Side pockets - The new Investment Opportunity

Every night has a day lying ahead. Similarly, every financial crisis leads to the huge investment opportunities. Sometimes it is done by the development of new financial instruments. Side pockets is one such form of investment that has, of late, been used by the Hedge Funds and large financial institutions.


Let’s say a hedge fund had some investments that were not yielding good returns, courtesy the financial crisis. The company that were otherwise fundamentally sound, but had become victims of the financial crisis had almost become dead investments. As a risk averse investor, you were not interested in such investments and thus found no incentive to invest in the hedge fund. On the other hand, the hedge fund manager knew that the investment was good, but was only a matter of time and didn’t want to sell off the investment to book huge losses.


How does the hedge fund attract investors then? Assuming it has enough cash (or liquidity) to invest in new investments it would set aside these dead investments in a separate class as designated investments of the fund and would classify them as illiquid (for practical purposes, Long term) investments.


Since these investments have been removed from the normal class of the fund, this does not affect you as you won’t invest in dead investments and would have fresh investments for the fund.


But what does it do with these dead investments then. Say I am an risk aggressive investor and share the same view that these investments would give high returns in the future. I would then invest in these investments (which are classified in a separate class) and look forward for high returns in the long term. These are called Side Pockets.


Once designated, distinct valuation, allocation, withdrawal and distribution provisions are applied to such designated investments without affecting the general portfolio of the fund (and its applicable terms)


Since the markets have started recovering, Hedge Funds have started reporting huge unrealized gains on these side pockets and the risk aggressive investors (in our example, me) are getting better fund returns. Obviously, since these were a separate class, the risk averse investors (you) are not sharing these unrealized gains with me.


Side pocket provisions typically permit a fund manager to create a side pocket, if the fund manager feels it to be in the best interests of the fund and its investors. Generally, only investors that are investors at the time the side pocket is created are allocated a participating interest in such investments. Accordingly, investors that become investors after a side pocket is created will have no interest in such designated investment.

Carbon markets, invest for the short term only

The influence of the current environmental lobby ensures that there will be a thriving short term market for carbon avoidance and carbon fixation schemes as well as markets related to carbon trading. However, I am increasingly convinced, having read a lot of the science on all sides of the debate, that the quality of climate models is low in that they ignore major components such as the impact on cloud formation of cosmic rays. By contrast, evidence from research centres such as CERN, in which I have much higher confidence, especially Jasper Kirby, suggests that this may be able to account for the bulk of the warming we have seen so far, backed up by analysis of good proxy data going back millions of years (I am familiar myself with some of this data).

If you want to read Jasper's paper it is at: http://arxiv.org/PS_cache/arxiv/pdf/0804/0804.1938v1.pdf or you can watch him present similar material at http://cdsweb.cern.ch/record/1181073. He isn't the only scientist saying this sort of thing, but he is pretty convincing, for me anyway, and when you put it all together, it makes a lot of sense.

Although CO2 may well also still be shown to be a significant contributor, I believe that we will find that current climate science bodies such as the IPCC have over-stated its importance in dealing with climate. The Cloud experiments at CERN (along with their collaborators at a number of other prestige labs) will investigate the cosmic radiation related mechanisms for cloud formation and will produce results over the next two or three years. Based on what I consider to be well-informed hypotheses by Kirby et al, I expect him to be shown to be correct. By contrast, recent evidence indicates that some of the most influential temperature records appear to be corrupted, data and models tweaked to fit hypotheses rather than the reverse, and worse still, group-think seems to have severely polluted the quality of application of the scientific method in large parts of the field. So while I have little confidence in the IPCC and some other climate bodies, I still have great confidence in the quality of basic science at a large number of sites, and CERN probably comes at the top of my list in that regard.

In my view therefore, it is highly likely that over the next few years, results from CERN will show that most of the climate change being experienced can be explained by variation in solar activity. Science will win out and most scientists will change their positions to adapt to this new knowledge - that is the nature of science when it is at its best - theories are changed to fit the data, not the other way around.

Even though limiting ocean acidification will also require management of CO2, the public understanding and support for carbon taxes is based on its impacts on climate. Consequently, it will be very difficult then to persuade people to back another reasoning base for the same taxes and governments will be accused not unreasonably of crying wolf. Due to decline in support, they will be very reluctant then to pour any more funding into schemes for carbon trading or fixation, and large corporations will also largely abandon their support for carbon markets and taxes.

Although it may take some time for schemes such as carbon trading to be dismantled, long-term valuations for any companies involved in CO2 reduction will fall very quickly once the science changes. Many green companies will go bust. Problems such as ocean acidification will be considered a lesser problem, solved on the fly by slow changes in carbon output that will happen in any case via technological change in energy and transport sectors.

The good news is that as the sun returns to 'normal', so will our climate and not for the first time, doom mongers will be shown to be wrong. The money we have already spent in green energy will not all be wasted, it will have accelerated development of cheap solar and wind power that will still have a market, (although subsidies will no longer be justified and will stop as contracts terminate).

Related to this, the CLOUD team is looking at a number of factors in cloud formation. The list is long but includes particulates and other aerosols, aircraft contrails, and various gases. They will investigate a range of atmospheric altitudes and temperatures and vary the kinds of radiation. I am confident we will know a great deal more about how our environment works as a result, and once the physics is understood, it can be factored properly into climate models, which will of course benefit from parallel development in many other branches of science. Since the 'climategate' affair, we can be reasonably assured that scientists will be more careful to do their work properly.

Summarising: strong short term market in carbon reduction and fixation technology due to what is likely to be shown as misunderstanding of climate science, but many companies in the carbon reduction sector will die in a few years when better science shows that CO2 is not the main problem. If you must buy now, get ready to sell quickly. The carbon band-wagon might well crash any time between the end of 2010 and 2012.

Carbon trading v R&D investment

Carbon trading won't save our environment. As Dr James Hansen (one of the world's leading climate scientists)  says http://www.timesonline.co.uk/tol/news/environment/article6941974.ece, it would be better that the Copenhagen conference fails than that a carbon trading scheme be locked in as the solution to climate change. Carbon trading has already been shown to be deeply flawed. It has encouraged fraud, especially in the offset area, with payments for schemes that would have happened anyway, phantom forests, multiple sales of the same trees, and poor monitoring or maintenance of planting schemes. It has also enriched the more imaginative criminal fraternity via intricate tax avoidance scams. Even on the legitimate market, it has perversely incentivised the destruction of forests and peat bogs since countries that weren't covered by Kyoto restictions could still sell carbon offsets and biofuels, so cleared forests and bogs to allow them to capitalise on planting new trees and plantations. And as Hansen says, it is really little different from the Catholic Church's indulgence scheme, where forgiveness for sins was sold for cash.

Carbon trading obviously needs a profit motive to work at all, and to do so it also needs a lot of administration. Yet there is little evidence that it significantly reduces CO2 production. This money could instead be spent on either improving climate science, filling in the remaining gaps, or accelerating the production of cheaper alternative energy sources, such as solar.

Wind power uses a fundamentally mechanical system, which limits the potential cost reductions. Solar uses either indirect production using sunlight concentration via mirrors or direct electricity production using photovoltaics. Solar power using photovoltaics offers a lot more potential for cost reduction and conversion efficiency improvement. It is already clear that in sunny areas, solar power will become cheaper than using energy from the grid (grid parity) by 2015. That will enable those regions to greatly reduce their fossil fuel use. Other areas that are less sunny will eventually be able to import energy from sunnier areas as technologies such as supercables develop. Europe could get much of its energy from the Sahara desert for example.

In parallel, development of electric vehicles and electronic driving technology will allow much greener transport solutions.

These areas will now develop anyway, there is already enough momentum in their markets to guarantee that. I certainly wouldn't argue for any subsidies on the products, which would disincentivise improvements. But increasing research funding would accelerate their development. That would be a much better use of the money that will be wasted in futile carbon trading schemes.

If Copenhagen results in governments agreeing targets and using carbon trading schemes as their mechanism for achieving them, the environment will suffer, because CO2 emissions will not be reduced sufficiently. Economies and quality of life will suffer due to extra costs, without significant benefits. People will become opposed to environmental taxes and it will be harder to solve the problem by more effective means later. We will be locking in a solution that won't work at the expense of ones that might. I fully agree with Hansen. If the climate scientists are right and CO2 is the problem they tell us it is, carbon trading will not solve it, and because this is being pushed as the main measure for solving CO2 emissions instead of incentivising R&D on alternative energy sources, Copenhagen will fail.

Art market, Sell: collapse is inevitable, only the timing is uncertain

Had a good think about the art market. Time to sell.

It is clearly in an unsustainable bubble, with high prices for stuff often with low intrinsic value. It seems to be sustained mainly by the desire to avoid tax, and as globalisation catches up over the next decade, art prices will inevitably start to fall. Once they start, they will drop very very quickly. The last people holding the items will often be left with something that still looks pretty but is now worth a fraction of what they paid.

Think dotcom. Everyone knew it would collapse, but everyone kept buying for ages, and most gained because some sucker would always buy at an even sillier price tomorrow. No-one knew exactly when it would happen till it did, but one day, the price increase cycle stopped, followed by a huge collapse. The last one holding the dotcom stock lost his shirt.

Don't be the last guy. Don't get burned. Sell now before the collapse. If you like it, sell it now, buy it back later at a pittance.

cake glue

No interest in developing this myself, so any culinary entrepreneurs out there who fancy having a go, be my guest (and send me a nice cake as a reward). I think there is some real potential for a paste that allows cooks to glue together parts of cakes that have fallen apart. It is quite common for cakes to break during kitchen processing, so a simple paste that allows people to stick them back together, without of course changing the taste, could be an essential item in every home cook's baking cupboard.

It could be a neutral-tasting paste that the cook spreads on both halves and then just puts them back together. Or it could use the remaining cake mix as a base, with an added agent to cause it to 'self cook' over an hour or so using the remaining heat in the cake.

Being able to salvage not just the cake, but also the reputation of the cook, would make this a valuable tool.

Employment Insurance or Unemployment Insurance

Unemployment Insurance or Employment Insurance as it is called in some countries provides temporary financial assistance for unemployed citizens while they look for work. In times of distress such as the global financial crisis when people get laid off, this is an effective way to protect people financially, well to an extent at least.
At the same time this does not promote or encourage unemployment among people.

HOW IT WORKS?
This insurance is not applicable for people who have not started working yet. This only applies if you were working as an employee.
Eligibility
Generally you need to be ‘qualified’ to be insured. Qualification includes
Insurable hours - Continuous period of work for a certain minimum hours (eg. 52 weeks)
Unemployment – you need to be without work and without pay for some minimum days (eg 7 days)
No fault – you should have been fired for no fault of yours and should not have left the job without any ‘valid’ reason.

Insurance Premium:
A portion of salary (e.g. 2%) is deducted with your paycheck. Your employer contributes a certain percentage (generally twice your contribution) and deposits this with the government.

Payback:
When you get laid off, depending on how long you worked, your last drawn salary and circumstances which led you to be unemployed, you can be compensated from basic needs to up to 80% of your last drawn salary for a certain period (e.g ranging from 20 to 50 weeks).

When you get another job, you just need to inform the insurer (the government agency) about your employment and they stop crediting the amount to your bank account.

How much will you receive?
The basic benefit rate ranges from 50% to 80% of your last drawn salary (or in many cases, 55% of your average insured earnings) with a maximum yearly cap. Generally this is a taxable income.

Most people are protected by this insurance while some others make arrangements with their employers and enjoy long term unpaid vacations as their finance needs are taken care of by the employment insurance paychecks they claim. They can get fired and re-join the same employer after the vacation.

Reagrdless, this works well in times of distress so that people can protect themselves financially if they are laid off, need to upgrade their skills or need to leave their jobs due to maternity reasons.

Vulture Funds

Vulture Funds are financial organizations/private equity firms that seek to invest in debt issued by a company (or in case of a sovereign debt, a country) that is weak and dying. They are also called “Distressed Debt funds”.

They buy up sovereign debts of poor nations that are assumed default or near bankrupt when at time the debt is just about to be written off and eventually sue the debtor for the full value of the debt plus interest in the future. The full value is usually 10 times the original paid up debt. Alternatively, they hold on to these investments (if the issuer doesn’t default) and sells them when the prices skyrocket.

So these vultures prey upon the debt cancellation measures received by the poor companies/nations by purchasing their debt at a discount (sometimes as low as 20%) and redeeming it at a premium (including interest). They provide a useful alternative for investors who are unable to follow up upon their defaulted debt and in turn are certain to face financial ruin if their debtors default completely. i.e. considering a realistic scenario distressed debt investing is a risky business which reflects two sides of a same coin; on one side a vulture fund can have adverse effects on its investment if the debtor continues to default and in turn may end up netting a zero value, but on the other side if the debtor has considerable assets to liquidate the vulture funds can make millions. They have tasted success quite a number of times in the past against countries like Argentina and Peru. So these are risky funds with the potential to pay off huge returns.

How they Operate?
These funds are private equity / Hedge Funds and are thus not available for individuals to invest. Vulture Funds raise most of their money through legal action in the US and UK courts, They frequently engage in litigation in these courts of rich nations to obtain judgments against the debtor and then attempt to attach the government’s assets abroad.
These funds buy commercial debt knowing fully well that multilateral debt relief availed by HIPC (Heavily Indebted Poor Countries) put them in a better position to pay up and even so they can be persuaded to settle the amount with them. As spoken earlier about the risk faced by distressed debt investors, this so called default risk is virtually nullified when political influence possessed by them is greater than the nation they are suing. Since most of their legal actions prevail in US and UK courts, lobbying and political influence hold good, and many Vulture Fund CEO’s possess links with the top officials in US as well as in UK. Political influence and lobbying plays a major role in assisting Vulture Funds in their dubious tactics in claiming millions from litigations in foreign courts. A recent report states that “at least 54 private companies are known to have taken legal action on 12 of the world’s poorest countries for claims amounting to $1.8 bn”

Source:
1. http://en.wikipedia.org/wiki/Vulture_fund
2. Prometheus Newsletter, (Author: Srikanth Srinivasan) Alliance Business School, Bangalore, India

I think Murdoch is wrong to charge for web content

Apparently, a study by Boston Consulting Group has shown that people are willing to pay for news on news sites. Rupert Murdoch plans to introduce fees on News Corporation sites, so such a study appears at first glance to offer hope for his model. But I think even a slightly deeper glance suggests that would be a strategic error.

Like many people, I read a good selection of newspapers every day. Sometimes I buy one or two, but I always read a few on-line. To date, even though I was among the first web users, and have spent thousands on retail sites, I have still never spent a penny on web content. If News Corporation starts demanding a fee to read the Times, I'll just abandon it and carry on reading the Guardian and Telegraph. I pay for Sky TV, but I just don't think of that in the same way as I do web content.

I think the Guardian and Telegraph sites offer a good model for the future of news-sites: professional journalists starting the ball rolling and stimulating numerous bloggers and contributors to add their comments to cover other angles.

Charging for some sites will concentrate advertising revenue on the rest. As Murdoch points out, there is only so much advertising revenue to go round so removing some of his own titles from the pool will help. The others will get a larger share of the advertising market, survive well and retain influence, while the Murdoch sites will probably end up with lower overall revenue, and much less influence.

Both kinds of site will soon offer personally targeted adverts, and these will pay more lucratively. The loyalty gained by allowing readers to contribute their own comments, read by a decent audience, will make them more sticky, and more aligned with the culture of the paper they contribute too, increasing both its marketing and political influence. Advertising will then be even more valuable on the freebies, so they will attract even more of it. News Corporation will see its profits fall and its political influence decline.

Then again, Murdoch became a rich man by knowing what will sell and for how much. Maybe he's right and I'm wrong. Time will tell.

Optional spend is key to recovery

The recession will hit profits at easyJet, my favourite airline: http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6919684.ece

No big surprise, many people are flying less and are more price sensitive. It's good that they are surviving at all. They blame rising unemployment and cost pressures for their expected profit drop in the months ahead, but one of the main problems is that flying is one of the easiest areas to reduce expenditure. Travel bans on staff in many companies appeared early in the recession, and many are still in place. Conference businesses are seeing large drops in attendance too, since it is easy to abort conference attendance when money is scarce.

Businesses that depend on optional expenditure are mostly the first to suffer and the last to recover in a recession. There are notorious exceptions of course. Providers of small luxuries benefit as people opt for small treats, and takeaway restaurants benefit at the expense of more expensive sit-in restaurants. But areas like holidays and conference trips offer big financial savings at low emotional cost, so are attractive targets for cuts.

There are many areas that indicate the start of recovery, such as manufacturing equipment sales and retailing. The sign that recovery is well under way will be when the markets for airlines and conferences pick up. That shows that people and companies are happy to loosen their purse strings for business-as-usual.

Personal carbon allowance will damage the environment

According to the Telegraph, Lord Smith of Finsbury, head of the Environment Agency, will recommend that everyone in the UK be given a personal carbon allowance, and penalised if they go beyond it:
http://www.telegraph.co.uk/earth/environment/carbon/6527970/Everyone-in-Britain-could-be-given-a-personal-carbon-allowance.html

Global warming is a problem that we must deal with, and scientists and engineers are making good progress both in understanding more of the science and figuring out mechanism to deal with it. The science is far from complete, but we know that although CO2 is a cause of warming, it is by no means the only one, and many scientists think it is far more appropriate to tackle other warming agents such as methane first, and making early impacts at much lower costs.

If we can't develop technology fixes to the problem, and consequently have to use solutions that depend on everyone changing their lifestyles, we need to ensure social cooperation. This requires that such changes be party-politically neutral. Solutions such as personal carbon allowances provide fuel to accusations that some green policy is just thinly veiled socialism, and are guaranteed to alienate those people who believe that personal effort should be rewarded by expectations of higher social status or comfort. We use the tax system to redistribute wealth, but we still accept that even after some distribution, people who earn more should be able to buy more, at least once they rise above dependence on welfare. We do not expect everyone to have the same cash allowance to live on, or insist they all live in the same sized houses, or eat the same amount of food, so why give everyone the same carbon allowance? It makes no sense except as a means of social levelling.

If we were to impose a personal carbon allowance that covers flying and other transport use, many people such as business executives would not be able to make their contribution to the economy without suffering personal hardship. Business will suffer, the economy will suffer and we will be less able to afford to look after the environment. So such a policy will damage the environment, not benefit it as it pretends to do.

We need to protect our environment, so we need good science, and we need to develop good technology based on that science. We will also need social cooperation right across every part of society. We must therefore reject environmental policy that favours one social group over another. Whatever we think of making society more socialist or capitalist, we should pursue those goals independently of protecting our environment or we will all suffer.

Free paper: Ten top attributes for business survival

A new report listing the top ten attributes for business survival has just been published by Ian Pearson and Simon Branston. it can be downloaded free of charge from http://futurizon.com/articles/tentopattributes.doc

Dartford Toll, we'd all be better off without it.

We just got back from a business trip which involved going via Gatwick, and hence going both ways through the Dartford Crossing. We had a 7 mile traffic jam going and a 4 mile jam coming back. There was no accident, that was all caused by the toll points. So, 11 miles of traffic jam to collect £6 from each car. On one hand, that's a lot of £3s so a large amount of cash. On the other hand, that £6 into one coffer caused two taxpayers to wait 45 minutes each, i.e. 90 taxpayer minutes. By any standards that is a low return, it is only about minimum wage. And yet the taxpayers in the cars mostly earn more than minimum wage (they drive cars). So on balance, the economy loses. As a nation, we would be considerably richer if we just abandoned the toll and let everyone use the crossing for free. We would spend less time in traffic jams, make less CO2 and less pollution, suffer much less stress and have a higher quality of life, and still be richer.

The Dartford toll makes no economic sense and should be stopped.

Second Life, imminent death

http://www.telegraph.co.uk/technology/5078444/Second-Lifes-span-is-virtually-over-as-firms-decide-to-get-real.html is a good article describing the decline of Second Life. As someone who was talking about future markets for virtual environments as early as 1991, I find it sad, but not surprising. Second life was a good idea, but the novelty has worn off. It is essentially a combination of an exploratory computer game, a role playing game, and chat room. With many excellent computer games that add excitement to large-map virtual environments and many of those offering networked multiplayer options, the game and virtual world side of it has very strong competition. With the glut of social networking sites offering lots of bells and whistles on top of chat capability, it has lost this battle too. As the telegraph article points out, it still has a lot of visitors, but the market will continue to decline as awareness and availability of high quality competition increases, and as it starts to fall below critical mass, people will abandon it very quickly. It is sad, but Linden Labs started with a great idea, which at the time was pretty much state of the art. but they have failed to adapt and evolve fast enough, and in the rapidly evolving jungle that is the web, that is usually fatal. They could still reinvent it, but the signs are that it is too late.

What was it the Bond film was called? You only live twice? This is Second Life already in this case. The interesting question is whether Linden Labs can take the money, run, and build something else that is as new and fresh as Second Life once was. I hope so, and I wish them well.

The Loch Ness Monster Recession

Economists differ on their views of the shape of the recession. Is it a single dip, i.e. a V-shaped recession, or a double dip, W-shaped recession? Most economists seem to agree on the latter now. I'm not a formally trained economist, I am a Physics and Maths graduate who has spent my working life in various branches of engineering and now apply myself mostly to predicting future technology and its impacts, thinking about the nature of many input forces as part of that process. Since economic forces have an enoprmous impact on the future, and the economy is a topic of interest in its own right, I do certainly have my own views about the workings of the economy, and am very happy to make general predictions about its future, formally trained or not. So, just for the record, so that no-one claims that no-one saw it coming this way, I think the recession will actually follow a series of dips and recoveries, and is therefore a 'Loch Ness Monster' recession (the monster is often portrayed as a sea serpent with its body dipping in and out of the water).

The reasons I think it will follow this shape are as follows:


1 the UK will have to reduce expenditure dramatically, but this won't happen for a few years for political reasons, so the economy will show the corresponding dip later
2 The rise of China and India will continue, and will cause big rise in demand for basic commodities. China especially is already trying to assure its own access to the commodities it needs. Prices will rise due to this demand, but again, the major effects have yet to be felt. Give it another 5 years and the price of meat, fish, oil, metals will rise a lot. With more of our incomes taken up providing for basic survival, there will of course be less for discretionary spend.
3 Taxes will have to rise a lot to pay for holes in pensions provision, but this won't really affect us until several years time, so a dip will happen then.
4 Rises in travel costs due to environmental targets (however inappropriate) will make it harder to do business, and also directly undermine tourist industry. This dip will be a short term one and will coincide with the second dip widely predicted elsewhere.
5 intergenerational conflict will become significant due to young people blaming their parent's generation for the problems they will face. Many of the most talented will emigrate to other lower-tax countries, leaving the UK with the old and those with less earning capability.

These forces will act in parallel, but their curves will be quite different. In a background of (hopefully) economic growth stimulated by improving technology and the markets it brings, they will result in a series of dips superimposed on a slow underlying recovery. Hence, a Loch Ness Monster recession.

Gold v lithium

My first post on the metals markets. Gold is expensive at the moment and Fortune warns of a bubble. I have to agree. There is little intrinsic value in gold. It looks pretty much like brass and has few industrial uses that need much of it. It is an excellent conductor but circuits only need tiny amounts of it. Jewellery uses it mainly because it is expensive, but the real value of that must lie below the $300 mark since the market wasn't demanding significantly more gold jewellery even at that point. So there is no good reason why it should remain at today's level, and it won't. Once the recession starts to recede, its value will fall back to a sensible level. You don't want to be holding significant amounts then, because it may be quite a while till the next crisis forces its value back up again.

Lithium on the other hand will be in great demand as electric cars pick up over the next decade. The price can only increase, especially given the difficult regimes where much of the reserves are.

Sell your gold and buy lithium futures.

bankers and bonuses

I'm still amazed at the number of articles about bankers and how they wrecked the economy and how they are still getting big bonuses. Politicians keep promising to stop it but still haven't. But I will say again and again till people stop missing the point. Bankers should be able to give whatever bonuses they want to incentivise their staff to maximise their profits. What they should not be able to do is to gamble with taxpayer's money. They should only be allowed to use their own. If bankers can make big profits using their own company's cash then fine, let them spread it out among the shareholders and those who earned it. Why should shareholders keep it all and the staff who earned it not get their rightful share? On the other hand, if they blow it all, then let them die. They will then be directly incentivised to take reasonable risks and benefit accordingly when they get it right, suffering accordingly when they get it wrong. We do not need to regulate their bonuses, just the means by whihc they earn them. We should protect taxpayers from having to pay the bill when they make wrong decisions. Then the banks are just companies like any other that live or die in the jungle of the markets.

Limiting bonuses will not in itself protect the taxpayer from the same thing happening again, limiting the funds with which they gamble will. It is baffling why our government cannot see that simple truth, and insist all the time on threatening to regulate the wrong targets. Until they understand, we all remain at risk.

JJB Sports, sell

We just went to JJB Sports on the way home. I was surprised to see it was still there after its problems earlier in the year. The shop had 5 or 6 staff on the ground floor, and 3 or 4 customers. At the till, the one guy in front of us, already mid sale, was buying sunglasses and a pair of trainers. Almost 5 minutes later, the two girls at the till had finished and were ready to serve us. I don't think I need to say more. Sell.

HFT High frequency trading, dangers

In June 1998, I wrote an article on IT and the Future of the City,
http://futurizon.com/idp/future/thecity.htm. I'm quite pleased now as I read an article in today's Times that says pretty much the same, albeit 13 years later.

Fast computing and geographic location

With a factor of 1000 in computer speed and memory capacity per decade, in parallel with advances in software, computers can now make logical deductions from the flood of information on the internet, not just from Reuters or Bloomberg, but from anywhere. They can often assess the quality and integrity of the data, correlate it with other data, run models, and infer likely other events and make buy or sell recommendations. Much dealing can now be done automatically subject to human-imposed restrictions, and the speed and quality of this dealing far exceeds current capability. The technology is now called High Frequency Trading, or HFT. Very predictable back in the 90s, and it has arrived on cue.

It will bring problems…

Firstly, the speed of light is fast but finite. With these huge processing speeds, computers can make decisions within microseconds of receiving information. Differences in distance from the information source become increasingly important. Being just 200m closer to the Bank of England makes one microsecond difference to the time of arrival of information on interest rates, the information, insignificant to a human, but of sufficient duration for a fast computer to but or sell before competitors even receive the information. As speeds increase further over following years, the significant distance drops. This effect would cause great unfairness according to geographic proximity to important sources, but there are two solutions. Either there is a strong premium on being closest, with rises in property values nearby to key sources, or network operators could provide guaranteed simultaneous delivery of information, which I believe is now the case. However, the simultaneous delivery only applies to a small number of companies and in a restricted area. It does not apply to the large number of individuals or companies situated a long distance away.

Secondly, exactly simultaneous processing will cause problems. If many requests for transactions arrive at exactly the same moment, computers or networks have to give priority in some way. This is bound to be a source of contention. Also, simultaneous events can often cause malfunctions, as has been demonstrated perfectly by numerous system crashes across many computer systems and networks. Information waves caused by significant events are a network phenomenon that could potentially crash networks.

An interesting future side effect of this is that the predicted flood of people into the countryside may be averted. Even though people can work from anywhere, their computers have to be geographically very close to the information centres, i.e. the City. Automated dealing has to live in the city, human based dealing can work from anywhere. If people and machines work together, they must both work in the City.

Consumer share dealing and software

Ultra-powerful palmtop computers pick up and analyse information all day long, organising every aspect of their owners' lives. With finance applications able to show which shares are doing well, spot trends and act on their computer’s advice at a button push, markets will grow for tools to profit from shares, whether they be dealing software, advice services or visualisation software.

However, as we see more people buying personal access to share dealing and software to determine best buys, or even to automatically buy or sell on certain clues, we will see some very negative behaviours. Firstly, traffic will be highly correlated if personal computers can all act on the same information at the same time. We will see information waves, and also enormous swings in share prices. Most private individuals will suffer because of this, while institutions and individuals with better software will benefit. This is because prices will rise and fall simply because of the correlated activity of the automated software and not because of any real effects related to the shares themselves. Institutions may have to limit private share transactions to control this problem, but can also make a lot of money from modelling the private software and thus determining in advance what the recommendations and actions will be, capitalising enormously on the resultant share movements, and indeed even stimulating them. Of course, if the share-dealing public generally perceives this problem, the AI software will not take off so the problem will not arise. What is more likely is that such software will sell in limited quantities, causing the effects to be significant, but not destroying the markets.

A money making scam is thus apparent. A company need only write a piece of reasonably good AI share portfolio management software for it to capture a fraction of the available market. The company writing it will of course understand how it works and what the effects of a piece of information will be (which they will receive at the same time), and thus able to predict the buying or selling activity of the subscribers. If they were then to produce another service which makes recommendations, they would have even more notice of an effect and able to directly influence prices. They would then be in the position of the top market forecasters who know their advice will be self fulfilling. This is neither insider dealing nor fraud, and of course once the software captures a significant share, the quality of its advice would be very high, decoupling share performance from the real world. Only the last people to react would lose out, paying the most, or selling at least, as the price is restored to ‘correct’ by the stock exchange, and of course even this is predictable to a point. The fastest will profit most.

The most significant factor in this is the proportion of share dealing influenced by that company's software. The problem is that software markets tend to be dominated by just two or three companies, and the nature of this type of software is that their is strong positive reinforcement for the company with the biggest influence, which could quickly lead to a virtual monopoly. Also, it really doesn’t matter whether the software is on the visualisation tools or AI side. Each can have predictability associated with it.

It is interesting to contemplate the effects this widespread automated dealing would have of the stock market. Black Monday is unlikely to happen again as a result of computer activity within the City, but it certainly looks like prices will occasionally become decoupled from actual value, and price swings will become more significant. Of course, much money can be made on predicting the swings or getting access to the software-critical information before someone else, so we may see a need for more equalised delivery services, with more suppliers covered. Without equalised delivery, assuming a continuum of time, those closest to the dealing point will be able to buy or sell quicker, and since the swings could be extremely rapid, this would be very important. Dealers would have to have price information immediately, and of course the finite speed of light does not permit this. If dealing time is quantified, i.e. share prices are updated at fixed intervals, the duration of the interval becomes all important, since it strongly affects the nature of the market, i.e. whether everyone in that interval pays the same or the first to act gains.

Also of interest is the possibility of agents acting on behalf of many people to negotiate amongst them to increase the price of a company’s shares, and then sell on a pre-negotiated time or signal.

Such automated systems would also be potentially vulnerable to false information from people or agents hoping to capitalise on their correlated behaviour.

HFT is a great idea in some ways, but it is not without costs. We can expect severe problems, with lots of opportunities for instability, crashes, wild swings, and abuse of customers.

How the CWU's stupidity will help the economy

It is amazing how stupid people can be sometimes. They will happily cause themselves great harm if they believe it will hurt an enemy. Quite a few soldiers have killed themselves to deny their enemy the privilege. Such is the current behaviour in the CWU, killing the Royal Mail (and ultimately themselves) to get their own back on the management, at the expense of the livelihoods of the union members. They are not the first or only union to wreck the prospects of their members - many British Airways employees are far worse off because of the actions of their unions which have forced the company into its current financial state. But seeing the impacts on BA, it is all the more amazing that the CWU have still taken the action they have. It should be blindingly obvious to them that customers can and will use alternatives in the future, so they know they are causing irreparable and possibly terminal harm to their own employment prospects. Many administrative procedures that previously used the post can be done on-line, and once implemented thanks to the strike, will never again use the post. In fact, it will be beneficial to the owners of those procedures.

And here is the silver lining. The stupidity of the CWU will cause earlier adoption of better managerial practices elsewhere, by making postal communication more difficult and expediting the migration to electronic systems. So while it might mean disaster for their members, it will help the rest of the economy to evolve. This is a widespread impact of the recession too. Of course, recession is bad, but it does have a benefit of expediting the demise of companies that don't measure up, replacing them earlier with ones better suited to the future, with leaner management, more efficient practices, less waste, and more agility. Anything that helps improve the economy isn't all bad news.

The Royal Mail was once an important organisation. Now it is much less so. That is a simple fact of life. In my company, they provide no function at all except the delivery of magazines and parcels. All of our communication is done on the networks. On a personal level, I very rarely send cards now, and never letters. So the only impact I will notice from a strike is that I will have less junk mail to bin. I can live with that. In which case, the longer the strike, the better. Today's papers are full of news of the major web retailers switching their delivery companies. Why would they ever want to switch back if the alternatives provide a decent and economic service. If the CWU is relying on customer loyalty, it is dangerously over-estimating their hand. The rest of the world has moved on, and willing to move even further.

If the Royal Mail is to survive at all, it will need to be fiercely competitive in the distribution of magazines and parcels, the only area with any future market. It will need a lean and mean organisational structure, with competitive labour rates and unbroken, high quality service. The action of 20th century unions trying to force the company to retain 20th century terms and conditions, when the market has moved on, will simply see the company shrink even more rapidly as competition rapidly captures the remain bits of the market.

This is not a case of poor staff being exploited by a wicked company. It is a fight for survival in a changing market, and the CWU's actions will lead directly and inevitably to disaster for the people it is meant to represent. They will suffer enormously as a result, but the economy will not, it will actually benefit.

Dixons campaign, next steps in marketing wars

I am surprised it has taken so long for the marketing professionals to explicitly recognise and exploit the behaviour people have been exhibiting for decades, to check something out in a store with good staff and good advice, and then go down the road to a cheaper supplier to buy it. We don't have to go outside the Dixons empire to see the whole history. I used to got to Currys, make a decision (when Currys still had good staff who had some idea of what they were selling and could tell you more than was just printed on the sticker), and then go and buy it 50 metres away in Dixons. Then of course Dixons bought Currys and the saga moved on to their other wing, PC World, which was their first major campaign using the web in harmony with the store. Dixons group has played the evolution of the web very well and this new campaign is just the next phase. It is no big surprise they are the first company to start it in any big way. It's just surprising that no other company has done it bigger, better, earlier, given how obvious the evolution route is.

So, what's next? Pretty obvious really. And I expect Dixons will probably be in the front runners here too, though probably not the first next time.

Now that we are seeing the first glimmerings of augmented reality, where you can hold out your phone and see graphics showing where the tube stations are, it is a short hop to overlaying marketing data onto video visors. It sort of works with a phone screen, but it is too small and too much effort to use, so the market won't really take off properly until visors become commonplace. Once the augmented reality market reaches critical mass, which won't be very long, you will be able to browse products in a store, point your phone at them, and  see how much it costs with another store. So you could do that in John Lewis, and see how much Dixons charges, and order it from there. Booksellers already suffer from some customers scanning barcodes on their books and ordering them directly from the web at a discount, but that is nowhere near as intuitive as it will be using augmented reality.

Augmented reality will allow full-blown digital trespassing. Getting a price for a product is one thing, and will certainly get the market moving, but imagine being in Marks and Spencer and seeing the clothes on sale in their competitors right alongside. A tiny amount of AI is needed to determine which products to set alongside, but it will happen. It will be just like Next having their clothes racks in Marks and Spencer right beside theirs. And vice versa of course.

Of course, marketers will encourage security to block wireless and mobile signals so that they can't carry real-time connections from competitors, but it is easy to bypass that. Mobiles will have plenty of memory, and will be quite capable of downloading enormous databases of competing products before the shopper leaves home. Of course, that also means they don't have to leave home, but we know from experience that people still like to visit real shops for all kinds of reasons even though they have broadband web at home.

Actually, although the first battles will be interesting, I expect the whole market will quickly adapt. Companies will know what brings people to their stores and will still be able to make advantage from that. Even if people can shop around more easily, it doesn't mean and end to diversity in the high street. New technology is mainly a threat to companies that refuse to adapt. For good companies, the battle just moves on, and competition thrives. Bring it on! And congratulations to Dixons for opening the next phase. But you know what? I'll still only buy from Dixons sometimes, sometimes not.

ATM Charges reintroduced - Customers suffer again

The celebrations of free ATM transactions from any bank in India was not even over that the RBI accepted the Indian Banks Association (IBA) proposal to re-introduce transaction charges for customers on the use of other banks’ ATM.

IBA has proposed to levy a transaction fee of Rs. 20 per transaction for using another bank's ATM more than five times a month. Also the Reserve Bank of India has said that not more than Rs 10,000 can be withdrawn each time they are used.

It will be optional on the part of the banks to levy this charge on customers. IBA has not made it mandatory but left it to the banks' discretion. Since the banks will recover the transaction costs it would have to pay to the bank providing the ATM services, it has less to lose. Once again, it’s the customers who lose.

ATMs have become an important channel for banking transactions, particularly for cash withdrawal and account balance enquiry and also funds transfer, bill payments and cell phone recharge facilities. The spread of ATMs has increased from 34,789 in March 2008 to 43,651 in March 2009. Banks have entered into bilateral or multilateral arrangements with other banks to have inter-bank ATM networks. The charges levied on the customers for use of ATMs varied from bank to bank and also varied according to the ATM network that was used for the transaction. RBI issued directives making use of own bank’s ATM or any other bank’s ATM free of charge for cash withdrawal, from April 1, 2009. This led to increase in volume of ATM transactions from 17,797 lakh aggregating to Rs.4,38,151 crore during 2007-08 to 23,530 lakh aggregating to Rs.6,16,456 crore during 2008-09.

As per IBA, a majority of the ATM transactions are in the range of average withdrawals of Rs.3500 to Rs. 40000, and 90 percent of all transactions are below Rs.10,000. Hence, the intended purpose to serve the common man is achieved. However, there was a small minority of users who withdrew very large sums on account of high card limits given by some banks to privileged customers.

However, there is more to it than meets the eye. For banks like ICICI and SBI who have established ATM/branch networks have nothing to lose because their customers can find their ATMs close by. These banks can thus, earn a lot of money from other banks with smaller networks whose customers will have to look for ATMs for transactions.

The banks with smaller networks would, thus always encourage their customers to come to the branches rather than using ATMs of other banks. Also, the customers and banks would prefer to have lower transactions and larger withdrawals from ATMs of other banks. While it may be argued that banks who have created large networks should get some benefit of maintaining such ATM networks. After all, it costs close Rs 60000 to Rs 70000 per month for a bank to operate an ATM (including maintenance, electricity, rent and direct expenses of operationg an ATM). But what about the customers? Is it wise for the IBA or the RBI to be biased towards customers of banks with large networks?

city bonuses

Some people get paid lots more than I do. It's a fact of life, and I accepted it a long time ago. Some of them don't deserve more, some do, and I get paid more than some people who deserve more than me, but we all know life isn't fair. But that isn't the point with city bonuses.

Banks have to encourage staff to perform well. Staff are not all equally good. Some can make much more than others because of their personal edge in the market, and without large differences in reward, it is hard to keep such people in a free market. Especially a global market such as banking. So I have no problem with big bonuses if they are rewarding success, and I think it is a mistake to try to stop or limit them.

What does need to be limited is the level of risks that bank staff are allowed to take. I believe strongly in free markets, but free markets mean that companies come and go. Some die, if they are not good enough. That is fine. But when they die, it should be their owners (shareholders) that suffer, and their suppliers (including customers who chose to do business with that company). It should not be the wider community, i.e the taxpayer.

The implementation of this could be relatively straightforward regulation to limit risks to what the company can show it can afford. It is fine if the company wants to risk all it has and lose it and die. It is not fine if it risks all it has and also some of what everyone else has too. Ensuring that banks must show that their total risk exposure is less than their total assets would eliminate the sort of problem we are trying to deal with. They should in essence be forced to gamble only with their own money, not the whole country's. The reason we had the problem was because banks were essentially allowed to gamble with the wealth of the whole country, keeping any big wins for themselves, while expecting losses to be underwritten by the taxpayer. Taxpayers aren't currently even being rewarded for underwriting unlimited losses by getting a guaranteed share of the winnings (apart from corporation tax). That is still the case now, and limiting bonuses will not solve it. I don't care how big the risks and rewards are, that is a free market problem, but they must be forced to gamble with their own cash, not mine. And that's it.

We don't need much more regulation, we probably need a lot less, but it needs to be the right regulation regulating the right things.

Accountants, corporate governance, strategy

I might come across in occasional blog entries as not thinking much of accountants, but that isn't true. I trust my tax affairs to an accountant and expect that he will save me more in taxes than he charges in fees. They have a valuable place in the world. I have a lot of respect for them, I just think they should stick to what they are good at.

The reason I am so often critical of the role they play is that they are often used outside their core expertise. In a narrow world of counting, calculation, extraploation and looking for legal holes to exploit, they are excellent. I have problems once we assume that this is the primary skill needed to run a company. Every board should have an accountant on it who understands the corporate finances extremely well. But this should only ever be an information provision role, one of simple advice on what is available, and of alerting threats and opportunities. Decisions though should be taken by people who fundamentally align with the nature and purposes of the company, who are visionary and can see the big picture, where they fit in now, and where they could migrate into nearby green fields. There is no reason why an accountant can't learn these skills, and I am certain that many companies are led very well by people of vision who also happen to be accountants, but there is no reason to assume any link between such talents.

Accountancy as a whole needs to learn to better understand the workings of companies. Movement of cash is only one part of it, and I think that too often, they overlook many of the mechanisms that influence the creation and destruction of wealth. Without analysing productive mechanisms properly, it is easy to make cuts where they cause harm to production in excess of the supposed savings. A good example of a classic error would be the elimination of coffee breaks, since if staff are working instead, surely they will be more productive. Errors such as this, and there are many like this, ignore the mechanisms of inetrpersonal interaction in the happiness levels, personal development and loyalty of staff, but even more importantly, the effects on creativity and even invention as staff cross fertilise, the sharing of good practice, the roll-out of corporate messages, improved networking, and of course oiling of the corporate machine by enabling staff to form key relationships with others in the business. These things are hard to measure, but that doesn't mean they should be ignored in favour of those that can, such as hours at the desk or numbers of transactions.

If and when accountants use business models that account sensibly for all the factors that govern the well-being of the company, and its rightful contributions to the host community (no company exists in a vaccuum and all parts of the economy are ultimately linked, so accepting a small loss to a competitor can sometimes generate a long term benefit), then I will be much more willing to give them more control. But where all they do is to count some of the beans, they should be firmly limited to advisory roles, with decisions left to others with a view of the bigger picture, and especially one that includes the long term future of the company.

eBay and Skype, the correct strategy

So eBay made a big loss selling Skype. While a lot of analysts are saying 'I told you so' because they never thought it was a wise purchase, I think it was the right decision, but it was badly managed. Certainly, eBay should have ensured that they were buying the proper package, it seems that they didn't actually buy the rights to use some of the key technology on which it depends, so are now crippled. But that is the only obvious error in the acquistion. In my view, the rest of the subsequent decline in the perceived market value is down to vision failure. And it was entirely recoverable right up to the point of the discount sale last week. The biggest mistake eBay made was to sell it. With a strategy review and a bit of effort, they could have made a lot of money from it, and used it to increase the overall presence of eBay, ensuring its longevity. They thought it was just a means to allow people to talk to each other during auctions, but they over-estimated the size of the market for that, and how saturated it already was. Now eBay is disappearing fast from everyday awareness as other entrants on the web take the limelight. Here is what they should have done and why the deal made perfect sense if they had carried through a sensible strategy.

When they acquired Skype, eBay already had a large market presence, with a very high level of trust from a very large number of users, and hence enormous brand value, while Skype was just getting going, so was still relatively cheap with a lot of potential in the right hands, but already well recognised and trusted. eBay owned Paypal, a well-recognised electronic cash variant, used all over the world.

At the same time, we started seeing the market acceptance of electronic cash, e.g. the Oyster card in London, which was just beginning to migrate from the London underground, to become acceptable in other shops for minor payments, exactly the sort of territory Paypal could have aimed at. And at the same time, mobile phones were being used for more and more payments, such as car parking, ticketing, store vouchers. So we were seeing a key vulnerability in the small payments markets worldwide. People everywhere obviously want a simple, convenient, portable, and most of all, trusted alternative to carrying lots of cash around, especially small change. The key factor in acceptance is the level of trust in the supplier, people need to be sure they won't lose all their cash through technology errors or fraud, and eBay was exactly the sort of company that could have pulled it off. It had enough presence, brand image, trustworthiness, and the ability to handle the many transactions involved. Supposing it had decided to do so. It would be the provider of the sort of platform needed to make a whole range of viable business models for mobile music,and all kinds of on-line content purchasing. It would also be able to implement cross linking of the physical and on-line worlds in areas such as enabling and policing access to on-line content on purchase of other physical products or services. So, but this physical product, get various forms of electronic cash bundled, and access to on-line content. Areas such as air-miles, supermarket loyalty points and other electronic cash could migrate easily onto a single platform.

So where does Skype fit in to all this? It was the missing link. Provision of the servers and software is only part of the solution. Having a global communication capability is also key to such a market success. Skype provided the ability to allow users free text, data, voice and video interactions across the net, so that vouchers and cash could change hands easily, and discussion or negotiation between parties could take place easily and for free. Skype was the oil to the global small financial transaction machine. Most importantly, mobiles were starting to replace laptops as the platform of choice for email and web access on the move. That was obvious even then. Now, with mobiles also due to become the target platform for services such as Spotify, destined to be the prototype business model for content distribution, it is increasingly obvious that we need more than ever a simple electronic payments service that works across all platforms, with no currency borders. Paypal, backed up with Skype, and offered as a wholesale platform for mobile operators, with the eBay transaction engines there to run it all, and all implemented by a trusted company, would be in pole position to capture a very large share of the revenue from micropayments, air miles, loyalty schemes, travel ticketing and minor purchases at millions of retail outlets. They could become the default platform for paid content distribution. And any mobile operator that didn't join up would face the threat of becoming marginalised since their call and text revenues would be increasingly bundled into other more palatable business models by their competitors. Even services such as smart metering would naturally fall into their camp.

So in a nutshell, the eBay/Skype/Paypal alliance was in a superb position to capture a lion's share of the revenue circulating the networked world. Starting with small payments and establishing trust, they could have grown via future alliances into the world's default electronic banking/retailing/ticketing system. With a competent and visionary team at the top, they could still be up there with Google as masters of the universe instead of looking enviously at Twitter and Facebook and wondering where it all went wrong.

eBay didn't really understand the world they were in. The guys who created Skype were visionaries. The guys who invented eBay and Paypal were too. But as with most companies in the IT world, they grew, the visionaries moved on to other things, and they became ordinary companies, with any lingering visionary skills pushed further and further down the organisation structure, as control migrated to mega-managers who are probably really good at managing generic big companies, but don't really understand the point of the company they are managing, and have too little awareness of the value of what they have in their armoury. They bought Skype for the wrong reasons, and never really understood what it was or how to use it.

So they blew it. Not the first company to get lost, and they won't be the last. But it's still sad looking at the lost potential.

Workplace Facebook ban is ill-advised

So, one of the Dragons from Dragon's Den (Theo Paphitis) has banned his staff from using Facebook at work and suggested other companies should do the same? I am not about to criticise the business judgement of someone who is obviously successful; what he does in his company is up to him and it plainly works for him. But I don't agree that other companies should necessarily do the same. It depends what business they are in, and is wrong for most.

Some companies, indeed, most companies, exist to make money. Some are short term ventures which only make a fast buck and then close. For some such companies, I think he is probably right. They want a focused workforce who just get on with the job, make money for the owners, and then disperse when it all shuts down. The advantages of allowing staff to use Facebook might be exceeded by the costs is some of these companies, in others, not.

Other companies have an additional purpose in mind, but want to make money too, and still others are not for profit organsiations. Most companies though have a desire for longevity, and I think that regardless of their profit or social function motives, long term businesses should not ban staff from using social networking tools such as Facebook and Twitter, provided that they don't let it get in the way of doing their jobs, which obviously is a line management policing function. Allowing them to use them during breaks is fine, and even a modest usage during work periods is fine too. Only if it takes up so much time that it reduces their productivity significantly should managers intervene. Why?

Actually, a few good reasons:

People are not just cogs in a big machine, or rather, they should not be treated as just cogs in a big machine. We don't stop being human when we go to work, and as our economy grows, we can afford to concentrate on other quality of life issues than pure financial wealth. Part of the point of wealth generation is that as we become wealthier, we can take time to enjoy life a bit more. Being able to blur the lines between home and work a little is a good thing. It makes people happier. They feel more in control of their lives. This is especially true of people working in mundane jobs. It is historically the nature of low paid work that there is a clear line between work and non-work, but it doesn't have to be that way. As long as the business can cope, why not let staff enjoy their lives too? They will probably work harder and be more loyal.

Secondly, many staff take work home, and companies of course encourage them to do so (Blackberry users work much longer hours than no-users), and it is both mean and exploitative to ask that they leave their social lives at home while expecting them to take work into their social lives. Companies make money by exploiting the efforts of employees, and of course employees gain from the relationship too, but there should be a mutual respect. Confrontation between unions defending staff from bad employers is a regular symptom of bad management or bad unions. In a good company, both sides understand and respect each other, and ensure that both sides get an equally fair deal from the relationship. To demand otherwise is selfish and unethical.

Thirdly, the economy is changing. People doing mundane jobs and behaving as cogs in a machine is sometimes unavoidable, in production lines for example, where they fill the areas that still can't be done by machines. Humane management can make up for this by providing generally good working conditions. But this kind of work is disappearing fast in the developed world. Modern work is already less machine-like, and will become increasingly focused on 'human skills' as time goes on. Adminsitration can be automated to a high degree by smart machines, especially as the semantic web takes hold. Professional knowledge can increasingly be captured and used by machines. Transactions in call centres have been highly displaced by voice recognitions and basic AI. What is left after all this runs its course is that part of work that involves emotional skills, caring skills, interpersonal skills, leadership and communication skills, entertainment, sports, policing, teaching, social work, personal services and and so on. i.e. jobs that are focused on dealing with other people. People doing this kind of work need to have good people skills of one kind or another. Companies that are here for the long term need staff with those skills. It make little sense to prevent them from becoming adept at them by banning them from using social networking tools. Time spent on sites like Facebook and Twitter might be wasted sometimes, but not always. It also sometimes helps improve human skills, so companies could reasonable think of it as training.

Fourthly, using social sites and thereby building and fostering personal networks helps people's employers directly. It is key to them building relationships with other companies that might be suppliers or customers, since those companies are also staffed by people. When companies are comprised of armies of AIs directly interacting with other AIs, we will no longer need to worry about Facebook anyway, but while the work is done by humans, it is a useful tool. Knowing people at the other end helps build and maintain trust, a very key (and increasingly so) ingredient for successful business interaction. Inter-company interaction via social networking also helps cross fertilise ideas and best practices. Finally, having staff that know potential future employees personally is a huge asset, saving on recruitment costs. And of course knowing the competition personally is a great asset too. The ancient wisdom tells us to 'keep your friends close but your enemies even closer'.

So companies have a lot to gain by letting staff use social networking sites while they are at work. Their loyalty will increase, they will be happier, and hence more energetic and probably work harder. The company's relationships with suppliers, customers and other companies will improve and their chances of survival enhanced by continuous updating of best practice and cross fertilisation of ideas. Sure, some employees will always abuse the freedom, but that is a simple line management issue. Most people will behave better when the company treats them better.

So, summarising, I don't think Theo Paphitis is necessarily wrong to implement a Facebook ban in his own ventures, it all depends on his business models. But for most organisations, it would be counter-productive. Treat your staff like humans and you will earn more, it's as simple as that. Even for the most extreme capitalist company, the long term advantages probably outweigh the short term costs.

All about SAS 70 Report

A SAS 70 report is the service auditor’s report on a service organization’s controls for use by user organizations and their auditors. Statement on Auditing Standards (SAS) No. 70, Service Organizations, is a widely recognized auditing standard developed by the American Institute of Certified Public Accountants (AICPA). The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 make SAS 70 audit reports even more important to the process of reporting on the effectiveness of internal control over financial reporting
It applies to any service organization that:
• Executes transactions and maintains accountability or
• Records transactions and processes related data
The primary purpose of the SAS 70 report is to provide information about the service organization to auditors who audit the user organization’s financial statements.

Benefits of a SAS 70 ReportReduces disruption to service organization operations (single auditor concept) - Otherwise, auditors of all user organizations would have to perform testing. This would result in significant duplication of effort in reviewing common service organization systems, and the service organization would have to provide support (and accept the disruption) for every review.

Provides an independent assessment of controls - Important function for many user organizations to have an independent, trained set of eyes evaluating internal control.

Value-added recommendations from the service auditor to the service organization - An independent, trained set of eyes is able to provide recommendations to improve operational aspects of the organization. They can compare the organization to other service organizations to provide suggestions and strengthen controls as well as improve operational effectiveness.

Potential efficiency gains for user auditors if reliance can be placed on the SAS 70 report - Utilization of a SAS 70 may allow the user auditor to reduce scope of direct testing of systems and procedures at the service organization, resulting in lower fees for the client.

Few basic definitions
User Organization - The entity that has engaged a service organization and whose financial statements are being audited (e.g., the customer of the service organization).

User Auditor - The auditor who reports on the financial statements of the user organization.

Service Organization - The entity (or segment of an entity) that provides services to a user organization that are part of the user organization’s information system (e.g., processes transactions on behalf of its customers).

Service Auditor - The auditor who reports on controls of a service organization that may be relevant to a user organization’s internal control as it relates to an audit of financial statements (e.g., performs the SAS No. 70 review of the service organization).

Why would a company use a service organization?Many companies are focusing on their core competencies and outsource certain other functions that specialized companies can do more efficiently.

These specialized companies or service organizations frequently provide outsourcing services to multiple organizations, thereby generating economies of scale.

When a company uses a service organization to accomplish tasks that affect the company’s financial statements, the processing performed by the service organization may impact the company’s system of internal control.

Therefore, the processing at the service organization may affect the user auditor’s planning and performance of the audit of the user organization’s financial statements and the audit of internal controls.

When to consider SAS 70?The fact that an entity uses a service organization is not, in and of itself, a compelling reason for a user auditor to conclude that it is necessary to obtain a service auditor’s report to plan the audit.

The user auditor should consider SAS No. 70 when auditing the financial statements of an entity that obtains services from another organization that are part of its information system.

A service organization’s services are part of an entity’s information system if they affect any of the following:
ª How the entity’s transactions are initiated
ª The accounting records, supporting information, and specific accounts in the financial statements involved in the processing and reporting of the entity’s transactions
ª The accounting processing involved from the initiation of the transactions to their inclusion in the financial statements, including electronic means (such as computers and electronic data interchange) used to transmit, process, maintain, and access information
ª The financial reporting process used to prepare the entity’s financial statements, including significant accounting estimates and disclosures

SAS No. 70 is not applicable to the audit of the financial statements of an entity when:
Services provided are limited to executing client organization transactions that are specifically authorized by the client. Examples: processing of checking account transactions by a bank and execution of securities transactions by a broker.

Services provided involve financial interests in partnerships, corporations, and joint ventures when proprietary interests are accounted for and reported to interest holders. Examples: include working interests in oil and gas ventures.

Types of SAS 70 Reports
Type I Report – Report on controls placed in operation
In a Type I report, the service auditor issues an opinion on whether the description of controls is fairly presented, whether controls were placed in operation and whether they are suitably designed as of a specific date. However, a Type I report does not address the operating effectiveness of controls over time. A Type I report may provide a user auditor with an understanding of the service organization's controls necessary to plan the audit and to design effective tests of controls and substantive tests at the user organization. A user auditor cannot rely on a Type I report to reduce the assessed level of control risk which may result in the reduction of substantive procedures.

Type II Report - Report on controls placed in operation and Test of Operating EffectivenessIn a Type II report, the service auditor performs the procedures required for a Type I engagement and performs tests of specific controls to evaluate their operating effectiveness in achieving specified control objectives. A Type II report:
• Describes controls and effectiveness over a period of time
• May provide user auditor’s information to place a greater level of reliance on controls
A Type 2 report is typically more useful to a user auditor because, in addition to providing an understanding of controls necessary to plan the audit, it may also provide the user auditor with reasonable assurance that control objectives that may be important to the auditor have been met.

Report Contents1. Independent service auditor's report (i.e. opinion).
Type I - Included
Type II - Included
2. Service organization's description of controls.
Type I - Included
Type II - Included
3. Information provided by the independent service auditor; includes a description of the service auditor's tests of operating effectiveness and the results of those tests.
Type I - Optional
Type II - Included
4. Other information provided by the service organization (e.g. glossary of terms).
Type I - Optional
Type II - Optional

The user auditor will need to consider whether the controls at the subservice organization are relevant to the user organization’s information system.

Carve Out MethodIf the controls of the subservice organization are not included in the SAS 70 report, the carve-out method is used. In the carve-out method, the subservice organization’s controls objectives and controls are excluded from the description and from the scope of the service auditor’s engagement.

Inclusive MethodIf the controls of the subservice organization are included in the SAS 70 report, the inclusive method is used. In the inclusive method, the subservice organization’s relevant controls are included in the description and scope and the description in the SAS 70 report differentiates between controls of the service organization and controls of the subservice organization.

Report timingWhen a Type 2 SAS 70 report period end date is within 6 months of our client’s year end, both our client’s management and the Service Auditor should consider procedures to bridge the gap between the period end of the SAS 70 report and the client’s year end.
When a Type 2 SAS 70 is dated more than 6 months before the client’s year end, the report provides little evidence of the operating effectiveness of controls at the service organization.

The User Auditor may need to perform alternative procedures to gain comfort on a control objective appearing in the SAS 70 report:
• In instances where there are non-negligible exceptions documented in the report,
• When a relevant control objective is qualified,
• When a period of time greater than 6 months has elapsed since the SAS 70 period end, or
• In situations where the service organization did not provide (or our client’s management did not obtain) a SAS 70 report over the service organization.

The procedures a User Auditor can rely on vary and may include some or all of the following procedures:
• Use work performed by management and their results
• Obtain specific information from the service organization to influence the nature, timing, and extent of testing to be performed.
• Request a service auditor be engaged to perform the necessary procedures (i.e. Agreed Upon Procedure engagement)
• Visit the service organization and performing the necessary audit procedures
• Evaluate the user controls at the user organization (our audit client) to determine if the control objectives are met with procedures already performed at the user organization.
References: www.sas70.com

Tesco, town decay, democracy

George Monbiot wrote an interesting piece in the Guardian about Tesco trying to move into his local town, and predicting its inevitable decay.

http://www.guardian.co.uk/commentisfree/2009/aug/10/tesco-planning-superstore-independent-shops

Although I enjoyed reading it, and he is probably right that it will result in the loss of many other shops in his town, I disagree with some of his analysis, particularly his assertion that this is a problem. 20% of people in his area have objected to it in writing, and he argues that each area should be able to decide whether they want a Tesco, and the process of blocking it should not be so potentially expensive for the local council that big companies should be able to bully them into accepting planning proposals. I fully agree that the planning and appeals system should be repaired so that planning decisions shouldn't be made on the basis of economic blackmail, but I think there is a wider issue here. I don't think that whether the area should have a Tesco should be up to local planners at all. Instead, I think that people everywhere in the country should be entitled to the same level of service provision. People are much the same everywhere, and within a country, should be able to live anywhere with the same basic rights and service provision. Postcode lotteries in state provision are a symptom of bad government, whether in health care, education, or social services. basic shopping facilities. In commercial markets, the free market is an excellent way of providing services to people at the level they want. We have very little direct control over the quality and level of local health care or education, but commercial enterprises live or die directly as a result of how well they fit the needs of the local market. If the presence of a Tesco in the area is so attractive to shoppers that other stores inevitably close due to lack of custom, then that shows that the market actually wants Tesco and doesn't care enough about the existence of the shops that die. It is a simple result of competition in a free market, and isn't something that should be blocked by local democracy. I don't think someone who thinks they like small shops should be able to prevent me from shopping in big ones, or vice versa. If there are enough of them, then both can happily survive side by side. If there aren't, or people who say they want to keep the small stores actually swap to Tesco once it's there, as many do, then the market is functioning perfectly when the other stores close. That isn't a fault, it is the nature of a free market.

Local democracy has a place, but not in regulating markets or basic quality of life issues, something best done at national, regional or even global levels. When we determine how the market should be regulated, then it should apply equally throughout the jurisdiction. Local government should be limited to local tweaking within that - issues of precise location, minor influences on look and feel, and ensuring that the services they are responsible for are adapted as appropriate to cope with the changes resulting from people's free decisions.

In the future, it will be interesting to see whether a hybrid model could survive. Some superstores have tried having small outlets alongside within the same superstore building. This combines the convenience of the big store with the ability to shop in small ones. Out of town malls do the same. This would be an option that might be able to satisfy both markets. If Tesco were permitted to build in an area, but obliged to make some space available in the same location for competing small shops, even the same ones displaced from the town centres, then we would retain some element of local vaiety and local culture without sacrificng the quality of life improvements offered by the superstore model. I rather suspect that the small shops would still fail, and that the perceived demand for them doesn't really exist in anything like the magnitude that George suggests. I don't like Tesco all that much, but I much prefer it to any of the alternatives. It seems that so do most other people.

All you wanted to know about the New Pension System (NPS)

New Pension Scheme

FAQs

What is the New Pension Scheme (NPS)?
New Pension scheme is a retirement planning instrument and a system of fund management like the Employees Provided Fund (EPF), Public Provided Fund (PPF).
It is based on defined contributions
It is voluntary for private sector employees but mandatory for new recruits to the Central Government Service (Except armed forces).

Who is it for?
It is applicable for salaried employee (both public sector and private sector) within the age group of 18 to 55. you need to compulsorily withdraw from the system on or before the attainment the age of 70.

Who is the regulator for this scheme?
The Pension Fund Regulatory and Development Authority(PFRDA) has been assigned the work of protecting the interest of the people participating in the NPS. It’s a Government regulatory body of India

What is PRAN?
Permanent Retirement Account Number (PRAN) is like an account number which will help you check your funds online or at the point of presence (Pops). It is allotted at the time of entering the scheme.

How much should I invest?
For government employees, the monthly contribution is 10 percent of the salary and DA to be paid by the employee and matched by the Central Government. However, there will be no contribution from the Government in respect of individuals who are not Government employees.

Minimum amount per contribution RS 500
Minimum annual contribution Rs 6000
Minimum number of contributions 4 per year

A default charge of Rs 100/ year would be charged if you are unable to pay the installments and the minimum amount of Rs 6000/year. The account will then become dormant and can be renewed on request after paying the charges and the contribution of Rs 6000.

How do I get started?
PRAN gives you access to two accounts
Tier I – you contribute your savings for retirement in this non-withdrawal account. Operational w.e.f. 1-May-09
Tier II – voluntary savings facility. Date of operation to be announced.

You can approach any one of 17 banks like SBI, ICICI, IDBI, Axis, LIC, Kotak Mahindra and many more through the 285 point of presence (PoPs) in India to register and get a Permanent Retirement Account Number(PRAN). You have the option of shifting your PoPs.
You can choose only Pension Fund Manager at any point of time.

Where does the fund invest my money?
NPS offers a choice of 6 fund managers and 3 investment options to choose from.
If you do not want to make a choice, your money will be invested in “Auto choice” option.
The three choices of investment are:
Class E - High Return High Risk – investments in predominantly equity market instruments (Maximum 50%)
Class C - Medium Return Medium Risk – investments in predominantly fixed income bearing instruments
Class G - Low Return Low Risk - investments in purely fixed income bearing instruments

Auto choice option
Till 36 years of age,
50% in class E (high risk, high return equity class)
20% in class C (medium return medium risk)
30% into debt instruments.

After 36 years of age the % of funds invested in class E and C comes down annually
While attaining 55 years of age
10% in Class E
10% in Class C
80% in Class G
No guarantee on investment returns. The choice of option can be changed later starting April 2010.


What is the withdrawal option?
The contributions and returns thereon would be deposited in a non-withdrawable pension account. The existing provisions of defined benefit pension and GPF would not be available to the new recruits in the central Government service.

In addition to the above pension account, each individual can have a voluntary tier-II withdrawable account at his option. Government will make no contribution into this account. These assets would be managed in the same manner as the pension. The accumulations in this account can be withdrawn anytime without assigning any reason.

What is the exit option?
Normally, individuals can exit at or after the age of 60. At exit, at least 40 percent of pension wealth is to be invested to purchase an annuity. The individual would receive a lump-sum of the remaining pension wealth, which she would be free to utilize in any manner.

If you exit the NPS before attaining the age of 60 years, you will be entitled to get 20% of the funds you have invested and the rest has to be invested in annuities in the insurance companies. An annuity will help you to get a steady income the rest of your life. If the subscriber dies, then the nominee will get the whole amount as a lump.

You can exit the new pension scheme anytime you decide to do so. And in case of death the amount in the subscribers account will be transferred to the nominee.

What does the Income Tax Act say about NPS?
Budget 2009 proposals,
- Any income received by any person shall be exempt from income tax u/s 10(44)
- Any dividend paid to the NPS Trust shall be exempt from Dividend Distribution Tax u/s 115-O
- All purchases and sales of equity and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax
- NPS Trust shall receive all income without any tax deducted at source u/s 197A
- NPS now has been extended also to “self-employed” u/s 80CCD (1). It is proposed that the amount received by an assessee from NPS shall not be taxed, if such amount is used for purchasing an annuity plan in the same year
- Amount taxed under Exempt-Exempt-Tax scheme. That is, withdrawals are taxed.

Source:
www.pfrda.org.in
www.livesharemarkets.com