Jobs In The UK

I've been asked to add this link to my blog. http://jooble-uk.com/ If you click on it you will be directed to a site that has comprehensive job postings in England.

Thanks

John A.

Follow Up From The Mainstream Media On Persistent Issues

The press has continued to cover topics and opine on matters that this blog has handled for months if not years, but the slants they offer now largely echo the sentiments that historically have dominated this column. Here are the specific areas, and I apologize in advance if the NY Times links require you to establish a free subscription to access the content.


Afghanistan

In "Let Them Have Oprah" (11/24/2009) and "More Afghanistan Commentary" (12/9/2009) I strongly suggested that our efforts should be oriented towards helping the Afghan citizens by educating them and showing them societal alternatives. As Nicholas Kristof wrote then and reprises now, our focus should be on, among other things, building schools. It costs $1 million per year to pay, equip and support each soldier assigned to this war, and that is more than enough to begin construction on 20 new schools. Kristof's article:

www.nytimes.com/2010/07/29/opinion/29kristof.html?emc=eta1

"The Afghanistan Fiasco" (6/12/2010) details reasons why the war is not only un-winnable but also, is a tragic waste of lives and resources. Let's face it, neither the Soviet Union nor Genghis Khan were able to conquer this territory and we won't be able to either. Bob Herbert details the personal horror and Albert Hunt writes about the collapsing US-Afghanistan policy. For many months, the war was lightly covered by the media and nearly unspoken by the administration and Washington politicians. Since our country is now spending $105 billion+ per year on this lunacy, it is about time that the travesty, duplicity and confusion receive wide exposure. The two links are below:

www.nytimes.com/2010/08/03/opinion/03herbert.html?_r=1&emc=eta1

www.nytimes.com/2010/08/09/world/asia/09iht-letter.html?emc=eta1


Prevaricator In Chief

I have severely criticized President Obama in a blog series entitled "Prevaricator In Chief" (June 12, 4, and 2, 2010) wherein the main issue I attack is the President's dissembling, spinning and outright lying to the American public. In the Wall Street Journal, Fouad Ajami, a Johns Hopkins professor has recently published an eloquent piece that depicts much more serious Obama failings. In essence, Ajami declaims that the Prevaricator is an "empty suit with a teleprompter," a sweeping, unpopular/socialistic agenda and wavering support from even his staunchest supporters. I highly recommend that you read this editorial, "The Obsolescence of Barack Obama":

online.wsj.com/article/SB10001424052748704164904575421363005578460.html?mod=WSJ_hpp_sections_opinion


Greenspan

In "A Shameful Performance Mr. Greenspan" (5/13/2009) and in other blog notes, I pointed out that Alan Greenspan has been in high gear, using extreme revisionism to attempt to restore his tattered reputation.

The octogenarian is at it again. Why won't this guy just fade away? In any event, for what some believe is political expediency, Greenspan is throwing what little weight he has left into the Bush tax-cut debate. Nevertheless, I'm pretty sure that most people will simply ignore the guy who was a primary architect of the collapsed financial edifice. Here's a link if you are interested:

www.nytimes.com/2010/08/07/business/economy/07greenspan.html?_r=1&emc=eta1


The Economy

I have written repeatedly about our economic circumstances, and while some predictions have been wrong, for the most part, things are happening as I have been reporting all along. For example, I had thought that the domestic auto industry would have collapsed by now and clearly, it has not done so, albeit it now employs 30% fewer workers than it did two years ago, and Chrysler still can't manage to earn a profit. For the record, I'm still worried that the car markets will backslide into the morass.

On other items like unemployment, which now stands nominally at 9.5% and closer to 20% in reality, prognostications have been pretty accurate. The same goes for foreclosures (residential and commercial), the fiscal deficit, state/municipal finances and the like.

For your reading pleasure, I am including some links that I have assembled on the various topics:

Boiling Over:
online.wsj.com/article/SB10001424052748703748904575411713335505250.html?mod=WSJ_hpp_sections_opinion

Foreclosures:
online.wsj.com/article/SB10001424052748704499604575407584128526218.html?mod=WSJ_WSJ_US_News_5

Going To Extremes:
www.nytimes.com/2010/08/07/us/07cutbacksWEB.html?emc=eta1

As The Economy Slows
www.nytimes.com/2010/08/09/opinion/09mon1.html?emc=eta1


China Pollution

I have been a strong believer that we need to pay attention to cleaning up the environment simply because this is the proper way to mitigate even the slightest risk to the planet. In keeping with the "bad math" theme that permeates the blog, it makes no sense to ignore potential catastrophe, even if the probabilities are remote. The better solution is to conserve energy because that helps avoid the problem while at the same time, it improves economic efficiency.

"Global Warming Redux" (8/8/2009) and "Dirty Little Secret" (5/25/2009) both assert that if China and India do not also improve their entire pollution footprints, then the world's situation is hopeless because these two nations comprise the largest and fastest growing filth-perpetrators.

In a recent development, China announced that it is closing down 2000+ factories because they are "energy-intensive" and these companies satisfy that appetite by using older, expensive and dirtier technologies. Let's be clear here. The Chinese do not care one whit about global warming and such, but they do pay extreme attention to their economy. Since China imports 100% of its oil and increasing amounts of coal, it makes consummate sense for that country to realign its industries so that they ensure their future competitive viability. Obviously this is welcome news and perhaps it is also a standard-setting example for others. In other words, no matter what the motive...just clean it up. I hope India is listening.

Here's the story:

www.nytimes.com/2010/08/10/business/energy-environment/10yuan.html?emc=eta1

Thank God For Angels!

During the past year or so, it has been incredibly difficult for seed and start up stage companies to raise money from professional venture investors. Yes, there have been a few notable exceptions that have been heralded by the financial press, but for the most part, traditional capital sources have yielded to angel funding; in my view this is not necessarily a bad thing.

First let's examine what has happened to venture capital. In the previous decade limited partners dedicated enormous sums to the venture capital asset class and inevitably, this money was deployed by both older firms and relatively new ones across the entire company life-cycle spectrum including stages such as seed, start up, early emerging, growth, buy outs and the like. Historically, venture firms have been able to generate decent returns in each segment. Of course, parameters and behavior vary by stage so that, for example, it is axiomatic that failure rates and exit horizons are higher/longer with early-stage investments than they are for more mature ones. Nevertheless, with proper discipline and mathematically-oriented investment criteria, it certainly was (is) possible to assemble very attractive portfolios at every stage, including the early ones.

So why has seed/start up money dried up? One reason is that according to Cambridge Associates, an organization that likes to keeps tabs on venture capital performance, investment returns during the past 3, 5 and 10 years have been worse than anemic. This is typified by a) too much money chasing deals, b) too few firms willing to cut and run and c) even for reasonably successful companies, a very hostile exit environment (ie. almost no IPOs, very stingy M & A, etc.) So what transpired is that venture capital partnerships are now loaded with inventory from prior investments and accordingly, they don't have the bandwidth to cope with new, early stage investments which on balance, take more effort than their later stage brethren. The following WSJ article about board seats neatly illustrates these points:

http://online.wsj.com/article/SB10001424052748703977004575393692282796162.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsFifth

Compounding this is that the fund raising atmosphere for existing venture capital firms and especially for new ones is murky at best. This has engendered a hypersensitivity biased towards shorter investment horizons and quicker, although not necessarily larger (as a multiple of capital invested) exits. My friend, former colleague and fellow blogger Larry Cheng has written an interesting article about why his practice now favors growth-stage investing:

http://larrycheng.com/2010/04/17/why-growth-equity-is-the-best-riskreward-in-private-equity/

Moreover, unfortunately the entire venture capital industry is shrinking. Even though this is caused by poor investment returns delivered in the past decade as well as the egregious behavior exhibited by venture investors in aggregate, one thing that the United States has been particularly good at through the years has been nurturing, growing and commercializing innovation. If early stage investing significantly evaporates, I believe that our nation will lose a critical strategic/financial resource and a key economic driver. Another WSJ piece summarizes the situation:

http://online.wsj.com/article/SB10001424052748704229004575371533586548818.html

So why am I optimistic about early-stage investing? While angel investors have fundamentally always been an important funding source, it seems that they have recently been filling the seed/start up investment vacuum very aggressively. Even some well-established venture funds have committed capital to so-called "Super Angel" groups so that they can maintain their relationships with early opportunities that are initially shepherded by designated angels. Universities are also establishing direct funds, incubators and the like so as to care for and feed those concepts that are developed in academia. The following two articles highlight these efforts:

http://online.wsj.com/article/SB10001424052748704569204575329692106711952.html?mod=rss_newyork_main

http://www.nytimes.com/2010/06/27/business/27incubate.html?emc=eta1

There are few inherent flaws associated with seed and start up investment activities so long as those who are involved pay attention to several precepts:

1. Concepts and technology should address very large markets, defined as at least $1B+ at the outset. Technical and execution risk is high enough with early stage companies so that if a company manages to pull off a successful commercial launch, there should be a very broad audience for whatever the thing is.

2. The early investor's initial ownership must be very significant. This not only helps mitigate future dilution but also provides a foundation for investment rewards when a company eventually navigates to a liquidity event. My rule of thumb is that early stage investors should receive 40% of the equity, entrepreneurs get 40% and 20% is reserved for future contributors. This formula operates somewhat independently from the amount being invested since it relates purely to seed and start up opportunities.

3. Investment discipline is paramount. If, for example, the founders have laid out a plan that shows that the idea will be demonstrable as a prototype for say, $500,000 then by the time $250,000 is spent, they better be way beyond 50% complete. Or if a company starts to modify the original investment thesis, then at that instant, the entire enterprise needs to be reevaluated with at least the same diligence effort applied when the investment originated.

4. It's imperative to cut losses short. If as in the above example, $250,000 has been spent and the thing isn't working, then it might well be better to just pack it in at that point, unless there is a highly compelling reason to continue.

5. Recruit new investors before exhausting the initial investment. If the early investor can't find fresh money at a reasonable valuation step-up (protecting against severe dilution) after the company has achieved important milestones, then this may be a reason to terminate further early-stage investment.

6. Seek customers and partners immediately after the company proves that the concept is viable. There are usually a plethora of early adopters for great, demonstrable ideas. If the company has trouble soliciting interest in the prototype, this can be a very bad signal. Of course, the usual and customary intellectual property protections need recognition here.

7. While inventors seldom have the skills requisite to propel a company beyond its early years, it is often a mistake to recruit executive "talent" too rapidly. The early stage investor should be qualified and prepared to fill the overseer role until such time as the company is actually ready to enter markets. This will not only conserve financial resources and reduce potential friction, but also, will allow the company to recruit higher quality personnel at the appropriate time.

Given the venture capital industry's woes, and assuming that there is a reasonable behavior pattern involved, I believe that the future for early stage angel investing, university funding, incubators and the like is quite bright. Angel investing and related activities operate on a scale much smaller than institutional investors such as venture funds. With a $10 million capital pool (minuscule by venture capital standards) and assuming that 6/10 $500,000 investments fail outright, 3 return capital and 1 achieves a $100M exit (also modest by venture capital measures), that pool will produce at least a 3X return. If it does so in 5 years then the annual return rate is nearly 25%, dropping to about 12% if it takes 10 years.

Returns such as this will not "move the needle" for large venture capital partnerships since this analysis doesn't assume finding the next Google so to speak. But early stage investing by angels and their counterparts can provide meaningful investment returns for smaller players, and just as importantly, it will continue to fuel the innovation that America so badly needs.

Oh No, Another Blowout In The Gulf!

Well obviously this hasn't happened yet, but the worst nightmare is that the so called relief wells will themselves cause a blowout. If you think that this isn't possible, then you need to more closely follow the record.

The two related NY Times articles below paint a very scary picture. The first story is 23 pages long so I will synopsize it for you:

1. Deep water oil drilling is a very dicey and not well-understood proposition...nothing earth shattering about this conclusion.

2. The ultimate fail-safe mechanism is the five-story tall blowout preventer which according to all reports is a Rube Goldberg device that relies on, in effect, giant scissors to sever and seal the mile-deep pipes when necessary.

3. Preventers are notoriously fickle. They have a single point of failure (certain valves) and in deep water usage, they fail 45% of the time. So much for Tony Hayward's stupid statistics about this being a 100,000 to 1 or 1,000,000 to 1 accident, as I have previously written about.

4. Everyone in the oil industry (yes that means you Exxon, Shell et al) employs this technology and they fully comprehended the risks and shortcomings associated with their blowout preventers.

5. The government including Obama and his retinue also knew about all this. Responsible agencies repeatedly failed not only to order redesigning the apparatus but also to demand that existing preventers be adequately tested.

6. The oil industry and the present government continually conspired to prepetuate the dangerous status quo with respect to deep water drilling.

The second NY Times piece outlines notes taken by on-site engineers which demonstrate how little even the "experts" know about how to contain this monster.

So what can we speculate about the ongoing situation? It's absolutely clear that there are no containment solutions on the horizon, other than attempting to drill relief wells, and even the abatement efforts are proving to be feckless so far. But the unspeakable truth is that nobody in authority is talking about what might happen if one or the other relief wells also blows out. And what is preventing that from occurring? You guessed it...a blowout preventer, albeit with some extra redundancy (2 scissors) but fundamentally, the same design as the original one that crapped out.

I wish I had answers or even suggestions that would apply to the present mess. But I do have well-founded fears that things could get very much worse, and I don't think that the oil industry should be running around doing more deep water drilling until they are prepared to demonstrate and deploy safety measures that are substantially more reliable than what exists today. I realize that considerable economic loss follows such a policy but as we have already seen, there are even worse consequences to continuing on the perilous path that led us to where we are today.

Here are the article links:

http://www.nytimes.com/2010/06/21/us/21blowout.html?emc=eta1

http://www.nytimes.com/2010/06/22/science/earth/22blowout.html?emc=eta1

The Afghanistan Fiasco (Continued)

In blogs posted on November 24, 2009 and December 9, 2009 I criticized severely the war effort in Afghanistan. Basically I asserted that this altercation is unwinnable, unpopular and unfair to those poor kids who risk their lives pursuing America's futile quest in the Middle East.

As just reported in the NY Times, Karzai the sleezebag is said to be cozying up to the Taliban because he believes that neither the West nor NATO forces can ultimately prevail. While it would have been nice if Karzai had made this proclamation more than a year ago, I find it hard to blame him for voicing, what seemed to me all along, an obvious truth. For all the gory details, you can follow the link below:

http://www.nytimes.com/2010/06/12/world/asia/12karzai.html?emc=eta1

In a related editorial, Bob Herbert opines in his usual eloquent style. In "The Courage to Leave" Herbert exhorts our government to admit that we have deeply misjudged the situation in Afghanistan and in effect, to get the hell out of there now. I couldn't agree more. Here's the link:

http://www.nytimes.com/2010/06/12/opinion/12herbert.html?emc=eta1

American Nero...Good Graphic, Different Subject

I recently used the graphic above which depicts Obama as Nero, fiddling while Rome burns. Just yesterday, a WSJ opinion piece likened the Prez to "An American Nero." You can access the link below. The article's gist is that the President, PICUS or whatever insists on throwing parties and taking vacations while:

1. The Gulf oil spill gets worse, Obama's ridiculous "ass-kicking" statements notwithstanding.
2. The economy is in shambles.
3. The "war" in Afghanistan deteriorates into dust (see my next blog.)
4. The US debt/deficit situation has escalated to "condition red."
5. The health care legislation is starting to look like the disaster that many predicted it would be; PICUS is now running around defending it like crazy to anyone who will listen to him...seniors, doctors, congress, whomever.

You can read all this for yourself but I was amused that the analogy they used is the same one that, a few days ago, I also conjured up.

http://online.wsj.com/article/SB10001424052748704312104575298550188788086.html?mod=WSJ_Opinion_MIDDLETopOpinion#articleTabs%

Bad Math Reaches Beyond Financial Debacles

In prior blog posts, specifically on September 8, 2009, September 11, 2009 and in sporadic comments throughout, I highlighted the atrocious risk management based on poor mathematical modeling that precipitated the financial meltdown in 2008. Going back ten years earlier, Long Term Capital Management made similar miscalculations despite the fact that two Nobel Prize winners in economics, Myron Scholes and Robert Merton worked there.

Now it seems that British Petroleum in particular and perhaps the oil industry in general are also using ludicrous algorithms for predicting risk. For example, Tony Hayward, the beleaguered CEO has made pronouncements ranging from stupid/insensitive all the way to downright pernicious.

"I would like to get my life back" is a really dumb and selfish thing to have said...hey Tony I've got news for you, 300+ million people in America would like their lives back too. "We are 60-70% confident that the top kill procedure will be effective." In hindsight, it doesn't seem like that prediction was all too accurate...top kill efforts failed repeatedly such that there is no possible way that they ever had anywhere near a 60% chance to succeed. Before cutting the leaking pipe, BP told us that this action might increase the outpouring oil volume by 20%. Now, some scientists are worried that after the cut has been made, the exiting oil could be many times that 20% estimate.

What really frightens me though is something that Hayward let slip this past Sunday and I am a little dismayed that I have not seen anyone in the media call him on it. In a press release Hayward was quoted as noting that the probability against this accident happening was "100,000 to 1 or even 1,000,000 to 1." At face value, this is an utterly absurd statement. It would be like handicapping a horse as being somewhere between a 10-1 and a 100-1 shot!? Probabilities which range a full order of magnitude are inane and useless.

Moving to the next level, even if the odds against the spill happening were indeed one million to one, the risk-adjusted view, which ostensibly should be used for making operational decisions, is far greater (perhaps a thousand times more likely) than that. One million to one is a better chance than someone has to actually win the lottery and yet, lotteries are won every week...get the point?

Finally, how in the hell did anyone manage to come up with this probability appraisal? There have been in aggregate, fewer than 6,000 deep water wells drilled on the planet. Throughout deep water drilling history there have certainly been numerous accidents; the Gulf spill is cataclysmic, but there have been other serious mishaps. One would think that prudent risk management would use prior drilling history to rate the potential danger before knocking open a hole in the bottom of an ocean.

For once I agree with President Obama...Tony Hayward should be terminated as BP's CEO but I have reasons different than Obama's. The President thinks that BP caused the oil spill but I rather believe that the oil industry in cahoots with the government was responsible for it. Shell, Exxon et al are I'm sure on their knees with their Rosary beads thanking the Lord that something like this didn't happen to them...this time (remember the Valdez?) Rather, I think Hayward should be canned because he makes stupid, inaccurate and dangerous public statements. He also allowed his company to behave in a grossly negligent manner, without properly considering the dire consequences that ultimately arose from this carelessness.

It may sound like I abhor oil companies, deep water drilling or even Wall Street, but that assessment is entirely incorrect. I am not even arguing for risk aversion...all progress requires taking a chance on something. But I am advocating rigorous risk awareness/abatement and the mathematical tools to perform this analysis already exist, albeit, outside the realm of the conventional statistics that are most often used. For example, if Exxon, the industry and the government had properly come to grips with the fact that tankers can run into something that punctures them, then maybe double-hulled vessels would have been more prominent at the time the Valdez incident occurred...this wouldn't have averted the spill but it would have mitigated the damage. If BP had realized that its drilling strategy and cost-cutting mentality (see the NY Times link below) were not only bet-the-company but also, bet-the-Gulf of Mexico propositions, then perhaps it would have bored relief wells (assuming that this is the ultimate solution...we'll see if that's true) simultaneously when poking the production hole. I'm not suggesting that I know the specific risk-reduction remedies, but I AM saying that anyone who is in a position to create catastrophes had better completely recognize their predicament. While there are always possibilities for error, in situations like this, trivial considerations such as short-term profits, cost-savings and the like must be dwarfed by overarching, preplanned, redundant remedial resources which are deployed long before any accident can possibly happen...in other words, before drilling begins.

Modifying corporate and governmental behavior patterns with respect to potentially gigantic human, environmental and financial liabilities like the Gulf spill will require not only new, more appropriate risk measurement methodologies but also, a refreshed risk-reward mindset. If projects can't sustain the costs associated with extensive, appropriate prophylactic elements then they should be abandoned. I have no idea how much oil is in that particular reservoir in the Gulf, but whatever it is, it isn't worth the trouble and tragedy that this spill has caused.

For a more detailed description about BP and their missteps, please see the NY Times article below:

http://www.nytimes.com/2010/06/06/magazine/06fob-wwln-t.html?emc=eta1

To read about oil projected to climb up the east coast and beyond, you can check out this piece from the WSJ:

http://online.wsj.com/article/SB10001424052748703340904575284950638479786.html?mod=WSJ_WSJ_US_News_