Here's a double re-fresh with articles/columns/blog on Investment & Markets, the Economy and Businesses of particular interest. This time around we've created a general purpose category of specially interesting links on CEO Libraries, the Breaking Up of GE and future earnings outlook from S&P.
Bon Appetit' !
General & Special
C.E.O. Libraries Reveal Keys to Success : Perhaps that is why — more than their sex lives or bank accounts — chief executives keep their libraries private. Few Nike colleagues, for example, ever saw the personal library of the founder, Phil Knight, a room behind his formal office. To enter, one had to remove one’s shoes and bow: the ceilings were low, the space intimate, the degree of reverence demanded for these volumes on Asian history, art and poetry greater than any the self-effacing Mr. Knight, who is no longer chief executive, demanded for himself. Could it be possible to read Phil Knight’s books in the order in which Mr. Knight read them — like following a recipe — and gain the mojo to see a future global entertainment company in something as modest as a sneaker? The great gourmand of libraries, the writer Jorge Luis Borges, analyzed the quest for knowledge that causes people to accumulate books: “There must exist a book which is the formula and perfect compendium of all the rest.” Personal libraries have always been a biopsy of power. The empire-loving Elizabeth I surrounded herself with the Roman historians, many of whom she translated, and kept one book under lock and key in her bedroom, in a French translation she alone of her court could read: Machiavelli’s treatise on how to overthrow republics, “The Prince.” Churchill retreated to his library to heal his wounds after being voted out of power in 1945 — and after reading for six years came back to power. Poetry speaks to many C.E.O.’s. “I used to tell my senior staff to get me poets as managers,” says Sidney Harman, founder of Harman Industries, a $3 billion producer of sound systems for luxury cars, theaters and airports. Mr. Harman maintains a library in each of his three homes, in Washington, Los Angeles and Aspen, Colo. “Poets are our original systems thinkers,” he said. “They look at our most complex environments and they reduce the complexity to something they begin to understand.” He never could find a poet who was willing to be a manager. So Mr. Harman became his own de facto poet, quoting from his volumes of Shakespeare, Tennyson, and the poetry he found in Arthur Miller’s “Death of a Salesman” and Camus’s “Stranger” to help him define the dignity of working life — a poetry he made real in his worker-friendly factories.
Is G.E. Too Big for Its Own Good? : Toxic mud wasn’t the only mess Mr. Immelt had to clean up when he took the reins from the legendary Mr. Welch in 2001. Along with dealing with a struggling reinsurance unit that forced G.E. to take billions in write-offs, a power turbine business poised to collapse and an overvalued stock, Mr. Immelt had the misfortune to move into the corner office just four days before the Sept. 11 terrorist attacks altered the political landscape and the outlook for core G.E. franchises like jet engines and aircraft leasing. There is growing pressure on Mr. Immelt to do something — anything — to get G.E.’s stock moving after six years of stagnation. Despite a 15 percent rally over the last two months, G.E. shares are still down 30 percent from their Welch-era peak. And in April, the analyst Jeffrey T. Sprague of Citigroup Investment Research stunned Wall Street by calling for a breakup of the company, urging Mr. Immelt to sell off NBC Universal, as well as the consumer finance and real estate units. Whereas Mr. Welch took over a company vulnerable to foreign competition and hamstrung by a bloated work force , Mr. Immelt took over a giant that had been successful but wasn’t growing as fast as smaller, more agile companies — and which had a number of financial and operational time bombs in its portfolio. “Five years ago, we had troubled franchises and no liquidity,” Mr. Immelt says. “Think about being in the aircraft leasing and aircraft engine business on September 12.”
To reinvigorate the corporate behemoth that is G.E., Mr. Immelt has made more than $75 billion worth of acquisitions in sectors like energy, aviation, water treatment and health care while selling off the division where he and Mr. Welch both began their careers, GE Plastics, for $11.6 billion in May. The result, says Mr. Immelt, “is that the company in every way is different than it was in 2001.”
Earnings: Where's the Growth?: With corporate profit gains slowing, S&P doesn't see much upside potential from current levels for stocks this yearFrom Standard & Poor's Equity ResearchThe second quarter 2007 earnings season got off to a rough start last week, with Home Depot (HD), D.R. Horton (DHI), Ryland Group (RYL), and Sears Holdings (SHLD) among the companies revealing that housing-related weakness appears to be having a continuing damaging effect on consumer spending and the consumer discretionary sector. Meanwhile, Standard & Poor's Ratings Services (an entity that operates independently of S&P Equity Research) downgraded some 500 subprime classes of debt totaling $6.4 billion in rated securities, dampening any hope of a swift end to housing and mortgage-related weakness. The discussion on the fundamental profit environment during S&P's Investment Policy Committee meetings continues to revolve around an expected lack of real earnings progress in 2007. S&P analysts estimate the S&P 500 index will post only 5% profit growth in the second quarter, a continued deceleration from the 8% increase posted in the first quarter of 2007. It is not only the relatively low prospects for earnings growth that are of concern, but rather the components of growth itself. S&P estimates that favorable foreign currency translation will contribute about 2% or 3% to quarterly earnings growth this year, with stock buybacks adding another 1% to 2%. Meanwhile, simple inflation is contributing 2% to 3%. When overall earnings growth is 14%, as it was for all of 2006, favorable foreign currency translation and stock buybacks are merely nice kickers to the earnings story. But now, with earnings growth expected to be only 7% in 2007, these former boosters are accounting for much of the total.
Investment & Markets
Debt Market Is Squeezing Private Equity : After two years of rapid-fire deal making, private equity firms are finding it harder to get the job done. Some 15 to 20 debt offerings — analysts’ estimates vary — have been modified or postponed as anxious investors have demanded better terms for high-yield loans and bonds, the lifeblood of the leveraged buyout. Private equity firms have had to raise interest rates and sweeten the repayment — or risk having to withdraw the offerings entirely. This week, the sale of loans meant to finance the buyouts of the Chrysler Group and the European retailers Alliance Boots and Maxeda have been sweetened or postponed. Bond sales have not fared much better: about $3.65 billion in offerings have been postponed since June 26, according to data from KDP. If conditions do not improve, private equity firms and their bankers may face an even uglier situation. Some $235 billion in loans are waiting to be sold, nearly all for leveraged buyouts, according to Standard & Poor’s Leveraged Commentary and Data.
Nearly all major debt offerings that were expected to take place next month have been pushed back In short order, one of the friendliest environments that private equity firms have seen in years has quickly grown hostile. Once they could command extraordinarily lenient terms from investors, making the debt used to fuel leveraged buyouts quite cheap. So-called covenant-lite loans, which have few restrictions on repayment, blossomed, as did pay-in-kind toggles, bonds that could be repaid by issuing more debt. Now, analysts say, investors have shunned that easy debt, forcing buyout firms to pay more to get their deals done.
The troubles in the loan market have followed similar struggles to sell high-yield bonds. Over the last month, companies like U.S. Foodservice, a major provider of food to restaurants and school cafeterias, and ServiceMaster International, a lawn care and pest control services provider, have had to cancel bond offerings totaling almost $2 billion.Buyout firms are not the only ones suffering from the growing wave of caution sweeping through the markets. An increasingly popular practice among banks has been to assume part of the equity of these deals in what is known as an equity bridge. The tighter credit markets may not choke off deal making. But, analysts say, private equity must be willing to pay a higher price.
Dollar diversification, Stephen Jen reveals all
Well what do you know? All sorts of people, governments and institutions have been blamed for dollar weakness. But contrary to popular presumption, says Stephen Jen, Morgan Stanley’s global head of currency research, More…
Well what do you know? All sorts of people, governments and institutions have been blamed for dollar weakness. But contrary to popular presumption, says Stephen Jen, Morgan Stanley’s global head of currency research, US real money managers are the biggest dollar diversifiers, not the Asian central banks.
Controlling about $20,700bn in assets - four times the size of the total global official foreign reserves - US real money managers have been diversifying aggressively out of the US since 2003, says Jen. And if you buy his line that ‘currency diversification equals currency weakness’, this explains why the dollar has shown a gradual downtrend since then - and why it is so weak now.
Energy Shock: Sector's Shares Still a Bargain
Here's an energy shock you might not have considered: Many energy stocks are still cheap.
It might not seem possible after the sector's multiyear run. But it's true because investors all along have been pricing these stocks as if the surge in energy prices was temporary, and not a permanent shift in the landscape of the industry. Investors also have been wary of hot sectors after getting burned by the dot-com bubble.
Economy
Northern Trust Daily Commentary (July 20, 2007 )
- How Do You Say "Rube Goldberg" in Chinese? (***)
- More Evidence of Spillover from Housing to Consumer Sector
Northern Trust Week in Review
Passing the torch: After relying mainly on consumers to provide the push since its inception back in 2001, the economic expansion is finally getting a helping hand from the business sector. Just in time, too, since data describing consumer activity has become mixed of late. Retail sales took a header in June, even as many chains reported better same-store sales than the Street expected. And consumer sentiment in the first half of this month rose to its highest level since January while motor vehicle sales sunk to a multi-month low. But there's no doubt where business spending is going. Virtually every statistic describing the business side of the economy is now flashing green.
No help for gas buyers -- or oil investors: Rising oil prices and increased refinery costs mean gas prices will keep going up. Yet record profits mean little to investors, since companies don't have a good place to reinvest the cash.
Gasoline prices are likely to continue rising, and it's not just because crude oil prices have risen above $75 a barrel.
Oil refineries, which usually buy their oil at a price below that headline price, have seen their discounts virtually disappear. So the price they pay for oil is up twice -- once because the headline price of oil is higher and a second time because their discounts have just about vanished. You can bet that those two price increases will be passed along to anyone filling up at the gas pump.
Big Rise Seen in Demand for Energy It started with a simple question by Samuel W. Bodman, the energy secretary: What does the future hold for supplies of oil and natural gas? After nearly two years, Mr. Raymond has finally delivered his answer: Because the world’s population is growing and living standards are rising worldwide, energy consumption globally is expected to rise by more than 50 percent over the next 25 years. But finding supplies to match that growth is going to be increasingly tough and will require huge new investments in coming decades.
Chicago Fed President Michael Moskow added to the evidence Fed officials are less optimistic about the economy’s long-run growth rate. “We at the Chicago Fed think potential GDP growth is lower than it was five years ago, and currently is somewhat below 3%,” Mr. Moskow said in a speech to be delivered today to the Global Interdependence Center at the Federal Reserve Bank of Philadelphia. Potential growth reflects both growth in the work force and output per worker (that is, productivity). Lower potential means a given growth rate is more likely to test the economy’s productive capacity and fuel inflation.
A missed opportunity ... : China is growing incredibly fast. No doubt net exports are contributing significantly to China's current growth. But net exports are equally clearly not the only reason for China's current growth. If net exports contributed 3% -- that is just a guess, but one consistent with the data from q1 -- to China's 12% growth in q2, China would have grown by a very respectable 9% even if its trade surplus didn't grow. That is the missed opportunity. This is a time when the global economy should be adjusting. If the global economy doesn't adjust now, when will it adjust?
The irony is that right now, China is at a stage in its domestic economic cycle where it doesn't need the stimulus from net exports, while the US does. Yet with the dollar at a multi-year low -- and with the RMB still effectively pegged to the dollar -- China ends up getting a stimulus from the external side precisely when it doesn't need external stimulus. Right now, China's authorities want less growth, not more. China's premier famously called China's current pattern of growth unstable, unbalanced, uncoordinated, and unsustainable ...
The new risk from China: deflation
Wildly rapid growth has made China the world's fourth-largest economy. But burdened with industrial overcapacity and corruption, it's in danger of a Japan-sized bust.
Could China, the driver of global inflation in commodities such as crude oil and iron ore, be looking at domestic deflation in 2006? Deflation effectively took Japan out of the global economy for more than a decade, slowing global growth and increasing global economic volatility. Serious deflation in China has the potential to be a lot more dangerous. At its least damaging, it would flood the world's markets with even cheaper Chinese goods. At the worst it could stall the Chinese economy, a major driver of global growth, and even send the country into one of its traditional periods of instability.
· Time running out on China's boom
· China: Tons of money, wanton waste
· Why China can't slow down
Thursday’s announcement of an 11.9% real GDP gain in Q2 from the year before, after 11.1% in Q1, looks like an honest number (for a change): the nominal GDP increase was 16.4% and the difference is reasonably close to the inflation rate. But the key issue remains trade. China’s trade surplus is exploding. Its current level of $25 billion a month is a $300 billion annual rate — with non-trade items added in, the current surplus in Q2 was in the region of a $350 billion annual rate. Not bad, considering it was $240 billion in 2006, $160 billion in 2005, and minor until 2004. This explosion shows no sign of letting up, as the growth of exports far exceeds that of imports, and is now working off a much higher base.
China has settled into a pattern of nearly-30% exports growth, versus imports rising 20% or less. But its exports are now running at $1.2 trillion, about the same as Germany’s (as is GDP — Thursday’s boast in the People’s Daily) less than two years after overtaking Britain and France. These exports are also a massive 40% of GDP, extremely unusual for such a huge country, which should have a much larger relative internal market than medium-sizers like Germany, etc. (This statistic alone indicates the degree of distorted mercantilism in Chinese policy.) When 40% of GDP grows at nearly 30%, the growth contribution is nearly 12%. When the 30% that is imports grows at 20%, the growth deduction is 6%. The difference, the net export contribution, is 5-6 percentage points. In a country with a 10% growth trend that only leaves 4-5% for domestic demand if GDP is to grow at trend. But income growth is in line with GDP. So for domestic demand to grow only 4-5%, versus income at 10%, the savings rate has to go up. But it is already a totally unprecedented 50% of GDP! Fundamental disequilibrium indeed!
Business
Accounting for good people: Surprising as it might seem, the Big Four accountancy firms have lots to teach other companies about managing talented people. BEING interesting can be overrated. Accountants became suddenly intriguing in 2002 with the spectacular collapse of Arthur Andersen, because of its involvement in the scandals surrounding the fall of Enron. This added unwanted colour to a grey profession. Since then the surviving titans of accountancy—Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC), also known as the Big Four—have mostly retreated back into the shadows of public awareness. But interesting they remain, above all for the way they manage their people. It is not just that they collectively employ some 500,000 people around the world. Many companies are as big as they are. Unlike most, however, the Big Four really mean it when they say that people are their biggest assets. Their product is their employees' knowledge and their distribution channels are the relationships between their staff and clients. More than most they must worry about how to attract and retain the brightest workers.
The meaning of EADS : In some ways the story of EADS has been a one-off. No firm has ever been so bitterly fought over by two governments. No company has ever been saddled with such a daft management structure in consequence. No corporate saga has ever demonstrated quite so conclusively that politics and business don't mix. But the tale illustrates a general point too: that even the maddest manifestations of economic nationalism give way in the end to the pressure of globalisation. What has changed is not the politicians, but the aerospace business. In ten years Boeing has gone from an introspective protégé of America's Department of Defence to a global civil aviation giant. It has outsourced production to contractors in America and found international firms, notably in Japan and Italy, to join in as risk-sharing partners, making much of its successful new 787. Boeing has taken the lead in developing new technology to make big aircraft more efficient, more economical and more eco-friendly. Airbus, meanwhile, has fallen on hard times with delays to its flagship A380 and to the launch of its rival to the new best-selling Boeing long-haul jet. Work shared between France and Germany led to a lack of co-ordination and delays on the A380 that have cost billions. And the rise of the euro against the dollar has made much of its production uncompetitive. Most of Airbus's costs are in euros, but aircraft are priced in dollars.
Ford's Volvo Dilemma
If Ford really wants to sell Volvo, as press reports in New York and London suggested last weekend, it must be in deep trouble. But at least there might be some willing buyers for its Swedish subsidiary. There don't seem to be many car manufacturers eager to take on the two Ford properties already up for grabs: British icons Jaguar and Land Rover. Depending on how all this shakes out, it could have major implications for European car making. …Ford has denied the reports that it is trying to sell Volvo, but the reasoning behind the speculation -- that Ford is pressured by its hemorrhaging finances -- is sound enough that the rumors refuse to die. Last year Ford lost $12.7 billion. In December it arranged the financing for its $23.4 billion restructuring plan. …Volvo, with its brand values of safety and general worthiness, has proved itself a success. Sales are accelerating as it replaces its model lineup. The company has also become an integral part of many other Ford products, providing components for the Taurus and Sable in North America….If the Volvo reports do prove true, it would clearly look bad for Ford. The company releases quarterly results next Thursday. With that in mind, Mr. Newton says, the rumors may indicate that Ford's U.S. operations are sliding even further than before, forcing CEO Alan Mulally to consider selling Volvo.
PluggedIn: Vista's growing pains leave room for XP: David Daoud ran into trouble when he started using Vista, the new version of Windows that Microsoft Corp. (Nasdaq:MSFT - news) and PC makers have spent millions of dollars advertising since it came out six months ago. He said it short-circuited key software programs he counts on: Quicken for balancing his checkbook, Lotus Notes e-mail and a networking program that connects his home to the office. His Sony camcorder also doesn't communicate with the PC properly.Such problems are part of the normal growing pains that come with every major upgrade to the Windows operating system. To ease those pains, some consumers are seeking out machines equipped with the more compatible Windows XP. That's prompted some PC makers and retailers to give the older operating system more room in their product lines. Hewlett-Packard Co. (NYSE:HPQ - DELL - 0992.HK) and Toshiba Corp. (6502.T) also offer similarly equipped machines. Microsoft has done its best to get Vista off to a strong start, making it compatible with more than 2 million different types of hardware. The effort seems to be paying off. The company late on Thursday reported quarterly revenue of $13.4 billion, up 13 percent from last year, citing help from strong Vista sales. Microsoft says most people using Vista are pleased with it and that nearly all software and hardware is compatible. Still, some companies have been slow to respond to Microsoft's call for upgrades. Consumers have taken note.
Business Sales Lift Microsoft's Net as Consumer Units Struggle: Microsoft Corp.'s latest financial results and an upbeat forecast signal how sales to businesses are helping mitigate growing pains in the company's high-profile but money-losing consumer businesses.
The software giant disclosed strong sales and profits for its fiscal fourth quarter ended June 30 and slightly increased its forecast for the year ending June 2008. Company executives said that renewals of Microsoft's long-term contracts with its largest business customers are a sign of stronger growth in the current fiscal year. Overall, sales of Microsoft's core Windows operating system and Office software helped offset costs associated with greater-than-expected defects in its Xbox 360 videogame consoles. Earlier this month Microsoft said it would take a $1.05 billion to $1.15 billion pretax charge to extend warranties on the Xbox. Net income rose 7.3% in the latest quarter, including a charge of eight cents per share for covering the Xbox 360 costs.
The results show how Microsoft's traditional core business -- selling software to businesses -- continues to subsidize promising but difficult consumer plays, including its videogames and online efforts. Those investments are closely watched in part because they center on battles with high-profile companies like Google Inc. and Sony Corp., but they continue to siphon off money Microsoft makes from its core businesses. Fortunately for Microsoft, most of those divisions continue to perform well -- though Microsoft's server division, which sells software used for large corporate computers, underperformed some analysts' projections for the quarter. Meanwhile, sales of Microsoft's Office 2007 suite of programs increased 20% in the quarter over the previous year to contribute $600 million to revenue.
Google Pays Price for Spending to Spur Growth
Google Inc. showed the price for its heavy spending to keep up with breakneck growth.
The Mountain View, Calif., Internet giant's second-quarter profit fell short of expectations as staff expenses and other costs weighed on the bottom line. Expenses have rarely been a major concern for investors amid surges in Google's sales. But with revenue-growth rates now slowing, the company's aggressive spending caught some analysts off guard.
Google posted a 58% increase in revenue to $3.87 billion, driven by strength in its core Web-search and online-advertising business
Investors are slowly regaining confidence in SAP AG, as the German business-software giant woos customers to new products and improves profitability. SAP's stock price had dropped sharply in the 12 months through April, as it missed sales targets and struggled to persuade big companies to switch to its new generation of software. But the share price has bounced back, and the company got another boost yesterday when it reported strong second-quarter earnings
· SAP, Oracle Move to New Battlefields
Caterpillar's Net Falls 21% On Soft Construction Market: Caterpillar Inc.'s second-quarter profit fell 21%, due to lower sales of truck engines and continued weakness in the North American construction market.
However, the Peoria, Ill., heavy-equipment manufacturer reported a 7.1% increase in sales, as demand continued for equipment used in mining and non-residential construction. Revenue was also boosted by continued strength in overseas sales, which made up for weakness in North America.
Caterpillar also forecast continued weakness in North America in the second half of the year, but added that lower sales there should be more than offset by higher sales in other parts of the world.
Each company is its' own individual case. In fact we ended up starting a detailed review sequence of HD and have several posts starting with Nardelli's dismissal and working on up to a suggestion of Six Major Strategic Initiatives. In their case the executive change was a good thing and they appear to be doing the right things but the jury is still out. Far out actually. And some of the entries are probably dated, both good and bad. But some are not. For example Chuck Prince took over a badly faltering Citi which was facing serious charges and had major performance problems. He seems to have cleaned those up but at the same time, and despite the spinoff/sale of many of the acquired operations, Citi still isn't either getting the most out of any division that I can tell. And certainly not getting the sum is greater than the parts synergies. Ditto for Time-Warner. And so on and so on.
For example the initial entry for Dell(1) was in the Sustainers category because their strategy and business model looked sustainable in their niche (business PC supplier) but also extensible to other major product lines (Servers, Printers, Services (?), Communications, Consumers) and geographies (Europe, LA, Asia/China). That's turned out not to be true. And worse yet their core value proposition, like HD's, was heavily dependent on good value (low price for decent functionality) combined with superb customer service. When Dell began cutting customer service expenses several years ago and getting very bad feedback on product quality they weren't just facing a cost management and margin problem. They were depreciating their fundamental soft asset - Service & Support - and the trust of their customer base. Rather like HD under Nardelli. Again Michael Dell may be starting to turn things around. Contrawise Chuck Scwab's return to Schwab led to a complete reset of strategy, offerrings, and execution. Hence Schwab's migration from a company with performance problems to Recovery Road.
.
