Why Statisticians Reject Most of What Media call as analytics?

Why statisticians reject most of what media call as analytics and then re-classify them as reporting? I attended a Big Data Analytics seminar recently with a statistician coworker. He thought it offered nothing new in analytics as compared to what existed in the industry ten years ago. I agreed with him and yet the 200 page slideshow on advanced mining and data visualization kept flashing in my mind.  It’s a fact usage gives a word the meaning. May be it’s time the meaning of the term analytics got .  But what these statisticians are talking about?

Analytics is a fascinating term and the meaning seems to suggest many flavors as more businesses embrace it. A couple of decades back financial services companies led the systematic ways of capturing and storing large volumes of transaction level data. Then they employed quantitative analysts who identified patterns and predicted customer behavior. A well-known application of analytics from those days is a scorecard, for example FICO Score. It predicted the likelihood of a customer walking away without paying his debt and it made sense.   

What really changed is the data landscape. A recent NPR story points out two related facts. The external data storage market is now worth $70 Billion a year and companies are allocating close to 15% of their Information Technology budget to warehouse data.   Data storage is a function now many businesses subcontract to companies like Switch, Amazon and Dell and for example, the size of Switch’s server farm in Las Vegas is as large as seven football fields.  It’s easy  to visualize every click you make in a website, every swipe you do with your credit card, and every ‘like’ you do on Facebook  is  finally finds its way to one of these servers. The unprecedented growth of data results in Big Data challenges we hear every day. Analytics applications that consume these massive data are touted to provide a competitive edge to the businesses that make conscious decisions to store data.

However, existence of analytics goes back to the days before we had computers, internet and quants. Now it’s like the Wright Brother’s invention that got really complicated when the advancements in physics, material science and aero dynamics wrapped around it. Who does not like a Dreamliner (not an endorsement).  Same way, advancements in Information technology, hardware and software alike, transformed the ways businesses capture, store and retrieve volumes of data. And they did it lot cheaper than in the past. Data mining and statistical  techniques, mostly used in academic and research settings, found many applications in in this new found data world and flourished  as analytics. 

Benefits of analytics are often exaggerated by the tools and solution vendors who benefit monetarily when a business decides to take the ‘analytics’ route. I found these vendors and their sales literature adds tremendously to the sloppy use of the term analytics. Let us look at some long words and sentences.

Applications providers, like SAP, emphasize that their work-flow solution is configurable and ready for analytics integration and business intelligence . When database vendor Oracle extends R capabilities, Greenplum, another cool database vendor, is driving the future of big data analytics by integrating Base SAS libraries at database server level.  When we hear partnership with SAS and R, the names long associated with reliable statistical modeling and analysis, it’s quite convincingly implied that they are providing analytics. A world of reporting tools, like MicroStrategy, SAP Business Objects or Hyperion provide data mining, business intelligence and analytics that leverage on multi-dimensional databases and brings out insights to the management in a drill down-roll up fashion.

Once you peddle through the jargons, they, Google analytics included, are still talking about reporting that just got extravagant with all the technological advancements.  It is hard is to define the term analytics without offending a lot of people. A lot of people already claimed their stake in this ‘next big’ thing. Not related, but an MIS division head I know recently changed his title to ‘ Data Scientist’. When I checked what changed, he said they hired a consultant to do Hadoop and Microstrategy for them.

Coming back to the main topic:  what’s core analytics means?  Yes I added ‘Core’ to emphasize. Probing deeper, it sounds like they mean predictive modeling or predictive analytics.  A set of old fashioned test-control- validation exercise using various statistical techniques like logistics regression, survival analysis, classification trees or even machine learning. Wiki does a better job in explaining this.  People who do such work are often called modelers and they want to differentiate themselves from a set of IT or near IT guys who primarily deal with reporting systems.   The seemingly simple issues these people deal with are not solved by the smartest visualization software – Like what is a statistically sound substitution to use for missing values in sample data?   How to derive some performance for the customer we never had? – There are hundreds of articles published in journals on these topics and hundreds were awarded PhDs. But still there is no agreement. Since there is no one rule and generalization is not a possibility, software cannot hide it under a layer. From data side, such analytics are often supplemented with data that’s not available in corporate Hadoop Big Data mine. So they don’t believe an off-the-shelf application sitting on that mine is going to get the things done. There is a difference in deliverables too. The so called generic analytics applications provide reports, tracking dashboards or warning systems.  Core analytics deliverables are sets of rules that sit in an application and acts like an expert.  Say a scoring model that replaces an underwriter.  When humans learn from the new environments and their own mistakes, an expert system pretends that what it had gleaned from the past is still sound. Moody’s AAA rating of junk bonds in 2008, is an example.  (I know genetic algorithms and artificial intelligences counter argue, but they cannot detect human lie).

The paragraph above attests how drawn-out and jargonized this topic is. Liberals have no place in such discussions. 

Then there is an overlap of these two worlds.   Google Analytics for example, it’s possible to setup a test- control strategy to see what works best in real life (A/B Testing).  Many analytics applications can be configured to work dynamically, for example: Amazon recommendations or fraud detection, are trained on the fly but rules behind them still lying in the disputed land.

I counted at least a dozen times the word analytics used in our meetings last week. It almost always meant some numbers to support an idea or argument. A report. With that statement, this topic is open for discussion.

S&P Downgrade of US and my stock

635 points drop in Dow Jones index was not expected though the Friday closed with lot of discussions on European economies and most importantly S&P's downgrading of US debt rating to AA+. S&P dropped the ball so many times so market appeared to know them better. Throughout today, market was buying US treasuries and gold as a safe haven ( read not the treasuries from AAA rated sovereigns) and that made me believe that market is going to stay at a 300 point loss levels. But appears the market sentiments are now driven by something stronger than S&P rating .

So those who stay invested can now watch whats going to unfold in a few days. Bank of America and Citibank are battered for no reasons. May be its better to book the loss tomorrow and hope to buy it back cheaper later.

Health Savings Accounts & Retirement Savings

An article I recently read about the 401K plans ( The Great Stock Myth ; The Atlantic) concludes that betting only on your 401K saving may not be a good idea as the historic returns are not even close to whatever we all have in our minds. With the kind of fluctuations we observe in the stock market(In other words, zero sum game), what makes the 401K attractive is the tax differed contribution and the employer match. Surprisingly Health Savings Accounts(HSA)s also come with similar features and hence provide a good avenue to park your savings for any future medical expenses.

Health Savings Accounts (HSA) are available since 2003 for the Americans who are holding high deductible health plans and more recently companies are encouraging the employees to sign up for HSA by contributing lump-sum dollars on their behalf. Of course it helps the companies to save on the premium they are paying to insurance companies but I think this plan overall helps in reforming the halthcare system ( Since this was introduced in 2003, the credit probably goes to George Bush but Obama did modify this plan to plug some of the misuses)


HSA is not available to everyone and its contributions are always associated with a high deductible health insurance plan . For example, if your health insurance plan requires you to pay-up the initial family medical expenses up to $2,400 (as of 2010) you are eligible to participate in an HSA. By opening an HSA account, you could transfer up to $6,150 a year tax free for meeting your medical expenses in the future. HSA is offered by most of the banks and are just like a savings/investment account with a debit card and check book. There are a few features I found very attractive as compared to a traditional plan.


1. Premium for your health insurance is lower because of the high deductibles and normally the out of pocket maximums are also lower than a traditional plan. You can use your tax advantaged HSA account to meet the deductibles/Out of the pocket maximum. Normally , employers contribute a percentage of the deductibles so there is always some funds to start with.

2. HSA balances are like a savings account and any unspent money is for you to keep for the future. Since young people tend to incur less of medical expenses, this help them to accumulate whatever unused funds from previous years to the future. Even if you switch to a low deductible plan in the future, you could still use these funds for eligible medical expenses for you or your family.

3. Your contributions are tax differed and based on you income this could be up to 30% return. Most of HSA providers allow you to invest these balances in Mutual Funds and other eligible instruments. So it works just like your 401K. In case you make a withdrawal for non medical expenses, you will have to pay a penalty of 10% and the income tax. Normally such withdrawals are made when you have less or no income so you will end up paying less income tax.

The best part I liked in HSA is that it makes you more responsible in spending on health care. For example, I now want to know how much the doctors are charging me . Some of my colleagues are negotiating better rates with physiotherapists and Chiropractors and the money is going from their savings. And of course I have a peace mind that if the expenses are exceeding the out of pocket maximum, insurance is going to take care of that.

Frankly, most of the working people can meet their expenses for primary care but its hard to be prepared for catastrophic medical situations and HSA seems provide just that.

Confused new home buyers

New home buyers first stumble at the decision point of buy or continue to rent and it invariably ends up in an elaborate spreadsheet exercises to compare the tax benefits, cost of renting, expected appreciation and outside the spreadsheet, the thrill of pursuing the American dream. Once decided, the next grinding stage was looking for a dream home -good neighbourhood, good school districts, commuting distance to workplace and daycare , construction quality and the number of bedrooms and a host of other things. But recently the complexity of this process increased due to recession, changed terms of loans and the new foreclosure and other laws. I think the recent shake-ups in the industry got the new buyers confused to the core.

The recent foreclosure mess is a good example for things that added to such confusion. Its true that most of the banks did not do the due diligence before every foreclosure as their status as a mortgage servicing company did have more benefit in foreclosing a loan rather than modifying it . In other words, Obama administration did know that as a result of the securitization process ( Wall Street taking over the mortgage receivables and selling it to varied investors as a packaged investment ) there was less incentives for the mortgage servicing companies to modify the loans and hence offered a $700 Million package for doing the loan modification. The recent fiasco in foreclosure and the fact that all 50 state attorneys suing the major banks would change this incentive system. Now the foreclosure means more paper work and legal process where the cost of this will outweigh the benefit of the foreclosure in comparison with the loan modification. May be its good for the current mortgage holders and industry in general as every foreclosure adds a home to the already surplus inventory of the homes.

New buyers are puzzled at two things
1. are the prices at bottom? Moody's say its not and people are just waiting for a right time. Also, the income levels did not change in last five years so buyers feel that prices will eventually have to correct to justify the income levels in a no growth economy.
2. Will the rates change? There is a feeling that's the interest rates are probably at the bottom now but the mortgage prices are not.

In addition, there are more foreclosed homes that are added to the supply of homes and there is always a better deal in waiting. May be the new foreclosure messs will help remove that confusion.

Healthcare reform bill

I was following the healthcare bill of Obama close but not that excited about it. There is no doubt that the bill helps increase the number of people who are insured and soft on pre-exiting conditions - a thing that only rich countries could afford and US should provide basic health care for all its citizens as a privilege. Apart from that, there is nothing in the bill that tries to fix the current problem. I am for the government proving health care thought its on network of hospitals to act as a benchmark for private sector and also to provide the Medical education free based on the meritocracy. I think if the government wants to fix the problem the should start with doctors by providing free education and these debt free doctors bring a new perspective to the overall health care system.

Toyota

Think about it. When you press the accelerator, the pad gets stuck. Its definitely scary for a regular driver. I always thought accelerating is a straight forward operation but Toyota story now tells us its not. Rather, its so complicated and has become a threat to Toyota's long enjoyed reputation for quality. Halting the production in the US plants only made the consumers more nervous, though it was the right thing to do.

Though Toyota CEO acknowledged that the company was chasing the numbers and compromised on quality, I feel there was also a 'pull' factor from US consumers. Every other person in the US wanted a Toyota and dealers did not mind stocking Toyotas in large numbers. The only way for Toyota to deliver such large numbers were outsourcing parts from across the world and probably that's where the things started going wrong.

Though Honda stands to gain from this mess, I feel it helps Ford better to emerge as a profitable business in 2010. Also, their product lines are more stylish and better quality. Especially when it comes to trucks and SUVs , Ford has some good products American consumers love to take look at.

Volker Rule

Bad part of Volker rule was that I lost a couple of grants in the unexpected stock market crash. I am not alone, everyone in the lunch table today was whining about bad timing Obama chose for this announcement and how the Volker rule and now doubtful Health reform bill will make him a failure. On a side note, I really wonder the President understands the amount of bad mouthing happens when the stock market goes down a couple of points. This one thing is, probably, the most significant, contributing variable in to his approval rating.

Some channels were showing the way stock market tumbling as Obama started speaking and by the time he was finished, it was well below the day's open levels.This reminds me of an old Saturday Night Live show where Mr. George Bush (Will Ferrel ) says that he decided to speak only in the night because whenever he speaks during the day, the stock market goes in to the crapper. I hope that's not the case with Obama as I have no plan to track his public appearances -:)

Jokes aside, I think the 'Volker rule ' is a formal acknowledgement from the Government that the taxpayers were held hostages during the crisis. If implemented right, these measures could bring the credibility back to the US financial markets(of course with a bad hit on their bottomlines). Its not just Paul Volcker, otherwise moderate Geithner also agrees that such regulations are required to minimise the future risks. Volcker Rule was announced just after the "Financial Crisis Responsibility Fee" and I guess that's what pissed the markets off. We will have to wait and see what's the real impact of Volcker Rule on the financial institutions and how diluted it would be when it comes for implementation. I still want to believe that Obama team wants to implement some sensible policies to avoid the future troubles and if it was just for a political mileage, they were better off without this announcement.

Stock Market Gambling in 2009-My investment rules

This is my 2009 roundup for my stock portfolio. I made an 80% annualized return on my portfolio and in this post I plan to track what I did for the future references and updates.

In my opinion, Stock market ‘kicks’ you almost the same way tables games do in casinos. I always thought I had a better chance to win if I had lots of money to bet on a roulette table ( yes, I am talking about those people who stack-up the chips all over the table and win 36 times back on some) Strange, but I thought the same about Warren Buffett .

So to gamble, I started my stock portfolio in 2009. Thanks to the academic training, the financial numbers and data don’t make me dizzy. (I should also mention that my master’s thesis was to model Stock market behavior). I risked $ 2,000 when I started this portfolio in early Jan 09 and the idea was to learn to play the game in the US market. My first pick was Ford as I liked their new products line and the CEO. My second pick was Citibank as I thought at $5 Citi was grossly undervalued. Also, these stocks were really cheap and entry was easier with a 2K portfolio. I sold Citi at a 21% loss a month after and four months later sold Ford for a 132% gain.

My first two trades used only 60% of the 2K I had and they generated a profit of $ 821 and that was a 41% return- close enough to a roulette side bet. I have noticed one thing; CEOs make a difference. Obviously that was not a new learning but I developed an investment rule for later use. Read the CEO profile in Wiki or online and if the products don’t impress you, at least CEOs should.

I stayed low during the March/April market meltdown and saved up money for a comeback in July. I increased my cash stake to 6.5K in July and bought beaten down financial select sector ETF (XLF), Citibank, Discover Financial and CIT. Financial sector was really fragile hence generated a lot more fluctuation than the overall market. This was also an opportunity to make money and I thought I had some advantage as I understood the finance business better. The investments paid off and by Aug I had a cash return of 3.1K i.e. a 48% return on the 6.5K investment. I was more convinced with the strategy of investing in the businesses you understand better. One of my investments, CIT was deliberate as they had become penny stock fearing bankruptcy and I thought the government would rescue them with another bailout. However, bailout did not happen but the bondholders provided a lifeline to CIT and bailed me out in the process.

During these seven months, I learned how and where to look for information. I also got some idea how news translates in to price movements on specific stocks. Unless you have your own money, you never pay attention to such details. With all the encouragement I had from the trading returns, I increased my investment to 25K by September. As of end of December, I did 27 buy transactions and generated 7.3K profit or 30% return on 25K. Since I did not have 25K in the beginning of the year, annualized return on my investment stands at 80%. Please take a look at attached trading log to see my winners and mistakes.

Many of us know gambling games are designed to benefit the house in the long-term and it might be a Monte Carlo or since we are talking about stock market, it might be Goldman Sachs. Again in my opinion, gone are the days where stock market was a place for long term returns but focusing just on short term, we could make some money or at least have some fun of trading.

These are some rules I developed in the first year of my US stock market investments.
1. Do at least 1 buy and 1 sell transaction in 2 weeks and keep at least 50% of the funds invested. Opportunity to make higher profit increases with the number of trades.

2. Never invest more than 60% funds. This means you have 40% of your portfolio as cash. When the price of the share you bought unexpectedly goes down and you have reasons to believe that it’s going to recover, try to average the price using the cash in hand. (Wells Fargo, Dell & Citi in my portfolio).

3. Sell whenever the net return on a trade crosses 2%. Never hold beyond 5%. ( Nomura, Citi, Ford)

4. Watch the panic sales and price drop due to unexpected news or expected stock dilution or similar. Jump in when they start recovering. Companies with good fundamentals are the best bet (Nomura, Dell, Autodesk are some examples in my portfolio).

5. Sell when prices continue to go down and there is no reason for you to justify a wait. In other words, don’t think every stock recovers in the long-term. By waiting, you are just blocking the cash (Lloyd, Citibank in my portfolio)

6. Invest in the businesses you understand – Old Warren Buffet saying but this also means that you should learn about a business before you invest in it. Many a times, knowing the business helped me to discard the Wall Street analyst’s number games. (Nomura for example )

7. Read about CEOs; watch they talk.

Overall, my favorites are beaten down stocks because bulls pick them to ride on. New product launch or a better sales quarter can cause these companies prices go up. Also, remember to get rid of them the moment they cross 2% return mark as such bull runs are usually short-lived.

I do not diversify the stock holdings as I believe it does not let me maximize my returns. Also I am against holding more than 3 companies at a time as that would demand a lot of time in research and tracking. I also invest in the same companies over and over again as I already know the price support and resistance levels. Finally, I use fundamentals to make sure they don’t become penny stocks in next couple of years.


Day trading is not possible for people like me who work 8 hours a day and no access to online trading at work. I see there is lot of leverage you could do by margin trading or increasing the frequency of trades but my investment objective was to make a 10-15% on my cash savings. And all I have is lunchtime and an iPhone so average holding period for a stock was 3 weeks.


Talking about liveraging, I also have a small options trading portfolio. I will have those results published soon.

Here is the trading book to see the buy and sell trades.

Healthcare reforms -never ending discussions

I am juggling my thoughts around the healthcare reform proposal of Obama administration and the discussions it generated so far.




I doubt backing out on a Government run insurance plan was a compromise by Obama administration. There are several programs like Medicare, Medicaid, Children’s health insurance and Emergency Medical care that morphs into a some form of insurance. All these programs were opposed as ‘socialistic’ at the time of their introduction and were never endorsed by the so called ‘conservatives’. May be the new plan could have streamlined it, at the best.



I feel insurance companies are not to blame for this mess. Just like any others, they provide a valuable service and make a profit out of it. There are several players in this market to ensure that competitive prices are available to the insurance shoppers.



In a marketplace, consumers demand value for their money. If that holds true for healthcare, they should check the doctor’s fee, cost of the procedures and services and compare it with the quality before availing the services. This means if someone is paying higher cost for their healthcare, it’s because he/she enjoys a superior service. I don’t think the present system encourage the insured customers to do this evaluation. Cost of many of the procedures I looked at is shockingly high and probably well justifies the cost of insurance.



Billing fraud and excessive billing by healthcare providers also pushed the average cost of insurance high. Physicians are often encouraged to perform multiple procedures allowed under the insurance plan because they want to be protected from any legal suits in the future and also they earn for their employers.



I have some proposals !

• Subsidize the medical education; let’s not pressurize them into making money to pay off the half a million debt. I think its worth spending for the best of our talent which government could tap into later.


• Protect physicians from unnecessary law suits. In other words, if the physicians win the case, the one who sued them pay the cost. This should discourage 90% of the fake litigations. Also this will reduce malpractice insurance cost and combined with earlier point, may reduce the consultation fee they are charging.


• Make people more responsible: Individuals pay for the normal consultations, fitness checks and simple procedures. That way, they will be encouraged to shop for the best value service in their area.Insurance coverage should be a protection for expensive procedures or hospitalization. A range of policy packages should ensure that everybody is covered to the degree of what they are paying for.


• Government should set-up a chain of hospitals that are competitive with private run hospitals in terms of facilities. This will help in setting a standard for the cost of diagnostic procedures and other services. Also the government could administer all their current programs through these outlets.

I am sure almost all of these thoughts are debatable; but I just want to put my version down. Penny for your thoughts !

Distracted Driving

Today's New York Times article throws another stinker on Bush administration for not letting National Highway Safety association publish a study that statistically proves that talking on telephone while driving could cause a crash four times likely compared to a normal driver. And it is probably as bad as drunk and driving.

None need to tell us that talking while driving is distracting - let it be with hands free or without. Every time i watch a vehicle coming too close or abrupt lane changes i see a driver talking. There is nothing wrong in talking while driving but since it has proven that such a behaviour is threatening others lives, it should come into the category of drunk and driving.

The benefits to the business and convenience to the consumer are clear. However, most of the consumers don't mind a legislation to prevent talking on telephone while driving. So the telephone industry and electronic device manufactures lobby the law makers to prevent any such bills getting passed in the congress/state legislature. The smart phones these days generate more revenue by surfing Internet and downloading stuff from the net - not just the calls. A lot people make use of such devices to stay in touch or read while driving hence improving the margins for telecom companies.

I use a smart phone and a reasonably busy person. When i use the phone while driving ( of course with bluetooth on) i really know that i get too involved in talking and make mental pictures about what i talk. Some people say i am incapable of multi-tasking which i agree as there is nothing like multi-tasking. So i really hope to see a legislation to stop this bad habit of mine :)

Securitization - GE tries something different

Yesterday GE removed 2 million accounts from its securitized master trust to shore up its performance and the accounts were mainly from their private label credit card portfolio. Its a rare event for any such a business and it tells about the proactive steps GE is taking to ensure the funds flow in future.

GE private label credit card business, under GE Money brand, is a leading player with more than 60 billion in assets. The portfolio includes private label cards for JC Penney, Wal Mart, Gap, Lowes and a number of other retailers. Securitization was always a significant source for GE for funds but due to the nature of their portfolio ( Storecards have some subprime customers) , the delinquencies in their trust went up to 10.58% recently. It was still maintaining a spread of 8% to investors (Thanks to the 26% finance charges and other fees ) but seems GE is worried about the spread getting thinner and the investor confidence in those instruments.

GE tried to sell this portfolio in 2008 but due to financial crisis and probably aversion for sub prime portfolios, it could not find a buyer . Now GE says they are going to keep it so maintaining the confidence on their securitized instruments is very vital to their access to funds.

This news is particularly interesting as a credibility building exercise from a major corporation.

Toxic Waste

Dow is at 6627 today.A drop of 1600 points since the historic inauguration day of January 20th. At that time around everyone thought the financial crisis was factored in to stock prices but i think the market is not clear about the direction the Obama administration is taking to stabilize the financial crisis situation.

As per the TARP, the initial plan was to buy back the troubled assets ( alias toxic waste) and there by inject money to banking system to boost lending activity. Now they are not sure that's the best way. It seems they are thinking over two possibilities :

1. Buy all the toxic waste at a fair price and sell to private investors

2. Lend low interest money to private investors to help buy the toxic waste.

both these cases don't guarantees an increased lending by financial institutions. The only way to do that is to nationalize the banks temporarily to unlock the liquidity and stagnation .

Bernake's confessed before the congress that bailing out companies like AIG (so far 180 billion spent and counting ) was most painful as they behaved more like hedge funds. This pain is no spreading to major banks like Citi ( 50 billion spent and guaranteed 306 billion worth of assets) and Bank of America (45 billion spent and 118 billion guaranteed). These are soon would be zombie organizations Obama's administration should temporarily nationalise so that markets will get stabilized and then its easier to direct funds to priority sectors.

Temporary Nationalization says Greenspan

Allan Greenspan's admission that temporary Nationalization might be a way to fix the current crisis is in a way conceding that laissez faire was not the right approach to keep a healthy banking system. Greenspan was a strong advocate of the hand-off approach as he believed the corporations always acted in best interest of the shareholders and in a perfect market there is no place of wrongdoing without being monitored by interested parties.

It's quite frustrating that Obama government refuse to admit this, even after many respected economists like Krugman was a strongly advocating the same. Relating temporary nationalization to Socialism is silly and makes no economic sense. It seems Obama is trying to stay away from a 'socialist' brand by avoiding such tough decisions. His economics council probably knows what's required but protecting his political image takes the priority so far.

Stimulus Plan Miracle

Obama's stimulus plan is being debated in a rare Saturday Senate session, ahead of the crucial Monday vote. Optimism around the recovery plan was reflected in the Market on Friday itself where Dow was up more than 200 points despite the dismal January job loss report and unemployment rate rising to 7.6%. One question remains : Is the economic stimulus package is big enough to stop the recession ? None seems to know.

800 billion spending in the form of tax cuts, infrastructure building and health care subsidies appears like a big amount and a required one. However, we probably cannot place all our bets on it for the economy to recover. The government is running out of tools to give a boost to the economy and deficit financing is probably the only one left. However, the US is in war for last 6 years and some estimates show that the government spends 16 billion a month to meet war expenses in Iraq and Afganistan. Obviously a good percentage of that is earned by the US corporations and citizens so there was a stimulus package close to 1 trillion already deployed in this economy . Some economists estimate that the real cost of the war is going to be 3 trillion and that means more money in the stimulus package.

So what's the miracle we are expecting out of this stimulus ? Looking at the economic models, its about flooding the economy with money hoping that the aggregate demand will increase, driven by the Goverment and people consumption. So the war expenses and the new stimulus package are doing the same thing. Stimulus package is probably more targetted with a hope that sectoral growth help spreading the activity to other sectors as all are realated in a grand scheme of things.

I really hope the stimulus plan works . However I see the economy slipping into very low activity in 2-3 years . There are couple of signs for that. 1. Increased savings by Americans(means less consumption and hence low production) 2. Unemployment rate : Indicates that businessess see no demand int he future also people get less money for consumption.

Low Gas Price ! Good for the US?

I feel low gas price is detrimental for the US, considering the way tax dollars are being used by the government and the paradigm shift in the way economy operates.

No doubt I feel a lot better at the pump these days and regret less driving a performance car. But high gas prices make me happier knowing that in this demand supply equation, high prices indicate that the economy is reviving and people have the funds available to purchase more. Since the Fed is trying all the monetary tools (like cutting Fed rates & funds to failing businesses) to increase money supply and thereby push the overall demand, a deflationary trend in major commodities like gasoline tells me the policy ineffectiveness. But that’s just gas price as an indicator.

Necessity is not always the mother of Invention but innovations and discoveries are normally aimed at incentives when a business pursues it. So low gasoline prices could put to rest many of the R&D efforts in improved technology, new sources or alternatives. For Instance, Toyota sold less hybrids at $2/Galon gas (Check sales number of Toyota Prius when the Gas was $4 and now); It would be less viable to drill newly found oil fields in Brazil or continue exploration in Arctic for fossil fuel at $2/Gallon. Same story is true for the electric line-ups now being demonstrated in Detroit Auto Show. Projects like creating mass transit facilities like electric trains in all cities will have few takers due to low potential demand as people have no incentive for taking a train as compared to riding their own car.

Government makes huge infrastructure investment (with Tax payer dollars) every year to maintain or build roads and bridges. This is where the Washington lobbyists protects the interest of Auto Manufacturers or resist any alternate form of transit.

So going back to the economic principles, we will have to create a new incentive system to motivate businesses and individuals to achieve the bigger goal of reducing fossil fuel consumption. I think it’s fair for the owners of the vehicle to pay for the maintenance of the road infrastructure(Not the whole country). When the auto makers sell cars, people just pay sales tax not a road tax. Many countries charge a road tax on the top of the sales tax and that could be 10% of the cost of the car, paid an yearly basis. Further, the Government should put an additional tax of $1-2/ gallon and that will automatically work as an incentive to consume less. When driving is part of their work, gasoline should be treated like a cost of production and should get the tax credit.

These two additional taxes in place, the incentive system looks lot better for an ordinary Joe. The tax he pays depends on what he buys- let it be car or gasoline. He pays a lot less when he takes a public transport so whatever discomfort he has is paid for. When he buys a gas guzzler he is prepared to pay a lot more, everyday, than his neighbor who rides a fuel efficient car.

India's Enron & Short-term achievers

Ramalinga Raju of Satyam was searching his saul over a decade and finally decided to speak out his conscious yesterday. The news dragged down India's Sensex 7% and wiped out the Satyam shareholders assets 77%. Satyam was in spotlight for a month ago for their decision to buy Maytas constructions, a company with Raju’s sons have significant stakes, as a case of poor corporate governance. The company did show a tainted image to the market then and that news was followed by World Bank banning Satyam from doing IT outsourcing because of their unacceptable business practices. The biggest looser is India as a country – the institutional investors now will require additional premium for compensating for this kind of risk.

Its quite evident that Raju was totally informed in the fraud game. Most of the reported adjustment was in cash balance and its hardest of all to hide. This also raises concerns about what auditors, Price Waterhouse Coopers, was doing in the process. The independent auditing is supposed to bring the credibility to the financial statements but appears like those practices are compromised. The market instantly named it as ‘Indian Enron’ so are we going to see Price Waterhouse going down soon? Satyam is going to get hurt badly as many of their Furtune 500 clients re-evaluate and decide to walk-off from the deal and most probably sign-up with one of the competitions like Infosys or Tata. The question left is how pervasive this kind of frauds are in India ? If Satyam could do this many others also could. Raju admitted that he was riding a tiger without knowing how to get off not being eaten. Something started as a small discrepancy, a decade ago, now grew into a billion dollar problem. This confession allude to a bigger global business issue- chasing short-term profits.



We see all market punishes the companies with lower quarterly earnings. If the earning doesn’t meet the analyst expectation, the share prices tumble and it seems the stock price is the only yardstick of CEO’s performance. Should the quarterly earning be that important? I think its important that the technology and product based companies are evaluated differently because lot of their future earning depends on the brand establishment and innovation, which takes several quarters of waiting. Analysts in Wall Street hardly know anything in engineering or innovations but so good at making judgments by crunching numbers from the financial statements. So none wants to give out a bad news to the market fearing its going to eat them up. Things would eventually culminate into a point of no return, hurting investors and employees and unrelated everybody else in the market.




Now this is not to justify Satyam's action. There is no justification for billions of shareholders lost wealth . Ever since Satyam was in focus for the bad deal to buy Maytas, Raju's back was on the wall and he knew a confession was better than exposing

Ponzi 2008

We all heard the word 'Ponzi' repeateadly by end of 2008. $50 billion Madoff scheme was hard to comprehend. More disturbing was the names of people got hurt in the process - seasoned investors, economists, banks and charities to name a few.

Paul Krugman was wondering how Madoff story was different from the investment industry as a whole ? His article convincingly concludes that the story was not very different . Instead of creating value, the whole investment industry was destroying the value of assets .

Financial companies have written off billions of their bad assets, a product of their lax lending practices , and pushed the economy into a financial crisis. Credit markets froze and left many businesses with no operating cash and layoffs. The shareholders lost 7 Trillion - a gain of last 6 years - in just one year. Home prices fell forcing a lot of home investors bankrupt. In short, everyone is some way or other had a negative financial impact in 2008.

There are some good signs in people's behavior - though not necessarily good for the economy to recover.Spending: There is a drastic cut in spending as people manages their finances better. People travel less, eat out less or buy less gifts.

Savings: Other than equities and funds, people are increasingly attracted to gold and low risk instruments as an alternative.

Ponzi schemes will always hunt us in some form - As someone pointed out, Social Security funds may be the biggest legal ponzi scheme -:)

Ways to Use Bailout Billions

The workers of Republic Windows and Doors in Chicago came out victorious from their week long sit-ins after the factory was closed due to credit crunch. Republic Windows workers had media attention and Bank of America and JP Morgan were forced to react.. The workers had a question to them: Weren't the billions these banks drawn from the Government, supposed to help the companies like Republic Windows ?

Last month when I posted about Detroit big 3, i thought they were so close to getting the money from Government. However, yesterday Republicans shot it down saying that unions needs to make more.When the republicans backed off ,Whitehouse stepped in to offer them help under TARP. As Friedman says , the investment in GM will be remembered as pouring billions of dollars into CD music business on the eve of the birth of iPods and iTunes.

Detroits Troubled Big Three and Bail Out plan

The government infusion of capital to banking system did not really impress the tax payers despite the explanation that a financial crisis hurts everyone. An average tax payer felt that Wall Street extorted money from government to stay solvent, magnifying the impacts of financial crisis to the nation.

Treasury Secretary Henry Paulson probably did the right thing in rescuing some institutions and infusing capital to others. However, tax payers can never put these things in perspective - the top executives and shareholders got fat dividends at good times and when there is a crisis government should rescue them. Worst of all, the crisis was a sub product of their own financial engineering.

The big corporations like GE lobbied hard to get their share from the bail-out package and was successful in getting the Government to buy their CPs, when Wall Street was shy in lending. Detroit big threes are also in the race for capital. As I write this, GM unsuccessfully, sought 10 Billion to acquire Chrysler and just now came out with a bleak future statement. When GM goes down millions get impacted and that remains as the selling point to the government.

Ford and Chrysler also joined GM to meet the speaker, Nancy Pelosi, to ‘brief’ her on the impact and surely the lobbyists are trying their best as well. The question is should the Government rescue the auto makers?

Its true millions of people – manufacturing jobs, dealer ships, suppliers – get impacted but they are unlike banking system. A financial crisis not only impact insurance and 401k, it freezes the capital required for small and medium businesses and they primarily depend on banks for working capital. If the businesses do not get working capital, they are going to close the shop and lay-off people.

Big corporations like GE might find a direct window in treasury but that’s not the case with smaller fries. Apart from the credit crunch, financial crisis could impact the exchange rates and inflation and push the country to a deep depression.

Earlier I supported the idea of government making investments in financial institutions as it might be proved to be a best use of tax payers’ money. It not only averts a crisis that impacts the whole nation but brings in a return at some point when the government exits. Additionally, the government gets a commanding voice on how to run the business, including the executive pay J .
Investing in big three makes no economic sense unless they agree to change their business model to make it competitive with the imports. The big threes always lobbied for higher restriction on imports and resisted any alternate fuel /environment friendly legislation. Ford under Alan Mullally, is at least trying to make it more efficient but GM shows no signs of improvement. Its doubtful that the government is going to let any of these fail - especially when many of their unions support the Democratic party. However, any investment in those would not be the efficient use of capital.

Today, Henry Paulson shelved his earlier plan to buy the troubled mortgage assets of bank as part of the rescue plan. He plans to use that funds to help the financial services sector- auto loans and credit card businesses- that started showing trouble already. Considering the large auto loan portfolio of Big Three, its possible that they could get substantial help through that route.

Captive Outsourcing Unit - A derivative prodcuct

GE, the company that pioneered the outsourcing in India, set-up its first captive unit in 1997. Captive outsourcing units are fully owned subsidiaries of the parent company and being so helped the management to have a complete control over the execution and quality of deliverables in the early stages of outsourcing. Additionally, the brand also helped them in negotiating better deals with government and attracting the top talent. Transition of work from U.S to India was not an easy job as there was always resistance from the employees to transition work or co-ordinate work with an off-shore location. The feeling of being the same company helped there as well.

Outsourcing was primarily to reduce the cost of operations(rent, wages, benefit- to name a few). However, GE showed the businesses that there are multiple ways to make money on outsourcing.

When GE built a big outsourcing unit in India, lot of jobs in the U.S /Europe were moved to their Indian operations. By conservative estimates, there should be at least 30% cost savings- Otherwise there was no point in outsourcing. GE engaged their workforces to train their counterparts in India and implemented the quality processes smoothly over a period of 10 years. Within 10 years , GE India unit was supporting most of the business units with different back office works - including analytics, financial transaction processing and customer service centres. That's the time GE businesses globally was aligned with the off-shore operations and the processes become smooth . Then came the news that GE was selling the India unit!

I think it was a brilliant decision GE took to make money out of their BPO operations. GE sold 60% of their Indian BPO operations in 2004 to two U.S private equity companies- Oak Hill Capital partners and General Atlantic Partners -for $480 million and the Indian unit become an independent BPO, Genpact.

GE never had any real estate holding in India. All their equipments were leased. So what did they really sell ? Knowledge about their own processes and the team that possessed it!

Savings to GE actually starts with the deal. GE committed for alt east 5 years of business - this means they continue to enjoy 30% discount on their operations cost. Now GE is a customer, they could always ask for more productivity - Something GE does with other IT vendors in India, where they insist 10% of productivity every year - This mean if you support a project with 10 people this year, you are expected to support the same with 9 people next year through process improvement or expertise building (or just working longer hours for some managers ?). Also, when Genpact renews the contract, pricing could be done based on a competitive bidding. So to an extend GE is insulated with increasing cost of doing BPO business. And who knows, there could be cheaper ways inthe future.

On the other hand, GE still holds a 40% stake in Genpact - good enough to control them along with their committed business(read dependency of Genpact). When Genpact flurishes, GE could still reap the benefit through dividends or capital appreciation. Genpact was listed in NYSE (G) in 2007 and this month we saw GE is offloading another 3% stake for $ 100 Million when the liquidity in U.S market dried up. ( That was another smart move as the Genpact shares crashed since then : from $14.32 to $6.92 as of today).

Well, I am impressed about GE management, ever since I joined them in 2001. What made me write this blog is a 'me-too' deal by Citibank to sell their BPO unit ( Citibank Global Services) to TCS for a $505 Million, with a commitment of business for next 9 years. May be half a billion is not too big for Citi or GE but the idea of capitalising their captive units and ensuring a low cost operations for years to come is definitely a smart move.

In other words, its possible to package the back-office work into a finacial product called captive unit. It has a revenue stream and hence a valuation ( Say 2.5 Billion in case of latest TCS deal). Now its safe to assume that Citi saves close to a 1.25 Billion when they sell their own work to TCS (505MM + 30% savings on outsourcing). And since it was captive, they made sure the new company could deliver the way want.

Not every one is happy. Employees feel betrayed as they signed up for an MNC brand but now they ended up with a less known Indian brand. Uncertainties like what will be the impact on the benefits when the clients squeeze for more productivity every year coupled with increasing cost of doing the business.

So the question is who is next ? Amex, HSBC, IBM ?. Thanks to GE.