Keepin It Brief

“Lululemon ditches tag touting benefits” – Vancouver based yoga wear promoter has agreed to cover up claims that their seaweed fibre clothes – VitaSea – provide health benefits including anti-inflammation, detoxification, and anti-bacterial properties.

My 2 Thoughts: This claim amounts to nothing more then watching infomercials on late night television. Wearing copper bracelets or Dr. Ho’s Massage System will appeal to some, but are we that gullible to think simply wearing a shirt (with properties no more distinct then cotton) is going to magically absorb vital nutrients and minerals into the skin. The health industry (salons and spas) make millions on these claims where they wrap you in seaweed for an hour to provide similar benefit. The difference with Lululemon is that it is a public company (traded publicly in the open market) and therefore is held to a higher standard then a private entity like you local salon. I personally enjoy the clothing as it is quite comfortable, but Lululemon is definitely capitalizing on the eco-sensitive crowd who is paying dearly for it. Therefore, if claims are being made it is as much buyer beware as it is the companies responsibility to provide accurate information of its products.

“October video games sales up 73%” – The Nintendo Wii has regained top spot in the US as the #1 selling console, however, Microsoft’s claims that their console (Xbox 360) has higher software sales (games) then either the Wii and PS3 combined.

My 2 Thoughts: I have a Wii. I purchased it because of my interest in the same technology that is used in cruise missiles (Wii remotes have wireless infrared sensors similar to technology used in guidance systems for missiles used in the military). I also bought the Wii because of price point. Futureshop has the consoles listed at the following prices: PS3 - $399.99 - $499.99, Xbox 360 - $299 - $499, and Wii - $269.99. Gaming consoles are classified as entertainment, so I asked myself what this entertainment was worth to me. I am not a hardcore gamer, I don’t play everyday (only when friends are over), and will rent the occasional game versus buy. For me the Wii was a hands down winner. Microsoft’s claim may be true but this is only because the console it self comes with nothing. The Wii comes with a sports package including introductions to games like tennis, boxing, bowling, baseball, and golf. I am only now getting the itch to buy another game to supplement my system. If your console comes with nothing, of course you are either going for a bundle package or supplementing games to your purchase.

“Wade – Shaq needs to step up” – The Miami Heat are in a 1-7 slump and Wade believes that Shaq needs to be more self-motivated if they are to turn the team around.

My 2 Thoughts: Dwayne Wade is a great player although his longevity in the league will be questioned given how hard he plays and the stress on his body. Nonetheless, Wade should not turn this into another Shaq-Kobe war where fruitless comments to the media that start to tear the two Heat stars apart. With more drama then Desperate Housewives, we all remember the Shaq-Kobe relationship that lead to the eventual departure of O’Neil from the Lakers. Kobe claiming Shaq was “less than manly” for sitting out with a toe injury, and Shaq claiming that his team “Lakers” would do better without the whiny comments from the second in command. Shaq is getting old, so his role has to naturally shift from that of a points leader to a role player helping to develop the talent on the bench. Career stats show a peak in 99-00 season and a steady decline since then moving from an average of 29 PPG (points per game average) to 14 PPG in the current season. If the Heat is to turnaround their losing streak, look to the bench to contribute versus putting the emphasis on the 35 year-old centre.

“A shameful day in Canada” – The death of polish immigrant continues to dominate media with blame targets including the Vancouver RCMP, YVR (Vancouver International Airport), and the any common citizen who chose to ignore the situation by walking by.

My 2 Thoughts – I can’t help but wonder if the situation would be any different if the immigrant was from a different nationality. We all know that CBSA (Canadian Border Services Agency) profile individuals as they enter security gates to determine “random” checks. By profiling, I am referring to the concept where assumptions are made about an individual from conscious or unconscious clues based on behavior, clothes or other characteristics visible to naked eye. In this concept, erroneous assumptions can result into action as profiling often occurs without any deeper or real knowledge of an individual. This being said, what if instead of a polish immigrant, clean-cut, and without head-ware, we had an individual from Islamic or Indian decent supporting a long beard with a turban or other head-ware. In a time where terrorist profiling is common, would the situation be any different if the latter was seen “hanging out” in the carousel area of YVR for 6 hours, struggling to communicate with anyone and becoming increasingly agitated? This is purely hypothetical but I hope it makes you think? The situation is far from black and white as blame can shift from the mother who asked her son to wrongly stay by the carousel when she had no feasible access to it; the common citizen who did not stop and help this poor immigrant in his time of distress; to YVR from not intervening sooner while this individual was a lot calmer; to the Police for their possible haste in how they handled the situation; to the Media for blasting everyone for the incident and raising Canada’s profile in international mediums contrary to our caring culture. I have my own personal bias but I said I would try and keep it brief.

Private Power Benefits BC Hydro

For a time I worked at the Business Development Bank of Canada. Part of the mandate of this bank was to support the development of small to medium sized businesses. This is how this federal mandated bank maintained its stature in a world dominated by the fab five (RBC, BMO, TD, ScotiaBank, CIBC). In fact, the structure of the bank is such that directors from each of these banks make up a board that regulates how the BDC operates within Canada.

In addition to having good credit, strong liquidity, and a working capital ratio greater than 1; the BDC’s policy on lending meant that you could only provide capital to a business that was creating gainful employment for the constituents of Canada. How does this relate to BC Hydro? Over the course of my employment at BDC, we had the opportunity to finance several IPP’s (Independent Power Producers). These projects required extensive capital to build, but once operational, cost little to maintain (if memory serves me correctly, a battery operated fan was the extent of the complexity). The only challenge was to make sure the estimates of water flow were correct and did not exceed or recede the levels agreed to in the 99 year energy contracts with BC Hydro.

We didn’t finance any of them (the IPP’s). I thought my branch manager was crazy as a steady cash flow and a contract as good as the government would appeal to anyone. Anyone but the BDC! As I mentioned before, any business that we were financing had to provide some notion of gainful employment to the community. Unfortunately for IPP’s, the employment to project ratio consisted of the two very rich owners and one maintenance guy that came around once or twice a year for service.

A new angle on the debate beyond the fact that BC Hydro is looking for private sources of power is who this deal with IPP’s really benefits. According to a Simon Fraser University economist (link) no one benefits from IPP’s except BC Hydro. Aside from the fact that these are lucrative contracts, BC hydro is looking to save energy from public facilities so that they can be sold at a higher value on the open market (mainly the US). What this means is that we could potentially be paying more for local sources of energy contracted at higher prices while cheaper public facilities sell energy also at a premium to benefit only BC Hydro. There was another article in BC Business that provides a good background on private power (link). “The 2002 BC Energy Plan (revised in spring 2007) is transforming BC Hydro from a generator of publicly owned electricity to a purchaser of energy from private power producers.”

Call me crazy but doesn’t it make sense for us to conserve energy so that we infact conserve energy (as opposed to using surplus energy to turn a profit on the open market)??

My 2 thoughts anyways….

Calculating Value: An Art Not A Science

Calculating the net worth (value) of a company is often a fickle business. Companies like PriceWaterhouseCoopers and other large accounting firms have made a living off such valuations because they are often so difficult to calculate. Some compare this to nothing more than "crystal balling" or taking numbers from the air. Why should anyone argue with this when you read the latest business-related news? Take the recent eBay example (link) where executives have finally admitted that they overpaid for Skype (an Internet Telecoms Company) purchased by eBay over 2 years ago. The company made a offer of 4.1 billion, of which is now looks like they paid 1.4 billion too much. It is easy to criticize such a transaction when you are dealing with such large dollar values but let me try to demonstrate to complexity of such valuation and projecting future cash flow.

The complexity of projecting future cash flow can be as simple as the following example. Many of us have walked into a bank to ask for a mortgage on a new house we wish to purchase. I did so recently on my home I purchased in Surrey. Part of the calculations a bank uses is you annual income (your pay cheque), liquid assets (cash, or something that can be converted to cash relatively quickly - usually in less than 6 months - mutual funds, stocks, etc), hard assets (other homes), rolling stock (vehicles), and long term securities (GIC's, RRSPs). If the calculation were simple, the bank would simply add up the value of all these income deriving lines minus all you costs (debts) you would then have a straight forward net worth calculation. However, life is often never that simple.

The complexity even with obtaining a mortgage arises from the following where in finance the two things are often true: first a dollar today is worth more than a dollar tomorrow; and second (related) their is no way to guarantee the sensitivity of future markets. The first speaks to the buying power of money. This buying power is in its simplest form is a function of inflation. As inflation goes up, the value of goods you buy conversely rises (goods like houses). However, since your wage and income does not also go up with inflation (usually a function of a bargaining agreement or a contract), the amount of goods you can purchase with the same dollar you had yesterday goes down. This is why you often see the Bank of Canada often intervening in markets by raising interest rates. As our economy is based on borrowing money, the bank is essentially trying to curb spending (or borrowing money to spend) to reduce inflationary pressures within the country. The bank you are applying for a mortgage to also knows this and wants to ensure that you wages along with other goods will service (pay the loan) for the long haul when the value of that dollar is questionable. They essentially want a good cushion (along with someone with good credit). The second related concept to this is sensitivity. As no one knows exactly how the markets will fluctuate, we have to make an educated guess based on where our economy is going. Also known as speculation, this is how many people make money of the stock market or real estate (buying low to sell high = profit). To aid in this, the bank often discounts ("takes away") some the value of your assets to account for the loss of buying power as describe above. For example, you current assets maybe valued as following when applying for a mortgage: house (75% of appraised value), mutual funds (60% of current market value), vehicles (50% of current value), rental income from homes (50% of current income) and so forth. The higher the certainty that the value of a assets will retain that value (or go up) the higher the valuation for that assets. Cash in the bank would be valued at 100% as it is cash that is not affected by external market pressures. However, mutual funds are affected by stock fluctuations; real estate is affected by the supply and demand as well as affordability; and vehicles are affected by their age, usage, make, model etc. Unfortunately, a bank is the worst form of conservatism where your valuation comes second to their interest in giving you a favorable interest rate on your bank account.

As the above example shows, even simpler transactions can produce complications when trying to foresee into the future about what your dollar will be worth. Imagine trying to do this with a billion dollar company. And to demonstrate how much these valuations differ consider the following: With oil & gas companies for example, their valuation is looking to purchase is often a function of potential (estimated) oil & gas reserves; with a drug company like Pfizer, the valuation is tied up in research and the potential for a new better drug on the market; or a blue-chip company like Lockheed Martin, their valuation is in long-term contracts they have arranged to provide artillery to the US army. The real difference comes with those companies based on the Internet. Their are no hard assets (few buildings), often no real contracts, and no established stream of revenue (most are often in the start-up phase and are dependent on debt to get going). Even those that have been in the industry for some time (like Google) are still considered unpredictable given the rate at which technology has been evolving (a phenomena known as disruptive technology-automobile replaces horse, digital photography replaces film, etc). Google is considered the best search engine on the Internet (and valued at $600/share for it) but it could be replaced tomorrow with something better.

Finally, back to the central argument. eBay gambled on telecoms technology but didn't know how exactly to value the company. Revenues were only at $60 million but eBay paid 683 times too much. eBay was trying to value potential cash flows and that's where all rules went out of the window. The best experts have challenges trying to project future growth and often end up valuing the intrinsic value of the company (what is worth to the competition). In my experience when trying to value such companies you should keep two things in mind: your time horizon short given the technology life-cycle; and second create some sensitivity in the analysis. Even for the business cases I currently author, I will include a Net Present Value (or net worth) of the project at several different discount rates (6%,8%,10%). This illustrates the sensitivity of such cash flows to small fluctuations in the discount rate. The lower the rate, the more sure you are that the cash flows are going to stay the same. This conservative approach, unfortunately means that most projects don't get off the ground. As an organization though, you have understand what your objectives are for investments and what is an acceptable risk. For eBay, a company founded and based on the Internet, the risks tolerance is obviously much higher then there would be at a bank.

My 2 thoughts anyways...

Isn't that Some Sad Shit

Like Chris Rock would say, "Itsn't that Some Sad Shit". Recent article in theglobeandmail (link). OJ can't even afford a real rolex anymore, and if he could, the Goldmans would have took it. But instead they have to return it. What gets me is that the watch still costs $100 (appraised value). So in my opinion not can he not afford a real rolex, he paid to much for the fake he was wearing.

Goldmans are mad because after the civil suit OJ hasn't paid a dime for all the legal woes and judgements that were passed. Essentially, the law of the state is that he got have his previous wages garnished (NFL pension) or money that he has already made. Its only new dollars that they are entitled to. So OJ did the only thing he could do, he stopped working.

Now OJ isn't broke by any means, unless you call living in a mansion, golfing everyday, and throwing the occasional trip into Las Vegas only to get caught stealing your own shit broke. No, thats called stupid.

My 2 thoughts anyways....

I'm leaving..and I'm taking my football!

If you have been following the paper you have witnessed the jockeying in Alberta over a recent report on royalty rates. Issued by an an independent panel of experts, this report revealed that Alberta is missing out on billions of oil royalties and should be able to raise rates without effecting the industry. The industry is crying bullshit, as many including mammoth industry giants Encana, threaten to curb spending in the Alberta economy by up to $1 billion dollars. Alberta's premier is now asking everyone to simply "calm down" as they work towards a resolution, a knee jerk reaction to the oil-foundation of the Albertan economy.

This reminds me allot about the football games I used to play in with my friends. These games were purely recreational, but you wouldn't be able to tell by the way we argued for every single yard. A couple individuals, specifically, were often on opposite teams and represented the crown and defense for every argument ever made (depending who had the ball). The trump card in all of this we the fact that one of these individuals owned the football. When the argument would get to a certain level, this individual would say that he was leaving the field if he didn't get the call. "Oh, and by the way, that's my football and I'm taking that too." There was a always a few on his team that supported his argument (usually the receiver) but many could care less and actually just wanted to continue playing (with the opposition obviously opposing the call). Never mind that it only took several calls to get everyone together on a rotary dial phone (we didn't have the luxury of MSN or email). Dial to fast or didn't complete a full circle and you have to start all over. The call lasted 1 minute, but making the call took 2 minutes with all the mistakes. Anyways, most the time, the opposition would simply allow the call so we could continue playing rather then send someone else home to get their football or quit the game altogether.

The oil companies are performing a similar maneuver in the face of an unfavorable call. If the oil companies collectively represent my friend with the football; a few of his supporters represent the special interest groups that support him; and the rest of the players represent Albertans, you might as well be playing this scene at our old elementary school. Oil companies are threatening to pull out of the game and take the only thing that would keep the province going, money. They obviously have a few supporters in form of special interest groups but rest of people affected, Albertans, stand to benefit collectively on a larger scale. Investment into health care, roads, schools just to name a few. Alberta already has the distinction of the only province with no net debt or provincial tax, but services otherwise are still suffering. Simply drive the roads and you will understand.

So what's the solution. Lets visit us in our younger days on the field again.

1) Someone else buys a football: Firstly, no one will pitch-in for the cost. Second, if another is readily available their is no incentive to buy another. Speaks to diversifying available resources and the economy.

2) Have a neutral party call the plays: There was no such thing as a neutral party. Everyone wanted to play so being assigned to one team or another and arguing for the opposition is effectively suicide. Besides, the argument would still be there given the stake of the game and lack of a paid official that both parties have paid to be there (hey we could barely afford a second football).

3) We quit playing football: This would often happen as we went through fazes where we abused one sport for awhile and then would switch to another. Much like the up and downs in the market but here the difference is our dependence on fossil fuels. Again, this also speaks to diversifying the economy.

In the end, the outcome in Alberta is going to be similar to the outcome at our football games. Someone will make a concession or realize asking the only individual with the game ball to pullout is like asking everyone to go home without the satisfaction of a win. Time, energy, and effort was wasted and in the end everyone leaves empty handed. Everyone that is, expect the individual with the ball, who realizes the next time he calls, you will still show up to play.

My 2 thoughts anyways....