Author Archives: nickcoll

How small business are dealing with Obamacare

One of the biggest detractors opponents of Obamacare would bring up when arguing against it was how small businesses would react to the mandate.  The argument that was brought up more often than not was that it would cause small businesses more costs which would hurt employment.  To give small businesses time to figure out their best policy, Obama gave them a break from the mandate until 2015 and for some 2016.  While over 8 million people have registered for Obamacare, small businesses are still trying to figure out the most cost efficient way for them to abide by the new health care law.  Business have two options when it comes to Obamacare.  They can either provide health insurance for all of their workers, or face a penalty of $2,000 per worker.  These added costs have them trying to figure out how to accept these costs without it effecting their bottom line.

Even though many of these businesses have until 2015 to figure it out, many don’t want to wait until then.  Business owners don’t want their customers see a drastic raise in prices to cover these costs which is what would happen if they waited until 2015. Unfortunately, this has had an effect on small business hiring practices.  45% of small businesses polled have said that they have reduced their hiring practices while 23% have said they have had to let workers go to account for these added costs.  The coverage isn’t the only cost that these business have to account for.  Many also face increased taxes and having to pay higher premiums.  The Wall Street Journal released a case study of two different small business and how it would effect their employees.  One of the most interesting interviews that they did of an employee is how he reacts to the new individual mandate.  He says that he is generally a healthy person and doesn’t visit the doctor because he never needed to.  A federal report released said that 65% companies with 50 employees or fewer, who are exempt from the mandatory health care law but offer health care anyway, will see their premiums increase.

While on an individual level, forcing everyone to have health care, even the healthy employees, makes sense because it keeps the premium down because insurance companies can distribute costs among more people.  Due to the 8 million people subscribed to the new health care, it seems almost impossible that the health care law will be repealed.  Unfortunately, the goal of federal health care was to reduce costs for the average American.  While it has reduced premiums in general, insurance companies are still predicted to raise premiums next year across the board due to the higher consumer spending on Health Care.  Instead of lessening the cost of health care, as Obama was hoping, there is now higher demand which will allow doctors to charge higher prices since the majority of these costs will be faced by the insurers.  This will lead to the higher premiums that analysts expect to see from insurers over the next few years.  I for one do believe that access to health care for everyone should be a definition for a developed country, but the US has some of the highest consumer spending on cost of health care and costs of practice.  The costs of providing health care should have been the focus of Obamacare instead of the cost of insurance and premiums.  The costs have just been shifted to insurers and dispersed among more people.  Obamacare feels like a band-aid instead of a systematic change in how health care is practiced.  One of the main reasons that health care costs are so high is due to the insurance that doctors have in case of malpractice suits.  The US has some of the highest malpractice suits in the world and the high costs of these suits are why many specialized visits are so expensive.  It seems that this may be an option that the federal government can look into instead of trying to reduce costs by dispersing them among more people.

Can the global growth help jump start Brazil?

The government of Brazil is expecting the growth in the global economy next year to spur growth in Brazil in 2015.  While I believe it is possible for global economic growth to spur growth in other countries, the back drop behind global growth this time is different.  The growth in 2015 is still based on a recovery from the Great Recession.  This means that US interest rates are still going to strengthen as more people bring capital back to the US with the expectation that interest rates are going to raise.  As we saw in December and January, countries like Brazil faced massive capital outflows and weakening currency rates, causing many of these countries to raise interest rates.  The central bank of Brazil has said that the growth in the world economy will help spur Brazil’s growth but there doesn’t seem to be any evidence to this statement.  The central bank says that the recovery and growth in the world economy has already started this year but analysts keep lowering their expectations of Brazil’s growth.  The bank of Brazil expects a growth of around 3% while economists are less optimistic and expect around 1.65% growth.  If the recovery is greater in 2015 then expected, Brazil could see a bump due to raising exports from Brazil if their currency keeps depreciating.  This is a big if though and I don’t think it will lead to the primary surplus that Brazil is hoping for.

As other posts in this blog have talked about, one key event that could help Brazil’s GDP growth is the World Cup this year.  There has become such backlash against Brazil’s development over the past 3 years that Brazil’s finance minister had to speak about it recently.  Many proponents of Brazil don’t believe that Brazil will meet the required infrastructure necessary for the World Cup or that the infrastructure will be hastily constructed and not up to par.  The finance minister points to outside forces as the key detractors of the World Cup preparations but FIFA has even issued warnings to Brazil about its preparations.  The World Cup usually leads to a large increase in outside investment and while Brazil’s currency has strengthened relative to the dollar, Standard and Poor just reduced Brazil’s bond rating to one step above junk.  This is going to make it even more difficult as many investors are still pessimistic about investing in Brazil.  One benefit that Brazil might have is inflation will most likely go down next year as food prices go down.  The recent drought this year caused food prices to sky rocket and support the high inflation rate of 6%.  A lack of a drought next year would help bring the inflation rate down.  While I do agree with Brazil that a large portion of their problems have been supported by the global slowdown, Brazil lacks strong infrastructure and political corruption is still a huge problem in Brazil.  Brazil needs a strong, fundamental base which it lacks.

Are high priced laptops soon to go the way of the dinasour?

Five years ago, Google released the Chromebook, a laptop that was only an internet browser.  At the time, many people scoffed at the idea of a laptop only being able to use the internet but with new innovations in cloud development, these laptops are slowly catching up to their pricey competitors.  Many consumers worry about not having access to word programs or being able to save work physically to their laptop but Google drive and Microsoft have made it a thing of the past.  Microsoft offers users the ability to access Microsoft Office as an online app and Google drive allows you to save documents to the cloud.  Many other programs we’re used to downloading and installing are now available as online apps.  The availability of these programs online allows the chromebook to compete with more expensive laptops.  While the memory capacity on the chromebook is 16 gigabytes, Google cloud offers 100GB of free storage space.  One of the biggest draws for the chromebook is that it is relatively inexpensive compared to other laptops.  Most models are under $400 while most laptops are above $700, not counting apple where most laptops run $1000+.

The biggest detriment of the chromebook is that a lot of its features require you to have internet access.  Many of their apps are beginning to be able to be used offline but it’s still missing key programs like Itunes and Skype.  This makes it exceedingly difficult for IPhone users to set up their phone or sync content unless it is synced to the apple cloud.  Another disadvantage of the cheaper chromebooks is that the physical appearance can be spotty.  Many of the models have spotty performance, cheap keyboards and low resolution.

While the chromebooks right now aren’t ready to replace laptops, they offer a great, affordable option for people who can’t afford laptops as well as schools.  Many schools have wifi set up so being online isn’t an issue, and buying a large quantity of chromebooks is bound to be less expensive than other laptops.  School’s with limited funding would be able to provide laptops in class for less fortunate students who normally wouldn’t have access to this type of technology.

It seems that some of the leaders in innovation, Google and Apple are moving in different directions.  If rumors are to be believed, Apple’s new IPhone 6 will be about $100 more expensive, whereas Google’s Chromebook remains focused on keeping costs low.  A lot of the innovation that Google is putting into the Chromebook comes directly from the consumers.  As the cloud becomes more developed it will be interesting to see what happens to the more expensive, decked out laptops.  While some of those laptops will still be necessary for some people, I could see browser based laptops becoming more popular because they are cheaper and people are able to do a lot more on the web.  An example of the shift towards internet applications is the popularity of Netflix and Hulu.  People are able to watch tv and movies online now which makes CD drives obsolete.  Apple has noticed this and removed the CD drive from their newest models.  As more and more hardware becomes obsolete, Chromebook makers will continue to improve the processing and performance of Chromebooks for a cheap cost than other laptops.

US Shale boom helping the little guys

A large portion of opponents of the shale oil boom in the US has been the belief that large oil and gas companies are the main beneficiaries.  Ever since the BP deep water horizon leak, the US public has been heavily anti-big oil.  Ever since the shale boom began though, smaller companies became the main beneficiaries.  Instead of the big oil companies buying large swaths of land, the shale oil boom has forced companies to become more efficient.  Smaller companies are becoming increasingly successful because they have begun to focus on finding the “right” land instead of the most land.  This leads to lower costs for fracking companies and more efficiency.  Even with smaller companies doing the majority of the drilling, the amount of natural gas and oil produced by the US has reached historic highs and has made the US one of the largest producers in the world.  Investors on Wall Street are beginning to notice the shift as well.  The amount of money being invested in shale oil companies holding large portions of land has decreased compared to the more efficient, higher quality companies.  It’s shifted the belief towards quality over quantity.  An example is the difference between Rice energy and Chesapeake Energy.  Chesapeake Energy owns 140 times the amount of land that Rice has rights to but its market value is only 5 times higher.

The main problem with the larger oil companies is that the more land they purchased, the higher the revenue had to be from wells due to increased costs.  Many of these large companies quickly found that wells were not producing enough to make these large acquisitions profitable.  It turns out that with the technology right now, only a portion of the shales in the US are economically feasible to drill in.  This means that investors are paying higher premiums for the smaller companies that own rights to the premium land.

Another perk that has come from the shale boom is that the majority of small drilling companies that are becoming successful are family run business.  This means that the majority of the growth and investments are domestic and helping the US economy.  While the short term benefits of the shale oil boom have helped boost economic growth, the long term costs and benefits are still unknown.  The US is becoming more energy independent but a lot of the employment that has come from the increased in domestic oil business have been relatively short lived.  The blue collar jobs that were created in the boom towns are highly dependent on the success of the wells.  A recent study by two large, shale counties in Pennsylvania found that even with the shale boom, the growth of jobs in these sectors still only account for a small proportion of overall employment in the counties.  From an economic and political aspect, I believe that the US should continue to allow the shale industry to operate because it has benefited small business and has caused the oil and gas industry in general to shift towards quality over quantity.

Japan’s trade deficit

Japan today posted a larger than expected trade deficit causing the Yen to fall .3%.  The trade deficit was caused by a larger than anticipated import growth of 18% for the month of March compared to a lower than expected 1.8% growth in imports.  Unfortunately, the growth in imports was drastically different from its 6.5% prediction.  As we have learned in class, a depreciating yen should increase the demand for exports.  Japan right now is facing too many outside issues with their goal to decrease their trade deficit. Unfortunately, the issues don’t just stem from domestic issues but also external issues.  Slowing demand in China and increased tensions between China and Japan has caused its exports to its largest trade partner, China, to decrease.  Just recently, China seized a Japanese ore caring ship due to Japan failing to pay wartime contractual obligations.  Japan faced its lowest export by volume numbers since June, much of which was caused by a drop in exports to China.  Another issues that Japan faces is due to the rise in the consumer tax on April 1st.  The knowledge that the consumption tax was going to rise to 8% caused demand to increase among Japanese consumers, causing many producers to delay exports to meet the demand at home.

While the data coming from Japan is bad, it doesn’t mean that Japan’s future outlook is in jeopardy.  The drop in the yen and Japanese consumer demand due to the increased consumption tax could increase the supply and demand for exports.  Rising labor costs around the world and the weakening of the Yen has brought Japanese producers back to Japan.  This would help the Japanese economy by increase local consumer expenditure and adding a slight bump to the economy.  One issue that many analysts have with Japan at the moment is that the quality of goods in Japan is falling behind, leading to a drop in demand for Japanese goods.  It seems that the lack of exports is a financial policy problem more than a monetary one.  Domestic firms in Japan are sitting on large stock piles of money instead of focusing on making Japanese goods more competitive.  Japanese firms hold as much as $2.1 trillion of cash and deposits.  Japanese goods are becoming more competitive due to the weakening yen but it isn’t enough to increase demand abroad.  Japanese firms aren’t being efficient enough to compete on a global scale.  A recent Wall Street Journal article states that Japanese firms hold onto less profitable operations longer than US companies, leading to a net profit as a percentage of revenue being 2.1%, compared to 8.5% in the US.  From this point of view, it seems that the problem that Japan is facing is less competitive firms than monetary policies.  I believe that the Japanese government needs to shift its focus to financial policies in order to jump start its exports.  The Japanese government could look into a R&D tax break, similar to the one that the US government in that past has used, to spur innovation and increase efficiency.  Japan could also reduce restrictions on small business from obtaining capital.  Japan won’t be able to rely on a weakening yen in order to decrease its trade deficit.

Mutual Funds becoming Venture Capitalists?

The easy money that has been available the past few years due to the Fed’s QE policy has increased investment to new heights.  Low interest rates make it easy for investors to make risky wagers in the stock market and new companies.  The number of IPOs this past year hit the highest mark since the Great Recession thanks to the increasing number of venture capitalists and easy money.  Mutual Funds have begun to get more involved with start ups though due to their large amount of capital.  In 2012, there were 9 rounds of start up funding that mutual funds took part in.  That number increased to 16 in 2013 and has already hit 13 this year alone.  From a monetary perspective, last year there was $16 billion invested in startups while already this year there has been $9 billion invested.  Traditional mutual funds operated by BlackRock, T. Rowe Price and Fidelity have played large roles in this increase.

To be honest, I’m worried by the increasing risks that mutual funds are beginning to take.  Mutual Funds are meant to invest in traditional, safer investments because most people who invest in mutual funds are interested in the long run returns, not the short run.  By investing in start ups, mutual funds are playing towards high risks to hope for a huge return when these companies go public.  The mutual funds response to critics is that many of these companies are waiting longer to go public meaning that these companies need more investment.  The head of global equity capital markets at Fidelity believes that there is a gap that can be filled by investors “willing to take a risk”.  To me this seems extremely worrisome.  Many investors who invest in mutual funds do so because of the lower risk and the safer returns.  The movement of mutual funds into venture capital lines more towards mutual funds looking for larger profits than consistent returns.  Some opponents of the mutual funds believe that mutual funds influx of capital is helping create another tech bubble similar to dot.com bubble.  I don’t believe this is completely right due to a key difference that most tech companies that are announcing IPOs have profit.  I believe that the main problem comes from an ethical standpoint.  Investing in start ups inflates a funds returns when they might not be very successful in the long run.  It would inflate the performance of their stock portfolio.  Another issue is the firms aren’t required to immediately announce investment decisions to investors and the start ups that they are investing in are much more difficult to value.  This makes it difficult for investors to gauge the performance of their mutual fund.

The future is definitely going to come from a start up, but if I’m investing in a mutual fund to mitigate risk, I wouldn’t necessarily want to invest in start ups.

Russia’s Economic Miscalculation

The continuing conflict between the West and Russia over Ukraine is beginning to cause a larger toll on Russia.  Putin is placing its global reputation ahead of its economy.  The Russian market plunged at the threat of new sanctions from the EU and the US while its currency hit a record low.  US politicians have recommended further sanctions aimed at Russia’s petrochemical and banking sectors due to increased violence among the Ukraine-Russian border.  Russia’s recent actions have been viewed as antagonistic and imperialistic these past few months.  Unfortunately, while it may appear that Russia looks strong, its economy is beginning to hurt.  Russia has already earmarked $7 billion for economic aid to give to Crimea.

As I’ve mentioned in previous posts, one of the key determinants of foreign direct investment and capital flows is political risk.  Russia’s actions and potential sanctions makes it an increasingly risky investment.  The Central Bank of Russia recently released a report stating that Russia had a capital outflow of at least $51 billion in the first quarter of 2014.  If the trend continues, Russia could stand to lose around $200 billion, or 1% of its total GDP.  The World Bank believes that Russia’s economy could shrink around 2% in 2014.  The confidence of Russia’s economy in Russia is deteriorating rapidly as well.  There has been an increase in emigration and the cost to import in response to Russian people’s lack of confidence in the market.  The fear of stagnation is extremely real with Russia’s low growth and high inflation.  Russia’s central bank at the beginning of April said that growth would most likely fall below 1% with the lending rate staying at 7% and the inflation rate at around 6.64%.  Unfortunately, Russia most chose between strengthening the ruble through high interest rates or lower interest rates in hopes of spurring growth.  Russia foreign policy has drastically hampered its monetary policy.  The large capital flight is due to the political risks and the central bank of Russia had to reply with higher interest rates in order to maintain some of the investment that it needs for growth.  The high inflation rate and high interest rate makes it difficult for the Central Bank to control inflation unless it wants to increase the interest rate further, slowing growth even more.  Russia’s low, decreasing growth increases the chance that Russia could face another recession.

Russia’s main hope in protecting their economy has been the gas they supply to the EU and Ukraine but as Russia raises prices, these countries begin to search for alternative options.  Ukraine recently stopped purchases of Russian gas and is actively searching for alternatives.  With the US becoming one of the largest producers of oil and gas, Ukraine could look to the West for help with its energy problem.

Russia’s actions right now provide a great case study about politics versus economics.  Russia is playing a political game right now and it’s drastically hurting its economy.  Interestingly enough, Putin’s approval rating is at 72% after the annexation of Crimea.  It will be interesting to see how high it stays as the economy continues to deteriorate and as the West increases sanctions.

 

Automaker’s next big bet: China (Part 2)

As I mentioned in my part 1 blog post, China’s large economy and growing middle class have made it a potential gold mine for the automotive industry.  For the past few years, China has been extremely important for the sales and profit of VW, GM and Toyota.  Ford has recognized this and have increased their presence in China, become one of the most popular brands with the focus and explorer.  China helped a lot of these automotive companies maintain their bottom line while demand slowed down globally.  Unfortunately, Chinese demand for cars has begun to cool as the young Chinese consumer view cars as being too expensive and unnecessary.  To make matters worse, China faces a growing pollution problem.  More cities in China are limiting auto sales to curb traffic congestion and pollution.  The increased pollution and expensive cars have actually led to car companies rethinking the cars they are producing in China.  New emphasis has been placed on efficiency and lowered price models with smaller engines.  Foreign automakers are advertising towards the young professional Chinese by offering lower-priced cars.

While these automakers are facing growing problems, it hasn’t effected growth.  Auto sales this past quarter grew 10% compared to last years.  While this is good news for the auto industry, it’s a far cry lower than the 16% growth of the past year.  The foreign car companies though are betting big on being able to appeal to the younger generations.  Volkswagen and its Chinese partner are investing $25.3 billion through 2018 in order to increase their production capabilities.  This would allow VW to produce 4 million vehicles by 2018.  GM will hit 5 million vehicles annually by 2015.  While demand is cooling, the regional heads at Ford and GM both believe that the growth is sustainable.

I believe that the fear of a decrease in Chinese demand being significant is not an issue.  Even if sales fall, China’s annual sales of 20 million units is still the largest in the world.  Foreign companies don’t have to worry about the potential of a demand slow down due to the continual decrease of domestic automakers market share.  Chinese automakers are viewed as inefficient and lacking the quality that the foreign car producers have.

On the other hand, the largest problem that car companies will face is from the government and restrictions.  In Beijing, the government limits the amount of cars by restricting the amount of vehicle licenses to 6 million by the end of 2017.  As of right now, 5.4 million vehicle license are issued.  The large reason for these vehicle limitations is to reduce pollution.  In 10-15 years, as the average middle class consumer in China earns higher wages, hybrid or electric cars will have a huge impact on the Chinese economy.

Automakers next big bet: China (Part 1)

Saying China is a huge player in the world economy is like saying Michigan’s winters are cold.  It’s a common conception and it seems that now automakers are making it the newest battleground for profit.  General Motors, Fiat, Volkswagen and Ford have all announced in the past few days that they will increase production in China to rival Nissan Motors and Hyundai.  The auto industry believe that the next gold mine in China is the SUV.  After acquiring Jeep from Chrysler, Fiat is wagering on the growing popularity of SUV’s in China to jump start Jeep sales.  They will produce three new Jeep vehicles in China with one being specifically designed for China.  The importance of China to automakers is exemplified by GM picking China as the location of its global rollout of its new Cruze sedan.  GM believes that the Chinese automarket is going to grow by 8-10% next year.  Ford, the fastest growing foreign automaker in China, is following the SUV trend and producing a new seven seat SUV specifically for China.

The most interesting aspect of the growth of foreign car makers in China is that each one has a domestic based automotive partner.  Fiat has partnered with Guangzhou Auto and Ford is partnered with Chongqing Changan automobile co. and Jiangling Motors co.     The large number of partnerships between foreign automakers and domestic automakers is interesting.  For the past six decades, China has established policies to create a global automotive company that can be competitive against the other major foreign car companies.  Unfortunately, it hasn’t been successful and the easy money that is available right now due to low interest rates have increased foreign automakers ability to invest in production plants in China.  I believe that this is why you see so many foreign automakers partner with domestic automakers when it comes to producing cars in China.  Because of China’s inability to produce its own global automotive brand, it’s adding incentives to partner with domestic companies to bypass many of its automotive import tariffs.  China’s automotive tariffs are one of the biggest reason why these foreign automotive companies are building plants in China.  This allows them to reach the fastest growing automotive market.

The importance of China to the auto industry is immense.  China last year became the first country to see annual motor-vehicle sales of more than 20 million units.  This huge growth in China’s automotive sales has lead to the creation of 70 major automakers in China.  Unfortunately for China, none of these have reached the global range that they have been hoping for.  The market share of these automakers has reached a new low of 39.3 as more foreign automakers find ways to invest in China.

Part 2 will focus on the problems that China still faces with the automotive industries.

Airline Companies Customer Service Problems

The major airline companies have received a lot of flack recently with changing reward programs and everyone’s favorite annual consumer complaints survey.  Many airline companies are beginning to reduce the services they offer frequent fliers and changing the frequent flier miles program so that miles are offered by the price of the ticket, not the number of miles.  The changes angered many consumers but unfortunately for them, since all airlines are changing their policies, the consumers are left with the brunt of the costs.  Delta, one of the airlines with the most changes, has had its stock price remain relatively stable between $33-36 this past month after announcing the changes.  It’s interesting that while the average consumer is angered by the change in airline policies, it hasn’t effected, and has actually somewhat improved, their bottom line.  This brings about a question that I have.  Does the average consumer complaint survey that comes out every year actually damage airline companies.

The recently released report focuses on American based airlines and complaints filed with the Department of Transportation’s Aviation Consumer Protection Division in the past 5 years.  The airline with poorest performance and with the most consumer complaints was Spirit airlines.  Interestingly enough, Spirit Airlines has been dropping consistently from a high of $63 to $56.  It’s interesting to see that Spirit’s stock price was actually influenced by consumer’s complaints.  Spirit has the distinction of having 3 times more complaints than any other airline and it has the worst on-time rating for any North American airline.  Interestingly enough, Spirit has actually improved heavily over 2014.  Out of the 864 total complaints issued this year, Spirit only had about 5.7% of the total complaints.  This is interesting to note because it shows that Spirit’s improvement in consumer service hasn’t translated to an improvement in its stock price.  At the same time, Spirit actually has the highest operating margin and return on invested capital of any airline.  The fact that Spirit performs very well as a business, but the stock price has decreased, illustrates that the consumer actually has an impact on the stock price.  It seems that investors will place consumers happiness slightly over business success when it comes to airlines.  This actually makes a lot of sense though because costumers have a lot of options when it comes to flying.  It’s interesting though that the anger from frequent flyer program changes has less effect on stock prices than consumer complaints.  It does makes sense though since consumer complaints sent to the DOT have a legal implication while courts recently have announced that airlines have complete control over their frequent flyer programs.