Friday, May 27, 2016

The Don’t Ask, Don’t Tell Guide to Trading on Inside Information (BW)

Why Phil Mickelson didn’t get busted.

On Friday, July 27, 2012, Phil Mickelson received a phone call. It wasn’t just any call; it was, according to the U.S. Securities and Exchange Commission, a transmission of business intelligence potentially worth millions of dollars. Mickelson’s friend, a gambler named William Walters, was calling to urge him to buy shares of Dean Foods. The Dallas-based dairy conglomerate was going to announce a spinoff of its organic foods unit the following week, and the company’s board thought it would cause Dean stock to pop. Walters had gotten the tip from the best possible source, a board member who’d participated in the conference call where the board encouraged the Dean chief executive officer to move ahead. It was about as close to a sure thing as you could get, and Walters, who understood odds better than most people, had already accumulated almost 4 million shares, an aggressive bet worth about $50 million.

The golf great was hardly a high-velocity stock trader. Mickelson, who’s made almost $80 million over his playing career, had never before invested in Dean, according to the government. Yet that following Monday and Tuesday, he allegedly purchased 200,240 shares, partly on margin, for $2.4 million. A week later, on Aug. 7, Dean announced the spinoff, and as the board had predicted, the stock shot up 40 percent. Walters made $17.1 million and Mickelson $931,000.

Three people, one a celebrity athlete, with access to internal information about a publicly traded company. Advantages the majority of investors in the market didn’t—and aren’t supposed to—have. Several perfectly timed trades yielding millions in profit. If one were to describe the transaction to a layperson, it’s likely that it would sound like a crime.

Securities investigations travel at an inchworm’s pace, and almost four years later, on May 19, the U.S. attorney for the Southern District of New York, Preet Bharara, stood in front of a room full of reporters to announce securities fraud charges against Walters and his source, former Dean board member Thomas Davis. Davis had cooperated and pleaded guilty; Walters had been arrested the night before. With the snappy language he’s known for—Bharara called Davis a “secret bug in the boardroom”—the U.S. attorney explained that Walters and Davis had used an anonymous prepaid cell phone and a code, “Dallas Cowboys,” to refer to the target company. “These bets were no gamble at all,” Bharara said of their trades, because Walters “had tomorrow’s headlines today.”

“Brazen insider trading continues to be a blot on our securities markets,” Bharara continued, “and the integrity of our markets continues to be a priority of our office.”

So why wasn’t Mickelson charged?

The answer is that certain kinds of behavior previously understood to be insider trading are now effectively legal—or at least not prosecutable. More than 20 years after the imprisonment of Ivan Boesky, the infamous arbitrageur, it’s become vastly harder to convict someone for insider trading—the result of several years of legal challenges that handed Wall Street an enormous victory. An appeals court ruling in December 2014 basically legalized the don’t-ask, don’t-tell information-gathering model employed by many hedge funds; it’s now OK to trade on questionable information that one receives secondhand, as long as you don’t know too much about how it was obtained.

Offering someone a pile of cash in exchange for confidential, market-moving intelligence is still clearly over the line. But to cite an example Bharara himself has used: Say a CEO knows his company is being taken over in a few weeks—he could, potentially, pass that information to a nephew for nothing in return, and the nephew and his friends could, in theory, trade on it. Alternatively, the CEO could share the plans with a bookie in exchange for forgiving a gambling debt. The bookie could then tell his friends to trade, who could then tell their friends to trade. As long as none of those further down the chain knew the tipper’s gambling debt was forgiven, they would be in the clear.

Is it fair for rich, well-connected individuals with access to valuable corporate information to freely make money from it? Or is that deeply unfair? “I don’t know that it gives traders carte blanche to break the law,” Richard Holwell, a federal judge who’s presided over major Wall Street trials, told Bloomberg News. “But it certainly makes it easier to get away with.”

The events that led to this new legal reality began in November 2010, when a group of dark, unmarked cars pulled up to an office building in Stamford, Conn. The SEC, FBI, and prosecutors from the Manhattan U.S. Attorney’s Office were in the midst of a major investigation into insider trading at multiple hedge funds. Raj Rajaratnam, the co-founder of the $7 billion-plus Galleon Group, had been arrested the previous October; government investigators were chasing down Rajaratnam’s connections, and their connections’ connections. One trader on the list was Todd Newman, a portfolio manager at the hedge fund Diamondback Capital. The FBI had come to Diamondback’s Stamford office to try to persuade Newman to cooperate, or else storm in and search the premises. While that was happening, a separate FBI squad was preparing to raid Level Global, a Manhattan hedge fund co-founded by Anthony Chiasson. A third fund, Boston’s Loch Capital, was also targeted. Soon, FBI agents were carting hard drives and cell phones out of major investment firms in broad daylight.

Chiasson and Newman were charged with insider trading in January 2012. But it wasn’t a typical case. Rather, the two were at the outer extremity of a ring of six traders and analysts the government accused of playing a sort of demented game of “broken telephone”—sharing and trading on material nonpublic information. Bharara called it a “criminal club.” In one example, an investor relations employee at Dell shared the computer maker’s internal financial information with a friend at an asset management firm. The friend passed it along to an analyst at Diamondback, who passed it along to his boss—Newman—as well as to a friend at Level Global, who passed it to his boss, Chiasson. Newman and Chiasson traded on the information. In all, they made over $70 million trading tech stocks this way, according to the government. It was unclear what, exactly, they knew about the source of the information, but it certainly looked suspicious.

The courts began to consider: Was this illegal—or simply what traders in the modern market do every day?

Much of the insider trading that occurred during the Boesky era was straightforward and transactional, sometimes involving suitcases of cash delivered by men in suits in hotel lobbies. By the early 2000s, the government saw insider trading as more amorphous, an exchange of favors, rumors, and sometimes hard numbers passed along for goodwill or expectations of career help. Traders cared less about one-off mergers and more about companies’ quarterly earnings. But while this new mechanism for making money was highly profitable and unavailable to average investors, prosecuting it was hard.

Thursday, May 26, 2016

Panama Canal Fever Sweeps Globe Again as New Era in Trade Nears

An expanded section of the Panama Canal seen from the control tower.

  • As U.S. gas exports ramp up, new route will slash time to Asia
  • $5 billion project also shifts oil, crops, container trade
A century after transforming global markets, the Panama Canal is about to redraw world trade once again.

Nine years of construction work, at a cost of more than $5 billion, have equipped the canal with a third set of locks and deeper navigation channels, crucial improvements that will double the isthmus’s capacity for carrying cargo between the Atlantic and Pacific oceans.

When the new locks slide open to receive traffic for the first time in late June, the reverberations will be felt from Asian gas terminals to Great Plains farms and ports from Miami to Long Beach to Santiago.

The debut coincides, fortuitously, with a surge in U.S. natural-gas production that has shale outfits suddenly seeking out new export markets. The deeper channels will be able to accommodate the kind of massive tankers that transport liquefied natural gas, shaving eleven days and a third of the cost off the typical round trip to the Far East. Markets from Chile to China will also become more accessible for oil drillers across the Americas while millions of tons of container shipments originating from Asia could start bypassing western U.S. ports and opt to dock instead along the Gulf Coast or Eastern seaboard.

The anticipated growth has triggered a multibillion-dollar dredging and building binge at ports in the U.S., Caribbean and South America, all seeking to win a share of the traffic boom. Panama is also bidding to become a distribution hub for global manufacturers, with plans to add space for more than 5 million additional cargo containers.

“There are going to be a lot of feeder services that develop around it," Moses Kopmar, a Moody’s Investors Service analyst in New York, said in a telephone interview. “What it will do is basically unlock a huge amount of the global fleet in terms of being able to transit the canal."

The expansion won’t solve all the canal’s challenges. While tripling the size of cargo vessels it can receive, Panama still won’t be able to take the biggest container ships or crude tankers. What’s more, its traffic will depend on the health of the global economy more than its dimensions, Kopmar said.

But expansion was critical, industry experts say, for a shipping route that risked losing relevance if it didn’t grow to handle the increasingly large vessels favored nowadays. The canal, which carried some 340 million tons of cargo in the fiscal year that ended last September, accounts for about 6 percent of total world trade.

3,200-Ton Doors

When it opened for business, the canal was an engineering marvel. 

In the 34-year span that began with France’s failed attempt and ended with the U.S. completion in 1914, some 75,000 workers toiled to carve out the 50-mile long (80 kilometer) channel. In the process, they created an artificial body of water, Gatun Lake, and an earthen dam that at the time were the world’s largest. They also opened up the mammoth Culebra Cut, a ditch through the Continental Divide that required the removal of about 100 million cubic yards of rock and shale. By the time work was complete, some 25,000 people were dead, many succumbing to yellow fever, malaria and other tropical diseases, according to the Panama Canal Authority.

The latest construction has come with less tragedy but its own share of cost overruns and engineering snafus. Leaky locks were one major problem, helping delay the project by two years. Those locks -- a set of chambers sealed by 3,200-ton doors that raise and lower water levels -- provide access to a wider lane for vessels: 180 feet across, compared with 109 feet in the original locks. (Many cargo ships squeeze through nowadays with just a couple feet of clearance on each side.) In the middle of the isthmus, the canal authority has also dredged deeper, wider lanes through Gatun Lake, where ships spend much of the inter-oceanic voyage.

For gas and crude oil companies reeling from the recent collapse in prices, the drop in time and shipping costs will provide a much-needed lift. Corn, soybean and wheat growers in the U.S. also stand to benefit, along with importers like Dole Food Co. Inc. and Chiquita Brands International Inc.

“We can send gas ships that couldn’t fit through the canal before," said Bill Diehl, president of the Greater Houston Port Bureau, a maritime industry trade group. “Asia looks like a good market for us now. The shipping costs look like a fair fight."

While the current locks are too small for most natural-gas carriers, almost 90 percent of the world fleet will be able to use the canal after expansion, the authority says. That’ll cut the round trip from the U.S. Gulf to Asia to about 20 days, compared with 31 days through the Suez Canal or 34 around Africa’s Cape of Good Hope. Sailing from Louisiana to Tokyo via Panama would be about 35 percent cheaper than taking the Suez, according to Jason Feer, head of business intelligence at Houston-based ship broker Poten & Partners.

“It certainly gives U.S. LNG producers options,” Feer said. “And it is a significant percentage of the reason that Asian buyers have been willing to sign contracts with U.S. producers.”

The impact on oil markets is likely to be more muted. While the canal will open to bigger “Post-Panamax" tankers, it still won’t fit Very Large Crude Carriers, the 2-million barrel behemoths that transport most of the world’s petroleum. Still, the canal anticipates the upgrades could open up new routes for oil from Mexico, Venezuela and Colombia. The U.S. government lifted its 40 year-old ban on crude exports in December and so far just one shipment has crossed the canal: 380,000 barrels of West Texas Intermediate sold to a Nicaraguan refinery in April.

“It’s a new trade and we have to see how it evolves," said Jose Ramon Arango, the canal’s senior specialist for liquid bulk shipments. “I’m quite confident we will play a role in that evolution."

The bigger canal may also trigger a shift for container ships that carry everything from clothes to chemicals into the U.S., the world’s largest importer. With the latest generation of ships too large for the original locks, most of that traffic now unloads in Los Angeles, Seattle and other West Coast destinations.

Though Western ports will retain a time advantage even after the new locks are in operation, cities from New York to Houston have been scrambling to upgrade facilities so they can handle the larger ships and volumes they expect. American ports will spend about $150 billion over the next four years to reduce congestion and accommodate bigger ships, the American Association of Port Authorities estimates. Caribbean destinations are also bidding to become distribution and logistics hubs for the increased traffic. Jamaica alone envisions some $8 billion in investments.

“It’s something you’ve got to do to remain relevant," said Brian Taylor, chief executive officer of the Jacksonville Port Authority, which is seeking federal aid for a $700 million plan to deepen its waters in northern Florida. “All ships are getting bigger."
And so is the Panama Canal.

Wednesday, May 25, 2016

Bayer’s $62 Billion Monsanto Bid Raises Alarm on Final Price

  • Why Bayer's Monsanto Offer Has Investors Concerned
  • Unsolicited offer by Bayer on May 10 was for $122 a share
  • Bayer proposes to fund part of deal with rights offer

Bayer AG offered $62 billion to buy Monsanto Co., deepening investor concern that it will strain its finances as it seeks to become the world’s biggest seller of seeds and farm chemicals.

The German company on Monday said it had told Monsanto it’s willing to pay $122 a share in cash. Bayer’s stock dropped as much as 6 percent, extending losses since the potential deal was first revealed. Monsanto shares posted muted gains, rising 4.9 percent to $106.45 in New York trading, signaling that investors remain skeptical about the deal.

“I don’t think Monsanto will accept” Bayer’s proposal, said Andrea Williams, a fund manager at Royal London Asset Management Co. “The danger is that you start then having discussions about how you are going to fund a higher offer, because they are already stretching the balance sheet.”

Buying Monsanto would allow Bayer to tap growing demand at a time when farmers must boost productivity to feed an estimated 10 billion people globally by 2050. Bayer Chief Executive Officer Werner Baumann has suggested that notion will convince skeptical investors of the value of the deal -- and help overcome public backlash at home against Monsanto’s genetically modified seeds -- as he seeks to pull off the biggest corporate takeover ever by a German company.

Monsanto Name Hated by Anti-GMO Forces May Vanish in Bayer Deal

The offer, which values Monsanto’s outstanding shares -- without accounting for debt -- at about $53 billion, represents a 37 percent premium to the May 9 closing price. The payment would be funded with a combination of debt and equity, with about $15.5 billion coming from selling shares to existing investors. Bayer doesn’t expect to sell any assets to fund the purchase, Baumann said.

China National Chemical Corp., or ChemChina, earlier this year valued Syngenta AG at more than 16 times earnings before interest, taxes, depreciation and amortization, Susquehanna Financial Group analyst Don Carson said in a note Thursday. A similar multiple means Bayer would need to offer $145 a share for Monsanto, he wrote then.

Monsanto shares are trading about $15 below the offer price, the worst performance on the day of the announcement of a megadeal -- those topping $30 billion -- since Anthem Inc. last July agreed to buy Cigna Corp. for $188 a share, according to data compiled by Bloomberg. Cigna shares closed 22 percent below the offer price on the day the deal was announced.

‘Uneducated Reaction’

Bayer fell 5.6 percent to 84.47 euros, the lowest since October 2013, in Frankfurt. That followed a plunge on Thursday, when it confirmed that it had made an offer, without disclosing the details.

“What we saw last week was an uneducated reaction in the media and the press because we did not communicate the details of our proposal,” Baumann said on a conference call on Monday. “We are utterly convinced of the rationale” of the purchase.

A deal would boost earnings per share by a “mid-single-digit percentage” in the first full year after completion, and by more than 10 percent thereafter, Bayer said. The German company also expects savings of about $1.5 billion annually from the fourth year following the deal.
Monsanto said on Thursday it was consulting financial and legal advisers. In a note to clients, Citigroup Inc. analysts Peter Verdult and Andrew Baum said they “would be surprised if Bayer’s first proposal was accepted outright.”

Abandoning Name

Bayer would likely abandon the Monsanto name after the purchase, just as it has dropped other brands following previous acquisitions, according to a person familiar with the matter. This could help distance the enlarged company from Monsanto’s reputation, the person said.

The offer marks a reversal of roles for Monsanto. The company had sought to buy Syngenta AG, but abandoned its $43.7 billion bid in August after the Swiss pesticide maker refused to agree to a deal.

The crop and seed industry is being reshaped by a series of large transactions. ChemChina agreed in February to acquire Syngenta for about $43 billion. Meanwhile DuPont Co. and Dow Chemical Co. plan to merge and then carve out a new crop-science unit.

The kind of genetically modified seeds that Monsanto started to sell two decades ago now account for the majority of corn and soybeans grown in the U.S.

Bank of America Corp. and Credit Suisse Group AG are advising Bayer and helping finance the deal, while Rothschild has also been retained as an adviser.

Tuesday, May 24, 2016

Switzerland's unconditional basic income initiative proposes $30,000-a-year payout for everyone

  • Switzerland Proposes Paying Everyone $30,000 a Year

The Swiss are discussing paying people $2,500 a month for doing nothing.

The country will vote June 5 on whether the government should introduce an unconditional basic income to replace various welfare benefits. Although the initiators of the plan haven’t stipulated how large the payout should be, they’ve suggested the sum of 2,500 francs ($2,500) for an adult and a quarter of that for a child.

It sounds good, but — two things. It would barely get you over the poverty line, typically defined as 60 percent of the national median disposable income, in what’s one of the world’s most expensive countries. More importantly, it’s probably not going to happen anyway.

Plebiscites are a common part of Switzerland’s direct democracy, with multiple votes every year. The basic income initiative is taking place after the proposal gathered the required 100,000 signatures, though current polls suggest it won’t get any further. The idea of paying everyone a stipend has also piqued interest in other countries, such as Canada, the Netherlands and Finland, where an initial study began last year. 

The initiators say the sum they’ve mentioned would allow for a “decent existence.” Still, on an annual basis, it would provide only 30,000 francs — just above the 2014 poverty line of 29,501 francs.

About one in eight people in Switzerland were below the level in that year, according to the statistics office. That’s more than in France, Denmark and Norway. Among those over 65, one in five were at risk of being poor.

“It’s not like you see abject poverty in Switzerland,” said Andreas Ladner, professor of political science at the University of Lausanne. “But there are a few people who don’t have enough money, and there are some people who work and don’t earn enough.”
Great Experiment

Among the proponents of basic income is former Greek Finance Minister Yanis Varoufakis, who says it's necessary as automation and robots increasingly eliminate jobs.
“A rich country like Switzerland has the great opportunity to try out this great experiment,” he said.

The initiative doesn’t lay out the conditions under which non-citizens would qualify.
The proposal is opposed by the government, which says the stipend would mean higher taxes, create disincentives to work and cause a skills shortage. The economy is already hamstrung by the franc’s strength, with businesses warning they’ll move production to less pricey locations to reduce costs.

“We’ve come to the conclusion that such an initiative could weaken our economy,” said Interior Minister Alain Berset.

That view has struck a chord with the electorate: Polls show some 60 percent also oppose it.

Monday, May 23, 2016

Expect oil demand to remain high


Patrick Pouyanne, Chief Executive of Total, expects oil demand to remain strong, yet unsteady.

He said oil demands saw increasing numbers for 2015, a rise of 2 percent. “This year, experts see demand at about 1.2 million barrels per day. Me and my team see it at about 1.4 million barrels per day, which is still strong and means the market is rebalancing, but will not rebalance completely by the end of the year, however, it will somehow support prices.”

Hope has been given to the oil crises future. With demand high as supply begins to weaken, prices rose from January’s $26 per barrel to $50 per barrel. The company opened eyes to unchanged global demand, leaving future risks to the upside.

Pouyanne states projects decided some years ago when prices were $100 per barrel are expected to begin in 2020. He adds investments have taken a drastic hit, continuing, “However, investments have fallen sharply, and we are not preparing production for the years 2019-2020. At this rhythm, there could be a shortfall of supply and a counter shock. There could be a shortfall of about 5 million barrels in that horizon, which is a lot. All of this because volatility has been extreme.”

Friday, May 20, 2016

The Quiet Epidemic That's Killing White Americans in Droves (BW)

The economy may be to blame

Every week, hosts Tori Stilwell, Dan Moss and Aki Ito bring you a jargon-free dive into the stories that drive the global economy.
After decades of progress in U.S. mortality rates, scores of white middle-aged Americans are dying or reporting that their health is deteriorating and life is increasingly painful. What does this have to do with the economy, and even the election? More than you might think. To discuss, Tori and Aki talk to Princeton professor Anne Case, whose work with husband Angus Deaton has documented the stunning regression. (Fire Up your speakers)

Thursday, May 19, 2016

This $5 Billion Software Company Has No Sales Staff

Atlassian sold $320 million worth of business software last year without a single sales employee. Everyone else in the industry noticed.

Brandon Cipes, vice president for information systems at OceanX, has spent enough time in senior IT positions to hate sales calls. “It’s like buying a car—a process that seemingly should be so simple, but every time I have to, it’s like a five- to six-hour ordeal,” he says. “Most of our effort is trying to get the salespeople to leave us alone.” Cipes didn’t always feel that way, though. Back in 2013, he was used to the routine. His conversion began when he e-mailed business-software maker Atlassian, asking the company to send him a sales rep, and it said no.

Atlassian, which makes popular project-management and chat apps such as Jira and HipChat, doesn’t run on sales quotas and end-of-quarter discounts. In fact, its sales team doesn’t pitch products to anyone, because Atlassian doesn’t have a sales team. Initially an anomaly in the world of business software, the Australian company has become a beacon for other businesses counting on word of mouth to build market share. “Customers don’t want to call a salesperson if they don’t have to,” says Scott Farquhar, Atlassian’s co-chief executive officer. “They’d much rather be able to find the answers on the website.”

The way technology companies sell software has changed dramatically in the past decade. The availability of open source alternatives has pushed traditional brands and rising challengers to offer more free trials, free basic versions of their software with paid upgrades, and online promotions.

Incumbents such as IBM, Oracle, and Hewlett Packard Enterprise, which employ thousands of commissioned salespeople, are acquiring open source or cloud companies that sell differently, says Laurie Wurster, an analyst at researcher Gartner. Slack, Dropbox, and GitHub are among the companies trying to attract corporate clients with small-bore efforts that rely largely on good reviews. The idea is to distribute products to individuals or small groups at potential customers big and small and hope interest spreads upstairs.

So far, though, Atlassian remains the most extreme example of this model. It’s a 14-year-old company, valued at $5 billion since going public in December, without a single salesperson on the payroll. More than 80 Fortune 100 companies use Atlassian’s software, and venture capitalists and peers often talk about trying to follow, at least partly, its sales strategy.

Luck had a lot to do with that strategy, says Farquhar. He and co-CEO Mike Cannon-Brookes founded the company while finishing their IT degrees at the University of New South Wales, and the pair initially relied on word of mouth because they didn’t know anything about selling business software.

Their first break came a few months later, in 2002, when the website let you download a free trial but wasn’t yet equipped for purchases, and all their orders arrived via fax. One day the fax machine transmitted an order from American Airlines, where someone in IT had downloaded and configured the software without Atlassian’s help. “That was a huge turning point for us,” Farquhar says, adding that it gave the founders confidence they could make their business model work without a dedicated sales staff.

American paid about $800 for that first order. This year analysts forecast Atlassian’s revenue will top $450 million. Last year, when sales reached $320 million, the company’s sales and marketing spending, mostly on ads and payments to partners, totaled one-fifth of that. By comparison, spent about half its revenue on sales and marketing; at Box, which has spent big to build a sales staff in the past couple of years, the number was 80 percent.

Jay Simons, Atlassian’s president, says the savings on staff means lower prices and more investment in research and development to refine software, making it easier to try, understand, and purchase. Farquhar says he’s resisted calls for half-measures, like hiring salespeople to manage subscriber renewals, and that he’s happier with a steady, predictable growth rate. “Salespeople are like your Adderall right before the exam,” he says. “It’s that last-minute kick when you’re not going to do well otherwise.”

In Silicon Valley, them’s still fightin’ words. “When you add a sales organization, revenue accelerates far greater than the cost of that organization,” says Peter Levine, a partner at venture firm Andreessen Horowitz. At GitHub, where Andreessen has invested, Levine lobbied heavily for the startup to recruit sales staff. Ultimately it did. (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz.)

Atlassian’s roots lie in Sydney’s barren tech scene. It was kept aloft early on not by venture capital, but by the founders’ credit cards, meaning it didn’t have impatient investors to answer to. “I don’t think their success is replicable,” says Tomasz Tunguz, a partner at Redpoint Ventures.

Startups including Dropbox and Slack are taking a hybrid approach, relying on grass-roots pitches to land initial users within a company, then setting up sales calls once those users grow to a critical mass. “For me it’s not either-or, but how do we combine the best of both?” says Kakul Srivastava, GitHub’s vice president for product management. Even HP Enterprise is experimenting with online sales and try-before-you-buy. Caroline Tsay, the executive in charge of that effort, says she’s hired some former Atlassian staffers.

Atlassian faces a crowded market, and it’s unclear whether the company will be able to keep expanding, says John DiFucci, an analyst at Jefferies. Still, Atlassian’s Simons says he’s not worried about an end to growth without salespeople. “I’ve been asked that question every year for the past eight years,” he says. “Whatever the mythical wall is, we would have hit it by now.”

The bottom line: Atlassian sold $320 million worth of business software last year without a sales staff. Everyone else in the industry noticed

Wednesday, May 18, 2016

The Race for the Wood Skyscraper Starts Here

Right now it’s more like 125 workers gluing boards together in Oregon. 
Here’s how they get to a 100-story tower of timber.

Timber skyscraper London
An architectural rendering of a 1,000-foot-tall wood skyscraper proposed for London.

At a newly renovated plant in Riddle, Ore., workers glue together boards harvested from nearby forests, where Douglas fir has grown for thousands of years, and feed the resulting 10-by-30-foot panels into a pneumatic press. 

What comes out three hours later, their boss is convinced, is the building material of the future.

Proponents of the material, called cross-laminated timber, or CLT, say it can be used to erect buildings that are just as strong and fire-resistant as those made from steel and concrete. Those qualities have helped excite the passions of architects and environmentalists, who think it could unlock a greener method for housing the world’s growing population, and timber producers, who hope to open a U.S. market for the value-added good.

"We see a horizon that’s very promising out there," said Valerie Johnson, who with her sister and mother owns D.R. Johnson Wood Innovations. The company employs 125 workers at a traditional sawmill and the laminating plant, which Johnson just expanded by 13,000 square feet to accommodate production of the new material. She's fielding calls from curious builders and is manufacturing samples so the material can be tested for fire safety and structural soundness. Currently, three North American manufacturers are certified by the Engineered Wood Association to make CLT for the construction of buildings, including D.R. Johnson and two Canadian companies. 

"People say this whole thing is six years out, but I'm fighting that," said Johnson, 63."There's no reason to lollygag around."

Valerie Johnson, president of D.R. Johnson Wood Innovations.
Valerie Johnson, president of D.R. Johnson Wood Innovations.

Mass timber construction, which uses CLT and other engineered wood products, was pioneered in Europe in the 1990s to replace concrete blocks in the construction of single-family homes and has slowly gained popularity. Wood sequesters carbon from the environment, while producing concrete emits carbon, exacerbating global warming. The system for building with CLT, Johnson adds, involves assembling prefabricated parts, speeding construction, and paring labor costs. 

Those attributes have sparked a race to build the world’s tallest wood building. Recently proposed structures include a 100-story tower in London, nicknamed the Splinter, and a 40-story building in Stockholm with a distinctive façade that should be a hit with quants and preschoolers alike: 

Conceptual plans for a timber skyscraper in Stockholm.
Conceptual plans for a timber skyscraper in Stockholm. 
A vast chasm lies between architectural drawings and completed buildings—to bridge the gap, add bank loans—and there’s a good chance those designs won’t get built. A number of wood buildings in Australia, Norway, and the U.K. have jockeyed for the title of tallest wood building in recent years, all topping 10 stories.

Interest is spreading from Europe to North America. In 2013, Vancouver-based architect Michael Green proselytized for the material in a TED Talk on the subject that’s been viewed more than a million times. The same year, SOM, the Chicago architecture firm that designed the world’s tallest building, published a white paper outlining techniques for building a 42-story wood building. Last year, the U.S. Department of Agriculture awarded a pair of grants to fund work on tall wooden buildings in New York and Portland, Ore
"On the economic side, the benefit could be tremendous," said Senator Jeff Merkley, an Oregon Democrat, who plans to co-sponsor a bill introduced in May that would fund further research. CLT could expand the market for timber products from single-family houses to larger buildings, and the process of turning raw boards into mass timber lets companies such as Johnson's hire more workers.  

The next challenge is to persuade building departments across the country to approve buildings made of mass timber. That means proving that the laminated wood panels are fire-resistant and showing that the engineering is sound. Over the longer term, mass timber proponents will have to answer a laundry list of questions, including whether people really want to live and work in tall wood buildings and whether trees used to make the material can be sustainably harvested1.  

"It's going to take some time to build up the infrastructure here to compete with materials already being used," said Thomas Maness, dean of the College of Forestry at Oregon State University. Eventually, the Pacific Northwest could be home to a half-dozen manufacturers, Maness said. 

Still, if mass timber gains traction in the U.S., Johnson, whose parents founded her company in 1951, will be well positioned. For the past 50 years, D.R. Johnson has made glue-laminated beams, industry-speak for what you get when you join two-by-fours into solid columns. The biggest beams the company has made are 9-foot-wide, 140-foot-tall posts custom-built as utility poles used by the fracking industry in North Dakota.

That experience gave the company a head start on producing CLT, though it still needed to hone new techniques and buy new equipment. Johnson invested in a custom-built panel press at the end of 2014 and produced wall and floor panels for its first project, a four-story building that went up in Portland in February. Now the company is installing a robotic fabricating machine to prepare panels for job sites and bidding on new projects. 

“If you look at the architecture or engineering or construction industry, there are a few pioneers in every field, and those are the people we’re working with,” Johnson said. “It’s been a once-in-a-career opportunity to be out in front of something.”  

Tuesday, May 17, 2016

Make America Gold Again: Calls for Everyone's Favorite Standard Are Back

  • Gold Prices Are Still Solid
  • Hard-money cause wins new converts in age of economic anxiety
  • What do economists think of gold standard? ‘It was horrific’

When times are tough, new economic theories get a better hearing. Maybe some old ones, too.

The gold standard is one of the oldest ideas about money, but the hardest of hard-money hawks sense an opening to breathe new life into it. Decades ago, the amount of cash circulating in a country was often limited by the stash of bullion held in its coffers. Especially since 2008, developed-world policy has headed in the exact opposite direction, expanding the powers of central banks to stoke growth. Helicopter drops of money, potentially the next new thing, would be a giant leap further.

For those in the U.S. who see much risk and little benefit in the current course, gold is still a rallying point. And their audience may be growing.

“The fringe has become the mainstream,” said Jesse Hurwitz, a U.S. economist at Barclays Capital in New York. He sees the gold standard as a bad idea but “something we’ll increasingly talk about.”

Of course, full restoration of the system that reigned in the U.S. for a century through the 1970s is almost inconceivable. Even many gold bugs say it can’t be done, and there’s near-unanimity among economists that it shouldn’t be attempted: the U.S. would be in much worse shape, they say, with a Federal Reserve stripped of its ability to freely tinker with the money supply.

But the backdrop to this well-rehearsed debate is changing. Rumbling discontent with the economy has left the establishment under siege, and you can’t get more establishment than the Fed. So, in a curious twist, it’s becoming easier for supporters of hard money -- historically a policy favored by the rich -- to give the idea a populist slant. The money conjured up by central bankers after the crisis, the argument goes, all went to bankers, leaving most Americans no better off. It’s time to tie the Fed’s hands, if not to gold, then at least to something.

“We don’t need to be a slave to history,” said George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute in Washington. The gold standard is “like Humpty Dumpty,” he said, hard to put back together. But “we can think about having a monetary system that isn’t completely arbitrary, where it isn’t just a matter of discretion, people sitting in a room 13 times a year doing whatever.”

‘Hijacked by Bankers’

For a while, to the hard-money folks, the U.S. election season must have appeared full of promise.

The Fed was getting bashed from all sides. “It is unacceptable that the Federal Reserve has been hijacked by the very bankers it is in charge of regulating,” Democratic candidate Bernie Sanders said in a New York speech in January. Economists who support Sanders, like Nobel prizewinner Joe Stiglitz, see the Fed’s quantitative easing as a form of trickle-down economics that’s exacerbated inequality.

The proponents of gold or some other fixed monetary rule are more likely to be found in the Republican Party, and what they object to is the very idea of money creation by fiat, not just its distributional effect. Still, there’s some overlap.

Ted Cruz, in one of the early candidate debates last year, said the Fed “should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold.”

‘Solid Country’

Then there was Donald Trump. “We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because “we don’t have the gold. Other places have the gold.”

In more recent interviews, the presumptive nominee sounds like he’s drifted toward a soft-money worldview. Last week, he drew attention to the U.S. government’s ability to print money. To the gold bugs, that’s a problem -- but Trump painted it as a potential solution.

Below the presidential level, though, the gold camp and its allies have gained support.

“There’s a growing constituency within the House Republican membership that a more rules-based approach or a gold standard would be advantageous,” said Hurwitz of Barclays.

‘It Was Horrific’

Not all Republicans welcome the development.

The gold standard “was awful. It was horrific,” said Tony Fratto, a former Treasury and White House official in the George W. Bush administration. “It led to some of the worst economic downturns and bouts of deflation in history.”

Fratto, now a managing partner at Hamilton Place Strategies LLC, a Washington-based consulting firm for financial companies, says monetary policy is “the least well-understood” of economic disciplines -- and that makes the central bank an easy target.

Those targeting it include the “Audit the Fed” movement led by Kentucky Senator Rand Paul, whose father Ron Paul has been a standard-bearer for gold. Trump and Sanders are among those who’ve endorsed the effort to scrutinize the central bank’s books.

Playing Games

For other critics, the goal is to impose new rules on the Fed. What would they look like? Cato’s Selgin favors the ideas of a school known as market monetarists, who say the money supply should be adjusted according to a target for overall spending in the economy.

Another, better-known option is the Taylor Rule, which dictates interest-rate adjustments based on changes to inflation and output. The formula has fans in Congress. It’s surfaced in some of the multiple bills aimed at overhauling the Fed -- none of which have yet reached the floor of the House.

Bill Huizenga, a Michigan Republican and chairman of the House Financial Services subcommittee on monetary policy, sponsored one of them. He sees talk of a new gold standard as “more of an academic exercise than a real-world exercise,” but supports rules that would restrain the “games being played” by central banks worldwide.

George Gilder thinks gold-standard ideas are on the way back whatever the politicians do. Founder and chairman of the Gilder Technology Group and a bestselling author who helped popularize supply-side economics in the Reagan era, he says the trillions of dollars that fly around global currency markets every day are a “bizarre abuse of capitalism,” sucking vitality out of the real economy.

Apocalypse Soon?

Gilder sees hope in countries like China that are “oriented toward a gold valuation” -- the Chinese are unfairly maligned for manipulating their currency, he says, when what they wanted was to do the opposite and fix its value -- and in the rise of bitcoin, a digital version of gold.

Running through a lot of the gold talk is an apocalyptic strain. True believers think a crash is coming that will blow away the current consensus, leaving only their ideas standing.

Gilder sees a political backlash when negative interest rates start taking away people’s savings. Jim Rickards, chief global strategist at money manager West Shore Funds and author of “The New Case for Gold,” says the Fed and its peers have expanded their balance sheets to “the outer limit of confidence.”

Rickards helped negotiate the rescue of Long-Term Capital Management in the late 1990s and says it’s been downhill ever since. “In 1998, Wall Street bailed out a hedge fund. In 2008 the Fed bailed out Wall Street,” he said. “What’s going to happen in 2018? It’s going to be the IMF bailing out the central banks.”

He sees a chance of “close to 100 percent” that a downturn worse than the Great Recession is on the way in the next few years -- and then, “you’re going to be hearing a lot more about gold.”

Monday, May 16, 2016

The Middle Management Error Vendors Love Most

Blue Mirror Ball

A vice president at a very large company just sent me a purchase order for a “blue disco ball.” That’s my metaphoric name for a specific kind of middle management error that most vendors, suppliers and even solutions providers love most. What is a “blue disco ball?” It’s every senior executive’s worst nightmare and every vendor’s holiday bonus all rolled into a budget-busting good time.

The Blue Disco Ball Story

My first internship out of film school was awesome! I had the good fortune to work for an assistant producer on a major motion picture. I was a gofer, the absolute lowest job on the totem pole. Some of my duties included getting coffee, going to pick up props, and keeping my mouth shut — all of which I did to the very best of my ability. What I didn’t know was that this particular entry level job was about to teach me some of the most important business lessons I was ever going to learn.

On my very first day, I attended a production meeting. The director (a super famous household name I will not drop) told the line producer that a he needed a 60″ blue disco ball to hang in the middle of the set for an upcoming scene. With no questions asked, the job was handed to my immediate superior with a very specific deadline two days out.

The first thing my boss did was call the property department and ask if they had any 60″ blue disco balls. They did not. He turned to me and said, “I know a fabrication house in town that can do this,” and without skipping a beat, he called the fabricator.

The quote came back for a flat $10,000 (approximately $35,000 in 2016 dollars). I was told to call all over town to find a better quote or a rental or something — even for a custom job with an incredibly short deadline, $10,000 was an insane “we’d really rather not take this job, but for $10K we’ll do it if we have to” kind of quote. In 1979, a run of the mill 12″ disco ball could be purchased at the local lighting store for about $50.

I located a bunch of red, green and clear disco balls, but there were no blue ones and nothing was even close to 60″ in diameter. My boss looked at my call list and agreed that I had contacted everyone who could possibly bid on the job. As requested, I had also obtained the additional fabrication quotes, but all were approximately $10,000.

My boss called his preferred vendor and ordered the 60″ blue disco ball and I heard him clearly communicate a deadline (which he set for six hours before we really needed the prop). I asked about the artificial deadline and was told that we needed a buffer, “just in case.” When I suggested that shortening the deadline by six hours might make an almost impossible deadline even more impossible, I was told, “that’s not how it works.” (We’ll save this particular vendor management issue for another day.)

In some alternative universe, that might have been the end of it, but this story was far from over.

An Unexpected Result

The artificial vendor deadline came and went, but my boss was not alarmed, he was an experienced assistant producer and he had built a six-hour buffer into the deadline. As the real deadline approached there was no sign of the ball and the fabricator was not picking up his phone.

About an hour before the real deadline the director barked a question at the line producer (my boss’s boss) and I quote, “Where the f#@k is my blue disco ball?” I didn’t hear the response, but the director became extremely agitated. There was a bunch of screaming and finger pointing when, out of nowhere, the property master for the studio (who just happened to be walking by the set) asked what all the commotion was about.

The director and the line producer told him that they needed a huge blue disco ball hanging in the middle of the set and that it had not arrived — they were going to have to cancel the shoot. That sounded serious, but when did the word “huge” replace the exact 60″ specification? I had not heard the word huge in the context of the blue disco ball before.

Then, the property master asked the most important question anyone could ask, “What are you trying to accomplish?” The director said, he wanted little dots of blue light dancing on the floor. The property master continued, “Are you planning to shoot the ball?” The director thought for a second, looked over at the director of photography, looked at the script, looked at the line producer, looked at the script supervisor and screamed, in an exasperated voice: “Is that on the shot sheet? No. I’m not shooting the f#@king ball … I want the dancing blue dots of light!!!” As calmly and quietly as I have ever heard anyone respond to being screamed at, the property master said, “So you need a disco ball big enough to reflect dots of light over the live area of the shot, and you want blue dots … got it.”

Without missing a beat, the property master picked up the phone and told one of the stage hands to bring up a disco ball. It was there in under five minutes. He told the gaffer put a dark blue gel over the light they were shining on the disco ball and “for free” there were blue dancing dots of light all over the set. The problem was solved by a seasoned pro who knew how to listen, ask the right questions and get the job done.

This would have been a happy ending, except that just as the set decorators and lighting director were finishing the set-up, the fabricator pulled up with the newly constructed 60″ blue disco ball. He was several hours past his artificial deadline, but he beat the deadline imposed by the line producer (my boss’s boss) by 30 minutes. He was on time and on budget. (There was no reason for the director’s tantrum, the cast wasn’t due out of make-up for three more hours.)

The free solution was already in place, so there was no need to use the shiny new 60″ blue disco ball (it was actually too big and would have been wrong for the shot, but this factoid is also for another day) they sent it to the props department. A $10,000 prop that should never have been ordered is probably still sitting unused in its original packaging 37 years later.

The Moral of the Blue Disco Ball Story

I am always impressed by how many projects go over budget and how much money is wasted because of the “blue disco ball.” After all, a little knowledge is a dangerous thing.

Generally speaking, unless you are an expert in the field and you know exactly what you want and why you want it, you should resist the temptation to tell a vendor (or a direct report who is schooled in the art) what you want them to do. Outcomes will almost always be better if you tell them what you are trying to accomplish, and then ask them what they suggest and why.

If you tell a preferred vendor you want a 60″ blue disco ball in two days, you’ll get one with a bill to match. Vendors love to do what they are told — on time and on budget — it’s what vendors do. But imagine how much better this story would have turned out if 1) the right people were in the right meetings or, 2) the goals were properly communicated.

Lessons Learned

I learned many lessons on that film shoot. Perhaps the most important was the role of a solutions provider versus the role of a vendor. I learned about management structure, corporate governance and the power of bureaucracy. (Why wasn’t the property master at the original production meeting?) And, though I didn’t realize it at the time, I also learned that a deep understanding project goals was going to be the key to creating value for clients later in my career.

So, while a different me might have simply taken an order for a 60″ blue disco ball, the actual me politely asked a few questions to help my client save some money, look like a genius to his boss and create value for his company. Of course, I would have made much more money selling him a brand new, custom-made 60″ blue disco ball — but he really didn’t need one.

Friday, May 13, 2016

Amazon Targets YouTube With New Online Video Posting Service

  • Creators can choose how to get paid for videos on Amazon
  • Move helps Amazon boost selection without upfront costs
Image result for amazon youtube Inc. will let people post videos to its website and earn money from advertising, royalties and other sources, putting the company in more-direct competition with Google’s YouTube.

Amazon already offers movies and television programs over the Internet -- including its own original productions -- to compete with Netflix Inc. The new product will let Amazon give consumers more options about what to watch without an upfront fee because many of those posting videos will be paid based on how their content performs. Competing streaming services have been driving up the cost of this material.

Amazon used a similar strategy to boost its inventory of electronic books through Kindle Direct Publishing, which lets authors bypass traditional publishers and reach readers directly by posting and selling their own e-books online.

The Seattle-based e-commerce giant said the service is designed for “professional video producers,” but its only requirements are that the videos be high definition and have closed-captioning for the hearing impaired.

Amazon is late in challenging YouTube, which has over 1 billion viewers who help it generate billions of dollars a year in advertising revenue and create Internet sensations such as PewDiePie. YouTube is looking to diversify its revenue with a subscription TV offering Unplugged that could debut next year.

Amazon has “tens of millions” of Amazon Prime members who get video streaming as part of their shopping and free-shipping subscriptions. Amazon sees video as a way to attract new customers and retain existing ones.

The companies are fighting for the eyeballs of cord cutters, those who cancel cable television subscriptions in favor of video streaming options, and those who never subscribed to cable at all.

The new Amazon service gives video producers many ways to get paid. They can sell or rent their programs on Amazon, or make videos available to all Amazon customers (not just Prime subscribers) in an advertising-supported format. Another option: Provide videos to Amazon Prime members and get royalty payments based on how many times the content is streamed, or as part of an add-on subscription.

Amazon will also distribute $1 million a month to the makers of the 100 most popular programs viewed by Prime members each month.
Partners include Conde Nast Entertainment, HowStuffWorks, Samuel Goldwyn Films and Pro Guitar Lessons. Content from these providers can be found now on Amazon Video. HowStuffWorks posts videos regularly on YouTube and has more than 450,000 people who follow its channel on the video site.

Amazon is also dueling with YouTube over video-game streaming. Amazon purchased the live-streaming site Twitch for about $1 billion in 2014. Twitch focuses on live broadcasts, letting viewers interact with broadcasters in chat rooms in real time. YouTube offers on-demand access to uploaded videos. The two platforms are converging, with YouTube adding live functions and Twitch letting broadcasters upload previous episodes to their channels.