Friday, April 20, 2012

GSA cancels Oracle IT contract


Oracle’s predatory business practices are legendary. Given the current business environment there will be a backlash against those practices, this is the start.  Aivars Lode

Washington Technology     April 20, 2012

    By Matthew Weigelt
    Apr 20, 2012

A senior General Services Administration official said April 20 that it was not in the government’s best interest to continue to offer Oracle Corp.’s IT services.

After reviewing the company’s GSA Schedule 70 contract, “it was determined that it was not in the best interest of the government to continue the contract,” Mary Davie, assistant commissioner of the Federal Acquisition Service’s Office of Integrated Technology Services, said in a statement.

GSA officials would not provide more any details. However, a spokeswoman said April 19 the contract that has been canceled due to the company not meeting the terms of the contract.

The cancellation takes effect May 17.

An expert says Oracle has many other contracts through which to offer IT services to agencies.

Mark Amtower, partner of Amtower and Company, said the GSA Schedule contract accounts for less than 7 percent of total government purchases. Oracle offers services through other avenues, such as NASA’s Solutions for Enterprisewide Procurements (SEWP) and other Defense Department indefinite-delivery, indefinite-quantity (IDIQ) contracts.

“Oracle losing its GSA contract is news, but don’t overlook these facts,” he wrote in a comment on Washington Technology’s initial story about the cancellation.

As a result of GSA's cancellation, all blanket purchase agreements (BPAs) awarded against the contract will end. Existing task orders may continue through their set period of performance but agencies will be unable to exercise options to these task orders or place new orders.

Agencies can still buy Oracle’s software and software maintenance products through resellers with active IT schedule 70 contracts, Davie said.

GSA has notified agency customers through Federal Business Opportunities website and is contacting agencies with known BPAs directly.

Oracle executives declined to comment on the cancellation.

Oracle contract 'not in best interest' of gov't, official says


This is the fall out from predatory behavior. Aivars Lode

    By Matthew Weigelt
    Apr 20, 2012

A senior General Services Administration official said April 20 that it was not in the government’s best interest to continue to offer Oracle Corp.’s IT services.

After reviewing the company’s GSA Schedule 70 contract, “it was determined that it was not in the best interest of the government to continue the contract,” Mary Davie, assistant commissioner of the Federal Acquisition Service’s Office of Integrated Technology Services, said in a statement.

GSA officials would not provide more any details. However, a spokeswoman said April 19 the contract that has been canceled due to the company not meeting the terms of the contract.

The cancellation takes effect May 17.

An expert says Oracle has many other contracts through which to offer IT services to agencies.

Mark Amtower, partner of Amtower and Company, said the GSA Schedule contract accounts for less than 7 percent of total government purchases. Oracle offers services through other avenues, such as NASA’s Solutions for Enterprisewide Procurements (SEWP) and other Defense Department indefinite-delivery, indefinite-quantity (IDIQ) contracts.

“Oracle losing its GSA contract is news, but don’t overlook these facts,” he wrote in a comment on Washington Technology’s initial story about the cancellation.

As a result of GSA's cancellation, all blanket purchase agreements (BPAs) awarded against the contract will end. Existing task orders may continue through their set period of performance but agencies will be unable to exercise options to these task orders or place new orders.

Agencies can still buy Oracle’s software and software maintenance products through resellers with active IT schedule 70 contracts, Davie said.

GSA has notified agency customers through Federal Business Opportunities website and is contacting agencies with known BPAs directly.

Oracle executives declined to comment on the cancellation.

The Myth Of The Free-Market Gold Standard


An interesting perspective. Aivars Lode


Forbes Magazine, 4/20/2012, Timothy B. Lee

I suggested that a fall in the value of the dollar due to money creation by a central bank is little different, morally speaking, from an oil company pushing down the price of oil by increasing production. Commenters raised a number of objections; here I want to focus on the oft-mentioned argument that money is different than oil because the government has a monopoly on money, while no one has a monopoly on oil.
On the surface, these seem like totally distinct questions. It’s been a very long time since we’ve had a genuine free market in currency, and so it’s hard to predict what such a market would look like. In principle, there’s no reason to assume that a private issuer of currency would produce a stable price level.
I think the reason so many people see a link between free markets and stable prices is that they see a gold standard as the alternative to central banking. And it’s true that the gold-backed currencies of the 19th Century held their value better than modern-day fiat currencies do. But the 19th Century gold standard was instituted by an 1873 act of Congress, it was hardly the result of market forces.
Moreover, it’s easy to overstate the extent to which gold- and silver-backed currency standards limited the government’s control over inflation rates. While the 1896 presidential campaign was nominally about whether to allow silver to be used as currency, the actual policy question was whether to expand or contract the money supply. The “free coinage of silver” advocated by Williams Jennings Bryan was the quantitative easing of its day. Bryan’s easy money views were no more or less free-market than the hard-money policies of his opponent William McKinley.
Even assuming that the free market would have produced gold-backed currencies in the 19th century, that by no means implies that it would do so today. During the 20th Century, we went from a world in which most people dealt in cash to one in which most people pay by check and (increasingly) credit card. In a world dominated by electronic methods of payment, interoperability is extremely important. And this means that as a practical matter, the incumbent banks that control the nation’s major payment networks would have a tremendous amount of influence over the choice of currency standard. And it’s hard to see why they’d go with a commodity-backed currency. After all, the ability to create money is extremely profitable.
Supporters of a gold standard believe that consumers would reject private fiat currencies in favor of commodity-backed currencies because the latter is likely to have a lower inflation rate over the long run. But observing consumers’ actual behavior tells another story.
Consider the case of credit cards. Credit card companies charge fees of around two percent for every transaction. Merchants and their customers can avoid paying those fees by dealing in cash. Yet most merchants find the convenience of accepting plastic to be worth the cost, and few customers go out of their way to patronize cash-only establishments because their prices are 2 percent lower.
The same point would likely apply to competing currencies. Obviously, consumers would eschew currencies with extremely high inflation rates. But given a choice between a convenient currency with a four percent inflation rate or an inconvenient currency with a zero percent inflation rate, most consumers are going to pick the more convenient currency. And that means that the market-leading currencies would have some room to expand the money supply (making large profits for themselves in the process) without much risk of lost market share.
So it’s far from obvious that a free market in currency would produce an inflation rate of zero. To the contrary, a free market in currency would likely result in a consortium of large banks controlling the money supply. This consortium would have a strong incentive to maximize real economic output, since doing so would maximize the profitability of its money-supply franchise in the long run. And so if, as many economists believe, the output-maximizing inflation rate is around 2 percent, that’s likely the inflation rate private issuers of currency would target.

Tuesday, April 17, 2012

Dividend-paying stocks pay yet another dividend: Price increases


As predicted. Aivars Lode

By Jeff Benjamin

April 15, 2012 6:01 am ET

With bond yields at historic lows, investors have turned to dividend-paying stocks as a source of investment income.

Now investors are getting an extra boost — call it an added dividend — in the form of rising prices of dividend-paying equities.

The long-term contribution of dividends to an investment's total return is well-documented.

But as dividend investing becomes increasingly popular, the resulting demand is driving up stock prices. This, in turn, could encourage even more companies to declare dividends.

The pressure to introduce and increase dividends could get intense, said Joshua Peters, an equity analyst at Morningstar Inc.

“Chief executives and corporate boards are going to start noticing that investors are rewarding dividend-paying stocks,” he said.

“Some companies might be dragged kicking and screaming [to start paying dividends], but investors are starting to pay attention, and they're starting to ask why some companies aren't paying dividends,” Mr. Peters said. “This is not a fad and it's not solely cyclical; I think we're in the early innings of a reversion to the mean of where we were in the 1950s and 1960s, when dividends were more common.”

It might just be a coincidence that in the midst of this renewed focus on dividends, Apple Inc. (APPL) announced plans to introduce a quarterly dividend of $2.65 a share. At a total of about $10 billion a year, it is the biggest dividend payout ever.

Investors have ex- pressed strong approval, driving the stock price up 7% from where it was the day before Apple's March 19 announcement through last Wednesday. By comparison, the S&P 500 fell 2.6% over the same period.

There is no denying the appetite for dividends among investors.

Last year, registered investment products that focused on paying dividends had $26.6 billion in net inflows, while the full universe of registered equity products experienced $178.2 billion in net outflows, according to EPFR Global, which tracks fund flows.

So far this year, dividend-focused products have had $15.4 billion in net inflows, while the universe of equity products had net inflows of $19.8 billion.
APPEAL OF COMPOUNDING

The initial appeal of dividends for most investors is often as straightforward as the basic math of compounding.

Lowell Miller, portfolio manager and founder of Miller Howard Investments Inc., makes the point by calculating the total return of $1 invested in the S&P 500 from 1936 through 2010.

The value of the initial investment, excluding dividends, would have grown to $93.65 over the 75-year period. But by reinvesting the dividends, the value would have spiked to $1,740.30.

“In our view, that's how investing should work,” Mr. Miller said. “You invest capital, and you get some return now and some in the future.”

To tap into the power of dividends in a growth play, investors should focus on companies that are initiating and/or increasing dividend payments — signs of strong balance sheets and potential capital appreciation.

Although George Fraise, principal at Sustainable Growth Advisers LP, takes the backdoor approach to dividend income by tracking a company's free cash flow, the end result is often the same.

For instance, the focus on free cash flow led Mr. Fraise to invest in Apple long before the dividend was announced.

“The best proxy for high dividend growth is free cash flow over time,” he said.

According to Mr. Fraise's analysis of the S&P 500 over the 10-year period through 2010, those companies with the highest dividend growth generated a combined total return of 177%.
LOOKING FOR GROWTH

This compares with a 56% combined total return for those companies in the index with the highest dividend yields but the lowest growth in dividend increases.

Looking beyond dividend yields and focusing on the direction of those dividends is where a lot of dividend strategies separate from the pack, and where investors should be looking for growth.

Don Taylor, manager of the $9.7 billion Franklin Rising Dividends Fund (FRDPX), places particular emphasis on companies with a history of “consistent and substantial dividend increases.”

“During the tech bubble of the late 1990s, dividends had fallen tremendously out of favor because paying a dividend used to mean a company couldn't grow,” he said. “But over the last several years, dividend stocks have done well in the marketplace, and now corporate management and boards are seeing that the markets are responding positively to more-enlightened dividend policies.”

Given the trends, investors should find a diverse collection of dividend-paying com-panies.

“There's something for everyone,” said Mr. Miller, who cited International Business Machines Corp. (IBM) and McDonald's Corp. (MCD) as among the best examples of companies that are increasing both dividends and stock price.
TURNAROUND STORIES

But if you are looking for turnaround stories, he recommends General Electric Co. (GE) and International Paper Co. (IP).

For market dominance, Mr. Miller likes The Boeing Co. (BA), Intel Corp. (INTC), and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM).

Fast growth? Mr. Miller gives the nod to Unitedhealth Group Inc. (UNH).

“More stocks are moving in the direction of dividends than I've seen in a long time,” he said. “The idea that dividends are just for big, slow, blue chip companies has been promoted by people who take an aggressive approach to stocks, and it misses the compounding effects of dividends.”

Questions, observations, stock tips? E-mail Jeff Benjamin at jbenjamin@investmentnews.com

Monday, April 16, 2012

The terrible cost the U.S. pays for derivatives


Succinct  article, I realized nearly this two decades ago as I watched two executives creating derivative’s and betting on two flys crawling up a wall at the same time. Aivars Lode

April 16, 2012: 10:53 AM ET

Whether they understand them or not, all taxpayers have been sucked into the derivatives virtual reality game, and at great cost.

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE -- It's tax time -- and if you are like many people, you may spend a moment contemplating all the benefits your tax dollars bring. But amid all of those benefits, your money is also propping up the proliferation of derivatives in our economic system. Now isn't that something to be proud of?

"Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal," Warren Buffett wrote in 2002. Boy was he right, in more ways than one.

In practice, they're destructive in three killer ways. Strike one: Unbridled manufacture of and investment in them continues to lead to bubbles, an erosion of trust in the capital markets, and they fueled our most recent financial crisis. Strike two: Used in compensation, they encourage risky behavior and economic instability. Strike three: Rather than going to other, useful causes, tax dollars are instead subsidizing both the corporations that dole out derivatives as compensation and the profits of the financial institutions that create them.

Derivatives aren't real in any natural sense, like iron or coal or water. They are a manufactured investment product that is supposed to have a relationship to something that is more real, like a stock, a bond, a mortgage, or a commodity -- but that relationship is sometimes tenuous at best. Whether they understand them or not, all taxpayers have been sucked into this virtual reality game, and at great cost.

Still crazy, after all these years

Many of us are aware that the securitization of loans and the manufacture of CDOs (collateralized debt obligations) contributed to the recent financial crisis. In Economic Value Management, a book I published decade ago, I explained how securitizations enrich investment banks, which garner fees for arranging them, and usually destroy value for the commercial banks that use them to offload subprime mortgage and credit card loans. Nevertheless, securitizations continued to proliferate, and along with derivatives, encouraged fraudulent loan transactions, the housing and securities bubbles, and the biggest financial crisis since the Great Depression.

But we haven't changed our stripes yet. Unbridled creation of these little monsters continues to be great sport for the investment banks -- and there still isn't effective regulatory control over the sale of these products, or the companies that manufacture them.

Consider the recent case of Credit Suisse's (CS) velocity exchange traded notes. The bank apparently controlled the market for this investment product and, according to Bloomberg, stopped issuing the notes in February and didn't resume until late March, drying up supply and driving up the price by 90%. The bubble burst and the notes' price fell by 50% in just two days, according to Barron's. (Other exchange traded notes have not fared well either. Barron's calls Barclay's S&P 500 futures exchange traded note "treacherous" for long-term investors, "down more than 90% over its lifetime.")

Consider also recent reports on derivative investment practices at J.P. Morgan (JPM). The Financial Times recently reported that "JPMorgan had amassed a big position in an index of credit default swaps, sufficient in size to move the market" and Bloomberg reported last week that J.P. Morgan trader "Bruno Iksil's outsized bets in credit derivatives are … fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money."

Clearly, we not only need the Volcker rule to curb proprietary trading, we need to make sure investment manager fiduciaries stay away from these instruments so our pension funds, 401k plans, and mutual funds don't continue to bleed like they did during the financial crisis.

An executive pay infection

But this isn't just an investment and capital markets problem. CEOs who receive stock options and restricted stock pay grants, which "are nothing more than long term options" to the executives who receive them, benefit from volatility and are prone to take risky actions that result in "economic instability," a December New York Fed staff report concluded.

Based on a review of large company filings this proxy season, derivatives in the form of stock options and restricted stock grants constitute the bulk of most executives' pay, from 75% to 99% for the CEOs of companies like Bank of America (BAC) and Apple (AAPL). (Buffett is a noticeable exception and receives no derivative-based pay.)

Uncle Sam helps to subsidize the proliferation of derivatives by providing low-rate funding to the banks that manufacture and control markets in these ticking time bombs. Meanwhile, your check to the government subsidizes the corporations that use stock options and restricted stock to take huge tax write-offs for pay. When stock options are in play, the amounts these companies deduct in taxes far exceed what is recorded on their books. These tax deductions are partly based on the false notion that this pay is for performance and is therefore not subject to the $1 million cap on salary deductions.

But this theory on performance-based pay doesn't match reality. For starters, options and stock grants are often explicitly not based on performance. This is no secret. Last month, over lunch, a board director at a well-known insurance company animatedly sketched what happens on a napkin. To match previous dollar values, boards often hand out the largest awards when stock prices are low (to achieve a  certain dollar value) even if the price has gone down on the executive's watch. By using derivatives in this way, stock price volatility, rather than stock price, becomes the real driver of pay.

Even if some shares and options are awarded at higher prices, momentary blips in stock price can be great times to cash out. Most top executives, unlike middle managers, time their stock sales carefully. They often hold out for long periods, waiting for just the right moment to cash in, according to Ted Allen, governance counsel at proxy advisory firm Institutional Shareholder Services.

Reform in the wings?

In February, Senator Carl Levin proposed the Cut Unjustifed Tax Loopholes Act. The bill, as currently written, would change tax deduction rules for stock options and would bring them in under the million-dollar pay cap (although, in its current form, the bill does not address restricted stock or other forms of pay). Based on current law, Facebook will have "a tax break of up to $3 billion" and may not have to pay a single cent in federal income taxes for years, Levin said. Putting it into perspective, Levin said that "in 2009, the most recent year for which IRS data is available, taxpayers from 11 states in our union sent less than $3 billion in individual income tax revenue to the treasury."

Facebook isn't alone. In total, options tax breaks cost the government tens of billions of dollars every year, according to several estimates. A report released last week by Citizens for Tax Justice outlines the extent to which taxpayers are subsidizing these behaviors. While tax subsidies that produce jobs and strengthen the economy may be worthwhile, it does not make sense to encourage pay that leads to economic weakness.

A decade ago, we received strong warnings about the effects of derivatives on our capital and labor markets -- and we chose to ignore them. The subsequent effects on the federal deficit were real. While the advice may be old, how many more tax seasons are we willing to let this go? And how many more crises are we willing to suffer through?

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.