Steve's Business Journal

NEW YORK -- Goldman Sachs Group Inc. posted a 70% drop in fiscal third-quarter net income on declining client activity and trading revenue, investment- banking losses and a slowing global economy.

For the quarter ended Aug. 29, Goldman reported net income of $845 million, or $1.81 a share, down from $2.85 billion, or $6.13 a share, a year earlier. Net revenue fell 51% to $6.04 billion.

Analysts polled by Thomson Reuters were expecting earnings of $1.71 a share on $6.23 billion in revenue.

The financial crisis that hit Wall Street over a year ago and a slowing global economy are affecting banks across the street. Global growth has slowed and that affects profit, Chief Financial Officer David Viniar said during a conference call with reporters this morning. "As soon as global growth picks up, our business will pick up across the board," he said.

Chief Executive Lloyd C. Blankfein's reference to a "marked decrease in client activity" is a big turnaround from three months ago, when the bank said client activity was "solid" in fixed-income trading and "strong" in equities trading.

However, analysts continue to believe in Goldman's investment strategy. "Management execution has been excellent, as it identified meaningful trends and repositioned the firm much earlier than peers to capture meaningful revenue upside and gain share," said Prashant Bhatia, analyst at Citigroup, in a research note. While Mr.. Bhatia believes Goldman is well-positioned, he does note that "the near-term macro environment will remain challenging."

Despite the crisis, Goldman Sachs was able to make money in the third quarter. The investment-banking model "supposedly doesn't work", but Goldman Sachs managed to earn money during one of the worst crises on Wall Street, said William Smith, president and senior portfolio manager of SAM Advisors.

Mr. Smith believes that Goldman Sachs will see an inflow of clients from the fallout of Lehman Brothers and the sale of Merrill Lynch to Bank of America, just as it received business from Bear Stearns when it went folded.

Market participants have become too "emotional," he said.

Many market participants and analysts believed at first that Goldman Sachs might be able to avoid the subprime-mortgage crisis that affected Goldman Sachs' peers and the financial sector. Goldman Sachs seems to be a victim of the deteriorating market conditions and skittish investors.

However, third-quarter earnings were not stellar for Goldman Sachs as investment-banking revenue slid 40%, financial-advisory revenue dropped 56% amid a decrease in completed mergers and acquisitions, and revenue fell by two-thirds at Goldman's trading and principal investments business. Equities revenue slumped 50%.

Meanwhile, the principal-investments group swung to a loss amid red ink from corporate and real-estate principal investments.

Still, the asset-management and securities-services division, which includes lending and other services to hedge funds, managed to eke out a 4.3% revenue increase as a 20% jump at the securities-services segment more than offset a 5.8% decline in asset-management revenues.

Goldman Sachs continues to have risks, but they are "primarily related to the macro environment, including the strength of the economy and strength of operating environments for investment banking, trading, origination, and global financial asset values," Mr. Bhatia said.

Shares of Goldman fell 4.2% to $129.76 in recent trading after slumping 12% Monday amid the U.S. stock market's worst daily point plunge since the first trading day after the Sept. 11, 2001, terrorist attacks.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn't in the best interest of shareholders.

Early Monday morning, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.

On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. (See related article.)

Though it steered clear of a bailout, the Federal Reserve is expected to take new steps to stabilize the broader financial system. These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral. Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman.

The Lehman board authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value, the firm said. In conjunction with the filing, Lehman intends to file a variety of first-day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.

However, employees at the Lehman units that filed for insolvency in the U.K. may not be paid, said Tony Lomas, a partner at PricewaterhouseCoopers assigned to help manage the proceedings for four Lehman companies there. The four companies in administration are: Lehman Bros International Europe, Lehman Brothers Ltd, Lehman Brothers Holdings plc and Lehman Brothers UK R.E., which holds real estate assets, he said.

Not in administration and continuing to function are Lehman Brothers Europe and Lehman Brothers Asset Management, Mr. Lomas told a news briefing Monday. There are dozens of PricewaterhouseCoopers people inside the Lehman building on Canary Wharf trying to come to grips with the company's affairs, he said.

"When we were appointed this morning, quite bluntly there was no cash because of the group treasury function," Mr. Lomas said, adding that his team would tell employees as soon as possible "whether or not there are funds enough to pay." Mr. Lomas said "a couple of dozen" of Lehman employees in London have been told definitely that they no longer have jobs. The rest should know by Wednesday, he said. The Lehman insolvency will be "larger and more complex" than similar proceedings for Enron and MG Rover, Mr. Lomas said.

Lehman said it is exploring the sale of its broker-dealer operations and, as previously announced, is in advanced discussions with a number of potential purchasers to sell its Investment Management Division. Lehman said it intends to pursue those discussions as well as a number of other strategic alternatives. Neuberger Berman LLC and Lehman Brothers Asset Management will continue to conduct business as usual and will not be subject to the bankruptcy case of the parent company, and its portfolio management, research and operating functions remain intact. In addition, fully paid securities of customers of Neuberger Berman are segregated from the assets of Lehman Brothers and aren't subject to the claims of Lehman Brothers Holdings' creditors, Lehman said.

The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values. Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.

Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.

Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.

At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.

At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.

In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.

"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.

Some traders said it was difficult to find new counterparties for many of their outstanding trades with Lehman. The snags included different terms and maturity dates on derivatives contracts, and market prices changed rapidly Sunday afternoon. "People were screaming at each other over the phone, asking: How can this work?" one trader said.

William Gross, chief investment officer at bond-fund giant Pacific Investment Management Co., said very few Lehman trades were offset. "There's an immediate risk related to the unwind of these positions," he said.

Many Wall Street firms concluded that a liquidation of Lehman's assets likely would proceed in an orderly fashion, people familiar with the situation said. That means other firms could quickly buy real estate, securities and other investments, preventing the assets from flooding the market. Because of that, these people said, some participants in the New York Fed talks decided that liquidation was no worse an option than selling Lehman to a buyer such as Barclays.

"There will be an orderly wind down," said one banker involved in the matter. "This was the default option. It happens when you have no buyer."

The outside firms decided that instead of making guarantees for Barclays or some other purchaser of Lehman, they would prefer to pool their resources and buy the assets themselves, taking on the risks and carrying costs, along with the possibility of profiting down the road.

Those firms would likely then buy assets such as mortgage-backed securities, leveraged loans, private-equity positions and investments in real estate or hedge funds.

Roger Freeman, a nine-year Lehman employee who analyzes brokerage firms, spent the weekend gathering cellphone numbers and email addresses from colleagues who also are likely to lose their jobs. He plans to clean out his desk Monday morning. "We worked long hours here, we've made some of our best friends here. We're suddenly being ripped apart," he said. "It's just unbelievable."

IT IS not, you would have thought, an auspicious name for a company that makes circular products. But Triangle Group, a big Chinese tyremaker, is flourishing even though the price of oil—the single most important ingredient in making and selling tyres—has reached record highs. Global passenger-tyre sales are growing by an average of 6% annually; Triangle’s are growing by more than 20%. A smaller division producing the fat, knobby tyres used by construction, farming and mining vehicles is doubling production this year.

All this growth comes despite fierce competition. Triangle is one of only two Chinese companies that have anything approaching a global market share (about 1% in its case), but it has five serious domestic competitors, 20 medium-sized rivals and another 300 or so small ones. And that is before you consider the global triumvirate of Goodyear, Michelin and Bridgestone and a raft of smaller but still significant foreign firms, including Cooper, Pirelli, Continental and South Korea’s Hankook.

It is a crowded field, but for the moment at least there is room for them all. Thousands of new cars spill out of Chinese factories onto its new (and instantly clogged) motorways every day, each needing four tyres, a spare and, eventually, replacements. Even with rapid growth, there are still only four cars for every 100 people in China, compared with 55 for every 100 in Germany, and 80 for every 100 in America.

What makes Triangle really interesting, however, is that, a bit like China itself, it has evolved from a state-run experiment into a genuine business. It will soon become one of a handful of noteworthy private firms to have emerged from the state. When Triangle was founded by the local Weihai government in 1976, the country was just beginning its transition from Mao to Deng Xiaoping, who famously said that “to become rich is glorious”. There was no wealth, no domestic car market and not much need for tyres. Export success (of a very modest sort) was limited to tiny tyres for the hand-pushed rubbish carts used by street-sweepers in Indonesia.

By 1993 Triangle had grown, but it was losing money, held huge inventories and had an awkward salary structure that distinguished between communist cadres and everyone else. And, as with many other state-owned firms, at this point it began to change dramatically.

A powerful chairman was installed who could run a business and negotiate the country’s complicated politics. The company reworked contracts, imposed a new approach to discipline and rustled up money (presumably from Weihai, Triangle’s parent) to invest in the production of modern radial tyres. Workers wear uniforms determined by rank, and every detail of operations, from the typeface to be used in correspondence, to the company song, to how a phone should be answered are recorded in an “enterprise culture” book. Order emerged, along with profits.

Triangle has undertaken a second restructuring over the past five years, to prepare for a public offering. Its accounts now meet Western standards; its factories are fitted with world-class manufacturing gear. Productivity has shot up (see chart). So too has quality, given that it has reached deals to supply Caterpillar and John Deere, as well as Goodyear’s low-priced Kelly division in Asia. Even so, the ultimate endorsement—a deal to supply the original tyres to a Western passenger-car company—has so far eluded it.

The distribution of shares to individuals is part of all of these changes. It is safe to say that when the public offering takes place, some people at Triangle and in Weihai will join Mr Deng’s circle of the gloriously rich—though who will benefit, and to what extent, will not become clear until the offering documents are filed. With the sale, control will shift from the government of Weihai to private investors.

There could be obvious benefits—money to hire new staff, build a brand, and consolidate a fragmented industry. But there will be a loss, too. Like other upstarts, Triangle has been a successful child of the government and a peculiar socialist system, with all that has meant in political and financial support. Weihai is a clean and well-run city on China’s east coast, and Triangle has benefited from its association. After the public offering the interests of the city and the company will soon diverge, as, to some degree, will the interests of managers and employees. For a company in China, the problems that presents may be far more difficult to handle than merely building and selling a better tyre.

ALMOST a year after launching what he thinks is the phone to change all phones, Steve Jobs, the boss of Apple, took to the stage again this week to introduce its second version, the iPhone 3G. In the past year Mr Jobs, who had surgery for pancreatic cancer in 2004, has visibly aged. Looking emaciated, he farmed out large parts of his speech, which is usually a big marketing and media event, to other presenters. But he still held the crowd in thrall as ever.

The new iPhone mostly addresses the shortcomings of the old one. It has GPS satellite-positioning technology that will allow a new and exciting category of services, such as location tracking, that depend upon the phone knowing where it is. It works with fast third-generation (3G) mobile networks, not just slower 2G ones. And it panders to corporate customers with features such as better integration with their systems and “remote wiping” of data if a handset goes missing.

This brings Apple in line with the business model used by other handset-makers, such as Nokia and Samsung. Getting operators to agree to Apple's novel revenue-sharing scheme seems to have hindered sales. Evidently Mr Jobs hopes to gain more from faster handset sales than he will lose by giving up his share of usage fees. By cutting the iPhone's price and increasing the number of countries where it is legally available from six to 70, Mr Jobs hopes to reach his goal of selling 10m iPhones by the end of the year. (So far, 6m have been sold.)

Competitors quickly tried to douse another conflagration of iPhone hype. “I see this as a catch-up release for Apple,” says Andrew Lees, head of mobile businesses at Microsoft, an arch-rival which provides software to many handset-makers. “We outsell them by two to one.” He points out, legitimately, that many phones using Microsoft Mobile software have long had both GPS and 3G, and have always tied into corporate computer systems.

Finland's Nokia sells the most “smartphones”, capturing 45% of the world market in the first three months of this year, and Canada's Research In Motion (RIM), the maker of the famous BlackBerry, is second, with 13%. Even in America, where Nokia is weak, RIM leads, with 42%, followed by Apple with 20%.

But Apple's impact on the industry has been greater than its market share suggests. The iPhone has set new standards in design and ease of use. A telling statistic from Mr Jobs is that 98% of users browse the web on their iPhones, 94% use it for e-mail, and 80% use ten or more features—including, of course, the built-in iPod music-player. As Mr Jobs joked, many users of other smartphones, with their clunky menus, cannot even find ten features.

This points to the ultimate role of the iPhone for Mr Jobs, Apple and the industry. There were personal computers before 1984, but it took the Macintosh, which Apple launched that year, to popularise the icon-based graphical interface that others copied, kicking off the PC era. There were digital music-players before 2001, but Apple's iPod made them both ubiquitous and user-friendly. In the same way, says Tim Bajarin of Creative Strategies, an analyst who has followed Apple throughout its history, the iPhone, with its elegant touch-screen interface, seems likely to be the gadget that sets the direction that others will follow in the era of mobility.

To bring that about, Apple is now turning the iPhone into a hand-held computer and allowing other firms to write software to run on it. Other handset-makers are doing the same, but the iPhone's operating system and programming tools, on display this week, are better than theirs. There is no doubt that Mr Jobs is trying to lead a third revolution in consumer technology in his lifetime.

Yes, Warren Buffett says the U.S. is in a recession. But some kind of economic doomsday? Hardly. The legendary investor is plenty bullish on the long-term viability of the American economy.

"Despite our country's many imperfections and unrelenting problems of one sort or another, America's rule of law, market-responsive economic system and belief in meritocracy are almost certain to produce ever growing prosperity for its citizens," Buffett wrote in a Friday letter to Berkshire Hathaway (nyse: BRKA - news - people ) shareholders. He said his holding company will continue to concentrate its assets in the U.S.

It's not just idle talk. In December, Berkshire Hathaway announced the biggest cash purchase in its history. It will pay $4.5 billion upfront, and more down the road, to buy the Chicago-based Marmon Group from the feuding Pritzker family. It's a broad endorsement of the American economy, since the remarkably diversified conglomerate includes 125 businesses like Union Tank Car and EcoWater Systems. (See "Buffett Helps Resolve Pritzker Family Feud.")

The current turmoil isn't swaying Buffett's philosophy on what makes a good company. "A truly great business must have an enduring 'moat' that protects excellent returns on invested capital," he said.

Since a successful business will inevitably draw copycats trying to offer the same goods or services, Buffett likes those with ingrained advantages that help them fight off upstarts. That's why Berkshire Hathaway owns insurer GEICO and a stake in discount-retail warehouse Costco (nasdaq: COST - news - people ). Buffett points to both as companies that can trump challengers because of their low-cost offerings.

He also points to an excellent brand name as a barrier that is difficult for competitors to overcome. Berkshire Hathaway owns stakes in Coca-Cola (nyse: KO - news - people ) and American Express (nyse: AXP - news - people ) partly for this reason.

Buffett, the second-wealthiest American, with a fortune of $52 billion when we last valued his holdings in the fall of 2007, is also sniffing out opportunities created by the recent financial market turmoil. Most of the major bond insurers are struggling after overextending themselves. In search of bigger profits, they started guaranteeing risky collateralized debt obligations, many of which are now souring because of spiking defaults in subprime mortgages.

Buffett pounced in December when he said Berkshire would start insuring municipal bonds. With a stellar credit rating, Berkshire is having no problems wooing governmental debt issuers. The new business should offer a safe, steady flow of profits since municipal bonds rarely default.

Investors looking to take a page out of Buffett's playbook should avoid the bond insurers facing credit downgrades. They are the ones most likely to cede market share. Instead, they could look into Assured Guaranty (nyse: AGO - news - people ), which didn't jump on the collateralized debt obligation bandwagon and thus kept its topnotch rating. The company looks even more attractive with deep-pocketed billionaire Wilbur Ross supporting it. (See "Billionaires Pounce On Bond Insurers' Stumble.")

High prices for food, fuel and other goods are troubling

Despite a slight dip in China's year-on-year consumer price inflation rate to 8.3% in March, from 8.7% in February, inflation remains at the top of the government's short-term policy concerns. According to a regular survey by the People's Bank of China (PBC, the central bank), a new high of 49% of respondents complained that prices were too high in the first quarter of 2008. These sentiments were echoed in a study by a market research firm, ACNielsen, which showed that consumers were cutting back on discretionary spending.

Worrying trends in underlying inflation have emerged, with price rises triggering increases in minimum monthly wage rates and welfare benefits. In Shanghai, for example, the minimum monthly wage rose on April 1st to Rmb960 (US$137) from Rmb840, and unemployment insurance rose to Rmb550 (from Rmb410). Allowances for poor rural households within Shanghai's jurisdiction have risen to Rmb3,200 a year.

In an effort to address concerns that grain shortages might push up food prices in China as they have done elsewhere in Asia, the premier, Wen Jiabao, in April reassured consumers that the country's grain reserves are ample, comprising over 150m tonnes. However, in late 2007 China had nonetheless imposed restrictions on grain exports, and the State Administration of Grain is conducting inspections in Anhui province, following claims by a renowned agricultural scientist, Yuan Longping, that grain reserves in some parts of China are empty. Press speculation about province-wide shortfalls, notably in Guangdong, has been repeatedly denied by the government.

Spiralling inflation prompted the imposition of stricter official controls on the prices of staple goods in late January. These remained in place throughout the first quarter of 2008, but some producers (notably of dairy goods) have been allowed to raise prices. Oil companies have not been successful in similar efforts, and it may be no coincidence that reports of oil product shortages, notably for diesel, re-emerged in March, first in southern provinces, but spreading to Shanghai and Beijing by the end of the month. The government recently announced a large package of compensation to China's top state-owned oil firms, meant to cover their losses on selling refined oil products at state-capped prices. These funds covered the period up to the end of the first quarter of 2008, suggesting that pressure for another rise in retail fuel prices will build in the weeks ahead.

Despite year-on-year growth in broad money (M2) trending down from 18.9% in January 2008 to 16.2% in March, according to central bank data, the PBC's governor, Zhou Xiaochuan, has emphasised the need to maintain the current regime of monetary policy tightening to fend off inflationary pressures. The reserve requirement ratio (the proportion of funds banks must keep as deposits at the PBC) was raised by 0.5 percentage points to 16% with effect from April 25th, following an earlier 50-basis-point increase on March 25th. On March 20th the PBC had also drained Rmb130bn (US$19bn) from the interbank market through repurchases and bill issues.

The government has also supported a continued strengthening of the renminbi against the US dollar, as part of a strategy to curb liquidity inflows through the trade surplus. In early April the renminbi reached a landmark by appreciating above Rmb7:US$1; on April 16th it was trading at Rmb6.99:US$1.

Outlook

Despite the headlines Chinese inflation is currently attracting, the Economist Intelligence Unit expects the year-on-year rate of inflation to fall rapidly in the second half of 2008. The key factor will be a cyclical fall in pork prices from the high base in 2007, helped by a restocking of China's pig herds. However, surging global food prices are likely to mean that the deceleration in inflation will not be as swift or deep as we previously expected. We have consequently increased our inflation forecast for 2008 to 5.9% (from 5% previously).

Short-term grain price inflation remains to a large extent dependent on the weather, and there is a risk that a major drought in China could cause price growth to accelerate rapidly. In the longer term, a falling supply of agricultural land, water shortages, and rising fuel and fertiliser costs will put upward pressure on food prices. However, inflation in the cost of manufactures will remain low, owing to intense competition and massive investment. Inflation should slow further in 2009, averaging 3.6%, owing to improving agricultural supply.

Country: United Arab Emirates
Fund Name: Abu Dhabi Investment Authority (ADIA)
Assets Under Management: $875 billion
Year Of Inception: 1976
Source: Oil

Recent Investments: In late November, ADIA bought 4.9% of Citigroup for $7.5 billion to become its largest shareholder, and earlier bought 9.9% of private equity titan Apollo Management for an undisclosed sum. Fellow investment arm Mubadala bought 7.5% of Carlyle Group for $1.4 billion in September 2007.

Country: Singapore
Fund Name: Government of Singapore Investment Corporation (GIC)
Assets Under Management: $330 billion
Year Of Inception: 1981
Source: Non-commodity

Recent Investments: In December 2007, GIC spent $9.8 billion on a 9% stake in Swiss bank UBS. The fund is relatively unique in its transparency and healthy corporate governance.

Country: Norway
Fund Name: Government Pension Fund Global (GPFG)
Assets Under Management: $322 billion
Year Of Inception: 1990
Source: Oil

Recent Investments: This pension fund focuses on small, minority stakes, reportedly with almost 4,000 different commitments worldwide. Between 50% and 70% its portfolio is made up of fixed-income securities, and 30% to 50% in equities.

Country: Saudi Arabia
Fund Name: No designated name.
Assets Under Management: $300 billion
Year Of Inception: N/A
Source: Oil

Recent Investments: The IMF says Saudi Arabia is a "major global investor," but little is known about where the fund allocates its money.

Country: Kuwait
Fund Name: Kuwait Investment Authority (KIA)
Assets Under Management: $250 billion
Year Of Inception: 1953
Source: Oil

Recent Investments: KIA recently took a stake in the Industrial and Commercial Bank of China, the country's largest commercial bank. It also owns 7.2% of Daimler, making it the automaker's largest shareholder. The fund also invests in Arab and international financial markets.

Country: China
Fund Name: China Investment Corporation
Assets Under Management: $200 billion
Year Of Inception: 2007
Source: Foreign exchange reserves

Recent Investments: This brand new fund bought 10% of Morgan Stanley in December and 10% of Blackstone Group in May, for $5 billion and $3 billion, respectively. Chairman Lou Jiwei says it will focus on capital markets hit heavily by the subprime crisis. It's currently recruiting staff and looking for offices around the world. China Investment Corporation has a mandate to rescue struggling Chinese banks.

Country: China Hong Kong
Fund Name: Hong Kong Monetary Authority Investment Portfolio
Assets Under Management: $140 billion
Year Of Inception: 1998
Source: Non-commodity

Recent Investments: The fund was set up to manage exchange rates by buying and selling Hong Kong dollars. But the size of the fund gives it potential for other investing--but where and how are open questions.

Country: Russia
Fund Name: Stabilization Fund of the Russian Federation (SFRF)
Assets Under Management: $127 billion
Year Of Inception: 2003
Source: Oil

Recent Investments: Russia has dithered over how to use this rapidly growing fund. it was originally set up to invest in foreign government bonds and companies; President Vladimir Putin recently declared the SFRF (which grew by almost 90% in 2006, according to RIA Novosti) should be spent on pensions and "innovation projects" in Russia.

Country: China
Fund Name: Central Huijin Investment
Assets Under Management: $100 billion
Year Of Inception: 2003
Source: Non-commodity

Recent Investments: The fund gave a $20 billion capital injection to China Development Bank soon after that bank made a $3 billion cash investment for a 3.1% stake in British bank Barclays in July 2007. Central Huijin also bought 71% of China's joint stock China Everbright Bank for $2.7 billion.

Country: Singapore
Fund Name: Temasek Holdings
Assets Under Management: $108 billion
Year Of Inception: 1974
Source: Non-commodity

Recent Investments: Temasek paid $2 billion for a 1.8% stake in Barclays in July 2007. Most assets are in Singapore and Asia, and about 20% are in wealthy members of the Organization for Economic Cooperation and Development (OECD)

Country: Dubai
(Private fund of Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum)
Fund Name: Dubai Holding
Assets Under Management: Not known
Year Of Inception: 2004
Source: Oil

Recent Investments: Little is known about Dubai Holding, though its subsidiary Dubai International Capital has assets under management worth $12 billion, with the ambition to grow to $25 billion in two years. Recent investments include 9.9% of U.S. hedge fund Och Ziff Capital Management Group for $1.1 billion; in May 2007, Dubai Holding bought a "substantial"--yet undisclosed--stake in HSBC. It also recently bought large stakes in Nasdaq and the London Stock Exchange.

^^^

Forget Steve Jobs.

The time to get the scoop on Apple's (nasdaq: AAPL - news - people ) next move is not when its charismatic founder is pitching the faithful on the computer and gadget maker's next product. It's when his minions--Chief Operating Officer Tim Cook and Chief Financial Officer Peter Oppenheimer--meet with Wall Street analysts every quarter to talk over the Cupertino, Calif., company's financial results.

Will Apple introduce a next-generation iPhone in June? Is the company about to overhaul its lineup of hot-selling laptops? Is something even more exotic on the way? Pay attention, because Cook and Oppenheimer will almost surely drop some hints Wednesday.

Of course, they'll almost surely drop some good news about Apple's latest quarter too. Strong demand for the iPhone and Apple's notebook and desktop computers will send Apple's earnings surging 26.3% in the quarter ending in March, according to analysts polled by Thomson Reuters. Net income is expected to rise to $972.8 million, or $1.07 per share, from $770 million, or 87 cents, in the corresponding period a year earlier.

This quarter's star will be Apple's OS X Leopard operating system. The new software is powering sales of Apple laptop and desktop computers ahead, thanks in part to software giant Microsoft's (nasdaq: MSFT - news - people ) troubles with Vista, the latest version of the ubiquitous Windows operating system.

Apple's market share is growing too. The computer maker grabbed 6% of the U.S. personal computer market in the first quarter, according to IDC, up from 4.9% the year before.

However, Apple is a stock driven by great products, not great numbers. Despite strong sales and earnings growth, Apple shares are down 18.9% this year, thanks largely to a dip in January after Jobs introduced the MacBook Air, a slick, ultra-light laptop that couldn't live up the expectations set by the previous year's introduction of the iPhone (to be fair, how could anything live up to that?).

On Tuesday, Apple’s shares sunk 4.7%, or $7.96, to $160.20 after an American Technology Research analyst cooled his rating on Apple to a neutral position, contending that expectations about Apple’s performance are too aggressive.

The game, then, is to look past the top- and bottom-line numbers Wednesday and watch for clues about new products. Despite Oppenheimer's iron discipline, in the Sarbanes-Oxley era it's almost impossible not to drop some broad hints when big changes are coming.

In a July call with analysts, Oppenheimer warned of a broad "product transition." (See: "Apple Tips Its Hand.") Over the next quarter, Apple replaced its entire lineup of iPod digital media gizmos, slashed the price of Apple's iPhone and gave its aging iMac desktop computer a complete makeover, sending Apple shares surging through the end of last year.

If anything, the stakes are even higher this time. Thin supplies of iPhones, coupled with an abrupt price drop in Europe, have triggered speculation that Apple will introduce one or more new models of its popular iPhone at Apple's World Wide Developer's conference in June. (See: "The iPhone Pain Train Keeps Coming.") It will be tough for Apple to avoid questions about the odd inventory changes at Apple's stores.

So, whether you are thinking of buying an Apple product, or sinking a few bucks into Apple's stock, pay very close attention Wednesday.

Late Tuesday, in response to questions from Forbes.com, an Apple spokesman said Apple has agreed to buy a boutique microprocessor design company called PA Semi. The company, which is known for its design of sophisticated, low-power chips, could spell a new future for Apple's flagship iPhone, and possibly iPod products as well.

The 150-person chip company, P.A. Semi, was founded in 2003 by Dan Dobberpuhl, who was a lead designer for the well-regarded Alpha and StrongARM microprocessors developed by Digital Equipment in the 1990s.

"Apple buys smaller technology companies from time to time, and we generally do not comment on our purposes and plans," said Apple (nasdaq: AAPL - news - people ) spokesman Steve Dowling. He declined to comment on the value of the deal, which a person familiar with the deal suggested was done for $278 million in cash. Apple is due to announce its quarterly earnings Wednesday.

The decision to center the iPhone design around a chip that Apple could own marks a significant strategic choice by Apple Chief Executive Steve Jobs, and is aimed at ensuring Apple can continue to differentiate its flagship phone as a raft of competitors flood the market. According to a source affiliated with the chip company, Jobs and Senior Vice President Tony Fadell led the tiny group of executives who spearheaded the acquisition, which included negotiations that took place in Jobs' home.

Apple's choice is a blow for chip maker Intel (nasdaq: INTC - news - people ), which has been trying to convince Cupertino, Calif.-based Apple to rely on Intel's chips--particularly its latest low-power line up, called Atom.

Apple has been rightfully proud of the iPhone, and has predicted that it will sell 10 million of the devices by the end of 2008. But that success has had a cost, too: Virtually every mobile-phone maker is scrambling to develop an iPhone-like device. Jobs has long asserted that Apple's greatest strengths lay in its software and in its ability to integrate hardware and software. The result: Machines that combine appealing design with an intuitive user interface, such as the iPhone. But interfaces--as Jobs well knows--can be mirrored, if not copied.

Few in the high-tech world are as wary as Jobs of turning control of core components over to a partner. The PC industry has been his proving ground; over the past three decades, he has watched numerous PC makers that have built their products around Intel's microprocessors wind up in fierce battles for narrower and narrower profit margins.

Led by Intel Chief Executive Paul Otellini, Intel is developing a line of chips that it believes can become as central to handheld computing devices as its "x86" chips have been to the personal computer industry. Intel has said it aims to create somewhat different lines of Atom processors tailored to different classes of applications, such as consumer devices, low-cost notebook computers and set-top boxes. The first of these designs is slated to begin shipping by the middle of this year; another by year's end.

But that doesn't mean Intel wants to create a unique chip for every customer--even for a charismatic customer like Apple.

Apple first got to know the designers at P.A. Semi about three years ago, when the computer maker still used PowerPC chips in its Macintosh computers. Dobberpuhl and his team, which includes engineers who had a hand in designing powerful chips, including Intel's Itanium, Advanced Micro Devices' (nyse: AMD - news - people ) Operton and Sun Microsystems' (nasdaq: JAVA - news - people ) UltraSparc. Dobberpuhl was also the lead designer on a DEC chip project called StrongARM, which was ultimately folded into Intel after DEC collapsed. Intel tried to use the design as the basis of chips for the smart-phone industry, but eventually sold that group to Marvell.

Dobberpuhl wanted to design a enormously powerful chip, based on the PowerPC architecture, that used little power. When Apple decided to quit using the PowerPC chip in favor of Intel microprocessors, the conversations with P.A. Semi petered out.

In February 2007, P.A. Semi debuted a 64-bit dual core microprocessor which the company asserted was 300% more efficient than any comparable chips. It consumes only 5 to 13 watts running at 2 gigahertz. Telecommunications, networking and wireless companies embraced P.A. Semi's work.

Meanwhile, Apple found a collection of other chip partners to build the guts of its iPhone. One key: According to technology market research firm iSuppli, South Korean electronics giant Samsung supplies the iPhone's applications processor. Like a number of companies cranking out processors for mobile phones, such as Texas Instruments (nyse: TXN - news - people ), Samsung's processor is based on a design licensed from Cambridge, U.K.-based ARM. Apple was among the three companies, also including Acorn Computers and VLSI Technology, that formed ARM in 1990.

Texas Instruments, Qualcomm (nasdaq: QCOM - news - people ) and Broadcom (nasdaq: BRCM - news - people ) are also fighting for share in the low-power applications processors for smart phones and mobile gizmos based on ARM designs, according to iSuppli analyst Tina Teng, with Texas Instruments leading the pack. These companies are building increasingly sophisticated processors, however, targeted at bigger and more powerful devices. "Companies like Qualcomm are trying to diversify themselves and move away from being a pure wireless company into these ultra mobile PCs, or ultra mobile Internet devices," Teng says.

Trevor Yancey, vice president of technology at IC Insights of Scottsdale, Ariz., sees ARM-based designs giving Intel a tough fight as Intel tries to push beyond notebooks and into smaller and smaller devices. "That's going to be a tough battle. If you look at the ARM core--where it has been and where it has come from--the ARM core is very well entrenched in those kinds of applications," Yancey said. "I think the gap between the two is certainly closing, but ARM is still developing at a fast pace."

Although no current Apple products use P.A. Semi chips, Apple executives kept a close eye on the work of the start-up. Talks of acquiring P.A. Semi began only in the past few weeks. Employees have been notified of the deal.

It will likely take at least a year before products incorporating P.A. Semi designs are ready. The company's flagship chip is at the heart of heavy-duty computing systems, such as those sold by NEC's (nasdaq: NIPNY - news - people ) storage division. But the design philosophy--hefty processing power and frugal power use--are in concert with Apple's directions. Although Apple plans to continue supporting P.A. Semi's current customers, insiders suggest that Jobs plans to use future P.A. Semi chips exclusively within Apple products.

At that point, executives believe the company will have created a unique asset--a powerful microprocessor that sips power lightly and so can support just about any imaginable applications Apple's software gurus can imagine .

The first question you should ask: Do you have a compelling value proposition? This point is forever worth repeating: Great ideas are only great business ideas if you can convince people to pay for your product or service at a price above what it costs you to deliver it. Just because you think the world needs new canine cologne doesn't mean anyone else agrees--or if they do, that they would be willing to pay enough to cover your electric bill.

You don't need a 90-page business plan to convey a value proposition. In fact, you should be able to communicate it in a few sentences. If you can't figure out why your product is great, your customers probably can't, either.

Another common mistake that budding entrepreneurs make is "overestimating their originality," says Toby Stuart, a professor of entrepreneurial management at the Harvard Business School. In other words: If you've thought of it, chances are someone else has, too.

Next question: Is there a viable market for your new product or service? Professional investors (like venture capitalists) don't want to write checks to launch companies with limited growth potential, even if they'll likely be profitable. And never count on creating a new market from scratch--chances are there's a reason it doesn't exist.

On the flip side, beware the temptation to grab for a small slice of a massive pie. That $43 billion in pet supplies may sound juicy, but that doesn't mean the dollars devoted to doggie perfume are large enough to nourish a standalone business. Rather than trying to capture 1% to 2% of a giant global market, startups should aim to capture 25% to 40% of a niche market, advises John De Puy, chief executive of Oaktree Ventures, a San Diego-based venture capital firm. "Define and dominate," he says. "That's the secret sauce."

Before you can dominate, you have to cover your development costs. "Most companies that fail do so because they are lacking capital," says De Puy. The key here is honesty: However much you think you need to bring your product to market, figure in a healthy cushion. Add more for tech-heavy products that may--read: will--need extra months of tweaking. If you can't scare up enough scratch to get out of the garage--no mean feat in the current economic climate--the market may be trying to tell you something.

"You won't really know whether you have a business opportunity until you try to get funding," says Charles Holloway, director of the Center for Entrepreneurial Studies at the Stanford Graduate School of Business.

But don't stop the analysis at the prototype stage. Lasting businesses need a sustainable competitive advantage. What's yours? If it's technology, can you patent it? If it's a commodity item, can you brand it? Sure, you could sell or license your nascent technology and let someone else worry about how to wring profits from it, but is that a bet you want to make?

If you're still convinced you're onto a real business opportunity, ask yourself one last question: How hard are you willing to work? According to the latest data from the Bureau of Labor Statistics, just two-thirds of new businesses make it past the two-year mark, while only 44% last four years--and that's just survival, not success.

Bottom line: If you're not ready to give everything (and then some) to your great idea, it probably won't matter how great Sam smells.

Sluggish times in the global semiconductor industry are likely to last for the next six to 12 months until consolidation eases an industry glut, according to one of the best-known figures in the world semiconductor contract-manufacturing business.

"This year, almost everyone senses pressure, and so I think this will be the year for consolidation and restructuring," including mergers and acquisitions, says Robert Tsao, chairman emeritus of United Microelectronics (nyse: UMC - news - people ). "There will more Taiwan, Japanese, American or even Singapore" companies involved in cross-border transactions, across all segments of the chip business, he says.

"From wafer manufacturing, testing, assembly--it will happen everywhere," Tsao says. "Basically, the whole electronics industry is an overcapacity stage, and you need restructuring to solve that."

Mergers and acquisitions usually take two to four quarters to work through, "so probably that would be the time frame we are talking about," Tsao adds. "The quicker the restructuring, the better the chance there will be a recovery quickly. There is too much overcapacity out there."

Dampened expectations among manufacturers were evident in a new forecast for capital spending on semiconductor equipment. According to Gartner, outlays will decline by 20% to $47.5 billion from $59.3 billion last year. Capacity among companies that specialize in contract manufacturing--a business known as foundry--will grow by only about 11% this year, compared with a peak growth rate in the past three years of 16%, according to emerging-markets brokerage CLSA .

Shares in UMC, founded in 1980, have declined 2% this year, even though Taiwan's stock market has been one of Asia's best performers, rising 7% since Jan. 1. Taiwan Semiconductor Manufacturing (nyse: TSM - news - people ), UMC's biggest local rival, is the world's largest contract manufacturer. Others include Chartered Semiconductor Manufacturing (nasdaq: CHRT - news - people ) of Singapore.

Tsao, who holds a master's degree in management science from Taiwan's Chiao-Tung University, retired as chairman at the end of 2005. Removed from day-to-day operations, he can joke about the industry's boom-bust trends that often lead to excess capacity. "The semi industry is an industry with some of the most brilliant people in the world, and they do the most stupid things," he says with a laugh, referring to over-investment. They also "cut each other's throats," he adds.

The current environment, he says, offers UMC good prospects to benefit from consolidation, "I think it will be a good opportunity to do some kind of restructuring with others" in cross-border business, he says, noting that he's speaking for himself and not UMC. CLSA estimates the company will earn $569 million this year, up from an estimated $510 million in 2007. Profits last year were only about half of 2006's.

Analyzing the outlook for China's semiconductor industry, Tsao says the country doesn't have a lot of players and isn't likely to be heavily involved.

He's more skeptical about Semiconductor Manufacturing International (nyse: SMI - news - people ), the "most noted" in China. "Their previous strategy has not very successful. They tried to build up a huge capacity" but didn't succeed in foundry, he adds. "I think the barrier for foundry was much higher than they expected" because of the time need to accumulate intellectual property.

"It's not as easy as pouring money into the hardware facility, Tsao adds. "It will take years."