Friday, October 31, 2014

A New Twist in the Argentine Debt Saga (BusinessWeek)


Cristina Fernandez de Kirchner, president of Argentina, speaks to Economy Minister Axel Kicillof in Buenos Aires on Sept. 30
Cristina Fernandez de Kirchner, president of Argentina, speaks to Economy Minister Axel Kicillof in Buenos Aires on Sept. 30
A new player has emerged in the Argentine debt drama. The question is why, and what does it mean?
Last week, Kenneth Dart, the billionaire heir to a Styrofoam cup fortune, jolted the Argentine debt negotiations by asking a New York judge to force Argentina to pay his bonds in full, too. Like Elliott Management’s Paul Singer, who has led a group of holdout bond investors trying to compel the Argentine government to reach a settlement with them, Dart is known as a “vulture investor” who has made a career of buying defaulted debt and then suing to be repaid at full value. Dart, it turns out, owns more defaulted Argentine bonds through his fund EM Ltd. than Singer’s fund NML Capital does, with $595 million worth to NML’s $503 million. Until now, though, he has remained quietly behind the scenes, as Singer and four other investors publicly battled the Argentine government through the U.S. court system. His sudden appearance shows that settling with Singer’s group of holdouts may not actually solve Argentina’s problems.
Argentina went into default on July 30 after a $539 million bond payment was blocked by a federal judge who said that the country can’t pay any of its exchange bondholders, who participated in the country’s two debt restructurings, until a group of holdout hedge funds are paid on their bonds. In addition to exacerbating what is already a difficult economic climate in Argentina, it has put the country’s leaders in something of a pickle. Argentine President Cristina Fernandez de Kirchner has made her battle against the American “vulture” hedge funds a central theme of her politics. To reverse course now, and pay Singer and the others what they want, would likely come at a high political cost. The goal then, from Argentina’s perspective, is to reach a resolution with the holdouts at the lowest price possible, and that can only be accomplished by diluting their leverage. Right now, their leverage is the fact that their actions pushed the country into default, so reducing it means finding a way to pay the exchange bondholders, which would get the country out of default, all without settling with the holdouts.
As of a week ago, the difference between what the holdouts were willing to accept and what Argentina was willing to pay had collapsed to a fraction of the $750 million or so that it was back in July. But Dart’s legal complaint draws attention to something that had been overlooked as the talks progressed: The so-called Gang of Five—the five holdouts at the center of Singer’s legal case: Singer’s NML Capital, Aurelius Capital, Blue Angel Capital, Oliphant, and a small group of retail investors—hold only about a quarter of all the New York bonds held by holdouts. In addition to Dart, there are approximately $2.4 billion worth of bonds out there that are governed by New York law and in the hands of other holdout investors. The minute Argentina settles with Singer’s group and the bondholder payments are allowed to flow through, all the other holdouts will likely rush forward to Judge Thomas Griesa’s court, demanding the same legal rulings and the same terms, which could block the payments again. The default could be cured temporarily, but then Argentina would be right back where it started.
That leaves only two routes to Argentina’s goals of restoring the blocked payments to its exchange bondholders; getting itself out of default; and, ideally, lowering the price it has to pay to all of its holdout investors. “To reduce the negotiation power of the holdouts, the payments on the exchange bonds must be placed beyond the reach of U.S. courts,” says Adam Lerrick, who led the negotiations on behalf of 40,000 European retail investors who formed Argentina’s largest international creditor in its 2005 debt restructuring. “The exchange bondholders can do this themselves by replacing their trustee and changing the payment process on their bonds. Or, Argentina could launch a new exchange offer where the new bonds are identical to the exchange bonds but the payment process is outside the U.S.”
In the first instance, in a plan Lerrick previously outlined, the exchange bondholders could band together and vote to remove the Bank of New York Mellon (BK) as their trustee and replace it and the rest of the bond payment process with financial institutions outside the U.S., where they would not be affected by Judge Griesa’s rulings. The payments could then continue to the exchange bondholders as planned, Argentina would no longer be in default, and it could then calmly turn to negotiations with the holdouts, without the threat of default hanging over it.
The second scenario involving a new exchange offer would likely happen if 25 percent of the exchange bondholders requested acceleration and immediate repayment in full of their bonds, an option that was triggered when Argentina went into default in August. An important deadline for holders to request accelerated repayment comes up on Oct. 30.
This is the game theory that is no doubt driving the decisions of Dart, Singer, and others with large stakes in the outcome. It’s unclear where it will lead, but an imminent settlement with Singer and Co. seems increasingly unlikely.
Kolhatkar is a features editor and national correspondent for Bloomberg Businessweek. Follow her on Twitter @Sheelahk.

Wednesday, October 29, 2014

FTC says AT&T 'misled millions', charging for unlimited data but throttling speeds (ZDNet)

Summary: The cellular giant gets a second slap on the wrist by the federal regulator after the FTC accuses the company of misleading millions of its customers over unlimited data.
By  
att-hero-2
The U.S. Federal Trade Commission is suing cellular giant AT&T after it allegedly "misled" millions of its smartphone customers over its unlimited data plans.
The FTC said on Tuesday that the second-largest U.S. cellular phone network charged its customers for "unlimited data," but nevertheless reduced their browsing speeds. In some cases, speeds dropped by close to 90 percent.
Filed in the U.S. District Court of Northern California [PDF], the federal agency charged with protecting consumer's rights said the company had performed a "deceptive failure" to disclose its mobile throttling plan.
FTC chairwoman Edith Ramirez summed up her sentiment in three words: "Unlimited means unlimited."
She added: "AT&T promised its customers 'unlimited' data, and in many instances, it has failed to deliver on that promise."
Here's the nutshell to the FTC's complaint.
The FTC said despite "unequivocal promises" by the company to its customers that they would receive unlimited data, AT&T began in 2011 throttling data after they used just 2GB of data in a billing cycle — which most average users can go through quite easily.
About 3.5 million individual customers may have been throttled more than two-dozen times, the agency claims.
Simply put: AT&T broke the law by changing the terms of the customers' unlimited data plans while they were still under contract. And, AT&T didn't "adequately" disclose its throttling program. 
Although AT&T falls within the realm of the Federal Communications Commission's jurisdiction, FCC staff were consulted and worked closely with the FTC on bringing charges.
In response shortly after the allegations surfaced, AT&T called the FTC's complaint "baseless" and said it was "baffling" why the FTC would go after the company.
AT&T general counsel Wayne Watts said in selected remarks:
“The FTC’s allegations are baseless and have nothing to do with the substance of our network management program. It’s baffling as to why the FTC would choose to take this action against a company that, like all major wireless providers, manages its network resources to provide the best possible service to all customers, and does it in a way that is fully transparent and consistent with the law and our contracts.
It's the second time this month the company has been bitten by the federal government.
Earlier in October, AT&T was forced to pay $80 million back to consumers after it billed customers for unauthorized third-party charges.
The FTC claimed the company billed for "hundreds of millions of dollars in charges originated by other companies," usually in amounts of about $10, for subscriptions to ringtones and other text message-based content.
AT&T was said to have kept at least 35 percent of the charges it billed to its customers in a practice known as "mobile cramming."
Zack Whittaker writes for ZDNet, CNET, and CBS News. He is based in New York City.


Tuesday, October 28, 2014

Obama Is Too Cool for Crisis Management (BusinessWeek)


Obama Is Too Cool for Crisis Management
By the time President Obama gave in and appointed an Ebola czar on Oct. 17, the White House response to this latest national crisis had already run a familiar course: the initial assurance that everything was under control; the subsequent realization that it wasn’t; the delay as administration officials appeared conflicted about what to do; and the growing frustration with a president who seemed a step or two behind each new development. Meanwhile, public anxiety mounted as cable news hysteria filled the vacuum and shaped the perception of the unfolding crisis.
Obama calmly insisted there was nothing to worry about when the news first broke of Thomas Eric Duncan’s infection. “It’s important for Americans to know the facts,” he said on Oct. 6. “Because of the measures we’ve put in place, as well as our world-class health system and the nature of the Ebola virus itself, which is difficult to transmit, the chance of an Ebola outbreak in the United States is extremely low.” It soon became clear the health system wasn’t prepared; the virus spread, infecting two nurses who had treated Duncan. One of them had called the Centers for Disease Control and Prevention to report having a fever, yet was still allowed to board a commercial airliner on Oct. 13. The CDC’s guidelines were declared “absolutely irresponsible and dead wrong” by Sean Kaufman, director for safety training at Emory University Hospital, where two American missionaries from West Africa were treated for Ebola in August. But Obama clung to his position for two more weeks, even after it began to look ridiculous.
Only with public confidence slipping and dozens of congressmen calling for a ban on travel from West Africa did Obama submit to the kind of grand theatrical gesture he abhors: He canceled a campaign trip to hold an emergency cabinet meeting and appointed Ron Klain, a veteran political operative, to coordinate the government’s Ebola response. Then the pageantry of White House crisis response reached its familiar end point, with anonymous aides telling the New York Times that Obama was “seething” at the botched response and the criticism that he’d mishandled the crisis.

If all this feels frustratingly familiar, many former White House officials agree. The difficulty in formulating a response echoes the fitful efforts to address the Deepwater Horizon oil disaster, the chemical weapons attacks in Syria, the advance of Islamic State, the rollout of healthcare.gov, and even the shooting of Michael Brown by police in Ferguson, Mo.

Administration veterans describe Obama’s crisis-management process as akin to a high-level graduate seminar. “He responds in a very rational way, trying to gather facts, rely on the best expert advice, and mobilize the necessary resources,” says David Axelrod, a former White House senior adviser. On Ebola, Obama’s inner circle has included Dr. Tom Frieden, director of the CDC, and Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, along with White House Chief of Staff Denis McDonough, Health and Human Services Secretary Sylvia Mathews Burwell, and Homeland Security Advisor Lisa Monaco. By all accounts, Obama treats a crisis as an intellectual inquiry and develops his response through an intensely rational process. As former CIA Director Leon Panetta said recently in a TV interview, “He approaches things like a law professor in presenting the logic of his position.”
Six years in, it’s clear that Obama’s presidency is largely about adhering to intellectual rigor—regardless of the public’s emotional needs. The virtues of this approach are often obscured in a crisis, because Obama disdains the performative aspects of his job. “There’s no doubt that there’s a theatrical nature to the presidency that he resists,” Axelrod says. “Sometimes he can be negligent in the symbolism.” Lately, this failing has been especially pronounced. Few things strike terror in people quite like the specter of Ebola. An Oct. 14 Washington Post-ABC News pollfound that nearly two-thirds of Americans (65 percent) say they fear a widespread outbreak in the U.S. Cooler heads have noted that more Americans have been married to a Kardashian than have died from Ebola. But that fun fact misses the point: People fear what they can’t control, and when the government can’t control it either, the fear ratchets up to panic.
Obama’s presidency is largely about adhering to intellectual rigor—regardless of the public’s emotional needs
Americans’ views of deadly viruses such as Ebola are shaped by Hollywood movies such asOutbreak and Contagion, and when the prospect of a global pandemic arises, we expect a Hollywood president to take charge. Obama’sSpock-like demeanor and hollow assurances about what experts are telling him feel incongruous.
A bigger problem is that the Ebola experts in whom Obama has invested so much faith have often turned out to be wrong. Frieden and the CDC misjudged the ability of health officials to contain the virus and were caught flat-footed when it spread. “We wanted so badly to assure the public not to be frightened that we have frightened the public by having the credibility of public health questioned,” says Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota.
The whole notion that something as slippery and capricious as Ebola was as easy to contain as Obama confidently predicted was almost certainly misguided to begin with. “Medicine can be a very humbling profession,” Dr. Steven Beutler, an infectious-disease specialist at Redlands Community Hospital in Redlands, Calif.,recently wrote in the New Republic, “and after more than 30 years of practicing infectious-disease medicine, I have learned that the ‘unanticipated’ happens all too often, especially where microbes are involved.”
It’s true that Obama’s task is made considerably more difficult by the antipathy that has marked the Republicans’ response to Ebola. Most seem more intent on stopping Democrats than on stopping the contagion. Their ads politicizing the virus have only added to the climate of fear. And their filibuster of Obama’s surgeon general nominee, Dr. Vivek Murthy, has also silenced an authoritative voice on public health, for reasons as small-minded as those dictating the party’s line on Ebola: They’re carrying water for the National Rifle Association, which objects to classifying gun violence as a public-health issue.
Even so, the failure is mostly Obama’s. It didn’t require extraordinary foresight to anticipate the public freakout once the infection spread beyond Duncan. Obama, who’s better acquainted with Washington dysfunction than anybody, should have anticipated the partisan acrimony. The crisis required more of him than he seemed to recognize. But he was hampered by the same things that have plagued him all along: a liberal technocrat’s excess of faith in government’s ability to solve problems and an unwillingness or inability to demonstrate the forcefulness Americans expect of their president in an emergency.
 
 
It’s hard not to suspect that Obama’s lack of executive experience before becoming president is one reason why he often struggles to strike the right tone. In this way, he’s the opposite of the man who preceded him. “I still remember where I was when Bush took the bullhorn at Ground Zero,” Axelrod says. He was recalling one of the great moments of presidential theater, when George W. Bush climbed atop the rubble of the World Trade Center after the Sept. 11 attacks. “I can hear you,” Bush shouted to the cheering rescue workers. “The rest of the world hears you. And the people who knocked these buildings down will hear all of us soon.” In a stroke, Bush galvanized the nation.

Obama recoils from this kind of bravado—and bravado didn’t always serve Bush so well. (A certain flight suit comes to mind.) It also deserted him at critical moments like the aftermath of Hurricane Katrina. But replacing the impulse and emotion that governed Bush with a fealty to experts has led Obama to develop blind spots of his own.
Two months before Deepwater Horizon blew up in 2010, he felt assured enough about the safety of offshore drilling to open up 167 million new acres of ocean. “It turns out,” he told critics concerned about the environmental impact, “that oil rigs today generally don’t cause spills. They are technologically very advanced.”
The White House response to the subsequent explosion was classic Obama: He dispatched his Nobel-laureate energy secretary at the time, Steven Chu, to BP (BP)headquarters in Houston to brainstorm ideas for stopping the leak, tapping a new expert to replace the old ones whose views about the safety of offshore drilling were so tragically misguided. When that failed, Obama was left to twist in the wind and grouse about his bad fortune.
“I still have searing memories of the leak and our response,” Axelrod says. One cable network began broadcasting a live feed of the underwater gusher. To many Americans, it was a running gauge of Obama’s ineffectiveness when confronted with a disaster whose possibility he had blithely dismissed. “We finally made an Oval Office address, because we felt we had to have a presidential presence,” Axelrod says. Eventually, Obama bowed to public anger and imposed a moratorium on drilling.
Somehow, experiences like this haven’t tempered Obama’s faith in professional opinion or sharpened his sense of tragic possibility. He still seems caught off guard when things go wrong. In the case of Ebola, you also sense his annoyance at the panic over what remain extremely long odds of a serious outbreak. A thought bubble over his head seems to say: “I can’t believe everybody’s flipping out about this stuff!” But as Panetta recently noted, “My experience in Washington is that logic alone doesn’t work.”
The consequence this time is more than just a needlessly frightened public. An Oct. 16 report from Goldman Sachs (GS) concludes that, while the virus has so far had little effect on consumer sentiment, “the ‘fear factor’ associated with Ebola appears more significant than in past instances of pandemic concern.” Unlike such earlier pandemics as SARS, bird flu, and swine flu, the effect of an Ebola panic, the authors suggest, may mirror that of the Sept. 11 attacks, which temporarily caused people to avoid crowded shopping centers and flying on airplanes. The drag on gross domestic product growth in 2001 was estimated to be 0.5 percentage points.
Replacing Bush’s bravado with a fealty to experts has led Obama to develop his own blind spots
Obama’s defenders argue that it’s become all but impossible to respond to a national emergency in a way that’s broadly seen as successful—that a feverish desire to find fault and assign blame overwhelms even the most capable administrations. That’s not quite true. There are examples of crisis management that not only obviated attack but also came to symbolize how government can function effectively. In 1993, when President Bill Clinton appointed his fellow Arkansan James Lee Witt to run the Federal Emergency Management Agency, FEMA was held in such low regard that it was known around Washington as “the turkey farm”—a dumping ground for incompetent patronage hires. Witt turned it around. (And he was no egghead; he has only a high school degree.) One important change was boosting public outreach through the media. “When they call, let’s give them an answer,” he told his staff. “If it’s bad news, let’s give it to them anyway.” Witt made the agency so effective at responding to floods in the Midwest and the Los Angeles earthquake that he eventually rated a glowing profile in People magazine (“A Natural at Disaster”).
Obama obviously shouldn’t hold his breath. But his record, even on issues where he’s drawn heavy criticism, is often much better than the initial impression would lead one to believe. He may tackle crises in a way that ignores the public mood, yet things generally turn out pretty well in the end. He and his economic team, though deeply unpopular, halted the financial panic and brought about a recovery that’s added jobs for 55 consecutive months. His signature health-care law addressed a slower-moving crisis; while similarly unpopular, it has delivered health insurance to more than 10 million people. Even Deepwater Horizon was nothing like the environmental cataclysm it threatened to become. “It really became a parable of how government can mobilize to solve a big problem,” Axelrod says. And he adds, “Bush didn’t get bin Laden—Obama did.”
The best-case scenario is that the U.S. Ebola scare mimics this pattern. That could already be happening. On Oct. 20, Texas health officials released from quarantine 43 people who had contact with Duncan. Both of the nurses who contracted the virus appear to be in stable condition. Belatedly, the CDC has created rapid response teams to dispatch to hospitals the moment Ebola is detected, and the Pentagon announced it was forming a 30-person team to back them up. The health-care system may soon be as prepared to handle an Ebola patient as Obama mistakenly believed it was three weeks ago.
It’s often said in Washington that the best politics is good policy. That hasn’t been Obama’s experience. Dragged down by Ebola and other headaches, his approval rating has dropped to 40 percent, the lowest yet in his presidency. Democrats are on the verge of losing the Senate partly as a result. This reflects the cost of botching the initial response to so many crises. All in all, it’s a fascinating case study in the interplay of modern media and politics, the sort of thing that would make for a good graduate seminar. “As Obama used to say all the time,” Axelrod says, “ ‘This shit would be really interesting if we weren’t right in the middle of it.’ ”
With Mark Drajem and Shannon Pettypiece
Green is senior national correspondent for Bloomberg Businessweek in Washington. Follow him on Twitter


 


Monday, October 27, 2014

E N M I O P I N I Ó N:Por: Ricardo Tribín Acosta

Hambre y cruceros

He tenido la feliz oportunidad de ser un ocasional participante en los cruceros marítimos y siempre he escuchado la cantidad de bromas que se hacen alrededor de lo que allí se come lo cual, para definir en pocas palabras, es muchísimo y, en no pocos casos excesivo y no necesario.

Los "Buffet" de desayuno, almuerzo y comida tienen tal variedad y cantidad de alimentos que, resistirse a la tentación de comer, es tarea más que titánica. Por ello esto de que se va la gente a conservar la línea durante la travesía es una broma bien sarcástica puesto que al finalizar no resulta extraño que el pasajero termine con varios kilogramos demás.


Me pregunto, pues he visto siempre bastante comida no consumida que sobra, qué se puede hacer con ella puesto que almacenarla requiere unas neveras grandes y costosas sin que, como en todo no negocio, no exista al respecto una relación beneficio- costo.


Se me ocurrió entonces elucubrar en que sí se alojan en refrigeradores y al llegar a los puertos se hagan donaciones de estas comidas a los bancos de alimentos para la gente pobre, pensando entonces que , con las deducciones tributarias que estas generen, se paguen las refrigeradoras por sí solas, esto sería un proceso distributivo en el que participarían tres espectadores: las líneas de cruceros, los gobiernos, y los pobres, pensando que quizás con esto podría reducirse un poco la cuotidiana hambruna, al menos para unos pocos.


Miami, Octubre 25 de 2014



Friday, October 24, 2014

Amazon's Spending Problem Worries Investors

Despite rising sales, Amazon's operating losses in the last quarter were the highest in the company's history.


Amazon reported disappointing earnings today and that sent shares plummeting about 12 percent in after-hours trading. Analysts were ready for a loss, expecting to take a hit of $0.74 per share, but Amazon reported a loss of $0.95 per share. Over the same period last year, there was a net loss of $41 million ($0.09 per share), but this quarter saw a more substantial loss of $437 million.

Buzzfeed Business reports part of this loss was due to a "$170 million charge," as per the investor call. Chief financial officer Thomas Szkutak said this charge was "primarily related to the Fire Phone inventory evaluation and supply commitment costs."

In the third quarter of 2013, Amazon had an operating loss of $25 million. This year, it was $544 million— its biggest operating loss ever. Revenue was slightly off, as analysts expected $20.84 billion and Amazon delivered $20.58 billion.

Net sales, however, were up 20 percent year-over-year from $17.09 billion in 2013, though it was still lower than analysts expected.
Google Finance
CEO Jeff Bezos, however, looked to the future instead of the disappointing quarter. "As we get ready for this upcoming holiday season, we are focused on making the customer experience easier and more stress-free than ever," he said in a statement. He promised a load of new price deals for the holidays, as well as new Kindle products.

Despite the massive sales, investors are clearly concerned about the rate at which Amazon spends money. Hart Lambur, a former Goldman Sachs trader and co-founder of Openfolio, a social media platform which specializes in tracking personal investment, told me in a email that "We’ve seen fewer buyers and more sellers of AMZN stock than we usually do. I think Bezo’s strategy of using big spending to fuel growth has reached a tipping point. Our users generally love the Amazon brand, but I think the network is growing impatient with the aggressive expansion strategy."

Looking to the fourth quarter, Amazon expects net sales of between $27.3 billion and $30.3 billion, up 7 to 18 percent from 2013, with an operating loss of as much as $570 million.

While Amazon has reported similar losses in the past, The Wall Street Journal's Spencer Jakab points out that this quarter may have a different effect, "Best-in-class in some fields but certainly not all, Amazon’s fans insist profitability could surge if it decides to sacrifice growth. Recent weakness shows the market is finally holding management’s feet to the fire." 

Tuesday, October 21, 2014

How Cheap Oil Could Become a Real Problem for Airlines (BusinessWeek)



Oil futures have been on a torrid plunge in recent weeks, touching lows below $80 per barrel. Great news for airlines, right? Maybe not.
For roughly the past 35 years, inexpensive jet fuel has routinely served as a siren call to airline executives. Cheap fuel spurs more flights and wild grabs for whatever business looks attainable in the travel market. Marginal routes become profitable with lower fuel prices, which, in turn, bolsters the argument that new flights can boost revenues with little cost. Cheap fuel also lets an airline experiment more radically with flight schedules in the bid to swipe market share from rivals.
“If it keeps trending lower, it totally changes the economics of the industry again,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. With oil cheaper, Kaplan predicts that many airlines will probably fly their planes in off-peak periods because of the low costs associated with those extra flights. A few additional flights on the weak travel days of Tuesday and Saturday could return to some schedules.
This possibility has some Wall Street analysts in a tizzy, concerned that if oil stays cheap enough for long enough, lower prices will cause airlines to backslide on their new-found religion against deploying too much capacity. “We feel like this industry needs an oil spike now more than ever,” Wolfe Research analyst Hunter Keay wrote last week in a client note. “[C]apacity discipline of late (from some) seems theoretical at best.”
Brent crude, the energy index most airline executives monitor for its correlation to jet fuel, has declined 22 percent this year; settling Friday at $86; a day earlier, the Brent Index scored a four-year-low, under $83. This constitutes a sharp reversal from recent years: After oil spiked to nearly $150 per barrel in July 2008, U.S. airlines radically restructured to try to cope with oil at whatever price it may be. That effort has left high or low oil prices much less important—quick swings either way are now the enemy—while turning expensive oil into somewhat of a barrier for new flying.
A bear market in oil futures is far from the worst economic problem airlines might confront: Oil at $80 per barrel is enormously beneficial, compared to $100. It’s a swing worth billions of dollars across the industry. All else being equal, when a carrier’s so-called “input cost” declines—and fares don’t—a healthy expansion of profit margins will follow. “The fuel price reductions we’ve seen in the marketplace are a huge opportunity going forward,” Delta Air Lines (DAL) Chief Executive Officer Richard Anderson said last week during a quarterly earnings call, referring to the profit potential. That’s likely to play out in abundance in the fourth quarter, a time of robust fares for holiday travel.
At a time of high demand among U.S. consumers, low fuel costs practically beg the airlines to add flights. Greater capacity might reduce fares, but additional flying reduces an airline’s unit costs: Expensive items such as airplanes, ground equipment, and employees become more productive as they are put to more use. Then there’s the greater revenue that comes from selling more tickets. American(AAL), for example, said earlier this month that it will add flights in March at its Miami hub and Los Angeles, including redeye flights from Salt Lake City to Miami and from Los Angeles to Atlanta. Last month, Delta said it would inaugurate flights from Los Angeles to Austin, Dallas, and San Antonio in Texas in the spring.
“I don’t know if they would have announced that with oil at $100,” Kaplan says of American’s new routes from Miami. “There are things that work at $90 [per barrel] that don’t work at $100 and things that work at $80 that don’t work at $90.”

Bachman is an associate editor for Businessweek.com.

Monday, October 20, 2014

The Strong Dollar Weighs Heavily on the Commodities Market (BusinessWeek)


The Strong Dollar Weighs Heavily on the Commodities Market

Early in 2014, the commodities markets were doing surprisingly well. China’s appetite for raw material was holding up, and the International Monetary Fund was predicting a decent year of global growth, which meant rising demand for everything from oil to cotton. Then the spell broke. In July, China reported lower imports of oil and copper. Since the country is the largest consumer of pretty much everything that’s pumped or mined out of the ground, the news sent prices of commodities sliding. On Oct. 2, oil fell below $90 a barrel for the first time in 17 months. Global growth was stalling, and the commodity companies were faced with much lower demand than they’d anticipated in January.
The biggest problem is that China’s stimulus measures have failed to boost economic growth. The first three rules of commodities demand, according to Quincy Krosby, a market strategist at Prudential Financial (PRU), are “China, China, China.” The last decade’s spectacular rally—evidenced by the Bloomberg Commodity Index, which almost tripled from the start of 2002 through 2008—hinged on double-digit Chinese growth, she says. That pace has fizzled now that the world’s second-largest economy is heading for its slowest expansion in two decades.
The China-led runup in prices spurred investments in new iron ore, copper, and oil production that have come to market just as growth has slowed. The IMF in early October reduced its forecast for global growth in 2015 to 3.8 percent, down from a July prediction of 4 percent. “Global economic growth has petered out in a way that nobody had anticipated at the beginning of the year,” says Ed Morse, Citigroup’s (C)head of global commodities research.
Aggravating the commodities slump is the strong dollar, buoyed by the fairly robust state of the U.S. economy compared with the rest of the world. That poses a problem for developing economies, which are big consumers of commodities such as the iron ore and copper they use to build infrastructure at home and manufacture goods to sell abroad. The dollar is up 5.6 percent since June 30 against 10 leading currencies. Because the global trade in commodities is conducted in dollars, developing countries with weak currencies have to spend more for the commodities they want.
Commodity prices advanced early in 2014 as drought in Brazil spoiled coffee crops, a cold snap in the U.S. drove up demand for natural gas, and war in Ukraine sent investors fleeing to the perceived safety of gold. Those factors have since disappeared or reversed themselves. Oil traders expected violence in the Middle East to disrupt supplies, but the disruption never came, and the world got an oil glut instead. American farmers followed up the worst drought since the 1930s with bumper crops of corn and soybeans. Stubbornly low inflation dimmed the appeal of gold. “The idiosyncratic factors that were boosting a lot of the markets earlier this year—the weather, for example, and even geopolitics—they’ve all faded away,” says Kevin Norrish, a commodities analyst at Barclays (BCS). Exceptions include coffee, still facing a shortfall in supply; beef, as a drought in Texas has shrunk the state’s cattle herd to its smallest size in at least 60 years; and cocoa, because of concern that the Ebola outbreak could spread to Ivory Coast, the top exporter.
The historic expansion of U.S. oil production, thanks to fracking, is also contributing to the decline in the price of oil as supply outpaces demand. The greenback draws strength from domestic oil production, which is at a 28-year high, reducing imports and narrowing the trade deficit. Saudi Arabia, Iraq, and Iran have cut prices rather than production: They’d rather let the price fall than lose market share. They may also be trying to drive out higher-cost U.S. producers, T. Boone Pickens, who made billions trading oil, said recently.
U.S. consumers are cheering cheaper oil. If prices stabilize at current levels, the average household will get the equivalent of a $600 annual tax cut, Citigroup’s Morse estimates. Regular unleaded gasoline now averages $3.18 a gallon, the lowest it’s been since February 2011, according to AAA. Producers, however, face investors’ wrath, because falling prices erode cash flow, making it harder to repay oil companies’ debts and potentially rendering new drilling unprofitable. The Energy Select Sector stock index has dropped 18 percent since Aug. 29, compared with a 7 percent decline in the Standard & Poor’s 500-stock index.
Some commodity producers have announced cutbacks, including Rio Tinto Group(RIO) and BHP Billiton (BBL), the biggest miners. Commodity consumers such asDelta Air Lines (DAL) (jet fuel), Gap (GPS) (cotton), and J.M. Smucker (SJM)(soybean oil and peanuts) have said they’re benefiting from lower costs. The problem is that the stronger the dollar gets, the cheaper commodities appear to Americans—and the lower the U.S. inflation rate gets. But that just makes the dollar even stronger. “There’s a feedback loop,” says Mike Wittner, Société Générale’s(GLE:FP) head of oil market research. That loop will be negative for some time to come.
The bottom line: The strength of the U.S. dollar is a burden for developing countries dependent on imported commodities.

FedEx Ground Says Its Drivers Aren't Employees. The Courts Will Decide (BusinessWeek)

FedEx Ground Says Its Drivers Aren't Employees. The Courts Will Decide
Five days a week for 10 years, Agostino Scalercio left his house before 6 a.m., drove to a depot to pick up a truck, and worked a 10-hour shift delivering packages in San Diego. He first worked for Roadway Package System, a national delivery company whose founders included former United Parcel Service (UPS) managers, and continued driving trucks when FedEx (FDX) bought RPS in 1998. FedEx Ground assigned Scalercio a service area. The company, he says, had strict standards about delivery times, the drivers’ grooming, truck maintenance, and deadlines for handing in paperwork, and deducted money from his pay to cover the cost of his uniform, truck washings, and the scanner used to log shipments.
FedEx Ground didn’t pay overtime or contribute to Scalercio’s Social Security benefits. That’s because since acquiring RPS and introducing its ground service, the FedEx unit has treated drivers as independent contractors, not employees. “The saying around the building was, ‘It’s their sandbox. We only get to play in it,’ ” says Scalercio, who no longer drives for FedEx Ground but is one of hundreds of current and former drivers suing the FedEx subsidiary, seeking back pay for overtime worked and for paycheck deductions. (The parent company is not a defendant.)Scalercio earned about $90,000 a year from FedEx, he says, but 40 percent to 60 percent of that was lost to deductions and truck expenses.
Independent contractors have always been a part of FedEx’s ground business, and the company says that’s helped differentiate it from the competition. “The business model … has been highly successful and beneficial—to customers, contractors, and FedEx Ground,” the company said in a statement. (Drivers at UPS are employees and have a union.) But several recent court decisions have rejected FedEx Ground’s arguments that the drivers are contractors, which could stem a broader trend of U.S. companies treating more workers as contractors instead of employees.
FedEx Ground has faced its drivers in court repeatedly over the past decade. In 2009 the D.C. Circuit Court of Appeals sided with FedEx, saying the drivers were independent contractors. In 2010 a federal district court in Indiana, which was assigned the task of coordinating 28 certified class-action lawsuits brought by drivers in dozens of states, also sided with the company, throwing out state claims. In recent months, FedEx Ground’s fortunes have shifted. In August the U.S. Ninth Circuit Court of Appeals in San Francisco, reviewing the Indiana decision, declared that drivers in California and Oregon were employees.
The Seventh Circuit Court of Appeals in Chicago is considering whether to uphold the Indiana ruling in other cases, including one in Kansas. In 2012 it asked the Kansas Supreme Court to consider questions regarding the Kansas case, the lead among the various state lawsuits. On Oct. 3 the Kansas justices ruled in favor of the drivers, clearing the way for many of the remaining cases to be heard again.
Beth Ross, who represents plaintiffs in California, says the potential damages FedEx Ground faces in all the class actions are in the hundreds of millions of dollars. The same week as the Kansas ruling, the National Labor Relations Board (NLRB) rejected FedEx Ground’s claims that its drivers are independent contractors, finding that they were in fact employees and that FedEx had violated the law by not bargaining with a group of them. “As FedEx’s counsel acknowledged at oral argument,” the Kansas Court said in its decision, “the company carefully structured its drivers’ operating agreements so that it could label the drivers as independent contractors to gain a competitive advantage, i.e., to avoid the additional costs associated with employees.”
Treating workers as independent contractors can save companies as much as 30 percent of payroll costs, including payroll tax, unemployment insurance, workers’ compensation, and state taxes, according to the National Employment Law Project (NELP), a workers’ rights group. Using independent contractors offers companies advantages, says James Baron, a management professor at Yale. “[It’s] driven in part by uncertainty about demand, and about future conditions, and a feeling that the firm has more flexibility with respect to scaling up and scaling down,” he says.
Because independent contractors aren’t covered by wage and hour rules, they don’t have to be paid overtime, and they can be required to pay for uniforms and truck maintenance. Contractors don’t have the right to unionize and aren’t covered by employment protections in the Civil Rights Act, so they can’t use those provisions to sue over sexual harassment or discrimination.