The global war that no one is talking about

A combination of higher wages and lower rise in prices of consumer durables is spurring demand for white goods. As highlighted in a Crisil report, discretionary spending grew to Rs 24,000 in 2009-10 from Rs 14,000 in 2004-05. This is a growth of over 11% per year, and higher than inflation which rose about 6% per year over the same period. So clearly higher affordability has fuelled more spending. 

But is rise in wages the only factor that can be relied upon for higher growth in these regions? Indeed, not. While it is certainly an important factor, over a period of time adequacy of infrastructure will be the key point that will drive the growth of such goods. Take power for instance. Many states in the country are deprived of power and lack of electricity is not going to create demand for white goods even if incomes of people in rural areas of those states are higher. Similar is the case for automobiles. While tremendous growth potential exists, unless focus is laid on developing road network in rural regions, demand for vehicles will remain lukewarm at best. So we are back to square one. This means that  ramping up infrastructure will have to be the government's key priority if India's growth has to reach the next level.

Garnering and harnessing talent has always been a major issue for corporates. But now it seems that labor imbalance is likely to further exacerbate this situation. By labor imbalance we mean differences in the ratio of skilled and non-skilled labourers. In early 80s when industrialization erupted, many unskilled nonfarm jobs were created. Along with that many high wage jobs were also created. True that the ratio of skilled to unskilled workers was not in unison then. But it provided enough opportunities for both sets of workers. 

However, as per the new study of Mckinsey Global Institute (MGI), the world might witness a huge labor imbalance in the future. It says that by 2020, developing economies will face shortfall of 45 m workers with secondary school educations. On the other hand, in developed economies about 95 m people will lack the necessary skills for employment. 

As far as India is concerned, it is believed that it will have very limited opportunities for low skilled workers. While labor markets may adjust to these gaps it could have serious repercussions in the near term. It could lead to higher levels of unemployment. Income inequality could also gain prominence. Perhaps the policy makers should provide a framework to avert such talent tensions in future. 

How Does Google Make Its Money?

How does Google (Nasdaq:GOOG) make money? No less an authority than the company's CEO posed the question, hopefully rhetorically, in a recent letter to shareholders. 

Or as the company's annual report succinctly puts it, "We generate revenue primarily by delivering relevant, cost-effective online advertising." 

There was a time, not that long ago, when Northern Light and Ask Jeeves were the default search engines of choice for many people. But within a couple years of its 1998 incorporation, Google went from a burgeoning upstart company to verb status - almost a genericized trademark. How did this happen? 

In a word, AdWords. In some respects Google is essentially the world's largest bus shelter, deriving 96% of its revenues from ads. That's what separated a nascent early-2000s Google, known primarily as a search engine, from its competitors. Google's founders realized that if people were going to visit the site and enter a term in the search box, they wouldn't be landing on the subsequent page by accident. Thus they'd be motivated to buy a product from any advertiser sharp enough to place an ad there. 

How Google Profits Off YouSay you run a small company - a bakery located in Topeka, Kansas, for instance. It's safe to say that people who would Google the words "Topeka" + "bakery" would likely patronize your business. Buy an ad on a page that'd be visited only by people who are looking for a Topeka bakery, and you're targeting about as accurately as it's possible to target a potential clientele. 

From a Google customer's perspective (defining a customer in the traditional sense, as someone who gives the company money in exchange for its service), this is a proposition with little risk. AdWords typically operates on a cost per click basis, meaning that an advertiser can place an ad with zero obligation. If no one clicks on the ad, the customer doesn't pay a dime. 

A Revolutionary Business Model
The traditional advertising media - radio, television, newspapers et al. - were and are incapable of drawing a distinction between patrons looking to generate traffic, and those looking to make the public aware of their brand. A static general-purpose ad can't tell who's actively in the market for whatever product it's selling, and who's just passively sitting there. To accommodate the latter - people who aren't ready to buy, but who might otherwise keep your competitors top-of-mind - Google lets you pay per impression. That means that the moment a Google user accesses a page on which an ad appears, Google charges the company that placed the ad. Which also literally doesn't cost a dime, but that's a function of the small amounts involved. A typical such agreement allows several views of your ad for less than a penny. 

From the perspective of Google's shareholders, it gets even better. This is all based via auction. Would-be buyers of AdWords bid for the right to use a particular ad, or phrase. Overpay, and Google enjoys a high markup. Underbid, and you risk losing the auction to a more motivated seller. 

But Wait, There's More
But AdWords is only one prong of Google's dual revenue strategy. A related and similarly named but different service is AdSense. 

Rather than having ads appear on search pages accessed upon visiting Google.com, AdSense allows owners of other websites to join Google's network and run Google-branded ads. Google's algorithms do all the work, too. Sign up for the network and your website devoted to Bikram yoga might end up running ads for mats, props, etc. Companies that pay Google to run those ads indirectly benefit site owners who use AdSense.

According to Google's income statement, about 70% of its advertising revenues come from AdWords, the rest from AdSense. 

What makes Google's success so remarkable is that so much of this is accomplished without contracts. The company derives almost all of its revenue on at at-will basis. As Google's own annual report states, "Our advertisers can generally terminate their contracts with us at any time."

While 96% of Google's revenue comes from advertising, the company is so big that that still leaves $1.5 billion unaccounted for. Again, quoting Google's annual report, "[Google] derive[s] most of [its] additional revenues from [its] enterprise products, as well as [its] display advertising management services to advertisers, ad agencies and publishers." Google might have started off (and be primarily identified) as exclusively about search, but its size has allowed it to aggressively buy up companies that stray from the advertising-heavy business model. Google's largest purchase was its 2011 purchase of Motorola Mobility, maker of phones and holder of various valuable patents. Products Motorola Mobility manufactures include the Droid RAZR, Droid Z and various other phones and tablets. 

The Bottom Line
Every other service Google offers - from Maps to Earth to Gmail to Docs to Drive - exists to further the primary business. Those services were expensive to create and require great resources to maintain, but for the result - having users spend more time on Google and thus perpetuate reading and clicking on Google ads - it's money well spent. 

At the time of writing, Greg McFarlane did not own any shares in any company mentioned in this article.

Read more: http://www.investopedia.com/stock-analysis/2012/what-does-google-actually-make-money-from-goog1121.aspx#ixzz2DAjIs65G

5 Economic Concepts Consumers Need To Know

An understanding of economics isn't seen to be as vital as, say, balancing a household budget or learning to drive a car. However, economics has an impact on every moment of our lives because, at its heart, it is a study of choices and why and how we make them. In this article, we'll look at some basic economic concepts that everyone should understand. (The concept of elasticity of demand is part of every purchase you make. Find out how it works. Check out Why We Splurge When Times Are Good.)

TUTORIAL: Microeconomics 101

Scarcity
You implicitly understand scarcity, whether you are aware of it or not. It is the most basic concept in economics, and is more of a solid fact than any abstraction. Simply put, the world has limited means to meet unlimited wants, so there is always a choice to be made. For example, there is only so much wheat grown every year. Some people want bread; some people want cereal; some people want beer, and so on. Only so much of any one product can made because of the scarcity of wheat. How do we decide how much flour should be made for bread? Or, more importantly, how much beer to make? One answer is a market system. 
 

Supply and DemandThe market system is driven by supply and demand. Take beer again. Let's say people want more beer, meaning the demand for beer is high. This demand means you can charge more for beer, so you can make more money on average by changing wheat into beer than grounding that same wheat into flour. More people start making beer and, after a few production cycles, there is so much beer on the market that prices plummet. Meanwhile, the price of flour has been increasing as the supply shrinks, so more producers buy up wheat for the purpose of making flour - and on, and on.

This extreme and simplified example does encapsulate the wonderful balancing act that is supply and demand. The market is generally much more responsive in real life, and true supply shocks are rare – at least ones caused by the market are rare. On a basic level, supply and demand helps explain why last year's hit product is half the price the following year. 

Costs and Benefit
The concept of costs and benefits encompass a large area of economics that has to do with rational expectations and rational choices. In any situation, people are likely to make the choice that has the most benefit to them, with the least cost, or, put another way, the choice that provides more in benefits than it costs. Going back to beer, the breweries of the world will hire more employees to make more beer, only if the price of beer and the sales volume justifies the additional costs to the payroll and the materials needed to brew more. Similarly, the consumer will buy the best beer he or she can afford, not, perhaps, the best tasting beer in the store. 

This extends far beyond financial transactions. University students perform cost benefit analysis on a daily basis, by focusing on certain courses that they believe will be more important for them, while cutting the time spent studying or even attending courses that they see as less necessary. 

Of course, everyone knows someone who has seemingly made a poor life choice. Although people are generally rational, there are many, many factors that can throw our internal accountant out the window. Advertising is one that everyone is familiar with. Commercials tweak emotional centers of our brain and do other clever tricks to fool us into overestimating the benefits of a given item. Some of these same techniques are used quite adeptly by the lottery, showing a couple sailing a yacht and enjoying a carefree life. This image and its emotional message ("this could be you") overwhelm the rational part of your brain that can run the very, very long odds of actually winning. Cost and benefits may not rule your mind all the time, but they are in charge more than you think - especially when it comes to the next concept. (This free thinker promoted free trade at a time when governments controlled most commercial interests. Check out Adam Smith: The Father Of Economics.)

Everything Is in the IncentivesIncentives are part of costs and benefits and rational expectations, but they are so important that they are worth further examination. Incentives make the world go round, and sometimes go wrong. If you are a parent, a boss, a teacher or anyone with the responsibility of oversight, and things are going horribly awry, the chances are very good that your incentives are out of alignment with what you want to achieve. 

We'll take a safe example, however, of – you guessed it – a brewery. This particular brewery has two sizes of bottle: one 500ml bottle and a 1L bottle for couples. The owner wants to increase production, so he offers a bonus to the shift that produces the most bottles of beer in a day. Within a couple days, he sees production numbers shoot up from 10,000 bottles a day to 15,000. However, he is soon deluged with calls from suppliers wondering when the shipments of the 1L bottles are going to come. The problem, of course, is that his incentive focused on the wrong thing – the number of the bottles rather than the volume of beer – and made it "beneficial" for the competing shifts to cheat by only using the smaller bottles. 

When incentives are aligned with organizational goals, however, the benefits can be exceptional. Some incentives have been proven so effective that they are common practice at many firms, such as profit sharing, performance bonuses and employee shareholding. However, even these incentives can turn disastrous if the criteria for the incentives falls out of alignment with the original goal. Poorly structured performance bonuses, for example, have driven many a CEO to take temporary measures to juice the financial results enough to get the bonus – measures that often turn out to be detrimental in the longer term. 

Putting It All Together
Scarcity is the overarching theme of all economics. It sounds negative, and it is one of the reasons economics is referred to as the dismal science, but it simply means that choices have to be made. These choices are decided by the costs and benefits that impact the choice, leading to a dynamic market system where choices are played out through supply and demand. On a personal level, scarcity means that we have to make choices based on the incentives we are given and the cost and benefits of different courses of action. This is a very broad look at what is, believe it or not, a very compelling subject. These concepts feed into others, like comparative advantage, entrepreneurial spirit, marginal benefit and so on. The world is wide with choices, so the field of economics is wide with theories, laws and concepts that explore those choices. 

Conclusion
These concepts aren't powerful laws that force human interactions into preset patterns. Rather, they are a recognition of the patterns that emerge from hundreds, thousands, millions and billions of individuals making choices with the information they are given. While knowing these concepts may not allow you to fundamentally change the world, it will help explain a lot. (Discover the theories that shaped the way we've come to understand economics. Refer to The History Of Economic Thought.)

Read more: http://www.investopedia.com/articles/economics/11/five-economic-concepts-need-to-know.asp#ixzz2DAi0p2vT

Now Moody's downgrades France

It doesn't feel very good when your teacher gives you a lower grade in school than what you got previously. This is exactly what a certain European nation must be feeling right now. France is the latest nation to face the humiliation of a debt downgrade. Credit rating agency, Moody's recently downgraded France's credit rating from Aaa to Aa1. The agency cited three main reasons. These include a weak long-term economic growth outlook, uncertain fiscal outlook and inability to withstand further shocks within the zone. The nation has seen a sustained loss in economic competitiveness and structural rigidities don't help matters much. France also doesn't have access to a national central bank for debt financing in the event of a market disruption. Given the current negative outlook on the nation's sovereign rating, an upgrade is unlikely over the medium term. However if France successfully implements reforms and fiscal measures, this may strengthen growth prospects. The protracted Euro debt crisis needs a resolution. Soon.

Why private sector investments stay away from power

Shortage of funds, uncertainty about fuel supplies and limited scope for tariff revisions. All these bottlenecks have ensured that critical private sector investments stay away from power sector. The result being that not just power generators but also power equipment makers like BHEL suffer. Bharat Heavy Electricals Ltd (BHEL) has an order book of nearly 55,000 MW. But according to the PSU, commissioning of new projects is a problem. As reported by Business Line, the chief of BHEL believes that lack of private sector investments in the power sector is a huge problem. Number of pro jects that were in the pipeline earlier are now getting stalled. Problems of NPAs from state electricity boards (SEBs) have also made banks wary of lending to the sector. During 2008-2010, tenders for more than 30,000-40,000 MW were floated. The same shrunk to just 4,000 MW in 2011. The sector has thus become a black box for suppliers, vendors, consumers and investors alike. Without any clarity in reforms, the deterioration in the sector's prospects could deal a heavy blow to the economy.

European Commission cuts growth forecast

The crisis in Europe does not appear to be easing off any time soon. As a result, the European Commission has cut its 2013 growth forecast for the zone. The Commission now expects the Euro zone to grow at a meager rate of 0.1% as opposed to the May 2012 estimate of 1%. Several things have triggered this downward revision. The worsening conditions in countries like Spain and Greece. Deficit triggered slowdown in the comparatively developed France. Even the performance of Germany has come under the clouds. It should be noted that Germany is largely dependent on exports to drive its economic growth. As the crisis has continued to bite away into the Euro zone, Germany has become less resistant to the troubles of the southern parts of Europe. Consequently the growth estimate of the zone's largest economy was revised down from 1.7% to 0.8%. The Euro zone's troubles stem from the huge mountains of debt that its countries have amassed. Though the region has undertaken numerous bailouts, things have not really improved. Germany has come to realize that bailouts are more of a short term fix. Euro zone needs a long term solution. Otherwise even the 0.1% growth estimate may be a little too optimistic.

China's gold demand

We know that China is the largest consumer for a range of industrial commodities like iron, copper, coal etc. However, its love for the yellow metal is unknown. Fathom this. In this year, China's gold demand is expected to grow 1% to 860 tonnes. This would effectively mean that China will overtake India as the world's biggest consumer of gold. As per consultancy firm Thomson-Reuters, China's jewellery demand will be at 520 tons while investment demand is expected to be at 270 tons for the year. The balance 70 tons will come from industrial consumption. It may be noted that in 2011, China's mine output was just 371 tons. So, effectively, China imports a lot of gold to satisfy its domestic demand. And increasing demand from China this year means that the gold prices are likely to stay firm. While the record high of $1,920 per ounce is still far away, the China factor may well see the same being breached soon

Why do Japanese stocks trade at such a huge discount?

For the investing community as a whole, Japanese equities have indeed been a conundrum. Here we have one of the most developed markets in the world. But with valuations that are nearly half of a typical developed country. A recent article in The Economist would perhaps help throw some light. Apparently, the President of a leading Japanese firm was sacked last year. And if you thought he might have committed some fraud, you can't be more wrong. His only fault was that he helped uncover an accounting fraud to the tune of US$ 1.7 bn. But when the truth came out, the board kept their jobs and the whistleblower lost his. Such hand-in-glove relationship of the institutional shareholders with the board of companies is the rule rather than exception in Japan. What more, even the proposal of having independent directors on the board is fiercely opposed every time it crops up. With so much bureaucracy, it is certainly not surprising that attention to shareholder wealth creation gets thrown out the window. It would be an understatement to say corporate governance in Japan needs some serious overhaul. Till then, its equities may continue to be more of a value trap than value buying opportunity we believe.