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What We Read Today 21 October 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Deal is a historic shift for IBM (Craig Wolf, Poughkeepsie Journal) A deflating world is an amazing thing: The ECB (European Central Bank) pays negative interest rates deposits (that means depositors pay a "storage" fee rather than have interest credited to their accounts). The latest occurrence is IBM selling an "asset" and paying the "buyer" $1.5 billion for taking ownership.

IBM is "selling" its semiconductor manufacturing business to Global Foundries (GF). IBM fab facilities (manufacturing plants) in East Fishkill, NY and Essex Junction, VT with an estimated 5,000 or more employees are involved. Only manufacturing has been sold; Semiconductor research and development will continue as an IBM business. 'Behind the wall' discussion today is devoted to aspects of this deal.

  • Amazonís Monopsony Is Not O.K. (Paul Krugman, The New York Times) Prof. Krugman says that that when it comes to books, Amazon has "robber-baron-type market power". He has the following citation as an example:
Back in May a dispute between Amazon and Hachette, a major publishing house, broke out into open commercial warfare. Amazon had been demanding a larger cut of the price of Hachette books it sells; when Hachette balked, Amazon began disrupting the publisher's sales. Hachette books weren't banned outright from Amazon's site, but Amazon began delaying their delivery, raising their prices, and/or steering customers to other publishers.
  • Articles about conflicts and disease around the world

Ebola

Testing shows Spanish nurse's aide free of Ebola, Madrid hospital says (CNN Health)

Dozens removed from Ebola watch list, Texas officials say (Al Jazeera)

Ebola Outbreak: Travelers From West Africa Must Arrive at Five U.S. Airports (NBC News)

Gaza and Israel

Gaza plan 'relieves Israel of responsibility' (Al Jazeera)

Israelis quietly expand enclave in Palestinian district of Jerusalem (Reuters)

Libya

Benghazi suspect enters not guilty plea (Al Jazeera)

Turkey

Turkey Says It Will Aid Kurdish Forces in Fight for Kobani (The New York Times)

Syria

Obamaís unpopular Islamic State strategy is the only sensible plan (The Conversation)

Iraq

Dozens Are Killed in Attacks on Shiite Targets in Iraq (The New York Times)

Iran

Iran acts to comply with interim nuclear deal with powers: IAEA (Reuters)

Ukraine

Summary executions but no 'mass graves' found in Ukraine, report finds: Amnesty International says both sides of conflict guilty of extrajudicial killings, but scale has been 'exaggerated' (Al Jazeera)

Polish ex-minister quoted saying Putin offered to divide Ukraine with Poland (Reuters)

Russia

Total boss plane crash caused by 'criminal negligence' (BBC News)

Poland's Sikorski under fire over Russia interview (Associated Press, Yahoo! News)

Russia prepares for ice-cold war with show of military force in the Arctic Vladimir Putin sends troops and jets to oil- and gas-rich region also coveted by Canada, United States, Norway and Denmark (The Guardian)

Hong Kong

HK leader: 'External forces' involved in protests: Leung Chun-ying also said the poor would dominate elections if protesters' demand for an open vote were realized (Al Jazeera)

Pakistan

Pakistanís complex relationship with Malala: Ambiguous views of the Nobel laureate say more about Pakistanis than about her (Al Jazeera)

Mexico

Mexican drug cartels are worse than ISIL (Al Jazeera)


There are 11 articles discussed today 'behind the wall'. All articles discuss the IBM - Global Foundries deal.

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  • Weak Results at IBM as Its Strategy Shifts (Steve Lohr, The New York Times) Including the Global Foundries move, IBM has shed businesses that amounted to $7 billion in revenue in 2013 but contributed $500 million in losses. Semiconductor manufacturing by itself lost $700 million on $1.4 billion revenue, so the small server business sold to Lenovo (OTC:LNVGY, OTC:LNVGF) and a divested customer service unit were larger revenue businesses than semiconductors and (between them) were marginally profitable. IBM will continue to invest in semiconductor technology R&D for chips to use in its own products as well as to license for other applications.
In an interview, John E. Kelly, director of IBM's research labs, said IBM planned to invest $3 billion over the next five years in advanced semiconductor research and development. The company wants to invent new chip designs while handing over the production of chips to Globalfoundries, which will build and be the sole supplier of those chips for IBM's mainframe and big data-serving computers. "What we lacked in chip-making was scale," Mr. Kelly said.
  • GlobalFoundries to acquire IBM's microelectronics business (Cyril Kowaliski, The Tech Report) Global Foundries (GF) is growing. The acquisition of IBM's semiconductor chip manufacturing facilities will more than double the GF manufacturing workforce in the northeastern U.S. The two IBM locations are about equidistant from GF's largest fab facilities in Malta, Saratoga County, New York, north of Albany, which currently employ more than 3,000, about 25% of GF's entire global workforce (before the acquisition). The East Fishkill and Essex plants are about 240 miles apart. GF has indicated that some employee transfers between locations may occur but all three fabs will remain in full operation.

The new enlarged Global Foundries will employ between 17,000 and 18,000 worldwide. It will be the "exclusive server processor semiconductor technology provider for 22 nanometer (nm), 14nm and 10nm semiconductors for the next 10 years" for IBM and will continue as a trusted foundry . The company is substantially owned by Advanced Technology Investment Company (ATIC) of Abu Dhabi (a sovereign wealth enterprise), and has operating agreements with Advanced Micro Devices (NYSE:AMD).

AMD stock rallied more than 8% from last Thursday morning lows to $2.75 Tuesday afternoon (21 October 2014). AMD stock has seen hard times, down 66% since March 2012. For more news see GlobalFoundries: Essex fab open for 'foreseeable future' (Dan D'Ambrosio, Burlington Free Press); and IBM fabs in NY, Vermont go to GlobalFoundries (Larry Rulison, Albany Times Union).

  • Abu Dhabi's ATIC to invest up to $10 billion in U.S. chip plant (Stanley Carvalho, Reuters) In January Global Foundries announced it intended to invest "up to $10 billion over the next two years" its upstate New York semiconductor factory, Malta, NY. It remains to be seen how this plan will be impacted by the IBM purchase.
  • IBM to focus on research, software and advanced systems (Patrick Thibideau, Computer World) Thibideau feels that IBM has made a good move with the Global Foundries (GF) deal (and with all recent divestitures. And it is also a good deal for GF which will gain economies of scale and enlarged technology scope. He sees the high-end hardware continuing to be key for the company (Watson supercomputing technologies and its Smarter Planet initiatives) as it continues to develop "focuses on research, software and advanced systems development".
  • The Truth Hidden by IBMís Buybacks (Andrew Ross Sorkin, The New York Times) IBM stock suffered a 3.94% decline Tuesday (21 October 2014) following the Monday evening announcement of the Global Foundries (GF)) deal. It was trading at $162.50 Tuesday afternoon. The stock has lost almost 16% from a close of $195.78 on 28 July and is down 25% from the all-time high near $215 in March 2013. These losses have occurred even as IBM has been aggressively buying back stock and increasing dividends. David A. Stockman has called these actions a "stock-rigging strategy" and a process of "self-liquidation". See The Canary In Big Blueís Mainframe: Why IBMís Q3 Bust Marks A Turning Point (David Stockman, Contra-Corner) and Big Blue: Stock Buyback Machine On Steroids (David Stockman, Contra-Corner). See also next article.
  • Blood Red From Big Blue: Why IBM Is Crashing, In Charts (Tyler Durden, Zero Hedge) IBM has been leveraging its balance sheet to increase dividends and stock buybacks. Since 2012 Big Blue has borrowed $33.6 billion, 89% of the $37.7 billion spent on stock buybacks. Over the past ten quarters IBM has reported year-over-year revenue declines, with four of the ten being greater than 5%. The latest revenue number is the lowest since Q1 2009 in the depths of the Great Recession. Does this activity amount to a pump-and-dump strategy as implied by this article and by David Stockman; Or is this a clever plan to finance the reinvention of IBM as suggested by Patrick Thibideau, second article above? Below we see the leveraging-up of IBM followed by timeline of IBM stock buybacks ($37.7 billion total) since the beginning of 2012.

Click for larger image at Zero Hedge.
ibm-debt-equity-zh-2014-oct-20-600x450

Click for larger image at Zero Hedge.
ibm-stock-buybacks-zh-2014-oct-20-600x450

Disclosure: The GEI Managing Editor has a major position (more than 5% of investment assets) in IBM stock. There are no plans for selling at this time and he continues to participate in the dividend reinvestment program.
  • Other Economics and Business Items of Note and Miscellanea

20 Toughest Militaries in the World (Rant Political)

The Economics of Mood Control (Bloomberg View)

Xenophobia Is Bad Economics: 5 Reasons Why Britain Should Welcome Immigration (Forbes)

West's Biggest Threat is Russia, Not China (G. Bin Zhao, Asian Century Institute)

Yes: Economics no good argument; savings could protect us (Meg Penrose, Arizona Daily Star)

Most Colleges Don't Mandate Teaching of Government, History and Economics (ABC News Radio, KTIC)

Watch: how to shorten the working week (NEF Blog) Video


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