I came across the following article in CFO magazine last night (see Ports in a Storm). The article details how applications have been picking up at business schools over the past year, and how such a stylized fact hints at an economic slowdown.

Anyone wanting further proof that the world economy is in trouble need look no further than the nearest business school. Many schools are hailing a bumper year for their full-time Master of Business Administration (MBA) programmes, which are popular with executives looking to hone their moneymaking skills while sitting out a downturn.

…Preliminary figures from the Graduate Management Admission Council (GMAC), an international organisation of business schools, show that 77% of full-time programmes have reported higher demand for places this year.

Applications to full-time MBA programs generally run counter-cyclically with the economy. In good times, fewer folks want to go back to school because there is ample opportunity to make good money, and leaving money on the table can be difficult. In fact, I remember during the dotcom boom that MBA students were dropping out of school in droves to open e-businesses that promised to make them rich. We all know how that turned out.

In bad times, people go back to school not only because their earning potential is lower, but also because many find themselves out of work, and with few alternatives. Going back to school allows students to wait out the economy.

But it would be wrong to look at a boom in applications and assume that it translates into a boon to the bottom-line. Although full-time applications tend to go up during economic downturns, other B-school offerings suffer - e.g., part-time MBA, executive MBA, and executive education programs.

During recessions, businesses reign in discretionary spending. One easy way for businesses to decrease costs is to eliminate spending on educational benefits for employees. Businesses often sponsor candidates for part-time and executive MBA degrees. And corporations are prime clients for custom executive programming. These lines of business (part-time, executive MBA, and exec ed) are generally more profitable for business schools than full-time MBA programs.

I anticipate corporate funding for these programs will dry up.

And although applications were up for most business schools this past year, it is likely that they will continue to increase in the coming years. As the article explains:

Worryingly for those betting on a swift economic recovery, business schools reckon that next year could yield an even bigger crop of applicants.

This does not bode well for our economy.

I apologize in advance if this post is a little wonkish, but I thought it was an issue important enough to warrant comment. I promise to return to my usually un-wonkish ways in future posts.

Myles Shaver and I wrote a paper several years ago in which we questioned the usefulness of a particular ratio - export intensity (click here for a copy of that paper). Export intensity is simply a ratio of export-to-total sales (expressed formally as export sales divided by total sales, where total sales is domestic sales plus foreign sales). Export intensity, you see, has become one metric by which researchers gauge the export performance of a firm. Our objection to this measure was that when export intensity increases, it can be difficult to determine whether that happens because export sales increase, domestic sales decrease, or some combination of the two (by mathematical construction, both end in the same result). Moreover, because export and domestic sales are interrelated, we must consider their joint impact on each other rather than artificially hold one (e.g., domestic sales) constant.

This is but one example of how ratios make inference difficult. Robert Wiseman (Michigan State University) excellently summed up a broad class of problems with ratios in a working paper entitled “Making Researchers out of Monkeys: On the Misuse of Ratios in Management Research” (contact Prof. Wiseman for a copy). In that paper he details how the use of ratios is not only controversial, but can also lead to statistical estimation and inference problems.

Which brings me (in a long-winded way) to what I want to write about today - ratios used by analysts in finance. Specifically:

1. Price/Earnings - Share price divided by earnings per share

2. Price-to-Book - Share price divided by the book value of the firm

These ratios suffer similar shortcomings to those described above, yet analysts often treat them as if the denominator were fixed.

I’ve had enough of folks in the financial community parroting something to the effect, “Well, its price/earnings is historically low, so that makes this equity a good buy” or “It is trading at less than book value therefore the equity is undervalued.” If I had a dollar for every time I’ve heard something along those lines, I’d be wealthier than Bill Gates.

The real issue is not that the ratios are low, but why the ratios are low.

There are several plausible explanations. One is that the ratio is low because the numerator is low - the equity’s price, for whatever reason, is not in line with what the denominator suggests it ought to be - consistent with what the analysts would like to have you believe, or wish were true. Another is that the ratio is low because the denominator is too high - there are issues with earning estimates and/or the book value of the firm - inconsistent with the views of analysts that bandy this information about. (There are other reasons that these ratios might not be in line with their historical averages - e.g., as a result of structural shifts in the broader economy - but I will not address those here).

Let’s, for example, assume that the latter reason is the “correct” one - that the problem is actually one with the denominator. What then would this suggest? If that’s the case, then it’s not the price of the equity that’s wrong, but rather, estimates of earnings (whether current or forward) that are erroneous. Likewise, it could be that book value is off.

This is not implausible (especially in times such as we are currently living). Don’t forget that many of the same folks who tell us that P/E ratios are low are also those who estimate earnings. Analyst estimates of earnings are notoriously sketchy, either as a result of predictable bias, or simple miscalculation (see Lim, 2001 JOF). Moreover, my hunch (although I can’t provide a cite to any concrete research off-hand) is that analyst estimates of earnings become noisier at economic inflection points.

Book value is not a given either. Book value is simply the best accounting estimate of the value of assets. Who’s to say that the accountants have it right? Let me provide an example - that of banks during the credit crisis. Banks have a book value. It is simply the fair value of the assets that they hold. But we’re really not sure of the “true” value of those assets to the firm unless they have a liquid and transparent market, or until they are sold. So with respect to the stated book value of a bank - does it truly represent the value of those assets, or is it an estimate that could be off? As we’ve learned with many banks over the past year, that value could be off quite significantly. So then if we observe a low price-to-book ratio, it could simply be that the denominator is off - that the assets of the firm are not accurately valued.

Low P/E ratios and low price-to-book ratios are certainly informative, but sometimes not in the way most analysts implicitly assume. It doesn’t necessarily indicate that the equity is undervalued. Rather, price could be the fixed parameter - acting as a signal that earning estimates and/or book values are too high.

Message to analysts: Denominators matter too!

So the next time you hear analysts extol the virtues of a particular equity for the reasons stated above, don’t accept their opinion blindly. Instead of buying their thesis, be sure to seek out the underlying cause for the drop (or rise) in those ratios.

A nice article appeared in the Washington Post yesterday detailing the difficulty that graduates from the Class of 2008 have been having finding employment (see Graduates’ Job Hunts: Majorly Frustrating). In that article, Nancy Trejos follows the plight of several recent graduates, all of whom are either unemployed or underemployed.

During robust economic times, college students in undergraduate and graduate school programs would easily get multiple offers. As the economy teeters on the edge of recession, college graduates this year face a tough job market, leaving many without work in their fields or doing jobs that people without college degrees can do…

I do not dispute that recent graduates are having difficulty finding employment. In fact, I wrote about that several months ago (see Job Prospects for B-school Grads). My point back then was that although those who graduated without a job (those who were not fortunate enough to lock-in early in the hiring season) were certain to encounter difficulty; in the aggregate, graduates from the Class of 2008 did not have it all that bad.

Most of the problem for recent graduates will come in the form of underemployment versus unemployment. For example, as the article details:

Paul Harrington, an economist at Northeastern University, also found that about 38 percent of young college graduates are “underemployed,” or doing work for which they are overqualified.

“It’s a loss of resources. It’s a social loss. These are bright people who could be engaged in more productive activities but . . . we haven’t figured out how to move them into productive activities,” he said. “That’s the tragedy of a recession.”

That is a prescient comment, and in my opinion “underemployment” will most likely plague 2008 graduates, …for a few years at least.

But again, all things considered, given what the economy has endured, that isn’t the worst of fates. At the least, employers still seemed to be hiring last year.

Employers were expected to increase hiring 8 percent for the class of 2008, sharply below the 17.4 percent surge for the class of 2007.

So if you think the 2007-2008 academic year was bad, just wait until the 2008-2009 year, when the year-over-year hiring rates will likely decrease. In my opinion then, prospects for the Class of 2009 look particularly grim. And unfortunately, we ain’t seen nothin’ yet…

Last night I stumbled across a WSJ article reporting that Google is planning to open a venture capital arm (see Google to Extend Reach with Venture-Capital Arm). Who better to comment on Google’s plans than Gary Dushnitsky, one of the foremost scholars on corporate venturing. Gary is a friend and colleague from Wharton; and given his expertise, I asked him to share his thoughts as a guest blogger. Hope you enjoy his perspective. I’m hoping he will chime in from time to time with commentary on strategy, entrepreneurship, and related topics.

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Today’s news (July 31, 2008) suggest that Google is the latest company to join the Corporate Venture Capital (CVC) club. The practice of minority equity investment in entrepreneurial ventures has been around since the 1960s. Corporate venture capital, however, might be remembered by most as a curiosity of the late 1990s, when many leading corporations (Dell, Microsoft, and Lucent to name a few) entered only to fold their venturing units a couple of years later. Yet there are also anecdotes to the contrary. Intel (Intel Capital) has been a major player in the venture capital space for many years, as has Motorola (Motorola Ventures), Johnson & Johnson (JJ Development Corporation) and even the Central Intelligence Agency (IN-Q-Tel).

The (yet unconfirmed) news from Mountain View, CA are even more surprising when one takes into account another bit of news from earlier this year. In March 2008, KPCB launched iFund, a $100M fund dedicated to investing in “…market-changing ideas and products that extend the revolutionary new iPhone and iPod touch platform” (see here for details). The interesting observation is that Apple chose not to pursue this line of investment via corporate venture capital. Moreover, Apple is not a limited partner in iFund. Apple’s actions are somewhat surprising given that (a) it sits on large cash reserves upwards of $10B, and (b) it had experience with CVC investing in the past.

There are many issues one has to consider when structuring a CVC program. Google might have a head start on some of these issues, such as gaining traction with the venture capital community, and carefully managing relationship with entrepreneurs. However, internal issues often prove the most taxing. The topic of compensation, for example, tends to be highly contentious. Independent venture capitalists stand to make millions through ‘carried interest’ (i.e., keeping about 20% of the profits). Traditionally, the compensation package of CVC personnel follows corporate-wide policies – only a handful of CVC programs award ‘carried interest’ to their investment professionals. In a recent study with Professor Zur Shapira (Stern School of Business, NYU), we observe that the lack of ‘carried interest’ is prevalent among CVC programs and critically affects the investment practices they undertake [Dushnitsky and Shapira. 2008. “Entrepreneurial Finance Meet Corporate Reality: Comparing Investment Practices by Corporate and Independent Venture Capitalists,” Academy of Management Best Paper Proceedings].

Whether ‘Google Ventures’ is a good idea or not – only time will tell. The evidence, however, suggests that there is room for cautious optimism. I conducted a comprehensive study of strategic value of CVC investment along with Professor Michael Lenox (Darden School of Business, UVA). We analyzed the innovation output of 247 CVC investing firms, and compared it to that of their industry peers. The results indicate that corporations investing in CVC experience greater patenting output [Dushnitsky. and Lenox. 2005. “Corporate Venture Capital and Incumbent Firm Innovation Rates” Research Policy, 34(5):615-639]. In a related study, we explore the overall financial benefits to the parent corporation. Analyzing the same data, we find that CVC-investing firms exhibit higher Market-to-book value, in comparison to industry peers. The premium, however, is experienced solely by strategically-oriented CVC programs while financially-oriented programs experience a discount [Dushnitsky and Lenox. 2006. “When Does Corporate Venture Capital Investment Create Firm Value?” Journal of Business Venturing, 21(6): 753-772].

The adage goes “If you cannot beat them, join them.” In our entrepreneurial, innovation-driven economy Google is clearly heeding the call. Will Brin, Page, Drummond, and Maris be able to claim “Veni, Vidi, Vici?” That all depends on “How the group will be structured and what sort of investments it is likely to target,” which according to the WSJ still “remain unclear.” Hopefully we will not have to wait 7 years to find out…

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Gary Dushnitsky is an Assistant Professor, and the Goergen Fellow, at the Wharton School (University of Pennsylvania). You can find a biography and his research papers on his website.

Last night I read an article about the difficulty students are having borrowing money to fund their education (see No Funds to Lend to 40,000 Students). This is not a new story. Bernanke testified on the topic back in February (see Bernanke on Student Loans). There have even been ongoing conversations on the topic at my institution for the better part of eight months now. But this is the first I’ve heard of the crunch putting students at immediate risk for the upcoming semester (which starts in as little as 5 weeks).

According to the Boston Globe article:

The Massachusetts Educational Financing Authority yesterday said it will not be able to provide student loans this fall for the first time in its 26-year history, leaving more than 40,000 families without an important source of tuition funds just weeks before college classes begin.

“As a result of our problems and the continued dislocation of the capital markets, we have been unable to raise funds for the coming academic year,” said Thomas M. Graf, the authority’s executive director.

Across the country, more than 50 lenders have stopped making federal or private student loans this year, largely because of the turmoil in the nation’s credit markets that began with the subprime mortgage crisis last summer.

This news saddens me. I am saddened that the financial crisis has had such extensive a reach that financial institutions are not able to fund one of our nation’s most valuable investments - education. I am also saddened that otherwise qualified students, who might not be able to afford the substantial costs of tuition on their own, may be forced to accept uncompetitive loans at very high rates, or in the extreme, forced to sit out of school until the economy improves.

I have one proposal.

Since many universities have amassed fantastic endowments (see Wikipedia on Endowments), now might be the time for them to tap those endowments to make loans on a temporary basis (until conditions improve) to their own students. Now there are obviously large disparities across universities in their endowments; however, I suspect that many universities are in a position to support such programs. After all, it would not represent a pure expense for the school (in the form of a non-repayable grant), but rather, an investment with a potentially healthy return.

My wife and I had dinner over the weekend with some close friends who were visiting from Washington DC. One of our friends just so happens to be Chief of Staff for a U.S. Congressman. He was interested in my views of the financial crisis, and the conversation quickly turned to the recent SEC-imposed ban of naked short-selling on a host of financial institutions (see SEC Restricts Shorting 19 Financial Stocks for background).

My friend and I agree on many issues. This was not one.

It is his view (and by extension, that of his boss) that short-sellers (UPDATE FOR CLARITY: He meant short-sellers in general, naked or otherwise) are to blame for much of the ills that have befallen U.S. banking stocks. He believes that by talking their books, hedge fund managers have effectively caused runs on banks. Moreover, he suggested that rumors passed from fund managers to CNBC, then reported on CNBC as fact (even if only as “alleged” fact), exacerbate the problem.

C’mon now, are you kidding me???

As much respect as I have for this friend, who is quite intelligent, I think he’s misguided on this issue. Blaming short-sellers for the failure of banks is as ludicrous as blaming Charles Schumer for the failure of IndyMac.

It is not the short-sellers that have caused the problems, but the banks themselves for lending irresponsibly thereby impairing their own balance sheets. Short-sellers are simply calling it as they see it, making logical deductions from the information at their disposal.

Now this does not mean that there are not instances of fraud, and I agree that fraud and attempts at outright manipulation should be prosecuted to the fullest extent of the law. However, to make a well-reasoned case for why certain banks are not healthy (even if consistent with your underlying trading position) is not fraud. Concerns about the health of banks not only should be raised - they deserve to be raised. The public ought to know what professionals truly believe about a company, for good and for bad. And for whatever it’s worth, the short-sellers often have it right (see Nasty, Brutish and Short).

Short-sellers provide a vital service to the functioning of our capital markets. Restricting their behavior is not only myopic, but also raises questions about the legality of those restrictions, and the “fairness” of the system (see Naked Fear for a nice summary of key issues).

And the point about how information relayed by CNBC can lead to a run - again, who’s joking whom? By the time information is disseminated by CNBC, it’s old news.

If you truly want to know about the health of a bank, there are two places to look - its balance sheet (if you’re so inclined to pore over such minutiae) and/or the credit default swap market (as bond traders are fairly keen at evaluating the health of corporations).

For what it’s worth, the credit default swap market has recently been sounding the alarm over Washington Mutual (see WaMu: Liquidity Options Running Low, Credit Default Swaps on WaMu, Uninsured Depositors at WaMu Begging for Trouble, or Death Spiral Financing at WaMu), among others.

To my knowledge, there has been no run on WaMu yet reported by CNBC. But if WaMu were to fail, I would not be surprised.

And that would have nothing to do with this post.

I’m not much of a macro guy (my specialty is firm strategy), and I do not pay too much attention to oil prices. After all, I live in NYC, so I don’t drive all that much. Further, I rent, so I don’t have to think too much about the cost of heating, cooling, and powering my apartment.

Not only that, but in some ways, I would almost prefer oil cost $1,000 per barrel. I don’t mean to be cavalier about that. It’s not because I feel like we should stick it to the little guy, whose life depends so much on the availability, and use, of oil. I get that, and I understand how much strain high oil prices have caused to the economy. However, my view is that $1,000 oil would incentivize us to find an alternative to fossil fuels, …and quick.

My philosophical bent is that we need to find, and encourage, alternatives to fossil fuel-based energy, for the end of our dependence on oil (foreign or domestic) can’t come quickly enough. It is my hope that we can reverse the degradation that years of carbon pollution has caused to our environment for the sake of future generations.

Now you know my bias.

But given that information, what do I make of oil’s precipitous drop from nearly $150 to $120?

Frankly, I think many who have made inferences in the wake of oil’s drop have gotten it wrong. I’m tired of hearing what a wonderful thing it is for our economy that the price of oil has been going down - as if it will cure all our ills and will help us avert a recession. Analysts have used this to explain why the market has gone up in recent days. For example, as reported just yesterday by Yahoo! news (see Stocks Advance Following Sharp Drop in Oil Prices):

Investors expect that a sustained pullback in oil prices would give a crucial boost to the economy.

Hogwash!

People are confusing cause and effect. People are buying into the story that lower oil prices causes increased economic activity. In normal times, sure. I buy that. However, in my opinion, this is not what has caused oil’s recent slide, nor is it what will likely drive oil’s continued decline in price (barring escalation of geo-political tensions in Iran, Nigeria, etc.).

What has caused oil to tumble is a drop in demand. Plain and simple.

American consumers are obviously in a bad way (see Rising Household Debts, Defaults Straining US Economy). My view is that we are currently in recession. During recessions, demand for a whole host of goods drops, oil included. But now that much of Europe is in, or near, recession (see Roubini’s excellent post on Global Recession Watch), European demand for oil (and other goods) is waning as well. Add the double-whammy of recessionary US and European economies, and it becomes obvious why the price of oil has dropped.

So the erroneous inference is that decreased oil prices will lead to increased economic activity. The correct inference is that decreased economic activity has caused a drop in the demand for oil, which causes oil prices to drop.

The drop in oil prices is therefore neither good news for the US economy nor Europe’s economy; but rather, bad news that indicates just how fragile those economies have become.

I’ve never been fond of the distinction that folks make between Main Street and Wall Street, as if there were some actual divide between the “real” economy and the “financial” economy. My hunch is that the correlation between the performance of our financial institutions and the performance of our economy is fairly strong (and positive). And if anything, that correlation is becoming stronger as we move toward an increasingly service-based economy (with more than 80% of our economy now devoted to services).

Nevertheless, if there were ever a company that speaks to the general health of our economy, it is American Express. Amex is a consumer and business finance company, and scrutinizing the behavior of its customers can provide insight into the direction of the broader economy. So where the adage once was, “As General Motors goes, so goes our economy”, my guess is that could be changed to, “As American Express goes, so goes our economy.” After all, consumer spending accounts for something like 70% of GDP.

It is for this reason that I was troubled by the earnings presented by American Express (see American Express Falls), and also by subsequent comments made in the conference call.

Don’t get me wrong. I am not troubled by what Kenneth Chenault said. Just the opposite. I applaud him for being honest about current conditions. Rather, I was troubled by the content, and what it likely means for the U.S. economy.

As reported by Bloomberg:

American Express Co., the biggest U.S. credit card company by purchases, fell the most in New York trading since the Sept. 11, 2001, terrorist attacks after earnings missed analysts’ estimates and the lender withdrew its 2008 forecast.

Chief Executive Officer Kenneth Chenault said yesterday in a conference call that the business climate was “much weaker” than earlier this year and American Express was hurt in the second quarter by rising U.S. unemployment and falling house prices.

Moreover, as reported by Calculated Risk from Amex’s conference call (see here and here):

“Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades,” said Kenneth I. Chenault, chairman and chief executive officer. “Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations.“

“In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6 percent earnings per share growth. That outlook was based on business and economic conditions in line with, or moderately worse than, January 2008. The environment has weakened significantly since then, particularly during the month of June.”

“Over the past month or so, we have seen clear signs that the US economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades, and consumer confidence is at one of its all-time low points. Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.”

“Affluent customers in some situations are cutting back on discretionary spending…we’re seeing a slowdown in spend across the board…The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behavior. Not just as it relates to mortgages and home-related spending, but also across the full spectrum of the consumer economy…we now believe the economic weakness in the US will likely worsen throughout the remainder of the year…” (emphases added by Calculated Risk)

Given this information, my expectations are that the chances for a second-half rebound are extremely remote, irrespective of what happens to oil prices (see Mish’s excellent posts on Deflation here and here). Moreover, I now expect conditions similar to those experienced by Amex to spillover to a broader swath of corporations, …not limited to housing, finance, and consumer discretionary.

For me then, this news speaks to the breadth of impact that we should expect from this recession - on both Main Street and Wall Street. My call therefore is still for long-and-deep versus short-and-shallow.

One month ago, in reference to Inbev’s offer for Anheuser Busch, I wrote (see Ambush by Inbev?):

…no way, ain’t gonna happen.

It was my opinion that the proposed takeover of Anheuser by Inbev would not be a successful one. I had several reasons for such a view. First, I thought that the deal involved far too much debt (Inbev had proposed to put only around 13% down), and in the current credit environment I thought they’d have difficulty arranging the financing. Second, it was clear that top management, and certain members of the Busch family (including August Busch, the CEO) did not want AB to be acquired. It looked as if they would attempt just about anything to thwart the deal. And third, I felt that there were so many interested parties running interference (e.g., politicians, unions, consumers) that they would eventually scuttle any deal.

OK, so back to the present. On Monday, Anheuser Busch agreed to a $52 Billion takeover by Inbev (see Anheuser-Busch Accepts $52 Billion Inbev Offer). Boy was I wrong…

That’s ok though - I’ve been wrong before and I’m certain I’ll be wrong again. However, as I mentioned in a follow-on post last week (see Inbev and Anheuser: Cooler Heads Prevail), I thought it was great news that executives at AB agreed to discuss the deal with Inbev. They finally put the interests of the shareholders before their own. As I also mentioned in that post, I have an inkling that Adolphus Busch IV (uncle to August Busch) had a little something to do with AB’s change of heart.

Now that the two parties have reached an agreement in principle, the deal is still not quite out of the woods. It must go through the regulatory channels to receive approval. But at this point, with the support of AB, I think that the Anheuser Inbev deal is likely to get the go-ahead.

Assuming that they do get the go-ahead, the issue then becomes: Will this acquisition work?

According to Bloomberg, Inbev will finance the purchase with $45 Billion in debt (see Inbev May Raise $4.6 Billion). That’s a whole heck of a lot of debt, leaving them little margin for error, and likely forcing them to dispose of assets to raise capital (most likely the theme parks).

The St. Louis Post-Dispatch had a nice article on some of the other cost-saving measures that Inbev will likely implement (see Inbev Faces Challenges). They acknowledge (and I agree) that it will not be an easy task for Inbev to generate value out of this acquisition. They write:

The deal is based largely on the premise that Budweiser will succeed when sent to the far reaches of the globe, and that two companies with dramatically different cultures can merge into a smoothly running global powerhouse.

My comment: As I’ve written before on this blog, culture can be the key to making/breaking a union. In this case, the cultural component is especially complex. The two firms obviously have different corporate cultures. However, because this is an international deal, those corporate culture differences are compounded by differences in national culture - how the Belgian, Brazilian, and American managers get on.

The article continues:

…the beer industry carries high-profile examples of beer not crossing borders easily, said Roman Shuster, an analyst with Euromonitor in Chicago. Brahma, for example, is a cautionary tale as InBev plans to send Budweiser into untapped markets. Brahma is a top beer in Latin America but much less prevalent elsewhere. InBev planned earlier in the decade to take Brahma worldwide, but the effort fizzled…

My comment: I do not expect Budweiser to suffer the same fate as Brahma. American-made products still carry caché abroad. They are a status symbol (for good or bad) for consumers from many countries, and a signal that a country (especially a developing country) has “arrived”.

In addition to the cross-distributional synergies that Inbev will try to generate, they will also attempt to rationalize AB’s operations:

Anheuser-Busch is expected to become considerably leaner when InBev applies its trademark cost-cutting. In a conference call Monday morning, victorious InBev executives laid out their plans to expand cost-cutting already under way at Anheuser-Busch. InBev envisions a deeper cost-cutting plan than the one A-B unveiled last month, when it was trying to fend off InBev. Anheuser-Busch’s plan to cut $1 billion in expenses through 2010 will be expanded to a $1.5 billion effort over the next three years.

The ramped-up cost cuts will include about $360 million from greater leverage with suppliers, more aggressive production efficiencies and “elimination of corporate overlapping functions” — which likely will lead to job losses at A-B’s corporate headquarters in St. Louis.

One thorny issue is whether — and to what extent — InBev executives will shake up A-B’s network of more than 600 beer distributors in the U.S. …InBev may see those distributors as ripe for cost-cutting, some analysts said. InBev has a record of tough dealings with distributors in Brazil, one of its main markets.

All told, I’m pretty happy I’ve been forced to eat my words on this one. I’m glad the two firms are coming together; otherwise, how would we get to see the fun part - how the Anheuser Inbev integration plays out. Buckle up.

Leave it to The Onion to come up with this amusing, yet sadly accurate, story (hat tip, Gene).

Recession-Plagued Nation Demands New Bubble:

A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. “We are in a crisis, and that crisis demands an unviable short-term solution.”

…According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.

“…The manner of bubble isn’t important—just as long as it creates a hugely overvalued market based on nothing more than whimsical fantasy and saddled with the potential for a long-term accrual of debts that will never be paid back, thereby unleashing a ripple effect that will take nearly a decade to correct…The U.S. economy cannot survive on sound investments alone,” [Greg] Carlisle added.

Well what do you know, if you give people incentives to do something (e.g., behave irrationally), they will do it, …in excess even.

Bottom-line: Incentives work.

There’s more of the story on The Onion site. Good fun!