Saturday, September 30, 2006

Online Retail vs. "Brick-and-Mortar" Retail

Q: Which has a larger market value?

1: The approximately 5,000 retail stores in the U.S. owned by two retail giants: Federated (Macy's, Bloomingdale's, Filenes, Hecht's, etc., about 1,000 stores), and Sears Holdings (Sears and K-Mart, about 4,000 stores).

2: Ebay and Amazon?

A: #2!

Federated and Sears have a combined market value of $47 billion and Ebay and Amazaon have a combined market value of $50 billion.

Friday, September 29, 2006

Significant Income Inequality for the NFL?

1. USA Today has a database of salaries for all professional athletes in the NFL, NBA, NHL and MLB, annually from 1988 to 2006. As one example, the Minnesota Vikings in 2005 had a payroll of $85.4 million for a roster of 61 players, a median salary of $596,100, and an average (mean) salary of $1.4 million. The lowest paid player was T.J. Cottrell ($139,840), and the highest paid player was Fred Smoot ($12.3 million).

2. The IRS keeps a database of income tax returns, and does an analysis of the
share of total income earned by different groups of taxpayers. For example, in 2004 (most recent year) here are the shares of total income earned by differnent groups of taxpayers:

Top 1% earned 19% of all income ($328,000 income or higher)
Top 5% earned 33% of all income ($137,000 income or higher)
Top 10% earned 44% of all income ($99,000 income or higher)
Top 25% earned 66% of all income ($60,000 income or higher)
Top 50% earned 86% of all income ($30,000 income or higher)

3. Many people express concern about the inequality of income across all taxpayers.

How are the above items connected?

Well, even the lowest paid Viking is in the top 5% of all taxpayers, most Vikings are in the top 1%, and many are in the top 1/2 of 1%. So I am sure nobody feels sorry for them. But wait a minute! Couldn't there be significant income inequality among this group of "the rich."

Here is the breakdown for the Minnesota Vikings:

The top 1% of the team earned 14.5% of total income (payroll)
The top 5% of the team earned 31.4% of total income (payroll)
The top 10% of the team earned 48% of total income (payroll)
The top 25% of the team earned 71% of total income (payroll)
The top 50% of the team earned 88% of total income (payroll)

Hmmmmmmmmmmm. If you compare the percentage breakdowns above, it seems like there is about just as much income inequality among the "super-rich" Minnesota Vikings, as among the general population. Maybe such income inequality is natural, and should be expected, regardless of whether it is all taxpayers, or various sub-groups of taxpayers. That is, you could take the top 1%, the top 5%, the top 50%, or the top X%, all the way to the top 100% (all taxpayers), and you would probably always find a significant, and possibly similar and consistent pattern of income inequality.

See my article on this topic. For Nobel prizes, the top 20% of countries receiving Nobels have received 85% of all prizes awarded. For Olympic medals, the top 20% of countries receiving medals received 70% of all medals. In most sales environments (real estate, securities, insurance, etc.), it is expected that the top 20% of salespeople generate 80% of all sales. It is probably the case that the top 20% of students at a university receive 80% of all grade points every semester. In the NBA, the top 20% of the players probably generate 80% of the total points scored. For movies, the top 20% of the highest grossing movies probably generate 80% of all revenues. For books, the top 20% best-selling book probably generate 80% of all sales. The list could go on... If this is a natural outcome in any competitive process, the process of earning income should be no different.

If talent, ambition, skills and luck are distributed "unequally," should we not expect unequal outcomes? And suppose you don't like the inevitable result of an inequality of outcome? What is the logical solution to correct such a "problem"? The use of the coercive force of the government to redistribute income, sales revenue, grades, Olympic medals, Nobel prizes, or grade points?

And now think about this scenario: what if professors started "grade redistribution" at the end of each semster, and took grade points away from the A students and gave them to the D students, to achieve a more "equal" distribution of grade points and final grades, possibly resulting in all Cs? Who would study?

What Does a 4BR Home Cost? Depends....

What does it costs to buy a typical four-bedroom home, with 2.5 baths and a double garage? Well, it depends a lot on whether you buy the house in Minot, ND or Beverly Hill, CA. In Minot the 4BR home will cost you $132,333, and the same house in Beverly Hills will cost you a cool $1.8 million. For the complete list of home prices in 342 cities, click here.

Greenspan Calls Sarbanes Oxley a "Nightmare"

From today's Investor's Business Daily, an editorial about Sarbanes-Oxley, specifically about how former Fed chair Greenspan now has second thoughts about a bill he once supported, but now calls a "nightmare."

According to IBD, it's "the arrogance of Washington that gave birth to the Sarbanes-Oxley monster, " which:

• Requires small companies to spend an average $3 million a year and big companies an average $8 million to comply with its rules.

• Is responsible for a $1.5 trillion reduction in value in the U.S. stock market, according to an American Enterprise Institute study.

• Creates conditions so demanding that only one of the top 10 overseas IPOs was held in the U.S. last year.

• Prompted European companies to withdraw from U.S. exchanges because of the heavy financial burden of compliance.

Good Thinking Senators.....

From today's NY Times, an article about how "the Chinese government has sharply stepped up the appreciation of its currency, allowing it to push through an important level against the dollar on Thursday for the first time."

The recent climb of the Yuan (depreciation of the dollar, see graph above) — less than a full percentage point since the beginning of September — is still modest and perhaps will not last. But it is producing cautious hope in the Bush administration that the Chinese government may be lifting its opposition to a revaluation that could ease China’s huge trade surplus with the United States.

And partly in response to the currency lift in China, two influential senators in Washington announced Thursday that they were pulling back legislation that would punish China with 27.5% tariffs if it did not allow the value of its currency to rise, a step that would make exports to the United States more expensive and imports from America more competitive.
Good thinking senators....... because how would 27.5% taxes (tariffs) on Chinese products that would be imposed on, and paid for, by US consumers and US business "punish China?" And wouldn't that be "price gouging?"

Wednesday, September 27, 2006

Business Failures are Good for the Economy

The market imposes strict, severe and fierce discipline, through the profit and loss system, especially by imposing harsh penalities for firms that operate inefficiently. More than 80 percent of new firms in the United States end up failing and about 10 percent of all American companies fold each year. But do these business failures provide real economic benefits and enhance social welfare? Yes, business failures are good for the economy, according to a study by University of Michigan professor Hart Posen.

His study found that the more firms that enter a market, the greater the likelihood that poorly performing established companies will disappear, suggesting that failure is merely a byproduct of a phenomenon (excess entry) that yields superior firms.

In addition, competition from a glut of new companies—even those that eventually fail—leads to innovation and efficiency gains among incumbent firms, they say.

This happens for two reasons. First, excess entry, which leads to decreases in price margins, spurs incumbent firms to innovate and reduce costs over the long term. Second, knowledge produced by failed firms, while wasted on themselves, may be absorbed by survivor firms through a spillover effect.

Competition breeds competence. The market rules.

Medical Tourism

It's easy to see why people are tempted to combine travel with surgery: The cost of medical procedures is often much lower abroad. For example, Howard Staab, a 53-year-old North Carolina contractor, was healthy in the summer of 2004--or so he thought, until his doctor found a life-threatening heart condition during a routine physical.

Uninsured, Staab had always paid out-of-pocket for medical care. But discussions with the local hospital revealed uninsured patients pay much higher fees than insurers do. Staab faced a $200,000 bill for the heart valve surgery he needed if it was performed there.

In September 2004, Staab got his surgery at a state-of-the-art facility in New Delhi, India. He is part of a growing number of people traveling to other countries in search of low-cost medical care. Staab's surgery cost $6,700; post-operative lodging and airfare added another $1,500 to the tab. is a Web site that connects patients with high-quality medical facilities in India, Thailand, Singapore, Mexico, and Costa Rica.

When potential clients contact, the medical staff reviews their medical history to assess whether they are well enough to travel; some people may have waited too long to seek care and therefore are not healthy enough to make a long flight to India or Thailand.

Staff members then help clients choose appropriate physicians and destinations for care; the medical records are digitized and placed online to allow physicians in the destination country to easily review the patients' medical histories; then arranges conference calls between the physician and patient to discuss the procedure.

Once the patient chooses a physician, arrangements are made for the procedure. assigns a case manager from the destination country; the site often arranges travel and lodging as well.

A country manager coordinates any additional requirements such as cell phone service and airport transportation; case managers attend to all needs that arise while the patient is in the destination country.

Although insurers currently do not make medical travel part of their provider networks, they may in the future, according to Mercer Health & Benefits, a national consultancy group for human resources managers.

Source: Devon Herrick, "
Medical Tourism Prompts Price Discussions," Heartland Institute, October 1, 2006.

Tuesday, September 26, 2006

What's a Degree Worth?

These salary increases indicate that 2005-06 has been the best job market in the past four years.

Business disciplines posted increases across the board. Accounting grads' average offer rose by 6.2 percent to $45,723, and business administration/management graduates saw an increase of 3.9 percent, raising their average offer to $39,850. The average salary offer to economics/finance graduates jumped 11 percent to $45,191.

DJIA Within 53.5 Points of Record-High

The Dow Jones closed today at 11,669.39, the second highest closing in history, and within 53.5 points of the highest close in history on January 14, 2000.

India's Outdated Foreign-Exchange Policy

From today's WSJ: "Rupee Reform"

Despite these achievements, India's whole approach to foreign-exchange control is badly outdated, a point occasionally recognized in the report itself. The system was invented during World War II, strengthened in the late 1950s and made truly draconian in the early 1970s by former Prime Minister Indira Gandhi. It is animated by the view that foreign exchange is the property of the state, and that Indian residents are constantly poised to mount a run against the rupee.

BUS 468: 10-year Yields Falling

Ten-year T-note yields hit 4.55% yesterday, the lowest level in about 7 months, since February 28 (see graph above).

From today's WSJ front page:

In one of the bigger surprises in financial markets this year, a growing sense that the economy is slowing and inflation receding is fueling a rally in the nation's bond markets, pushing Treasury-bond yields to their lowest levels in months.

Because bonds pay fixed interest, their yields go down as investors bid up their prices, and vice versa. Earlier this year, Treasury yields rose as investors fretted that a strong economy would pump up inflation. Inflation eats away at bond returns, so investors dumped Treasurys, which pushed bond prices lower and their yields higher.

Now, in the upside-down world of bond investing, bad news about the economy has investors turning back to bonds, which is pushing yields back down, essentially making it cheaper to borrow money.

Monday, September 25, 2006

Home Sales Fall in August, Buyer's Market

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 0.5% to a seasonally adjusted annual rate of 6.30 million units in August, down from 6.33 million homes in July, and were 12.6 percent lower than the 7.21 million-unit level in August 2005.

The national median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005 when the median was $229,000. This was the first year-to-year median price decline since April 1995, and it was the second-biggest year-to-year price decline in the 38-year history of the monthly survey of home sales released by the National Association of Realtors (since 1968).

Mortgage Rates Falling

30-year mortgage rates now at a 6-month low of 5.8%.

Sunday, September 24, 2006

Wal-Mart Goes Global

The number of Wal-Mart stores in foreign countries:

Argentina: 11
Brazil: 295
Canada: 278
Japan: 398
Mexico: 774
Puerto Rico: 54
S. Korea: 16
UK: 315
China: 56
Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica: 363

How does this benefit the U.S. economy? Wal-Mart employs about 1,500 people at its Arkansas headquarters (about 10% of 15,000 total jobs there) just to coordinate worldwide shipments for the 2,560 stores outside the U.S.

$1.90 Gas and Oil Below $60!!

Gas prices keep falling, now down to $1.90 per gallon in Missouri, and oil just went below $60 per barrel for the first time in 6 months!

Economic Appreciation 101

"I think we really need to appreciate what we have in the U.S. economy. That we benefit greatly from openness and competition. Our economy is by far the world's strongest. Because it's built on openness … to people of all nationalities, new ideas, investment, openness to competition, and it's a model that others try to emulate. And if you're sitting here in this country, you don't see it like you do when you're traveling around, and when I traveled around the world and everywhere I went, where people would welcome me, they welcomed me because they wanted to know about economic best practices. They wanted to know how we did things in the U.S., often, and how it would be applicable to particularly the developing world. And so we need to cherish what we have, we need to strive to keep it this way, and I think it's our proven record of success that lets us advocate free trade, open markets, here in the United States and around the world."

~Treasury Secretary Henry Paulson

International Gas Prices

Current gasoline prices, in USD per gallon:













To Tow or Not to Tow?

The sign above is posted in the parking lot of the UAW Local #659 in Flint, Michigan, and I just took this picture today. I noticed a Honda in the parking lot while I was taking photos, so I am not sure how strictly this parking ban is enforced.

Just wondering..... how do you think the local union would classify these vehicles?

Buick Lacrosse, Chevy Equinox, Chevy Impala, Chevy Monte Carlo, Chevy Silverado, Chrysler 300, Chrysler Pacifica, Chrysler Town and Country, Dodge Caravan, Dodge Charger, Dodge Magnum, Ford Crown Victoria, Ford Freestar, GMC Sierra, Mercury Grand Marquis, Dodge Stratus, and Pontiac Torrent. Problem? All of these vehicles are made by the UAW, but in Canada. Isn't that a foreign country? Wouldn't those be "foreign made autos"?

Another problem is that the Chevy Silverado and GMC Sierra are also produced in the U.S., directly across the street from UAW Local #659 in Flint at the Flint Truck Plant. Better check those VINs before towing - 1A is US and 2A is Canada. Same for the Chrysler Town and Country and the Dodge Caravan, they are produced both in the U.S. and Canada, so check those VINs before towing those models.

Now, what about these vehicles?

Mitsubishi Eclipse, Mitsubishi Galant, Mazda 6, Toyota Corolla, Mazda Tribute, Mitsubishi Endeavor, Mazda B Series Truck, Mitsubishi Raider, Toyota Tacoma, Isuzu I-Series Trucks?

The problem? All of these vehicles are produced in the U.S. BY THE UAW!? Hmmmmmmm. Guess they can't be towed. But don't they sound pretty "foreign"?

And what about the Cadillac Catera, now discontinued and replaced by the STS and CTS? The problem? It was built in Germany. Tow or no tow?

And to further complicate matters, what about Volvos, Jaguars and Saabs? Volvo and Jagaur are owned by Ford and Saab is owned by GM?

To tow or not to tow? It gets soooooo complicated in the Global Economy.

BUS 466: Undervalued Yuan and Yen?

A recent WSJ article reported that during the annual meeting of the International Monetary Fund (IMF) in Singapore last weekend, finance ministers from the Group of Seven (G-7) major industrial powers (United States, Japan, Canada, France, Italy, Germany, and the United Kingdom) urged China and Japan to appreciate their currencies. The United States and European countries have become worried that their companies are being placed at a disadvantageous position by cheap Asian competitors as a result of undervalued Asian currencies, namely, the Chinese yuan and Japanese yen.

U.S. politicians, unions and manufacturers argue that China has deliberately kept the yuan undervalued against the dollar costing American companies sales and American workers jobs. Treasury Secretary Henry Paulson thinks that the yuan issue has to be addressed to resist protectionist measures under consideration in Congress. As a punitive measure, the U.S. Senate is expected to vote this month on a bill that would impose 27.5% tariffs on Chinese imports.

In a related WSJ article, China's central bank governor says China will allow market forces to play a greater role in setting the value of the yuan and will adjust the currency's daily trading band "sooner or later."

We will discuss these issues in class on Tuesday.