Saturday, December 02, 2006

Ford Stumbles to 4th Place in November

1. Ford Motor Company dropped to 4th place in November (180,939 units sold) for US auto sales, trailing #1 GM (293,558 vehicles), #2 Toyota (196,695), and #3 Chrysler (186,665).

2. Compared to November 2005, Ford's sales dropped by almost 10% last month, and Ford's market share fell from about 16% a year ago to less than 14% in November 2006.

3. The combined market share of Detroit's automakers fell to a historic low of 51.9% in November.

4. Toyota's market share increased to 16.4% in November, up nearly two points from 14.5% market share last year.

Some of Ford's financial troubles can be traced to low worker productivity, the lowest in North America. For example, the Harbour Report does an annual analysis of productivity in the automotive industry. For 2005, here are the results of one of the most closely-watched statistics: Total Hours per Vehicle for Assembly, Stamping and Powertrain, i.e. how many hours of total production does it take to produce a car or light truck:

Nissan: 28.46 hours
Toyota: 29.40 hours
Honda: 32.51 hours
GM: 33.19 hours
Chrysler: 33.71 hours
Ford: 35.82 hours

Therefore, it takes Ford workers 7.36 more hours to produce a car than Nissan workers. Over the 2.85 million vehicles Ford produces, that is an additional 21 million hours of work time compared to Nissan producing that number of cars. Multiply 21 million hours of additional work time by the average compensation cost to Ford of a UAW worker ($65/hour), and you get about $1.365 billion of additional cost every year at Ford! Ford excepts to lose about $10 billion this year, and at least $1.365 billion of that loss can be traced to low worker productivity.

Friday, December 01, 2006

USD Slides, But It's Not All Bad

Yesterday, the dollar hit a 20-month low against the euro and a 14-year low against the pound. Over the past year, it has dropped 6.7% against a Federal Reserve index of seven major currencies.

As the graph above shows, the appreciation of the British pound from about $1.40 to almost $2.00 over the last 4 years (left scale), and the accompanying fall of the USD, closely follows the increase in the supply of dollars, measured by M1 (right scale). Supply of dollars goes up, the value of the dollar goes down, and it takes more dollars to buy a British pound. Simple. It shoudn't be any surprise that the significant increase in the US M1 money supply, because of expansionary monetary policy in 2001-2004 (bringing the Fed Funds target rate from 6% in 2001 to 1% by 2004), has led to a decline in the value of the dollar.

A falling dollar might sound bad, but there are many benefits:

1. Higher stock returns overseas in dollars, because of the appreciation of foreign currencies, see my post below.

2. Increased demand for US goods and services, because of the appreciation of foreign currencies, see this story in today's WSJ: "Shopping as the Dollar Drops: Europeans Flock to U.S. for Deals While the Pound and the Euro Soar; Scoring iPods, Tiffany, Nike Sneakers."
A hot destination for European travelers this winter: Minnesota.

At a Holiday Inn near the Mall of America, the giant shopping center just outside Minneapolis, foreign tourists shopped so much this week that the hotel had to set aside four guest rooms to hold their suitcases after filling up its baggage-storage room.

Europeans are flocking to U.S. stores for Christmas shopping because the dollar's weakness makes the U.S. look like a bargain basement to them. The British pound yesterday hit a 14-year high against the dollar, and the euro has hovered around historic highs, too.
3. A weaker dollar could help the U.S. deflate its ballooning trade deficit by making American goods cheaper abroad and foreign goods pricier for Americans. It also could help Treasury Secretary Henry Paulson fend off what he considers an alarming rise in protectionist sentiment. See WSJ article here.

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Shop Global, Think Global, Invest Global


From today's WSJ, an article titled "Dollar's Decline Boosts Overseas Returns: Money Pours Into Mutual Funds That Focus on Non-U.S. Stocks:" "Mutual-fund investors in the U.S. shipping their money overseas continue to have the wind at their backs. They are getting a lift from declines in the value of the dollar against other currencies that in some parts of the world have more than doubled the returns on their stock- and bond-fund investments."

As the table above shows, YTD stock returns throughout Europe have been about double the US stock market return of about 12%, and have been boosted by the double-digit appreciation of the euro and pound during the year. YTD Dollar returns in China, India and Spain are 3-4 X times higher than the U.S. return.

An often overlooked and neglected advantage of globalization are the significant benefits from global investing. According to the graph above, a $10,000 investment over the last three years would have generated about an additional $4,500 for a US investor from investing overseas ($17,000) vs. investing in the U.S. ($12,500). Globalization not only give U.S. consumers access to the world's cheapest and best goods and services, but it also gives US investors access to the highest stock returns. Disucssions about the "benefits of trade" often overlook the benefits of international investments.

Dollar returns in Spain and India this year are more than 3.5X higher than the 12% in the U.S., and the 55.55% return in China is more than 4X the U.S. return. We hear a lot about losing U.S. jobs to India and China due to globalization and outsourcing, but we don't hear much about the significant benefits to U.S. investors from "outsourcing" investments to China and India and getting returns 3-4X higher than the U.S.

Think about it: We get goods from China at lower prices than domestic prices, we get services in India at lower wages than domestic wages, and we get stock returns in those countries 4X higher than in the U.S.? What more could we ask for?

And I can hear protests already that only "the rich" can benefit from 40-50% stock returns overseas, but that is not true. According to my analysis at
Morningstar, using its fundscreener, there are almost 200 no-load international stocks mutual funds that have minimum purchases of only $500! A $500 investment overseas three years ago would now be worth about $850!

My advice: Shop globally, invest globally, travel globally, eat globally, think globally.

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Thursday, November 30, 2006

Do Economists Agree on Anything?

Do economists agree on anything? Yes, according to a paper by Wake Forest University economist Robert Whaples in a paper titled "Do Economists Agree on Anything? Yes!" In general, economists strongly favor free trade, outsourcing, vouchers and legalizing marijuana, and they strongly oppose tariffs, subsidies for farmers and professional sports teams.

See the
repsonses here to a list of questions posed to economists who are members of the American Economic Association, and their responses:

90.1% of economists oppose restrictions on employers outsourcing work overseas
87.5% of economists oppose tariffs and other barriers to trade
85.3% of economists say that the gap between Social Security funds and expenditures is unsustainable if nothing is done
85.2% of economists are opposed to subsidies for professional sports teams
85.2% of economists say we should end agricultural subsidies
69.2% of economists agreed that parents in poorly-performing schools should be given educational vouchers
62.2% of economists said the US should legalize marijuana

Also, see Greg Mankiw's post on this topic
here.

Publik Skools

If there is one thing the Department of Education does well, it is collect statistics about schools:

1. Between 1970 and 2002, average per-pupil spending in public elementary and secondary schools more than doubled, from $4,170 (in real dollars) to $8,802, an 111% increase!

2. From 1990 to 2003, real per-pupil spending increased 25 percent, from $7,692 to $9,644.

Did increased spending result in increased student performance in public schools? Not at all.

3. Reading scores for eighth-grade public school students remained static between 1998 and 2005. In 1998, eighth-graders averaged a score of 261 out of 500 in reading. In 2005, they averaged 260. Only 29 percent were rated grade-level "proficient" or better, and 71 percent rated less than proficient in reading.

4. Math results were a little better. Between 1990 and 2005, the average eighth-grade score rose from 262 to 278. But again, only 29 percent were rated grade-level proficient or better, and 71 percent rated less than proficient in math.

5. Private schools did better. Forty-nine percent of eighth-graders in Catholic schools rated "proficient" or better in reading, and 40 percent in Catholic schools, rated "proficient" or better in math.

Read more here.

Read my article here "The Educational Octopus."

Whoooooooooops!?

Former Senator John Edwards is on a crusade promoting his new book. Edwards has also embarked on an anti-Wal-Mart crusade. He instructs his staff members and all Americans not to shop at Wal-Mart, saying that wages at Wal-Mart are "too low."

"Wal-Mart makes plenty of money. They need to pay their people well," Edwards said at a Pittsburgh anti-Wal-Mart rally in August.

So naturally, when visiting New Hampshire to promote his book, Edwards held his book signing at Barnes & Noble instead of the Wal-Mart right next door. One big problem for Edwards? Wal-Mart pays hourly employees more than Barnes & Noble. The Barnes & Noble where Edwards promoted his book pays $7 an hour for new employees, and the Wal-Mart right next door pays $7.50 an hour.

Hmmmmmmmmmmmmmmmmmmmmm. Just wondering, will Edwards now release a statement saying "Barnes and Noble makes plenty of money. They need to pay their people well."

Wal-Mart Saves Consumers Two Ways


Research shows that Wal-Mart saves consumers billions of dollars in annual savings from the discount retailer's everyday low prices.

One study, by the economic consulting firm Global Insight, calculates that Wal-Mart saves American households an average of $2,300 a year through lower prices, or a $263 billion reduction in the cost of living. That compares with $33 billion savings for low-income families from the federal food stamp program.

In another recent study, MIT economics professor Jerry Hausman (former students include Fed Chairman Ben Bernanke) estimates that Wal-Mart has shaved 0.75 percentage point off annual inflation in food prices. "These guys have done much more than any antipoverty program," he says.

Wal-Mart gets all of the attention and publicity both favorable (consumers save billions) and unfavorable (Wal-Mart pays low wages, although they are about the same or more as Target, Borders, Barnes and Noble, McDonalds, etc.). What has received less attention is the additional cost savings to consumers from other non-Wal-Mart discount retailers, who compete with Wal-Mart with their own everyday low prices.

Today's WSJ has an article about the French retailing giant Carrefour (second largest retailer globally next to Wal-Mart), which started discount retailing in France in 1963, around the same time Wal-Mart started expanding across the U.S.

Carrefour's new CEO, 42-year-old José Luis Duran, is trying to whip the retailer into shape. Since taking over in February 2005, he's slashed prices in Carrefour's core French market to combat the rise of discounting rivals. He hopes to make the company quicker and nimbler.

Carrefour faces a bigger threat than ever from Wal-Mart, which is pushing overseas as its growth slows down in the U.S. Wal-Mart has a greater presence in North America and Latin America, while Carrefour operates in more European and Asian countries. But they face off in three of the world's biggest markets: China, Brazil and Argentina.

Bottom Line: Wal-Mart saves consumers billions of dollars annually all over the world who shop AT Wal-Mart, and the intense competitive pressure FROM Wal-Mart, saves consumers billions of dollars annually all over the world who shop AT non-Wal-Mart stores like Target, Carrefour, K-Mart, etc. So even those consumers who might hate Wal-Mart and shop at Target or other discount retailers, STILL benefit from Wal-Mart, because without Wal-Mart, Targets prices would be HIGHER.

Wednesday, November 29, 2006

Dollar Hits 20-Month Low vs. Euro

The euro reached a 20-month high against the dollar at $1.3210. Read about it in today's WSJ.

The Organization for Economic Cooperation and Development warned yesterday that a sharp appreciation of the euro against the dollar could stunt a euro-zone economy already expected to slow next year on the back of slower U.S. growth and domestic fiscal overhauls. A euro closer to $1.40 could prompt monetary policy makers and politicians to speak up.


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Drilling in the Gulf of Mexico, using new technology to drill in ultra-deep water, costs $120 million per well (see picture above).

Many people claim now that oil companies are somehow "underinvesting" or not investing enough in oil exploration and oil production.

Fact: Most oil companies spend about as much in investment as they make in profits. For example, ConocoPhillips makes about $1.5 billion a month in profits and is investing about $1.2 billion a month in oil exploration and oil production. For the U.S. to remain competitive globally for oil and gas, punishing and crippling our own oil companies with windfall profits taxes and fewer tax breaks doesn’t make economic sense.

Read my article in today's Detroit News titled: "Drill a hole in myth on oil investment: Companies actually spend more to find energy than they earn in profits."

Tuesday, November 28, 2006

Housing Market Remains Cool

According to a report today from the National Association of Realtors (NAR), the national median home price plummeted 3.5% to $221,000 from $229, 000 a year ago -- the largest year-over-year price drop since the NAR began keeping records in 1968, and "it's probably the largest price drop since World War II,'' said David Lereah, NAR's chief economist. It follows a 2.2% price decline in September and a 1.7% drop in August.

Further, the current housing inventory of 3.854 million homes in October 2006 is 7.4 months supply at the current sales pace, up from 4.9 months in October 2005.

Read the
WSJ article here about the housing report.

EU vs. USA

The data above are from a Sweden think tank Timbro, from its study "EU vs. USA. " A home appliance that we take for granted (clothes dryer) is fairly rare in many other countries like Spain (5%) and Italy (10%).

From the study "If the European Union were a state in the USA it would belong to the poorest group of states. France, Italy, Great Britain and Germany have lower GDP per capita than all but four of the states in the United States. In fact, GDP per capita is lower in the vast majority of the EU-countries (EU 15) than in most of the individual American states. This puts Europeans at a level of prosperity on par with states such as Arkansas, Mississippi and West Virginia."

Here is the
link to the study.

The Curious Economics of Temptation

Undercover Economist ("The economic mysteries of daily life") Tim Harford writes in Slate on the Economics of Temptation.

One of the results of the recent research is that we have a sense of just how strong the pull of the now actually is. The answer is that anything on offer right now is worth half as much, again, as it would otherwise be; that also means that any immediate cost, such as the pain of going to the gym, is similarly inflated. (That is, you'd much rather go to the gym next week than today.) Of course, the costs will vary across people and across temptations, but that seems to be a consistent finding.

Monday, November 27, 2006

Top Movies

According to RottenTomatoes.com, the top 3 movies by the Tomato-Meter rating (percentage of positive reviews):
1. The Queen (98%)
2. Casino Royale (94%)
3. Sweet Land (93%)

Lowest T-Meter rating:
Let's Go to Prison (7%)

Top 2 Movies for
highest weekend gross:
1. Happy Feet ($42m)
2. Casino Royale ($41m)

Top 3 Movies by
highest total gross:
1. Pirates of the Caribbean ($422.5m)
2. Devil Wears Prada ($125m)
3. Departed ($114m)

Golden Arches Theory of Conflict Prevention

According to NYTimes columnist Thomas Friedman, "No two countries that both have McDonald's have ever fought a war against each other since each got its McDonald's."

Charitable Giving

Per capita, Americans will give more to charity this December than most nations give all year long.

Survey data indicate that people who think that government is "spending too little money on welfare" -- are less likely to give food or money to a homeless person than people who oppose greater welfare spending.

Read more here.

Wal-Mart Goes to India

From today's WSJ, an article about Wal-Mart finalizing a joint venture with Indian telecommunications company Bharti Airtel (provides cell phone service to 24 million Indians) to to open a chain of hundreds of discount retail stores across the country.

India's booming retail market, estimated at about $200 billion, is currently dominated by more than 12 million mom-and-pop shops. Large, air-conditioned stores remain a rarity. Rising middle-class incomes and an increase in demand for branded products are driving the growth of retail business in India. Nevertheless, selling through company-owned network stores currently totals about $8 billion or less than 5% of market.

Wal-Mart Facts:

Wal-Mart has more than 2,700 stores in fourteen markets outside the U.S.: Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Germany, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the United Kingdom.

Wal-Mart's international stores employ more than 500,000 Wal-Mart associates, serving 49 million international customers each week.

Worldwide, more than 176 million people shop at Wal-Mart stores every week around the globe, proving that low prices is a message clearly understood in any language.

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Sunday, November 26, 2006

The Ethanol Swindle

Cornell University Professor David Pimentel (College of Agriculture and Life Sciences) and University of California–Berkeley Professor Tad Patzek (Department of Civil and Enivornmental Engineering) have conducted extensive research that shows that the production of ethanol results in a net loss of energy: A scientific analysis of the 14 energy inputs that go into corn production, and the 9 energy inputs in fermentation and distillation operations, confirms that 29% more energy (derived from fossil fuels) is required to produce a gallon of corn ethanol than is contained in the ethanol.

Professor Pimentel responds to critics:

The pro-ethanol lobby have been attacking me for many years. The way that the pro-ethanol lobby are able to show a positive energy return is by omitting many legitimate inputs, including farm labor, farm machinery, hybrid corn-seeds, and irrigation. These are all inputs that are listed by noted agricultural economists when they assess enterprise data for corn production. Why do the pro-ethanol lobby omit these legitimate data? They provide no explanation. In addition, some take up to 60% credit for by-products when they should only take credit for 9%.

Concerning the energy inputs in producing gasoline, the pro-ethanol lobby again provide misleading data. Their claim is that it takes more energy to produce a gallon of gasoline than a gallon of ethanol. In fact, it is the opposite. A gallon of ethanol requires about 1.3 gallons of oil equivalents to produce 1 gallon of ethanol. It takes only 1.12 gallons of oil to produce 1 gallon of gasoline. Note, also that ethanol has only 66% of the energy that a gallon of gasoline has.

The pro-ethanol lobby also ignore most of the environmental impacts. These include:

1) Corn production causes more soil erosion than any other crop grown.

2) Corn production uses more nitrogen fertilizer than any other crop grown and is the prime cause of the dead zone in the Gulf of Mexico.

3) Corn production uses more insecticides than any other crop grown.

4) Corn production uses more herbicides than any other crop grown.

5) More than 1,700 gallons of water are required to produce 1 gallon of ethanol.

6) From 6 to 12 gallons of sewage effluent are released into the environment per gallon of ethanol produced.

7) Enormous quantities of carbon dioxide are produced and released during production, including the large quantity of fossil energy used in production, large quantities of carbon dioxide are released during fermentation, and when the soil is tilled soil organic matter is exposed and oxidized.

8) Related to the total operation, including the burning of the ethanol in automobiles, the air pollution problem is significant.

Ethanol is the most misguided public policy in a generation.

Wal-Mart Opens Banks in Mexico

From the International Herald Tribune, an article about the Finance Ministry in Mexcio giving final approval for Wal-Mart to open banks in Mexico in 2007.



Public opposition has all but killed a Wal-Mart plan to open its own bank in the United States. But in Mexico, the retailer's push for a bank is sailing through.


One possible reason for the different receptions in the United States and Mexico is that, by most estimates, as many as 80 percent of Mexicans do not have bank accounts. Working-class Mexicans have been largely shut out of traditional banks by high fees, minimum balance requirements and intimidating paperwork. Community banks barely exist.

Because Wal-Mart plans to offer bank accounts to working-class Mexicans, local groups apparently had difficulty trying to stir up public outrage.

In the United States, Wal-Mart's application for an industrial bank is frozen. The company said that it wanted the bank to process credit card transactions. But community banks in the United States and even larger banks joined the usual Wal-Mart foes like unions, labor activists, small merchants and community groups to oppose the bank.

Too bad for the USA. In a recent study, Professor Hausman from MIT estimated that Wal-Mart had shaved 0.75 percentage point off annual inflation in food prices in the four years ending with 2001. "These guys (Wal-Mart) have done much more than any antipoverty program," he says. We're probably all a little poorer now with Wal-Mart banks in the US.

Toy Scalping and Fake Bidding for PS3s on Ebay

There is a lot of bogus bidding on PS3s on Ebay, and the $20,000 sale I mentioned in the post below did not go through. Many of the winning bids for PS3s above $5,000 were from bidders who were "Not registered users" or suspicious "New users" with 0 feedback. For example, this Ebay auction ended with a winning bid of $5,000 from a user named "bigdaddy1923223231," who is: a) not a registered Ebay user, b) has only been a member since Nov. 19, 2006, and c) has 4 negative feedbacks, all for making fake bids on 4 PS3s on the same day! Here is another example of a fake bidder, Plasticadhesive, who made the fake bid for $20,000 mentioned in my posting below.

There appear to be hundreds of fake bids on PS3s, what's up with that? Is it intentionally malicious behavior like spreading a computer virus or what? How do we explain intentionally bogus bidding on PS3s? Comments welcome!

According to a
Washington Post article, 14,675 PS3s have been sold on eBay for an average price of $1,186 from November 17 to November 24. So the pricing puzzle remains: Why does Sony set the retail price of PS3s at $600 when the real market price is about twice that, $1200 (according to Ebay sales)? Why sacrifice $600 in profits to "toy scalpers" on Ebay? We assume Sony is not trying to avoid making profits, so what is the deal? Cheap publicity? CSR? Goodwill? Developing customer loyalty? What is going on?

We assume profit-maxizing sellers charge "whatever the market will bear," so why doesn't Sony? (I can guarantee that if you sold you house, you would charge "whatever the local real estate market will bear" and you wouldn't sell it for $600,000 if the market value was actually $1.2 million!) Comments welcome.