A prior post looked at Carl Icahn's (Kaptain Karl) views on enterprise performance, which he found broadly deficient through too many nice guys moving up the hierarchy thru political management rather than focusing on what their companies needed to do to perform and create value. Or at least that's my reading-between-the-lines interpolation (the video is posted, please feel free to review it).

For several years now I've been tracking those companies which make the headlines for performance problems (and occaisional successes - unfortunately the former dramatically out-number the latter). But stop and consider for a moment...since the beginning of the year how many companies have made major earnings announcements and executive changes based on strong earnings and positive strategic outlooks ? We have whole industries just beginning to go through major transformations after, literally, decades of denial.

What names come to mind for you ? How about Dell, Wal-Mart, JP Morgan, Citigroup, Microsoft ? And more ? We're talking here about the bluest of blue-chip companies that not to far back, say 3-4 years, were the poster children of doing it right. All the bizz schools, trade press and general business press were lauding these folks for the strategies, operational execution, delivered customer value and postitive outlooks. Why just yesterday the WSJ had a major front-page story on MSFT's struggles with innovation ( Behind Microsoft's Bid To Gain Cutting Edge  ).

Let me offer up a chart (actually two) that's a snapshot that gets updated and refreshed from time-to-time, of companies and their status. Take a look and see what you think. Suggestions and emmendations (in the comments) would be welcome.

The categories (somewhat arbitrary but best judgement) are Criminal Malfeasance, Bad Leadership/Malfeasance, Bad Leadership/Poor Performance, Adjustment Failure/Internal Agendii, Internal Friction/Adjustment-Innovation Failure. The numbers in parens (x) are sequences show a (1) means that's the first entry while as a company evolves it might move to a different column, or even the next chart on good-performance.

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.

The other side of the coin is those enterprises showing either improved or sustained performance. Frankly that was a lot harder a chart to build - perhaps because my sampling method was based on headlines ? Anyway the categories are Strugglers & Stragglers, Recovery Road, Renewal & Growth, Sustainers and Next Big Thing (NBT) Potentials. The last category is more a list of industries which show significant promise for the future from now to the near-term to much farther out. So, for example, right now we don't see any major industry coming forward with the same sorts of major structural innovations that lead to the origination and creation of the Pharmaceutical or Electronics & Computer Industries. On the other hand there are several going thru huge transformational re-builds as the underlying technology changes, e.g. Telecom, Consumer Electronics and Entertainment. As before feel free to argue with my candidates and placements.

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.

But, at the end of the day, it's applying the Kaptain's test of enterprise performance and value delivery that determines classification. And profit, return and general appeal - the test questions: would you want to work for which companies ? And put money in which as an investor ? Take it to Buffett's Test - imagine yourself an owner, then which are targets and which to be avoided ? Which are opportunities with the right re-working ?

Posted by dblwyo at 10:59 AM | Permalink | Comments (0)

A couple of weeks ago the WSJ held its' "Deals & Deal-Makers" Conference and put up several of the interviews on it's web site. Two of the most interesting, at least from our perspective here of being focused on total enterprise performance, were with Carl Icahn. One of his key, much-repeated themes was the lack of executive accountability for performance through a focus on the wrong things. One of the videos is embedded so you can reach your own interpretation but Kaptain Karl, as I've called him in reference to an earlier post on how to balance leadership, rewards and employee commitment (the Pirate's Code) starts to address these issues. At the other end of the spectrum the implications of the buyout and buyback liquidity-driven boom is that executive management is holding up earnings by NOT investing in their companies long-term development. Stop and consider for a minute, if the Kaptain is right, about the future outlook for rapidly growing worldwide competition, escalating earnings pressure and liquidity-driven valuations what that means for re-thinking enterprise performance.
An earlier post (On Being a Boiled Frog) talked about the strategic outlook for US industries and enterprises and, hopefully, made the major point that business as usual - tending to internal agendii and quarterly earnings - is not a recipe for success. Rather it's a recipe for declining performance without a fundamental re-thinking of value, strategy, execution and performance. Which is the point the Kaptain makes to my mind. The final conference interview with Icahn is here and the panel interview with Alan Murry below. See what you think:

Posted by dblwyo at 10:01 AM | Permalink | Comments (0)

We just finished looking at the YoY% changes in GDP (inflation adj. real, not nominal) and found that the pickup wasn't quite as good as the headline as usual. More importantly though Consumption rose only 1.3% in the quarter verses the Q1 increase of 3.7%, on a QtoQ basis. YtoY it was better. So with the "organic" parts of the economy not doing well and GDP being held up by Net Exports and a smaller decline in Housing, as well as (allegedly - we'll see) Inventory re-building, the question then becomes what did the major components do ? And what are the implications ? Aside from general macrotrends the component breakdown may have some real issues to be considered for specific industries, firms and therefore their stakeholders.

Below we borrow a very good chart on QtQ changes to show the breakdowns and follow up with our preferred YoY delta analysis by looking at the Q1/Q2 deltas individually and cumulatively. After you take a look at the charts we also ask a couple of interesting questions about the implications for key industries and enterprises peformance pressures. 

Let's start by looking at a very nice chart showing QtQ changes from the Mess Greenspan Made via the BigPicture (it's worth clicking on thru to get the discussion):

 Notice that, except for the Katrina impact in Q305, Consumption made the smallest contribution in 3 years, while the other components were important positive contributors as well. Even Investment made a small positive contribution for the first time in several quarters.

Now, let's switch our perspective back to the YoY% changes and compare Q1 & Q2 changes between this year and last. Below is a chart of the major components of GDP and a table of all the numbers is at the bottom so you can see the data for youself if you care to kick it around a bit.

The charts are probably better labeled YoY Changes but they show the delta in each quarter in each category between '06 and '07. They also show the sub-components of Consumption (Durables, Non-durables, Services), Investment (Capex, Residential), Inventory, Net Exports (Imports-Exports) and Gov't spending. So, for example, Durables spending increased $57.2B in Q1 and $58B in Q2 while Services spending went from a gain of $154.1B and decreased to $124.3B. Despite both the headlines and better discussion in the mainstream press Capex didn't in fact show much improvement though Housing declines decreased. In particular, on this analysis, Inventory didn't show much contribution though both Exports and Gov't spending did. In fact the US as an exporting economy is actually one of the few major positive stories around - now if only we'd had a national energy policy in place for the last couple of decades :).

If we want to see the contribution of each of the components we can look at the relative buildup in each quarter. In Q1 there was a $216.4B, or 1.55%, increase in GDP while in Q2 there was a smaller increase of $201.2B but a larger YoY% improvement of about 1.8%. Now how can that be ? Recall that the economy was slowing last Spring, partly do to decling spending and partly due to high and rising oil prices. So if we break it down chartwise it looks like this:

The numbers won't tie out because the Residual adjustment used to bring things together isn't thrown in but, trust me, these are the gov't numbers as reported. A closer look at the chart shows several things, including the continuing role of Consumption as the primary engine but also it's aggregate slowing in absolute terms. Relatively speaking Capex, Housing and Inventory don't appear to help make things much better. It's only Exports and Gov't spending that do. While exports may continue favorable because for the first time in decades the US Economy is not the sole engine of worldwide growth the positive impact is not that great. And the Gov't spending impact is both small and a 1-time event.

Taking a look at this chart suggests our earlier conclusion is still on track - that is Consumer spending is slowing and there doesn't appear to be anything much in the way of alternatives to pick up the slack.

So, FWIW, here's the numbers breakdown showing the YtY changes, YtY% changes and % contribution to the total GDP number. You ought to be able to look at some of these and not only get a clearer picture of the structure and direction of some of the changes. But also to ask what the demand for various industries might be. For example with Capex not doing particular well how does that break down in terms of Technology spending ? Or with services decreasing are consumers cutting back on entertainment, eating out, etc. etc. ? Food for thought, perhaps ? It also suggests a couple of other things as well.

1. First, from an investment perspective what industries would appear to be under growing demand pressures ?
   
2. And second, if you're involved in a company as employee, executive, investor or supplier/customer what are they doing to adjust to and anticipate these pressures ?

Posted by dblwyo at 09:01 AM | Permalink | Comments (0)

Well Friday saw the release of the first guestimates of the Q207 GDP and the headline number was pretty good at 3.4% but for the first time in a couple of years the press writers have noticed Consumer Spending isn't doing well (in fact very much in line with our expectations). Of course that's QtoQ comparisons instead of the YtoY examination of real data instead of nominal. The reasons are discussed in What's Really Going On. But progress nonetheless ! Take what we can get, always.

Below, before diving into our preferred analysis, we present a totally confusing and nearly impossible to interpret version of QtQ numbers just to reinforce the point before diving into the real structural changes and looking at GDP & Consumption followed by closer looks at Employment and Real Wages. The latter are particularly important because they are the foundation of future consumer spending which in turn drives all else. But before diving into our analysis let's take a peek at what the reporters are saying (at last, at last):

 

Fears Intensify On Economy, Despite Growth

Behind the picture of strong second-quarter economic growth are new worries: Fears that the continuing housing slump, higher gasoline prices and tumbling financial markets could damp consumer spending and blunt the U.S. economy's momentum in the second half. The economy grew at an annual rate of 3.4% in the quarter, reversing the anemic 0.6% growth in the first quarter, the Commerce Department said. Increases in exports and government spending drove much of the improvement. A rise in commercial construction spending and building of inventories offset a drag from housing and sluggish consumer spending. Fed officials haven't changed their expectations for moderate growth for the rest of the year, but persistence of the housing slump underscores the downside risks -- particularly to consumer spending. The combination of a sour housing market and rising energy prices reduced growth in consumer spending to a very slow 1.3% pace in the second quarter after the first quarter's downwardly revised 3.7%.

So let's dive into our charts and analysis. The accompanying chart shows the QtQ% changes in the big three indicators (GDP, Consumption, Investment), not annualized, in the real data. If you look closely you can sorta see the relationships and that GDP turned up in Q2 over Q1 because Investment did. In a follow-on post we'll break down the changes more but it turns out to be primarily due to a DECREASE in the size of the negative Residential Invesment. How encouraging. But Consumption turned down - oops. Hence the reporters observations. We should also take note of the fact that the general run of commentators still looks for a 2nd Half pickup overall.

Shifting gears let's take a look at the YtY% changes which makes the timing, trend and turning point patterns much....much clearer.  The first thing to notice is that the "improvement" in GDP wasn't all that good - in fact in went from a 1.55% increase to a 1.78% increase. Bearing in mind that we need growth of 3.2-3.5% to be at the economy's speed limit we're far below that. The Fed by-the-way (BTW) has lowered its' estimate of the speed limit AND its' outlook for the year and maybe the next two. And while you can still the GDP uptick coming from Investment the slow-motion slowdown appears to be accelerating with Consumption slowing as well. Industrial Production - the harbinger of future business demand as well as current corporate activity, continues to slow.

The mantra is Consumption drives GDP while Investment is the accelerator and the drivers of consumer spending - in addition to being able to borrow against/liquidate assets (MEW, Stocks) - are jobs and wages. In other words if we'd like to know how the consumer is holding up we need to look at how Employment is doing as well as real wages.

The answer is not very well. A couple of things to notice, also. First, looking at turning points, Employment is a lagging indicator. Next, we never got a return to the robust 2.5% YoY growth of the late 90s. Instead we ceilinged off around 1.5%+ and it's been trending down since early '06. Historically high profits and earnings are all well and good but you have to ask if it's organic or based on cost-cutting and other factors (which we did in fact take a look at here and found buybacks now exceed capex spending !). In fact Employment growth decreased from 1.52% to 1.45%. We'll see what the next round of Payroll data tells us but the bottom-line is that there is no resevoir of future demand lurking in job growth. And hasn't been thruout this entire recovery. Worse, it's getting weaker.

The accompanying chart is a little busy but to a constructive purpose so please take a moment with it. It shows Consumption (PCE), real Retail Sales and real weekly average Wages (plus the trend of the latter). This is to let PCE link back to the earlier charts and show the relation as well as show how Retail Sales and Consumption relate. Notice - perhaps the most important thing - that Wages turn before Consumption and Retail Sales. The latter follows Consumption but is more volatile.

Next, another key point is that Wages were in a longer-term downtrend beginning in late '97 and continuing, essentially, thru the middle of '06. There was a big runup in real wages last summer and fall which is THE explanation for why the downturn in the economy that was being anticipated last Spring didn't come about. Now, notice they have turned sharply downward indeed. Interesting - one wonders what that's all about ? Wait - oh year. There was a big downturn in Oil Prices which caused the headline CPI to also turn down. Guess what - oil prices are back big time and it shows in wages.

So, bottomlining again, the key drivers of future Consumption growth are weakening rapidly.

If consumers can't continue to borrow against their houses (MEW) or sell stocks in buyouts and buybacks they'll lack any source of liquidity to maintain spending. Consumer debt btw has been climbing rapidly in the last two quarters.

So take a look at the charts and come to your own conclusions. My interpretation is that consumer spending will continue slowing and we've just barely seen the first 1/3 of the housing mess (the various industries sources btw have JUST started talking about a "recovery" in '09 or later). Comments, objections or alternative interpretations are welcome. On the whole I'd be happy to be wrong about this but don't think it likely.

Posted by dblwyo at 10:07 AM | Permalink | Comments (0)

Whew, what a week. With the big drop in the markets, the constant flow of news on credit and LBO financing problems we’ve split this weeks’ Reader into two sections, with a separate post on all the Markets & Investments news. Below you’ll find selected – in the inundation of valuable and interesting news – articles on the economy, the great credit contraction, the strategic outlook for the buyout ( & by implication buyback) game. In addition to the key articles in the Special section I highly recommend reading Northern Trust’s end-of-week Daily Commentary, which dissects the structure and outlook for all the major GDP components as well as anything. And goes on to relate both consumer spending to the low-rate credit environment and discuss the outlook for real profits. Also the articles on Sovereign Wealth Funds are worth reviewing, as they are harbingers of a major shift in foreign investment patterns away from Treasuries into other assets. This is potentially a huge change. And there are interesting articles on the major challenges facing Detroit, how Boeing is doing and several key articles on the Technology Industry and players therein.

Happy reading or skimming as the case may be.

General & Special

Subprime could create global crisis, economist says The problems in the U.S. subprime mortgage market could spiral out of control into a global financial crisis, economist Mark Zandi said Thursday. With a "high level of angst" in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody's Economy.com. A global meltdown is not likely, but the risks are growing, Zandi emphasized in a conference call with reporters following the release of a new study on subprime debt that concludes that the housing crisis could be deeper and last longer than investors now believe. Read the latest data on home sales. And it could spread. "Mounting mortgage delinquencies and defaults now pose the most serious threat to the global financial system and economy," Zandi said in his report.

The Great Credit Contraction of 2007

Last month, I noted 6 reasons why rising yields were a threat to equity prices:

Valuation
The M&A/LBO Put
Competition
Profits
Share buybacks
Consumer spending

As of late, we have seen the threat of two of these issues increase dramatically: The M&A/LBO Put and Share buybacks are being pressured by the increasingly expensive credit. 

Takeout Guessing Game Is Over, Analyst Says : Trying to pick the next takeover target has been one of Wall Street’s favorite sports over the past year or so. But Richard Bernstein, Merrill Lynch’s chief investment strategist, is blowing the whistle. In his latest market commentary, Mr. Bernstein suggests that the ongoing search for “takeover premiums” and “L.B.O. takeout values” shows that some equity investors in deep denial — “behaving as though the real economy has no connection with the financial economy.” Mr. Bernstein is just the latest market watcher to suggest that the troubles in the credit market could bleed over to the stock market, in the form of reduced takeover premiums. Dozens of companies have experienced elevated stock prices lately because of speculation that they could be swept up in the flood of leveraged buyouts.

Investment & Markets

The next generation of winning stocks: Small-cap growth stocks ready for supersize growth are getting increasingly hard to find. But a little digging has turned up new ones for my Future Fantastic 50 Portfolio. There's a shortage of great young growth companies right now, says MSN Money's Jim Jubak. But things are changing. The second quarter of 2007 was the best for new startups since 2001, and the hottest sectors are medical devices, information technology and communications.

Countrywide: "Home price depreciation at levels not seen since the Great Depression": An amazing conference call with Countrywide Financial (CFC), the largest US mortgage underwriter. It was beyond ugly. Here are some notable quotables from Chief Executive Angelo Mozilo

Keep your T-bonds, we'll take the bank The governments of China and Singapore take stakes in Barclays, giving some clues about how sovereign investors plan to operate. Although CDB is a state-owned bank, most governments buy their foreign assets through state-run investment pools, known as sovereign-wealth funds. These funds are getting bigger and bolder. They have some $1.5-2.5 trillion to play with, according to America's Treasury, a sum expected to grow fast. Although sovereign funds began investing conservatively, the Barclays deal shows that they can provide an attractive source of funding for mergers and acquisitions. Some sovereign funds are also getting into the buy-out business. Delta Two, a fund backed by the government of Qatar, is currently bidding for Sainsbury's, a British supermarket. Yet despite making their presence felt in financial markets, little is known about these funds. To understand them, it helps to think about where their money comes from. Many emerging markets, notably China, have built up vast reserves of foreign exchange. Such reserves are traditionally invested in liquid assets like Treasury bonds, which could be sold quickly if the central bank had to prop up the currency. But many countries have far more reserves than they need for this purpose. And China is in any case protected by capital controls. That leaves the government free to buy more exciting things where it might make a better return. Earlier this year China decided to set up a sovereign fund.

Economy

Kansas City Shadow Fed / Maine Fishing Trip Recap

I wanted to give y'all a recap of the "Kansas City Shadow Fed Meeting" up in Grand Stream Lake, Maine. Here's a bit of quirkiness: My outlook on the US economy was probably the most bearish of the entire group; at the same time, I probably had the most fully invested investment posture in terms of our managed accounts versus the rest of the fund managers. Kinda weird . . . A few other interesting items worth relating (Economics, Politics, Markets, The Fed, BLS):

China's Exported Inflation May Signal Interest-Rate Pressures The rising cost of goods the U.S. imports from China may be an early warning signal that central bankers from the U.K. to India are about to pay a price for a cause they've championed: globalization. China, a source of cheap manufactured products for the past two decades, may be starting to export inflation as the world economy grows at the fastest pace in a generation. Prices rose 0.3 percent again in June, the biggest back- to-back increase since record-keeping began in December 2003. With monetary policy makers struggling to contain pressures from other forces beyond their control -- increased trade, faster capital flows and record commodity prices --officials including Bank of England Governor Mervyn King and New Zealand's central bank Governor Alan Bollard may have to raise interest rates or maintain them at higher levels for longer than they might prefer.

The increasing integration of the world's economies isn't fully understood, even by those who have benefited the most from expanding international trade and investment. Fed Chairman Ben S. Bernanke has said it may complicate policy making, and the benefits of cheaper imported goods are, at least, countered by higher costs for raw materials and energy. Booming global demand is already forcing up food and commodity prices and squeezing spare productive capacity at a time when more investment from abroad weakens central banks' grip on the supply of money in their economies. The International Monetary Fund predicts that the amount of slack will shrink to 0.1 percent of global gross domestic product in 2008 from 0.4 percent last year.

Cracks in the Great Wall of China China's economic growth surged to an 11-year high of 11.9% in the second quarter. Asia's new economic giant is on course to chalk up its fifth straight year of double-digit percentage growth. And after leapfrogging the United Kingdom in 2005 to become the world's fourth-largest economy, China is set to overtake Germany for the No. 3 spot by the end of this year. Eye-popping economic growth rates notwithstanding, China's reputation for economic invincibility has taken a serious knock in recent weeks. The media barely noticed when Chinese-made drugs contaminated with diethylene glycol led to the deaths of dozens of people in Panama last year.

U.S. Economy Probably Quickened Last Quarter on Factory Pickup The U.S. economy probably grew last quarter at the fastest pace in more than a year as manufacturing rebounded and exports improved, economists said before a government report today. The 3.2 percent annual pace of growth for gross domestic product is the median estimate of 85 economists surveyed by Bloomberg News. The growth rate would follow a 0.7 percent gain in the first quarter that was the weakest since 2002. Factories ramped up to rebuild inventories and fill orders from Europe and Asia, overcoming a drop in homebuilding and slower consumer spending. The report may also show price pressures cooled, providing some comfort to Federal Reserve policy makers who consider inflation their predominant concern.

• Northern Trust Daily Commentary (July 27):Rebound in GDP Growth Likely Temporary. The Past Year's Stock Market Rally Has Not Been Economically Driven
• Northern Trust Daily Commentary (July 23): Q2 Real GDP Growth Forecast:  Chicago Fed at 2.7%; Consensus at 3.2%

$100 Oil May Be Months Away, Not Years, Say CIBC, Goldman The $100-a-barrel oil that Goldman Sachs Group Inc. said would prevail by 2009 may be only a few months away.

Falling US dollar puts pressure on the buying power of Opec nations

The falling US dollar is lowering the Organisation of the Petroleum Exporting Countries' purchasing power by up to a third, making the powerful oil cartel more reluctant to increase production and cut prices. Although oil is trading near last August's record price of $78.65 a barrel, Opec calculations show that when adjusted for currency fluctuations and inflation, oil prices have fallen in the past year. The adjusted price averaged only $43.60 a barrel in June this year, compared with $44.30 abarrel in the same month last year, according to the latest Opec monthly report. Growing trade between Opec members, especially those in the Middle East and north Africa, and the European Union, is aggravating the problem because the value of the pound and the euro has risen against the dollar.

Business

Detroit Shrinks to Survive (Asset Sales Could Help Fund UAW Health-Care Trust):The Big Three U.S. auto makers are hanging for-sale signs on more prime assets as they hunt for cash to finance a deal with the United Auto Workers to ease the burden of retiree health-care liabilities. General Motors Corp. and Ford Motor Co. have moved in recent months to pare assets and build up cash as they seek answers for their loss-plagued North American auto operations. Potentially adding to the moves, people familiar with the matter said over the weekend that Ford is considering selling its Volvo car unit, a profitable business expected to receive considerable interest from other car companies and financial buyers such as private-equity firms. GM, meanwhile, agreed to sell its Allison Transmission unit for $5.6 billion after nearly 80 years of ownership. It has also raised more than $10 billion in recent months in credit markets, all of which was won by pledging assets essential to running its automotive business.

·         At Ford, the 'Outsider' Is Optimistic (In a Town of Pessimists, CEO Mulally Tells Everyone 'It's Going to Be OK'). When former Boeing Co. executive Alan Mulally took over as Ford Motor Co.'s chief executive officer last September, Ford was on the way to losing $12.6 billion for 2006. It doesn't project a return to profitability until 2009. High gasoline prices are hammering sales of the sport-utility vehicles that once drove Ford's U.S. profit. The new CEO also confronted the complexity of running a family-controlled company that had long operated as a collection of fiefdoms.

Boeing seen swinging to profit as jet deliveries Boeing's success selling jets laid the groundwork for sharply higher earnings in the second quarter, say analysts, who are anticipating the company will raise its outlook for future quarters.

Think, Play, Do: Technology, Innovation, and Organization

In my opening remarks I focused on the opportunities to leverage the huge advances in technologies, standards and communications to enable us to look at a whole organization - an enterprise, an industry eco-system or an economy - as a holistic, integrated system, linking together processes, information and people.  Needless to say, these are incredibly complex systems. The tools we are using to design, build and manage them today are quite primitive, and they thus require considerable labor-based services.

We need breakthrough innovations to enable us to better deal with these increasingly complex organizational systems.  Engineering has done a very good job developing advanced tools and methodologies - e.g., CAD/CAM, simulations, models, etc - to help us deal with very complex physical systems, like airplanes, skyscrapers and microprocessors.  This has enabled very high quality and productivity in the production of physical objects. 

Our challenge and opportunity now is to develop similarly sophisticated tools and methodologies to deal with complex organizational systems like those found across industries and economies.  Compared to what we’ve done so far, this is hard, - very, very hard.

How IT Departments Are Spending: One CTO’s View

U.S. information-technology spending appears to be on the upswing, but the way your company’s IT department is using its money may be changing. Consumer tech spending has been growing for some time, and now businesses are starting to open up their wallets as well, according to an article in Saturday’s Journal. Spending by IT departments should grow seven percent this year, Stephen Minton, an analyst at market-research firm IDC, tells the Journal.

Geoff Endris, chief technology officer at Capital Assurance Corp., an insurance company based in Prospect, KY, tells the Business Technology Blog that there are two interconnected reasons for the shift: 1) Companies have finished with the projects that they needed to do to comply with federal regulations – in particular the Sarbanes-Oxley Act, which requires companies to have tight controls over the processes they use for financial reporting. “Money for tech got spent on compliance,” Endris tells this blog. “Now companies can reallocate it to business investments,” most of which have some IT component; 2) Companies have spent the last several years improving their technology infrastructures. Now they are in a position to buy more sophisticated software that takes advantage of this.

• Does Your Company Suffer From Tech Addiction? Information technology has increased the rate of work and improved our ability to communicate. But is that a good thing? One IT head says addiction to tech can lead to sloppy work and bad decisions. IT is having a dangerous sociological effect on businesses, says Tracey Baetzel, director of information services for the law firm Honigman Miller Schwartz and Cohn LLP. “Technology controls us more than we control it,” she tells the Business Technology Blog.

Instant Messaging Invades the Office During the preholiday crush last December, a computer maker asked staffing company Adecco SA for 300 additional factory workers -- immediately. Using an instant-messaging program, Senior Vice President Steve Baruch tapped managers in three states to line up the workers within hours. If he had relied on email and phone calls, Mr. Baruch says, the same process could have taken him as long as three days. Instant messaging is invading and changing the workplace. Employees started to sneak instant messaging into the office in the late 1990s, but now more companies are endorsing it. Faster and more casual than email, instant messaging can foster broader collaboration among employees even as it further blurs the boundaries between work and life.

Microsoft Q&Q. Old News is Good News ? I think mainstream financial analyst questions at quarterly conference calls must be designed to support day trading. They don’t appear to be much help when it comes to investing. The back and forth at the recent Microsoft quarterly conference call was just another example. I heard a dozen trivia questions about old news like client and server software and only one (there might have been another technical modeling thing) about the future, Microsoft’s online division. What I did hear in the formal presentation and in the carefully scripted answers to the carefully backwards-looking questions was all good. Even the stuff in the seams between the carefully scripted pauses was good news: 1) The guidance does not yet include the boost that the aQuantive advertising/publishing applications will give the online division, and 2) the estimate of what enterprises will do in general in FY 2008 is conservative. There could be upside from the already raised expectations.

Tax Break Used by Drug Makers Failed to Add Jobs Two years ago, when companies received a big tax break to bring home their offshore profits, the president and Congress justified it as a one-time tax amnesty that would create American jobs. Drug makers were the biggest beneficiaries of the amnesty program, repatriating about $100 billion in foreign profits and paying only minimal taxes. But the companies did not create many jobs in return. Instead, since 2005 the American drug industry has laid off tens of thousands of workers in this country. And now drug companies are once again using complex strategies, many of them demonstrably legal, to shelter billions of dollars in profits in international tax havens, according to their financial statements and independent tax experts. In one popular accounting move, companies declare their foreign markets as far more profitable than their American businesses — even though drug prices are typically higher in the United States than anywhere else in the world.

 

Apple whacked by iPhone worries: One day before the company is due to report earnings, its shares slide after AT&T says fewer iPhones than expected were activated in the second quarter.

·         iPhone Review Concluded: Memo to Motorola…Whatever You’re Working on, Stop

Bear Stearns Shares Show Cayne's Dummy `Body Blow' Won't Hurt :When Bear Stearns Cos. Chief Executive Officer James E. ``Jimmy'' Cayne told the New York Times the failure of the firm's hedge funds was a ``body blow of massive proportion,'' he may have been using a tactic honed in three decades of championship bridge. Bear Stearns, the biggest U.S. broker to hedge funds, doesn't expect to lose even a dime on the bailout, according to a July 17 statement to clients. Most analysts say the debacle is unlikely to have anything but a negligible impact on profit and book value. Only two of 16 have cut their estimates for Bear Stearns earnings in the past four weeks.

External affairs Old assumptions are being challenged as the outsourcing industry matures For a start, the industry is growing less rapidly than before. Offshore work is a component of most outsourcing contracts, but jobs no longer flow only from richer countries to poorer ones. Cost savings are still the principal motivation to outsource, but performance is becoming the main battleground between providers. Even the language is changing. Vendors refer to themselves as partners. Labour arbitrage is out; “intellectual arbitrage” is in. Some even recoil from the word “outsourcing” itself. “It gives the impression of just throwing something over the wall,” says Ross Perot Jr, chairman of Perot Systems, a computer-services firm based in Plano, Texas. Start with the numbers. The latest quarterly report on the state of global outsourcing from TPI, a consultancy, was published earlier this month. It showed that both the number and value of contracts awarded during the first half of this year had declined in comparison with the same period in 2006. In 2007 the total value of contracts awarded in the first six months was the lowest since 2001 (see chart).

Posted by dblwyo at 05:55 PM | Permalink | Comments (0)

Whew what a week for the markets. What I feel is a long overdue correction got underway with a vengeance.  Since this market has been financially driven for some time the re-pricing of risk and adjustments in the credit markets are creating huge ripple effects in all markets, assets & instruments and sectors. The odd thing is that several insightful observers from CalculatedRisk to Bill Gross have been predicting these adjustments in one form or another for some time. The real question is, is this just a correction or something more severe ? Time will tell of course and this next week or so will be particularly revealing. My feeling is that one the one hand we’re just seeing the beginnings of facing up to realities, on the other hand there’s still a huge divide between the major of Street-based prognosticators who see a 2^nd half return to higher growth and earnings – despite, for example Bernake and the Fed revising both their outlook and sense of the upper limits to sustainable growth (the “speed limit” or natural rate of full-employment growth) down this week.

 

Articles marked with * are particularly worth reading  and thinking about.

 

I’d say happy reading but it isn’t so …valuable reading ?

Investment & Markets

A Short-Lived Golden Age: Private Equity Highlights Shift in Market Sentiment; Correction or Far Worse? Henry Kravis said in April that we are in private equity's "golden age." Market sentiment has clearly changed. But why are these buyout kings, along with an increasing array of other financial luminaries, acknowledging the problems? Surely it would be in their interest to deny there was anything wrong, particularly if, like KKR, they are on the point of launching a huge initial public offering. In fact, they are already arguably behind the curve. When Mr. Kravis spoke of a golden age, investors were already fretting about troubles in the U.S. subprime-mortgage market. The doubts increased as the losses became concrete, most notably last week's wipeout of one fund managed by Bear Stearns Cos. Meanwhile, credit spreads have widened, conditions on new leveraged-buyout loans are tighter, and banks are finding it hard to shift $40 billion of LBO debt for the likes of Chrysler and Alliance Boots PLC, the U.K. retailer. Even the enthusiasm for emerging markets has faded: OAO Rosneft, the Russian oil giant, earlier this month pulled a $2 billion bond offering.

·         DealTalk: KKR plays hard ball and Wall St. winces Kohlberg Kravis Roberts & Co., the legendary leveraged buyout firm known for its tough deal tactics, is living up to its image, to the growing frustration of Wall Street. KKR, with four major buyout deals in the debt pipeline, is refusing to budge on lending terms agreed to with investment banks, even as debt investors show a weakening appetite. That tough stance amid shaky debt markets means banks will have to shoulder all the risk and perhaps take significant losses on the massive loans. With other private equity shops willing to renegotiate with banks, KKR's position is starting to fuel ill-will with Wall Street, sources close to the firm say. Bitter bankers are hardly what KKR wants in the days before its planned initial public offering. Of course, if the LBO climate steadies or returns to being robust, then any bad feelings will quickly be forgotten. But should the debt markets continue to decline, some on Wall Street think KKR's hard ball tactics could come back to bite them.

• Sperling Says Debt Crunch Could Tighten PE Purse Strings Private-equity firms recently have been paying sky-high prices for the companies they buy, but their generosity won’t last long. That at least is the view of Scott Sperling, co-president of the venerable Thomas H. Lee Partners and a veteran of the private-equity business. Deal Journal tracked down Sperling to ask him about the recent turmoil in the debt markets (which Sperling will have to tap to complete his firm’s $19.5 billion buyout of Clear Channel Communications). His conclusion? The debt crunch will force PE firms to tighten their purse strings.

• Calling an End to the Buyout Boom The failure of investment bankers to find buyers for debt backing big leveraged buyouts on either side of the Atlantic today has the Financial Times predicting that the end of the greatest LBO boom in history may be upon us. The double whammy of delays of debt sales for both Alliance Boots and Chrysler has Marek Gumienny, a honcho at U.K. private-equity firm Candover, talking about a denouement for the private-equity drama. Echoing what many bankers in the U.S. are saying privately, Gumienny tells the FT that a number of investment banks, loaded up with high-yield paper they can’t move, were said to have “shut the door” to new lending for LBOs on the continent.

KKR, Homeowners Face Funding Drain as CDO Sales Slow The Wall Street money-machine known as collateralized debt obligations is grinding to a halt, imperiling $8.6 billion in annual underwriting fees and reducing credit for everyone from buyout king Henry Kravis to homeowners. Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $9.1 billion in the U.S. this month from $42 billion in June, analysts at New York-based JPMorgan Chase & Co. said in a report yesterday. The market, which was ``virtually shut'' earlier this month, is showing ``signs of life,'' the bank said. Investors are shunning CDOs after the near-collapse of two hedge funds run by Bear Stearns Cos. that owned the securities. Standard & Poor's downgraded bonds from 75 CDOs as mortgages to people with poor credit defaulted at record rates. Concern about losses on home loans are rattling investors across the credit spectrum. Investors are demanding yields 10 percentage points higher than benchmark rates to compensate for the risk of losses on some of the lower investment-grade rated parts of CDOs, up from 4 percentage points at the start of the year, according to data compiled by Morgan Stanley in New York.

• Basis Capital Fund Management Ltd. hired Blackstone Group LP as an adviser after the Australian hedge fund manager was battered by losses in the U.S. subprime mortgage market. The losses at the fund, which recorded an average annual return of 15.5 percent for the past five years, underscores the global impact of the subprime shakeout. Federal Reserve Chairman Ben S. Bernanke said July 19 there will be ``significant financial losses'' from risky mortgages, pointing to estimates as high as $100 billion. Basis Capital had assets of $1 billion as recently as May, before reporting its Aust-Rim Opportunity Fund and the Yield Fund lost 9 percent and 14 percent respectively in June. The funds ran into trouble by investing in the unrated, riskiest portions of collateralized debt obligations. These portions, also known by bankers as ``toxic waste,'' are first in line for any losses when borrowers fall short on mortgage payments.

(**) Pimco's Gross says weakness in subprime, junk bonds is spreading Weakness in junk bonds and subprime-mortgage markets could lead to as much as a double-digit correction in U.S. stock markets, respected bond-fund manager Bill Gross warned on Tuesday. Investors should watch the impending sale of DaimlerChrysler AG for clues as to how far an ongoing meltdown in subprime lending could spread, he added. From what he hears, Gross says yields on the paper being issued to help finance the deal will be around 9%. But some pieces of that placement could reach yields of close to 12%, he added.

• Chrysler's Bankers May Take On Debt: Chrysler's attempt to tap debt markets for $20 billion hit a critical juncture as bankers began discussing the likelihood that they will have to step up with a large part of the money because investor demand hasn't been strong enough. The financing is being watched closely in Detroit because the Big Three and a horde of auto-parts suppliers have depended on tapping debt markets for low-interest loans and bonds in a wave of restructuring and asset sales.
• Bankers Postpone Chrysler Debt Sale Bankers raising $20 billion in loans for Chrysler Group have postponed a sale of $12 billion in debt for the auto company and are planning to fund the bulk of that debt from their own pockets for the time being, according to a person familiar with the matter.

•   KKR Banks Fail to Sell $10 Billion of Boots Loans (Update2) Kohlberg Kravis Roberts & Co.'s banks, led by Deutsche Bank AG, failed to sell 5 billion pounds ($10 billion) of senior loans to fund the leveraged buyout of Alliance Boots Plc, two people with direct knowledge of the deal said. KKR's eight underwriters will offer higher interest rates to sell 1.75 billion pounds of junior loans, said the people who declined to be identified because the discussions are private. The banks will keep the senior loans on their balance sheets, the people said.

• Chrysler Throws Salt in Citigroup’s Wounds Citigroup is one of the banks that will, at least temporarily, be left holding the bag after investors took a pass on the sale of $10 billion of loans at Chrysler’s auto unit for the company’s leveraged buyout. (The others include J.P. Morgan Chase, Goldman Sachs Group, Bear Stearns and Morgan Stanley.)

·        It’s the biggest chunk of paper forced on investment banks since debt- buyers decided last month to stop financing buyouts with easy terms. It isn’t good news for either the banks or the buyout firms. There will come a point, if we aren’t there already, when banks refuse to make new loan commitments. That’s because they’re too occupied getting rapidly- accumulating paper off their books. (The giant Alliance Boots deal in Europe also is now headed down the same path — though Citigroup doesn’t appear to have a primary role there.)

• Scorecard: Deals Hurt by Credit Tremors (**)
  

Bond Risk Soars by Record as Investors Flee Corporate Debt The risk of owning corporate bonds increased by the most ever in Europe and Asia on concern banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts, according to credit-default swap traders. A sell-off in the U.S., Asia and emerging markets extended to Europe, where the cost to protect company debt approached the record high in 2005 when General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings. Deutsche Bank AG's risk premium jumped to five times the amount on June 1. Investor wariness caused more than 40 companies worldwide to reorganize or abandon borrowing plans in the past month. The retreat forced banks to take on $20 billion of LBO loans they had planned to sell for Kohlberg Kravis Roberts & Co. and Cerberus Capital Management LP this week.

M&A Boom: 'I'm Not Dead Yet'

In the world of deal making, who are the real kings – private equity or corporations?

Once upon a time, the answer was simple – strategic buyers. Armed with cost-cutting synergies, conventional Wall Street wisdom held that strategic buyers always outspent private equity.But with the credit markets tightening for LBO-related issuance, are strategic buyers making a comeback? Ok, sure. Corporate buyers never really went anywhere — they still account for the vast majority of deals. While strategic buyers are doing more than 10 times as many deals as private equity and accounted for 75% of the total announced deal volume from June 1 to July 25, private-equity’s buying frenzy appears unabated. For the period, total deal volume was $941 billion, with leverage buyouts accounting for 25% of that. By comparison, LBOs accounted for 23% of the of the year-earlier period’s volume and 22% of deal volume in the first half of 2007, according to Dealogic. Buyout volume jumped to $231 billion, up 80% from the year-earlier June-July period. That jump was powered by the largest buyout ever (BCE) and Blackstone’s takeout of Hilton Hotels for about $20 billion. In fact, the top five deals accounted for almost 40% of the leverage buyout deal volume. (See the chart at the bottom of this post.) A look at the average premiums paid in the top five buyouts and the top five strategic deals (by no means a comprehensive analysis) suggests private equity continues to be willing to spend to get their targets. In the top five LBOs, the average premium paid was 16.7%; in the five largest strategic deals, it was 14.9%.

Look to financials for market movement clues: The carnage in this space 8% declines in a five-session span by some of the largest financial institutions in the world is the principal point of concern. The market is pricing in the potential for a broader contagion given our debt dependency, tightening credit parameters and an interwoven financial fabric with $370 trillion in underlying derivatives. A "tail event," such as a contagion, is by definition a low-probability affair. To our earlier point, however, the event itself doesn't have to occur to impact market psychology. Perception is reality on Wall Street, and the slightest whiff of fear will affect a crowded tape with a slimming margin for error. That's the nuts and guts of where we stand, and the financials remain the truest proxy for this dynamic. If they bounce, they'll quickly shift sentiment and trigger a sharp squeeze. If they continue slide lower, they'll pull the equity spectrum along for the downside ride.

Posted by dblwyo at 05:43 PM | Permalink | Comments (0)

Well this week will bring some eagerly awaited economic data - particularly on home sales and the advanced GDP guestimates. The latter in particularly tends to get revised severely so it'll be hard to put too much stock even though it will be taken that way on it. There are a couple of critical crossing points that will start to surface here though.

Update:Northern Trust Daily Commentary (July 23):

• Q2 Real GDP Growth Forecast:  Chicago Fed at 2.7%; Consensus at 3.2%
• Inflation Expectations:  Tolerance Threshold is Tough

One way to approach this is to look at the higher frequency montly data and see what it tells us about the outlook for consumer spending, now and in the future, as well as the business outlook. Let's start with a little table of the key variables and then take a look at some charts - which always help me see things a little more clearly. 

 But before diving into the high-frequency data let's set the table by reviewing the basic consensus that has emerged and key points therein:

1. First, the general consensus is that growth (& therefore/thereby profits and earnings) is slowing but decent for the last half of the year. In fact the expectation is for something between 3-3.5% annualized growth even though everyone admits consumer spending is slowing. The expectation is that business investment will make up the difference along with an improving trade picture. The problem (as we discussed in an earlier post looking at relative contribution and performance of the various components) is that a lot of ground might have to be made up. Of course this gets even more interesting when the Fed's implicit growth rate has been lowered as it was last week.
2. Part of the problem is that while it's being grudingly conceeded that GDP growth might be lower than expected that the impact of housing, MEW and the ripple effects of a widening credit crunch are likely being under-estimated. We've been hearing for well over a year that the end of the housing downturn is in sight only to be surprised by yet another set of homebuilders announcements and housing data. The problem there, and the outlooks are now moving toward - at best - a bottoming in late '08 not early this year as was true not to long ago, is that the lag timing of housing downturns keeps getting under-estimated. There is no more sticky market than housing so it takes a long time for prices to adjust down. Similarly it takes a long while to permit and start construction so the current employment levels haven't been as impacted as expected because a lot of work is still going on. Finally consumers used their houses as ATM's but with the re-pricing of home equity that's coming to an end.

 

Part of the problem is that the high-frequency data updates thruout the month so at any point in time some will be missing and in process. Hence some "missing" entries. Here we have YoY% changes in som key data, oftentimes a smoothed 3MoMA to dampen things a little bit. For Consumption indicators we have monthly real consumption (PCER), real retail sales and auto sales. For future consumption we have wage and job growth - wages drawn from average real weekly earning data. And New Home sales. And for the business outlook we have industrial production and durable goods orders ex-aircraft.

Take a look at the chart - that's not a set of numbers that makes me feel sanguine just on the base economy - more sanguinary. And that's before we factor in the various deeper and more hidden issues mentioned above.  One thing to notice about last year that shows up clearly is the clear upkick created by lower oil prices on last year's consumption. Last Spring's expectations of lower spending, lower growth and increased inflation risks were pretty well grounded until we got a huge drop in oil prices. That "tax" is going to be working the other way now. Well real consumption recovered but is showing a downtrend while real retail sales falterred a bit in June after a slight uptick in May but both are consistent with the trend (shown) downward. Meanwhile Auto sales (on the r.h. scale) took a huge drop last year but are still showing negative growth - despite the chances for better YoY comparisons. Longer-term indicators aren't particularly strong either. Employment growth seems to have, at best, floored off at about 1.5% which doesn't increase demand while real wages, after showing a strong uptick - and the first in this "recovery" - are showing a much stronger downtrend. In other words there are not indicators of sustained consumer demand, let alone growth in demand.

Shifting to the business side of the house take a  look at the accompanying chart. For comparisons PCER is left as is New Home sales (partly because residential construction is the "other" major driver of investment spending and has been so crucial this cycle). The other two key indicators are Industrial Production and durable good orders ex-Aircraft. And I have to say those definitely don't look well. Take a look and see what you think. Orders have shown a fairly steady downtrend. It doesn't look as if the much ballyhooed recovery in business spending is underway, or at least to the extent it might be, with much strength. But it's industrial production that shows this the most clearly and most recently, since the June data came out last week. In fact after a very slight May uptick which in now way disturbed the fairly steep downtrend it tipped back down again in June.

Taken all together then one would have to say that an outlook for Q2 GDP growth of 3.5% is pretty optimistic. And an outlook for the last two quarters that results in 3% or better growth for the year seems highly unlikely. Paul Kasriel of Northern Trust has suggested, as have others, that we might see an uptick in business spending in Q2 as inventories are re-built but that the 2nd Half outlook is not particularly good. Calculated Risk put up an interesting post a while back (discussed in our prior post on GDP components and outlooks) that used the available two quarters of consumption data to make guestimates. For the first two months of Q2 personal consumption spending rose at a rate of about 1.7% annualy. That means that the factors supposed to get us over the hump will have to have big upticks.

As they say - may you live in interesting times. Oh, I forgot. We ARE living in interesting times. Sorry

Posted by dblwyo at 09:46 AM | Permalink | Comments (0)

Several posts here have explored the relationship between enterprise performance and the human environment. The argument is that the better people are treated the better they will perform for the company by taking care of customers and its' interests. Now my biases in this case are shaped by both my management experience and my earliest working experience at Fedex who's motto was/is "People, Service, Profit". And they backed it up - the three policy manuals around which the company governed itself were the People, Service and Profit manuals. Compensation and promotability were determined by effectiveness in people management and they've found since their beginnings that people are the key to service which is their whole reason for existence (& pricing and profit : ).

That said, at the same time, people are definitely not all perfect. In fact my experience has been that out of any ten person team normally assembled you're lucky to get one star solid performer, three decent ones and a lot of folks who'd like to be more than they work or are capable of. And further everybody's in denial about this from both sides - both bad bosses and bad employees. With all due respect to HR's due processes they aren't taken very seriously in general.

But, I'm more convinced than ever that good HR is a mandantory strategic performance requirement and excellent HR is a competitive differentiator.

UPDATE (8/1): Seth Godin has two interesting post on toxicities among bosses and employees that are short, sweet and to the point. To which I'd add, my point here, toxic behavior is not rational (this is a family blog so scruples prevent putting it more strongly). 

Bob Sutton over at his blog has covered his new book "The No Asshole Rule" and triggered an avalanched of heartfelt outpourings on bad treatment. Some of the stories of aholes run amok and bad people policy are....what ? Startling, heartrending, make you shake your head ? Well my triggerring was to start wondering about the rationality of these choices and on several lines of inquiry I'd argue that we can make a very strong case (see the three prior posts cited below for different perspectives on total enterprise performance and people management). Let me put that more directly and strongly.

1. Bad people policy makes no rational sense and damages corporate performance in the short- and long-runs.
2. Bad people policy has a measurable impact on both enterprise value and internal efficiency and effectiveness. It is NOT judgemental though judgement as to consequences is required.
3. In other words the costs and benefits of strategic investment in investing in people can be thought of in the same way as we do other strategic choices.

In other words we've all known for a long-time that we don't like working in bad environments and our collective tribal knowledge is that it's bad for us, for the company and for the stock. But we've also generally talked about these issues in 'soft' terms. I would argue that's mis-guided when the problem is properly framed and thought thru.

So how to bridge the gap between delusions and realities ? Well, it's not entirely clear that I've got an answer but being on a plane and in that wonderful state of sleep-deprivation, crampedness and caffeine over-dosing where sometimes the gods speak to you what they suggested was this little manifesto. It's based on the principle of running a company for adults. See what you think:

Six Principles of People Management (draft manifesto): 

1. You are an adult, worthy of respect, who has every right to be treated as such and so expect.
2. But we also expect you to be and act as an adult who takes responsiblity for their actions and deals with the good and bad  times equally well.
3. You are entitle to a fair day's pay for an honest day's work
4. We expect you, in fair exchange, to put the organizations long-term best interests first in your priorities but not to the unbalanced exclusion of others in your life.
   • The virtuous circle of priorities is Customer (take care of them), Organization (which results in satisfaction and value) and You (so the Organization will take care of you).
5. We will walk this walk together - not just talk about it while we walk to the bank and you walk to the door.
6. Good work done well is worth doing and it's fun (or least satisfying). We intend to do good and do well and have fun as best we can manage.

 The prior posts that make the case are:

• People & Performance:Assets or Fungible Commodities ?

• Aaargh, Captain Ye Best Take Care of the Crew

and Bob's blog is here and one of my favorite posts dead on this is "Waste of Talent" .

 

Posted by dblwyo at 07:41 AM | Permalink | Comments (1)

 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.

Fed’s Moskow: Potential Growth Has Slowed :

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 u