Friday, March 27, 2009

Electric Edsel

Have any big successful products emerged from government programs? None that I can think of. It's not likely Steve Jobs and Steve Wosniak at Apple received help from taxpayers to build their first computers. More colorfully and geeky entrepreneur-like -- according to the Apple myth -- Wosniak had been making money building and selling little devices that fooled telephone company computers into giving him -- and his customers -- long-distance phone calls for free.

Microsoft? Federal funding? No. Then there's the Internet. The Net did get its start in a government setting. But its transition to public use was completed without a dime of taxpayers' money. Frankly, the Net is an example of the government's inability to see the commercial value of something it controls. When it comes to spotting opportunity, the governments suffers from a severe blindspot.

The following NY Times article is interesting and disturbing. When you read Electric-Car articles, you get a feeling that everything about an electric car has sprung from a new technology freshly innovated for the electric vehicle. There's a sense that electric-car companies are truly re-inventing the wheel.

In fact, there's only one aspect to these vehicles that is tied to technical advancements -- the battery. Everything else is, as they say, "off the shelf."

Unfortunately, the reporter claims the car will travel 300 miles on a single battery charge and the batteries can be recharged in 45 minutes. Both claims seem totally bogus.

Currently there's no battery system that will move an electric vehicle that far without recharging. The claim is probably based on theoretical projections including motion at slow speed over flat terrain with the stereo, windshield wipers, headlights, air conditioner or heater and interior lights OFF.

Tesla's claim of recharging the batteries in 45 minutes also needs a lot of explanation. If the batteries can receive a charge at that rate -- that's like drinking water from a fire hose -- then the recharger is unsuitable for use at home.

The reporter ignores their revolutionary nature and rolls right along, mentioning that the car factory has not been built yet. No mention of whether members of the United Auto Workers union will staff the assembly line. Probably not.

Tesla designers also take a cavalier attitude toward kids when assigning their seating in this sedan. They ride in the trunk.

Meanwhile, the most obvious conclusion derived from this article concerns the fact that the Venture Capital firms that had been backing Tesla want out. They want to recover their investment by tapping taxpayers. They have completed their analysis and they know these electric cars -- at $50,000 -- are the new Edsels.

March 27, 2009

An All-Electric Sedan, Awaiting Federal Aid

LOS ANGELES — Tesla Motors on Thursday unveiled its Model S, an all-electric sedan it hails as the beginning of a generation of fossil-fuel-free cars and a profitable company.

But before that happens, the company must find the money to build the vehicle. Tesla is pinning its hopes on Washington and a $450 million government loan. The company expects to hear from the Energy Department this year.

“We are highly confident that Tesla will be selected, and it will occur this year,” said Elon Musk, the company’s chief executive, after displaying the car to customers, analysts and reporters in a gigantic hangar set up to look like a lounge at SpaceX, Mr. Musk’s rocket factory. His other venture is to build a spacecraft.

Tesla, which was founded in 2003, was heralded as Silicon Valley’s solution to the nation’s energy problem. If a struggling Detroit could not make an electric vehicle, then a Silicon Valley start-up would.

Today, Tesla is facing the same plight as many green-energy start-ups. These huge, capital-intensive projects have been paralyzed by the credit crisis, and their survival depends on federal loans that have only just started to flow.

“Silicon Valley has mocked the government for decades and is now completely dependent on it,” said Michael Kanellos, a senior analyst at Greentech Media. “They can’t get a project off the ground without these loans.”

The Model S is Tesla’s second car. Its first is the $109,000 Roadster sports car. An elite group of 300 own the car and the waiting list is 1,000 names long.

The Model S, which Tesla says would be the first mass-manufactured all-electric car, will cost $57,400, or $49,900 after tax credits. Mr. Musk said that, when gas savings are taken into account, buying a Model S will be comparable to buying a $35,000 Ford sedan. “Would you rather have this car or a Ford Taurus?” he asked, pointing to the sporty silver prototype.

The car will travel 300 miles on one battery charge, he said, and the battery can be recharged in 45 minutes. The car is big enough to carry five adults and fit two children in rear-facing seats in the trunk. There is a touch screen in the console connected to the Internet and storage under the hood.

The Model S is supposed to be ready in mid-2011, but that will depend on securing the government loan and finding a site for the auto plant. Mr. Musk said Thursday that Tesla was close to signing a deal to build a plant in Southern California.

Tesla has spent $50 million developing the Model S and needs $250 million to $300 million more, he said. Once Tesla finds a site and gets the money, it will take 24 to 30 months to begin production, he said.

Tesla has raised $186 million from investors, $55 million of it from Mr. Musk, who made his fortune when PayPal, which he helped found, was sold to eBay. Other investors include Google’s billionaire co-founders, Larry Page and Sergey Brin, and Draper Fisher Jurvetson, the venture capital firm.

Mr. Musk has said that he underestimated the money, time and effort needed to build a car company.

Tesla hopes to receive one of two government loans it is seeking. One, a $250 million loan, would come from money Congress authorized in 2005 for clean energy projects. The first loan guarantee under the program was made to solar company Solyndra last week.

The second loan Tesla is seeking, $450 million, would come from $25 billion Congress authorized in 2007 for electric vehicle technologies.

The Energy Department has not granted any loans under that program and has been criticized for moving slowly. But the energy secretary, Steven Chu, has said he plans to distribute some of the money in coming weeks.

Tesla is also financing the development of the Model S with deposits from people on the waiting list, who can pay $40,000 to reserve one of the first 2,000 cars or $5,000 for later cars.
For those who are worried about what will happen to their deposits if the car is never produced, since the money will be spent on development and not held in escrow, Mr. Musk said: “The worst-case scenario is they would lose their money. They are at risk.”

Still, he said: “This car will be manufactured, it will come to market. You should have zero doubt about that.”

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Monday, March 23, 2009

The Geithner Principle

There are days when the government cannot get it right. Then there are days that make those days look like golden moments.

Last night President Obama spoke to the nation on CBS's "60 Minutes". He made the most chilling statement of his presidency. His scariest words in a presidency that has made extensive use of scare tactics and fear. President Obama said:

"Treasury Secretary Geithner is as sharp and as skilled a public servant as we have."

If Obama is right, we're in deep trouble. Maybe too deep.

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Friday, March 20, 2009

Huge Hype, Small Profits

If the experience of India's Tata auto-maker is a guide, is there hope for GM, Ford and Chrysler when it comes to building small cars? Meanwhile, if the goal of building small inexpensive cars is to start new car buyers on the path toward buying bigger, more profitable cars, is the marketing of small cars really consistent with the goals of environmentalists? There are more than 2.5 billion people in India and China and they would rather drive than walk. Their day will come despite the efforts of environmentalists and global warmists to postpone the inevitable.

NEW DELHI -- When the Nano minicar was conceived by India's Tata family in 2003, patriarch Ratan Tata said his intent was to provide an affordable, fuel-efficient, safer alternative to the two-wheelers deployed by millions of low-income Indians.

The 3.1-meter-long car's launch Monday will come at a very different time - for India, the auto industry and the Tata empire as well.

The focus will be as much on whether the Nano will sell big and deliver profits to debt-strapped Tata Motors Ltd. as on whether it could spur a transportation revolution on India's roads.

With an expected price tag of 100,000 rupees (about $2,000) for dealers for the basic model, the Nano will be one of the world's cheapest cars, if not the cheapest.

The company has so far declined to discuss details on costs, production plans, and profit margins. It's expected to reveal fresh information, such as the monthly production volumes and sales forecasts, on Monday at the launch event in Mumbai.

Like auto makers the world over, Tata Motors is contending with slowing demand for its bread-and butter commercial vehicles in India as well as its luxury nameplates, Jaguar and Land Rover.

Scrambling to raise money, it sold a 1.37% stake in group company Tata Steel Ltd. to Tata Sons Ltd., the parent of both Tata Motors and Tata Steel, for 3.59 billion rupees last year.
Tata Motors is also laying plans to sell small stakes in six profitable unlisted units, according to local media reports.

Undoubtedly, the Nano, with a 623-cubic centimeter, rear-gasoline-engine, symbolizes the global auto industry's rush to embrace affordable, lower-emission vehicles amid the economic expansion of developing nations from India to Brazil. Should the car succeed commercially, it could represent the coming-of-age of modern India's manufacturing prowess.

But going by the auto industry's experience with small cars, the tiny upstart Nano won't be much of a money-spinner. Manufacturers have traditionally made razor-thin margins on smaller cars, using them to lure buyers only to try to up-sell them to more profitable makes as they grow in age and wealth.

Indeed, the Nano's well-publicized affordability could prove to be a double-edged sword. On the one hand it might draw young and lower-income buyers. Yet it may be too low to significantly improve Tata Motors' consolidated revenue and profitability.

Other auto makers are pursuing their own versions of the Nano.

Bajaj Auto Ltd., India's second-biggest motorcycle maker, is developing an inexpensive small car with Nissan Motor Co. and Renault SA. General Motors Corp. and Volkswagen AG have indicated they may join the low-price bandwagon.

Suzuki Motor Corp., which controls half of India's car market through its joint venture Maruti Suzuki India Ltd., sells the 0.8-liter Maruti 800. The cheapest car in India - for now - it costs nearly twice as much as the Nano.

"We don't see the Nano as a game-changer today. In our current forecast scenario, we are hesitant to think about that," John Bonnell, J. D. Power & Associates' director of forecasting (Asia Pacific), said. "I think the (100,000 rupees) market price will be difficult to sustain over a long period of time given there is always a minimum material cost."

Bonnell doubts India's enormous numbers of motorcycle buyers will upgrade to Nanos en masse because it's still more than three times the price of a modest two-wheeler and costs more to maintain.

Ratan Tata, Tata Motors' chairman who heads the diversified Tata Group conglomerate, has said the Gujarat factory will have an initial capacity of 250,000 cars per year; that volume could eventually be doubled.

Amol Bhutada, an analyst with Edelweiss Securities Ltd. in Mumbai, says the Nano's margin of profitability will be at least 5%, reflecting lower commodity prices and the federal government's excise-tax cuts on small cars in the past year.

However, he notes that "the Nano cost structure is based on high volumes. So, only when you make good use of the installed capacities, then you will start making good money on such products, which we believe will come only from fiscal year 2010-11 when we expect them to produce 300,000-400,000 units per year."

Wednesday, March 11, 2009

Madoff -- A Prediction -- Death Benefits

As Bernie Madoff prepares to plead guilty to 11 charges that will earn him a sentence of as much as 150 years, he's undoubtedly thinking of the one option that will allow him to avoid prison. There is a way he can get himself off the hook and spare his family a future of endless law enforcement inquiries. He is likely to exploit the Ken Lay option. Death before the final step in the criminal process. Death before he's sent to prison for the remainder of his life. Suicide.

Ken Lay did it, even though it was unintentional. Nevertheless, his demise may well present an interesting choice for aging criminals unsuited to an empty life in tight quarters. There are family benefits too. Death ended the criminal proceedings against him and allowed his family an exemption from further governmental investigation efforts.

Lay died while vacationing in Colorado on July 5, 2006, about three and a half months before his scheduled October 23 sentencing. Preliminary autopsy reports state he died of a heart attack caused by coronary artery disease. As a result of his death, on October 17, 2006 the federal district court judge who presided over the case vacated Lay's conviction.

Bernie may well understand the benefits of dying before he allocutes and exposes his family to endless government intrusion. What else would an exposed Ponzi Schemer do? Without his plea of guilty, the legal dynamics are thrown entirely out of whack. Will he do it? It appears he's taken the government into his confidence, as Ponzi Schemers always do. Investigators, however, have yet to say they think they've found the trail to all the missing money. In true Ponzi fashion, it was most likely distributed to investors who thought they were getting the returns of Madoff's investing brilliance.

I think he's leading investigators on a merry chase, allowing them to think he's revealed all there is to reveal. However, after he jumps from his penthouse window, consumes the entire contents of his medicine cabinet, or shoots himself, investigators will discover the long list of red herrings he's planted. Last laugh goes to Bernie as he "shorts" the prosecutors one convict.

Madoff jail won't be as bad as "Shawshank," expert says

Ensconced in his $7 million home, Bernard Madoff, the accused Ponzi swindler, is probably wondering what type of prison awaits him.

Madoff, who allegedly stole billions through his investment firm, could face a 150-year sentence if convicted in Federal Court in Manhattan on Thursday. He is expected to plead guilty to 11 criminal counts, according to one of his lawyers, Ira Lee Sorkin.

Madoff has managed to avoid jail so far, thanks to the $10 million bail that he posted. Since his December arrest, he has remained with his wife under house arrest in their luxurious Manhattan residence.

But he won't be able to dodge the slammer for much longer, assuming he pleads guilty, and it's unlikely the 70-year-old man will ever be free again.

Madoff may ask the court to be placed in a prison of his choosing and the court can then forward this request to the federal Bureau of Prisons.

The bureau "ultimately decides where the inmate [is incarcerated]," said bureau spokeswoman Felicia Ponce. "We take into consideration judicial recommendations, but they're not binding."

Despite his white-collar status and non-violent history, Madoff won't be whiling away his days in some cushy "Club Fed" type of prison.

Ponce said the bureau weighs the "seriousness of the offense, the expected length of incarceration, any history of escapes and violence" as well as the age of the inmate and "security needs." The bureau tries to incarcerate inmates within 500 miles of their homes, she said.

Madoff's lawyer, Sorkin, wouldn't provide any details of his client's preferences. "There are many different facilities in many different places," he said.

No such thing as Club Fed

Ponce, of the Bureau of Prisons, dismissed the Club Fed institution as a "myth."

Ed Bales, managing director of Federal Prison Consultants, which prepares inmates for prison life, said that "Club Fed" facilities used to exist in such places as Nellis Federal Prison Camp near Las Vegas. He said these types of facilities were also located in Florida and Pennsylvania. They provided more freedom and better accommodations to inmates than the typical prisons, but were shut down several years ago.

Larry Levine, another prison consultant and former inmate, wrote on his Web site about the experience of being transferred from Nellis when it shut down in 2005 to a "real" prison near El Paso, Texas, replete with "warring gang members" and other violent offenders.

"The Nellis inmates were shell-shocked into the real world of federal prison," wrote Levine. "Gone were their cushy days of being in a camp."

White collar crooks: You never know where you'll go

Nowadays, all types of prisons await white collar offenders. Martha Stewart, the domestic diva convicted of insider trading in 2004, served her five-month sentence at Alderson Federal Prison Camp in West Virginia, a minimum-security women's prison known as "Camp Cupcake."

At the other end of the spectrum, former Tyco Chief Executive Dennis Kozlowski, who was convicted in a state court and sentenced to up 25 years for grand larceny, was sent to a rougher, medium-security state prison in upstate New York. In a 2007 letter to Fortune, he wrote, "[Prison] is the most difficult of all difficult places to be."

Bales, of Federal Prison Consultants, said his newly convicted clients typically expect the worst, their nightmares of prison rape fueled by television shows like "Oz" and movies like "The Shawshank Redemption." But once they end up behind bars, some inmates are pleasantly surprised to find that it's not as dangerous as they'd thought, he said.

"They're scared out of their minds," said Bales. "They think they're going to get jumped in the shower. But once they hear what they're really like, they calm down a bit."

Fairton is the fairest

The best possible facility is the so-called prison camp, where there are "no murderers or rapists" and "no bars on the walls," said Bales. But he added that a lengthy sentence such as Madoff's might bar him from such a desirable facility.

Instead, Madoff might be eligible for a low-security prison, which isn't as bad as medium-security, but it's still a prison.

"In low security, you have some violence, you may have some low-level Mafia type figures, you may have some people who have been involved in child porn," he said. "[Madoff] may be facing that type of scenario."

The best possible low-security federal prison where Madoff could conceivably land is in Fairton, N.J., said Bales. That's the current residence of Sanjay Kumar, former Chief Executive of Computer Associates, serving a 12-year sentence for fraud and obstruction of justice.

"It's one of the best places to do your time," said Bales. "They send a lot of senators there and attorneys."

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Tuesday, March 10, 2009

Obama to Teachers -- Raises for Everyone

It is true Obama supports "merit pay" for teachers. It is also true he thinks almost every teacher "merits" higher pay. Thus, teachers who feel betrayed by Obama are actually demonstrating their inability to "read between the lines", a skill that is an essential part of "critical thinking."

In the world Merit Pay for Teachers, the job least likely to result in a pay increase is a teaching post in a top school, where only minor improvements are possible. However, teachers working in the worst schools are starting from the lowest possible base, which means earning bonus money will come rather easily. Teachers will have a financial incentive to come as close as possible to giving kids the answers to test questions. But that might be nothing more than repeated reviews of past tests -- an acceptable and time-honored practice.

However, except in the rarest of cases, schools are powerless in the battle to overcome the dissipating effects of the social pathologies by which they are surrounded outside of school. Obama seems determined to appoint schools as substitute parents for the millions of kids coming from random, disorganized or non-existent families.

The Teachers' Union has been pushing its pay gambit for years. It works like this: math and science teachers are in short supply in the nation's public school system. Meanwhile, it is widely believed the only way to fill the gap is by offering math and science teachers better pay. But since all teachers are paid on a union scale, a raise for one means a raise for all.

However, the Teachers' Union depends on false logic to push its claim. The reason for the shortage of math and science teachers lies in the lunacy of the certification process, not in pay.

Certification in math and science requires applicants to have a minimum number of credits in their math, science or engineering major. So far, so good. However, would-be science and math teachers must also have college level foreign language credits. Why? Who knows?

But many math, science and engineering students receieve B.S. degrees, which means they are relieved of the requirement of taking foreign-language classes. Thus, if they decide they want to teach math or science, they must spend time and money obtaining foreign language credits in addition to other credits commonly included in curriculums for students at "education" schools.

In New York City a would-be teacher must pass the Liberal Arts and Sciences Test (LAST), which is similar to the SAT except it is easy. Easy.

Second is the Assessment of Teaching Skills -- Written. This exam tests the teaching knowledge of aspiring teachers. It tests teachers on material usually learned in four years at a Teachers' College. However, from personal experience I can tell you that with one review book and several evenings devoted to learning the basics, passing the test is a breeze. In a rational world, it should seem that passing the test is enough. But it's not. Perhaps a person passing this test with nothing more than several hours of review upsets the sensibilities of educators who spent four years in college attempting to obtain the same knowledge.

Third is the content exam. This one tests subject knowledge. Thus, those seeking math and science certification must demonstrate their knowledge of the material. The content exam is by far the most challenging of the three. But due to the fact that the math and science content exams are difficult, many teachers avoid them. Instead, they take easier content exams and receive their certifications in other subjects. Even though they lack certification in math or science, principals are willing to assign them to teach math or science.

All this because the certification process discourages applications from people who are qualified to teach the subjects themselves, but lack a peripheral, contrived and meaningless qualification.

Thus, the Teachers' Union has successfully manufactured an artificial labor shortage, which is the wedge it hopes to use to drive paychecks higher.

WASHINGTON – President Barack Obama embraced merit pay for teachers Tuesday in spelling out a vision of education that will almost certainly alienate union backers.

Educators oppose charter schools because they divert tax dollars away from traditional public schools. Merit-based systems for teachers have for years been anathema to teachers' unions, a powerful force in the Democratic Party.

Obama acknowledged this in his talk to the U.S. Hispanic Chamber of Commerce.

"Too many supporters of my party have resisted the idea of rewarding excellence in teaching with extra pay, even though we know it can make a difference in the classroom," he said, delivering the first major education speech of his presidency. "Too many in the Republican Party have opposed new investments in early education, despite compelling evidence of its importance."

But he argued that a far-reaching overhaul of the nation's education system is an economic imperative that can't wait, despite the urgency of the financial crisis and other pressing issues.

"Despite resources that are unmatched anywhere in the world, we have let our grades slip, our schools crumble, our teacher quality fall short, and other nations outpace us," Obama said. "The relative decline of American education is untenable for our economy, unsustainable for our democracy, and unacceptable for our children. We cannot afford to let it continue. What is at stake is nothing less than the American dream."

The ideas the president promoted were nearly all elements of his campaign platform last year. He only barely mentioned the reauthorization of the Bush-era No Child Left Behind Act, which introduced sweeping reforms that schools are struggling to meet without the funding to match. Obama said his administration would "later this year" ensure that schools get the funding they need and that the money is conditioned on results.

Among the principles Obama laid out were:

_Challenging states to adopt world-class standards rather than a specific standard. Obama's economic stimulus plan includes a $5 billion incentive fund to reward states for, among other things, boosting the quality of standards and state tests, and the president said the Education Department would create a fund to invest in innovation.

_Improved pre-kindergarten programs, including $5 billion in the stimulus plan to grow Head Start, expand child care access and do more for children with special needs. He also said he would offer 55,000 first-time parents regular visits from trained nurses and said that states that develop cutting-edge plans to raise the quality of early learning programs would get an Early Learning Challenge Grant, if Congress approves the new program.

_Reducing student dropout rates. To students, Obama said: "Don't even think about dropping out of school." But he said that reducing the dropout rates also requires turning around the worst schools, something he asked lawmakers, parents and teachers to make "our collective responsibility as Americans."

_Repeating his call for everyone to commit to at least one year or more of higher education or career training, with the goal of highest proportion of college graduates in the world by the year 2020.

On charter schools, he said the caps instituted by some states on how many are allowed aren't "good for our children, our economy, or our country."

Obama also spoke at length about what he described his policy toward teachers, what he called an `unprecedented commitment to ensure that anyone entrusted with educating our children is doing the job as well as it can be done." In up to 150 more school districts, Obama said, teachers will get mentoring, more money for improved student achievement and new responsibilities.

Also, Obama said, "We need to make sure our students have the teacher they need to be successful. That means states and school districts taking steps to move bad teachers out of the classroom. Let me be clear: if a teacher is given a chance but still does not improve, there is no excuse for that person to continue teaching."

The president acknowledged that a rethinking of the traditional American school day may not be welcome — "not in my family, and probably not in yours" — but is critical.

"The challenges of a new century demand more time in the classroom," Obama said. "If they can do that in South Korea, we can do it right here in the United States of America."

Obama's War on Business

Back in the 1960s, Lyndon Johnson gave us the War on Poverty. In the 1970s, Richard Nixon launched the War on Drugs. Now that we have seen President Barack Obama’s first-year legislative agenda, we know what kind of a war he intends to wage.

It is no wonder that markets are imploding around us. Obama is giving us the War on Business.

Imagine that some hypothetical enemy state spent years preparing a “Manchurian Candidate” to destroy the U.S. economy once elected. What policies might that leader pursue?

He might discourage private capital from entering the financial sector by instructing his Treasury secretary to repeatedly promise a brilliant rescue plan, but never actually have one.

Private firms, spooked by the thought of what government might do, would shy away from transactions altogether. If the secretary were smooth and played rope-a-dope long enough, the whole financial sector would be gone before voters could demand action.

Another diabolical idea would be to significantly increase taxes on whatever firms are still standing. That would require subterfuge, since increasing tax rates would be too obvious. Our Manchurian Candidate would have plenty of sophisticated ideas on changing the rules to get more revenue without increasing rates, such as auctioning off “permits.”

These steps would create near-term distress. If our Manchurian Candidate leader really wanted to knock the country down for good, he would have to provide insurance against any long-run recovery.

There are two steps to accomplish that.

Discourage Innovation

First, one way the economy might finally take off is for some entrepreneur to invent an amazing new product that launches something on the scale of the dot-com boom. If you want to destroy an economy, you have to persuade those innovators not even to try.

Second, you need to initiate entitlement programs that are difficult to change once enacted.

These programs should transfer assets away from productive areas of the economy as efficiently as possible. Ideally, the government will have no choice but to increase taxes sharply in the future to pay for new entitlements.

A leader who pulled off all that might be able to finish off the country.

Let’s see how Obama’s plan compares with our nightmare scenario.

Treasury Secretary Timothy Geithner has been so slow to act that even liberal economist and commentator Paul Krugman is criticizing the administration for “ditherin.” It has gotten so bad that the Intrade prediction market now has a future on whether Geithner is gone by year’s end. It currently puts the chance of that at about 20 percent.

No More Deferral

On the tax hike, Obama’s proposed 2010 budget quite ominously signaled that he intends to end or significantly amend the U.S. practice of allowing U.S. multinationals to defer U.S. taxes on income that they earn abroad.

Currently, the U.S. has the second-highest corporate tax on Earth. U.S. firms can compete in Europe by opening a subsidiary in a low-tax country and locating the profits there. Since the high U.S. tax applies only when the money is mailed home, and firms can let the money sit abroad for as long as they want, the big disadvantage of the high rate is muted significantly.

End that deferral opportunity and U.S. firms will no longer be able to compete, given their huge tax disadvantage. With foreign tax rates so low now, it is even possible that the end of deferral could lead to the extinction of the U.S. corporation.

If any firms are to remain, they will be festooned with massive carbon-permit expenses because of Obama’s new cap-and- trade program.

Importing Drugs

Obama’s attack on intellectual property is evident in his aggressive stance against U.S. pharmaceutical companies in the budget. He would force drug companies to pay higher “rebate” fees to Medicaid, and he included wording that suggests Americans will soon be able to import drugs from foreign countries. The stock prices of drug companies, predictably, tanked when his budget plan was released.

Obama will allow cheap and potentially counterfeit substitutes into the country and will set the U.S. price for drugs equal to the lowest price that any foreign government is able to coerce from our drugmakers.

Given this, why would anyone invest money in a risky new cancer trial, or bother inventing some other new thing that the government could expropriate as soon as it decides to?

Finally, Obama has set aside $634 billion to establish a health-reform reserve fund, a major first step in creating a universal health-care system. If you want to have health care for everyone, you have to give it to many people for free. Once we start doing that, we will never stop, at least until the government runs out of money.

It’s clear that President Obama wants the best for our country. That makes it all the more puzzling that he would legislate like a Manchurian Candidate.

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Monday, March 09, 2009

Circuit City -- the Rise and Fall

Circuit City ran out of juice. Competition got tougher and tougher, though there's nothing unusual about that. But people both inside and outside of the company have acknowledged that Circuit City took the wrong path too many times, or reacted too slowly to shifts in its industry.

60-Year-Old Circuit City Says Goodbye

RICHMOND, Va. (March 9) - What began 60 years ago as a humble television store in this sleepy Southern capital ended Sunday as Circuit City closed its doors for good - its 567 remaining U.S. stores to be left broom clean and vacant.
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After failing to find a buyer or secure refinancing under bankruptcy protection, Circuit City, once the second-largest consumer electronics retail chain in the U.S., shuts all of it doors.

Also: Timeline of Circuit City Stores

For the last month and a half, a group of four liquidators have conducted going-out-of-business sales for what was the nation's second-largest consumer electronics retailer, selling its remaining $1.7 billion worth of inventory weeks sooner than expected.

In its wake Richmond-based Circuit City Stores Inc. will leave more than 18 million square feet of vacant space in a faltering real estate market. And more than 34,000 employees, some who worked through the liquidation announced in January, will be jobless. Shareholders will likely get nothing and creditors may receive far less than what they are owed.
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Circuit City filed for Chapter 11 bankruptcy protection in November with hopes of emerging as a stronger company able to compete in the ever-expanding marketplace; shedding its $2.32 billion in debt and getting out of older real estate.

Circuit City owes nearly $625 million to its 30 largest unsecured creditors - mostly vendors who supplied the DVDs, flat-screen TVs and headphones on Circuit City shelves. They must wait to be paid until secured creditors such as bank lenders are satisfied.

Over the last few years, Circuit City, which at its height had more than 700 stores, faced heightened competition, pressure from vendors and waning consumer spending. Ultimately, the hobbled credit market and consumer worries proved insurmountable. The dismal environment also has claimed retailers including KB Toys and Mervyns.

Circuit City, which posted losses in seven of its final eight quarters, had its brand value diminished in the 1990s as it lost significant traffic to rivals like Best Buy Co., which built bigger stores in better locations and achieved greater economies of scale. Wal-Mart Stores Inc. and others who have expanded their electronics offerings also wooed Circuit City customers.

Around the country, stores once full of televisions, stereos, computers and other consumer electronics had little merchandise left on the last day of business, with many locations selling store fixtures like shelves and other odds and ends.
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At a Circuit City store on Manhattan's Upper West Side, store employees spent time saying their last goodbyes. The store had already been fleeced of all its inventory, and a makeshift sign outside the store offered only fixtures. Shopping carts, store displays and even check-out stands were for sale, although few customers streamed into the two-story space.

"Everything is picked over. They're going over wires and TV stands, the little stuff," said Roman Garcia, 30, carrying a bag crammed with videogames. He bought nine copies of an online multiplayer game called "Team Fortress." He picked up the copies for $1 apiece and planned to send them to other members of his online gaming group.

Alan L. Wurtzel, son of company founder Samuel S. Wurtzel and himself a former chief executive of Circuit City, has previously said the company didn't take the threat from Best Buy seriously enough and at some points was too focused on short-term profit rather than long-term value.

Still, Circuit City took arduous steps in an attempt to turn around its struggling business.
In 2008, it defused a proxy battle, opened its books to potential buyers like Blockbuster Inc., changed management, closed stores in some locations and tested smaller concept stores in others. It laid off about 3,400 store workers in 2007 and replaced them with lower-paid employees, a move analysts warned could hurt morale and drive away customers.

Circuit City also had hoped to make up for its diminished product margins with its service and installation business called Firedog, which opened in 2006 - four years after Best Buy purchased the similar Geek Squad service.

"I wish there was one kind of fatal blow that we could all pick out," said Stephen Baker, vice president of industry analysis at market researching firm, The NPD Group Inc. "Every time there was a crossroad ... in hindsight they almost always did the wrong thing."

Baker pointed to many other missteps in management, among them: not declaring bankruptcy sooner, not getting into the music and movie business earlier, takeover bids in the mid-2000s, and exiting the appliance business in 2000.

When asked for comment on the company's store being shuttered permanently, Circuit City offered only this from James A. Marcum, its vice chairman and acting president and chief executive: "I want to thank our associates for their hard work during this difficult time."

Thursday, March 05, 2009

Oil -- Nature's Gift to Man

Let's Get Real About Renewable Energy

We can double the output of solar and wind, and double it again. We'll still depend on hydrocarbons.

During his address to Congress last week, President Barack Obama declared, "We will double this nation's supply of renewable energy in the next three years."

While that statement -- along with his pledge to impose a "cap on carbon pollution" -- drew applause, let's slow down for a moment and get realistic about this country's energy future. Consider two factors that are too-often overlooked: George W. Bush's record on renewables, and the problem of scale.

By promising to double our supply of renewables, Mr. Obama is only trying to keep pace with his predecessor. Yes, that's right: From 2005 to 2007, the former Texas oil man oversaw a near-doubling of the electrical output from solar and wind power. And between 2007 and 2008, output from those sources grew by another 30%.

Mr. Bush's record aside, the key problem facing Mr. Obama, and anyone else advocating a rapid transition away from the hydrocarbons that have dominated the world's energy mix since the dawn of the Industrial Age, is the same issue that dogs every alternative energy idea: scale.

Let's start by deciphering exactly what Mr. Obama includes in his definition of "renewable" energy. If he's including hydropower, which now provides about 2.4% of America's total primary energy needs, then the president clearly has no concept of what he is promising. Hydro now provides more than 16 times as much energy as wind and solar power combined. Yet more dams are being dismantled than built. Since 1999, more than 200 dams in the U.S. have been removed.

If Mr. Obama is only counting wind power and solar power as renewables, then his promise is clearly doable. But the unfortunate truth is that even if he matches Mr. Bush's effort by doubling wind and solar output by 2012, the contribution of those two sources to America's overall energy needs will still be almost inconsequential.

Here's why. The latest data from the U.S. Energy Information Administration show that total solar and wind output for 2008 will likely be about 45,493,000 megawatt-hours. That sounds significant until you consider this number: 4,118,198,000 megawatt-hours. That's the total amount of electricity generated during the rolling 12-month period that ended last November.

Solar and wind, in other words, produce about 1.1% of America's total electricity consumption.
Of course, you might respond that renewables need to start somewhere. True enough -- and to be clear, I'm not opposed to renewables. I have solar panels on the roof of my house here in Texas that generate 3,200 watts.

And those panels (which were heavily subsidized by Austin Energy, the city-owned utility) provide about one-third of the electricity my family of five consumes. Better still, solar panel producers like First Solar Inc. are lowering the cost of solar cells. On the day of Mr. Obama's speech, the company announced that it is now producing solar cells for $0.98 per watt, thereby breaking the important $1-per-watt price barrier.

And yet, while price reductions are important, the wind is intermittent, and so are sunny days. That means they cannot provide the baseload power, i.e., the amount of electricity required to meet minimum demand, that Americans want.

That issue aside, the scale problem persists. For the sake of convenience, let's convert the energy produced by U.S. wind and solar installations into oil equivalents.

The conversion of electricity into oil terms is straightforward: one barrel of oil contains the energy equivalent of 1.64 megawatt-hours of electricity. Thus, 45,493,000 megawatt-hours divided by 1.64 megawatt-hours per barrel of oil equals 27.7 million barrels of oil equivalent from solar and wind for all of 2008.

Now divide that 27.7 million barrels by 365 days and you find that solar and wind sources are providing the equivalent of 76,000 barrels of oil per day. America's total primary energy use is about 47.4 million barrels of oil equivalent per day.

Of that 47.4 million barrels of oil equivalent, oil itself has the biggest share -- we consume about 19 million barrels per day. Natural gas is the second-biggest contributor, supplying the equivalent of 11.9 million barrels of oil, while coal provides the equivalent of 11.5 million barrels of oil per day. The balance comes from nuclear power (about 3.8 million barrels per day), and hydropower (about 1.1 million barrels), with smaller contributions coming from wind, solar, geothermal, wood waste, and other sources.

Here's another way to consider the 76,000 barrels of oil equivalent per day that come from solar and wind: It's approximately equal to the raw energy output of one average-sized coal mine.

During his address to Congress, Mr. Obama did not mention coal -- the fuel that provides nearly a quarter of total primary energy and about half of America's electricity -- except to say that the U.S. should develop "clean coal." He didn't mention nuclear power, only "nuclear proliferation," even though nuclear power is likely the best long-term solution to policy makers' desire to cut U.S. carbon emissions. He didn't mention natural gas, even though it provides about 25% of America's total primary energy needs.

Furthermore, the U.S. has huge quantities of gas, and it's the only fuel source that can provide the stand-by generation capacity needed for wind and solar installations. Finally, he didn't mention oil, the backbone fuel of the world transportation sector, except to say that the U.S. imports too much of it.

Perhaps the president's omissions are understandable. America has an intense love-hate relationship with hydrocarbons in general, and with coal and oil in particular. And with increasing political pressure to cut carbon-dioxide emissions, that love-hate relationship has only gotten more complicated.

But the problem of scale means that these hydrocarbons just won't go away. Sure, Mr. Obama can double the output from solar and wind. And then double it again. And again. And again. But getting from 76,000 barrels of oil equivalent per day to something close to the 47.4 million barrels of oil equivalent per day needed to keep the U.S. economy running is going to take a long, long time.

It would be refreshing if the president or perhaps a few of the Democrats on Capitol Hill would admit that fact.

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