Back in Kabul

Last Friday we drove to Paghman with our friend Jean. Driver Karim, the father of five, takes his oldest shy daughter with us as well. We have a wonderful walk up to Paghman River, enjoying warm sunshine and murmur of the stream. I wonder that there are almost no people in the popular picnic place; the season seems to be over. Just some jaded kebab-offers have a tedious time while some families eat their kebab, mast and chai under the trees covered with golden leaves.
We have had a long holiday – one and half month – in our home back in Estonia. I am always amazed about the metamorphosis inside myself, moving from my homeland in Northern Europe to Afghanistan. And opposite. For example, it takes some days to become used to the fact that we can buy frozen foodstuff like ice cream – because there is all-time electricity. Back in our lovely Kabul home, after one day I have already the feeling as if I lived here forever.
After one-month routine in Estonia, Kabul seems dangerous and unattractive. Especially thanks to media – there is a lot of coverage as there are more than one hundred Estonian troops in Helmand. After a while I stop reading the articles about Afghanistan written by Estonian journalists, spending one-week war-tourism-trips in south. Last one I tried to read began with sentence: ´”There is no doubt that military helicopter is the most preferred transportation in Afghanistan.” Really?!
I am the only Estonian journalist living in Afghanistan. I am not very beloved by my homeland defence forces because I have not praised the foreign forces. They dislike me so much that I was not allowed to listen to NATO conference about Afghanistan in my hometown. There is not enough room, was their answer.
Conversations in Estonia about our living here are almost always the same: how can you live in that horrible country? My replay is: it is beautiful country. I spend so much energy explaining the simplest facts. There are big differences between south and north. There is a different climate. There are different landscapes. There are different tribes and traditions. And definitely all Afghans are not interested to kidnap or kill me...
To explain my point of view I started to organize photo exhibitions in biggest cities of Estonia. The official to whome I showed my photos, seemed really confused. It can’t be Afghanistan, she just murmured. Also I decided to publish a book (in Estonian) with my own photos. In order to counterbalance fear and hatred, that is generally connected to Afghanistan-topic, the title will be Beloved Afghanistan.

SAP: SAP Should Follow Oracle’s Lead

There has been plenty of hot air expelled this week over whether SAP’s (SAP - Annual Report) acquisition of Business Objects (BOBJ) is a sign that it is adopting Oracle’s (ORCL - Annual Report) big acquisition strategy or whether it is a simply a larger part of SAP’s existing strategy of using small “tuck-in” acquisitions. I’ll leave others to bloviate on those issues.

I am less interested in whether SAP is following Oracle’s strategy than whether they ought to be. And I think the answer to that question is a resounding “yes.”

For one thing, corporate IT buyers’ main concerns tend to be reducing costs and reducing complexity. Much better to have Oracle and SAP tie together the applications from a number of vendors (by directly integrating them) than to devote in-house IT staff to doing it. Research 2.0 criticizes the Business Objects acquisition for this reason, saying “SAP now faces many of the same incompatible architectural challenges faced by Oracle with its many acquisitions.” I think their customers would rather have SAP deal with the incompatibilities than to have to do it themselves. Since when is making life easier for customers a bad thing?

More importantly, however, there are just too darn many application software manufacturers out there. While consolidation in some industries occurs because the weaker businesses fail, software balance sheets are generally too strong to for this to happen. The only way to fix the problem of too many customers chasing a relatively fixed amount of dollars is for an industry leader to soak up the excess capital by leveraging its own balance sheet to acquire other companies - for cash, not shares. Oracle has been pursuing that fix.

Software companies tend to generate significant cash flow, and Oracle has been able to use this cash flow to fund the acquisitions while both maintaining a healthy balance sheet and avoiding dilution to existing shareholders. As an example, consider its first large acquisition – that of PeopleSoft in January 2005 for $11.1 billion in cash. Prior to the acquisition Oracle held more than $9.5 billion in cash and marketable securities on its balance sheet, and had virtually no debt. The company used this cash and a $7 billion bridge loan to complete the acquisition, and by the end of its fiscal year in May, 2005 it had reduced the loan value to $2.6 billion while still maintaining nearly $5 billion in cash and marketable securities and actually reducing its share count.

By May, 2006 the company had made another $4 billion worth of acquisitions (net of the cash held by the acquired companies) and increased its cash and marketable securities to $7.5 billion while restructuring its debt load to $5.7 billion in long-term debt. Even though the debt was $3 billion more than the prior year, most of that was offset by the increase in cash – meaning that the $4 billion in acquisitions was made possible almost entirely through cash flow from operations.

Speaking of cash flow, in the year ended May 2007 Oracle generated $5.5 billion of it from operating activities, and spent only $320 million of it on capital expenditures. That turns out to be a free cash flow yield of 4.5% from the existing businesses. Most of that continues to be invested in new acquisitions for new growth opportunities. The free cash flow has increased 55% since FY2005.

Meanwhile, SAP is generated approximately $2.0 billion in free cash flow last year, giving it a 3.0% free cash flow yield. Its acquisition avoidance has left the free cash flow essentially unchanged over the last three years (though arguably the change in the Euro/dollar exchange rate is providing growth.)

A higher yield and growing free cash flow compared with a lower, flat one is not much of a choice in my book.

If any doubt remains over which strategy is working better, one need only turn to a price chart. Since Oracle closed the PeopleSoft acquisition in January 2005, its shares are up 70% (mostly driven by rising cash flow), compared to just more than 30% for SAP over the same time. To me, it seems like that is exactly the type of “challenge” SAP would want to adopt.

Top 10 Most Fuel Efficient Cars

Here's the top 10 most fuel efficient cars, according to the 2008 Environmental Protection Agency and Department of Energy's fuel economy guidebook, published this Saturday. Prius tops the charts.

2008 Model Year Overall Fuel Economy Leaders

Class Model City/Highway MPG

10. Honda Fit (manual) 28/34
9. Toyota Corolla (manual) 28/37
8. Ford Escape Hybrid 4WD 29/27, Mercury Mariner Hybrid 4WD ", Mazda Tribute Hybrid 4WD "
7. Toyota Yaris (automatic) 29/35
6. Toyota Yaris (manual) 29/36
5. Toyota Camry Hybrid 33/34
4. Ford Escape Hybrid FWD 34/30, MazdaTribute Hybrid 2WD ", Mercury Mariner Hybrid FWD "
3. Nissan Altima Hybrid 35/33
2. Honda Civic Hybrid 40/45
1. Toyota Prius (hybrid-electric) 48/45

If you want to save on gas, hybrids are the way to go.

Lowest Fuel Economy by Vehicle Class for 2008 Model Year

Class Model City/Highway MPG

Two Seater Lamborghini Murcielago (manual) 8/13
Minicompact Car Aston Martin DB9 Coupe, Volante (manual) 10/16
Subcompact Car Bentley Continental GTC 10/17
Compact Car Bentley Azure 9/15
Midsize Car Ferrari 612 Scaglietti (auto) 9/16
Large Car Bentley Arnage RL 9/15
Small Station Wagon Audi S4 Avant (manual) 13/20
Midsize Station Wagon Mercedes-Benz E63 AMG Wagon 12/18
Sport Utility Vehicle* Mercedes-Benz G55 AMG 11/13
Minivan* Toyota Sienna 4WD 16/21
Pickup Truck* Rousch Performance Stage3 F150 11/15
Van (Passenger and
Cargo)*
Passenger Chevrolet G1500/2500 EXPRESS 2WD 12/16
" Chevrolet H1500 EXPRESS AWD "
" GMC G1500/2500 SAVANA 2WD "
" GMC H1500 SAVANA VAN AWD "
Cargo Chevrolet G15/25 VAN CONV 2WD "
" Chevrolet H1500 VAN CONV AWD "
" GMC G15/25 SAVANA 2WD CONV "
" GMC H1500 SAVANA AWD CONV "

*Trucks over 8500 pounds gross vehicle weight rating are currently exempt from federal fuel economy requirements

Highest Fuel Economy Models by Vehicle Class for 2008 Model Year

Class Model City/Highway MPG

Two Seater Audi TT Roadster (2 liter engine,auto) 22/29
Minicompact Car Mini Cooper Convertible (manual) 23/32
Subcompact Car Toyota Yaris (manual) 29/36
Compact Car Honda Civic Hybrid 40/45
Midsize Car Toyota Prius (hybrid) 48/45
Large Car Honda Accord 4Dr Sedan (manual) 22/31
Small Station Wagon Honda Fit (manual) 28/34
Midsize Station Wagon Passat Wagon (manual) 21/29
Sport Utility Vehicle Ford Escape Hybrid FWD 34/30
Mazda Tribute Hybrid 2WD "
Mercury Mariner Hybrid FWD "
Minivan Dodge Caravan 2WD 17/24
Chrysler Town & Country 2WD "
Pickup Truck Ford Ranger Pickup 2WD (manual) 21/26
Mazda B2300 2WD (manual) "
Van (Cargo&Passenger)Chevrolet G1500/2500 Van 2WD 15/20
(4.3 liter engine)
GMC G1500/2500 Savana 2WD Cargo "
(4.3 liter engine)

Lowest Overall Fuel Economy Models* for 2008 Model Year

Rank Manufacturer/Model City/Highway MPG

1. Lamborghini Murcielago (automatic) 8/13
2. Bugati Veyron 8/14
3. Lamborghini Murcielago (manual) 9/14
4. Bently Azure/Arnage RL 9/15
5. Ferrari 612 Scaglietti (automatic) 9/16
6. Lamborghini Gallardo Spyder (manual) 10/15
Ferrari Ferrari 612 Scaglietti (manual) "
Bentley Arnage (auttomatic) "
7. Lamborghini Gallardo Spyder 10/16
Aston Martin DB9 Coupe "
Aston Martin DB9 Volante "
Mercedes-Benz Maybach 57 "
Mercedes-Benz Maybach 57S "
Mercedes-Benz Maybach 62 "
Mercedes-Benz Maybach 62S "
8. Lamborghini Gallardo Coupe (manual) 10/17
Bentley Continental GT (automatic) "
Bentley Continental GTC (automatic) "
Bentley Continental Flying Spur (automatic) "
9. Mercedes-Benz G55 AMG 11/13
10. Jeep Grand Cherokee 4WD 11/14
Mercedes-Benz Ml63 AMG "

US Foreclosures Nearly Double

Foreclosure filings across the U.S. nearly doubled last month compared with September 2006, as financially strapped homeowners already behind on mortgage payments defaulted on their loans or came closer to losing their homes to foreclosure, a real estate information company said Thursday.

A total of 223,538 foreclosure filings were reported in September, up from 112,210 in the same month a year ago, according to Irvine-based RealtyTrac Inc.

The number of filings in September was down 8 percent from August's 243,947, the firm said.

Despite the sequential decline, the September figure represents the second-highest total for filings in a single month since the company began tracking monthly filings two years ago.

"August was an extraordinarily high month for foreclosure activity, so some falloff was almost predictable," said Rick Sharga, RealtyTrac's vice president for marketing.

The filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.

Typically, borrowers must be 60 to 90 days past due on their mortgage payments before their lender will consider them in default, the first stage of the foreclosure process. If a homeowner can't find a way to get current on payments, the home is then often put up for auction, and if it doesn't sell, it eventually goes back to the bank.

In all, 39 states saw a decline in foreclosure filings, the firm said.

Sharga noted that there was a spike in the number of bank repossessions in August that did not occur in September.

It's likely that the sequential decline in foreclosure activity between August and September was just a blip, not a bellwether of lessening foreclosure filings.

"We don't see September as the beginning of the end in this cycle of foreclosures," Sharga said.

The foreclosure rate for the nation in September was one foreclosure filing for every 557 households, the firm said.

The U.S. housing market has seen sales decline and home prices fall or remain flat, making it harder for homeowners who can't afford to make mortgage payments to sell their homes or seek refinancing.

Many of those troubled homeowners were among those who took on adjustable-rate mortgages that are now adjusting to a higher interest rate, translating into payments they cannot afford to make.

The rising delinquencies and foreclosures this year have led the mortgage industry to tighten lending standards, further narrowing options for homeowners struggling to pay their mortgage.

Nevada, Florida and California had the highest foreclosure rates in the country last month, the firm said.

Nevada reported one foreclosure filing for every 185 households, earning the state the highest foreclosure rate in the nation for the ninth month in a row. The state had 5,504 filings in September, down 11.1 percent from August and more than triple from September 2006.

Florida had one foreclosure filing for every 248 households. The state reported 33,354 foreclosure filings in September, down just less than 2 percent from August, but more than three times greater than September 2006's total.

California's foreclosure rate was one filing for every 253 households. The state reported the most foreclosure filings of any single state with 51,259, down 11 percent from August but a fourfold increase from September of last year.

Rounding out the states with the top 10 foreclosure rates last month were Michigan, Arizona, Georgia, Ohio, Colorado, Texas and Indiana.

Income inequality worst since 1920s, according to IRS data

Half of US senators are millionaires

The superrich are gobbling up an ever larger piece of the economic pie, and the poor are seeing their share of earnings shrink: new IRS data shows the top 1 percent of Americans are claiming a larger share of national income than at any time since before the Great Depression.

The top percentile of wealthy Americans earned 21.2 percent of all income in 2005, up from 19 percent in 2004, according to new Internal Revenue Service data published in the Wall Street Journal Friday.

Americans in the bottom 50 percent of wage earners saw their share of income shrink to 12.8 percent in 2005, down from 13.4 percent.

"Scholars attribute rising inequality to several factors," the Journal reports, "including technological change that favors those with more skills, and globalization and advances in communications that enlarge the rewards available to 'superstar' performers whether in business, sports or entertainment."

The data could cause problems to President Bush and Republican presidential candidates, who have played up low unemployment and a strong economy since 2003, crediting Bush's tax cuts for contributing to both. In an interview with the Journal, Bush downplayed the significance of the income gap, saying more education is the answer to narrowing it.

"First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps," Bush told the Journal. "And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids. That's why No Child Left Behind is such an important component of making sure that America is competitive in the 21st century."

The Journal notes that many Americans fear the economy is entering a recession, and the IRS data show income for the median earner fell 2 percent between 2000 and 2005 to $30,881. Earnings for the top 1 percent grew to $364,657 -- a 3 percent uptick.

Scholarly research suggests that top earners did not have such a large share of total income since the 1920s, the Journal reported.

The Journal reports that a recent stock boom likely contributed to higher earnings among those in the top income bracket, with hedge fund managers and Wall Street attorneys seeing their incomes skyrocket in recent years.

Another prominent pool or wealthy Americans gathers regularly on Capitol Hill to write the nation's laws. The Center for Responsive Politics, which tracks campaign spending and politicians' wealth, says more than a third of Congress members are millionaires, with at least half the Senate falling into the millionaires club.

Forbes reported that last year's incoming class of new Senators did "little to shake the Senate's image as a millionaires club," with half of the newly elected members having seven- eight- or nine-figure personal fortunes.

Freshman Sen. Bob Corker (R-TN) is worth between $64 million and $236 million, and newly elected Sen. Claire McCaskill's (D-MO) fortune is between $13 million and $29 million. R

Roll Call estimates Sen. John Kerry (D-MA) is the chamber's richest member with an estimated net worth of $750 million; another Democrat, Wisconsin Sen. Herb Kohl, is among the chamber's richest with between $220 million and $234 million in personal assets.

SBUX: Is Starbucks doomed or an excellent opportunity to invest?

So, after 50 years of selling hot mud, McDonald’s (MCD - Annual Report) continues to awaken to the notion that its customers might enjoy coffee that tastes good. According to Crain’s Chicago Business, “McDonald’s Corp. plans to sell lattes, cappuccinos and other specialty drinks in all of its 14,000 U.S. restaurants next year. McDonald’s predicts the new drinks will add more than $1 billion a year to sales.”

Not surprisingly, the anti-Starbuck’s (SBUX) crowd has latched on to this announcement as proof the company is doomed. 24/7 Wall St. even called it a “coup de grace,” which is defined as a “death blow intended to end the suffering of a wounded creature.” Although Starbuck’s the stock is certainly suffering, down about a third from the high reached earlier this year, it is hard to argue the company is wounded, or in need of a merciful end to its suffering.

It’s time for the doubters to face some facts. First, McDonald’s is not planning to match Starbuck’s “product for product.” In a Bloomberg article published just last month, McDonald’s President Ralph Alvarez said McDonald’s has no plans to offer the breadth of Starbuck’s beverages such as raspberry latte with soy milk and half the caffeine. Instead, they intend to compete for the plain-Jane cappuccino, offering it at about a 25% discount to the equivalent Starbuck’s model.

Secondly, Starbuck’s doesn’t need to concede the future market growth to others. For one thing, McDonald’s is already selling the cappuccinos in two thirds of its stores, according to the Bloomberg article. That potential market share loss has already been baked in, and it doesn’t seem to be hurting too badly. Starbuck’s same store sales growth is running at 4%, below its historical norm but above that of most retailers. If anything, the fact that most of McDonald’s rollout will be complete next year could ease the pressure on comp sales.

If further convincing is necessary, just look at the expected sales numbers. McDonald’s wants specialty drinks in 14,000 stores to add $1 billion to sales. In 2006 Starbucks had an average store count of approximately 6,500 and produced $6.5 billion in sales from them. In other words, they are still selling 14 times as much coffee per store as McDonald’s. The further incursion from the remaining one-third of McDonald’s expansion, even under the generous assumption that 100% of those sales would have otherwise gone to Starbuck’s, amounts to about 4% of Starbuck’s trailing twelve month company-owned retail sales – about one year’s worth of same store sales growth at worst.

Meanwhile, over the last 12 months Starbucks has generated $1.2 billion in cash flow from operating activities, and used just $1 billion to expand those operations by 15%. Assuming that two thirds of the capital expenditures went to open new stores and the rest was routine maintenance, the free cash flow from their existing store base is approximately $700 million per year, for a 3.5% free cash flow yield on the $20 billion enterprise value. It isn’t what I would call cheap, but it is much less like a wounded animal than a healthy tiger pouring its energy into a continued pounce by opening still more stores. At its current expansion rate, in two years the free cash flow yield would exceed that offered by treasuries, and Starbuck’s would still be only halfway through its expansion plans.

I would consider the stock cheap if it went down another 15% to $22.50, or if it just stayed at about the current price for another year. Since neither of those outcomes is certain, Starbuck’s fans will have to pick their own entry point. In the meantime, my favored strategy of writing put options may be worth considering. The April 2008 $27.50 puts are selling for about $2.30 right now. By writing those options you could earn an 8.5% 6-month return if the stock goes up, or buy the stock for an effective price of about $24.25 (which by April would probably meet my “cheap” criteria) if it goes down.

I think it is great that McDonald’s is offering its customers good coffee, and think the two companies can coexist much in the same way that McDonald’s has coexisted with, for example, hamburgers sold at ballparks. The two companies have very different customers and serve different purposes for them throughout the day. As for “coups de grace,” I don’t expect either company will need one any time soon.

Disclosure: Author is long Starbucks (SBUX) at time of publication. - by stockmarketbeat

An interesting list of fastest growing companies:

Rank	Company	EPS growth*	Revenue growth*	Total return*
1	NutriSystem	433%	225%	244%
2	Hansen Natural	145%	80%	139%
3	Arena Resources	140%	165%	100%
4	Intuitive Surgical	123%	62%	94%
5	Titanium Metals	151%	48%	140%
6	Apple	149%	48%	96%
7	RTI International Metals	225%	43%	68%
8	Dynamic Materials	127%	45%	173%
9	Southern Copper	83%	67%	83%
10	Global Industries	159%	48%	67%
11	Frontier Oil	291%	33%	105%
12	Allegheny Technologies	250%	36%	81%
13	Ceradyne	105%	85%	46%
14	VASCO Data Security International	75%	54%	120%
15	Perficient	59%	77%	73%
16	Holly	89%	42%	101%
17	SEACOR Holdings	198%	59%	29%
18	Pioneer Drilling	262%	58%	25%
19	Freeport-McMoRan Copper & Gold	127%	51%	44%
20	Kansas City Southern	178%	52%	34%
21	Ladish	198%	28%	70%
22	Grey Wolf	248%	51%	25%
23	Allscripts Healthcare Solutions	138%	38%	48%
24	XTO Energy	83%	60%	42%
25	Grant Prideco	300%	33%	43%
26	Hornbeck Offshore Services	157%	38%	44%
27	Dawson Geophysical	97%	54%	41%
28	National Oilwell Varco	69%	61%	49%
29	Helmerich & Payne	202%	37%	40%
30	Dril-Quip	116%	32%	69%
31	Knot	155%	26%	72%
32	First Acceptance	105%	277%	13%
33	CB Richard Ellis Group	88%	33%	79%
34	Gulfmark Offshore	306%	28%	48%
35	Helix Energy Solutions Group	96%	53%	38%
36	Valero Energy	87%	37%	60%
37	General Cable	76%	32%	107%
38	Hologic	74%	39%	68%
39	Lufkin Industries	98%	33%	61%
40	American Science & Engineering	169%	35%	40%
41	Joy Global	141%	27%	65%
42	Range Resources	66%	50%	57%
43	Palomar Medical Technologies	119%	51%	27%
44	Patterson-UTI Energy	136%	52%	17%
45	Unit	91%	58%	26%
46	Netflix	180%	49%	-19%
47	Gardner Denver	59%	57%	45%
48	Akamai Technologies	123%	39%	39%
49	Psychiatric Solutions	76%	50%	43%
50	F5 Networks	69%	51%	45%
51	Rowan Cos.	532%	36%	20%
52	RPC	106%	30%	55%
53	Atwood Oceanics	155%	27%	49%
54	Superior Energy Services	87%	32%	58%
55	W-H Energy Services	100%	33%	47%
56	First Marblehead	83%	79%	13%
57	TETRA Technologies	75%	40%	47%
58	Cognizant Technology Solutions	55%	56%	43%
59	Cleveland-Cliffs	72%	31%	78%
60	ImClone Systems	87%	65%	-26%
61	ValueClick	47%	81%	35%
62	Allis-Chalmers Energy	54%	118%	33%
63	Nucor	118%	27%	50%
64	Chesapeake Energy	58%	65%	34%
65	Celgene	33%	48%	59%
66	Tesoro	82%	29%	61%
67	Precision Castparts	73%	31%	65%
68	Miller Industries	145%	30%	37%
69	Oneok	34%	72%	37%
70	Reliance Steel & Aluminum	75%	40%	42%
71	Southwestern Energy	37%	35%	84%
72	Lam Research	132%	37%	24%
73	Penn National Gaming	81%	28%	54%
74	Jones Lang Lasalle	73%	28%	61%
75	Radiant Systems	115%	28%	41%
76	Steel Dynamics	66%	38%	45%
77	Oil States International	71%	42%	39%
78	Layne Christensen	76%	38%	35%
79	Pinnacle Financial Partners	46%	81%	17%
80	Concur Technologies	165%	27%	29%
81	Avatar Hldgs.	82%	45%	23%
82	inVentiv Health	57%	51%	33%
83	Noble Energy	58%	47%	35%
84	A.M. Castle	74%	28%	50%
85	Encore Wire	84%	43%	17%
86	Commercial Metals	63%	27%	62%
87	American Capital Strategies	31%	62%	25%
88	Team	35%	48%	41%
89	WMS Industries	109%	35%	13%
90	First Advantage	43%	74%	7%
91	Deckers Outdoor	47%	32%	51%
92	OYO Geospace	56%	29%	58%
93	Pantry	101%	29%	28%
94	Cameron International	70%	30%	43%
95	Jackson Hewitt Tax Services	61%	50%	18%
96	Dress Barn	100%	28%	34%
97	World Fuel Services	32%	57%	24%
98	Regal Beloit	55%	44%	30%
99	Swift Energy	64%	43%	25%
100	Berry Petroleum	46%	40%	38%