Inflation or Higher Rates

When considering inflation, you can't just look at the figures in front of your face. You have to consider inflation expectations, and the Fed realizes this and moves accordingly. Greenspan has done a great job of keeping core inflation relatively low. Bernanke will come in and continue with his "inflation targeting" policy. My report on Ben S. Bernanke and inflation targeting should be available on RW Wentworth website in the coming weeks.

The reason why core PCE has been relatively low is a result of the Fed’s continued bias towards increasing fed funds rate and also from cheap goods coming from foreign countries. On the other hand, some companies have been biting the bullet because of high energy prices. They’re probably having a tough time raising prices on their products due to competition. So, they turn to operating efficiencies, but seriously, how much more do you think technology will be their answer. These companies will probably come together to do something to raise prices.

As mentioned, one thing that has kept prices down is the cheap goods from abroad - like China. Domestic producer concerns are probably why the senators have been so aggressive in pushing China to appreciate their currency. Last resort will be a tariff on these goods, which would directly increase prices of the items in the PCE and other inflationary measures.

Sure inflation isn’t here yet, but there are pressures out there. The FOMC will continue to raise rates to keep inflation stable. So it’s like take your pick: higher inflation or higher short term rates.

China's Financial Structure

When people think about international investing, they cannot ignore China. The country represents a huge market, but some of its structures still remain questionable. Some major reforms are needed before people begin to trust their money in a socialist run economy. Today's post on Asia Business Intelligence, contributed by Mr. Howard H. Jiang, explains in detail the financial structure in China. Mr. Jiang thoroughly outlines the steps for foreign financial firms to enter this potentially profitable yet risky market. I highly recommend reading this piece if you consider doing business in China.

The $3 Trillion Stamp

My report on the Privatization of Japan's PSS is up on RW Wentworth's website. Also up on the site is my summary of the recent Fed Minutes.

101 Uses for an iPod

Steve Jobs wasn't kidding when he said that Apple will create markets by teaching people how to use their iPods. I love catching companies work themselves into movies or TV shows. The best are the quick subliminal type of screenshots. But going back to Apple, they seemed to have made some deals with TV show producers.

I was channel surfing and saw that Apple’s iPod had made its way into some scripts. On the new show E Rings, there were a couple of marines trapped in a small building. I believe they were surrounded by enemies and were in desperation for rescue, but they had no obvious means of communication. Wait… good thing one of them had an iPod. They were able to rig the gadget and somehow connect it to a telephone wire or something. They then applied the podcast application to transmit Morse code.

To those that haven’t familiarized themselves with podcasting, it’s a method of publishing audio and video signals over the Internet. Think of it as the audio and video versions of blogs.

It’s undeniable that we’ve entered a new era, and new markets will continue to be created. The digital world has been changing our society. I’ve heard that newspaper companies have been hurting during this transition. Internet sources such as Yahoo or even blogs can be blamed for the hurting newspaper industry. With the rising trend and popularity of podcasting and portable digital devices like the iPod, will radio and TV suffer a similar pain that newspapers currently feel?

Do They Really Have a Case Against Violent Video Games?

I'm not much of a fan of Michael Moore. I find his bombarding interview tactics very rude and his manipulative editting methods very deceiving. It's funny how he accuses large corporations and greed for the problems in our society. Yet he uses his tactics to sell his story and make tons of money. But I'm not writing now to point out his hypocritical point of view. Instead, I agree with one of his points in his "Bowling for Columbine."

Media is quick to blame so many things on gun violence in our society. We have become so accustomed to play the blame game, and we see this everywhere. People probably fear taking on responsibilities anymore. I used to think taking blame for others was honorable... not anymore. It's flat out stupid to do so in our society. Especially while we continue to play this blame game.

I found one interesting point Michael Moore pointed out, and that was about the effects of video games on gun related deaths. I found it funny how Japan creates and plays most of these "violent" games, yet the country only sees 39 gun related deaths per year, according to Moore's data. This is opposed to over 11,000 gun related deaths yearly in the U.S.

Parents need to take some responsibilities and stop playing this blame game. Let these kids play their video games... if anything, it probably keeps them away from real-life problems. I don't really condone video games, but I know video games aren't to blame for the real-life violence. Kids will fulfill their appetites one way or another. If we take away violent video games, then we need to eliminate movies, news, history, etc. Come on, this is not realistic, and we will never live in a perfect society. Stop blaming others for your misguided mistakes that come from the lack of fufilling your own responsibilities.

CPI - As in Corruption Perceptions Index (Not Consumer Price Index)

In this time of globalization, international investing has become a familiar term. But where do you invest? I'm not going to lie and say that it's an easy task. Perhaps it's best that you consult your investment advisor if you plan to diversify globally. Or maybe you prefer managing your own money and taking your own risks. You could invest in country indexed exchange traded funds. But where do you start? That depends on your risk tolerance level and how much you value safety. For starters, you may want to look at the Corruption Perceptions Index, which is an index of surveys and studies conducted by Transparency International of Berlin, Germany. This CPI ranks countries according to corruption levels (1 to 10 with 10 being least corrupt). The following diagram is one of several sources issued by the organization.



Source: Transparency International

It's a Snow Storm

U.S. Treasury Secretary had positive comments on China's reform after meeting with China's leaders this weekend. He talked about how "real" this reform seems. Mr. Snow probably came out and positively spoke about this because Good Ol' Mr. Chuck Schumer is probably barking about China's slow progress to revalue the yuan. Schumer had previously promoted his Schumer-Graham bill, which would raise tariffs on Chinese imports by 27.5%!!! The senators are, for lack of a better word, pissed at China. Obviously Snow and Greenspan oppose this bill because if this bill passed, Wal-Mart shoppers will suffer, inflation would immediately rise, and China who has been a big buyer of Treasuries will retaliate. I wrote about Schumer's bill several months ago for RW Wentworth. There's alot more to this story than Snow just coming out to say that this reform is happening. Another problem that congress finds upsetting is the lack of intellectual property laws in China. There's really too much going on for me to comment here. You can read my article on the following link.

Heated Relations Between U.S. and China

Rogue Trading

Refco has made some negative headlines lately, and its public listings status remains in jeopardy. Many corporate frauds have come out in the recent years and in various forms. My best guess is that Refco's thing is probably more like that of the Barings Brothers back in the mid 90s. I'm not sure, but Phil Bennett seems to have pulled a Nick Leeson who fraudulently hid huge losses when he made some poor speculation after another. We all make mistakes, but Leeson and Bennett pulled some incredibly ballsy blunders. Some of you may know what happened to Barings Brothers. It closed its doors, and ING bought it out. I heard ING got rid of the Barings name and assets earlier this year. Perhaps Refco will face a similar fate.

Koizumi Finally Did It

What has bunch of letters and over $3 TRILLION? Give up?... it's Japan's Postal Savings System, which was state-owned until now. The bill to privatize the PSS finally passed Friday (today) by a vote of 134 to 100. This has been a long fought battle for Japan's Prime Minister Junichiro Koizumi, but he did it. The privatization process will commence in 2007 and expected to be completed by 2017. We at RW Wentworth have been following this long-awaited battle and believe this will have some implications to certain U.S. assets. My report on this matter should be freely available on RWW's website in the coming weeks.

We Got Game

Many conservative and mature individuals may view video games as an occasional stress reliever. However, many gaming participants under their mid 30’s consider interactive games as a major part of life. In this regard, this phenomenon is comparable to that of rock music to the baby boomers. Instead of Led Zeppelin or the Eagles, the makers of Halo, Grand Theft Auto, and the likes have cultivated loyal fans lining up to purchase the next sequels and hits.

Video gaming has impacted our culture. My observations and also those of others show that gaming participants (gamers) range widely in age and game purchasing patterns. Apparently, games have changed exponentially since the 1950’s when Ralph Baer had the idea that games could be played on TV. Only few would have seen what was about to be created decades after playing Pong and Atari for the first time. Generation X and those following have been witnessing the transition in the video gaming industry.

Industry participants have come and gone. Some familiar names such as Nintendo have survived by adapting to changing technologies and demographics. Conglomerates like Sony, Vivendi Universal and Microsoft have entered the playing field and possess great influence in changing environments. While some company divisions focus primarily on game consoles, other companies such as Electronic Arts have sustained loyal gamers for their popular gaming programs. We have seen large conglomerates enter the market as others have built their companies supported by the growing video gaming popularity.

I do not condone allotting time spent on video games to pass the time, however we cannot ignore that the gaming phenomenon has evolved into a healthy industry. Not every company involved in the industry will capitalize from growing industry sales trend. On the flip side, those that develop and apply viable business models with steady revenues will thrive from rising numbers of gamers and sales.

Many now realize that, like the radio and television, the Internet is simply a medium that we use on a daily basis. So, where do video games fit in the picture? Perhaps a brief historic overview will give us a hint of where interactive gaming is headed.

As our Executive Vice President Tom Au mentions in his book A Modern Approach to Graham & Dodd Investing, the Internet could be viewed as the radio during the Roaring Twenties. The number of radio broadcasting stations increased from 3 in 1920 to 500 in just four years. In the fifties and sixties, television became the new means of communication. During both of these eras, “experts” pronounced to listeners and viewers new and efficient ways of conducting business. These overly optimistic views spread through the public and fueled investor confidence in the stock markets. One cannot ignore the similarities of these two eras and the recent Internet era.

Of course, we all know that dismal economic periods followed these booming eras. Keep in mind what was going on with the music industry during the seventies. Rock & Roll began to have sub-genres, and rock music became a big business. One could make an argument that people in the 1970’s turned to music to escape reality (period of "stagflation” and oil shocks), just as some people currently do when they engage in virtual interactive reality. Perhaps the video gaming industry will experience a similar success that rock music had during the seventies.

The Internet represents a new playground for gamers and allows industry participants to profit by adjusting business models. Interactive gaming has gone beyond the console and cartridge or CD model. Industry participants have become creative in distributing their games to the consumer and generating additional and recurring revenue. Previously, these interactive software producers were vulnerable to piracy and illegal downloading.

Stolen intellectual property remains a large problem for many policymakers and business decision makers. It’s not just video games, but all software-related products and that of other entertainment industry participants. Protecting innovators and patent-holders is key to sustaining a productive future. Who in the right mind would be willing to expense the hefty R&D costs (estimated to have topped $10 million to develop a new hit game), if these producers figure that their end product will be stolen and sold by those who exploit piracy practices? This problem has been affecting many companies, particularly those in the entertainment and software industries. Some companies have addressed this problem through various methods.

Some independent gaming producers have turned to offering free downloads. This represents a step towards making these vendors who copy intellectual property obsolete. However, the intellectual property holder needs to generate revenue through other means besides from the end-product sale to the consumer. Some game makers share profits from host sites that generate revenue from advertisements. As we have seen after the Internet bust, the advertisement-only model does not generate sufficient revenue stream for companies to sustain positive profits (excluding Google).

However, there may be some light for those who have applied the subscription-based model. Some gaming industry participants charge retail prices of $20 to $50 for their software. Additionally, some have been successful in building loyal gamers who willingly pay a subscription to participate online. Popular PC games charge approximately $15 per month or $45 per quarter. Microsoft also offers a subscription service for its Xbox console and charges $5.99 per month or $49.99 annually.

Subscription-based models may point to the answer to piracy that has been plaguing the entertainment and software industries. Companies who become successful on implementing this subscription or lease-like strategy will benefit from the growing number of Internet users and broadband connections. Of course this also depends on how well these companies monitor rogue gamers and gather subscription-paying gamers. Organizations have arranged tournaments with attractive prizes for winners to increase popularity of selected games. Gaming continues to evolve as serious gamers make a living as professional gamers. The video gaming world has come a long way, just as baseball has evolved since the Knickerbocker days (the time when first published rules of modern day baseball were documented in 1845).

Let's Make a Pact

Microsoft seems to have joined the recent trend of large companies making pacts with each other. MSN has made a deal with Yahoo’s messenger to take on AOL’s dominance in the instant messenger market. I've been using and following instant messengers and their developments for awhile. Here's what I've discovered:

-AIM is favored by younger users, but its popularity seems to be on the decline.

-MSN has found itself useful in the corporate world. I know for a fact that employees working for large conglomerates, who need to communicate with their counterparts in foreign countries, fully utilize MSN's instant messenger. This is a huge cost savings method for those who conduct business outside the country... think about those in the U.S. who need to communicate with the manufacturing department (most of which have gone overseas). Now think about what the phone bill would cost without instant messengers. Here's probably what's going on... make corporate users rely on MSN IM product so they can support Microsoft's continued dominance/monopoly. If you think about it, MSN's instant messenger is not really free... you'll pay for it one way or another.

-Yahoo's messenger seems to be slowly taking away MSN's users. Which leads me to believe why MSN wants to do this deal with Yahoo. They probably also realized that Trillian poses a threat.

Let's face it, IMing isn't just for kids anymore. You really don't want to get left behind in this communication-driven world. Sensitive data flow through these means, and IM developers will need to prove their security protection abilities against hackers. I will also note that I have seen the webcam function being used more often. Video conferencing is right around the corner. Who will take that market? AIM, MSN or perhaps Skype...

Video On The Go

Apple’s new iPod will offer video capabilities, and Apple and Disney have shook hands to deliver “Desperate House Wives” and “Lost” to the new iPod. Steve Jobs mentioned that there currently is not a market for portable video devices, and that Apple will need to create one. They also cover their claims by reassuring people that their main function still focuses on mp3s.

I don't know about you, but I remember those tiny portable television devices in the 80's; but the only place I saw them were at baseball games, where fans would bring them to anxiously see if they might be caught on TV for a slight second. Yeah... that fad died out quicker then SUV's popularity in current gas price trends. Going back to portable video players, Apple isn't the first to do this. There are Samsung's Yepp players, among others, that already exist in the market. I've noticed that kids favor this product, but they get this product mainly for bragging rights or bordom remedy. I'm sure there will be other uses for portable video functions, but I guess Apple will have to create this market... time will tell.

NHL is Back

NHL has commenced its season after a year-long absence that was caused by contract disputes between the players and owners. This was something that the league did not need, given the lack of ice hockey’s popularity among U.S. fans. It’s a well-known fact that ice hockey is the dominant sport in colder regions such as Canada and Russia. However, many Americans would love hockey if they learned the true essence of hockey. Hockey is not a boxing match on ice. Instead, it’s a finesse game played at high speeds.

TV viewers have complained about the difficulty of following the small puck on their TV sets. HDTV will be the answer to that problem. I am very familiar with television technology because I grew up being a child of a Samsung engineer. I will tell you that people will be able to follow the game much easier because of the clear and high resolution pictures produced by HDTV sets.

The kid in me will always love playing ice hockey; but when I think of sports nowadays, I am beginning to see more of the business aspects of the sports industry. Of the four major sports in the U.S., NHL will probably most benefit from dropping HDTV prices (particularly those that use DLP technology - a Texas Instrument proprietary product). NHL must resolve many issues to regain momentum. On the bright side, the league started the long awaited season opener with a bang, nearly selling out across the arenas and with a record attendee level.

Demand or Supply

The oil crises of the 70’s and 80’s had disrupted economies as political conflicts in the Middle-East created supply shortages. This led to a recession in the U.S., but the recent oil situation differs to that of the 70’s and 80’s. Economists credit the lofty oil prices to increasing demand for oil consumption. A demand driven event seems more maintainable then oil price concerns caused by a supply shock. This is because expanding economies support demand driven oil price hikes.

However, our economy may feel the pain of Katrina and Rita’s one-two punch. BP estimates these two devastating storms will cost the company approximately $700 million. This story can be obtained in this link. Increased demand may have helped BP achieve record first-half profits, but one should wonder how the recent supply issues will impact the economy as a whole. Greenspan has mentioned how our nimble and flexible economy has been able to absorb some negative influences. Then again, how many bullets do you think we can dodge?