Belatedly this is the post that should have gone up earlier this week or over the weekend but time flies. The charts are thru the end of last week and are still valuable, and the points I want to make still accurate; perhaps more so in some ways. The goal here is to look at the recent market turmoil in light of both economic and financial realities (where the current state of the economy is discussed in Praise Be, the Data Has Saved Us (NOT): New Homes & Orders and financial conditions & Fed policy in  Schadenfreude, Oh Schadenfreude: the Fed vs the Whingers ).

Just to keep things in perspective instead of putting up the short-term ("trading") chart first we'll start with the longer-term ("investment") chart. With the side comment that it continues to amaze me how prior to mid-July all was right with the world of Goldilocks and now all the mainstream economists are beginning to accept the slowdown that folks like Kasriel and Roubini have been talking about for months and has been visibile in our charts for a long...long time. The reference to read is either the psycholgy/typology of denial, Denial , or the stages of denial, Kübler-Ross model , where we are arguably still locked into the first stage. Admittedly I'm amusing myself, and hopefully my readers, but there's real merit to the point.

What we'll find when we look at the long-time chart of the S&P over the last four years is that, despite relatively weak real economic growth and very poor net job creation, is that the market boom's uptrend has basically not been beached - excuse me, another F-slip. I mean breached. And in the short-run the market appears to be struggling to convince itself that not only is denial correct but the diagnosis is completely wrong, i.e. the post Shanghai-Surprise mini-bubble is entirely correct. In fact various talking heads on bubblevision are arguing that with appropriate selection of strong, defensive sectors, or those with good int'l exposure and good, blue-chip companies that we're in a trading range and one should judisciosly pick from your shopping list at bottoms.

We'll that may be but to tell the truth it'd sure surprise me, over the long-run. Meanwhile just to put some more perspective on it BigPicture has put up some very good charts from another blogger that looks back at several major historical busts and put's our current "correction" in perspective. As they used to say, "It Don't Mean Nuthin":A Historical Perspective of Recent Bear Markets. Highly recommended as these charts show prior busts starting with today's DJIA levels; and tell you how far they went and how much room we've got, and how small the "correction" is. In fact, historically, it's just a normal blip (Makes you wonder what all the sturm und drang is about - at least until you look at short-term funds rates and the credit market heart-attack we just had).

Let's start with a chart of the S&P for the last four years, using my rudimentary technical analysis skills to try and interpret & interpolate. Several points to notice here. First off, as we noted a couple of weeks ago, the downturn hadn't really broken the l.t. trend (green) lines, though the credit-seizure caused a very s.t. breach. Which could have really...really turned bad except for the technically brilliant and practiced interventions of the Fed and other Central Banks (this is NOT a minor point - during the '20s and '30s a lack of understanding, tools and courage collapsed the world economy in very similar financial circumstances !). During that breach the talking heads were mentioning drops at least downto the 1380 (yellow) line or more likely the 1225 (red) line. In fact even if we "corrected" to 1300 or so we'd still be in the uptrend. Yet within the last four weeks everybody is all of a sudden talking about a weaker economy and screaming for rate cuts. Methinks they doth protest, to much, and too self-interestedly, forsooth. And just in passing let's also note a point we've discussed before (Markets, Earnings and PE) about the l.t. rationalities of the market because earnings have gone up tremendously but PE ratios have been very compressed. In other words investor's long-term outlook is for significantly slower growth and they don't think those good earnings are grounded in l.t. organic growth of the companies.

Shifting gears let's take a look at the YTD and last 10 day S&P and see if we think it'll tell us much. Interestingly enough this week's rather wild gyrations confirm my original musings. As of last Fri. it looked like the debate was whether we'd establish a new s.t. downtrend or struggle back up over 1490 and get a new  uptrend going. Certainly it looked as if the psychology and sentiment favored that. Notice again btw that the s.t. downtrend almost got busted bigtime two weeks ago to the downside and then we'd have been off to the races. (for those of a certain age or inclination does the image of Slim Pickens riding his bomb come to mind ? )

If you look at the 10-day chart you can get a good idea of how close to the edge of the abyss we really came.

The S&P broke to about 1370 or so and was headed for never-neverland (red oval in 10-day) when the Fed stepped in by injecting funds via open market operations. And then overnight put together the the major discount window action that on Fri. restored the markets (yellow oval for both actions). THAT was the abyss because (as we discussed in Schadenfreude the credit markets really did seize up and are still having enormous troubles in the Commercial Paper markets.).

So, not bad for a bunch of in-experience academics with pointy-heads who don't know what they're doing. Kinda makes you wonder who really understands economics and financial market mechanics - the guys who keep breaking it and whinging about it or the guys who keep changing their diapers and stop them from burning down the barn.

The questions now are where away: recover a milder uptrend as soon as all this temporary insanity goes away - balmed by a market-mandatory rate cut, establish a new trading range based on business-as-usual and ignoring the lurking perfect storms in housing, credit markets, the economy and structured debt problems lurking in other asset classes ? Or, heaven forbid, even have a serious correction until expectations and valuations are more in line with underlying realities.

If you wait just bit that'll all be cleared up for us - one way or another. A major part of the problem is that the problems are anything but clear. We've got a lot of working thru in re-pricing credit risks and adjusting various fundings, loans, etc. etc. Months if not longer. And even murkier views of the underlying health of the economy - at least according to the MSM.

This is not likely a time to be taking any wild flyers on even "sound" investments until we get better clarity on these issues. 

Posted by dblwyo at 01:00 PM | Permalink | Comments (0)

To the best of my understanding whinging is the British (English) term for whiners and complainers but it sounds more subtle and sophisticated to say it with an English accent :). BTW - please consider singing Schadenfreude to the tune of Oh Tannenbaum to get a flavor of our perspecive here !

It strikes me as greatly ironic that the Fed (Greenspan) has been blamed for letting rates remain low for too long and the role and impacts of the financial community in substituting credit and leverage on bad...bad diligence - think adult supervision - gets short shrift from the players. So short that as soon as things got a little tight a couple of weeks ago certain parties, as in all of them, where whinging about needing an immediate cut in the policy federal funds target. Fortunately good sense, experience, education and insight led to some short-term functional and operational fixes when the gearbox seized up (and make NO mistake it really seized up and we were all staring into the abyss). The accompanying chart shows target funds rate vs actual and up until that seize it was the normal minor fluctuations. The intervention by Ben & Co. strikes me as brilliant and courageous. If you won't mind me quoting myself let me borrow from an e-mail exchange on the topic that was also a posted comment on another blog. Before that let me mention that what we're seeing in the markets, in discussions of Fed policy and in discussions of the outlook for the economy (see this earlier post ) is a pretty complete lack of reality or the first stage in denial. We'll dig into the Markets and Fed Policy to get a better handle in follow-on posts but let's put it all in context. First, the brief dissection of Fed tactics and strategy:

Let's put ourselves in the Fed's shoes for a minute & recall their jobs are to 1) manage the economy around the speed limit - which gets most of the attention. But also 2) to make sure financial markets are orderly and don't seize up and 3) oversee the regulatory mechanisms that are required to keep the Jay Goulds of the world from taking the rest of us to the cleaners. The last statement indicated really that they're perfectly comfortable with what is essentially a neutral stance while recognizing a widening housing problem AND a liquidity squeeze (not a credit crunch which is when non-price restrictions keep any money from flowing [recall Reg Q and disintermediation ?]). It's funny that not too long ago everybody was complaining that they left rates too low for too long and not everybody's whining :). The Fed can't control the fundamental speed limit of the economy but can try to keep it as close to that potential as possible which means dampening down inflation on one side and demand shortfalls on the other. They're doing a fantastic job in the face of uncertainty. At the same time notice that the $ is very weak AND China is beginning to export inflation. Econ policy targeted rates need to stay up. Meanwhile we have an asset bubble based on bad diligence plus leverage & more bad diligence and discipline. That all needs to work out (recall Moral Hazard).
As it happens though the mechanism for actually managing rates is the same one for ensuring the system doesn't seize - and the discount window is always open but only used when Fed funds rates are lower than inter-bank loans. Given the shortfalls in ready liquidity in this last week the central banks are doing exactly what they're supposed to do and releasing funds into the system to maintain the target rate. The two are separate but highly inter-linked decisions. But don't read - as best I can tell - the injection of liquidity to keep the wheels greased as any change in policy. Which, as BR noted earlier, shouldn't be done or we'll get the buyout, buyback and over-leveraged asset boom driven by bad credit that's been needing to be cleaned out for a while now.

 The key here is whether or not there is adult supervision of financial decision making by all the players. Below is Minyanville's take-off on Jim Cramer's well-known tantrum from several weeks ago. That may have faded from your memory by this time but it shouldn't. The deeper question is, was this a black swan or was it anticipatable. Given that some very smart money, e.g. Wilbur Ross, have positioned themselves to take advantage of the still-to-be-worked-out implosion of the credit markets probably not. One could also point to excellent discussions by Paul McCulley and Bill Gross of PIMCO or a string of Jim Jubak columns (all referenced in various Weekly Readers) to confirm that. So to put it in context we offer up three different video takes. First, from Minyanville and then from WSJ's interview with Mr. Ross, finally concluding with Cramer's (admittedly rather brave) apperance on the Colbert Show where he sorta does and sorta doesn't take credit for the Fed fix.

Here's Hoofy and Boo to put it into perspective:

Now to keep up the humor here's our friend Mr. Cramer in a deep and insightful appearance on the Colbert Show. Followed by the master of both seriousness and being an adult, Mr. Ross. And to put a capstone on it as well as introduce a little adult perspective on how to actually have planned on reality instead of on fantasy here's the Master of Making Money Mr. Wilbur Ross. Please pardon the cosmetics !

Posted by dblwyo at 03:52 PM | Permalink | Comments (0)

Judging from the talking heads of the pontificate the upside surprises of Durable Goods orders and New Home sales are the 2nd coming of either a recovery (which was only talked about as the markets and credit markets seized up in the last week or so) or of the soft, soft-landing. Goldilocks saved and reborn anyone ? Actually orders were pretty good for total orders - up 8.1% YoY or 3.0% on a 3MoMA of the YoY data. Which is very nice after watching a downtrend since last summer. On the other hand orders ex-Aircraft which is the number more representative of actual capital spending plans is up only 0.2% YoY and the 3MoMa is -0.8%; furthermore the downtrend doesn't appear to be broken. So we can argue that the 2nd coming of Goldilocks doesn't lie in these numbers. And housing - well the headline number was 879K on an annual rate which is good news only in that it's so much better than expectations, admittedly. But two years ago the number was about 1.4 million ! So it's good news only if you're happy that the rate of rapid decceleration is slowing. We've got a long....long way to go. Below we're going to dive into New Home Sales a bit and then tackle Durable Goods Orders but the source, and I mean that canonically, is Calculated Risk who's been THE astute observer, analyst and assessor of Housing and it's inter-actions with the economy. His latest detailed dissections (from which we borrow a single key chart) are here, here, and here. Highly...highly recommended for anybody who believes that a bottom is nigh, visible or somesuch. My amateur guess is that we're barely, at best, 1/4 of the way thru the sub-prime mess with most of the mortgage resets to come. That we're about 1/8th (optimisitically ?) into the adjustment in existing home sales and prices and who knows from a real turn-around in the housing market. BtW CR also points out, repeatedly, that Commercial construction follows Residential and, further, that a downturn in RI always preceeds a slowdown(Recession) in the economy. Rather than my bad attempts to cover this space when CR does it so well and completely please check there for regular and powerfully useful analysis. Just to put things in perspective before diggin into the details let me share the following excerpt from the WSJ. Note that the numbers are positively discussed but wrapped in a fairly negative headline and discussion - appropriately so and the first time in the last several years the devil is getting his due. BTW - it might also make a little sense to review the prior posts on the overall economic situation and outlook which, despite some upward revisions in the GDP numbers being anticipated, is still holding up well enough to be worth taking seriously (that's a strong hint :) ).

• Reality Checks: the Latest GDP Report and Outlack ?

• Foggy Market Breakdown: GDP Component Changes

 Here's our friends from the Journal:

Economic Strength May Not Last -- Factory orders and housing may have been picking up momentum before the latest turmoil in credit markets clouded the economic outlook. Orders for durable goods, those expected to last more than three years, surged in July, and an important gauge of capital spending turned up, according to government data released Friday. Sales of newly built homes perked up, too, though that could be a temporary flicker of life in a sagging market. Orders for cars, appliances and other durable goods gained 5.9% in July over June to a seasonally adjusted $230.7 billion, the Commerce Department said. Nondefense capital-goods orders excluding aircraft, a closely watched barometer of business investment, rose 2.2%. Sales of new homes, meanwhile, showed a surprising rebound of 2.8% in July from June as average prices fell. But declines are expected in coming months as the housing sector works through high inventories and weakening demand. July's strength in orders and new-home sales came ahead of a sharp stock-market downturn and turmoil in some credit markets. Concerns over rising defaults in the subprime-mortgage market -- that is, loans targeted at borrowers with less-than-stellar credit -- have stoked caution in the debt markets, leaving companies encountering difficulty in obtaining short-term financing such as commercial paper. Consumers are having more trouble getting mortgages, too, as lenders tighten standards.

Let's start with the not-so-good/bad news of taking a serious look at Durables Goods. It's not entirely clearly why the market jumped up last Fr. (my personal suspicion is that we're early in the Stages of Denial) but the excuse was great strength in prospective capex spending. But what do the numbers actually tell us ? Indeed they did grow, and have been up-trending since Mar. or so on a 3Mo average basis (which we use to help smooth a very noisy series). But a) that's after a downturn that began in late '05 and b) doesn't look at the Orders ex-Aircraft, which is far less encouraging. In fact if you look at Orders ex-Aircraft, and especially the trend over the last year, it's continuing down. The best that could be said is the rate may be decreasing.

There's often a good deal of puzzlement (denial again ?) on the relationship and pattern over time of Durables orders and the economy so a look back on orders and Industrial Production might be in order. Here's the YoY% changes since Jan93 where you can the relationships, trends and turning points. Notice that IndProd appears, a turning points - at least the last one, to drive capex spending. There's nothing in these charts that would support the level of optimism in the headlines over the Investment spending outlook (which BTW needs to be born in mind with regard to the outlook for the Technology Sector). Some background on the roles of Investment in Business Cycles is here and a more detailed look at GDP, PCE, IndProd, etc. is here.

Now we need to take a look at New Home Sales which also got so much positive press. Hard to concieve when you look back over the last several years, which we do in the accompanying chart. Another data series that got a lot of positive headline spin and the news is good if you believe a decrease in the rate of decline is acceptable; it went from nearly -30% to "only" -20% (of course today's Existing Home Sales is a returning dose of reality - especially when you recall that the contracts behind those numbers are likely 2-3 months back !). We won't see the real impacts of the turmoil until Oct.

A better and more detailed look can be had by looking at a chart from CalculatedRisk which shows Annual(left) vs July(right) New Home Sales. This brings the "goodness" of the news into stark relief. Looking at just the July numbers you can see that we're still in a major, steep decline. You can then compare it to total annual sales to get an idea (also bearing in mind that the "season" for New Homes is the spring) how well total sales thru July predicts sales for the year. CR's forecast of 847K new homes sold for this year, which he thinks may be optimistics, is looking more and more spot on. The other little thing to think about is where might New Home Sales trough ? The options are a) same proportion decrease as prior downturns - which means a lot more to go, b) troughing down to the same level as earlier downturns - which means a long way to go or c) having to go far enoug to offset the excess building  (which you'd think likely) but we'll hope not for obvious reasons. Based on this chart you'd have to hope the likely trough isn't to far south of 500-600K/year. Which in any case means a continued downturn thru next year or beyond.

The danger here is that no one seems to be paying any attention to these trends, data or structural characteristics but only looking at monthly data and spinning it as positively as possible. These ARE NOT black swans - this has all been visible (obviously from these graphs) for a long, long time. Yet the implications are not reflected in many economic, market or business planning outlooks. Not good but if it proceeds as we think perhaps an opportunity, or several, eventually. ;) 

Posted by dblwyo at 02:44 PM | Permalink | Comments (0)

Well a not so wild week for a change. In case no one noticed the wings of the angel of death brushed us by last week, almost literally depending on how you feel about the role of the economy in enabling you to eat and so forth. There’s been so much going on that I’ve let fascination with Armageddon triumph my own postings somewhat so this is going up early to clear the decks and let me get back on topic. Back to the “Wings” problem – last week credit and stock markets nearly seized up worldwide as the excess liquidities and leverages showed us a “Whack-a-Mole” problem with sub-prime related structured debt instruments that led to a problem in commercial paper so bad that banks weren’t lending to anyone. Thru some forceful, brilliant and courageous, not to mention extremely quick (which means they’ve been thinking hard about this for some time) manuvering the Fed lowered the discount (the one charged to banks borrowing when they have liquidity problems NOT the Fed funds discount rate which is what they use to control longer-term policy). The really interesting thing is that, after Mon. everybody seems to think that things are going to drift back to normal. What are the five stages of denial again ? Seriously, this is just the tip of the first iceberg in a whole flotilla of icebergs (an argument we intend to pursue with a later and more substantive post) and even then the liquidity/leverage-based buyout, backback and so forth premiums (which may be as high or higher than 15% according to street heresy, excuse me I mean hearsay) go away while the buyout community re-works the existing deals. And the banking community starts re-pricing risks throughout the entire spectrums of structured debt.

To that end there are several interesting articles to take a look at, not least the ones either starred and/or in the special section. The vignettes in “Smart Money Speaks” are good representations of the accumulated tribal wisdom ignored that a) got us into this problem and b) appear to be going back to being ignored again. Meanwhile there’s a long list of finance & markets links, an interesting int’l economics link on labor out-sourcing (the two pieces of econ news will get their own separate post) and interesting real world links on Virgin’s approach to low-cost IT, Ford and the Auto Industry, Dell’s continuing (accelerating decline) and a strategic look at Xerox’s recovery (on which any feedback would be welcome) as well as Wal-Mart’s struggles with it’s add approach to India. There's also another econ-related article on the accelerating shortfall of trained and skilled labor in both China and India as the demand for folks with modern qualifications exceeds the supply. A couple of years out this has major structural implications (which are btw all according to theory and data/experience) for the performance of their economies, and socieites. So if you can pull up from a focus on market turmoil it's worth thinking about.

General & Special

(5*) The smart money speaks

(***) Surviving the markets The new financial order is undergoing its harshest test. It will not be pretty, but it is necessary. Over the past week central banks have lent tens of billions of dollars to restore confidence to the markets But it is already clear that this mess is about more than a bit of rash mortgage lending to Americans who were in the habit of falling behind with their monthly payments. Hedge funds and private-equity firms, kings of the boom, are nursing big losses. Debt markets that once handed out cash to all comers are tight or closed altogether. In almost every asset market, investors are scurrying to reprice risk—which mostly means to reduce it. The gravest and most immediate threat is to the banking system. For the time being, banks no longer trust other banks enough to lend them money except on onerous terms; equally worryingly, they lack confidence that other banks will trust them if they want to borrow. It is alarming when the very outfits that exist to supply the economy with credit start to hoard it from each other. At best this tightens monetary policy; at worst, a shortage of cash will cripple the payments system and cause runs on otherwise solvent banks and businesses that cannot rapidly raise funds.Underneath all the new technology and the fancy derivatives with strange acronyms is a dilemma as old as banking itself. Anyone who thinks that lending has been too loose—and many bankers do—should welcome a purge: better now than later when the imbalances would be bigger and the economy probably weaker. But if good banks fail and money for good companies dries up, the purge will wreak huge and wasteful damage on healthy parts of the economy. How likely is that?

• If wheels fall off, you were warned As we continue to listen to the vernacular from the powers that be around the world, the onus is on us to assimilate the cumulative dynamic that has evolved over the past five years. The Federal Reserve attempted to buy time on the back of the tech bubble with fiscal and monetary stimuli that encouraged risk-taking, reward-chasing behavior. It was a grand experiment of sorts, and it continues to brew. While debt is front and center as the issue at hand, credit of a different breed -- credibility -- has emerged as the issue at hand for markets at large. If and when investors begin to perceive that central banks are no longer larger than the markets -- and this, in my opinion, is simply a matter of time -- a crisis of confidence will ensue. That's a troubling thought, considering the current angst in the context of global indices that remain higher for the year.

Federal Reserve Expects Markets Will Take Days to Digest Discount-Rate Cut-- Federal Reserve policy makers don't expect to know for days whether their Aug. 17 discount-rate reduction will succeed at calming markets, Fed watchers say. Yields on three-month Treasury bills yesterday fell the most since the 1987 stock-market crash as money market funds dumped asset-backed commercial paper in favor of the shortest- maturity government debt. Fed officials, who said they would accept everything from home-equity finance to municipal bonds as collateral for loans, expect some disruptions because banks are more cautious about what collateral they themselves accept. ``What the Fed wants to do is buy time to sort these things out,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Fed Chairman Ben S. Bernanke is trying to avoid an emergency cut to the benchmark lending rate between banks, focusing instead on trying to maintain liquidity in markets. Futures traders are betting he'll fail and that the credit crunch will force him to ease monetary policy for the first time since 2003.

• Bernanke Aims to Avoid Emergency Rate Cut, Differing From Greenspan's Way

• Treasuries Fall as Fed's Lacker Dims Expectations for Emergency Rate Cut

(***)Capturing talent Despite its booming economies and huge numbers of people, Asia is suffering a big shortage of skills. And it is about to get worse.IT SEEMS odd. In the world's most populous region the biggest problem facing employers is a shortage of people. Asia has more than half the planet's inhabitants and is home to many of the world's fastest-growing economies. But some businesses are being forced to reconsider just how quickly they will be able to grow, because they cannot find enough people with the skills they need. In a recent survey, 600 chief executives of multinational companies with businesses across Asia said a shortage of qualified staff ranked as their biggest concern in China (see chart 1) and South-East Asia. It was their second-biggest headache in Japan (after cultural differences) and the fourth-biggest in India (after problems with infrastructure, bureaucracy and wage inflation). Across almost every industry and sector it was the same. Old Asia-hands may find it easy to understand why there is such concern. The region's rapid economic growth has fished out the pool of available talent, they would say. But there is also a failure of education. Recent growth in many parts of Asia has been so great that it has rapidly transformed the type of skills needed by businesses. Schools and universities have been unable to keep up.

Markets & Investments

Currency 'Carry Trade' Becomes Harder Play Amid Aversion to Risk But the onset of a U.S. credit crisis has generated an aversion to riskier, higher-yielding assets. That has caused speculators to reverse course, buying back currencies they borrowed in before they get even more expensive. The quandary now is that after many lucrative years with the carry trade, there is no obvious strategy to take its place under the current market conditions. The biggest winner during the unwinding of the carry trade is likely to be the yen, which at one point on Thursday strengthened more than 4% against the dollar -- which would have been its biggest one-day gain since 1998, had it held all those gains.

Tough love on Wall Street As lenders hunt for bad loans the Street is learning hard lessons about disclosure. Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios. The significance of proper disclosure is, in effect, the key to the current crisis. The food chain in this case is not one of predator feasting on prey, but a symbiotic credit extension, always for profit, but never without trust and belief that their money will be repaid upon contractual demand. When no one really knows where and how many Waldos there are, the trust breaks down, and money is figuratively stuffed in Wall Street and London mattresses as opposed to extended into the increasingly desperate hands of hedge funds and similarly levered financial conduits. These structures in turn are experiencing runs from depositors and lenders exposed to asset price declines of unexpected proportions. In such an environment, markets become incredibly volatile as more and more financial institutions reach their risk limits at the same time

How a Panicky Day Led the Fed to Act Freezing of Credit Drives Sudden Shift;Shoving to Make Trades. Strains in financial markets had been evident for weeks, but Thursday, Aug. 16, was different. As the day dawned in London, $45.5 billion in short-term IOUs issued outside the U.S. by corporations and others were maturing and had to be rolled over. Traders usually have buyers for such paper by lunchtime in London, around 7 a.m. in New York. On this morning, demand had dried up, and it would take the whole day to sell less than half of it, said a person familiar with the market. At 7:30 a.m. in New York, the largest maker of mortgages in the U.S., Countrywide Financial Corp., said it was tapping $11.5 billion in bank credit lines, a sign that it was unable to raise money in financial markets as it had been. This was a development more serious than another hedge fund running into trouble.

·         The Fed's Job

• Investors are looking to the stock-market crash of 1987 and the downdraft of 1998 as they try to gauge whether this month's financial-market turmoil is a passing storm or a more-lasting disturbance.
• As investors seek guidance amid the market's turbulence, some worry that even timely Fed action won't offset profit and economic growth damped by fallout from the subprime-mortgage problem
• Many analysts expect more market instability in Asia because of uncertainty over how much more bad news is to come and because international investors, who had piled into Asia's markets, are retreating en masse.
• China's stock market has been insulated from the global market chaos by capital controls, but its economy would be vulnerable to a U.S. slowdown.

Subprime Infects $300 Billion of Money Market Funds, Hikes Risk . Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans.

CDOs are packages of bonds and loans, and almost half of all CDOs sold in the U.S. in 2006 contained subprime debt, according to a March report by Moody's Investors Service.

Can Private Equity Firms Get Out of Buyouts? Amid the ever-tightening market for corporate debt, investors are already betting that some of the biggest deals may collapse, or at least be renegotiated.

(4*)The game is up In a special section, we look at how trouble in the credit markets has led to a crisis of confidence in global finance. During two exceedingly prosperous decades, that theory seemed to work just fine. But the swings in almost all financial markets this month have made dispersed risk suddenly morph into dispersed mistrust. The uncertainty has been magnified by the way that bad risks have become so hard to value. Investors have bought asset-backed securities that use shaky subprime mortgages in America as collateral, but as defaults have risen, the value of that collateral has tumbled. Meanwhile, collateralised-debt obligations (CDOs), made up of clumps of those securities and laced with leverage, have become almost impossible to trade. So none of the players really knows how much he has lost. While this uncertainty lasts, investors are taking it out on the banks that peddled the securities by dumping their shares; and the banks are taking it out on those they sold them to by demanding more collateral on their loans. The banks have even grown cagey about lending to each other.

Waiting For The Keg To Ignite Turnaround firms have enough dry powder to support a major offensive. Now the question is whether the downturn they’ve been stockpiling for is finally at hand. Fund-raising by firms that take active roles in distressed situations, either as creditors or owners, has really gathered steam in the last few months. Together such firms have raised well over $20 billion in the first half of 2007, and that tally could easily soar past the $30 billion mark by year-end.

Economy

Jones Day, Kirkland Send Work to India to Reduce Client Bills Clients are pushing law firms like Jones Day and Kirkland & Ellis to send basic legal tasks to India, where lawyers tag documents and investigate takeover targets for as little as $20 an hour. The firms are reacting to a trend that will move about 50,000 U.S. legal jobs overseas by 2015, according to Boston- based Forrester Research Inc. Companies with in-house legal departments in India include Wilmington, Delaware-based DuPont Co., San Jose, California- based Cisco Systems Inc., and New York-based Morgan Stanley, according to ValueNotes Database Pvt. The Indian legal services industry will more than quadruple to $640 million by 2010 from $146 million in 2006, Maharashtra, India-based ValueNotes said.

Business

The darker side of buyout firms The case of Aegis Mortgage shows that when private equity loses a high-risk bet, ordinary employees are the ones who suffer, reports Fortune's Katie Benner

Wal-Mart Fumbles Into India Wal-Mart (WMT) recently announced a strategic entry into India. They are positioning themselves as wholesalers so as to not run afoul of Indian laws prohibiting foreign entities from direct control of retail stores. This supposedly protects the very large class of small merchant and the employees they may have.

Dell embraces the 'Stodgy Factor' in tech. The current Buicks, although apparently well-made, look like they were designed by a fundamentalist minister working for Hyundai. Nothing could have so little style. To me the tech equivalent of the Buick is Dell computers. The only reason I recently moved to a Mac computer is because the alternative company option was a Dell. I don't want to single out Dell since it's not the only company suffering from old man's syndrome. Microsoft has been inching towards this status for years as has Intel. In the case of Intel it has brought this on itself with lame somewhat baffling advertising that is supposed to look hip. The recent dancing and gyrating idiots commercials are a good example. Hey Intel, break dancing was over 20 years ago. Get with it. With Microsoft the decline is more onerous, subtle and associative. For example nowadays every time you see Bill Gates he's standing next to some geriatric and decrepit third world leader as if these are the people he's hanging with. This is creating a negative brand image no matter that he's out there with these people as a philanthropist. Most of the Japanese consumer electronics companies teeter on the edge of stodginess but most have managed to not fall into the chasm. Hitachi probably comes the closest in my mind as somewhat stodgy especially when you consider the fact that they are seen by insiders as one of the most technologically advanced engineering companies. The unanswered question to the Buick dilemma is can the process be reversed?

• Is all well with Dell? Stock Spotlight: Wall Street debates whether Dell's turnaround is for real or if the PC maker will lose more market share. -- Dell announced Thursday afternoon that a year-long investigation into its accounting practices has ended and the company plans to restate earnings back to 2003. And for investors, a big cloud hanging over the personal computer maker has been lifted. It is now time to regroup and focus on whether Dell can reclaim the top spot in the personal computer industry. Last year, the company gave up the PC market share lead to Hewlett-Packard, and watched foreign competitors such as Lenovo and Acer gain steam as well. Dell was the only top computer company to lose worldwide PC market share. Investors watched Dell's shares drop nearly 30 percent in the past two years while HP shares gained more than 70 percent in that period.

Virgin America Flies New IT Path Discount Carrier Eschews Expensive Mainframes, Goes the Linux Route Virgin America Inc. has built an information-technology infrastructure that is a far cry from the traditional frameworks at larger airlines, which typically use costly mainframe systems and airline-specific software. Instead, the new closely held discount airline used inexpensive servers that run the Linux operating system and built many homegrown applications, including its Web site, using low-cost, modifiable "open source" software. It also outsourced big chunks of its information technology -- including software monitoring and the voice technology in its phones -- to more than 10 tech partners.

Xerox Duplicates Its Early Successes Since Anne Mulcahy took over as CEO of Xerox, 'the document company' has once more become poised for profitable growth. More and more of our revenues are now being delivered from services-led engagements, and there's less and less discussion about pure technology. Rather, our business is now about technology as an enabler to solve significant business problems that delivers bottom-line returns for our customers. For a company like Xerox, it's critical that our people really understand the services-led-solutions selling approach. We all know the pressures on hardware margins, but the fact is that today customers are looking for returns that come with productivity and efficiency improvements and an integrated solution that drives a complete business result. They're less interested in a product that represents one component of the solution. One of the historical aspects of a strong selling organization is a deep customer-centricity which is so fundamental now for a successful company. It's not just about the selling folks. We now develop on customer locations, for example. We have more engineers out there working with and talking to customers than we've ever had in the past. We're a leaner, more efficient organization, and everybody has to think in terms of the customer orientation. This influences the decisions and investments that we make, all with an eye toward really creating customer value. We've shifted some of our investment, for example, from the sales force to our field organization, which is in many ways part of our transition from strictly technology to a services-led organization. It's really about the knowledge we have about our customers and our ability to respond to the challenges and opportunities they put in front of us. Having a very strong heritage as a customer-facing organization is no question an advantage in thinking about the customer from a services perspective.

Ford Stays the Course, Wherever It May Lead What has changed in the year since Alan R. Mulally left Boeing to be chief executive at Ford Motor? In a sense, everything and nothing. Since his appointment last September made him the first outsider in recent memory named to run a Detroit auto company, Mr. Mulally has brought discipline to a company known for rivalries and infighting. An admirer of the development team that created the Taurus sedan, he revived the nameplate, most recently relegated to a rental car. He mortgaged virtually all of Ford’s assets to amass the billions of dollars the company needs for its restructuring, and he has put up for sale Ford’s British luxury nameplates: Jaguar, Land Rover and Aston Martin. Despite that, Mr. Mulally, who turned 62 this month, has not dispelled concerns about the future of Ford, which Toyota passed this year for second place in the American market.

GM Cuts Reveal Troubles Sector Faces Threat Of Extended Slump Amid Sales DeclineGeneral Motors Corp.'s move to cut production of full-size pickup trucks is underscoring fears that the auto industry is headed for a longer and more painful downturn in the U.S. than many had expected. A longer downturn, industry observers say, could threaten the turnaround plans of GM and the two other U.S.-based auto makers. U.S. auto sales declined sharply in June and July as falling home values and credit worries damped consumer interest. Early reports from dealers and market researchers have shown slight or no improvement this month compared with what was regarded as an unusually weak August a year ago. The sales weakness has hit both Detroit's Big Three and Japan-based auto makers like Toyota Motor Corp., which saw U.S. sales drop last month after a string of healthy increases.

Toyota's customer satisfaction takes a hit. U.S. automakers still trail but make strides against foreign rivals in study. Car buyers, in a surprising shift from a year ago, are more satisfied with their American-made Buicks and Lincolns than they are with their Toyotas these days, according to a University of Michigan study published Tuesday. But the turnabout isn't indicative of quality and reliability improvements up and down model lineups at both General Motors and Ford. Instead, the study contends, it's a function of Toyota's brand, which has suffered from recalls and other uncharacteristic hiccups, dropping from first place and allowing offerings like Buick and Lincoln-Mercury to climb the list.

Buick scores industry honors as it widens net Buick still holds some cachet in the slow lanes of West Palm Beach, but it'll take more than industry praise for General Motors to get its oldest, and perhaps most tarnished, brand to appeal to younger car buyers.

·         Detroit's Quality Improvement Myth

Posted by dblwyo at 02:05 PM | Permalink | Comments (0)

Perhaps we label this as a wild, wild week but in truth it’s not going to be the last one we see and we’ll run out of adjectives soon. The prior Weekly Reader post split out the Markets & Investments section so here we’ll concentrate, largely, on the matters of real substance in the economy and business. With some nod at financial issues – let me draw your attention to the 4* column on re-discovering and re-evaluating Graham and Dodd’s work on valuation and the need to look at long-term trends which finds that, despite the wishful thinking, that the markets were over-valued (which is reflected in our analysis of long-term PE Ratios and their importance). Another really interesting article introduces JPMorgan’s interesting look at trying to deal with the complexities of exchange rates via the Economist. Excellent. There are also interesting articles on China, India, Europe and the overall World economies and the sudden discovery that they are likely to slow more than anticipated, as well as deeper structural problems, e.g. the millions of Chinese engineers whose qualifications don’t meet requirements. The really interesting article sets are two. First, given our primary emphasis in this blog is on understanding the deep structural factors that drive both the environment and enterprise performance, is a multi-part set on what managing by the numbers really mean, the neglect of management systems and the critical role of judgment and its’ overwhelming neglect.

General & Special

Why is the market going crazy? Sure, the subprime mess is a big factor. But there's more to the stock market's stunning summer sell-off and wild daily swings than the real-estate bust.The stock market has been trading violently up and down every day recently. The Dow Jones Industrial Average ($INDU) has gained or lost more than 100 points on 13 days since the blue-chip index peaked at 14,000 on July 19. It dropped as much as 343 points by 1 p.m. Thursday -- and recovered nearly all of it by the close. Even so, stocks are off nearly 10% since July 19. Why? Here are some of the forces behind the sell-off, the wild gyrations and why it may be a while before the market finds a bottom.

(4*) Remembering a Classic Investing Theory More than 70 years ago, two Columbia professors named Benjamin Graham and David L. Dodd came up with a simple investing idea that remains more influential than perhaps any other. In the wake of the stock market crash in 1929, they urged investors to focus on hard facts — like a company’s past earnings and the value of its assets — rather than trying to guess what the future would bring. A company with strong profits and a relatively low stock price was probably undervalued, they said. Their classic 1934 textbook, “Security Analysis,” became the bible for what is now known as value investing. Warren E. Buffett took Mr. Graham’s course at Columbia Business School in the 1950s and, after working briefly for Mr. Graham’s investment firm, set out on his own to put the theories into practice. Mr. Buffett’s billions are just one part of the professors’ giant legacy. Yet somehow, one of their big ideas about how to analyze stock prices has been almost entirely forgotten. The idea essentially reminds investors to focus on long-term trends and not to get caught up in the moment. Unfortunately, when you apply it to today’s stock market, you get even more nervous about what’s going on.

Misleading misalignments Judging whether a currency is seriously undervalued is much harder than you think. This activity is based on the widespread assumption that the Chinese yuan is hugely undervalued against the dollar. Yet the awkward truth is that it is almost impossible to be sure when a currency is misaligned, let alone by how much. A recent Treasury research paper admitted that there was no fail-safe method to estimate the correct value of a currency. A study by two IMF economists, Steven Dunaway and Xiangming Li, examined eight different estimates of the yuan's supposed undervaluation: they ranged from zero to almost 50% depending on the methods and assumptions used. The yen might be anything between 18% overvalued and 29% undervalued, depending on which model you trust. But nine of the 13 models signal undervaluation, with the median value suggesting the yen is 15% too cheap—the weakest currency in the chart. What about the yuan? Morgan Stanley uses only four models to estimate the yuan's fair value, of which the median valuation suggests it is only 1% undervalued against the dollar—not the answer Congress wants. Another surprise is that most other emerging Asian currencies now look overvalued. None of these numbers should be taken as precise, but two conclusions follow. The first is that, in theory at least, there is a stronger case for declaring Japan's currency to be misaligned than China's. It is bizarre that the weakest currency is the yen, when Japan is the world's largest net creditor and had faster GDP growth than either America or the euro area in the first quarter. The problem, says Mr Jen, is that traditional models for estimating the fair value of currencies still focus mainly on the real economy, but increased cross-border investment flows (based partly on nominal interest-rate differentials) are now much more important. The second awkward conclusion is that the highly subjective nature of assessing currency misalignment will make it very hard for America or the IMF to agree on whether a currency is out of line.

Economy

Do China and India Produce A Million Engineers? For years, pundits and the press have been warning that the millions of engineers and scientists India and China produce each year would soon challenge the United States' technical superiority. Just a few months ago, the London-based think tank Demos warned in a report that "the center of gravity of innovation has started moving from the West to the East," and that China could become a "scientific superpower" by 2050. Indeed, the raw numbers are impressive. China cranked out more than 600,000 engineers in 2005 alone, and India produces nearly 500,000 technical grads annually. But these stats only tell half the story. Many of the graduates can't find work, and corporate recruiters in both countries lament a dearth of qualified applicants. "Out of the huge number of engineering and science graduates that India produces, only 25 to 30 percent can be regarded as suitable," says Kiran Karnik, head of the National Association of Software and Services Companies. The reason? Underfunding and a range of other factors have produced serious educational crises in India and China. These problems could soon wreak havoc on their economies. To sustain their breakneck growth, the countries will need lots of high-quality engineers and scientists. Yet neither have enough reliable universities to produce them. M.A. Pai, who taught at the prestigious Indian Institute of Technology in Kanpur, warns that the "lack of highly trained people at the Ph.D. level in both sciences and engineering will be a serious setback to India becoming a knowledge economy."

• Investors Are Wary of China Politics Wrangling among China's political elite in the coming months, ahead of a pivotal Communist Party meeting, could leave some foreign investors scratching their heads about their China portfolios.

Blame Money, Not Pigs, for China's Price Scare: -- What makes China's worst inflation scare in a decade doubly dangerous is its deceptively harmless appearance. Many analysts are inclined to write it off as a temporary food shortage, when it actually stems from a serious money glut. The annual inflation rate zoomed to 5.6 percent last month, the highest in more than 10 years, the National Bureau of Statistics said yesterday. Food prices jumped 15 percent, driven by a 45 percent surge in meat and poultry. Non-food prices, by contrast, remained well contained, rising just 0.9 percent from a year earlier. It may be erroneous to make light of China's inflation challenge just because the gains are occurring in food, rather than ``core'' -- or non-food -- prices. It may be equally facile to view the surge in inflation as transient, caused by supply shocks such as floods and the ``Blue Ear,'' a respiratory illness that has killed thousands of pigs in China and curbed hog supply.

Europe's Economic Growth Slows More Than Forecast -- European economic growth slowed more than economists expected in the second quarter as a rebound in consumer spending failed to make up for weakness in manufacturing and construction. The economy of the 13 nations that share the euro expanded 0.3 percent from the first quarter, when it grew 0.7 percent, the European Union's statistics office in Luxembourg said today. The growth is the slowest since the fourth quarter 2004. From a year earlier, the economy expanded 2.5 percent. The euro's 7 percent gain against the dollar in the last year has eroded export competitiveness and higher oil prices increased costs for companies and consumers. While record-low unemployment may lead to more consumer spending, confidence may be hurt by further turmoil in financial markets. ``It confirms what we've thought, that from the spring onwards and into the second half, we see the economy losing some momentum,'' said Kenneth Wattret, an economist at BNP Paribas in London. ``Most business surveys still suggest growth, but the economy is slowly decelerating.'' The second-quarter growth was slower than the 0.5 percent median forecast of 32 economists surveyed by Bloomberg News. The statistics office, Eurostat, will publish a breakdown of the gross-domestic-product data on Sept. 3. The European Central Bank forecasts the economy will expand about 2.6 percent this year, close to the 2.7 percent recorded in 2006, which was the fastest in six years.

·         WTO Warns of 2008 Slump Over Concerns About Credit -- Global economic and trade expansion could slump in 2008 because of increased risks in financial and property markets, the World Trade Organization said Tuesday, citing concern about credit problems that started in the market for subprime mortgages. The global commerce body said market uncertainty caused by defaults in U.S. subprime loans, combined with large trade imbalances in goods and services, is already hampering global economic growth, which it said would be around 3% for the year. Global goods trade growth for 2007 will slow to about 6% from 8% last year, the WTO said in a 119-page report.

• Northern Trust Commentary Don't Underestimate the U.S. Consumer? The Global Economy Is Strong?

US retailers warn of tough times Two US retailing giants, Wal-Mart and Home Depot, have warned about a poor year ahead after their latest results. Wal-Mart's profits hit $3.1bn (£1.54bn) between May and July, from $2.08bn last year, but missed forecasts. In contrast, Home Depot saw profits fall to $1.59bn from $1.86bn in the same period a year earlier, but beat expectations. But both firms expect earnings to fall in the months ahead, amid fears that the US economy will continue to cool.

• Homebuilder Confidence in U.S. Declined in August to Lowest in 16 Years
• Shoppers Held Back in July
• Consumers Key to Offsetting Weak Business Spending

Economists React: Inflation Isn’t the ‘Beast’  Economists weigh in on the July consumer-price data, which showed a modest increase in the headline number due to falling gas prices and a jump in core prices amid increases in costs for apparel and medical care.

Business

(***) Now, It's Business By Data, but Numbers Still Can't Tell Future We've had management by objective and total quality management. Now it's time for the latest trend in business methodology: management by data. The success of enterprises as diverse as Harrah's Entertainment, Google, Capital One Financial and the Oakland A's has inspired case studies, books and consultants promising to help executives outpace rivals by collecting more information and analyzing it better. There is much to be said for the approach. In many cases, analyzing data would be an improvement over prior management techniques, which Stanford business professor Robert Sutton derides as "faith, fear, superstition and mindless imitation." Mr. Sutton is co-author of "Hard Facts, Dangerous Half-Truths & Total Nonsense," one of several recent tributes to the data-driven enterprise. Running a complex enterprise can't be reduced to a spreadsheet, however. Even the most detailed statistical analysis has limitations, as Mr. Sutton acknowledges. For one, conditions may change, rendering the analysis misleading. Thomas H. Davenport, a management professor at Babson College and co-author of "Competing on Analytics: The New Science of Winning," says such change helps explain why so many sophisticated lenders and investors have gotten burned by the downturn in subprime mortgages. For years, default rates followed a predictable pattern based on the borrower's credit score. Last year, that pattern changed slightly and many lenders didn't adjust. Jeffrey Pfeffer, Mr. Sutton's colleague and co-author, offers a more insidious pitfall: Managers can be so focused on perfecting today's business that they lose sight of tomorrow's. The tension between the short term and the long term is familiar to managers. Other research suggests that quality-focused approaches may reduce defects, but hamper innovation. That helps explain why companies seem invulnerable one minute and aimless the next. For a decade, Dell captured an increasing share of sales and profits in the PC industry by mastering supply-chain logistics. But Dell couldn't diversify its business, making it vulnerable once Hewlett-Packard matched its expertise. The real trick, then, is to combine these skills, gaining advantage by analyzing today's problems while looking creatively for tomorrow's opportunities.

·         Cog Or Co-worker? The organization man isn't extinct or even endangered—but the role has been refined over the past 100 years The 21st century is still young, and management gurus are sounding positively Aquarian. They proclaim that the future of work lies in creativity, flexibility, and individualism—broken molds and smashed time clocks. They say that organizations of the future will have to adapt to their employees, not the other way around.

·         New CEOs May Spur Resistance If They Try to Alter Firm's Culture Employees who find themselves reporting to a new chief executive, especially an outsider who has bought their company or been recruited to turn it around, often face a roller coaster of changes. New leaders typically reshape their senior executive team and the company's growth strategies. The most wrenching adjustment occurs when a CEO changes the corporate culture -- the core values and ways of doing things that bind people to their jobs.

·        How a Company Made Everyone a Team PlayerAmerican corporations love teamwork. But few companies are as smitten as ICU Medical Inc. At the San Clemente, Calif., maker of medical devices, any worker can form a team to tackle any project. Team members set meetings, assign tasks and create deadlines themselves. Demand for the company's Clave product, used in connecting a patient's IV systems, was skyrocketing; Dr. Lopez needed to figure out how to ramp up production. ICU had fewer than 100 employees but was expanding rapidly. Handling the booming growth and demand "was an overwhelming task for one entrepreneur CEO," says Dr. Lopez, 59 years old. He was still making most decisions himself, often sleeping at the office. Then, he had an epiphany watching his son play hockey. The opposing team had a star, but his son's team ganged up on him and won. "The team was better than one player," says Dr. Lopez.

TXU to begin pushing buyout to shareholders - Texas power company TXU Corp. (TXU.N: Quote, Profile, Research), making a final push to win support for its $32 billion buyout, said on Monday it would probably split into three separate businesses if the proposed deal fails. The company has set a September 7 shareholder vote, where it needs two-thirds approval to go ahead with its proposed sale to a group led by private equity firms Kohlberg Kravis Roberts & Co. (KKR.UL: Quote, Profile, Research) and TPG (TPG.UL: Quote, Profile, Research), formerly known as Texas Pacific Group. TXU's management team, led by Chief Executive John Wilder, on Monday began a series of meetings with top investors on the merits of the buyout bid. The deal has encountered opposition from the company's largest shareholder, money manager Franklin Resources Inc. (BEN.N: Quote, Profile, Research), which said the offer price was too low. TXU said it was scheduled to meet with Franklin Resources as part of the final push. In a presentation to investors, TXU said the buyout's 25 percent premium was meaningful and superior to alternative options, including a stand-alone plan that would separate the company into three distinct businesses. TXU's three core units are transmission, generation and retail electricity.

Caterpillar: Big trucks, big sales, big attitude In the most recent quarter, weak construction activity in the U.S. sent profits down 21 percent. Even so, Cat has been on a great run over the past five years, revelling in a global moment - booming commodities, infrastructure-hungry markets and a weak dollar - precisely suited to its strengths. Double-digit growth overseas in both mining and construction equipment helped propel it to record exports ($10.5 billion), profits ($3.5 billion) and revenues ($41.5 billion) in 2006. Net profit margins have also improved, from 4 percent in 2002 to 8.5 percent in 2006. And shareholders have joined in the fun. Shares are up more than 20 percent in the past six months, and the stock has outpaced the S&P by 100 percent over the past two years. Overwhelmed by business, Cat cannot keep up with demand, taking orders into 2009 and beyond. Yet the boom obscures something more fundamental - and potentially threatening. Its factories, however, win few awards for efficiency and productivity. So Caterpillar is launching a major effort - its third since 1985 - to raise its manufacturing game. If the effort fails, the risk is that Caterpillar goes down the same disheartening road as General Motors (Charts, Fortune 500) - becoming another iconic American company with a dominant presence that failed to step up in terms of manufacturing innovation and performance, allowing other competitors to chew into its markets. Academics and consultants figure that Caterpillar's production system operates under the same philosophy used in Detroit in the 1970s - production is pushed by the availability of parts rather than pulled by the demands of customers - and we know how that story turned out. Here's another unhappy parallel. Embittered by three major labor disputes in the past three decades, many of Caterpillar's employees are leery of buying into the new overhaul, much as autoworkers resisted changing work patterns at GM in the 1970s and '80s. And just as in Detroit, which put off change because it made so much money for so long, instilling a sense of urgency is not easy.

Why Deere Is Weeding Out Dealers Even as Farms Boom. -- For more than a century, Deere & Co. has relied on dealers to sell its iconic John Deere tractors and other farm equipment. Deere dealers like to brag that they "bleed green," the company's trademark color. But even as the farm boom helps Deere harvest record profits, dozens of North American dealerships are getting sent out to pasture, including some that have passed through families for generations. Chief Executive Robert Lane says times have changed. In an age when tractors use satellites to track the location of every seed, he says, dealers must match the sophistication and size of agribusiness customers. "For years we talked about Deere as a family," says Mr. Lane, a former banker. "The fact is, we are not a family. What we are is a high-performance team....If someone is not pulling their weight, you're not on the high-performance team anymore." Deere's overhaul is one answer to a challenge faced by many large businesses that distribute their products through independent retailers. These retailers are supposed to know the local turf and market the product more effectively than a big corporation could. But if the retailers are too small-scale, their inefficiencies could outweigh the advantages.

• · Overseas sales power Deere results

Nestle sets $21 billion buyback, lifts outlook

·         Nestle Credit Rating Cut by Fitch, Signaling End of AAA Corporate Debt Era

Macy's earnings tumble M&A costs are said to have slammed the department-store chain's bottom line, but news of Carl Icahn stake bolsters the stock.

Overrated  The subprime-mortgage meltdown could—­finally—end the credit-ratings racket. Late last year, officials from Moody’s Investors Service gave a PowerPoint presentation to a group of mortgage lenders in Moscow. There were the usual arcana about what the ratings mean and how the agency creates them. Along with competitors Standard & Poor’s and Fitch Ratings, Moody’s serves as an unofficial umpire in major league finance, helping investors and underwriters gauge what to buy and what to avoid. Many big investors aren’t allowed to even touch bonds that don’t have the blessing of a good credit rating. But midway through the presentation, Moody’s revealed a significant, and ultimately more dangerous, role that the agencies play in financial markets. The slides detailed an “iterative process, giving feedback” to underwriters before bonds are even issued. They laid out how Moody’s and its peers help their clients put together complicated mortgage securities before they receive an official ratings stamp. But this give-and-take can go too far: Imagine if you wanted a B-plus on your term paper and your high-school teacher sat down with you and helped you write an essay to make that grade.

A Legend's Bloated Legacy Sandy Weill’s Citigroup is staggering under its own excessive weight. Tucked in the bowels of the Citigroup website is a family tree every bit as sprawling as the one belonging to the Hapsburgs, the continent-spanning family that once ruled Europe. Set against a Gustave Courbet painting of a mighty oak, the tree represents the different branches of the seminal financial conglomerate of the 1990s. The website kindly offers three different options for printing it out. I chose the shortest version, eight pages (no joke). But even then, I needed a magnifying glass. By my count, there are 271 entities, combinations, spin-offs, and name changes listed, ultimately filtering down through the decades to become the ungainly entity ridiculed as GroupCorp. Now Wall Street wants to take a chainsaw to those magnificent branches. Investors have come to believe that Citigroup needs to be whacked down. This spring, hedge fund manager Eddie Lampert bought $800 million worth of the stock. That’s only a small percentage of the $260 billion bank, but the purchase stirred the hearts of investors, who hope that the manager who liked Sears and Kmart so much he bought the companies might be able to spur change in another boardroom.

 Driven to the Brink Bill Ford is scrambling to save the family legacy. But with Motor City in a tailspin and takeover firms hovering, can a new C.E.O. figure out how to keep the Fords in Ford?  It’s a rainy Friday night in Detroit, and Bill Ford would much rather be on an ice rink playing pond hockey with his buddies or at home watching 24 with his wife, Lisa—anywhere but here, the Cobo Center, where he’s feeling hot and confined in his black tie, taking part in the kind of pomp and pageantry for which he has little patience. Tonight is Detroit’s Charity Preview gala, the biggest social event of the year and the triumphant finale of the opening week of the North American International Auto Show in January. Ladies in department-store ball gowns sweep past dazzling Maseratis and Mustangs, sipping champagne and trying to catch a glimpse of the glitterati—captains of industry like former Chrysler chair Lee Iacocca, G.M. vice chair Bob Lutz, and Bill Ford, the executive chair of Ford Motor. There is an aura of old Vienna. This is truly Detroit in denial, or maybe pretending that it is still the center of the universe. Never mind that Ford will soon post its biggest-ever annual loss, $12.7 billion, or that Chrysler will be put up for sale, or that before long the Big Three might become the Big Two and eventually, God forbid, the Only One. Toyota is the real star of this show, but for tonight at least, everybody acts blissfully unaware, and that’s driving Bill Ford crazy. He’s always been an iconoclast in macho Motor City. He shakes hands and makes pleasantries until beads of sweat break out on his forehead, and he tugs at his collar and says under his breath, “Can you believe this? My least favorite night of the year.”

The Most Dangerous Deal in America Inside the secretive world of Cerberus Capital­­­—and why its plan to save Chrysler spooks Wall Street. Now the question is whether Feinberg can turn the battered auto manufacturer around or whether this might finally be the deal that gets the best of him. In an industry of damaged companies, Chrysler is almost a total wreck: It has sunk to fourth place in North America, the market on which—unlike its competitors—it is almost entirely dependent. Nearly 75 percent of its business comes from sales of increasingly less popular light trucks, such as the four-wheel-drive Jeep Grand Cherokee, which was ranked by the Environmental Protection Agency last year as the least-fuel-efficient S.U.V.—an impressive distinction. Chrysler controls less than 10 percent of the hot market for crossover utility vehicles. And it owes its retiree medical plan more than $17.5 billion. The day after Zetsche announced the sale, the company revealed that in the first quarter of 2007, Chrysler’s revenue had dropped 11 percent compared with the same period the previous year, and it had swung from an $857 million operating profit to a $2 billion loss. “There’s no economic justification for Chrysler Corp. to exist,” says Gerald Meyers, the former C.E.O. of American Motors and a professor at the University of Michigan’s Ross School of Business. “Whatever they can do, someone else can do better.”

Uncool or not, Nokia is soaring The world's biggest handset maker has cultivated brand loyalty with cell phones that are basic, reliable and cheap. Now Nokia is ready to take on the BlackBerry -- and it thinks it can win.A few years ago, Nokia found its stock stagnating and its market share declining. In an age when mobile phones had become fashion statements, multimedia tools and design benchmarks, Nokia remained unrelentingly uncool. The Finnish company missed design trends like clamshell phones and arrived late with so-called candy-bar phones, which slide open and closed. But though Nokia (NOK, news, msgs) was slow to take advantage of the developed world's move to ultrathin, blingy and multifunctional cell phones, it continued to build its business in critical developing markets such as China, India and Indonesia where consumers still demand basic, reliable hardware. That strategy has paid off and given Nokia time to retool its new-product pipeline and global marketing strategy. Nokia's global market share rebounded and is expected to top 40% this year. The company posted a 14% gain in brand value on the BusinessWeek/Interbrand Top 100 Global Brands ranking in 2005 and a 9% gain in 2006.

Posted by dblwyo at 10:20 AM | Permalink | Comments (0)

Well it seems a shame that there’s only one word for wild plus assorted adjectives to make it wilder J. But, again, this was another interesting week and so much went on that we’ll have to split the links into two. One (this one) focused on financial and market readings and the other on economic and business. Perhaps we could think of it as the split between the unreal and the real ? 

In any case the business sections, TV shows and on-line news services have been, necessarily and somewhat appropriately, focused on the turmoil in the markets due to credit and liquidity problems. Both of which – and we intend – should receive more detailed discussions. But te distinction between longer-term substantive issues and immediate foci should be kept in mind, though the latter can spread to the Mainstreet world and become very substantive.

The biggest closing news was the Fed’s dropping the discount rate (note NOT the Fed Funds rate which is what their policy normally refers to) – the rate charged banks for short-term loans. Unfortunately the markets are taking the euphoria of having “forced” a Fed policy change far too far and to heart. Oddly enough for all the technical confusions between the various Fed instruments and intents the best explanation is in Wikipedia. But 99% of this problem is confusion between liquidity (cash or equivalents) that can be used to buy things. And credit which can be created by borrowing against assets – only in this cash we lived in a world where credit was turned into liquidity which was turned into assets which were re-borrowed against on the theory that risk was non-existent and we lived in the best of Goldilocks world.

The articles in the General/Special section do a very nice job of re-tracing the problems with this and the re-emergence of a focus on sounder practices. In fact one might say they celebrate it. But, in their euphoria, people are grossly under-estimating the scope and scale of the problem and just want to return to business as usual. The links in the Markets & Investments sections are basically examples of where the breakdown in good financial and business practice is coming home to roost.

General & Special

 (***)Our Risky New Financial Markets Tremors from America's quaking subprime mortgage market have spread throughout the financial world. This latest disturbance in global financial markets is neither isolated nor idiosyncratic. It points to deeper, enduring changes in the structure of our markets -- changes that have profoundly altered the behavior of market participants in ways that tend to encourage risk-taking beyond prudent limits. Just as troubling is the failure of official policy makers to effectively rein in such excesses, leaving our financial system vulnerable to similar turmoil in the future. The principal structural driver behind this and similar financial tribulations is the massive growth of financial markets, combined with a plethora of new credit instruments. By any measure, current financial activity -- new financing or secondary market trading volume -- dwarfs the past. The outstanding volume of nonfinancial debt now exceeds nominal GDP by $15 trillion, compared with $6 trillion a decade ago. Traditional credit instruments such as stocks, bonds and money-market obligations have been joined by a long and diverse roster of new obligations, many of them extraordinarily complicated. Along with the arcane tranches of mortgages that recently garnered attention are a myriad of financial derivatives, ranging from those traded on exchanges to tailor-made products for the over-the-counter market.

Fear makes a welcome return “At particular times a great deal of stupid people have a great deal of stupid money. . . At intervals. . . the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ‘speculation’; it is devoured, and there is ‘panic’.” Walter Bagehot.*

Panic follows mania as night follows day. The great 19th-century economist and journalist, Walter Bagehot, knew this better than anybody. Lombard Street, his masterpiece, is dedicated to the phenomenon. It is devoted, too, to how central banks should deal with its results. Ours has been a world of the “no income, no job, no assets” 100 per cent mortgage; of the “do what you like with our money, as long as you pay the fees” covenant-light loan; and of the “in go poor credits and out comes a triple A-rated security” financial alchemist. It has been a world of confidence, cleverness and too much cheap credit. This is not new. It is as old as financial capitalism itself. The late Hyman Minsky, who taught at the University of California, Berkeley, laid down the canonical model. The process starts with “displacement”, some event that changes people’s perceptions of the future. Then come rising prices in the affected sector. The third stage is easy credit and its handmaiden, financial innovation. The fourth stage is over-trading, when markets depend on a fresh supply of “greater fools”. The fifth stage is euphoria, when the ignorant hope to enjoy the wealth gained by those who came before them. The warnings of those who cry “bubble” are ridiculed, because these Cassandras have been wrong for so long. In the sixth stage comes insider profit-taking. Finally, comes revulsion.

Hold tight: a bumpy credit ride is only just beginning Central bank intervention last Friday to inject liquidity into the global financial system did not mark the beginning of the end of financial market turmoil. It was merely the end of the beginning. Liquidity injections will not deliver lengthy respite. The next phase of market volatility will be more vicious than before, led by downgraded ratings on credit instruments and followed by further dislocation in the credit markets that will spill over to equity markets.

Credit markets are the big brother of equity markets. In the US and Europe, capitalisation of private debt securities is a combined $28,000bn (€21,000bn, £14,000bn), compared with $23,000bn in equity markets. Although rating downgrades will be a consequence of existing anxieties about credit quality, they will have knock-on effects. Substantial parts of the credit markets are priced off these ratings. This presents rating agencies with serious conflicts of interest that will move centre stage when investors start looking for a scapegoat. Rating downgrades will convert risks into losses. Lossmaking credit funds will suffer redemptions, forcing fund managers to dump well-performing parts of their portfolios as well. Loan covenants will require rated entities to inject liquidity on a downgrade. Where central banks are pushed to ease liquidity more aggressively than their inflation objectives may suggest, currencies will weaken. The yen will rebound.

Those who are older than the trading floor average will have seen this before. But what makes this credit cycle more complicated and perhaps more hazardous is the very thing that the former Federal Reserve chairman Alan Greenspan and others argued had made financial systems safer: the securitisation of credit. Securitisation brings benefits. But in these circumstances it will make the down cycle more severe and will transmit systemic risks along untraditional paths that may prove less sensitive to interest rate cuts than in the past.

·         Moody's Warns of LTCM-Scale Hedge Fund Collapse as Debt Market 'Seizes Up'

You know you’ve arrived when your central strategic concerns get major NPR coverage.

·         Central Banks and the Moral Hazard of Bad Bets Morning Edition, August 14, 2007 · The Federal Reserve injected $62 billion into the banking system last week, and $2 billion Monday, in the hope of calming credit worries. The next step to help the economy: to lower interest rates, says Bob Rose, executive editor of Smart Money. The European Central Bank and the Bank of Japan have intervened with large doses of cash as well. But the role central banks have in stabilizing markets is complicated, as Rose told NPR's John Ydstie. While sending the message that it doesn't want a recession, a move to cut rates would "essentially bail out people who have made bad decisions, or taken risks — and the risks have blown up," Rose said. The result, Rose says, is that the Fed is walking a fine line, between maintaining order in the markets and solving the problem too soon — which could encourage more speculation and irresponsible behavior.

·         Credit Crunch Could Stall Private-Equity Deals All Things Considered, August 7, 2007 · The end of easy credit is hitting private equity firms especially hard. These are companies that aren't traded on the stock market and have fewer regulations — such as government-mandated earnings reports. They often produce huge returns, buying other companies on the cheap, hoping to sell them later for a profit. Philip Coggan, capital markets editor for The Economist, talks with Andrea Seabrook about the effects of worries about defaults on private equity acquisition.

And you’ve really made the big time when you get covered on MSN Money in the column specifically written for beginners !

• How analysts missed a meltdown The case of now-bankrupt American Home Mortgage shows why you can't wait for the experts. By the time many Wall Street analysts said sell, the company was collapsing.

Poole Says Only `Calamity' Would Justify Rate Cut Now -- William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a ``calamity'' would justify an interest-rate cut now. Poole, who confers regularly with regional business contacts, said in an interview yesterday that ``no one has called up and said the sky is falling.'' The best course is for officials to assess economic figures, including the August jobs report, when they next convene on Sept. 18, he added. The comments suggest a reduction at or before the September meeting isn't the certainty that futures traders assume. Reports this week showed increases in retail sales and industrial production in July, while exports surged the prior month. Economists predict that revised government figures will show growth in the second quarter exceeded 4 percent. ``It's premature to say this upset in the market is changing the course of the economy in any fundamental way,'' Poole, 70, said in the interview at the bank's St. Louis headquarters. ``If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don't have the intelligence they need to have a policy actually based on solid evidence.'' His comments were the first by a Fed official since the U.S. central bank joined counterparts in Europe and Asia to inject emergency funds after a surge in money-market rates. The Fed has added $71 billion of reserves in the past five trading days.

·         Fed Cuts Discount Rate to 5.75 Percent to Ease Credit Crunch -- The Federal Reserve, in an unscheduled announcement, cut its discount rate and said it's prepared to take further actions to ``mitigate'' damage to the economy from the rout in global credit markets. The central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.

Investment & Markets

CDOs: Waiting for the Next Shoes to Drop From a risk management perspective, MHP and MCO look a lot more fragile when it comes to financial and reputational exposure than do leading investment banks focused on the mortgage sector like BSC or Lehman Brothers (NYSE:LEH). Unlike a financial institution, publishing companies such as MHP and MCO lack the capital cushion and access to liquidity with which to absorb large financial losses. Even though the ratings agencies reportedly charged up to three times the customary fees for CDO ratings, this compared to the fee charged for a similar size bond issue, there still is not enough money in the proverbial cookie jar to offset the added risk from these complex structured assets. Indeed, wouldn't it be a delicious irony if one or both of the major ratings agencies were forced into bankruptcy due to legal claims made regarding CDOs? As Bloomberg noted back in May of 2007: "When it comes to CDOs, rating companies actually do much more than evaluate them and give them letter grades. The raters play an integral role in putting the CDOs together in the first place." The illusion of an investment-grade credit rating resulted in roughly a trillion dollars worth of subprime and other non-investment grade mortgages being packaged and sold to the Buy Side. We discount the recent market upset that has seen some commentators claim, irresponsibly in our view, that CDOs have little or no value. If you consider the situation more calmly, then a haircut of 25-30% or some $250 to $300 billion in aggregate principal loss, seems reasonable to us -- at least for starts. And that's just the basic loss, not counting punitive damages and costs.  Given the above estimate of aggregate losses to the Street, the bad news coming from BSC seems just the beginning. True, the folks at BSC have been generating headlines, but there are still dozens of Sell and Buy Side firms that have yet to come to Jesus when it comes to the CDO fisasco. We are still very early in the process of unwinding the excesses of the past several years. Bottom of the first inning, to be precise.  But that does not mean that the Sell Side firms are standing still. One well-placed reader of The IRA reports that the top Sell Side firms are closing down a couple of hedge funds a day in an effort to staunch the bleeding from CDOs.

·        Moody's, S&P Lose Credibility on CPDOs They -- Moody's Investors Service and Standard & Poor's, the arbiters of creditworthiness, are losing their credibility in the fastest growing part of the bond market. The New York-based ratings firms last month gave a new breed of credit derivatives triple-A ratings, indicating they were as safe as U.S. Treasuries. Now, investors are being offered as little as 70 cents on the dollar for the constant proportion debt obligations, securities that use credit-default swaps to speculate that companies with investment-grade ratings will be able to repay their debt.

·         An ECB Put?  Both the European Central Bank and the Federal Reserve intervened heavily in money markets last week to keep short term rates from shooting higher as the supply of interbank funds was constricted. The ECB’s intervention meant banks weren’t forced to borrow at penalty rates, and the Fed could have intervened more effectively by offering unlimited funds at the Fed funds rate, says Robert Eisenbeis, retired research director at the Atlanta Fed. In his time in that position, Mr. Eisenbeis advised the Atlanta Fed president on monetary policy, periodically listened in on the daily morning call between senior Fed staffers and the New York Fed’s open markets desk, and studied the European banking, monetary and financial regulatory systems. Here are his thoughts:

Goldman Wagers On Cash Infusion To Show Resolve Goldman Sachs Group Inc.'s injection of $2 billion into one of its flagging hedge funds opens a new window on the difficulties even some of the world's premier financial players are having as credit-market anxiety infects a widening circle of investors.After a week when financial markets were spooked by losses in several Goldman funds -- among other startling setbacks in the financial world -- the big investment bank yesterday said three of its funds have seen the net value of their assets fall a total of about $4.7 billion so far this year.Goldman announced just before New York's financial markets opened that it led a high-profile group putting $3 billion into Goldman's Global Equity Opportunities Fund. The fund, worth $3.6 billion before the new money arrived, lost more than 30% of its value last week during one of the market's most turbulent stretches in years, Goldman said. The move, which the firm described as a solid investment that will pay off in time, helped calm markets. But it also amounts to a bold gamble by one of Wall Street's most respected names: By drawing attention to its conviction that this is a turning point -- and by bringing some heavyweight investors on board -- Goldman is betting it can shore up confidence in one of the worst-hit areas of the market and pave the way for a rebound.

• Goldman `Quant' Fund Reduces Fees to Woo Investors After 28 Percent Drop
• Goldman Says `Quant' Funds Need Different Strategies After August Losses

The Market's Persistent Uncertainty

Each generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.
-George Orwell
Seldom does the market thread the needle and hook the shorts as it did on Monday's open and then let them off the hook so quickly, unless there is serious liquidation backstopping the bears. And as a serious change in character: the back of the sell-the-rally mentality has not been broken. It has not even been bruised. Markets around the world attempted to respond to Fed injections but the reality is that many of the best and brightest funds are in trouble and down on the year. Consequently, every rally attempt is viewed as an opportunity to sell.
With risk managers assuming a refreshingly novel role of actually managing risk, every rally must be sold: it's a case of machine bites man, man bites machine. No one wants to be a hero with financial tomahawks zipping through the air lest they lose their scalps or worse, their jobs. If Wall Street doesn't like uncertainty, it abhors chaos. Although the wagons may have been temporarily circled, it seems no one can positively, absolutely connect the dots according to the brave new world of Stat Quant. It seems no one can truly explain the DNA of some derivatives' incestuous ancestry and the havoc their mutated offspring may provoke. No one wants to be a hero here: where once financial pioneers staked claims, now investment bankers see the plains littered with the bodies of pioneers. No one wants to get trampled by the march of the machines, the regime of the Black Boxes goose-stepping through Tape Town.

Mid-Market Deals Feel The Credit Crunch, Too Middle-market buyout deals are experiencing the same problems raising debt as their multi-billion-dollar counterparts, with a number of smaller deals having trouble securing debt at the desired prices and some deals being pulled altogether. At least 10 outright buyouts, dividend recapitalizations or debt refinancings are having a difficult time finding buyers for their paper, according to several middle-market lenders. Among the deals having trouble are MidOcean Partners' buyout of Bushnell Outdoor Products Inc., a maker of binoculars, telescopes and other optical equipment; as well as Graham Partners' planned purchase of Schneller Inc., a maker of decorative laminates, these people said. The credit crunch is similar to the problems that some mega-buyout shops are having raising debt to fund multi-billion dollar deals, such as the buyouts of First Data Corp. and Chrysler Corp., as problems in the subprime mortgage markets have essentially frozen the debt markets. Traditional mid-market lenders, like collateralized loan obligation funds, or CLOs, are reducing their commitments, while banks and other lenders are demanding more conservative capital structures and better prices. "Leverage is moving down a bit, while cost is moving up," Daniel Duffy, co-president of the corporate finance group at CapitalSource Finance LLC, said. Lenders say the upper limit for digestable debt ratios is now around 4.75 times earnings before interest, taxes, depreciation and amortization, down from some 6.2 times Ebitda in the second quarter, according to Standard & Poor's Leveraged Commentary & Data. The new level is more in line with multiples seen in 2005 and 2006.

Private equity still drawing big investors Even as the debt crunch is putting deals on hold, long-term investors are still flocking to buyout funds. -- Amid the freeze on private equity deals, big investors like pension funds and college endowments are still plowing money into buyout funds, suggesting they still see opportunities for outsized returns. Buyout funds have already raised $139 billion globally so far this year and are on pace to exceed the $212 billion raised in 2006, according to London-based research house Private Equity Intelligence.

Another record year of fundraising comes just as the buyout boom has come to a grinding halt. A push back in the debt markets that began in late June has erupted into a full-blown credit crunch, with financing for leveraged buyouts now at a standstill.

Credit crunch: Blackstone smells opportunity President Tony James says the private equity firm has an eye on debt that has been oversold in the market.-- The debt markets may be creating trouble for some leveraged buyout deals, but private equity titan Blackstone is sniffing out opportunities. The private equity firm is keeping an eye on the debt of buyout deals that have come under financing pressure, Blackstone President and Chief Operating Officer Tony James said Monday.

• Beazer's Rocky Ride Set to Continue Beazer's recent disclosure of accounting irregularities is expected to accelerate an SEC probe of the home builder.
• Countrywide's Woes Multiply Countrywide shares fell 13% after a Merrill analyst issued a sell rating and fueled worries about the mortgage-lender's ability to cope with the credit crunch.
• Countrywide Taps $11.5 Billion Credit Line to Shore Up Its Available Cash

Quant quake shakes hedge-fund giants Goldman, Renaissance, AQR see losses, but also sense opportunity. -- Some of the largest firms in the $1.5 trillion hedge-fund industry have been hit this month by big losses among so-called quantitative funds, which use computer models to generate trading ideas. The turmoil reached "historical" proportions last week, according to one hedge-fund executive, but now many of these same firms are saying there's money to be made when dislocated markets recover.

• A Crisis in Parallel Universe Greed and financial recklessness in the online universe doesn't look all that different than they do in the real world, as shown by the meltdown of Ginko Financial -- which exists only in cyber world Second Life.
• Did 'Quants' Miss the Boat on LBO Boom? Quant fund managers and the models they use to find market-beating stock trades may have missed something everyone else noticed -- the LBO boom.
• KKR Financial Slumps After Firm Sells Mortgage Loans at $40 Million Loss
• A KKR affiliate sought to delay repayment of $5 billion in short-term debt held by 15 money-market funds as the mortgage crisis hit the Wall Street titan

Asia Decoupled? Now There's a Subprime Concept: -- So, Asia finally unshackled itself from the U.S. economy. Riiiight! Financial contagion oozing from the U.S. wiped out the Nikkei 225 Stock Average's gains for the year; that benchmark was down 7.2 percent this year as of 2:14 p.m. in Tokyo. The Morgan Stanley Capital International Asia-Pacific Index lost 2.5 percent on Wednesday alone. Arguments that Asia has decoupled from the U.S. suddenly look, dare I say, rather subprime.  Yes, Asia is a very different place than a decade ago. Banks, Japan's included, are healthier and carry significantly less debt. On top of that, the region amassed some $3 trillion of currency reserves. Asia has so much cash available to fend off crises that government investment funds are being created to take more advantage of it. That's just one of the many ironies a decade after Asian's financial crisis. Another is how U.S. woes now threaten Asia, not the other way around. One more is that Asia may soon be gobbling up distressed U.S. assets, the way U.S. investors did in Asia in the late 1990s. First, though, Asia's export-dependent economies must gauge just how much damage their growth will get from the U.S. troubles.

·         Yen Rises to Highest Since 2006 Against Dollar; Investors Flee Carry Trade

·         Global Stocks Tumble on Credit Concern, Led by Deutsche Bank; Bonds Climb

Posted by dblwyo at 07:42 AM | Permalink | Comments (0)

Another wild week in the markets and the economy.  We’re just beginning to see the excesses of mis-priced liquidities surface and have a long-way to go to sort it out in EVERY asset market, though almost everyone is in denial. Meanwhile the real economy is slowing and there are major changes in business operations going on out of sight. The article on the shift of major blue-chips to slow-growing blue chips is a harbinger as is the equally valuable article on retailing in India (which should be read in light of last week’s articles on WMT’s worldwide inability to adjust it’s model to new markets). We’ve also crossed the five-year anniversary of Sarbox – which to my mind is best understand as ISO standards for good business practice, even though the enforcement mechanisms have left a lot to be desired. But the worldwide spread of credit problems starting with structured & leveraged products based in the sub-prime market is spreading rapidly. The key problem is that almost everybody is still in denial – both about the extent of the real estate problems but much more importantly on the extent to which a similar lack of diligence and fundamentals is likely to ripple thru ALL other markets. This may just be the tip of the iceberg. More unfortunately we just don’t know and the bottom is completely invisible to us because of the total lack of transparencies in these complex instruments. Two posts this week btw look at long-term Employment trends and long-term market trends which are worth reviewing. It might also be worth your while to refresh yourself on the slowing economy with two earlier posts (here and here) because, all of a sudden in the last 2-3 weeks it's beginning to dawn on folks that the outlook is not what they thought it might be. A little "told-you-so" might be in order if so many weren't still so far in denials. Sigh... Meanwhile please enjoy the sumaries and links in the Special, Investment/Markets, Economy and Business sections. Some very interesting stuff.

General & Special

(**) Intel, Cisco, Johnson & Johnson Lure Value Investors -- Intel Corp., Cisco Systems Inc. and Johnson & Johnson, perennial favorites of money managers seeking U.S. stocks with the fastest profit growth, are becoming staples for so-called value investors. Shares of growth companies in the Standard & Poor's 500 Index trade at an average 16.3 times estimated earnings, while value stocks, those priced at a discount to the market or their historical average, trade at 14 times profits. The gap between them, now 2.3 points, has narrowed from 25.5 at the beginning of the decade, data compiled by Bloomberg show. Stock valuations are converging as markets tumble worldwide, turning technology and health-care companies, whose shares haven't kept up with profit gains this decade, into relative bargains. Rendino is buying shares of Intel, International Business Machines Corp., Johnson & Johnson and Wyeth, and is ``overweight'' shares of drugmakers for the first time since 1994. New York-based BlackRock Inc. is the largest publicly traded U.S. money manager. The S&P 500/Citigroup Growth Index's 2007 performance trailed the S&P 500/Citigroup Value Index until last month, when banks, brokerages and homebuilders led a global decline that wiped out $2.1 trillion in a week. On Aug. 3, as the S&P 500 completed its steepest three-week retreat since 2003, the value index erased its gains for the year.

Sarbox Was the Right Medicine As Sarbanes-Oxley turns five this summer, the controversial act is once again being put under a high-powered microscope. Has it been the transformative law that supporters -- prominently including Treasury Secretary Henry Paulson -- claim has restored investor confidence and helped corporate America move out from the ugly shadow of Enron, WorldCom and other epic-sized scandals? Or, as detractors argue, is it a roadblock to the competitiveness of the U.S. capital markets by virtue of its outsized cost of compliance? The last five years have made it irrefutably clear. Sarbanes-Oxley (Sarbox) is a textbook case of how regulation should ideally work in a democracy: A scandal is addressed through strong legislative reaction, followed by fine-tuning by relevant agencies (in this case, the SEC and the Public Company Accounting Oversight Board). Is it any wonder that variations of Sarbox and its rigorous internal controls are being adopted in Japan, France, China, Canada and other countries around the world?

·        Five years under the thumb

The Trouble With Economists The WSJ Op-Ed pages remains a fertile ground for debate. Up today is Brian Wesbury -- a very nice gentleman I've met on various shows, and had a terrific (dare I call it lovely?) debate at the WSJ's econoblog (Reasons to Pout?) early last year. Like Brian, I believe the global economy is booming. Unlike Brian, I see the U.S. economy as significantly weaker than the rest of the world.  But that's not my main gripe with his piece: Its the concept that the CNBC and Fox are remotely close to offering a balanced perspective on anything.

Paul Krugman: Very Scary Things In September 1998, the collapse of Long Term Capital Management, a giant hedge fund, led to a meltdown in the financial markets similar, in some ways, to what’s happening now. ... The Fed coordinated a rescue..., while Robert Rubin, the Treasury secretary..., and Alan Greenspan,... the Fed chairman, assured investors that everything would be all right. And the panic subsided...What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in ... financial instruments backed by home mortgages ... have shut down because there are no buyers. This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults. The origins of the current crunch lie in the financial follies of the last few years... The housing bubble was only part of it; across the board, people began acting as if risk had disappeared. Everyone knows now about the explosion in subprime loans ... and the eagerness with which investors bought securities backed by these loans. But investors also snapped up ... junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows. Then reality hit... First, the housing bubble popped. Then subprime melted down. Then there was a surge in investor nervousness about junk bonds...

What Happens in Sub-prime…Gets to Spain Really Quickly “How does this happen?” somebody asked me this weekend. That somebody was my wife, and she was wondering out loud how a financial institution such as Bear Stearns could get caught in a sub-prime debt crisis that pretty much everybody in America, including my dog Lucy, knew was coming. It’s a great question. On the one hand, it’s inexplicable. How could grownups decide that buying paper written by unscrupulous mortgage brokers with no documentary evidence that income or assets or creditworthiness are as stated would be a good way to invest their client's money? What makes a well educated veteran who lived through the Long Term Capital melt-down ten years ago think nothing of leveraging forty-to-one a portfolio of sub-prime paper backed by overpriced houses next to Interstate 80 in Sacramento? How does a wise-guy bond maven who as recently as April 12th got a fawning article (“Prospering in an Implosion; Subprime Market's Fall Plays to the Strengths Of a Bold Contrarian”) and his photo alongside his wife, his children and his yacht, in the New York Times, hit the wall in June, freezing investor redemptions and putting the yacht up for sale? The complex answer involves newer age MBA-type concepts such as alpha and beta coefficients and bond strategies beyond my comprehension, along with older-fashioned realities such as leverage and margin calls. The simpler answer, however, is the fact that these markets of ours vacillate—over seconds and minutes and hours and days and weeks and months and years and decades—from greed to fear and back to greed again

• Cheap Money Extends Credit and Risk Expands to Match

Why Surge in Buybacks May Ease As Credit Gets Tighter, Many Firms May Tread With Greater Caution. If credit-market troubles make it harder for companies to borrow, the raft of share buybacks that has been helping to buoy the stock market could become a thing of the past. Companies have been buying back shares at a breakneck pace, repurchasing a record $122 billion of stock in the second quarter alone, according to Standard & Poor's estimates. Those buybacks have helped propel the stock market higher because they have reduced the supply of shares available to invest in and, in doing so, have also raised per-share earnings. Last Friday, Procter & Gamble Co. said it plans to buy back $24 billion to $30 billion of its shares over the next three years, and yesterday Wells Fargo & Co. said its board had authorized it to buy back as many as 50 million shares of its stock. But with the trouble in subprime mortgages spreading to the bond market, fewer companies may be buying back shares in the months to come. Corporate bond prices have fallen sharply in recent weeks, sending their yields, which go in the opposite direction, higher. Although corporate borrowing costs are relatively low, historically speaking, companies have cut back sharply on debt issuance. In July, companies issued just $29 billion of corporate bonds, down from $128 billion in June.

Investment & Markets

It ain't easy Despite the recent turbulence in the credit markets, the Federal Reserve holds fire on interest rates.The Fed acknowledged in a statement that financial markets had been volatile, that credit conditions had tightened (if only for “some” households and businesses) and that core inflation had “improved modestly”. But it stressed that America's economy was still on course for moderate growth, albeit with greater downside risks, and that inflation remains the main policy concern. Hopes of a bigger shift in tone, paving the way for a cut in interest rates later this year, were firmly dashed. Before the Fed's statement, a cut by the end of the year had been fully priced into financial markets, with another expected by March. Once the market had digested the Fed's stance, it was only marginally less optimistic about the likelihood of lower rates. But by stressing that policy will respond to economic developments, the Fed seemed at pains to quash any notion that it would ease policy to shore up financial markets.

The mandarins of money Central banks in the rich world no longer determine global monetary conditions. EXACTLY 30 years ago, in August 1977, The Economist published an article by Alan Greenspan, the former chairman of America's Federal Reserve, who was then a private-sector economist. It listed five economic “don'ts”. One of these was: “Don't allow money-supply growth to spiral out of hand.” Yet that is exactly what central bankers have done in recent years. The bubble in credit markets that now seems to be bursting and the frothiness of so many asset prices was encouraged by loose monetary policies which pumped liquidity into financial markets. The real short-term interest rate is now above its long-term average for the first time since 2001, suggesting that global monetary policy is no longer loose. So why did financial markets remain exuberant for so long? One reason is that the world's two most important central banks, the Fed and the ECB, have not been the main sources of global monetary liquidity. Many economists in investment banks and international institutions mistakenly assume that “global” monetary conditions are set by the central banks of the rich economies. Yet over the past year, a staggering three-fifths of the world's broad money-supply growth has flowed from emerging economies.

LBO `Freeze' Shuts Wall Street Pipeline; $1.3 Billion Dries Up While no one's predicting a Biblical seven-year drought, the pace of buyouts has slowed more than 33 percent since June, data compiled by Bloomberg show. Investors are cutting back on riskier assets such as the loans and bonds that fund LBOs after being burned by losses from U.S. subprime mortgages. At that rate, banks would miss out on at least $1.3 billion of fees in the second half. JPMorgan Chase & Co., the third-biggest U.S. bank, has the most at stake after earning more than anyone else from arranging leveraged loans in the first half. Together with Credit Suisse Group and Deutsche Bank AG, it made a combined $919 million from loans in period, data compiled by New York-based Freeman & Co. and Thomson Financial show. The three also got $426 million for advising LBO firms on takeovers and $190 million from bond sales. Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide rout in the debt markets. Companies such as London-based Cadbury Schweppes Plc, the world's biggest candy maker, have delayed asset sales, and banks including New York-based JPMorgan and Frankfurt-based Deutsche Bank have been left on the hook for as much as $300 billion of debt they've agreed to provide for LBOs. A 50 percent drop in income from arranging buyouts and other ``higher-risk credit,'' together with a 10 percent decline in other investment-banking revenue would slash earnings at Zurich- based Credit Suisse by 19 percent, London-based Deutsche Bank analyst Matt Spick said in a July 26 note to investors. Credit Suisse spokeswoman Rebecca O'Neill declined to comment. Private-equity firms announced a record $616 billion of buyouts in the first half, capping four lucrative years of deals, according to Bloomberg data. New York-based Morgan Stanley, the second-biggest U.S. securities firm, is set to earn $45 million from New York-based Kohlberg Kravis Roberts & Co. for the $25.6 billion buyout of First Data Corp., the world's largest processor of credit-card payments.

LBO shops circle ravaged loan desks Sensing opportunity amid the credit markets' woes, several private equity firms are angling to purchase buyout-related loans and bonds at steep discounts from banks' trading desks, sources said.

Ironically, these are often the same private equity firms that have forced the banks to honor loan and bridge financing commitments that the banks now seek to unload by selling them at a discount.

'Great Unwind' May Be Here The problems have been gathering for months, beginning with subprime loans and spreading outward. Now Wall Street firms face the risk of a broad bond-market unwind, leaving vulnerable five years of record earnings and stock run-ups. Investors are worrying about more than just reduced earnings growth. It's the overall uncertainty, they say: The unintended risks of "bridge" loans stuck on balance sheets or even how to value a new set of exotic securities that can't find buyers. This could weigh on Wall Street stocks -- be it Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. -- for months to come. The worries stretch across a number of areas. In the past few weeks, trading has fallen off to a trickle in some asset-backed bonds, issued at double-A or triple-A ratings. With no bidders lining up, valuations and ratings have been left uncertain. Investors are also finding it harder to trade some risky high-yield, or "junk," bonds and leveraged loans for borrowers with high debt levels. The pullback in liquidity has been made worse by the usually slow summer-vacation season. That has hurt the chances Wall Street securities firms can offload their bridge-financing commitments for pending private-equity deals, which have soared this year. For months, analysts and bankers had predicted that rising debt levels for hedge funds, buyouts and Wall Street dealers might eventually snap, leading to a "great unwind" of lower prices and forced selling. Now, some say, the process has begun.

• Stocks feel the pain of a buyers strike and How far will the credit crunch spread?

BNP Paribas Freezes Funds as Loan Losses Roil Markets  BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds because it couldn't ``fairly'' value their holdings after concern over U.S. subprime mortgage losses roiled credit markets.

·        ECB Lends 94.8 Billion Euros as Money Rates Surge -- The European Central Bank loaned an unprecedented 94.8 billion euros ($130.2 billion) after demand for cash in the European money markets drove interest rates higher. A reluctance to lend money after concern over U.S. subprime mortgage losses roiled credit markets pushed overnight euro rates to as high as 4.7 percent today, compared with the ECB's benchmark refinancing rate of 4 percent. The rate for borrowing dollars overnight jumped to 5.86 percent from 5.35 percent yesterday. Borrowing rates are rising on concern banks face growing losses on investments linked to U.S. mortgages. BNP Paribas, France's biggest bank, today halted withdrawals from three investment funds, saying a lack of liquidity meant it couldn't ``fairly'' value the holdings.

Why the private equity bubble is bursting Loans will go bad, deals will be canceled, fortunes will be lost. The sudden end of cheap financing is wreaking havoc on the buyout market, says Fortune's Shawn Tully. It's looking more and more as if the private equity phenomenon was a classic Wall Street bubble. It brought unprecedented riches to investment banks, minted a flashy new generation of billionaire Masters of the Universe, and bestowed a magical aura on leveraged-buyout specialists like Carlyle and Kohlberg Kravis Roberts. And now the bubble's bursting. Loans will go bad, deals will be canceled, fortunes will be lost. We're witnessing the unwinding of the whole dynamic that propelled the stock market (not to mention Manhattan real estate prices) to record highs. Alarm bells are ringing. Since mid-July, worries about risky debt have helped drive the S&P 500 down by 6%, wiping out about two-thirds of this year's gains. At least one big hedge fund, Sowood Capital Management, run by a former member of the team that steered Harvard's endowment, has gone bust. And banks have been unable to syndicate loans financing several high-profile buyouts, including those of Chrysler, First Data and ServiceMaster. The bursting of the bubble will inflict broad damage. The cascade of private equity deals will slow to a trickle - and the firms that vastly overpaid for their targets at the peak of the frenzy in the past two years - when, by the way, most of the deals were done - will deliver extremely low returns to the pension funds, university endowments, and wealthy families that invested in them in recent years.

·         Morgan Stanley Vs. Carlyle: A Credit Market Dust-Up The credit-market meltdown is claiming victims worldwide. Next on the chopping block: The profitable harmony between buyout firms and the investment banks that serve them.

Economy

Chicken-and-Egg Economics Shows Serious Cracks:  There's something counterintuitive about that proposition, and repeating it often enough (it's one of economists' favorite palliatives) doesn't make it true. I mean, businesses don't hire out of the goodness of their heart or to earn humanitarian awards. Quite simply, they hire people to produce the goods and services consumers want to buy, hopefully turning a profit in the process. The problem with this line of reasoning is that business executives don't wake up one morning and arbitrarily decide to lay off 10 percent of the work force. They take their cues from something else, and that something else is demand. Relying on business hiring to support consumer spending is one of those chicken-and-egg issues, except in this case, the egg (demand) clearly comes before the chicken (hiring).

The Myth of Deindustrialization It's been a quarter-century since author John Naisbitt blithely described manufacturing as a "declining sport" that Americans could easily offshore to Asia. Since then obituaries for U.S. manufacturing, both mournful and enraged, have been written many times. The reports of death are premature. Many of the most vibrant economic regions in this country -- from the deep South to the Pacific Northwest -- are still making and transporting real goods. The success of America's "material boys" suggests that the old economy and its blue-collar workers -- so often patronized and pitied -- can still more than hold their own in today's global economy. Manufacturing's role in promoting job and income growth is often understated. Although overall industrial jobs have diminished by almost five million since the late 1970s, the loss has been concentrated largely in lower-skilled positions. The number of higher-skilled positions, with a median hourly wage of $24, jumped by more than 36% between 1983 and 2002 to nearly 4.5 million, according to a 2006 study by the Federal Reserve Bank of New York. These skilled workers remain in great demand across much of the country -- 80% of manufacturers in a recent survey conducted by Deloitte consulting expected a shortfall in their numbers over the next three years. Construction, logistics management and trucking are particularly important in part because they provide a path to upward mobility for people with less than four-year college degrees. The jobs include welders, machinists and tool-and-die makers.

Business

How Small Firms Can Weather a Credit Crunch A credit crunch could be on the way for small businesses -- and it is crucial that they prepare themselves for the possibility. Banks, nervous about the prospect of more borrowers defaulting on loans, have been tightening their purse strings when it comes to lending money to consumers and major corporations. And industry experts say lending jitters may soon extend to small firms as well, making it harder for them to find loans. In recent years, credit has been relatively easy to come by as banks aggressively pursued entrepreneurs, offering larger loans at cheap rates to untested companies. Most bank executives say that for now, they have neither toughened lending standards nor raised interest rates on loans to small businesses.But banks say some businesses that received loans in recent years are falling behind on payments -- and default rates are expected to accelerate. As a result, experts say some lenders are already tightening their lending criteria and they expect more to follow suit.

Chrysler Picks Ex-Home Depot Chief Nardelli to Lead Automaker Chrysler LLC named former Home Depot Inc. Chief Executive Officer Robert Nardelli as CEO, demoting Tom LaSorda, as new owner Cerberus Capital Management LP takes control of the automaker. Nardelli, 59, a Cerberus adviser, also will become chairman, Auburn Hills, Michigan-based Chrysler said yesterday in a statement. LaSorda becomes president, while Chief Operating Officer Eric Ridenour will leave Chrysler and won't be replaced. The leadership shift puts Cerberus's stamp on Chrysler as it begins operating the third-largest U.S.-based automaker as a private company. Nardelli will have to lead Chrysler back to profit while battling Asian rivals led by Toyota Motor Corp. that are grabbing U.S. sales and market share. ``This is a bit of a surprise,'' David Healy, a Burnham Securities analyst in Sierra Vista, Arizona, said in an interview. ``But I think it shows that Cerberus is going to be tough because of Nardelli's tough reputation.'' Nardelli's selection comes three days after Cerberus closed a deal to buy an 80.1 percent stake in Chrysler from DaimlerChrysler AG for $7.4 billion. Nardelli joined Cerberus after being ousted at Home Depot in January amid investor criticism for earning $225 million while the company's stock fell 7.9 percent in his six-year tenure.

·         Nardelli is strike one for Chrysler

·         Cerberus: With the closing of the Chrysler deal, the (very) private equity shop is poised to succeed or fail very publicly, say Fortune's Katie Benner and Geoff Colvin.

Rupert gets his trophy NEWS reports suggested that the result was in doubt right up to the end, but Rupert Murdoch's admirers were certain that he would prevail. Mr Murdoch has played a difficult hand brilliantly. He read the internal politics of the sprawling Bancroft clan, which owns a controlling stake in Dow Jones, perfectly—perhaps better than he reads his own family. His $5 billion offer was just high enough to swing the intergenerational politics of the Bancrofts his way, by enticing enough of the younger members of the clan to put money before the continuation of the family's long stewardship of the company. And when some members of the family tried to get Mr Murdoch to raise his offer, his refusal to do so and his threat to walk away were convincing enough to get them to agree to his original offer.

·         Why Murdoch wants the WSJ

Bear Stearns Caymans Filing May Hurt Bankrupt Funds' Creditors -- Bear Stearns Cos.' decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors' and investors' ability to get their money back. While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings. The Bear Stearns cases may establish a precedent that would let other failed hedge funds liquidate in the Caymans, where judges have a track record of favoring management. The local monetary authority estimates that three out of four hedge funds globally are incorporated in the islands.

(***)CHAOS THEORY In India, a Retailer Finds Key to Success Is Clutter

Consumers Like Noise, Bins, Mr. Biyani Says;Narrowing the Aisles

On a tour of one of his supermarkets, Kishore Biyani notes that shopping carts are getting stuck in the narrow aisles, wheat and lentils have spilled onto the floor, black spots cover the onions and it's difficult to hear above the constant in-store announcements. He grins and congratulates the store manager. Mr. Biyani, 45 years old, has built a large business and a family fortune on the simple premise that, in India, chaos sells. Americans and Europeans might like to shop in pristine and quiet stores where products are carefully arranged. But when Mr. Biyani tried that in Western-style supermarkets he opened in India six years ago, too many customers walked down the wide aisles, past neatly stocked shelves and out the door without buying. Mr. Biyani says he soon figured out what he was doing wrong. Shopping in such a sterile environment didn't appeal to the lower middle-class shoppers he was targeting. They were more comfortable in the tiny, cramped stores -- often filled with haggling customers -- that typify Indian shopping. Most Indians buy their fresh produce from vendors who keep vegetables under burlap sacks. So Mr. Biyani redesigned his stores to make them messier, noisier and more cramped. Mr. Biyani divides India's 1.1 billion people into three types of consumers. "India One," as he calls them, are those with good educations, good jobs, and much disposable income. They also are the target audience for many foreign companies seeking to sell their wares here. Mr. Biyani estimates that such customers comprise about 14% of the total population. Where he sees the greatest sales potential is among consumers he calls India Two: the drivers, maids, cooks, nannies, farmers and others who serve India One. He estimates that 55% of Indians -- roughly 550 million people -- fall into this category. They are seeing their wages rise and their children frequently pursue further education and careers that will vault them up the social ladder. India Three, he says, is the rest of the nation -- those at, or slightly above, subsistence level, who don't represent much of a market for modern retailers. He thinks any retailer that tries to re-create a Western store in India will miss most potential customers. "People like to do what they think works in the West," but India is different, he says.

Banks Whistle Past the Credit-Ratings Graveyard: If a guy with a herd of cows described the milk market as the worst for 22 years, you might expect the creditworthiness of dairy producers to decline. In the worst air- travel market in more than two decades, you could reasonably anticipate that the credit ratings of airlines would suffer. So when Bear Stearns Cos. Chief Financial Officer Samuel Molinaro said last week that conditions in the fixed-income markets are as bad as he has ever seen in his 22 years in the securities industry, guess what Moody's Investors Service said? While banks are whistling past the credit-rating graveyard, stock-market investors seem less than convinced that lenders will emerge with creditworthiness and earnings unscathed. As of Aug. 7, the 92 members of the Standard & Poor's 500 Financials Index had a total return of minus 7 percent in the past month, compared with a 3.4 percent decline in the benchmark S&P 500 Index. The Dow Jones U.S. Financials Index had dropped 8 percent. The UltraShort Financials Proshares, an exchange-traded fund that aims to deliver double the inverse performance of the Dow Financials index, gained 18 percent in July.

Deutsche Post Faces `Bloodbath' as Mail Monopoly Set to End Deutsche Post AG may be defenseless against invaders into its lucrative home turf as the rest of Europe backtracks on promises to throw open national mail markets. A two-year delay in opening most of the region is thwarting plans by Europe's biggest postal service to expand. That leaves Deutsche Post little room to improve margins when its letter- delivery monopoly in Germany, its most profitable business, ends Jan. 1. The shares have dropped 18 percent since April, after more than doubling in four years as Deutsche Post shed workers and boosted profit.

Why iPod's slide may not matter Still, for those paying attention to the nitty-gritty of Apple's numbers, the iPod part of the rumor may not have seemed entirely far-fetched. Simmering beneath the surface of Apple's recent banner fiscal third-quarter financial results the highest revenue and profit in Apple's history is an iPod warning sign.

Time Warner May Have to Suppress Cable Buyout Urge Time Warner Inc. Chief Executive Officer Richard Parsons may be forced to suppress his urge to buy more cable systems for the company's Time Warner Cable Inc. unit. That's good for shareholders.The obstacles to Parsons' hunt remove distractions and will allow him to address the lagging performance of cable systems he acquired in 2006 from Adelphia Communications Corp. and Comcast Corp. Time Warner is just starting to offer telephone service, a key to expanding profit, in new markets such as Dallas and Los Angeles, where the company has 90,000 digital phone subscribers and expects more than twice as many by year's end.

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

Starting with the YTD chart we can see the market moving in an uptrend channel since the beginning of the year, until it reached and failed to breach the resistance at the upper bound. Triggered by the exponentiating credit squeeze over the last few weeks. Taking a closer look we see that it broke thru the 50-day MA easily and then blew right on thru possible resistance around 1490, defined by the low bounces of May/June. Then it appeared to be looking for support around the next firebreak around 1460 defined, roughly, by the Feb. pre-Shanghai Surprise high. We'll have to see how this all works out but so far this week, on the back of the most positive possible spin of the Fed minutes plus some good earnings (e.g. Cisco) and the return of self-fulling prophecies it looks to be trying to break back above that 1490 level. We'll see. If it fails that it be might argued, barring some more news on a widening squeeze and growing awareness of further economic slowing, that a sideways movement would result. Whether or not that happens depends on how the squeeze and the economy appear to paly out.

Now, for a little compare and contrast let's look at the last four years since the summer of '03, which pretty well defines the bull this time around. In some ways even more fascinating. In spite of all the sturm und drang of daily/weekly/monthly bubblevision coverage we've basically been in a steady uptrend channel with some ebbs and flows. What particularly fascinates me is that it was only this last fall, as housing problems became increasingly visible despite repeated bottom-calling in the face of all evidence, that the upper bound was breached. And just as it appeared in the late winter that we were topping out the Shanghai Surprise bounced off that upper bound and we actually bubbled up afterwards. And one can only, on this timeframe, regard that as a liquidity-driven LBO-put that was speculative and self-reinforcing. Until of course, it was not.

What's even more interesting is that the recent drops bounced against resistance on the long-term trend, AND, that resistance is roughly in exactly the same place as the intermediate-term resistance. Judging from the charts then we all, collectively speaking, desperately want to get back to the liquidity-put. (Why do visions of us all standing around the campfire chanting "I Belive" come to mind ?). The real question is how firmly grounded is this uptrend in financial and economic realities ? And how well is that reflected in the market ? Notice that rolling EPS grew from about $30 to over $80 but PE's shrank dramtically from near 35 to the 17-18 range. Now a net gain of approx. $55 in EPS from $30 is a 183% growth, or about 16-17% per year compounded annually. Amazing - that would (based on our earlier investigations of Graham-Dodd valuation analysis) call for a PE in the 25-30 range. Of course that trick depends on what the very long-term growth rate steadies on and averages out to. Guess what - a 17-18 PE implies a growth rate of 7-8% if you believe that particular method and my application of it. BtW - that prior investigation into the formulas is here and comparing historical calculations to actuals is here. It was worth my time to re-fresh and re-convince myself how useful the tool is, how it works and how well it's held up historically.

So, perhaps a third step is to re-visit that analysis a little and take a look at S&P's earnings forecasts and what likely/reasonable guess as to interest rates and earnings growth rates might imply. S&P is estimating CY07 annual earnings around $85.35-87.03. At reasonable and likely AAA-bond yield of 6.0% and earnings growth of 7-8% we end up with an SP500 range of 1408-1564. Which amazingly enough, is roughly where we are or have been. And also, as we discussed, pretty consistent and convergent (highly !) with both intermediate and long-term technical trends. When a story comes together from that many angles, using such different approaches, it should strengthen itself, shouldn't it ? Well, it scares me because too many moving parts appear to hang together too well. But what it's telling us is that we got ahead of ourselves on the LBO spec-put. That we're roughly fairly valued if growth holds together and that even if we were to "bust" the upper bound on the long-term trend we'd be alright as long as we bounced off the lower. In fact if we got back into the channel, with extremely judicious selection of markets, sectors and companies you might have some major buying opportunities.

On the other hand, as we've discussed in several places the oomph behind the markets is financial, not fundamentals. The Housing ATM is long-gone though the full impacts of the Housing downturn are only about, at best, 1/4-1/3 thru (in fact recently I've heard fairly conservative commentators talking about bottoms in '08 and recovery in '10 and beyond !), and we have no credible visibility into the reach and range of the credit market problems. Which has yet to have any impact on a real economy which is already showing clearer signs of slowing.

I guess at this point we simply wish each other the opportunity to live in interesting times ? Or keep your powder dry - that is, build up some cash and figure out what you'll do if the hostiles do charge over the hill. More prosaically things are very unclear pending the credit markets settling down - which may not happen for quite a while. BUT....an uptick would be a risky and highly speculative trading opportunity - or a chance to raise cash. A sideways move is probably another trading opportunity. And a breach of the longer-term channel, depending on the economic and credit news, a great opportunity to find those highly select potentials. As long as the breach stops short of the lower bound :) !

BUT....BUT, that do appear to be a lot of smoke rising behind the hills - whether cookfires or somebody making more swords and arrows is the question. Or, a little levity for the liberal arts majors and poetry lovers, let me borrow from Rudyard Kipling: The Young British Soldier:

When you're wounded and left on Afghanistan's plains,
And the women come out to cut up what remains,
Jest roll to your rifle and blow out your brains...

Posted by dblwyo at 01:05 PM | Permalink | Comments (0)

In all the fascinating & wild gyrations of the markets in the last week plus we've seen the recent GDP and Employment numbers get far less attention than they normally get. Or than they deserve. On the other hand, as an interesting contrast, in that same week the sub-text of many columns, MSNBC coverage, etc. is that the Economy is indeed slowing and the Fed "NEEDS to Do SOMETHING, Right Now !". (Emphasis not added, cf. Mr. Cramer's last Fri. outburst). This would be amusing were it not sad - one suspects the emphasis is less on the general health of the economy and more on the short-term un-ravelings of the markets but why would one be supicious of non-disinterested commentary from such sources ? Moral hazards, ill-founded leverage, commuppances and schadenfreude aside.

Be all that as it may - and the serious consequences restrains one's sense of humor - we covered the nature and structure of the GDP trends in two prior postings (YoY changes and major components) but haven't said much about Employment. Given the significances it seems like it might be time for another deep data dive similar to prior posts.

So below we'll cover short-term and long-term trends in Employment patterns, relate those to GDP and Profts and, an especially interesting looksee, take a look at the l.t. creation of aggregate new jobs. This last is particularly important because it looks at Net New Job creation since 1980 and helps explain a lot of the low wage pressures and relative roles of Earnings and Jobs. 

The chart here shows s.t. changes  in  Employment along with two different views of the trends. The blue line shows a linear downtrend, which isn't very  encouraging  but the red line which shows the non-linear trend captures more of the  trend and is evern less heartening. The trick is to find a reasonable  form that captures the trend and also, where possible, minimizes the variances. With an R-Sqaure of .74 that's done and it shows employment growth peaking in early '06 and marching steadily downward since then.

The second chart shows longer-term YoY% changes in Employment along with the total employment numbers from 1980 to now on a quarterly basis. We march rather nicely from about 90 million employed to almost 140 million, which is a tribute to the strength of the economy. Though if you look closely you can see the blips in the totals brought about by downturns. Which are more clearly visible in the in the YoY% changes line where the major downturns, not suprisingly, coincide with the major downturns in the economy. Unfortunately, the same downtrend seems to repeat itself since the late 90s, after rising in the 80s and early 90s. Which raises some very interesting questions indeed, doesn't it ?

Now, we get to the really interesting longer-term trends in employment trends and structures in the third chart, or some of them at least. Here we compare YoY% changes in GDP (light blue) on the right and Employment (dark blue) on the left. Notice several key things. First off Jobs follow the Economy, not the other way around. Next turning points in the economy are followed by similar turning points in jobs. In other words Employment is a lagging indicator and good current headline jobs numbers tell us how things were, not how they are or will be. Judging from these charts the recent discovery that the economy is slowing might in fact be overdue by a ways. The third, though not necessarily final, thing to notice is that job growth in this "recovery" was nowhere near as robust as in prior cycles. Not a new discovery but important and very clear when viewed this way.

Which brings us to one of the key issues of long-term job creation. While lots of new jobs have been created the real question is are we keeping up with the long-term potential of the economy, its' speed limit. Which is usually defined as the sum of labor force growth and productivity. A reasonable figure of merit is that we must create 150K jobs/month, or 450K/quarter just to breakeven. But have we ? In reading the monthly headlines this is a critical number - anytime it falls below 150K we're loosing ground. And after an economic downturn it nees to run for some time at 250K/month, or about 2.5% YOY growth or so, to make up the lost ground. This chart shows Net New Jobs (New Jobs - 450K)/quarter. Notice in the 80s and 90s we had sustained periods above zero but not in the last several years. Which shows up in the cumulative number of Aggregate Net Jobs (light blue). For everybody who's been wondering why people aren't feeling well about the economy or why wage pressures have not built up here you go - we're still about 2 Million aggregate jobs in shortfall.

One more chart to try to finish painting the bigger picture - the shares of Profits and Wages in the Economy. Here you see relative shares the late 40s to now. Thru the 50s and 60s they shared a relative prosperity but under the stagflationary conditions of the late 60s and thruout the 70s both deteriorated. However Profits stabilized in the 80s, significantly upticked in the late 90s and dropped ahead of the Internet bust as the Economy ran out of steam. Meanwhile Wages continued to deteriorate until the Investment-driven boom of the late 90s both created more net new jobs (shown above) and drove up real wages. Since then however Wages have returned to their long-term downtrend while Profits have jumped up and accelerated significantly, reachings GDP shares not seen since the 50s and 60s. So companies aren't hiring, nor paying the folks they've got on-board ? It's a seperate discussion as to what they are doing but the corresponding Investment numbers show that Capex isn't the answer. Not investing and not hiring - which brings us to earnings, more specifically buybacks.

The lack of Corporate investment in two critical assets of People and Equipment wouldn't argue that the longer-term outlook for the economy is particularly good. You might want to take a look back at the prior post on Buybacks for some supporting data and the risks. 

Posted by dblwyo at 02:17 PM | Permalink | Comments (0)

General & Special

Analysts Debate If Bull Market Has Peaked Is the bull market over? Last week's stock-market carnage -- the Dow Jones Industrial Average fell 4.23% for the week to 13265.47 -- seemed an overreaction to most analysts, who focus on fundamentals like corporate profits and interest rates. The global economy continues surging, they point out, while most market interest rates remain low by historical standards. What matters, they say, is whether the credit crunch, caused by ill-conceived loans to home buyers and businesses, starts to interfere with growth and interest rates. But another, less fashionable, breed of analysts sees storm warnings. Known as technical analysts or chartists, because they plot and compare a wide range of sometimes-arcane market data on graph paper and spreadsheets, they liken their work to hurricane tracking. They can see a pattern building, they say; the trick is distinguishing a brutal Category 5 storm from a less-severe Category 2.

With Asset Boom Essentially Over, Is It Time to Buy? The great asset boom is over. Market historians may want to mark last Wednesday, July 25, on their calendars to note the end of an era. That's the day the Cerberus-led high-yield debt offering for Chrysler collapsed. Or perhaps it's July 19, the day the Dow Jones Industrial Average closed over 14000. Or maybe it's June 22, when private asset manager Blackstone Group went public. After last week's stock-market carnage and debt-market paralysis, they already seem like distant memories. Let's step back a moment from the subprime crisis, which morphed into a mortgage-backed-securities crisis into a collateralized-debt-obligation crisis into a junk-bond collapse and now a credit freeze. What should be clear by now is that global liquidity is part of one continuous stream, and when one of the springs that feeds it -- in this instance mortgage money -- dries up, the stream shrinks to a trickle. This is not, as most had expected, because long-term interest rates have risen. After briefly surging above 5% (hardly catastrophic) they are again well below that level. Investors were so fixated on interest rates that they lost sight of the other side of the equation: asset values. High leverage makes sense as long as asset values kept climbing. But the moment appreciation falls below the cost of capital, or worse, actually declines, the leverage effect goes into reverse, leading to massive losses.

(***)Are We at The Peak of a Minsky Credit Cycle?  It is always risky to call an equity market peak and the beginning of a bear market in equities; so I will not try to do that. But leaving aside equity valuations, it increasingly looks like we are at the peak of a credit/debt cycle, in the US and globally. Specifically, the crucial macro question that we should ask ourselves today is whether we are at the peak of a Minsky Credit Cycle. Or as the UBS economist George Magnus – an expert of financial instability - put it: “Have we reached a Minsky moment?” In his view periods of economic and financial stability lead to a lowering of investors’ risk aversion and a process of releveraging. Investors start to borrow excessively and push up asset prices excessively high. In this process of releveraging there are three types of investors/borrowers. First, sound or “hedge borrowers” who can meet both interest and principal payments out of their own cash flows. Second, “speculative borrowers” who can only service interest payments out of their cash flows. These speculative borrowers need liquid capital markets that allow them to refinance and roll over their debts as they would not otherwise be able to service the principal of their debts. Finally, there are “Ponzi borrowers” cannot service neither interest or principal payments. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations. The other important aspect of the Minsky Credit Cycle model is the loosening of credit standards both among supervisors and regulators and among the financial institutions/lenders who, during the credit boom/bubble, find ways to avoid prudential regulations and supervisions.

·         Credit Brothel Raided, Even Piano Player Not Safe: Mark Gilbert As the financial-liquidity police raid the credit-market brothel, even the piano player faces arrest. The malaise enveloping global markets is becoming increasingly indiscriminate in choosing its victims. At the start of July, Tunisia hired Daiwa Securities SMBC Co. and Nikko Citigroup Ltd. to help its central bank sell yen- denominated bonds. By the time the fund raising finished this week, Tunisia's borrowing costs had risen by almost a quarter of a percentage point. So the taxpayers of an African nation suffer because Joe Blow in Detroit can't pay his mortgage.

ADP Employer Services Says U.S. Added 48,000 Companies in the U.S. added fewer jobs in July than forecast, a private report based on payroll data showed today. The 48,000 increase, the smallest in four years, followed a revised gain of 143,000 for the prior month that was less than previously estimated, ADP Employer Services said. The worst housing slump in 16 years and high fuel costs have damped consumer demand, and may have prompted companies to slow hiring. A Labor Department report this week is forecast to show the economy added jobs in July at about the same pace as in June, according to the median forecast in a Bloomberg survey.

·         U.S. Payrolls Rose 92,000 in July; Jobless Rate at 4.6% Employers in the U.S. added a fewer-than-forecast 92,000 workers to payrolls last month and the jobless rate unexpectedly rose, a sign the labor market is cooling. The increase in jobs followed a 126,000 gain in June that was smaller than previously reported, the Labor Department said today in Washington. The jobless rate rose to 4.6 percent, the first increase since April, from 4.5 percent. Wages gained 3.9 percent from a year earlier. The slowdown in hiring reflected the first decline in government payrolls since January 2006, while service industries added jobs at a slower pace. The report may ease Federal Reserve policy makers' concern that a low jobless rate and higher labor costs will spur inflation. The central bank is forecast to keep interest rates unchanged next week.

Investment & Markets

Rising Japanese Investment Abroad Weakens Yen, Deepens Economic Imbalances

 Japan's financial-services companies are trying to coax the country's prodigious savers to think globally, urging them to invest their nest eggs abroad, where they can expect to reap much higher returns. After years of extraordinary low interest rates at home, and with a large percentage of Japan's population looking toward retirement, that advice is starting to take hold. But while investing abroad makes sense for the Japanese individually, the resulting outflow of cash had been pummeling the already-weak yen -- which only began strengthening earlier this month -- and worsening imbalances in the nation's economy. As yet, only 3.6% of Japan's $13 trillion in personal savings is invested abroad, while more than half is held in cash and domestic bank deposits. [By contrast, U.S. households keep less than 13% of their savings in cash and deposits.] With the Bank of Japan holding its key rate at 0.5%, interest paid on Japanese deposits is low, so those assets earn almost nothing. That is largely why the country's households have become important players in the so-called yen carry trade. That involves either buying mutual funds that invest abroad or borrowing yen at Japan's low interest rates and selling them to acquire investments denominated in higher-yielding currencies such as Australian and New Zealand dollars. As a result, investment trusts, the Japanese equivalent of mutual funds, are recording record inflows. Investment trust foreign assets rose by 1.7 trillion yen ($14.31 billion) in April to 32.3 trillion -- the largest one-month increase since the statistics were first compiled back in 1981.

Making Sense of the Slosh of Liquidity It's time for investors to do some heavy thinking about the "L" word.

A flood of money sloshing around the world the last few years has helped drive up the price of everything from commodities and stocks to junk bonds and emerging-market debt. The catch phrase for all this money is "liquidity." Now that the markets are in spasm, it makes sense to look at where the liquidity came from and where it is going. Money is created by central banks, and amplified by the institutions that use it -- banks, hedge funds, investors. The more confident they are, the more easily it flows. The liquid world leaves everyone with more investment, and also more debt.

To be sure, there is still a lot of liquidity in the till, and reasons not to be too fearful. Low global interest rates are a sign money is still cheap. U.S. companies are highly profitable. China's government has opened an investment fund with $200 billion searching for a home -- a sign of how some flush government coffers help feed global markets. It doesn't look yet like one of the last global liquidity purges, in 1998. Back then, the hedge fund Long-Term Capital Management tilted at the brink of collapse, the Russian government defaulted on its debt, and Asian markets remained in turmoil more than a year after the Thai baht was devalued. The Federal Reserve lowered interest rates and strong-armed Long-Term's creditors into bailing out its positions to avert a more severe global money squeeze. Before long, the market was functioning and a new bubble in tech stocks was building. The world's financial architecture is different now. The proliferation of hedge funds and derivatives has theoretically spread risk around, making a Long-Term-like event less likely. It's also far more complex. Unknown problems could lurk in today's derivative jungle, and quick fixes like the one that cured the Long-Term debacle might not be as effective.

Credit crunch refocusing investors on fundamentals .But broader impact may be limited, even if companies pay more to borrow A tightening that's rippled across global credit markets could significantly hamper two of the hottest trends that have helped fuel stock market gains in recent years, market professionals say. Instead of picking the next leveraged buyout target or waiting for another huge share buyback, investors may now have to refocus on company fundamentals like earnings and revenue. And those could be healthy changes, said some observers, who discount concerns that the economy will suffer ill effects of tightening credit, even if companies have to pay a few extra percentage points to borrow money. "People will start looking at fundamentals again, rather than which company is next to be acquired in an LBO," said Kingman Penniman, president of KDP Investment Advisors, an independent research firm focused on high-yield bonds and leverage loans. "It wasn't solid fundamentals that drove the stock market higher and if some of those technical props fall by the wayside, we're probably better off."

Economy

India Is Waking Up to Tackling Glut of Cash:  The Indian authorities may have finally become serious about mopping up unwarranted liquidity in the banking system. With yesterday's announcement of a 50-basis-point increase in the ratio of deposits that lenders have to keep with the central bank as unremunerated reserves, the call-money rate may now rise from the 0.17 percent level it fell to last week. Overnight rates hovering near zero in an economy that's growing at a 9 percent annual pace, and where inflation may be simmering just beneath the surface? That wasn't just ridiculous; it was plain dangerous. Had it gone on for some more time, bankers would have judged the excess liquidity to have become permanent. Part of it would have then been funneled into the overheated property market, jeopardizing the central bank's efforts to slow down mortgage demand. Banks are itching to cut home-loan rates, which have risen 2 percentage points this year because of monetary tightening. Already, high borrowing costs are pushing up delinquencies in unsecured personal loans that are usually the first ones to witness defaults by households with stretched mortgages. If banks cut lending rates prematurely, credit growth may pick up speed again. Inflation, which accelerated to a six-week high in the week to July 14, may not be tamed without raising interest rates. Although an eighth quarter-point increase in the policy rate since October 2005 may not derail corporate investment growth, it would still be entirely unnecessary. The liquidity glut has been caused by foreign inflows that haven't been ``sterilized,'' or absorbed by the central bank.

High Oil-Field Costs Crimp Search for New Supplies

Inflated Gear Prices Almost Guarantee New Crude Records

Fierce cost escalation in the oil patch is complicating the industry's ability to respond to higher prices with new supplies, setting the stage for still-higher prices in the months and years to come.During past surges, higher oil prices pinched consumers and the economy but also made a greater amount of untapped oil economical to pump. As a result, new supplies eventually came online, putting downward pressure on prices. That dynamic helped tame the high oil prices of the early 1980s. But during the current four-year rise in oil prices, inflation for equipment, labor and other crucial oil-field needs has largely kept up with the rise in oil prices. In recent quarters, this has crimped results at the world's oil producers, including Western majors such as Exxon Mobil Corp. as well as the world's biggest state-run oil companies, and has also led to delays and cancellations of major projects. While plenty of activity remains in place, the high prices are nibbling away at other projects that were expected to bring significant new supplies of oil and natural gas to the world.

Business

Behind Microsoft's Bid To Gain Cutting Edge  As the man designated to replace Bill Gates as Microsoft Corp.'s long-term strategic thinker, Craig Mundie is at the center of a daunting corporate challenge: positioning the company to survive and thrive in the post-Gates era. That mission keeps Mr. Mundie rolling with his bag of dirt-hiding black clothing and chocolate-mint energy bars through airports around the globe. At Microsoft's far-flung research facilities, he huddles with employees whose work is sometimes ignored by the powerful product executives who set the company's agenda. It's up to Mr. Mundie, the company's chief research-and-strategy officer, to bring home long-term business opportunities. Throughout its history, Microsoft has been slow to grasp some of the computer industry's biggest technology shifts and business changes. When it decides to embrace an innovation, the company has often succeeded in chasing down the leaders, as it did years ago with Lotus Development Corp. on spreadsheets that allow users to organize data, and a decade ago with Netscape Communications Corp. on Web browsers that transformed the experience of using the Internet. For years, this catch-up-and-surpass approach worked well. Early this decade, however, companies such as Google Inc. and Apple Inc. exposed holes in the approach. Microsoft was slow to see the potential in Web search and online advertising, and despite heavy investments, has so far failed to catch industry leaders Google and Yahoo Inc. It also was late coming to market with its own music player, and despite a push, remains far behind Apple. Today, a host of Web-based software services from Google and others threaten to reduce the importance of Microsoft's personal-computer software.

GM profit may mask struggles to come:  General Motors Corp., like Ford Motor Co. last week, surprised investors Tuesday with better-than-expected second-quarter profits. GM reported an $891-million margin, more than double what Wall Street had expected, but analysts caution that the turnaround at the nation's largest automaker is far from complete. In fact, the road could get rough again soon, because GM's North American division practically broke even -- it lost $39 million in the quarter -- despite cutting $9 billion in annual costs and hitting peak production of the full-size pickups and SUVs that have provided the company with its greatest profits. Despite apparent progress in cutting costs, both automakers are losing customers and not making enough money in the crucial North American market, analysts say.

·         Putting a Muzzle on Guzzlers In the past year, sustained gas prices of $3 a gallon have led to a decline in the market for sport-utility vehicles, trucks and other large vehicles that use a lot of fuel. To win back customers, auto makers are using a variety of new technologies to improve SUVs' fuel economy, including cleaner-burning diesel engines, gasoline-electric hybrids, special lightweight parts and even power-steering pumps that think for themselves.Smaller fuel-saving measures being used in a number of different cars include turbochargers that enable smaller, more efficient engines to generate more power, weight-saving electronics to replace mechanical systems and light materials like aluminum, carbon fiber and plastics. Car makers have grown to depend on large vehicles -- especially trucks -- to drive profit and are eager to make them popular again. Large SUVs have higher profit margins than family sedans because they are built on truck chassis that don't cost much to develop. The auto makers hope that improvements in fuel-efficiency will make it easier for car shoppers -- many of whom still like large vehicles -- to justify the purchase of a SUV.

Auto Makers Report Weak Sales for July Auto makers from Detroit to Tokyo posted lower July U.S. sales Wednesday as the U.S. housing market downturn and high gas prices depressed demand. Ford Motor Co. slid behind Japan's Toyota Motor Corp. for the month, as it struggles to retain the No. 2 sales ranking in its home market. General Motors Corp., the largest U.S. auto maker, said July light-vehicle sales dropped 22% from a year ago. Ford posted a 19% drop in sales of cars and light trucks, as it continued to slash sales to rental-car fleets. Chrysler Group posted an 8.4% decline to its lowest level in four and a half years, and Toyota posted a 7.3% decrease for the month. Industrywide, light vehicles sold at a seasonally adjusted annualized rate of 15.54 million units last month, down from 15.6 million in June and 17.19 million units in July 2006, according to a preliminary tally by Autodata Corp.

·         Foreign Automakers Pass Detroit in Monthly Sales

Subprime Defaults Blamed for U.S. Earnings Setbacks  Railroads, chemical producers and insurance companies are blaming the worst U.S. housing slump in 16 years for their earnings woes. Burlington Northern Santa Fe Corp., the second-biggest U.S. railroad, said lower shipments of housing products and lumber reduced second-quarter earnings. DuPont Co., the third-largest chemical maker, said slumping demand for kitchen and bathroom countertops was partly responsible for its profit drop. Genworth Financial Inc., the former insurance unit of General Electric Co., said earnings will be at the ``lower end'' of its forecast this year as mortgage-insurance claims increase. ``The subprime slime is oozing,'' said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey, who correctly predicted the recession in 2001. ``As home equity evaporates, that takes out the foundation of strong consumer spending growth, which has been the mainstay of the economy.'' U.S. profit growth has been cut by more than two-thirds because of the housing slowdown, according to David Rosenberg, chief North America economist at Merrill Lynch & Co. Earnings growth is running at 6 percent and would be 19 percent, he said. Business is suffering as home sales plunge more than economists estimate and foreclosure filings in the U.S. jumped 58 percent to 573,397 in the first half, according to RealtyTrac Inc.

Dell Plans to Trade `Cheap' PC Image for Cool One Michael Dell is undoing everything that made Dell Inc. unique so he can make it the world's largest personal-computer maker again. It just may work. Eleven of Dell's 16 largest outside investors added to their holdings, according to the most recent filings. The stock has risen 15 percent since the founder's return as chief executive officer, more than twice the gain of Hewlett-Packard Co. In the second quarter, Dell had its first increase in PC shipments from the previous quarter in a year. Investors have responded to Michael Dell's reassertion of himself as a controlling figure. The shift toward retailers, announced by Dell after he ousted protégé Kevin Rollins as CEO, is part of a larger campaign to resuscitate sales and earnings. In the last two fiscal years, Dell's revenue growth fell to 2 percent from 19 percent. In May, Dell said he would cut 10 percent of the workforce. When Dell announces second-quarter results Aug. 30, analysts predict he will report sales and profit rose again. Dell wants to cast aside the perception of the company as a maker of ``cheap'' machines and convince buyers its consumer PCs are ``cool'' and its business machines powerful, Jarvis, 44, said. ``He knows precisely what we need to do.'' Michael Dell's first tenure as CEO was marked by tightfistedness. In 2003, Dell replaced workers who packed PCs into boxes in Austin, Texas, with machines, saving $4 million a year. He handed control to Rollins in July 2004. The company lost its pricing edge after Hewlett-Packard pared jobs and retirement expenses and leaned on retailers to help woo U.S. consumers. The plan worked, and Hewlett-Packard retook the PC market lead in mid-2006 after lagging behind Dell for three years.

·         Dell Screws Up a Good Thing As a small business guy, I don’t particularly care if my printer has the latest ink cartridge technology or my computer has fifty gigaflips of terabytes. And I absolutely don’t want to have to deal with some Office Depot salesman trying to hit a month-end quota in order to buy my office equipment.I want a good computer system I can order online or over the phone; I want it shipped to my office; I want plug-and-play so even any idiot, including myself, can get up-and-running before the market opens; and I want great support if I need it. And Dell satisfied those needs for more than ten years, because Michael Dell understood the time value of technology. But that was then, and this is now: and what happened now is that I spent five hours off and on last night dealing with a mish-mash of toll-free numbers and incompetent or not-my-department technical support people at Dell. Poor service at Dell is not necessarily new-news. I’ve been hearing since last summer from various friends and acquaintances that Dell tech support was not all it had been cracked up to be. But since I haven’t called Dell Technical Support in over a year, I didn’t pay much attention to it.

Aerospace Notebook: Boeing may build 16 787s a month THE BOEING CO. is reportedly talking with its suppliers about the feasibility of eventually boosting production rates of its 787 to as many as 16 jets a month. That would be more than double the highest production rate for any previous Boeing or Airbus widebody jet. There have been frequent reports that Boeing is aiming to set 787 rates at 10 to 13 planes a month, but the company apparently is looking at possibly going well beyond that rate. Douglas Caster, chief executive of Ultra Electronics, a British company that makes parts for the 787, told Reuters that Boeing is "talking to the supply chain about raising 787 output from 14 to 16 aircraft a month." Boeing has made no secret that it will boost production of its 787 after the first 112 Dreamliners have been built for customers in 2008 and 2009. Boeing will not increase production sooner because it does not want to overtax its supply chain. That's what happened in the late 1990s. Boeing tried to ramp up production too quickly, and assembly lines in Renton and in Everett broke down when suppliers could not keep up and jetliner parts did not arrive on time. The 787 is being readied for its maiden flight at the end of September. Deliveries to airlines are supposed to begin in late May. With nearly 700 orders so far, the 787 is the fastest-selling jet ever developed by Boeing or Airbus. But that has presented a difficult challenge for Boeing -- 787 production positions are essentially sold out through 2013. Boeing must boost production to get more planes to that growing customer base.

Wal-Mart Looks to Grab Gains in Gadgets Two years ago, Wal-Mart Stores Inc. targeted three categories in its campaign to attract more upscale shoppers, adding trendy merchandise in apparel, home decor and electronics to its sprawling supercenters. The retailer's efforts to peddle fashionable clothes and home furnishings have stumbled, in part because it didn't have a track record in those areas. But relying on well-known brands and lower prices, the push into higher-end consumer electronics has been a coup for Wal-Mart, boosting its sales and roiling competitors. Wal-Mart, based in Bentonville, Ark., discloses only general information about its sales of electronics. The retailer tallied roughly $21 billion in electronics sales at its supercenters and discount stores in 2005 and $22.6 billion last year, though those figures also include sales of ancillary items such as CDs, DVDs and videogames. And they don't include sales of electronics at Wal-Mart's 585 Sam's Club stores. Those figures put Wal-Mart behind market leader Best Buy Co. ($31 billion in U.S. sales last year) but well ahead of No. 3 Circuit City Stores Inc. ($11.9 billion). This year, analysts expect Wal-Mart to make significant gains in electronics, strengthening its market position.

·         5 ways to fix Wal-Mart

·         Wal-Mart Raises Its Emotional Pitch

·         Wal-Mart's June Sales Gain Seen as Payoff of New Strategy

Posted by dblwyo at 04:23 PM | Permalink | Comments (0)

A few weeks ago a friend of mind asked me to compile a list of recommendations for an executive reading list. The final list ended up, without a lot of annotation, as a WishList on Amazon with the top selections slightly annoted as a recommended readings list. A couple of weeks ago the NYT ran an interesting article on CEO reading lists and how eclectic they were:

C.E.O. Libraries Reveal Keys to Success Michael Moritz, the venture capitalist who built a personal $1.5 billion fortune discovering the likes of Google, YouTube, Yahoo and PayPal, and taking them public, may seem preternaturally in tune with new media. But it is the imprint of old media — books by the thousands sprawling through his Bay Area house — that occupies his mind. Serious leaders who are serious readers build personal libraries dedicated to how to think, not how to compete. Perhaps that is why — more than their sex lives or bank accounts — chief executives keep their libraries private.

 Jeff Matthew's of NotMakingThisUp recently posted a series of entries detailing his pilgrimmage to Omaha for the annual BRK meeting and the Warren reinforces the point, indeed.

“What should I do to become a great investor?”

Buffett’s emphatic answer reminds me of “The Graduate,” when Mr. McGuire famously tells Dustin Hoffman’s character, Benjamin, that one word—“Plastics”—as if it is the key to the universe.

Buffett says:

“Read everything you can.”

It is advice Buffett will give in different ways throughout the morning and afternoon.

For Buffett strongly believes—and Munger later concurs—it was the reading he did in his formative years that shaped his approach to investing and prepared the groundwork for the next fifty highly successful years.

And he’s not kidding when he says to “read everything you can”:

“When I was ten,” he says, “I’d read every book in the Omaha Public Library with the word ‘finance’ in the title.”

Buffett does not advise reading a particular book, nor does he steer the budding Buffetts towards any particular investment style, even though the impact of Benjamin Graham’s “The Intelligent Investor” on Buffett is widely known.

Rather, he advises reading everything possible to find the style that suits the individual:

“If it turns you on, it probably will work for you.”

Well since the prior entry was on Kaptain Karl's (Carl Icahn) views on the general lack of performance of senior executives and the lack of value delivery of their companies it struck me that a small step in the direction, and following Warren's sage advice, might be to share my little shopping list. Or at least the first part of it though.

To come up with such a list though - and it's both eclectic and has a certain personal skew - one has to start by asking what's the purpose of the list.

 While by no means final it seemed to me that certain objectives were, in the spirit of learning to think, understand, lead and execute, desirable:

1. Need to understand all the moving pieces of an enterprise, now they fit together and how to make strategy workable. To that end Kaisha by Abbeglen & Stalk, although dated, in it's study of the Japanese corporation provides as decent a guide to all the pieces as any I've found. This also begs the question of needing to understand all the myriad moving pieces, from finance to marketing to operations to technology but those lists are for another time, largely.
• Complementing this perspective and extending it are Michael Lewis' "Moneyball" and the Idiot's Guide to Landscaping.
2. At the same time executives need to understand how to put the right set of controls in place to coordinate all the moving pieces. It never ceases to amaze and startle me how few professional, managers and executives aren't grounded in basic financials and think budgeting is a mere time-wasting exercise. Which admittedly it is all too often. So Graham's "Interpretation of Financial Statements" is on the list.
3. It's one thing to have a theorectial idea of where to head off to but entirely another to get everybody to go with you. Doris Kearns Goodwin's "Team of Rivals" is among other things as good a study of leadership, team-management and executive skill as any.
• At the same time leaders have to both have the trust and confidence of the led and a deep abiding sense of confidence in themselves and their directions. Finding the ground to stand on is always difficult and especially so in challenging times. Which these are and will be more so. No one does it better than James Stockdale on the individual level or, discussing the moral responsiblities of facing up to problems and adapting to survive, with regard to public leadership.
  
4. Finally there are a few more carefully selected books on business models & profitability, economics and business history to round things out. Plus Gary Sutton's "Six-Month Fix" as the best jumpstart book of practical advice which works whether you're taking over a division or a cost center (suitably adapted of course) and have to "make your bones" before the clock runs out and the rest of this doesn't matter.

Posted by dblwyo at 02:46 PM | Permalink | Comments (0)