Economy: Why Capitalism Wins - What We Could Learn From Apple and Samsung

Recently I was surprised by an article in the "Economist", at least at first look (economist.com). The magazine reported that Samsung and Apple are working together and that the Asian company is an important supplier for Apple´s iPhone.

This cooperation is very remarkable because they are fierce competitors. They are fighting over the markets for smartphones and tablet computers (iPads), even in the courts. Sales of Samsung`s Galaxy 10.1 tablet,  a rival to Apple`s iPad, were recently banned by a German court because of patent questions.

According to the Economist, Samsung produces "the flash memory that holds the phone's apps, music and operating software; the working memory, or DRAM; and the applications processor that makes the whole thing work. Together these account for 26% of the component cost of an iPhone".

This cooperation exists because both are benefitting from it, competitors or not. The reason is the profit motive, the quintessence of capitalism. Apple chooses Samsung as a provider because the Asian company is cheaper & better than the other producers. Samsung works for Apple because they gain an additional market. This allows them to produce more flash memories & processors which reduces their average costs. The cooperation is also good for the consumers because they get better & cheaper iPhones & processors.

This cooperation explains why capitalism wins. The profit motive causes more productivity & efficiency. The result are cheaper and better products. Therefore in the long run capitalism is a machine which creates wealth for everyone.

Economy: Why Europe is Much Weaker Than the Rest Of The World

The European economies are in a mess. Growth in Germany, the UK, France and other countries is faltering at best. The media explain the European weakness is due to the high debts of the governments, shrinking public expenditures (aka austerity policies) and distrust of the banks. Maybe so.

But there is another reason: The price of oil. The European oil (known as Brent) is significantly more expensive than the US oil (called WTI or just "crude"). Since April the US oil price dropped from $114 into the $80`s, while the European oil prices stayed way above $100. Today Brent costs around $110, around 30% more than WTI. OPEC still calculates an oil price above $100, ignoring the lowered US oil-market (bloomberg.com ).

The media blame this price difference on the war in Libya. They tell us that Europe strongly depends upon oil deliveries from this Northern African country. Oil was scarce in Europe because the revolution in Libya stopped the production of oil there. Now as the war there comes to an end, the market is ignoring the peace process. Many pundits claim that it will take a long time before the Libyan oil production recovers, in spite of reports about a swift restart of the Libyan oil deliveries.

Anyway. The fact that European oil is much more expensive than the US oil explains - at least partially - why in Europe consumer demand & manufacturing are significantly weaker than in the rest of the world. Recently, we received news that retail revenues in the UK were shrinking again, partially because of high energy prices. Therefore the expensive Brent is slowing the European economy, adding to the woes of debts, austerity and general pessimism.

Economy: Who Is the Loser From A Buffett Tax?

The economics news of this weekend is this message: U.S. President Obama is proposing a special tax rate for millionaires. The politician follows advice from Warren Buffet, who recently proposed a special tax for billionaires like himself, report the media. Therefore they call this proposal the Buffet Tax.

The plan of a Buffet Tax raises some questions. Warren Buffett is a praised philanthropist who donates a lot of his fortune to charitable organizations. Other billionaires like Bill Gates do the same.  If Buffett & Co. have to give more money to the government, they have less money to spend for charities. That´s simple arithmetic.

"The world’s second richest man continues to make his fortune in investment and turn it to philanthropy in the grand tradition of Carnegie and Rockefeller", writes this website ( looktothestars.org ). There you can find a lot of charities which benefit from Buffet`s generosity.

All these organizations could loose donations, if a Buffet Tax will be realized, just because the donor  has less money to spend. This could also happen to organizations which are financed by other billionaires, like the Bill and Melinda Gates Foundations, which was founded by the Microsoft founder and his wife. This organization is supporting health and education around the world.

The history of the U.S. has been shaped by donations from billionaires like Carnegie, Guggenheim and Rockefeller. A lot of museums, libraries an other public institutions are financed by donations from billionaires. Could a Buffet Tax endanger them? And: Does the government make better use of the money than these institutions? Does the government spend money more wisely than the Bill and Melinda Gates Foundations or the Rockefeller Foundation?

I doubt it. Governments don´t have a good track record in spending money. Otherwise there wouldn`t be such mess  today.

Investing: A Post 9/11 Portfolio II

2. Intelligent Defense

The 9/11 trauma also created a huge demand for defense, meaning military devices to be used abroad and at home. But a lot of these perspectives are already priced in the values of the stocks. And the defense industry depends heavily on politics and could suffer when the government is forced to cut expenses further.

However, there could be some specialities which prosper even in a shrinking market. I`m thinking about companies which produce "intelligent" products, for example devices "which strike the bad guy without endangering our people". These companies could benefit from the modernization and automation in the military.

This company looks interesting: AeroVironment (Nasdaq: AVAV finance.yahoo. ). They design, develop, produce and support unmanned aircraft sytems, so called drones (also called remotely piloted aircrafts). These devices were used for example in strikes against suspected al-Qaeda terrorists. Orders for their drone aircraft might even grow when the demand for traditional military craft declines.

AeroVironment has fascinating products in their research pipeline. For example the first robotic hummingbird, that is a very small technical device, equipped with a camera, which can almost fly like a real humming bird.

But AeroVironment isn`t a pure play. This high-tech company also produces things like charging systems for electric vehicles. And there are other companies, like Lockheed Martin, which also offers drones.

There is another company which caught my eyes: iRobot (Nasdaq: IRBT finance.yahoo.com). They lend their name from a science fiction book by Isaac Asimov. The company produces cybernetic systems (robots) for 2 different markets: households (devices like the self-steered vacuum cleaners, called the "Roomba Vacuum Cleaner") and military.

While the household section is slowly accepted by consumers (these robots are still expensive), the army sector seems to prosper. iRobot produces so called "Small Unmanned Ground Vehicles". These are robotic machines, which detect and deactivate bombs and land minds. It`s a no-brainer that the U.S. army orders more & more of these life-saving devices, especially when the robots become more advanced because of the rapid technical progress. But in this market are also a lot of competitors, like Northrop Grumman Corp., and the british Cobham PLC,  who want a slice of the growing cake.

Conclusion: Even investments in security aren`t secure. No investment and no stock is without risk. The stock price depends not just on the economic development, which is fragile in the moment, the management must always react to competitors, who are trying to steal their market. Even in a growing market the danger exists that the management fails.

It may be helpful, even in the stock market, to be a bit paranoid.
Take care.

Investing: A Post 9/11 Portfolio I

Many things have changed since 9/11, many changes were caused by this traumatic event. The world got more suspicious and more paranoid. Being an economist & investor it interests me how the market reacts on the growing paranoia.

There is an obvious trend: People and the governments, who depend upon their votes, want more security, whatever that means. Almost everywhere we see more controls and more surveillance. Airports especially, and other public places are more and more controlled by more or less sophisticated measures. Big Brother is growing.

1. Dividends from Big Brother?

The high vulnerabiity for airplanes, airports and other public devices and places caused a new and  expanding industry which deals with these risks. Visitors to the USA are now familiar with the eye- and finger-scanners that US Homeland Security uses for immigration control. One leading manufacturer is L-3 Communications Holdings (NYSE: LLL  finance.yahoo). This big technology conglomerate (with market capitalization around $7 billion) also offers full-body scanners which are already in place at Amsterdam´s Schiphol Airport.

Although LLL has a lot of market opportunities, the company relies upon US defense spending. In the last 2 years the stock performed weaker than the U.S. stock market (S&P 500) and has lost around 30% since July! Maybe the risk, that U.S. government expense cuts to control the disturbing budget deficit, put the stock under pressure. Speculations about the US deficit and US military expenses could therefore generate huge fluctuations for this stock price!  Otherwise the sentiment for LLL  might rekindle if there is more demand for security products.

Investors should also consider, that LLL is not alone, and has to deal with a lot of (hungry) competitors. One of them is OSI Systems (Nasdaq: OSIS  finance.yahoo.com) which also produces X-Ray machines for security checks. Their products "are used to inspect baggage, cargo, vehicles, and other objects for weapons, explosives, drugs, and other contraband, as well as to screen people" reports Yahoo Finance. But they are much smaller  (market capitalization is just $ 600 million) than LLL and therefore they are riskier. Like LLL their stock suffered a recent setback, probably because of U.S. budget problems.

Their common rival American Science and Engineering (Nasdaq: ASEI  finance.yahoo.com) "engages in the development, manufacture, marketing, and sale of X-ray inspection systems for detection and security screening solutions in the United States and internationally",  per Yahoo Finance. Some of their products can check for explosives under clothes. "Its products search cargo at ports, airports and train centers across the country. The company has products to screen cars and trucks as well human beings", reports TheStreet.com. The stock (market capitalization about $ 600 million) was also recently weak.

Another competitor is FLIR Systems (Nasdaq: FLIR  finance.yahoo.com) with a market capitalization of around $4 billion. They produce authentication technologies. Such devices rely on sensor cameras, key cards and scanners to collect and verify data. They are focused "on thermal imaging systems that enable the watchers to see at night. In addition, the company's detection division helps design instruments to detect biological, chemical, nuclear and radiological threats to homeland security" writes one expert on TheStreet.com. Guess what? Their stock performance was weak too.

One another is I.D.  Systems (NYSE: IDSY  finance.yahoo.com). They offer face recognition systems and software which should protect against counterfeit IDs, created from stolen identities. The stock performed much better than LLL and the stock market and gained 60% since begin of the year. But the company is very small (market capitalization just around $ 57 million). Therefore the stock is very risky & speculative.

Investors who want to play the Chinese stock market, which is even more risky than Wall Street, can try their luck with China Security & Surveillance Technology, Inc. The stock is traded on the New York Stock Exchange with the symbol CSR  ( finance.yahoo.com). They have at least one advantage: They don`t depend on the clammy U.S. budget.

The company "manufactures, distributes, and installs security and surveillance products in the People’s Republic of China" writes Seeking Alpha. They produce "digital cameras; intelligent high-speed dome cameras; intelligent control system software platforms; perimeter security alarm systems; monitors; and radio frequency identification terminals and data collectors" reports Yahoo Finance.

Internet: The City of the Future?

The online edition of the New York Times has a new article which fascinates me: It`s called "One Path to Better Jobs: More Density in Cities" (nytimes.com). Ryant Avent, an economics correspondent for The Economist, writes about the economical advantages of the city. The author describes that the density in big cities like New York reduces travel time and considerably lowers costs of commuting. Both should bring more jobs, the author claims.

I agree. But I guess, we can now also get many advantages from a big city when we surf the Internet. Maybe the Internet is the city of the future?

Like the big city, the Internet creates density: This post is written from Bonn, a sleepy town in Germany. It could be read in New York City, Tokyo or elsewhere in the world and competes with millions of other websites which are just one click away. You could easily compare the legion of online retailers, suppliers of content or other online offers worldwide by using search machines or networks like Facebook.

Using the Internet spares you a lot of travel costs, the way a super-dense city does. You don´t have to go to an travel agency to buy a flight anymore, and from your home you can buy kitchen equipment, shoes and lots of other things, even download books & movies, games and music. It takes just seconds.

Avent praises cities as " incubators and transmitters of ideas, and, correspondingly, engines of economic growth". This also fits the Internet. You don`t have to go to an University to study, you don`t need to visit a  library physically, now more & more schools come to you at home. You can exchange any idea worldwide by using Google, Twitter, Facebook and other websites.

Like the big city, the Internet creates a larger market "which facilitates competition, which again boosts quality and reduces prices". A producer of sophisticated coffee machines can find customers in the whole world which enables him to sell very specialized devices. In a small city without the Internet there wouldn`t be enough buyers for it.

Like the city, the Internet "reduces the risks associated with specialization and therefore encourages more of it. By allowing workers to focus on tasks at which they’re relatively better at than others, specialization helps drive economic growth" . As I wrote recently the Internet is part of the technical progress which has enhanced the wealth of the world since centuries(drivebycuriosity)

Often cities and the Internet work hand in hand: A restaurant could find more customers by advertising its specialties on the web or sending meals to customers homes, cinemas can lure visitors by showing trailers, rock venues attract customers by introducing their performance bands (with the little help of Facebook, Youtube and other sites).

It`s true, the Internet will never be a complete substitute for a city, but it could take over a part of their function and develop a new kind of virtual city.

Traveling: Williamsburg Bridge, New York

 

(Drivebycuriosity) - New York City is a real beauty. She owes part of her charm to the water. Manhattan and other parts of the metropolis are islands, separated by channels. You will find a lot of bridges there, which are not just masterpieces of engineering, they also are aesthetic structures.

Almost everyone knows the majestic Brooklyn Bridge, at least from movies & photos. I have another favorite: The Williamsburg Bridge (WB), which was built from 1896 until 1903 (wikipedia). This construction straddles the East River, which is a natural channel, connecting the Lower East Side in Manhattan with Williamsburg, a neighborhood of Brooklyn. 

Both areas are lively places that have experienced a lot gentrification in the last few years. In my eyes Williamsburg is the mirror image of the Lower East Side. Both areas offer interesting architecture, funny graffiti and lots of cool restaurants, pubs & bars. At both places you can meet a lot of cool people.

Many commuters use this bridge by car or subway (J, M & Z train) but there also are separate tracks for pedestrians & bicyclists. It looks like lots of New Yorkers use these tracks as a kind of sports track. You could see numerous runners and sporty bicyclists doing their sweaty workout on the Williamsburg Bridge. 

Just walking over the bridge is also a lot of fun. You will be rewarded with impressive views of the East River, the skylines of Manhattan & Brooklyn and the boats going up & down the waterway.

The bridge herself has a lot to show. The 100 plus years old construction is a beautiful document of historical engineering. I admire the almost filigree looking elements of this huge structure. Some segments show awesome geometric figures and could be exhibition parts in a museum for modern art. 

Walking the bridge I also enjoy the library of graffiti on the pedestrian & bicycle tracks. Some are colorful murals, others are just like Egyptian hieroglyphs. It seems a lot of the New York graffiti artists deliver their symbols and messages on this bridge.

Walking the Williamsburg Bridge is both: A multimedia event and healthy way to spend your time. Enjoy!

Traveling: You never know II

Traveling is full of surprises. In July I reported about an unplanned night in Amsterdam (travelling-you-never-know ). Last weekend my trip home from New York brought another surprise. I had booked a flight with Delta/KLM from JFK airport to Cologne/Germany with a transfer at Amsterdam Schiphol, starting on Sunday August 28th at 6.00 pm.

But last weekend the JFK Airport was closed and all flights were cancelled because Hurricane Irene was approaching. My patient and crafty girlfriend got me another flight connection after waiting 40 minutes on the telephone line. Delta booked me on a flight starting at JFK Airport on Tuesday 6pm to Istanbul where I should get a ticket to Cologne via Turkish Airlines.

It functioned. The Delta flight from NYC to the Turkish metropolis was very pleasant because the airline had upgraded my flight to their business elite class with spacious seats and delicious food. I arrived Wednesday around 11.20 am local time at Istanbul Airport Ataturk, after a one hour delay. But I had still enough time to get my boarding pass at the desk of Turkish Airlines and to catch the flight to Cologne (scheduled for 12.25 pm) which was already boarding.

Economy: Recession? What Recession?

In the recent days there was a lot of fuzz about an allegedly new recession in the U.S.. Some pundits claimed that the stock market turmoil in August made the situation even worse. The falling stock prices could scare the consumers and therefore reduce the consumer spending in the U.S.

Today we got the first hard data from the consumer front. These facts show that these predictions were wrong. The U.S. consumers didn´t react on the stock market and stayed in spending mode.

Today a lot of retailers reported encouraging sales numbers for August. Many merchants showed a respectable back-to-school shopping season, reported Yahoo finance (finance.yahoo.com ). Overall, revenue in August was up 4.6% at stores open at least a year among 26 retailers -- a key industry measure -- according to the International Council of Shopping Centers.

Luxury chains eased worries that wealthy shoppers would pull back because of the wild swings in the stock market in August, writes Yahoo Finance. The fashion chain Nordstrom Inc., for instance, had a 6.7% gain, higher than the 4.8% increase analysts had expected.

Among the biggest gainers, membership warehouse club Costco Wholesale Corp.  and its smaller rival BJ’s Wholesale Club Inc. posted sales gains of 11% and 11.5% each ()www.marketwatch.com.

Victoria’s Secret parent Limited Brands Inc.  also posted a better-than-expected 11% increase. Department store operator Macy’s Inc. sales rose 5%, beating estimates. It said sales would have been higher by 1.5 percentage points without the negative impact of tropical storm Irene, which caused many shops to close on last weekend.