Avago: Conducting Themselves to Success

By Rob Gelb

Behind every new version of Apple’s iPhone is the company that provides the essential parts. The man behind the curtain is Avago, semiconductor company that focuses on both chipmaking and the 4G LTE market at a time where higher bandwidths are constantly in demand. Avago conducts business with Samsung as well, and has business ventures around the world, particularly in China. The company has had six straight quarters of accelerated sales and earnings growth, while stock prices have surged by about 105% over the past year to near record highs. Merrill Lynch tipped their hats to the company, having a price target for them at $140 a share. On a daily basis, Avago is trading over 2 million shares, which are notable for their enormous volatility. For the moment, Avago is the name to remember when looking for investment opportunities. Once the iPhone 7 (inevitably) comes out, it will be more than Apple you can thank for that.Sourceshttp://bit.ly/1xUtaFfhttp://bit.ly/1ag7Tenhttp://bit.ly/1xUtt2I

Apple: Not Far From the Tree

By Cole Lennon

New business ventures are often similar to something that came before.  Apple’s recent push toward streaming and radio is no different, as the tech giant aims to release a revamped streaming service and relaunch iTunes Radio.  Apple will bring in more experienced professionals to help, with prominent musician Trent Reznor redesigning the streaming service and award-winning DJ Zane Lowe assisting with iTunes Radio.  Updates to these services help Apple compete for market share--not just with streaming-based companies like Spotify, but online radio sites like Pandora.  Even with new main rivals, Apple’s foray into music simply builds on what they already have. Music-related business, like iTunes in January 2001 and the iPod in October 2001, is an area where Apple has a broad base of experience.  Now, it is just the same song with a second verse.Sources:http://bit.ly/1G4aVj4

The Optimal Bundle Special Report on the U.S. Tech Industry

The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee. It centers on a single economic topic covered in-depth from multiple perspectives.This edition of the Optimal Bundle features the U.S. Tech Industry, as the tech-heavy NASDAQ broke 5,000 for the first time since the dotcom bubble in 2000.This is an online version of the print edition of the Optimal Bundle.

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Op-Ed: The Half-Full Economy

By Cole Lennon

China’s economy still packs a punch.  Despite this self-evident fact, The Economist writer Simon Rabinovitch predicts an era in which China’s recent slowdown will get much more unpleasant as the Chinese economy takes harsher hits to economic growth. Rabinovitch’s argument falls flat, as it neglects to note more recently aggressive monetary policy, plans for more growth-enhancing fiscal policy, and a lack of perspective on how China relates to other economies.  China’s economy is not just staving off decline, it is building a better future compared to the rest of the world.The Chinese government plans to use monetary and fiscal policy to revive massive economic growth.  The People’s Bank of China (PBOC) recently has been cutting interest rates and plans to cut even more to evade deflation.  Inflation has risen from 0.8% in early 2015 to 1.4% now, so its plan looks promising.  Fiscal policy should also provide more gains.  Chinese officials recently cited $18 billion of previously unallocated spending, as well as an additional $258 billion in deficit spending next year.  It is doing so to boost growth from the current rate of 7.4% and overall demand.  Economist Alexander Wolf cites low demand as one of China’s biggest problems, and these measures are expected to help solve it.  China’s economy is also favorable to many economies worldwide, as its 7.4% growth is higher than the average for every continent on Earth.  It ranks in the top 20 among countries and only falls behind double-digit growth in much smaller economies.  China’s stature still leaves room for optimism.Changes in China’s economy are ultimately a sign that economic progress is here to stay.  China’s more stimulative monetary policy will ensure that growth can stay above an already high percent.  Its fiscal policy will also support high growth, as it has already pumped hundreds of billions of dollars into China’s $10 trillion economy.  The Chinese economy’s 7.4% growth rate is also impressive when considering the massive struggles  advanced economies in Europe have faced to achieve even 1% growth.  China is primed for a second round knockout.Sourceshttp://on.wsj.com/1Bpvoanhttp://reut.rs/1BwiPgxhttp://reut.rs/1BwiPgxhttp://reut.rs/1Bp5cB9http://1.usa.gov/1rqYqbfhttp://reut.rs/1EOGkCX

Op-Ed: The Half-Empty Economy

By Camille Mendoza

China's economy looked like its new cities: bright, expensive, but empty. In 2011, China became the world's leading exporter, and the largest economy, with annual GDP growth at almost 12%. Since then, growth has decelerated to 7%, causing the rest of the world to fixate on China's economic slowdown. It is easy to see that the Asian Giant's economic miracle is coming to an end by looking at the export boom and outcomes of countries that have faced banking crises in the past. The miracle is ending for China, and there is nothing it can do.The International Monetary Fund has noted that over the past 50 years, only four other countries have experienced as rapid a buildup of debt as China during the past five years. All four—Brazil, Ireland, Spain, and Sweden—faced banking crises within 3 years of their supercharged credit growth. This debt paid for China's boom and exports have sustained it. China's current surplus of exports points to billions of dollars wasted, as countries are not buying enough Chinese goods. The Wall Street Journal reported that a lone steel production company in Hebei, a province surrounding Beijing, produces twice as much crude steel as the entire U.S., and no longer needs to produce this much. China's overproduction may be its downfall.While excessive Chinese exports and consistent declines in GDP explain a bleak Chinese future, the past is also important. Harvard economists Lant Pritchett and Lawrence H. Summers argue that countries that have had long periods of abnormal growth tend to revert to around 2% growth, a meek figure in comparison to China’s current growth rate. This figure has grave implications. Economist Neil Irwin explains if growth reverts to 2%, China's GDP will be $11.2 trillion by 2033. The effects are already being felt. Wall Street Journal writer Bob Davis explained that what was once a Chinese skyline full of construction projects has become a cluster of empty apartment complexes.Optimists must have confused China's economy for a bright dawn instead of a dreary twilight brought on by high levels of debt, dangerous surplus of exports, and the already glaring signs of what China is poised to become: a ghost economy.Sourceshttp://on.wsj.com/1C8hUDuhttp://nyti.ms/1HAKphO

The Housing Problem: China's Ghost Cities

By Rob Gelb

Imagine cities like New York City completely deserted, where the homes of millions of people are either uninhabited or abandoned. A ghost town, if you will. China faces such realities in their country, as demand continues to suffer in the housing market and prices keep falling. Based on data from China's National Bureau of Statistics (NBS), new home prices fell by 5.1% on average from the year-ago period for a majority of cities. The housing sector is significant in China, too, contributing to around 15% of its economy. Furthermore, housing is so abundant that there are not enough people to live in these properties. That is where “ghost cities” start springing up throughout the country. As business executive Michael Garrity notes, “The problem China has now is large developer inventories. Chinese developers have two to five years of inventory still to sell off.” One of the main responses by the Chinese government has been more stimulus, particularly in the housing sector. While this initiative has been swift--there was a $328 billion surge in new credit two months ago--pumping in so much money to prevent housing prices from falling will not work overnight. Even if China can handle this spending now, who is to say that their money is going where it needs to in the long run?Sourceshttp://bit.ly/1AoX4Prhttp://bv.ms/1wrleVz

Shadowboxing

By Kevin Grant McClernon

A string of defaults by Chinese firms could spell trouble for the Chinese economy. Debt defaults are never a good thing. They are even worse when the lenders are in “the shadow.” “Shadow lending” is a process by which companies unable to secure traditional financing from banks turn to other companies for loans. Following the international credit crunch after the financial crisis, the Chinese government condoned shadow lending as an alternative means to provide liquidity to a still-growing Chinese economy. Shadow lending increased about 125% in 2010. As of 2015, the total outstanding balance of shadow loans in China is about 22 trillion Chinese yuan (about $3.5 trillion). It is a dangerous practice -- the potential repercussions are significant. One firm defaults on a shadow loan, endangering the balance sheet of another. Then another. And another. As the process continues, the theoretical domino effect multiplies and the trouble extends throughout the economy – beyond just the financial system. As China’s government scrambles to save the faltering economy, shadow defaults could be an unanticipated punch in the gut.Sourceshttp://on.wsj.com/1Cn7Nw3http://on.wsj.com/1bqOdoq

Chinese Central Bank to the Rescue

By Joe Kearns

The People’s Bank of China has answered its call to action. Chinese economic growth declined from 14.2% in 2007 to 7.3% in the last quarter of 2014, prompting the PBOC to lower interest rates twice in the past three months. Additionally, the PBOC expanded its medium-term lending facility, a monetary tool from which individual banks can draw reserves for more liquidity. These measures attempt to reverse a declining property market and deflationary pressure induced by falling commodity and oil prices. UBS economist Wang Tao argues, “Against this backdrop, it would seem clear that monetary policy in China should be eased more aggressively.” Investors, however, appear to be comfortable with the current scope of the PBOC’s intervention, as fewer investors are betting that interest rates will change soon. Moreover, Wall Street Journal commentator Greg Ip warns that if the PBOC takes more aggressive actions like currency devaluation, it would not help global markets because China has strict controls limiting capital mobility. Has China resolved its problem or opened Pandora’s box?Sourceshttp://reut.rs/1CMppBUhttp://bloom.bg/1EXMZNOhttp://on.wsj.com/19gSxWLhttp://nyti.ms/1DUQZyq

The Optimal Bundle Special Report on the Chinese Economy

The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee. It centers on a single economic topic covered in-depth from multiple perspectives.This edition of the Optimal Bundle features the Chinese economy, as it faces an ongoing economic slowdown.This is an online version of the print edition of the Optimal Bundle.

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Op-Ed: Give 'Em A Break Already

By Rob GelbIf any country is aware of the concept of tragedy, it would be Greece. Contrary to what students learn in their high school literature classes, the one major qualification for a tragic figure is acting in ignorance. With this financial crisis, acting in ignorance was the tragic flaw of the troubled hero: the Greek government did not realize the extent of the measures they would have to take in order to combat this financial conundrum. The void of competent leadership in Greece during the immediate aftermath of the late 2000s financial crisis put the country on the road to ruin. Greece’s demands that half of its debt be written off may seem extreme, but its critics fail to realize the extremity of the situation.Greece did not go far enough in austerity, and when they realized that, it was already too late. Look at America, arguably still recovering from the Great Recession of 2007-2009, which some economists worried would lead up to a crash worse than the Great Depression, with an unemployment rate of 28%. Greece is in many ways what America would have become if such nightmares came true. To make matters worse, the bailouts were not directed towards helping Greece’s economy recover, but to satisfy creditors at its expense. Only about 11% of this money went to the Greek government. While the creditors benefited in the short-run, Greece remains in the thick of one of the worst economic situations in Europe.Despite the Greek government's past mistakes, the steps it is taking now are much more effective at reducing its debt burden than it was a few years ago. They are standing down on anti-austerity measures. They are accepting the programs of the eurozone. Despite its adversarial campaign rhetoric, even Syriza is willing to reach a primary surplus. It has also expressed a willingness to reach primary surplus at the cost of some of its spending pledges. Michael Ball, portfolio manager at the $850-million money manager Weatherstone Capital Management, suggests investors should have more confidence in the Greek government: “I think people look at it and say, ‘The worst is behind us.’” Take pity on this greek tragedy, people.Editor’s Note: This piece is one of two op-eds framed around the question, “Are Greece’s Creditor’s Being Reasonable?”  It takes the negative position. To read the opposing view, please read “Time For Greece to Stop Passing the Buck" by Joe Kearns.Sourceshttp://bbc.in/1M37JT9http://on.wsj.com/18JmIFNhttp://nyti.ms/1DEBCok http://bit.ly/1BR13YS

Op-Ed: Time for Greece to Stop Passing the Buck

By Joe KearnsIt takes two to negotiate. The Greek government has won the misguided sympathy of Washington Post columnist Katrina vanden Heuvel. She claims that “Syriza is a pro-European party. It does not want to leave the EU. Its leader, Alexis Tsipras, says that it wants to honor Greece’s debts. But debt that cannot be repaid will not be repaid.” The premise of vanden Heuvel’s argument rests on the myth that it is inherently impossible for Greece to pay down its debts at current levels and the ruling Syriza Party has offered a reasonable compromise. The Greek government is casting its creditors—the International Monetary Fund, the European Central Bank, and the European Commission—in a negative light to portray itself as a victim. While some changes to the current debt agreement are sensible, the its insistence that creditors should write off half of its sovereign debt invalidates the idea that its demands are reasonable.Greece’s debt-servicing schedule is neither unusual nor unfair compared to the budget schedules of other European debtor nations in recent decades. Under the current agreement, Greece must run a budget surplus (before interest payments) of 4.5% of its GDP this year. As recently as 2013, debtor nations like Portugal, Italy, and Ireland paid 5%, 4.8%, and 4.4% of GDP in interest respectively. Creditors have already taken a 74% loss on their debt in real terms from a prior haircut, where the Greeks received several concessions of lower interest rates and extended loan maturities. Greece’s interest payments have already fallen from 7.7% of GDP in 2011 to 4.2% last year. According to the Greek government, they will eventually decline to just 2.2% of GDP in 2022. Far from getting a raw deal, Greece got a bargain.Although creditors should reject Greece’s demand to write off half of its debt, they should consider other reforms. To his credit, Irish Finance Minister Michael Noonan proposed additional reductions of interest rates and extended repayment dates. While creditors are open to reasonable concessions, the Syriza-led government has not reciprocated. In a seven-page letter to the Eurozone, the government even included policies that could raise costs, including a “basic income scheme” for retirees and an increased minimum wage. Apparently, meeting the other side halfway is overrated.Editor’s Note: This piece is one of two op-eds framed around the question, “Are Greece's Creditor's Being Reasonable?"  It takes the affirmative position. To read the opposing view, please read "Give 'Em A Break Already" by Rob Gelb.Sourceshttp://on.wsj.com/1Gfz8CVhttp://bloom.bg/1wdPfIqhttp://on.wsj.com/1DS5pil

Get Them to the Greek

By Camille MendozaWhat happens when a kid is not grounded anymore, but now his friends cannot go out to play? Greece is currently experiencing a similar situation, considering its neighbors are not playing ball. Its trade deficit reached a peak of 4 billion EUR in July 2008, making it highly dependent on its neighbors for imported goods. Because Greece shares a common currency with other Eurozone members, it had to suffer through the late 2000s recession without the ability to devalue the currency, which would have made exports more attractive. Even so, Greece was able to decrease the deficit to 1 billion EUR in December 2014 through aggressive austerity. Although this is a substantial improvement, the deficit has stayed at  its pre-financial crisis value for the past two years. Countries like Germany and Italy, two of Greece's top 5 export destinations, were inching towards recession. In other words, Greece finally decreased the trade deficit substantially, but the other European countries are now unable to play--or rather, trade--with Greece. It looks like Greece will have to sit alone in the sandbox.Sourceshttp://huff.to/1AV1vTmhttp://bit.ly/1Ncn2fC http://bit.ly/1wQlMnX

Waiting to Grexhale

By Kevin Grant McClernonInvestors breathed a sigh of relief early last week. Greece reached an eleventh hour agreement  Tuesday with its international creditors to secure €240 billion in continued bailout funding. Its willingness to push the envelope has roiled financial markets in the past month. The yield on Greek 10-year government bonds rose as high as 11.21% this month before settling at 9.24% after trading Thursday. An increase in bond yields indicates fears that Greece may not repay its debt. Greek bond investors have reason to worry – a 2012 debt restructuring shed the face value of Greek debt by 53.5%, reduced interest rates, and extended maturities. In all, the debt lost 74% of its overall value. International investors now hold €370 billion in Greek debt – a similar restructuring would cost them about €270 billion. The new agreement gives Greece four months to act. In the meantime, investors will hold their breath once again.Sourceshttp://bloom.bg/1stFtlmhttp://on.wsj.com/1Ee0jLWhttp://read.bi/1zUO02ihttp://on.wsj.com/1aJRjU6http://bit.ly/1M35O0K

On Losing the War

By Cole LennonIf economic booms and busts are like battles, Greece has surely lost the war.  Greece’s economy been in horrific conditions since 2010, and the damage is still ongoing.  Data from the World Bank reveals that Greece’s real GDP per capita has fallen from $26,861 (in U.S. dollars) in 2010 to $21,956 in 2013, the most recent full year available.  This is a massive 18.3% decrease in a key economic indicator, which suggests Greece’s problems have gotten worse. Additionally, European Commission data shows that Greece’s unemployment rate has gone from 10.8% in January 2010 to the most recent November 2014 rate of 25.9%.  The latter unemployment rate is higher than even the highest rate during the U.S.’s Great Depression.  It is evident that the Greeks have decisively lost crucial economic battles since 2010.  Given this data, the surprise now is not about the verdict.  The shock is that they are still not waving the white flag of surrender.Sourceshttp://bit.ly/1eRbn2Ehttp://bit.ly/1GMm0Tg

The Optimal Bundle Special Report on the Greek Sovereign Debt Crisis

The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee. It centers on a single economic topic covered in-depth from multiple perspectives.This edition of the Optimal Bundle features the Greek Sovereign Debt Crisis, following the decision by Greece's creditors to extend the current debt agreement by four months.This is an online version of the print edition of the Optimal Bundle.

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Op-Ed: Don't Forget the Animal Spirits

By Kevin Grant McClernon

U.S. oil production is booming and global demand is cooling. That is the story, at least. But when you look at the data – it just does not hold up. As of the end of 2014, daily supply exceeded demand by 800,000 barrels per day in a market that consumes more than 92 million every day. The world is producing only .85% more oil than we are consuming. Are we really to believe that such a minimal “oversupply” has resulted in a nearly 60% drop in oil prices? If traditional supply and demand cannot adequately explain the seismic shift in prices, behavioral economics might.

	Daily Production	Consumption	+/- (+ is excess)
2013	90.90 mm	91.24 mm	- .34 mm
2014	92.94 mm	92.13 mm	.81 mm

If the numbers do not add up, there must be other exogenous factors influencing prices. What are they?Fear, anxiety, and uncertainty - as Professor “Chud” Chuderewicz would say, animal spirits. The market reaction has as much – if not more – to do with people’s emotions than it does with fundamental economics. Investors just want information. They want to know who is going to win. They want to know if Saudi Arabia will stay on top. They want to know if America is for real. They want to know how long this battle will last. Uncertainty in financial markets creates hysteria. It produces emotional responses. It drives people to make judgment calls on the spot that may not be fully informed. And passive investors get caught up in the mix. It is psychology that says we like to follow the crowd.Sometimes our “fight-or-flight” reactions get the best of us. But maybe we should just look at the fundamentals. Does this “oversupply” of less than 1% really justify the wild drop-off we’re witnessing? Or are we just scared?Editor’s Note: This piece is one of two op-eds framed around the question, “Do Market Fundamentals Explain the Oil Price Decline?”  It takes the negative position. To read the opposing view, please read "Supply and Demand Are Guilty Until Proven Innocent" by Camille Mendoza. Sourceshttp://bit.ly/1mKT7dFhttp://1.usa.gov/ZmwTudhttp://1.usa.gov/ZmwTud

Op-Ed: Supply and Demand Are Guilty Until Proven Innocent

When it comes to the reasoning behind falling oil prices, there is only guilty until proven innocent. As crude oil prices float around $50, it is important to consider what caused this 50% decline from less than a year ago in the first place. While consumers in oil-importing countries rejoice at lower gas prices, Venezuelan economist José Toro Hardy worries about the reasons behind the sharp decline. Hardy identified the 2 key reasons: slowing global demand and a surplus of oil, brought in part by increased American production. Supply and demand are driving the market. It is simply basic economics.The Organization of the Petroleum Exporting Countries (OPEC) reported that it expects global demand for its crude oil to fall in 2015 to 28.92 million barrels per day (bpd)--the lowest level in decades. This would cause a surplus of over 1 million bpd in 2015. An easy fix is to cut output, yet Saudi Arabia is urging fellow members to combat the growth in U.S. shale oil, thus making oil prices plunge even further. As OPEC members refuse to decrease their production, the supply remains high and prices remain low. Thus, it is inaccurate to suggest that the excess supply of oil is irrelevant to falling oil prices. Fracking (the process of drilling and injecting fluid into the ground at a high pressure to release natural gas inside) has increased in the United States by 3 million barrels a day. As a result, the U.S. has reduced its oil imports by nearly 30%, so traditional suppliers like Nigeria are not exporting to the U.S. And the U.S. is not the only eager country! Brazil and Russia are pumping oil at record levels. With figures like these, it makes no sense to minimize the role of either increasing oil supply or decreasing oil demand.There is no doubt that supply of oil and dismal demand are to blame for the plummeting prices. U.S. production of shale oil is increasing and OPEC members are attempting to outlast this production. Supply and demand are guilty. Case closed.Editor’s Note: This piece is one of two op-eds framed around the question, “Do Market Fundamentals Explain the Oil Price Decline?”  It takes the affirmative position. To read the opposing view, please read "Don't Forget the Animal Spirits" by Kevin Grant McClernon.Sourceshttp://bit.ly/1AiYPxjhttp://read.bi/1ABGejxhttp://bloom.bg/1ESPj8y

(We Are Not) Drilling Our Own Grave

By Joe Kearns

When you are in a hole, keep drilling. That notion seems illogical for the oil and gas industry. Brent crude prices have fallen by more than 50% since June 2014, yet there is merit to the strategy for some firms. Despite suffering declines in profit last year, Exxon Mobil and Chevron can afford to produce more oil because they are large firms involved in both the drilling and refining stages. This means they are less sensitive to price shocks than their smaller competitors. The oil supply glut has reduced industry demand and, consequently, the cost of services from firms who work for oil and gas companies. Eight of Exxon’s large projects came on-line last year, and there are more to come. Meanwhile, Chevron intends to expand production up to 20% by 2017. Production from these firms’ projects will last for decades, so short-term losses will likely amount to long-term gains. These companies would be foolish not to twist the knife while their competitors are wounded.Sourceshttp://abcn.ws/19tKQMHhttp://nyti.ms/1L8e3bnhttp://onforb.es/1zlS1wh

An Uneven Playing Field

By Cole Lennon

Drilling can be thrilling—that is, until falling oil prices  hurt your state’s economy.  The eight oil-exporting U.S. states--Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, Wyoming, and West Virginia--will not enjoy the energy boom from recent years. One certainty of declining oil prices is that many oil drilling projects will be unprofitable and not move forward, and Scotiabank research indicates that the weighted average breakeven price is about $60 for most projects across the U.S. and Canada.  Sluggish oil revenues hurt the eight states who are net-exporters of oil.  The other 42 states, however, are seeing net gains.  Environmental economics researcher Stephen Brown estimates that the overall U.S. economy as well will get a 1% net boost in GDP this year due to cheaper oil.  The uneven effects of U.S. oil production will then be largely beneficial for the country as a whole.  Such a boon is not just a cheap thrill.Sourceshttp://bit.ly/1GTjcDZhttp://bit.ly/1Joc6wahttp://bit.ly/VaalLJ

Investors and Consumers: A Conflict of Interests

By Rob Gelb

Oil prices have increased 5% this month, and whether that is a good sign depends on who you are asking. High prices benefit investors who gain from a positive externality, as prices for other commodities have a positive correlation with oil prices. However, higher oil prices do not bode well for consumers. In a recent Wall Street Journal survey, 69 economic forecasters speculated that there is a net positive outlook for a country as a whole when there is a drop in fuel costs, particularly in gasoline, there is a net positive outlook. “Lower oil prices and income gains could unleash faster consumer spending,” chief economist Lynn Reaser of Point Loma Nazarene University explained.  For now, investors might be the ones who will be enjoying the benefits, as consumers will be forced to accept higher gas prices. Since markets have been reacting poorly to the consistent dip of oil prices though-it fell over 300 points in January-a little less consumption might be a necessary tradeoff if markets, and subsequently the U.S. economy, are going to stabilize.Sources:http://on.wsj.com/1E3qsgJhttp://on.wsj.com/1E3qEwChttp://cnnmon.ie/1vDb8k5