Monthly Archives: February 2008

China Investment Corporation in context

From Institutional Investor:

TICKER
CIC Emerges
China’s new fund sets high bar on foreign mandates

18 Feb 2008
Kevin Hamlin

For China Investment Corp., which made quite a splash with high-profile investments in Blackstone Group and Morgan Stanley, is getting down to more-basic business. Set up last March to manage some $200 billion of the country’s reserves, CIC in December put out for bid its first four international equity mandates for foreign fund managers. And in a sign that the agency wants to move quickly to build up its overseas exposure, it requested bids late last month for two international fixed-income mandates.

The terms of the equity mandates, the sizes of which were not disclosed, indicate that CIC will be an aggressive investor seeking 10 percent-plus annual returns, say experts.

Three of the four mandates feature an emerging-markets component. Two will be benchmarked against the MSCI emerging markets index and the MSCI Europe, Australasia and Far East index and call for managers to outperform those indexes by 300 and 200 basis points, respectively. A third mandate, for an Asia ex-Japan equities, invites fund managers to propose benchmarks and performance targets. The final mandate calls for managers to outperform the MSCI all-country index by 300 basis points.

“These are very, very aggressive mandates when compared to what the National Council for Social Security Fund did last year,” says Peter Alexander, founder of Shanghai-based consulting firm Z-Ben Advisors. The Social Security Fund, a strategic pension reserve, awarded ten mandates in November 2006 totaling about $1 billion, including six equity mandates focused mainly on developed markets.

CIC has not revealed how much money it will farm out. Fund managers anticipate up to $7 billion in equity mandates this year with $1 billion to $3 billion in the first batch. Applications closed on January 15, and CIC is likely to interview 70 to 80 of an estimated 200 applicants before awarding the mandates as early as March, Alexander says.

On the fixed-income side, CIC is seeking tenders for two mandates: an active global fixed-income portfolio with a target return of 150 basis points over a composite of Lehman Brothers’ U.S., Euro zone, Japan and U.K. Treasury indices, and an active emerging-markets debt portfolio with a target return of 200 basis points over JPMorgan’s EMBI global index. Applications are due by February 29.

Why is CIC being so aggressive? It is paying 4.45 percent annually for the funds it received from the People’s Bank of China, and it also must contend with yuan appreciation. At a conference in December, CIC general manager Gao Xiqing said, “The returns on our national foreign currency reserves have never reached this [4.45 percent] level before. I’m not sure I can do much better than that. We feel big pressure.”

Yet Gao must do much better if he is to enhance returns. Many economists expect the yuan to appreciate by some 5 percent this year and an additional 4 percent in 2009. Alexander says the CIC must target an annual investment return of 10 percent over the long run.

CIC’s $5 billion investment in Morgan Stanley in December underscored its high tolerance for risk and long investment horizon. “With the U.S. dollar weak and the yuan moving up, CIC sees a golden time to buy a good long-term asset fairly cheaply,” says Hong Kong–based Stuart Leckie, founder of pension fund consulting firm Stirling Finance, which advises the Chinese government.

In November, CIC chairman Lou Jiwei said his fund would not be ready to make large overseas investments for at least one year. But the subprime crisis has produced hard-to-resist valuations in some Western financial services firms. “They are unwilling to pass up such investment opportunities,” says Donald Straszheim, vice chairman of Los Angeles–based Roth Capital Partners. “We expect more to be announced near term.”

Bloomberg on Ethanol

Looks like a good follow-up to trying to figure out the ethanol thing

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Ethanol Demand in U.S. Adds to Food, Fertilizer Costs (Update3)
By Alan Bjerga

Feb. 21 (Bloomberg) — U.S. plans to replace 15 percent of gasoline consumption with crop-based fuels including ethanol are already leading to some unintended consequences as food prices and fertilizer costs increase.

About 33 percent of U.S. corn will be used for fuel during the next decade, up from 11 percent in 2002, the Agriculture Department estimates. Corn rose 20 percent to a record on the Chicago Board of Trade since Dec. 19, the day President George W. Bush signed a law requiring a fivefold jump in renewable fuels by 2022.

Increased demand for the grain helped boost food prices by 4.9 percent last year, the most since 1990, and will reduce global inventories of corn to the lowest in 24 years, government data show. While advocates say ethanol is cleaner than gasoline, a Princeton University study this month said it causes more environmental harm than fossil fuels.

“We are mandating and subsidizing something that is distorting the marketplace,” said Cal Dooley, a former U.S. congressman from California, who represents companies including Kraft Foods Inc. and General Mills Inc. as president of the Grocery Manufacturers Association in Washington. “There are no excess commodities, and prices are rising.”

The energy bill requires the U.S. to use 36 billion gallons of renewable fuels by 2022, of which about 15 billion gallons may come from corn-based ethanol. The nation’s current production capacity is about 8.06 billion gallons.

Alternative Energy

Oil prices tripled since the end of 2003, causing the government to consider alternative fuels. Now, the competition for corn is leading to higher costs for food companies, raising prices for everything from cattle to dairy products.

Corn doubled in the past two years, touching a record $5.29 a bushel today in Chicago. The price of young cattle sold to feedlots gained 8.7 percent in the past year, reaching a record $1.1965 a pound on Sept. 6 on the Chicago Mercantile Exchange. Average whole milk rose 26 percent to $3.871 a gallon in January from a year earlier, the Department of Labor said yesterday.

“For thousands of years, humans grew food and ate it,” said Andrew Redleaf, 50, chief executive officer of Whitebox Advisors LLC, a Minneapolis hedge fund that manages $3 billion. “Now we are burning crops to make fuel.”

Whitebox bought three U.S. grain depots in the past year to profit from the growth in demand.

Updated Forecast

Farmers will have to increase planting of corn for ethanol by 43 percent to 30 million acres by 2015 to meet the government’s requirements, said Bill Nelson, a vice president at A.G. Edwards Inc. in St. Louis. This year, growers outside the Midwest are focused on more profitable crops such as soybeans and wheat, the USDA said today in a crop forecast.

Corn planting will fall 3.8 percent this year to 90 million acres as farmers sow 12 percent more land with soybeans and 6 percent more with wheat, Joe Glauber, USDA acting chief economist, said today at the department’s annual conference in Arlington, Virginia. The USDA said Feb. 8 that world corn reserves would drop for the seventh year in the past eight.

Increased planting has caused some fertilizer costs to double. Diammonium phosphate, a nutrient used on corn fields, reached $792.50 a ton on Feb. 15 from $297 a year earlier, USDA data show.

Greenhouse Gases

Researchers led by Timothy Searchinger at Princeton University said their study showed greenhouse-gas emissions will rise with ethanol demand. U.S. farmers will use more land for fuel, forcing poorer countries to cut down rainforests and use other undeveloped land for farms, the study said.

Searchinger’s team determined that corn-based ethanol almost doubles greenhouse-gas output over 30 years when considering land-use changes. Bob Dinneen, president of the Renewable Fuels Association in Washington, said the study used a flawed model and overestimated how much land will be needed.

Ethanol is important in reducing emissions, ending energy dependence on the Middle East and creating jobs in rural areas, Dinneen said today at the USDA conference.

“There are still some who want us to choose between food and fuel,” said Dinneen, whose organization represents ethanol producers including Archer Daniels Midland Co. “I don’t think we have to choose.” Research shows cellulosic ethanol made from grasses and crop waste may contribute 21 billion gallons by 2022, and farmers will be able to boost yields, he said.

Food Costs Rise

U.S. food costs, which account for about a fifth of the consumer-price index, rose 0.7 percent in January, the Labor Department said Feb. 20. They will increase as much as 4 percent this year, Glauber said in remarks at the forum.

“Food prices through 2010 will rise greater than the overall inflation rate,” because of rising energy and commodity costs, he said.

Ethanol’s contribution to inflation is limited, USDA economist Ephraim Leibtag said in an interview. A 50 percent jump in corn prices in 2007 from the 20-year average only added 1.6 cents to the cost of an 18-ounce box of Kellogg Co. Corn Flakes cereal, Leibtag said. The cost is less than 2 percent per box, JPMorgan Chase & Co. estimates.

Ethanol’s boom helps restrain government spending on farm subsidies, said House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat. The USDA expects taxpayers to spend $941 million on the two main subsidy programs tied to price this year, down from $9.1 billion in 2006.

Smithfield, Tyson

For food companies, demand for ethanol translates into lower profits and job cuts.

Smithfield Foods Inc., the largest U.S. hog producer, said Feb. 19 it will cut output by as much as 1 million animals a year, or 5 percent, because feed costs are too high. The company is based in Smithfield, Virginia.

Tyson Foods Inc., the largest U.S. meat company, forecast an increase in grain costs this year of more than $500 million. Springdale, Arkansas-based Tyson also reported a 40 percent drop in first-quarter profit and said it will close a beef plant in Kansas, firing 1,800 workers.

Ethanol “has caused a domino effect,” CEO Richard L. Bond said in a statement Jan. 28. “For the foreseeable future, consumers will pay more and more for food.”

To contact the reporter on this story: Alan Bjerga in Washington at abjerga@bloomberg.net.

Last Updated: February 21, 2008 19:32 EST

The intricacies of art investing

A question from Askville:

Everyone dreams of being the first to recognize the genius artist before he or she hits it big. Wouldn’t it be great to buy his or her work at a time when it is still affordable? Do you know someone who is living in obscurity now, but is a future Van Gogh? If so, who and why? Link to examples of his or her work if possible.

Trying to find the next van Gogh will get you nowhere. Art investing is all about diversification and risk control. To diversify, you need to be able to hold a large number of pieces (a hundred is a good starting point) for extended periods of time. To control the risk of buying worthless art, you should avoid buying art from artists (unless you are an expert) and only buy art that already found its way to the auctions (or combine the best of both worlds and buy art from artists whose other works have been auctioned before). This said, you should avoid buying through major houses, Sotheby’s and Christie’s (other things being equal, an item sold through a major house sells more expensively), while making every effort to sell through the major houses.

What is search engine optimization?

A question from FunAdvice:

What exactly is seo or search engine optimisation.Is it just link building or does it go to higher levels of website optimisation?

Search engine optimization is a process of making a site’s content easier for search engines to understand, index, and rate. A SEO effort would usually involve making sure that all pages have unique and descriptive <title> tags and relevant <meta> tags, that headings are tagged as such (i.e., using <h1><h6> tags rather than styled paragraphs), that all images have descriptive “alt” attributes, etc. Sometimes, large portions of content are rewritten entirely to include certain keywords and/or statistically improbable phrases.

There’s also a different kind of “SEO”, which can be undertaken separately or in conjunction with the above. Multiple ghost sites are set up to do nothing but to point to pages on the site being “optimized” in an attempt to bring up its page rating (pages to which other pages refer are rated higher).

Preventing SQL injection in PHP

A question asked privately:

What techniques can be used to prevent SQL injection?

There are at least two.

A newer and more radical one is to prepare SQL statements for execution.  This used to be one of functionalities implemented in database abstraction layers, but now it is available in the MySQLi (MySQL improved) extension.  See documentation for mysqli_prepare().

An older and more ad-hoc technique is putting all user input through mysql_real_escape_string() before including it in a query.  When using this approach, it’s important to check for the value of the magic_quotes_gpc configuration directive and process the input accordingly.  Here’s a possible way to do it:

function db_defuse($arg) {
  if (get_magic_quotes_gpc()) {
    return mysql_real_escape_string(stripslashes($arg));
  } else {
    return mysql_real_escape_string($arg);
  }
}

Usage example:

$u = db_defuse($_POST['user']);
$q = "SELECT * FROM users WHERE user = '$u'";
$r = mysql_query($q);

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Dani Rodrik is surprised…

Dani Rodrik writes:

In economics we think that happiness increases with lifetime wealth, albeit at a decreasing rate. But recent research on happiness fails to show a steep gradient between incomes and self-reported life satisfaction. But this work has typically focused on rich countries. In a recent paper, Angus Deaton uses Gallup poll data for a large number of countries and uncovers–to my surprise, at least–that people in poor countries are indeed less “happy” on average than people in rich countries.

Here is the relationship, broken down by age group.

Income and Happiness

So much for the romantic idea of the poor but happy peasant, in communion with his natural environment…

But note also some of the interesting anomalies. For example, Indians are a lot happier than the Chinese, despite having lower incomes on average. Maybe the influence of all those Bollywood movies? And Pakistanis are significantly happier than either. One wonders what they are on.

Validating an IP address in PHP

A question asked privately:

How can I validate a user-submitted IP address ?

One approach is to offload the validation burden to the ip2long() function:

function isValidIPAddress ($ip) {
  $long = ip2long($ip);
  if (($long == FALSE) or ($long == -1)) {
    return false;
  } else {
    return true;
  }
}

The problem with this approach is that ip2long() will consider an incomplete IP address (such as 192.168.0) to be valid. If this is not acceptable, there’s an alternative:

function isValidIPAddress ($ip) {
  $segments = explode('.', $ip);
  if (count($segments) <> 4) {
    return false;
  }
  foreach ($segments as $segment) {
    if (!is_numeric($segment)
         or ($segment < 0)
         or ($segment > 255)) {
      return false;
    }
  }
  return true;
}

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The longest aircraft in the world?

A question from FunAdvice:

can some one tell me which is the longest aircraft in the world? is it airbus 340-600 (OR) is it boeing 777ER? or is there any other aircraft longer than these two?

Depends on how you define aircraft…

If you’re only interested in heavier-than-air, the longest aircraft is Airbus A340-600; it is 247 ft (75.3 m) long:

A340-600

Boeing 777-300 and Boeing 777-300ER are slightly shorter, 242 ft 4 in (73.9 m):

Boeing 777-300

But zeppelins used to be much longer than that. The Hindenburg, for example, was 804 ft (245 m) long:

The Hindenburg