Friday, November 21, 2008

The Tough 2000s

This is the 3rd decade I have lived in and boy is it the worst one I've seen.

I was young in the 1980s but I generally remember it as being a slow yet stable decade. I remember the 1990s as being 'the good old days'. Like Reagan, we had another popular president at the helm (one Bill Clinton) and the economy really took off. High Tech was the talk of the town and the mood in the country was upbeat. Again we had our issues but none of them was able to bring down the relentless push forward.

Then came the 2000s and everything fell apart. We elected George W. Bush in 2000 (the biggest mistake of the decade and the one that led to many other of the decade's problems). I wasn't impressed with him as a candidate during the election and would have voted for Gore if I could (I didn't become a citizen until 2002) but when he won I wasn't too distraught. Ok, so the other guy won. Big deal, right?

Actually, it was a big deal. Then came September 11, 2001. Bush's response was to figure out a way to tie this event to Iraq. There was of course no connection, but he was going to manufacture one to settle an old score. Two years later in 2003, we invaded Iraq, where we still are today.

From 2001 to 2003, our economy was in recession due to the bursting of the tech bubble and the uncertainty after the 9/11 attacks. High Tech jobs were the first to go and the once high-flying industry was brought down to earth. You could feel ''innovation'' leaving the United States.

Then came the 2004 presidential election. This time, it really did matter. We saw what happened in the first Bust term and now we knew what we would get with another Bush term. But, the country was divided into those who let fear rule them and those who didn't. The former won and in extremely polarized voting, the 'red' middle of the country beat the 'blue' coasts in the 2004 election.

So we continued to struggle in Iraq and in Afghanistan, where things had been going well, things started to go south. However, the economy did come roaring back and the Dow crossed the 14,000 mark. But, oil also hit $147 a barrel and commodity prices shot up. Somehow I didn't feel like this economy and stock market was being driven by solid fundamentals and a collapse was bound to happen. Speculation had driven the market up and speculative balloons are easily popped.

Then came the financial crisis brought about by the credit crunch in the summer of 2008. And now we're in the 2nd recession of the decade. The financial sector has almost collapsed and other industries are getting dragged down with it. Economists are finally stepping up to make predictions about how long the tough times will last and I'm hearing predictions like 1 year, 2 years, 3 years. On the international front, both our wars are still being fought and we have no idea how to deal with Iran. Many economic and political pundits are predicting the 'rise of the rest' and the end of US dominance on the world stage. Sadly, they might be right.

Thus I see the 2000s, so far, as an extremely volatile decade with the US exerting an overactive foreign policy and with a lack of innovation at the base of the US economy. I don't remember the 1980s and 1990s being like this. In those decades and probably the decades before them, there was an unshakable confidence in the US economy that no matter what happened, things would be OK. Today, that confidence has been shaken as the world reorders itself.

Fortunately, most Americans (52% of them) thought like I did and voted for change this year. We got change in the form of Barack Obama. In fact, the hurricane of change started earlier in 2006 when the democrats swept back into power in the congressional elections. The democrats made even bigger gains in 2008. I for one am happy with this change because the old way wasn't working. Why not try something new? And we Americans know that if this style of governing doesn't work out, we'll vote them out in 2012 and look for something new. Americans are not afraid of change. I believe our greatness as a country stems from this fact.

I firmly believe that for America to regain its confidence and its stride, we need to have something to believe in. I say we put our money and faith into alternative energies, biotech, domestic infrastructure; we should bring back manufacturing and in-source (i.e. bring back) jobs (but at lower wages to make it economically viable) and hope for the best. We may need to hunker down for a few more months, but when the new administration takes over on January 20, we need to come out of shells with our guns blazing with bold new ideas. It's our best shot.

Saturday, August 9, 2008

Amarnath Contraversy

The disquiet in J&K continues, now with a simmering contraversy regarding the Amarnath temple. The gov't attempted to transfer about 99 acres of land to Shri Amarnathji Shrine Board (SASB) to create temporary shelters pilgrims who want to visit this site. There have been protests in Kashmir (majority Muslim) opposing this land transfer and protests in Jammu (majority Hindu) supporting the land transfer for which the order has been presently revoked. BJP is accusing Congress of being weak-willed in the revocation of the land transfer. BJP is also claiming that the voices of the people of Jammu are not being heard and only those of the Kashmiris are. Kashmiris are claiming that the land deal is an attempt by the government to change the dynamics of J&K to increase the Hindu population percentage in the state (which is very low in Kashmir).

I support the transfer of land to SASB. I don't think there are any designs to change the dynamics in the state. Hindus are being deprived of a voice simply because they are in the minority. I believe that Congress has displayed a weak-will in this issue and will probably stand to lose in the next election. If Kashmiris are threatening to leave for PoK, let them. Hinduism was in the state of Kashmir well before Islam and the rights of Hindus need to be respected, especially when they don't interfere with the rights of Muslims.

Wednesday, July 30, 2008

Healthcare Consolidation

The signs of global healthcare consolidation are starting to appear.

1. Last week, Roche bid for the remaining shares of Genentech that it didn't own (about 70%). One of the reasons for this bid was to reduce overlap between the two companies. Genentech, which normally produces larger biological drugs, is starting to produce small molecule drugs i.e. pharmaceuticals. Also, Roche is expanding into North America, Genentech's home turf. This offer, which was 9% higher than Genentech's stock price on the day of the offer, is under review. Most industry analysts expect the deal to go through but only if Roche's raises its bid.

2. Research-based pharmaceuticals are moving into generics. As drug patents begin to expire, pharmaceuticals are finding that their pipelines are not strong enough to introduce enough new drugs to counteract the reduced sales that they will encounter when generics begin to reproduce their drugs. Ranbaxy, an Indian generics manufacturer, was recently bought by Daiichi Sankyo, a Japanese pharmaceutical company.

3. Health care companies are looking to expand globally and into emerging markets. Teva Pharmaceuticals, an Israeli pharmaceuticals has promised a spate of international acquisitions. The acquisition of Ranbaxy is another example of this trend.

Increasing regulatory pressures, patent expirations, and the sheer difficulty in making new drugs are driving the consolidation. I expect a significant amount of M&A in the healthcare world over the next few years as companies jockey for position.

Saturday, July 19, 2008

6 Years in Afghanistan

This week Time has decided to focus on Afghanistan. Actually, everyone is now remembering that we are fighting a counterinsurgency in Afghanistan after a couple hundred militants stormed a coalition military outpost in Western Afghanistan and killed 9 US soldiers. The US has since decided to abandon that outpost.

I, like most people, have long felt that Afghanistan is the front line in the War on Terror and that Iraq is a major distraction from this battle. And I find it disappointing that the Afghanistan war only gets in the news when we suffer as large a loss of life as we did in the last week.

The main article on Afghanistan in Time is by a man named Rory Stewart and he has some interesting ideas. He argues that the West should 'Get out of the Way' which means do not increase troop numbers, do decrease the West's involvement in the government and the economy, and do increase aid to programs and sectors of the economy that are functioning well. He also believes that our military strategy should focus on counter terrorism and not counterinsurgency.

My reaction:
Afghanistan will continue to be a failed state until it or we can establish security, peace, and stability. It is for this reason that I disagree Stewart's plan. After battling with the Taliban for the last 6 years, we can't expect the Taliban to let non-Taliban sponsored programs flourish. The Taliban promote a medieval style of living with only the bare necessities. They would surely be ideologically opposed to the country's advancement which would include the education and empowerment of women. If we focus on counter terrorism and not also counterinsurgency, we are essentially handing the country to the Taliban. The best native Afghan fighters are Taliban fighters because they fight for ideals. The Afghan National Army do not have the same courage or conviction. A smaller Taliban force would quickly overrun a larger but less motivated Afghan National Army. The Taliban must not be allowed to regain power.

In "Time for an Afghan Surge" John McCain argues for essentially that. He will pledge an additional 3 brigades to Afghanistan. He also advocates doubling the size of the Afghan National Army and convincing Pakistan to root out terrorism in their own country.

My reaction:
I agree with McCain's strategy. We do need more troops in Afghanistan. And we do need Pakistan to develop a spine and take on terrorists in their country.

In "Refocusing on the Central Front", Barack Obama basically argues for the same things as McCain. The only major difference is that Obama will transfer troops from Iraq to Afghanistan.

My reaction:
I agree with this tactic - but I don't think we should transfer actual soldiers. Instead we should transfer the numbers. We shouldn't take a poor soldier in Iraq who has already spent years in Iraq and then expect him to start afresh in Afghanistan. Send that soldier home and bring a new soldier into Afghanistan. One thing I really liked about Obama's position is his willingness to go after Al Qaeda targets in Pakistan.

Essentially, McCain and Obama are in agreement on the issue of Afghanistan. That's good news for us Americans.

Wednesday, July 16, 2008

The Fallacy of Shareholder Activism

The management shakeup at VMWare and the coming ownership battle at Yahoo! are just two more examples in a long list of shareholder activists creating havoc.

While there are many ways to value a public company, a company's market value is generally defined by its stock price * number of shares outstanding. If you wanted to buy a public company, you would typically pay something around this amount. If your offer price is above the market value, the shares will start trading at this price.

And what does the stock price depend on? Revenue? Profit? Cash? Debt? No, the stock price does not depend on any of these things. The stock price depends only investor confidence / psychology and what investors are willing to pay for a share of the stock. When the asking price matches the selling price for the stock, the price of the stock is defined at the moment of time.

When companies go public, they enter the world of speculation. In return for a capital infusion from the Initial Public Offering (IPO) and the ability to raise cash through further stock (equity) offerings, the founders and owners give ownership of their company to the public. After the IPO, they old adage becomes true: "Live by the stock, die by the stock". When a company is opened up to public ownership, all sorts of hostile takeovers become possible. We are witnessing this with Yahoo! and Microsoft.

The point I'm trying to make is that in our financial system, public companies are valued by the stock price, and too much importance is given to the stock price. Stock prices are a mix of emotion, psychology, and confidence, and can have nothing to do with the fundamentals of a company. Stock prices can be manipulated by short selling, rumor mongering, and other tactics. Think about that - the value of the company can be affected by simple trading tactics. This is not right. In an efficient market and ideal world, the market value of a company would be accurate. The ideal, accurate value of a company, in my opinion, is the following:

Value of a Company = Present Assets (Cash, other assets, etc.) + Future Assets (Projected earnings which are translated into assets)

The stock price is simply an indication of shareholder sentiment. I think you can value a piece of music or art using something as intangible as 'feelings', but I think businesses should be valued using a more scientific approach. Indeed, this does happen with the DCF (Discounted Cash Flow) method. If you still want to trade stocks - fine - but don't make the value of company dependent on the stock price.

Given my doubts regarding the accuracy of stock price as a measure of company value, I am opposed to the ideology of corporate raiders like Carl Icahn who will tear a company limb from limb to raise the stock price. If investors feel that Icahn's actions will help the company, the stock price will go up. In reality, Icahn's actions may be detrimental to the true value of a company (see my formula above).

Secondly, I believe that company founders need to be treated with more respect. Some will argue that these founders surrendered their autonomy when they went public, and I will agree with that statement. However, if not for people like Jerry Yang and Diane Greene, Yahoo! and VMWare might not exist today. If these companies are really in trouble (not as defined by their stock price but as defined by a more robust metric like revenue or earnings), then something does need to be done. But nothing should happen without the consent of the founders. When you ask for a girl's hand in marriage, you consult her parents. The parents often know best and if not for the parents, the girl would not exist.

I believe that not all actions should be motivated by the need to raise the stock price. Recall the book "Barbarians at the Gates" in which the CEO of Nabisco tried all sorts of tactics to raise the company's staid stock price, including taking the company private. He took a completely drastic and unwarranted action which caused great stress to his company and his employees simply to move the stock price.

Companies don't and shouldn't exist to please shareholders. Companies should exist to provide a valuable product or service to society and shareholders should come along for the ride. But I'm willing to reconsider my position if the methods of company valuation change.

Monday, July 14, 2008

Emerging Industries and their Challenges

In my estimation, three of the most prominent emerging industries are Biotech, Nanotech, and Renewable Energy.

Of these industries, Renewable Energy seems to be the least risky. This is because the major challenges of this industry are not technical but are business related. In other words, we already know how to make wind turbines, solar panels, etc. Yes, we can always make them more powerful or more efficient, but the technology exists. The world realizes the importance of renewable energy and is investing in this new industry. For this new industry to achieve its goals, it requires not only talented engineers but people who can work with the government to setup the right incentives for companies in this space. Also, the right sort of partnerships need to be set up with fossil fuel energy producers (like oil companies).

Biotech / nanotech is a different story. The challenge here is not so much business-related as it is technical. If you can make a drug that works, it will sell. Period. There's not a lot of convincing that needs to be done. But it's really hard to make drugs that work because these drugs are targeting some very complex diseases. And is the Biotech industry in turmoil right now? Or has it always been a state of turmoil and is this normal? Nuvelo, a once promising biotech company in the Bay Area, is trading at around $1 after its catheter-opening drug failed in Phase 2 of its clinical trial. But, this kind of thing is always happening in the Biotech industry. The question is what happens to everyone who is laid off in this division and how easy is it for them to get a new job? Without a doubt, the scientists and researchers who lose their jobs are some of the brightest people around and deserve to get back on their feet quickly. They are too valuable to society.

And I guess my observations of Biotech also apply to Pharma and Medical Devices. In the world of healthcare, either your product works or it doesn't. If it doesn't work, it won't sell. And by 'not working', the product could be ineffective or it could even cause severe damage to a patient's health or even kill that patient. In my view, it goes like this:

Software --> Hardware --> Biotech / Pharma / Medical Devices

Sales & Marketing intensive ---------> Research intensive
More room for error ---------> Less room for error

You can ship buggy software. You can't ship buggy hardware. And in Healthcare, your products better work or else people may die. There's no margin for error in this field. The question is in the early days of software, when it was also an emerging industry, was it as heavily research oriented and was it also lacking Sales & Marketing functions? I tend to think yes. If you look at Google - in its early stages they only hired engineers. Now, they have Sales, Marketing, and other non-engineers working at their company.

The question now becomes where do these 3 emerging industries intersect. It could be biofuels. Or else as my friend Anand conjectures, maybe you can genetically engineer algae to 'eat up' carbon dioxide in the air, thereby reducing greenhouse gases. But at this point, Biotech is still focused on healthcare.

I guess if you want to be involved in an emerging industry, it's 'no guts, no glory'. You have to be willing to bear the risk for the possible reward. And this also means that if you're not passionate about what you're doing, step aside. Emerging industries are not for the faint-hearted. But society needs answers to its toughest problems so it invests in emerging industries and accepts the risks. I feel we need to increase the incentives for companies in these emerging industries and 'cushion' the fall for companies that fail - because they failed in a noble pursuit and we need them to try again for the good of society.

Sunday, July 13, 2008

2008 US Presidential Elections

The battle lines have been drawn for the US presidential elections this November. In one corner, we have Barack Obama, Democratic nominee. In the other corner, we have John McCain, Republican nominee. Then, around the ring, we have Bob Barr (Libertarian), Chuck Baldwin (Constitution), Cynthia McKinney (Green), and Ralph Nader (Independent).

I'm still trying to understand the major differences between Obama and McCain. I briefly checked out Obama and McCain's campaign websites. Obama's is much nicer and easier to read while McCain's is old-fashioned and not particulary enticing. From what I have heard so far, Obama is more committed to removing troops from Iraq than McCain is. McCain favors lower taxes and lower corporate taxes while Obama favors higher taxes. But I think the candidates have not yet fully differentiated themselves from one another. I expect this to happen over the next few months. But given the perceived similarity between McCain and Obama, this could be an interesting year for the Independents.

The issues that I care the most about are the economy, healthcare, and energy. After 8 years of international meddling, I think the US needs to focus inwards. In this way, I applaud the positions of the Constitution and Libertarian parties which favor non-interventionism. However, unlike the last two elections, where I knew where I stood early on, I still haven't heard anything to put me firmly in any one candidate's camp. I guess that makes me an undecided voter. The good news is that whoever we elect will be a drastic improvement over Bush, whose last two years as president have been better than his first 6 years simply because he learned a little thing called humility.