan problem is actually as bad as the pessimists fear. Elena Romanova, banking analyst at Standard & Poor's (MHP) in Moscow, says that in general banks now regard around a third of loans as potentially "problematic." But it still remains to be seen how many of those loans will actually go bad and how many will be restructured. "The risk is serious," she says. "But it's difficult to say how the situation will develop in Russia, because we've never been through such a calamity before."

    It doesn't help that Russia's system of accounting differs in important respects from Western standards, recording unpaid loans (including loans on which the interest is unpaid), rather than estimating which loans are fundamentally unsalvageable.

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  • Monday, April 13, 2009

    Marcial: Pros Gazing at Star Scientific

    Marcial: Pros Gazing at Star Scientific

    Investors will be watching intently as a big tobacco industry patent-infringement case goes to trial in mid-May: a David-and-Goliath court battle pitting the second-largest U.S. cigarette maker, R.J. Reynolds Tobacco, a unit of Reynolds American (RAI), against the tiny and little-known Star Scientific (STSI).

    Shares of Star Scientific, which has developed tobacco-curing technology that prevents the formation of certain carcinogenic toxins in tobacco, have started to attract some big investors. They're betting that if it wins a lawsuit it has filed against Reynolds, seeking damages of about $1 billion, the potential rewards to the small-cap company would be huge. The stock has been on the rise, climbing from a low of 1.48 a share on Nov. 20, 2008, to 4.84 on Apr. 9, 2009. Reynolds stock has also gone up recently, from 31 on Mar. 6 to 39 on Apr. 9.

    Wall Street analysts haven't had much to say about the lawsuit. Of the 11 analysts tracking Reynolds, four of them rate it a buy, including MatrixUSA, which tags it a strong buy. But no analysts cover Star. While the disparity in size between the two companies is huge, investors in Star are upbeat. "Despite Reynolds' legal efforts to derail and delay the patent-infringement suit, Star Scientific succeeded in getting a trial date," says Neal Goldman, president of Goldman Capital Management, which holds a 4% stake in Star. That indicates Star has a chance of winning, "and we believe it will," says Goldman. The stock, he adds, is very undervalued, based on its technology, products, and likelihood of winning the patent fight.

    Goldman notes that if Star emerges victorious, the loss to Reynolds would be huge. So he figures Reynolds may agree to an-out-of court settlement. At the same time, however, he doesn't discount the possibility that Star may be bought out before the case is resolved in court. A large tobacco company, he argues, could make a bid to acquire Star. Goldman puts Star's worth at 20 a share.

    Reexamining the Patent

    At issue in the litigation: Star's patents covering a technology invented by CEO Jonnie Williams, the company's largest shareholder with a 15% stake. Williams began work on the project in 1996. The result: He developed novel methods to inhibit the "microbial nitrate-reductase" activity in tobacco that leads to the formation of nitrosamines. Williams says those are among the most active cancer-causing agents in tobacco and have been identified in animal and clinical tests as contributing to a variety of cancers, inducing tumors of the lung, oral cavity, esophagus, pancreas, and liver. Star was issued a patent for the technology on Mar. 20, 2001.

    The legal battle started on May 23, 2001, when Star sued R.J. Reynolds Tobacco, accusing it of using and selling tobacco made by a process that infringed on Star's patent. Reynolds adamantly denies the charge and also questions the patent's merit.

    David Howard, a spokesman for R.J. Reynolds, says the U.S. Patent & Trademark Office has granted Reynolds' request to reexamine Star's patent because of questions about its validity. The reexamination could take six to eight months, he says. "We are confident of winning the case," says Howard.

    But on Mar. 9, 2009, the U.S. Supreme Court dealt Reynolds a severe blow by refusing to hear its appeal on the case. And on Mar. 31, Reynolds suffered another setback when U.S. District Court Judge Marvin Garbis denied its request to suspend a jury trial while the U.S. Patent & Trademark Office was reexamining Star's patent. The jury trial is scheduled to begin on May 18.

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  • Jack Bogle's Last Crusade?

    Jack Bogles Last Crusade?

    It's only 7 a.m., but John C. Bogle, 79, is already throwing elbows. He's impatiently boarding the Amtrak Acela in Philadelphia en route to Washington, where he's giving a lunchtime talk to a group of investment advisers. Today's speech is just the latest in a career-long campaign, on behalf of small investors, to wrest the financial system from overpaid financial middlemen. It's a quest he began even before he founded Vanguard Group, a pioneer in low-fee mutual funds, in 1974.

    Bogle slowly takes his seat on the train, then contorts his arthritic hands to push the recline button. After taking a pull from his coffee, he ticks off some grim statistics: U.S. family wealth plummeted 18% last year, the most since the 1930s; $9 trillion in stock market value has vanished since 2007; the Dow Jones industrial average touched 6500 in March, a level not seen since Bill Clinton's second inauguration. And yet (and yet!) the financial services industry took home some $500 billion in fees last year. "What the hell for?" he thunders. "If they looked after other people's money with the same care they look after their own, we wouldn't have to be bailing out banks."

    Bogle's latest mission may be his most ambitious yet: to persuade regulators to overhaul the U.S. retirement-savings system by simplifying account options, clamping down on fees, and making risk more understandable. It also might be his last. Bogle tells BusinessWeek his body has started to reject his 13-year-old transplanted heart. The attack, which began last summer, has landed him in the hospital on four separate occasions. Not that he's looking for sympathy. "I'm not introspective about my health, nor do I live in fear of dying," he says. "Your life expectancy is not enormous when you're 80."

    Surely no one would begrudge Jack Bogle, who created the world's first "index" mutual fund in 1975 and retired from Vanguard a decade ago, the right to take it easy. But he won't hear of it. Much to the consternation of Eve, his wife of 52 years (who declined to comment for this story), Bogle spent seven hours a day during hospital stays last summer editing his seventh book, Enough: True Measures of Money, Business, and Life. In May he's bringing out a new edition of his 1999 best seller, Common Sense on Mutual Funds, and he has accepted at least eight speaking invitations between now and then. He's also making regular rounds on TV. "I need to be out here doing this," he says. "I'm a worker by temperament."

    "It's a calling," says Jeffrey A. Sonnenfeld, a professor at the Yale School of Management. "He is the country preacher of finance. Henry Fonda would have played Jack Bogle in the movie."


    As the train reaches cruising speed, Bogle's rhetoric heats up. The financial system, he charges, is too far skewed toward Wall Street and money management firms. At the same time, he says, individual investors have far too much freedom to make ruinous decisions with their retirement accounts.

    So how would he fix things? Bogle proposes the creation of a federal retirement board to simplify and clarify the retirement-savings process. The board would oversee a new kind of defined-contribution account to replace the salad bowl of options—401(k), IRA, Roth IRA, Roth 401(k), 403(b)—that currently confront and confound investors. It would also monitor savers' investment choices to help them determine just how much risk they can tolerate and would emphasize low-fee mutual funds over pricier ones. Just as important, Bogle is urging Washington to require retirement plan providers—and all money managers, for that matter—to meet basic client protection standards. He wants fuller and clearer disclosures of all potential conflicts of interest and any other information that might affect investing decisions.

    If there's a gadfly gene, it runs in Bogle's family. Way back in 1868, his great-grandfather, Philander Banister Armstrong, needled his fellow insurance executives. "Gentlemen, lower your costs!" he challenged in a speech. In 1917, Armstrong, whom Bogle calls his "spiritual progenitor," published a 258-page diatribe called A License to Steal: How the Life Insurance Industry Robs Our Own People of Billions.

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    Architecture in Recession: Spain

    Architecture in Recession: Spain

    The boom in Spanish housing construction, fueled over the past decade by low European Union interest rates, was dealt a fatal blow by the crisis this past fall. According to the Madrid College of Architects, a professional association, permits for new construction virtually came to a halt in 2008. Paloma Sabrini, head of the organization, estimates that at a national level, the market will require three years to absorb the existing overstock of one million units. In Barcelona, Carlos Ferrater, an architect who works in both the private and public sectors, reports that "Most developers have come to a full stop. We've gone from euphoria to ruin in three months."

    Spain's investments in infrastructure over the past 30 years have turned the public sector into a major source of commissions and catapulted the country's architecture into the international limelight. But overspending has stretched local governments to the limit. Ferrater notes, "Municipalities like Madrid and Valencia are heavily indebted, and can't even handle projects already under way."

    Rafael de La-Hoz, head of one of Madrid's largest studios, finds many public works in undeclared paralysis. "If you ask the clients, they'll tell you that everything is going forward, but the fact is that work has halted." Among the projects affected are his two courthouses for Madrid's Campus of Justice.

    In response, President Jos Luis Rodrguez Zapatero announced a $10.6 billion program to finance municipal works in 2009. The funds will permit Madrid to revive lvaro Siza's modernization of the spaces around the Prado Museum and the reconstruction of the banks of the Manzares River over a buried highway, designed by a team led by local architect Gines Garrido. The city has dusted off plans for 269 projects, including 20 new child-care centers. Barcelona will spend $375 million on public spaces and social services.

    Architects report slowdowns in roughly 20 percent of their current work. Francisco Mangado in Pamplona says, "Though the municipalities aren't paying right now, you know they'll eventually come through." Younger firms are especially vulnerable, but Csar Jimnez de Tejada of Estudio Entresitio in Madrid, reports that the open competitions for public housing and other local services on which they depend continue to be announced.

    De La-Hoz has found some relief in international commissions. His newest clients are in Eastern Europe (including one in Bucharest); they look to Spain as a model for integration in the European Union. But he foresees that, "In the long term, the situation is unsustainable."

    Like many architects, Ferrater balances design work with teaching, which allows him to take a long view on the crisis. "I want to focus more on the fundamental mission of the architect, in social, cultural, academic and professional terms. You've got to take a positive attitude, looking ahead, instead of behind you."

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  • How Microsoft Is Fighting Back (Finally)

    How Microsoft Is Fighting Back (Finally)

    For 25 years, Microsoft (MSFT) held unquestioned dominance in the personal computer business. But last year the maker of the Windows operating system started to look like a weary, vulnerable champ. Fueled by iPhone-mania and the iconic "I'm a Mac" TV ads, Apple (AAPL) was nearing a double-digit share of the PC market. At the same time, a new generation of sub-$500 "netbooks" that ran on the free Linux operating system was taking off.

    Now, Microsoft has launched a determined counteroffensive. Its uncharacteristically cool TV ads emphasize the affordability of PCs vs. Macs. And it has started offering PC makers a version of Windows, normally around $70, for as little as $15. Mac sales are sliding, and Linux is disappearing from most netbooks. Researcher NPD says 95% of PCs with a small screen and a sub-$500 price tag run Windows today, up from 10% in early 2008. "Microsoft has driven Linux off the lot in netbooks," says Roger Kay, founder of tech research firm Endpoint Technologies Associates.

    Microsoft CEO Steve Ballmer and his top lieutenants say they're not done yet. They predict the introduction of the next Windows upgrade this fall will spark a renaissance in the company's flagship business. Named simply Windows 7, the program promises greater ease of use and reliability, rather than new bells and whistles. And while every major Windows overhaul in the past has required more powerful computers, Windows 7 can work with slower microprocessors and fit into less hard-drive space. That means it will run on a full range of PCs, including netbooks. "Although we make less per unit, we're making very decent money" on lower-price PCs, says Brad Brooks, Microsoft's corporate vice-president for consumer-product marketing.

    Still, selling millions of copies of Windows 7 for $15 or so is hardly a positive trend. Microsoft investors are used to the massive profit margins that come with selling Windows for four times that amount. But Brooks says the company has found a way to attract new customers with cheap models, while minimizing price erosion. The secret is a new strategy behind its "Windows Anytime Upgrade."


    Because of the smaller size of Windows 7, three versions of the program will come loaded even on lower-end machines. If a consumer on a cheaper PC running the "Standard" version tries to use a high-definition monitor or run more than three software programs at once, he'll discover that neither is possible. Then he'll be prompted to upgrade to the pricier "Home Premium" or "Ultimate" version.

    Microsoft says the process will be simple. Customers enter their credit-card information, then a 25-character code, make a few keystrokes, then reboot. Brooks says pricing hasn't been determined, but upgrading "will cost less than a night out for four at a pizza restaurant."

    Even at Pizza Hut prices, it's a risky proposition. Consumers may not appreciate having to fork over more money to accomplish routine tasks. "It could create a backlash from consumers," says analyst Toni Sacconaghi of Bernstein Research. "Such a move could be viewed as a bait and switch." The current version of Windows, called Vista, also has different tiers, but few customers upgrade because it means ordering a DVD and going through a clunky installation.

    The strategy had better work if Microsoft is to maintain its Windows franchise's high level of profitability. The business pulled in $13 billion in operating profits for the past fiscal year, on revenues of $16.9 billion. While the Linux threat may have cooled for now, reports have leaked out that major PC makers including Acer, Dell, and Hewlett-Packard are interested in using Android, another Linux-based platform championed by Google.

    The leaks may well be a tactic to influence discussions Microsoft is having with PC makers over the pricing for Windows 7. Nevertheless, "Microsoft is trying to freeze average selling prices when everyone else is trying to go the other way" and lower prices, says Endpoint's Kay.

    That's where the new ad campaign comes in. A year ago, the company devised a three-year strategy to reestablish the Windows brand with consumers. The latest ads, which feature volunteers who hunt for a laptop using money from what they think is a market-research firm, resonate particularly well with the thrifty mood of today's shoppers. In the first, a part-time actress named Lauren chooses a $700 laptop over a $2,700 MacBook. "I'm not cool enough to be a Mac person," she says. In the second, a techie named Gianpaulo picks a $1,500 PC. The third will feature a mother and her 11-year-old son, who opt for a Sony after the boy dismisses a pink PC and Macs, which can't run the Blu-Ray DVDs on which many games are printed.

    Lauren has become a YouTube sensation, but Microsoft recognizes it still has work to do. "We're not cool yet. Trust me, my daughter tells me that every day," says Brooks. "But we're having a lot of fun telling our story. It's been a long time coming."

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  • How to Cut Payroll Costs Without Layoffs

    How to Cut Payroll Costs Without Layoffs

    Ask any entrepreneur about his worst business experiences, and laying people off is sure to top the list. After all, people who work together in an intimate setting often form personal connections that mirror family bonds. Craig Lindell, chief executive of 17-person wastewater treatment company Aquapoint, remembers having to lay off staff in the mid-'80s, when he was chief operating officer of a fashion accessories company. "I faced those people when they lost their jobs," says Lindell, who still gets choked up talking about it. Reka Mostella, area manager of the Small Business Development Center at the University of South Carolina Aiken, sympathizes. "Business management is not about running a company under ideal circumstances," she says. "It's knowing what to change when things change."

    Aside from the personal toll, losing highly skilled workers can inflict long-term damage on a business, making it hard to bounce back and forcing managers to spend precious time and money recruiting and training when conditions improve.

    But salaries and wages typically account for 60% to 80% of a small company's expenses, according to Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville. And with nearly 70% of small businesses suffering sales declines, their owners are doing "things that they hoped they would not have to do," says Alice Bredin, an adviser to American Express Open, AmEx' small business division. That often includes tightening payroll. In a survey fielded by Open late in January, one-quarter of small business owners said they were cutting staff hours or jobs, and 9 out of 10 said they were curtailing hiring plans. It adds up. In January, small businesses with fewer than 50 workers shed 175,000 jobs, according to payroll firm ADP.

    Yet many entrepreneurs are trimming payroll costs without laying off hard-to-replace employees. Some, including Jim Strite, CEO of Strite Design & Remodeling, are working with staff to devise ways to save jobs and minimize the blow to workplace culture if cuts are unavoidable. Naturally, the first line of defense has been to shrink nonessential expenses such as travel and business meals, make do in smaller quarters, and postpone or cancel big-ticket investments. But some business owners are preserving jobs by reducing hours, encouraging employees to take unpaid leaves, and chopping pay (often their own).

    If you're feeling the squeeze, it may be possible to squeak by without losing your company's best assets. Following are three strategies to help keep your prized employees on board.


    Jim Strite, Strite Design & Remodeling

    On Thursday, Mar. 20, 2008, Jim Strite gathered his staff around the oval table in his "education room," where charts illustrating the company's progress adorn the walls. The owner of Strite Design & Remodeling in Boise, and a former economics lecturer, Strite showed his 14 employees how the housing meltdown was affecting the company: Revenue was a third below target. Gross profit, off 40%, wasn't enough to cover overhead, putting the firm in the red. Quick improvement was unlikely. Spring usually yielded projects that lasted through the summer, but calls about kitchen remodels, bathroom makeovers, and dream additions weren't coming in nearly often enough, despite a stepped-up marketing effort.

    Strite's employees were accustomed to straight talk, although they were surprised at the urgency of Strite's message. The firm is an "open-book" company, where employees see finances regularly, are schooled in the business, and are expected to drive its success. "Communication is important at all times. In tough times, it just becomes all that more important," says Rich Armstrong, president of Great Game of Business, a Springfield (Mo.) consulting company that promotes open-book principles. Armstrong says that candid dialogue eliminates distracting rumors and fears and fosters teamwork.

    In Strite's case, staffers immediately volunteered cost-cutting ideas, including offers to cut their own hours and take unpaid vacation.

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  • Soros Sees Strides in Fixing the Global Financial Crisis

    Soros Sees Strides in Fixing the Global Financial Crisis

    By the end of the day on Apr. 3, the Dow closed just over the 8000 mark, and a rally appeared to be taking hold on the heels of the G-20 summit in London. But at press time on Apr. 8, the Dow had dipped to 7837—in part because of remarks made by George Soros, the storied hedge fund investor. Two days earlier, Soros called the upswing of the Dow and the S&P 500 "a bear market rally," but he may not be as pessimistic as those words imply. I talked with Soros after the G-20 and again on Apr. 8, and while he remains cautious about the remaking of the world financial system and the direction of the market, he was heartened by the outcome of the summit. Soros, who came out of retirement last year to take charge of Soros Fund Management, now says he is back in retirement mode. Apparently, though, the lion in repose can still scare the jungle.


    When do you expect a true turnaround in stocks?


    I think we are in for a long period of bottom-building. We had a good bottom in February and a good rally following it. We are going to have a number of bottoms in the years to come. Whether they will be higher or lower than the February bottom, I cannot predict—especially since I argue in my new book [The Crash of 2008] that financial markets are inherently unpredictable.

    What was your reaction to the outcome of the G-20?

    They pulled a few rabbits out of the hat, and it was a very impressive communiqu [coming out of the meeting]. It was probably [British Prime Minister] Gordon Brown's finest hour. He really did see the need to address the global problem because you have the less developed world facing a potential collapse as the banks don't roll over their loans. I would say this is probably the first time the authorities are actually ahead of the curve. They've managed to forestall a crisis in the developing world.

    The money that will be pumped into the IMF could rise to $750 billion. Is that enough?

    What's very important is special drawing rights of $250 billion. That is internationally creating new money and will allow countries that are unable to print their own money the way the U.S. can to stimulate their economies. And it will provide additional stimulus for the world, and particularly the part most in need—less developed countries that have been hit by a crisis not of their own creation. So I think it was very important not just for moral purposes but also for our own self-interest because this restart international trade.

    When do you expect the U.S. recession to end?

    It will take time. The magnitude of the problem cannot be overstated. It is bigger than it was in the 1930s. But [the outcome of the summit] is a very positive development.

    FASB [the Financial Accounting Standards Board] says it will relax the mark-to-market rules—the way assets are valued on banks' books. How much will that help?

    I remain critical because I think it would have been much more effective to recapitalize the banks, create clean banks that are able to lend. The way the TARP money was spent was very messy and badly done. And because of that, there's a reluctance by Congress to make new money available. So it will take a long time for the banks to dig themselves out. And while they're doing that, they will not be providing sufficient credit to carry on business, they'll be charging a lot, and that generally is going to weigh on our economy.

    Are you expecting that we'll see more banks go down?

    No, I think it's clear that no major [U.S.] bank whose failure would have a systemic effect will be allowed to go under.

    They'll be nationalized?

    It would be better to nationalize [the banks] than merely to nationalize their debt and leave them with the profits, because that's really to the disadvantage of the taxpayer.

    Secretary [Tim] Geithner says the Treasury should be able to regulate nonbanks such as an AIG. Do you agree?

    I do. Basically, this whole financial system collapsed because regulators failed to regulate. There was a belief that markets are self-correcting. That turned out to be wrong. So we have two tasks: One is to arrest the collapse and reverse it, and I think we are making good progress. And what happened at the G-20 is an important step. Now comes the task of rebuilding the financial system from its foundations, because it was built on false premises. That will take longer. There's much less clarity on that than there is on what needs to be done to stop the collapse.

    What will the banking industry look like once we emerge from this crisis?

    It will look fundamentally different because if you recognize that there has to be a guarantee for the deposits, then you also have to regulate those entities that are guaranteed. So it's not enough to regulate the money supply. You have to regulate credit. And you have to recognize that markets are prone to create asset bubbles and accept the responsibility of preventing those bubbles from becoming too big and self-reinforcing, because that's what a bubble is—a self-reinforcing process. And you have to recognize that markets have moods that regulators must counterbalance. You also have to recognize that if the markets don't know what equilibrium is, then regulators can't possibly know either. So you have to accept that regulators will be wrong. But with the benefit of feedback from the market, you can judge whether you've done too much or too little.

    You saw the story about some hedge funds saying: "We're leaving London. The tax situation is not favorable. We don't like business conditions here."

    Where are they going, another planet? There's general agreement that regulation has to be global. If you have global markets, you must have global regulation. There is no alternative now with tax havens being brought under control. Hedge funds will have to get used to being regulated.

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  • Nissan's Cube Aims Young

    Nissans Cube Aims Young

    Back in 2004, when Toyota (TM) launched the Scion brand to grow into a younger niche, Scion's xB showed that young buyers weren't only into slammed Civics and souped-up Mustangs. A boxy, strange-looking vehicle, the xB was more about a rolling living room than a fast set of wheels. Now Nissan (NSANY) and Kia would like a piece of that action. They are using the original xB formula and coming to market with the Cube, for Nissan, and the Soul, for Kia, both of which are smaller than the latest-gen xB, which has grown bloated and more expensive than the original box that launched the Scion brand.

    An aside: Some want to say Honda's (HMC) Element must share some DNA here as well, but given that the buyer age trends older, the Element is more like the young couple's car when they reject the minivan—or the empty-nester's car, when he or she also rejects the minivan and the pickup but spends a lot of time either surfing or heading to the garden center.

    Why mention the Element? Because buyer age is a compelling story for all of these vehicles, since a strange thing happened to Scion as well as with Honda's Element: The target was millenials/eco-boomers, but both Scion as well as Honda found a two-tier pattern, with empty-nesters adopting their boxes almost as fervently as the kids.

    Nissan says they expect the same to happen with the Cube, and the reasons are pretty clear why both very young buyers and certain empty-nesters will dig it:

    • Iconic Design. The Cube isn't meant to be instantly lovable. The design is purposefully polarizing, like the xB before it. The Scion was once considered controversial, and now it's almost staid. Such design can be equated with rebelling from tradition, a virtue to the youth crew, but fiftysomething Dwell readers will likewise be attracted to the unconventional, modern hew.

    • Utility, Comfort and Adaptability. The Cube is tall even though its wheelbase is quite short, even shorter than the compact Nissan Versa upon which the Cube is based. Height creates interior space, so there's incredible headroom in the car; one 6-foot, 6-inch tester at the launch still had plenty of space overhead. The car is comfortable and airy inside (height-adjustable driver's seat and steering wheel mean the short as well as the tall can get a decent perch behind the wheel), and the cockpit is easily altered to suit various needs. For instance, the front seats fold backwards completely, to meet the rear bench, which itself slides fore and aft up to six inches, depending on what you need to fit behind it; slide it backwards if you need more rear-seat legroom. Why would you want the front seats to fold completely backwards? Use your imagination. One wart: The rear seats fold forward, but they don't "dump" into the floor or flip forwards against the front seatbacks, so fully utilizing the back of the car for cargo requires a bit of fiddling. The flat load floor of a Honda Fit, for instance, is a little easier to manage.

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  • Zemanta, for Snazzier Blogs

    Zemanta, for Snazzier Blogs

    Slovenia is a long way from Silicon Valley. But a two-year-old tech startup called Zemanta is bringing a little California magic to Ljubljana, the country's capital, with a cutting-edge software tool that helps authors worldwide easily add related content and multimedia to their blog posts and e-mails.

    "People ask: 'Why Slovenia?' I say: 'Why not?'" says Alex Spetic, Zemanta's 36-year-old chief executive, who got his MBA at California State University at Hayward. "We're in the blogging business. It doesn't matter where you're based, it matters what you produce."

    What Zemanta has created is a one-stop shop for bloggers looking to dress up their postings with related content links, images, audio, and video. Once a blog entry has been written, Zemanta's Web-based program—which is compatible with tools including Blogger from Google (GOOG), Movable Type from Six Apart, and the open source WordPress—scans the content using search technology. Then it suggests free and public-domain material that bloggers can add, ranging from YouTube videos and Amazon (AMZN) merchandise to Wikipedia entries and news articles from 10,000 Web sites. Inserting the suggested material is as easy as point and click.

    Enhanced Content Is a Win-Win

    "The biggest usage will be professional authors who are looking for other forms of content to add to their blogs," says Saul Klein, a partner at London venture capital firm Accelerator Group, which provided first-round funding to Zemanta. "If the content is enhanced, both the author and reader win."

    Zemanta's premise may be simple, but bringing the product to life was far from it. For one thing, the initial prototype was written in Slovenian—not exactly a mainstream choice for reaching a wide Web audience. But after the company won a €50,000 ($67,200) prize in 2007 from Seedcamp, a European competition to foster entrepreneurship, Spetic and a team of five developers set about converting the software to English and raising more money.

    "We only had 10 weeks to get it up and running," Spetic says. "All we could pay [the developers] was food and accommodation."

    Despite the short development window, venture capitalists saw the potential. In January 2008, Accelerator, Britain's Eden Ventures, and New York's Union Square Ventures (which also backed Twitter), stumped up a combined 750,000 ($1.1 million) for an undisclosed stake in the startup. That was followed by a further $650,000 investment in September 2008, and now Zemanta is raising further capital (amount undisclosed) in a funding round expected to be complete by May.

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    A Credit Card You Want to Toss

    A Credit Card You Want to Toss

    Credit-card issuers have drawn fire for jacking up interest rates on cardholders who aren't behind on payments, but whose credit score has fallen for another reason. Now, some consumers complain, Bank of America (BAC) is hiking rates based on no apparent deterioration in their credit scores at all.

    The major credit-card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving an explanation for the increase, according to copies of five letters obtained by BusinessWeek. Fine print at the end of the letter—headed "Important Amendment to Your Credit Card Agreement"—advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer. "No one could give me an explanation," says Eric Fresch, a Huron (Ohio) engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit.

    Bank of America spokeswoman Betty Riess confirms some bank cardholders could be receiving rate increases for reasons other than declines in credit scores, such as running higher balances with their Bank of America cards or with other creditors. She says the increases are part of a "periodic review" that assesses customers' credit risk. She declined to say if the Charlotte (N.C.) bank had changed its credit standards thereby bumping some consumers' rates or how many cardholders were being affected by the review. Bank of America has 40 million U.S. credit-card accounts.

    Buzz about the letters is building on the Internet. Since mid-January, a credit-card information site, has received 40 complaints from consumers Bank of America had notified of sharp rate increases, even though they were current on their bills, says Emily Davidson, a researcher. Complaint sites and say they have also received similar complaints.

    The so-called "opt-out" letters give borrowers the option of no longer using their card and paying off the balance at the old rate. But they must write Bank of America by later this month if they plan to do so—otherwise their rates on existing and new balances automatically rise.

    Arbitrary Criteria

    What's striking is how arbitrary the Bank of America rate increases appear, credit industry experts say. In recent years, many card companies have turned to a practice called "risk-based pricing," where they will raise a regular paying consumer's rate because of a decline in the person's FICO score. FICO is a credit-risk score developed by Fair Isaac (FIC) that includes a number of risk metrics the Minneapolis company doesn't disclose. Credit reporting bureaus supply creditors with FICO scores along with other data, such as late payments and debts owed.

    In a December congressional hearing spearheaded by Sen. Carl Levin (D-Mich.), lawmakers slammed big card companies for using such pricing with customers who pay on time. By law, credit-card lenders can change terms as long as they notify borrowers. Even so, JPMorgan Chase (JPM) and Citigroup (C) announced ahead of Levin's hearing that they would stop the practice of raising card rates based solely on FICO scores.

    But Bank of America appears to be taking an even more aggressive stance because, beyond credit scores, it is using internal criteria that aren't available to consumers. That makes the reason for the rate increase even more opaque. "Congress has faulted credit-card companies for lack of transparency in raising rates," says William Ryan, a financial industry analyst at Portales Partners, a New York-based research firm. "Bank of America is bringing it to a new level."

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  • Architecture in Recession: Japan

    Architecture in Recession: Japan

    Architects are feeling the chill of an economic recession and the effects of the U.S. subprime crisis. Despite an estimated 2.2 percent drop in GDP in 2008, a decrease in housing starts, and a reluctance on the part of banks to lend, design firms large and small are hoping to wait out the storm. Due to its dependence on foreign financing, speculative housing has been particularly hard hit, falling 5.8 percent in December from the year before. As a result, developers are going bankrupt and projects are dying.

    But other sectors have slowed without coming to a complete stop. "Sometimes a break is good, since it gives us a chance to take another look at the design and maybe make it better," says Michel Weenick, president of the Tokyo firm PAE Design and Facility Management. After a six-month hiatus, PAE is moving forward on an auction facility for trucks and construction equipment.

    Large developers who are less dependent on foreign money and are engaged in a wide range of projects are faring better than those focused just on housing. Across the board, though, location is key. Large developments in central Tokyo, like Mitsubishi Estate's redevelopment of the city's Marunouchi District, are continuing at a steady clip.

    But outside that highly desirable location, clouds are gathering as land values and rents drop. According to the Nikkei Real Estate Market Report, 52 mid-sized office buildings in the middle of Tokyo will finish in 2009, an improvement over the 44 that were completed in 2008 but considerably less than the 92 projected for this year.

    In regional cities, lending and new construction are practically at a standstill. "Basically lending has stopped for anything outside of Tokyo," says Weenick. Architects in Nagoya, Toyota's hometown, are facing a double whammy as diminished tax revenues from poor auto sales have led to budget cuts for existing projects like the public library being designed jointly by Jun Mitsui & Associates Inc. and Pelli Clarke Pelli Architects. Few architects are relying on public commissions these days—a sharp contrast to the 1990s, when public works in the hinterlands sustained many firms after Japan's economic bubble burst.

    Another difference between the two recessions is the current decrease in international work. Instead of looking to the Middle East or China where opportunities abounded until recently, Japanese architects are searching for jobs at home. Branching out into interiors, renovations, urban design and feasibility studies—projects they would have passed on a year ago—has enabled many firms to maintain a sure footing. "It is a great chance for us to expand our capabilities and our client base," says Jun Mitsui. Not to mention hold onto staff. In Japan, once the land of lifetime employment, layoffs are still infrequent.

    Architecture in Recession: IndiaArchitecture in Recession: GermanyArchitecture in Recession: ChinaArchitecture in Recession: Brazil

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  • Monday, April 6, 2009

    Marcial: Sterling Construction, a Shiny Stimulus Play

    Marcial: Sterling Construction, a Shiny Stimulus Play

    Some savvy investors have been scouting for infrastructure pure plays, mainly those operating in states where the Obama Administration's American Recovery and Reinvestment Act of 2009—known the world over as the U.S. stimulus package—will have greater impact. One name that has caught attention as a potential significant beneficiary of such spending is Sterling Construction (STRL), a relatively obscure contractor focused on road, rail, bridge, and water infrastructure projects in Texas and Nevada.

    "Our research indicates that 86% of the projects that will be funded with stimulus dollars are construction projects, such as new lanes, new roads, and new bridges," says John Kasprzak Jr., an analyst at BB&T Capital Markets (BBT) (it has done business with Sterling), who rates the stock a buy. These are just the kinds of projects most suited to Sterling, he says.

    The Texas Transportation Dept., he notes, has a list of 309 projects that will be funded primarily by the stimulus funds—roughly $2.8 billion worth. Five of the largest construction companies in Texas, including Sterling, will be seeking a share of the projects, scheduled for competitive bidding this summer.

    flying high since the election

    Kasprzak says that because of his confidence in the company's ability to benefit from the stimulus package he has raised his stock price target for Sterling to 22 from 20 a share. The stock has been flying high since November's Presidential election, most probably because of President Barack Obama's promise to create 3.5 million jobs through an infrastructure construction program.

    From a low of 9.40 a share last Nov, 21, the stock zoomed to nearly 20 on Jan. 28, 2009. Profit-taking has since pushed the stock down, to 18.64 by Apr. 3. Kasprzak figures the stimulus dollars will help Sterling earn $1.45 a share in 2009 and $1.75 in 2010, up from 2008's $1.32.

    "Sterling should benefit from the stimulus package in the coming months as money begins flowing into these projects," says analyst Craig Bell of SMH Capital, who rates the stock a buy. The state transportation budgets in Texas and Nevada, when combined with the stimulus funding, will provide a solid environment for Sterling to win projects and execute successfully over the next several years, he adds.

    "Through a combination of growth in state funding and economic stimulus programs, Sterling's heavy construction projects are expected to jump by more than 50% in 2009 and 2010," says John B. Rogers, an analyst at investment firm D.A. Davidson, which would provide substantial opportunities for increased bookings or projects and earnings growth over the coming years. He rates Sterling a buy, with a higher price target of 23 a share. (Davidson expects to do business with Sterling.)

    a long-term bet, too

    Sterling isn't just a short-term play, however, that depends only on the stimulus package. Based on the prospect of increased economic activity, which should add to its work backlog over the near term and support growth for the long term, "we expect Sterling to realize solid, long-term earnings growth of about 11% over the next five years," says Rogers.

    Some of the country's largest institutional investors have discovered and invested in Sterling, whose market capitalization of $233 million is tiny compared to the much larger big-cap stocks in their portfolios. Among them are Wellington Management, its largest shareholder, which owns a stake of 12.5%, or 8.3 million shares, and T. Rowe Price (TROW), with 8.2%, or 1.6 million shares.

    Since the push began to bolster the economy through big-ticket infrastructure projects, Sterling's stock has produced nifty returns. And the stimulus spending hasn't even begun.

    Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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  • Sunday, April 5, 2009

    The Peter Principle Lives

    The Peter Principle Lives

    The Peter Principle, about to be reissued in a 40th anniversary edition, was a best seller when it was first published. A satiric treatise on workplace incompetence, it touched a nerve with readers because it was so funny. And so true. Much like the film Office Space, NBC's The Office, and Scott Adams' Dilbert comic strips, this book by Laurence J. Peter (a former teacher) and Raymond Hull (a playwright) captured the twisted logic of workplaces—tapping into how ridiculous they feel to insiders. It gleefully emitted a cloud of jargon monoxide and absurd advice as it reached its famous main conclusion: "In a hierarchy, every employee tends to rise to his level of incompetence."

    The Peter Principle made us laugh, but it also made us aware of the importance of simple competence—and of how elusive it could be. When people do their jobs well, Dr. Peter argued, society can't leave well enough alone. We ask for more and more until we ask too much. Then these individuals—promoted to positions in which they are doomed to fail—start using a bag of tricks to mask their incompetence. They distract us from their crummy work with giant desks, replace action with incomprehensible acronyms, blame others for failure, cheat to create the illusion of progress.

    If Dr. Peter were alive today, he'd find that a new lust for superhuman accomplishments has helped create an almost unprecedented level of incompetence. The message has been this: Perform extraordinary feats, or consider yourself a loser.

    We are now struggling to stay afloat in a river of snake oil created by this way of thinking. Many of us didn't want to see the lies, exaggerations, and arrogance that pumped up our portfolios. Instead we showered huge rewards on the false financial heroes who fed our delusions. This is the Bernie Madoff story, too. People may have suspected that something wasn't quite right about the huge returns on their investments with Madoff. But few wanted to look closely enough to see the Ponzi scheme.

    Nor did anyone care to see the limits of professional athletes. Baseball's Barry Bonds was a great player, but excellence wasn't enough for the San Francisco Giants' management, himself, or deluded fans like me. During those alleged steroid years, Bonds sure looked juiced: His head resembled a balloon. My reaction? Like most Giants fans, I joked about the meds—and loved it when he blasted those homers.

    The cure for our malady? We should return to what Dr. Peter wanted: rewarding ordinary competence and being wary of feats that come too easily. Perhaps the late Ray Kroc is the right role model here. One of his first steps in building the McDonald's empire was to run his own outlet—he cooked, cleaned bathrooms, picked up the trash. The focus on doing ordinary things well was, he believed, key to McDonald's success.

    Simple competence was central, too, for former U.S. Marine Lieutenant Donovan Campbell, who led a platoon in bloody street battles in Iraq. As Campbell's account, Joker One, tells us, he earned his men's respect and protected them through simple acts: training them to get in and out of a Humvee quickly, reminding them to eat, and arguing with superiors when those under his command were unnecessarily put in harm's way.

    Finally, consider how Captain Chesley Sullenberger III explained his astounding emergency landing of US Airways (LCC) Flight 1549 in New York's Hudson River in January. "I know I speak for the entire crew when I tell you we were simply doing the jobs we were trained to do," he said. As Dr. Peter might have observed, there were no pretenders, blowhards, or shared delusions that day, just the deftly coordinated actions of people who had not reached their level of incompetence.

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  • As Factories Fail, China's Business Law Does, Too

    As Factories Fail, Chinas Business Law Does, Too

    Dongguan, China - Business had been good, even great. But by early 2008, the lighting manufacturer realized his factory in China was heading for failure. The collapse of the U.S. housing market had devastated demand for his lamps and fixtures sold at American retailers. Costs kept rising in Dongguan, the southern city where he had expanded his operations. So the 43-year-old boss quietly slipped out of China, leaving behind $100,000 to cover the final month's rent and salary for his 400-plus workers. Suppliers were left unpaid.

    Lucky he left early. As word spread about the factory's closure, furious employees streamed onto the nearby street, a narrow passage lined with Internet bars and outdoor pool tables. Suppliers drove up in blue moving trucks, blocked the gate, and sent in hired thugs to grab computers, cables, machinery—anything of value. Unable to find the boss, the gang roughed up the company's lawyer and held him hostage for much of the day. "It was a new factory and looked like a gold mine. They were going to take everything out," says the boss, a European who has been in hiding in Taiwan for almost a year.

    Order was restored only after the landlord called in five truckloads of police to protect his property. And suppliers who arrived too late were out of luck. Xiao Xiaosan, a maker of metal parts for lamps, says he is owed $76,000. Although he rushed to the factory on the day of the closing, he doubts he'll ever see his money. "It's impossible for me to find the owner outside of China," he says.

    As the global recession slams China, bankrupt business owners are shutting factories overnight. Often, they leave the mainland, afraid of angry suppliers and workers and uncertain about legal protections. Dongguan alone last year recorded 673 cases—up 24%—of owners fleeing their factories, leaving behind 113,000 unemployed workers owed $44.1 million. Labor disputes almost doubled, to nearly 80,000.

    The problems are spurring everyone to be more cautious. In the past, many deals were made on the basis of trust. But suppliers these days are demanding bigger payments up front. "It's gumming up the normal free flow of goods," says Ben Schwall, an American who heads Aliya Lighting, a Dongguan company that supplies lamps sold at Home Depot (HD), Lowe's (LOW), and elsewhere. "A lot of friendly credit is disappearing."

    Worried about factories going belly-up, buyers for multinationals are closely monitoring the financial health of their suppliers. "It's a big concern," says William Fung, managing director of Li & Fung, a Hong Kong company that handles purchasing in Asia for retailers worldwide. "The most often asked question by our buyers is whether the factory...will still be around tomorrow." Purchasers who once might have had little contact with suppliers to their suppliers—companies that sell, say, buttons or zippers to a shirtmaker—are now quick to react if they hear those smaller players aren't getting paid, a clear sign of trouble at the factory. "You can only deal with people you have known a long time," says Peter Lau, chairman of Giordano International, a clothing retailer with 2,000 stores across Asia. "And the trust has to be both ways."

    In the U.S., factory owners could file for bankruptcy, getting some protection from creditors and maybe even court-ordered financing to keep operating. That was supposed to be the case in China, too, under a two-year-old bankruptcy law that was heralded as a key step in market reforms. But few judges have received the necessary training to understand the complex measure, so local officials often discourage hard-pressed owners from filing for bankruptcy. And by compensating creditors before employees, the law undercuts Beijing's desire to minimize labor unrest.

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