Mid-Life MBA: The Art of Business

So where are the last great oil reserves?

Two of them lay much nearer to home than many people may realize.  Venezuela’s Orinoco Belt is estimated to contain up to 235 billion barrels of recoverable oil but a good old clash between Hugo Chavez’s leftist politics and the capitalist interests of Chevron et al, has staunched the flow to 2.2 million barrels per day from what was once 3.5 million. 

North of the border, Canada’s Athabasca tar sands contain similar reserves.  Now that the price of oil can justify the expense of upgrading the tar sands the major remaining issues concern human capital and infrastructure. Still by 2020 the tar sands are expected to produce 5 million barrels per day.

On not so grand a scale as in the USA, Nepal reports imports rising 24% against a 14% increase in exports for the first 8 months of the Nepali fiscal year.  This further widens a trade gap that for the current fiscal year has matched 43.3 billion rupees  (1.68 billion) in exports against 114 billion rupees ($618 million) in imports.

The People’s Daily Online said, “According to the statistics of NRB, the country’s trade deficit touched 74.16 billion Nepali rupees (1.06 billion U.S. dollars), while it was 54.10 billion Nepali rupees (772.86 million US dollars) during the same period of the previous fiscal year.”

And What about India?

The International Herald Tribune reports that India has enjoyed a 9.3% economic growth rate over the first quarter of 2006, comparing well to China’s estimated 10%.  Perhaps surprisingly, significant increase is attributed to agricultural growth (2.9 to 5.3).

“Based on an orderly correction in the US current account deficit, the World Bank said today that it expects an annual, 5% effective decline in US currency through 2008.”  At the same time it expects the global economy to expand at a rate of 3.7% in 2006, up from its estimate of 3.2% in late 2005.

Private investors have  bid to take oil pipeline company, Kinder Morgan, private.  Richard Kinder, former Enron executive, owns 20% of the shares and has rallied support of other company executives as well as a cadre of private equity firms including Goldman Sachs, American International Group and Carlyle and Riverstone.

Shares notched up almost 20% today to 100.90 following Kinder’s current bid which represented $100.00 per share. The current bid at $13.4 billion (over $20 billion including debt) is anticipated to move yet hire. Some analysts speculate that interests such as TransCanada and Enbridge may offer competing bids.

WestJet, the Canadian, discount airline, admitted on 5/29 that it had improperly accessed key Air Canada data relating to key flight operations data including excess capacity information for its routes.  It also admitted that it had gained this information with the full knowledge of the highest levels of WestJet administration.  In its settlement WestJet will donate $10 million to children’s charities and pay $5.5 million of Air Canada’s legal costs for the two year battle.  WestJet had $288 million in cash at the end of the 1st quarter 2006.  WestJet shares rose by 5% following the announcement of the settlement.

Richard Branson, chairman and owner of the Virgin group estimates that in the event of the bird-flu virus mutating to facilitate ”human to human” transmission of the disease, 70% of airline carrying capacity could be grounded for up to a year. He said, “statistically, there is about a 6 percent chance that in any one year of the next 10 years this becomes a person-to-person problem, and we just have to hope it is not this year.”  The only up side to the epidemic would be a precipitous drop in fuel costs.

As a precautionary measure Virgin Airlines has purchased sufficient quantities of the Tamiflu, anti-viral drug to treat all of its airline employees.

Convicted on Thursday May 25th, both Ken Lay and Jeffery Skilling were found guilty of fraud and conspiracy though, as several analysts point out, they neither violated FASB rules nor masterminded the “smoke and mirrors” financial mis-management at Enron.

For example, when they shifted lines of business between business segments with the net effect of reducing the outward appearance of losses, they violated no GAAP (generally accepted accounting principles).  What was at issue however was their non-disclosure of underlying reasons for these changes to investors–a fundamental failure of the level of accountability required by the SEC (in hindsight) and now mandated by Sarbanes Oxley. The Times concludes, “Enron’s financial statements did not conform to the rules. But the convictions of Mr. Lay and Mr. Skilling were based in part on determinations that they failed to give a fair picture, even when they did not violate the rules. That is a precedent that could come back to haunt other executives.” 

How did Lay and Skilling not present a fair picture? A further example of their well-developed pattern of misrepresentation occurred during a summer, 2001 meeting between Lay and analysts where he declared Enron’s liquidity to be “fine” even though he knew at that time about $7 billion in hidden debt, and liquidity temporarily guaranteed only by an emergency $1 billion loan with Enron pipelines offered as collateral.

On another occasion during the same period, despite knowledge that broadband was going way south, that Arthur Anderson had found a $1.2 billion balance sheet oversight and that a major partnership was failing, he declared to the public that Enron stock was “an incredible bargain.”

Now that there is a conviction some argue that Sarbanes Oxley is no longer required to protect the public from corporate corruption. Scott Richardson, an accounting professor at the University of Pennsylvania’s Wharton School of Business concluded, “The regulation isn’t necessary because the legal system is working.”

What the legal judgment does nothing to mitigate however are the following consequences of the Enron debacle: $60 billion in market value wiped out, $2.1 billion in pension plans destroyed, 5,600 jobs gone forever. 

After Trial Quotes:

“I firmly believe I’m innocent of the charges against me. We believe that God in fact is in control and indeed he does work all things for good for those who love the lord.” -  Ken Lay 

“Some things work, some things don’t.” - Jeff Skilling

“You can’t lie to shareholders, you can’t put yourselves in front of your employees’ interests. No matter how rich and powerful you are, you have to play by the rules,” - prosecutor Sean Berkowitz.

“To me, God has spoken to him with this verdict, I guess it gives me a little comfort, but it doesn’t put back my retirement money.” - Sherri Saunders (former Enron employee who lost $1 million in retirement savings).

When the question of whether the recent verdicts were fair was put to a vote on MSNBC, of the 138,200 who voted, 92% said “Yes, they deserve to go to prison,” 3.1% said “No, they clearly showed their innocence,” and 4.6% didn’t know what to believe.  

What do you think?   

 
“Rising incomes allowed Americans to spend more in April.”

It’s always interesting to read analysis from a foreign perspective.  The BBC reported on Friday that “US spending grew at it’s fastest rate for 3 months as US workers brought home more money.”

The article noted that a .5% increase in incomes fueled the .6% increase in spending that it termed “a spending rush.”

The article also points out that core inflation rose by only .2% but admitted that once food and fuel were included overall inflation rose by .5%. 

The obvious explanation is that both food and fuel are relatively inelastic and that .4% of the increase in spending was pretty much unavoidable.  What about the other .2% increase in spending?  How about rising interest rates, upwardly adjusting ARMs and a deflating dollar?

In this week’s Barrons, James Turk, founder of goldmoney.com talked about the rising price of gold.  Correct in his predictions so far he asserted that a reasonable ceiling in the near-future was $1300.00 per ounce with a potential for $2000.00 to $8000.00

Turk said that the price of gold wasn’t so much going higher as the dollar was going lower and compared $500.00/oz gold in 2006 with $42.00/oz gold in 1971 as a function of inflation.  He cited with some measure of incredulity and regret that the government no longer compiled M-3 statistics on dollars in circulation.  He speculated that the elimination of M-3 measurement was not so much to save the $1 million budget as it was a cautionary step to control inflationary expectations, a misstep in the long run.  At the cessation of M-3 measurement, said Turk, the number of dollars in circulation was increasing by 8% annually but with an overall upward trend. 

There do exist of course, other-than conspiratorial views regarding the elimination of M3-watching by the fed. For a well reasoned explanation of the relative insignificance of M3 to most economists visit www.econobrowser.com. Professors Hamilton and Chinn suggest that it conveys little useful information about liquidity in the economy and they assert that inflation can be assessed without it.

Quote: “There are problems with the dollar, and that’s being reflected in a higher gold price. So, truth be told, it’s not that gold is going higher — it’s that the dollar is going lower. An ounce of gold still purchases as much crude oil, essentially as it did 50 years ago, but that can’t be said about dollars.”

reference: www.Barrons.com

If you can’t afford to devote one to two full time years to graduate business study, can you get the equivalent by reading the books?  The central thesis of the PMBA concept is that you can come close.

While you won’t derive the equivalent by reading alone, and while you won’t actually read all of the books that you might encounter in a traditional MBA, and while you won’t benefit from the lecture and team-based project components, you will absorb a lot of the content.  The reading program has the potential to extend your leadership potential and familiarize you with core concepts.

One of the books, “How to Read a Financial Report” by John Tracy provides a startlingly clear “dummies” guide to wading through financial reports.  This is useful.  It is less than comprehensive however, the natural shortcoming of a primer.

Josh Kaufmann lists several PMBA resources on his site with extensive discussion.  There is also a PMBA site for participants to gather and discuss individual books.  Well worth a serious look if you are interested in business concepts and in acquiring new skills and insights.

Josh Kaufmann

The Personal MBA