The Truth About Apple v. Microsoft

It amazes me when people ooh! and aah! over various upgrades to the Windows operating system. Why? Because most of the items have already been in the Mac OS X system for quite a while or years and Windows is just trying to copy them and, usually, poorly so.

Many people especially under 35 or so don’t recall that Apple was using a Graphical User Interface since at least 1987 under Mac System 6! I bought my first Apple computer in 1991 (with Mac OS 7) after I was literally blown away by the ease-of-use and fun of the Mac that a client of mine carried around with him (no, it was not a laptop). So, it still sticks in my craw when Microsoft is credited with creating a “Windows” in  1995 when the Mac was using “windows” by that time for at least 8 years or more. So much for innovation on the part of Mr. Softy.

The latest impending blunder is that Microsoft is trying to copy the Apple Store model. Whereas Apple is both a hardware and software company, Microsoft is only software in terms of computers. They’ve completely copied the Apple store layout and even created areas analogous to the “Genius Bar”, etc. But have they added anything new? Whose hardware is going to be running all of the software in their stores? How is Microsoft going to thread that needle with so many PC manufacturers who buy their products. Are the Microsoft “experts” going promote certain PC manufacturers over others? Are they going to provide support for all of the PC brands?

The inherent problem with Microsoft and a Microsoft store is the lack of a “coolness” factor. People like Apple products not only because they work well and are fun to use (even if Mom and Grandma are also using them), but also because they are “cool”. Nobody buys Microsoft products to be cool. They buy them because of familiarity (years of use) and historic business adopted (though that is starting to change) and because of unfamiliarity with Apple’s array of products. But, even so, many Windows users are converting to the Apple/Mac ecosystem every day. And a significant percentage of iPod, iTunes and iPhone users came from the Microsoft environment. Oh, yes, in that regard, Apple literally created the model for digital music, photography organization and editing and now mobile phones, among others.

Finally, take the Apple v. PC commercials. That says it all. The Apple guys is hip and the PC guy is a nerd and so it will always be that way.

Got to give credit to Gates though for being the first guy to mass-market a computer operating system successfully, but given the likes of Apple, Google, Twitter, Facebook and a whole host of other technology companies, the user experience is going the opposite direction from a “Windows-enclosed” environment. No one can say for sure but I think Microsoft’s days of dominance are well over. Their biggest advantage, still, is a large installed user-base, but as more and more alternatives arise such as cloud computing, it just doesn’t make any sense for the majority of people to pay for second-rate technology that can virtually be replicated for free on the internet.

Fox’s Ingraham: Pelosi not quite a prostitute? I wish we could say we were surprised

Fox’s Ingraham: Pelosi not quite a prostitute? I wish we could say we were surprised

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Political Expediency Distorts GDP Gains

Should we be cheering the recent positive GDP of 3.5% for the third quarter? Hardly. With unemployment now hovering at 10.2%, it is clear that any recovery, let alone a sustained one, is not around the corner. Nor it is clear that GDP growth is even connected with the true strength of the “domestic” portion of the American economy. What do I mean by that?

For purposes of this article, I am dividing the American economy into its domestic and international components. The domestic portion includes the sales and revenues generated by sales to businesses or consumers geographically located in the U.S. as opposed to that portion generated outside of the U.S.

By way of example, in 2009, Apple Inc. generated 46% of its revenues from international sales and 43% in FY 2008 and 41% in FY 2007. While this is a testament to Apple’s success and ability to expand it markets, it also reveals that American multinational companies are becoming less dependent on the domestic sales to generate its revenues and profits. Also, as more business is generated internationally, a disproportionate number of the new jobs created by Apple’s success are outside of this country.

There are a variety of factors benefitting Apple and other American companies doing business outside of the U.S., such as a weak dollar and cheaper manufacturing and overall labor costs, including health insurance costs. But, regardless of the reasons why, there are very few indicators that this globalization trend is going to benefit American workers to the same or even to a reasonably equivalent level as it does developing economies such as the BRIC nations.

As a result, it is perfectly explicable why the U.S. GDP figures are on the rise as and there is not a corresponding benefit to job growth here. But instead of enacting more business-friendly policies in the U.S. such as reducing the corporate income tax rate and controlling the mounting budget deficits by restraining explosive government spending, to strengthen the value of the U.S. dollar, just the opposite is occurring.

Such anti-business policies do not stimulate job growth and nor does a stimulus package that is focused more on buttressing bloated government spending at the State and municipal levels as opposed to investments in overdue infrastructure improvements where jobs can’t be outsourced. But the Obama Administration is a master at managing economic events to distort short-term economic outcomes having nothing to due with the real overall health of the economy. That should could as no surprise since Wall Street and public companies have been managing earning expectations for years.

This is the kind of mentality that led us to Cash for Clunkers. Provide an artificial short-term stimulus of tax credits to “juice” auto sales even though the vast majority of those sales are merely being moved forward instead of creating additional macro demand. In the process, as stated, politicians trade short-term benefits for sustained growth over the long-term. This, in turn, stems from a political gamble that if we can just kick the can down the road a little bit longer everything, including job creation will get better over time. Problem is there is absolutely no current economic evidence to lead to this conclusion.

A similar phenomenon is occurring in the real estate market, both residential and commercial. After some accounting legerdemain and FASB complicity (to be sure, under Congressional pressure), banks that were on the verge of insolvency due to the declining values of Collateral Debt Obligations (CDOs) backed by real estate all of a sudden don’t have to a reflect it at its true salable value. As a consequence, financial institutions (CDO obligors) are better off keeping undervalued collateral on its books at “make-believe” values as opposed to clearing the real estate at values derived through the normal free-market capitalism liquidation process such as foreclosure to arrive at real price discovery.

To create bogus demand in the real estate market, various homebuyer credits have been enacted to create the impression of a back-to-life real estate market when a substantial portion of the transactions are “short-sales” or some other form of deed transfer where loss recognition is prolonged as long as possible.

Hence, a rising GDP base on increasing foreign sales, a weak dollar and government interventionist policies don’t lead to economy recovery or to private-sector job creation. Yes, I know that “unemployment” is a lagging indicator — as if that meaningless qualifier by jobs creation apologists is a sufficient explanation of for the lack of new jobs.

Welcome To Bailout Nation Mentality: Ford Workers Reject Further Concessions

On October 30, 2009, TheStreet.com published a story about how the UAW membership appeared to be voting against contract modifications with Ford Motor Company despite the recommendation of the UAW leadership. The contract modifications only sought to conform Ford’s contract with the revised contracts between the UAW and General Motors and Chrysler, respectively. At first blush, this seemed curious to me, as UAW workers at GM and Chrysler had already agreed to the same changes negotiated by UAW leadership earlier this year.

As I concluded the article, a “Eureka” moment occurred to me. The UAW workers were acting perfectly rational in light of the bailout nation mentality that now inflicts us due to massive government intervention in the economy. Let’s break it down.

Ford Motor avoided TARP money and bankruptcy by astute management decisions. As a result, they were able to honor their continuing obligations to the UAW workers. So, when Ford requested similar treatment to the other U.S. automakers, to remain competitive, no one should have been surprised. But the very fact that Ford successfully avoided the minefields plaguing GM and Chrysler is now the exact reason why the UAW workforce has become emboldened.

Because of government intervention in the automotive industry, now only the financial support directly given to GM and Chrysler but also “Cash for Clunkers”, it is almost without question that the U.S. government is not going to allow Ford to fail. Or if it has to file bankruptcy in the future because of a higher, non-competitive cost structure in comparison to its competitors, the U.S. will be there to fund a Ford bankruptcy proceeding as it has done with the other automakers. As a result, it is perfectly rational that the UAW workers would not voluntarily agree to further contract concessions if (i) Ford can afford to pay the union obligations, albeit at a smaller profit to the company, and (ii) Ford is “too big to fail”, as GM and Chrysler were deemed to be.

It GM or Chrysler had been allowed to fail or to fend for themselves in Chapter 11, it is highly doubtful that Ford workers would reject cost concessions if their livelihoods were truly at stake? But, they needn’t worry about that now. Bailout Nation mentality has now permeated large segments of our economy. And as one bailout begets another, the perception of a further bailout, should it become necessary in the case of Ford, is simply a logical extension of that mentality.

Massive government intervention of the type we have witnessed (not including health care) does nothing to restored the discipline of the free market system where fail is a distinct possibility if undue risks are undertaken. Instead, intentionally or not, the government has turned the financial and automotive industries into welfare recipients who will not be held accountable for their bad decisions and outcomes.

Back to the case of Ford, the UAW workers have now figured out how to game Bailout Nation to their advantage. Squeeze Ford as hard as it can, regardless of the differential treatment among the automakers. Ford will either be able to pay the union costs or not. If it can, then the UAW workers will benefit at the expense of bondholders and shareholders since market forces will no longer have much to do with their actions. On the other hand, if Ford begins to suffer competitive disadvantages and suffer losses because the UAW has decided not to yield ground, the worst that will happen is that the U.S. taxpayer will recapitalize Ford at the expense of the American taxpayers. And if the recent history with GM and Chrysler is a guide, the UAW will probably be the biggest beneficiary of a bankruptcy plan of reorganization. It will undoubtedly receive a disproportion share of any newly issued stock in relation to the debts owed to it and it will receive a higher priority treatment than those creditors who negotiated higher priorities as a condition to extending credit to Ford.

Bailout Nation mentality has also leeched over to the American consumer via “Cash for Clunkers” and first-time homebuyer tax credits. But that is a topic I will address in a future article.

Disclosures: No position in GM (MTLQQ.PK) or F

Health Care Proposals Are Not Budget Neutral

Democrats have been giddily propounding that the current health care proposals on the table are budget neutral based on a recent review by the Congressional Budget Office (CBO). The problem is that CBO only considered the first  ten years of the plans which collect tax revenues to fund them from enactment, yet the bulk of the covered health care services don’t come online until 2015. Clearly, ten years of taxes to fund six years of costs is far from budget neutral, particularly after the one-time accounting charade is over. What happens after the first ten years when revenues and expenses have to balance? Obviously, there will be a shortfall because the six years of medical costs from 2015 forward do not fund themselves on an annual basis. Those years are only funded because of the four extra years of taxes imposed.

Moreover, the primary assumption behind budget neutrality is that doctors and other medical practitioner reimbursement rates will continue to decline a la Medicare. This is unrealistic to say the least as the only reason why doctors are able to accept to Medicare patients nowadays is because they are able to obtain higher reimbursement rates from their clients with private insurance.

This brings up an incredibly irony. The insurance companies, lambasted as greedy and the cause of escalating medical costs, have only been placed in that role because the government has failed to provide reasonable reimbursement rates. Were it doing so, private insurance costs would be lower as doctors would not have to make up for the shortfall from Medicare patients via private-insurance covered patients.

If a government option takes hold, it will be impossible for private insurance companies to compete with government-fiat imposed rates of reimbursement. Consequently, the “private insurance pool” that currently exists to make up a significant portion of shortfall from Medicare and other patients covered by government programs will no longer exist. In that event, doctors will be relying almost completely on government-sponsored patients. To assume that doctors will take automatically accept a huge decline in their revenues because private insurance has been replaced entirely by government reimbursement rates is unrealistic and assumes that doctors will continue to find the practice of medicine economically feasible as opposed to other economic alternatives. Additionally, a single payer system of health care, with inevitable declining doctor incomes, certainly does not encourage the best and the brightest to take up the profession, which leads to the question of whether medical services under such a system over the long-run will decline.

Finally, the fact that none of the current Democratic proposals addresses tort reform will force doctors to continue to pay exorbitant malpractice insurance rates caused by the need to practice defensive medicine, thereby making the practice less economically viable. Until the Democratic-controlled Congress is prepared to take on the trial lawyer special interests and enact tort reform, that added medical expense cost will act as a malpractice insurance surcharge, currently paid by private insurance patients. If we convert to the “public option”, there won’t be anyone left to absorb this cost except the doctors themselves. And that does not bode well for maintaining or improving the highest quality health care currently available in the world.

Pigs Make Money on Wall Street

There is a longstanding stock market aphorism that “bulls make money, bears make money, pigs get slaughtered”. The message is clear. Those who “overplay” their hand and are overly greedy may end up suffering the biggest losses of all.

But what has happened to Wall Street since the economic meltdown last Fall? After excessive risk-taking and unbridled greed at the “too-big-to-fail-banks”? Certainly, they haven’t gotten slaughtered. In fact, just the opposite has occurred at many of those banks.

Take Goldman Sachs. After receiving $10 billion of TARP funds and another $12.9 billion of TARP largess via AIG, thereby enabling Goldman to receive a 100% return on its AIG exposure which would not have happened absent massive government intervention, plus easy FED money, Goldman within a year of its potential demise has reported record profits and the intention to make record bonus payments to employees. So, at least in this instance, the pigs are making the most money of all thanks to the American taxpayer.

But even their “own” such as George Soros are now turning on them because the public outrage over excessive, undeserved bonuses is justified. For someone of his stature to publicly chastise the piggishness on Wall Street in itself is remarkable since he accumulated his fortune based on trading stocks and currencies (though at risk to himself and his investors). Nevertheless, the majority of bankers (i.e., bonus recipients) somehow still think that they really earned their bonuses even though their downside risk was virtually non-existent due to government policies and support.

Alas, perhaps we need to modify the conventional Wall Street wisdom to add that “pigs get slaughtered except the socialist ones who make the most money of all.”

Health Care Proposals Are Not Budget Neutral

Democrats have been giddily propounding that the current health care proposals on the table are budget neutral based on a recent review by the Congressional Budget Office (CBO). The problem is that CBO only considered the first  ten years of the plans which collect tax revenues to fund them from enactment, yet the bulk of the covered health care services don’t come online until 2015. Clearly, ten years of taxes to fund six years of costs is far from budget neutral, particularly after the one-time accounting charade is over. What happens after the first ten years when revenues and expenses have to balance? Obviously, there will be a shortfall because the six years of medical costs from 2015 forward do not fund themselves on an annual basis. Those years are only funded because of the four extra years of taxes imposed.

Moreover, the primary assumption behind budget neutrality is that doctors and other medical practitioner reimbursement rates will continue to decline a la Medicare. This is unrealistic to say the least as the only reason why doctors are able to accept to Medicare patients nowadays is because they are able to obtain higher reimbursement rates from their clients with private insurance.

This brings up an incredibly irony. The insurance companies, lambasted as greedy and the cause of escalating medical costs, have only been placed in that role because the government has failed to provide reasonable reimbursement rates. Were it doing so, private insurance costs would be lower as doctors would not have to make up for the shortfall from Medicare patients via private-insurance covered patients.

If a government option takes hold, it will be impossible for private insurance companies to compete with government-fiat imposed rates of reimbursement. Consequently, the “private insurance pool” that currently exists to make up a significant portion of shortfall from Medicare and other patients covered by government programs will no longer exist. In that event, doctors will be relying almost completely on government-sponsored patients. To assume that doctors will take automatically accept a huge decline in their revenues because private insurance has been replaced entirely by government reimbursement rates is unrealistic and assumes that doctors will continue to find the practice of medicine economically feasible as opposed to other economic alternatives. Additionally, a single payer system of health care, with inevitable declining doctor incomes, certainly does not encourage the best and the brightest to take up the profession, which leads to the question of whether medical services under such a system over the long-run will decline.

Finally, the fact that none of the current Democratic proposals addresses tort reform will force doctors to continue to pay exorbitant malpractice insurance rates caused by the need to practice defensive medicine, thereby making the practice less economically viable. Until the Democratic-controlled Congress is prepared to take on the trial lawyer special interests and enact tort reform, that added medical expense cost will act as a malpractice insurance surcharge, currently paid by private insurance patients. If we convert to the “public option”, there won’t be anyone left to absorb this cost except the doctors themselves. And that does not bode well for maintaining or improving the highest quality health care currently available in the world.