Tuesday, May 19, 2015

Articles of interest

Apple

Scott Fearon offers a skeptical opinion of Apple's prospects:

Apple is a consumer product company. That’s an extremely volatile business, especially when–like Apple–you’re a consumer product company with exactly one hot-selling consumer product... As others have pointed out, Apple is now a cellular phone company that happens to make a few other products on the side. Yes, that cellular phone is fabulously popular right now. It’s shattering sales records left and right. But, like all consumer products, the iPhone is still subject to the fickle whims of consumer tastes.


Buffett

Warren Buffett was in the news recently saying that "If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I’d do it." Stagflationary Mark points out that Buffett has a poor record of predicting interest-rate moves.


China

GaveKal writes that "2014 marked the 10th consecutive annual increase in aggregate leverage as measured by total liabilities as a percent of equity. Meanwhile profit margins are down by more than half over the same period." Much of last year's leverage increase took the form of rising inventories and accounts receivable rather than rising debt.


Independent power producers

A doctoral candidate at NYU provides an overview of the 2002 merchant energy crisis, focusing on the experiences of AES, Calpine, and NRG. Particularly interesting is his discussion of AES, which extensively used non-recourse project financing and avoided bankruptcy when many of its peers had to file.


Lumber Liquidators

After previously defending Lumber Liquidators from some of Whitney Tilson's more hysterical accusations, "Max Vision" writes that the company's situation is getting worse. By pulling Chinese laminate from its stores after previously insisting it was safe, Lumber Liquidators has opened itself to inventory writeoffs, lawsuits, and bad publicity.


Oligopolies

Fortune reports that Christie's and Sotheby's, despite having an effective duopoly, are unable to earn oligopolistic profits.

Discussing Micron, Russ Fischer writes that "Oligopolies do not have a license to steal" and that "What isn't discussed so much is that, while an oligopoly can stabilize prices, it has no effect on costs."

On the other hand, Reihan Salam writes that industry consolidation has allowed hospitals to charge exorbitant prices. Salam also argues that hospitals, since they're often the largest employers in their Congressional districts, have enough political power to thwart efforts to rein them in.


Posco

Korea JoongAng Daily discusses Posco's origins as a state-owned company and the Korean government's continued interference in the company's operations since its privatization in 2000.


Profit margins

In "The Profit Parfait," Deloitte researchers analyze the different methods companies can use to earn sustainably high profit margins. Among other interesting anecdotes, the article mentions that Weis Markets earned high margins by pioneering the use of store brands but that its margins fell when competitors caught up. My impression is that Tesco has had the same experience in Britain, pioneering things like store brands and loyalty cards that have since been widely adopted.


Subprime

A 1998 Fortune article profiles FirstPlus, a subprime lender that offered 125% loan-to-value mortgages in the 1990s. Borrowers typically took loans from the company to pay off other, higher-interest loans (e.g. credit-card debt). According to the article, "FirstPlus usually doesn't bother with appraisals anymore--it mostly takes the borrower's word as to a home's value. And competing lenders are offering 135%, 150%, even 200% second mortgages."

FirstPlus depended on securitizations to finance itself. The securitization market shut down a few months after the article was published, and the company went bankrupt in early 1999.


Turkey

Dani Rodrik argues that Turkey's economic problems are large and growing and that, contrary to popular belief, they began before the country's political problems. Rodrik also writes that "Turkey (and other similar countries) benefited from an unusually favorable external environment. In particular, financial globalization and the availability of cheap foreign capital seems to have played a critical role."

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