Weekly Reader: 23Sep07
Well the big deal the week end 9/23 was the launch of Alan Greenspan’s memoirs. Just kidding it was the cut in the Fed rates by an unexpectedly large 50 basis points. Though to judge by the media blitz, including the Jon Stewart Show, it wasn’t. Which was actually good news because it provided a lot of air cover for a difficult, contentious and uncertain policy decision. While my suspicion is that problems in the world credit markets were the proximate cause since, judging by interest rate spreads, adjustments are being made, the much worse than expected jobs numbers and the accelerating implosion of housing gave a certain flavor to things. Amusing isn’t it that prior to July all things were for the best in the best of all possible worlds, Dr. Pangloss was treating Goldilocks for recessive tendencies and now you can’t turn around without someone whispering, actually shouting, the R-word. Oh my, we aren’t in Kansas in any more ?
Or are we – judging by by the markets reaction and near recovery of previous highs we’re on the Yellow Brick Road for sure. Not sure what song we’re singing…maybe Lucy in Sky with Diamonds, catering by Timothy Leary ? Speaking of credit crunches the Special section contains as usual the ‘must-reads’, and the article by Jim Jubak on the recurrent credit markets booms and busts of the last ten years in a relatively otherwise flat market is well worth reading. As is his advice on positioning. The theme continues with an exceptionally interesting column on how widespread structured credit products are, how little understood and how much farther we’ve got to get them under control, based on the work and thinking of Satayajit Das, one of the original thinkers and creators of those same products and markets.
The rest of the Markets section basically takes the disharmonic themes and looks at their consequences – rapidly escalating pressures on the dollar, credit crunch implosions in England (Northern Rock) and the on-going re-thinking of the deal-making business that underpinned so much of the last two years of market uptick. Now we have to unravel the existing deals and get them re-priced, clear the clogged pipeline of deals and financings by re-pricing or otherwise adjusting them and also dealing with the longer-term consequences. Ironically one of the progenitors, Goldman-Sachs, was the only contrarian smart enough to play against the game and win in Q3 !
We start the Economy section off by focusing on Greenspan’s Memoirs – which has gotten a lot of press because it turns out he can speak clearly when he wants to. There’s the autobiography, the policy and history reviews and so forth. But the most important and timely section is Uncle Allen’s look at the state and course of the economy. If he can get serious, well-informed discussion of the simple characteristics he lays out into the wider discussion he will indeed have left a legacy. The section continues with a look at the outlook for this “puzzling” economy and the accelerating housing crunch but also considerable on the weakening signs abroad as well as major adjustments in various foreign economies including India, China and Japan as well as major new structural shifts in SE Asian trade patterns as China moves up the value stack. There are also interesting tidbits on the fact that inflation hasn’t gone away nor have oil prices increases; in fact as the ME Oil Exporters develop their economies, for the first time of four opportunities they’ve squandered remember, they’re becoming major consumers of their own product.
As worldwide competitive pressures continue to mount companies are re-discovering the need for strategic HR development (on which we’ve waxed eloquently several times) and improved customer service. Both are starred articles. The discussion of leadership is interesting in that it flags a re-awakened interest in HR issues but the conclusions, particularly given some of the companies used as examples, need to be checked. In my experience with several if they’re leaders the rest must be really bad. In addition to the starred articles two sets of related business are really worth thinking about. The first is more in the on-going epic saga of the Airbus-Boeing confrontation which embodies one of the biggest structural competitions in a major worldwide industry. The 2nd is the mounting challenges to MSFT’s core from people discovering that Mac OS X and/or Linux can be viable alternatives. As if that weren’t bad enough, and given the on-going open source wars, new challenges are emerging in the core Office applications arena. IBM has just announced a “new” Symphony product that puts a vastly improved front-end on the OpenOffice engines. This attacks MS at the heart of it’s franchise and could become critically important.
General & Special
The Credit Crunch Continues At long last, financial markets have lurched toward higher risk premiums, the extra interest that lenders receive for eschewing Treasuries in favor of less-safe loans. Nor has the leveraged lending business been spared. The spigot of new commitments has shut tight. The average risk premium on high yield bonds leapt to a recent high of 4.87 percentage points above Treasuries, compared to June's record low of 2.63 percentage points, an almost seismic adjustment for the tortoise-like debt market. But unlike the seeming free fall in the mortgage market, the waves of worry in the high-yield arena have been more episodic, far less fear than is needed to raise risk premiums to sensible levels. Tuesday's aggressive rate reduction by the Federal Reserve, while perhaps desirable to shore up the economy, complicates this adjustment process. When the music stopped in July, $330 billion or more of these commitments was outstanding. By comparison, that's in the range of the total annual lending volume to similar borrowers as recently as 2005. Only a few billion dollars of these commitments have come to market, and lenders have been able to push them through with relatively modest sweeteners. Now more deals -- including a fistful of mega-buyouts like First Data and TXU -- are beginning to close. In a normal world, perhaps the banks would succeed in offloading this paper, as badly structured and mispriced as it is. But one consequence of the turmoil in the housing-finance market has been the shriveling up of securitizations, the process by which banks package up loans and sell them in slices to investors. As intimidating as it may seem, the supply overhang is not our biggest worry, which is the prospect of many of these loans going bad (the seminal reason for the collapse of the mortgage market.) Never before in the history of capital markets has so much money been lent to so many challenged borrowers.
How to ride the boom-panic cycle The market's roller-coaster pattern might be with us for years. The current panic is, by my count, the fourth of the past 10 years. On that evidence it's at least worth considering that "normal" now consists of a recurring pattern of market booms driven by excess global cash that leads to a global mispricing of risk and is punctuated at regular intervals by panics. If a pattern of boom, panic, boom, panic is indeed the new normal, it has profound implications for how we should invest. On the surface, these panics seem significantly different because they all have involved different players and different market vehicles. But note the similarities below those surface differences:
Each was rooted in a surplus of global cheap money. Each required a massive mispricing of risk. Investors put so much money to work at relatively low rates of return because they underestimated the risk involved in those investments. And each cycle led the world's central banks, often led by the U.S. Federal Reserve, to limit the fallout from the panic by flooding the market with cash, thus setting up conditions for the next turn in the cycle.
Markets & Investments
Are we headed for an epic bear market? The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game. Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions. The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way. He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates. [Satyajit Das was discussed earlier on Mefi. This interview with him is a great explanation of the financial skullduggery that we're knee-deep in. ]
- Banks' dark off-balance-sheet world Financial institutions have been running virtual savings and loans through special-purpose entities with flexible accounting and little oversight. No wonder they're in trouble now. With all of the problems that we have experienced thus far in structured credit, one might think that there would be more people scratching their heads about why there are so many off-balance-sheet entities in the financial community in the first place. I wish I had a good answer. It's pretty obvious that little attention had been paid to these entities, at least from the perspective of potential problems. Of course, the fact that conduits, and special-purpose entities generically, reside off balance sheets is a reason why everyone has been caught by surprise. Because if mountains of this paper are away from plain sight, potential problems can't be anticipated, as you can't attempt to understand what you can't see.
- What the big banks aren't telling you – yet The third quarter could end up as the worst in the past decade for the financial-services industry, but you wouldn't know it from the earnings forecasts. The banks are in denial. With credit markets still largely frozen, unemployment rising and major corporate expenditures slowing to a halt, every indication suggests that a surprising number of major financial firms, including Wachovia (WB, news, msgs), Washington Mutual (WM, news, msgs) and Bank of America (BAC, news, msgs), will come up short of expectations in October, kicking off an unpleasant autumn for investors. Investors need to care more about financial stocks than any others because they make up more than 20% of the broad market indexes. So let's get some clarity on exactly what they're facing.
Fears of dollar collapse as Saudis take fright Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East. The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40. There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries. The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit -- expected to reach $850bn this year, or 6.5pc of GDP. Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
· Few Asian Nations Will Celebrate `Bernanke Put': Andy Mukherjee To most Asian policy makers, the larger-than-expected cut this week in the U.S. Federal Reserve's target for overnight interest rates is just the return of an all-too-familiar headache: unwanted liquidity. Following the Fed's move, currency strategists are already advising clients to buy Asian currencies, though it's highly unlikely that the Bank of Korea or the Reserve Bank of India will allow their currencies to surge against a weakening dollar.
- The long gold boom Metal may be due for correction, but that could spike price to $2,000, analysts say .After reaching their highest level since 1980, gold prices may be due for a correction soon, but that could help feed what many expect to be a long-term boom -- to $800 and then inflation-adjusted highs past $2,000 in the years to come. The most immediate influence on gold prices this week has been the Federal Reserve's decision Tuesday to cut its overnight interest rate target by a half percentage point to 4.75%. Gold's rally has been built on longer-term inflationary pressures that could be unleashed due to the prospect of, and now actually declining U.S. and then global interest rates, said Patrick Lafferty, a commodities broker at Capital Trading Group.
· European Bonds Drop Most in Almost Two Years Amid Higher Inflation Outlook European government bonds fell the most in almost two years this past week after the Federal Reserve's interest-rate cut rekindled speculation global inflation will quicken. The Fed's rate cut prompted several companies to sell bonds in Europe as investor concern about rising corporate borrowing costs was allayed. The risk of owning European corporate bonds fell yesterday, according to traders of credit-default swaps.
· Yen Falls Against Dollar, Euro as Investors Seek Returns on Riskier BetsThe yen fell against the dollar and touched a six-week low versus the euro after stocks and bonds in the U.S. and Europe rallied. Japan's yen declined against all 16 major currencies as investors jumped back into carry-trade bets that involve borrowing funds in Japan to purchase higher-yielding assets elsewhere. The cost of overnight loans in dollars decreased a third day, after the Federal Reserve cut its benchmark interest rate by a half-percentage point to 4.75 percent on Sept. 18.
U.K. Central Bank to Offer Support To Mortgage Lender Northern Rock The News: Northern Rock, one of the U.K.'s largest mortgage lenders, turns to the country's central bank for an emergency funding arrangement. Street Scene: Customers line up at the bank's branches to withdraw money despite efforts by Northern Rock CEO Adam Applegarth (above) to reassure them. Bottom Line: The global liquidity crunch, which has caught financial firms in the U.S. and Europe, is showing minimal signs of improving. Panic Spreads Among Northern Rock Customers Hundreds of customers lined up outside branches of Northern Rock to withdraw their savings.
Deal-Making Ties Unravel In the hypercompetitive world of Wall Street, investment banks are normally willing to do whatever it takes to keep their clients happy. But these aren't normal times. Witness the fate of PHH Corp., which General Electric Co. and Blackstone Group LP agreed in March to buy for $1.7 billion. The mortgage lender and corporate vehicle fleet manager said yesterday that J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc. "revised [their] interpretations as to the availability of debt financing" that could result in a shortfall of as much as $750 million needed by Blackstone to fund its part of the deal. While the fate of leveraged buyouts such as First Data Corp. and TXU Corp. have been attracting the most attention, the banks underwriting buyouts have proved more comfortable wiggling out of smaller deals. The banks "run the risk that some place down the road, they will pay for it," said Kevin O'Mara, a mergers-and-acquisitions lawyer at Cadwalader Wickersham & Taft, because buyout firms such as Blackstone might take their business elsewhere. "These guys have long memories." People in the Blackstone camp are described as "shocked" at the development. A week ago, the banks "dropped a bomb" on Blackstone, GE and PHH, one person familiar with the matter said, informing the group that they would shave their funding commitment.
· How Goldman Sachs defies gravity It is one of the most stunning bets Wall Street has seen in decades. As the credit markets fell apart over the summer, causing the prices of hundreds of billions of dollars of mortgage-backed bonds to plunge, Goldman Sachs had already positioned itself so that it would profit massively from a decline in those securities. Thursday, Goldman reported earnings for its fiscal third quarter that were far above expectations. While several businesses were surprisingly strong in a difficult period, the chief contributor to the earnings blowout were trades that made money from price drops in mortgage-backed securities.
- Deals backlog nears $500bn A backlog of nearly $500bn in outstanding financial deals – including leveraged loans to fund private equity buy-outs, delayed initial public offerings and corporate bond issues – has built up over the summer because of the market turbulence. Private Equity Giant KKR Faces Mortgage Crisis The delayed repayment by KKR Financial Holdings, an affiliate of Kohlberg Kravis Roberts & Co., of its commercial paper is the latest sign that the mortgage loan crisis is spilling over into the broader financial markets.
Bondholders Hoisted by Own Petards as Company Sales Depress Seasoned Debt During the summer of subprime discontent, bondholders refused to purchase the debt of the most creditworthy borrowers unless they could be compensated with extraordinary yields. The companies are returning the favor with the proviso: Be careful what you wish for. Offering higher yields enabled companies to sell a record $92 billion of investment-grade debt in August, after they raised less than $40 billion in July, the lowest in more than two years, data compiled by Bloomberg show. This month's $50 billion is 16 percent ahead of the September 2006 pace. By contrast, high-yield, high-risk issuers have been shut out of the market. More than 45 companies were forced to cancel, delay, or postpone debt offerings in June and July because of speculation that losses in mortgages to people with poor credit would slow the economy, data compiled by Bloomberg show.
Economy
(10*) Greenspan charts our economic course What, then, can we reasonably project for the U.S. economy for, say, the year 2030? Little, unless we first specify certain assumptions. If we smooth through the raw data on output per hour, a remarkably stable pattern of growth emerges, going back to 1870. Annual growth of nonfarm business output per hour has averaged close to 2.2 percent. Even without adjusting for the business cycle, wars, and other crises, the range of overlapping consecutive fifteen-year averages of the annual increase in output per hour stays consistently between 1 and 3 percent. Our historical experience strongly suggests that as long as the United States remains at technology's cutting edge, annual productivity growth over the long run should range between 0 and 3 percent. Which brings us to our bottom line. Coupled with the projected 0.5 percent annual increase in hours worked between 2005 and 2030 that follows from the demographic assumptions cited earlier, a slightly less than 2 percent annual average growth in GDP per hour implies a real GDP growth rate of slightly less than 2.5 percent per year, on average, between now and 2030. That compares with 3.1 percent per year, on average, over the past quarter century, when labor force growth was considerably faster. As awesomely productive as market capitalism has proved to be, its Achilles' heel is a growing perception that its rewards, increasingly skewed to the skilled, are not distributed justly. Market capitalism on a global scale continues to require ever-greater skills as one new technology builds on another. Given that raw human intelligence is probably no greater today than in ancient Greece, our advancement will depend on additions to the vast heritage of human knowledge accumulated over the generations. A dysfunctional U.S. elementary and secondary education system has failed to prepare our students sufficiently rapidly to prevent a shortage of skilled workers and a surfeit of lesser-skilled ones, expanding the pay gap between the two groups. Unless America's education system can raise skill levels as quickly as technology requires, skilled workers will continue to earn greater wage increases, leading to ever more disturbing extremes of income concentration.
- 'The Age of Turbulence' by Alan Greenspan Greenspan is world famous because he was very good and very lucky at this role. During his tenure at the Federal Reserve, he made roughly 36 substantive decisions about the direction interest rates should go. Six times I disagreed with him. Five of those six times, I was wrong. (The sixth? In the summer and fall of 2000, as the dot-com stock-market bubble crashed, I would have been cutting interest rates had I been sitting in Greenspan's chair; he waited for more information to see how much the fall in stock-market values would affect high-tech investment spending before he acted.) That is an amazing record -- much better than Barry Bonds', and Greenspan clearly has never been on steroids. It is certainly much better than most economists I know could have done.
Americans wonder which way their economy is heading Across the United States, the impact of the turmoil in the housing and credit markets on the broader economy has been relatively modest so far. But just as some of the customers who go to Cox's restaurant are becoming more cautious and Tuberman is holding back on hiring, many people are preparing to hit some economic headwinds. Whether that caution on the part of consumers and business translates into little more than a modest economic slowdown or turns into a full-blown recession will depend on a variety of factors. But perhaps the most important is whether jobs remain plentiful and consumers keep spending. That is what was so ominous about the government's recent report that businesses reduced total employment by 4,000 jobs in August. Another important labor market indicator - the share of the working-age population that reports holding a job - has fallen to its lowest level in nearly two years. And consumer spending, while it continues to grow, has slowed in recent months. Economists on Wall Street now put the risk of a recession at about one-third, which is significantly higher than earlier this year but far from a sure thing. Reports of the Death of Inflation Have Been Greatly Exaggerated
U.S. Downshift Puts Trade in Flux The long-widening U.S. current-account deficit appears to have begun reversing course, as growth slows. A gradual shift could correct imbalances in the global economy, but a rapid one could be painful to U.S. consumers. For years, economists have warned that the U.S. can't run up endless charges on the national credit card to cover its huge appetite for imported cars, oil, electronics and other goods. Someday, they said, the bill will come due. It looks like someday may have finally arrived. After 16 years during which the U.S. mainly borrowed and bought while much of the rest of the world lent and sold, the global economy appears to be undergoing a fundamental shift. The result: Instead of depending as heavily on the U.S. for demand, the world economy could become more evenly balanced. In the background is a U.S. dollar that has grown weaker against the euro, British pound, and many other currencies. The euro hit $1.39 this month, the strongest it has been since its birth in 1999. If foreign money turns scarce and the trade deficit narrows suddenly, Americans could face a tumbling dollar, soaring interest rates and an economic downturn. That could send shock waves back through Europe and Asia if their own consumers don't make up for lost demand from the U.S., the world's largest national economy. If the turnaround persists, the implications for the U.S. could be profound. The weak dollar makes imports more expensive and raises an inflation risk. Interest rates are also likely to be higher than they otherwise would, as Americans have to offer higher yields to induce foreigners to put their money in the U.S.
Housing Starts in U.S. Fall More Than Economists Forecast to 12-Year Low Builders in the U.S. began work on the fewest homes in 12 years in August, raising the risk the real-estate recession will spread to other parts of the economy. The 2.6 percent decline to a lower-than-forecast annual rate of 1.331 million followed July's 1.367 million, the Commerce Department said today in Washington. Building permits dropped 5.9 percent to a 1.307 million pace, also the lowest since 1995. The housing slump may deepen after borrowing costs rose and lenders shut off access to credit, causing growth to slow even more, economists said. Federal Reserve policy makers yesterday lowered the benchmark rate by a half point to prevent a broader economic slowdown.
Big home price drops loom Over the next few years, more than three-quarters of the nation's housing markets will suffer some decline in home prices. Many will experience double-digit hits in a forecast that has worsened considerably in recent months. According to an analysis conducted by Moody's Economy.com, declines will exceed 10 percent in 86 of the 379 largest housing markets. And 290 of the cities will experience price drops of 1 percent or more. The survey attempted to identify the high and low points of housing prices in each of the markets, some of which started declining from their peak in the third quarter of 2005. All are median prices for single-family houses. Nationally, Moody's is projecting an average price decline of 7.7 percent. That's a jump from the 6.6 percent total price drop that the company was forecasting in June and more than twice that of last October's forecast of a 3.6 percent price decrease.
- Moody's Forecasts House Prices to Fall 7.7% Nationwide Look at the price bottoms; Moody's is mostly forecasting the price bottoms to happen in late 2008. That would make this one of the shortest duration housing busts with similar price declines in history. Historically declines of this magnitude have taken 5 to 7 years because house prices are sticky. My guess is prices will decline further than Moody's is expecting, and the duration of the bust will be longer.
Asia Will Lose as `Made in China' Goes Local: Andy Mukherjee Much of the analysis of China's bloated trade surplus focuses on exports, when it's the imports that deserve greater scrutiny. In the first eight months of this year, China's exports grew 28 percent. That's less than the annual export growth of 35 percent recorded in both 2003 and 2004. More importantly, the 20 percent increase in imports so far this year pales in comparison with the 36 percent expansion in 2004 and the 40 percent surge in 2003. Slower import growth, according to Louis Kuijs, a World Bank economist in Beijing, is a key reason why China's trade surplus is spiraling out of control, creating an avalanche of domestic liquidity that's fueling inflation and asset bubbles. Chinese imports have decoupled from exports since 2005 because assembly lines in the country are increasingly purchasing intermediate parts from local suppliers. The substitution of imports with locally produced components has important implications for the rest of Asia, which has become more and more reliant on Chinese factories to tap final demand in the U.S., Europe and Japan. According to the Asian Development Bank, more than 70 percent of the trade between China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand includes ``intermediate goods'' -- parts, components and semi- finished material. These are then used to manufacture products that are ultimately sold outside the continent. China is the ``driver'' of this regional trade, even though only 6 percent of it is on account of final consumption on the mainland.
Eurozone suffers ‘worst’ jolt since 9/11 The eurozone economy has this month suffered its biggest jolt since the aftermath of the September 2001 terrorist attacks, with global financial turmoil hitting the services sector particularly hard, according to a closely watched survey. The unexpectedly steep fall on Friday in the eurozone purchasing managers’ index – the third consecutive monthly drop – could knock policymakers’ previous confidence that the 13-country eurozone economy would escape largely unscathed from the US subprime mortgage crisis. Although the slowdown may prove temporary – and the survey showed companies continuing to take on staff at a rapid rate – it coincides with the euro’s rise to record levels against the dollar and on a trade-weighted basis, which will hit eurozone exports.
· Growth slowed in the euro zone's manufacturing and services sectors, while exporters took a hit from the strong euro.
The oil squeeze has just begun Think the market is already tight? It's going to get tighter over the next five years under pressure from both the supply and demand ends. Here's why. The market for oil will get even tighter over the next five years. (And in case you're looking for a way out, natural-gas markets may be even tighter.) As much as I'd like to believe that the agency has made a mistake, the logic behind its pessimistic assessment of supply and demand is impeccable. In the best case, the International Energy Agency calculates, supply will grow at 1% annually. Even that might be optimistic, though, because global oil production grew by just 0.4% in 2006. That creates just a teeny-weeny problem, because the agency projects that demand will grow by 2.2% a year over the next five years. Thanks to years of underinvestment, mismanagement, lack of technology or political interference -- or all of the above -- oil production is dropping faster than anyone expected at some of the world's biggest oil exporters. In 2006, oil production fell by 6.9% in Norway, 10% in the United Kingdom (which shares North Sea oil fields with Norway), 2.1% in Mexico and an estimated 5% in Venezuela. In all of those cases, the rate of decline is accelerating. The problem is geology, not politics (as it is in places such as the Niger Delta, where a collapse of order has shut down 25% of Nigeria's oil production). Any fix for a geologic problem is expensive and can take years to implement.
OPEC drives up oil prices in a new way. The oil-producing nations' fast-growing, subsidized economies and soaring consumption of petroleum are big reasons the rest of world is paying more for its crude. This time, OPEC really is to blame for higher oil prices. There's a huge debate inside the oil industry and in the commodity pits about the status of Saudi oil reserves. The Saudis carry great clout inside that organization, but they have faced fierce opposition this year from an OPEC faction headed by Venezuela and Iran that is adamant about keeping prices as high as possible. Both countries desperately need high oil prices: Oil revenue is the only thing that stands between the regimes that rule in Caracas and Tehran and huge, possibly uncontainable protests. But there's a third part of the global energy demand story that hasn't received much attention until lately -- and it explains why higher oil prices haven't slowed global economic growth more rapidly and why OPEC is getting badly beaten by the energy traders these days. From 2000 through 2006, OPEC countries themselves accounted for 22% of global growth in oil demand. From 2000 through 2006, oil consumption by OPEC countries climbed by 1.8 million barrels a day, or 29%. Consumption is projected to climb 400,000 more barrels a day this year. OPEC consumption has been growing at 2.5 times the rate of global consumption. By the end of this year, consumption growth in OPEC countries will just about wipe out all the 2.2 billion barrels a day in increased production that OPEC has added since 2000.
Good Morning, Japan -- Time Your Leaders Woke Up: William PesekRemember that credit-rating upgrade for which Japanese officials were hoping? Well, they can forget it. Investors, too. Hopes were buttressed in July, when Moody's Investors Service put Japan on review for a higher rating, citing prospects for lowering the government's debt burden. Prime Minister Shinzo Abe's resignation on Sept. 12 ensured the status quo would prevail for a while longer. To officials in Tokyo, it has always been unfair that Moody's rates Japan's long-term local-currency debt A2, the same as Bahrain, Lithuania and South Africa. Standard & Poor's grades Japan at AA, the same as Slovenia and Chile. Their rationale is that Japan is a Group of Seven nation and a uniquely rich one. The idea that the second-biggest economy would default on debt is almost unthinkable. Yet ratings upgrades are rewards for good fiscal deeds, not continued profligacy. Even though Japan has enjoyed steady growth since 2002, it has made no noticeable progress in reducing public debt. Officially, it hovers at about 150 percent of gross domestic product; observers such as the Organization for Economic Cooperation and Development put it at around 170 percent.
India Brokers Desert CLSA, JPMorgan for Local Firms, Millions in Bonuses Domestic brokerages are winning staff with signing bonuses of $2.7 million and more, plus equity stakes. The competition is about to worsen as unlisted local brokers plan initial public offerings to fund expansion and as India's largest companies enter the industry. Indian brokerage shares are surging. India Infoline has jumped 174 percent this year, with almost all the increase coming after the announcement of its new hires in May. JM Financial Ltd., which lured five sales traders from JPMorgan in August, has risen 92 percent in 2007. The nation's benchmark Sensitive Index is up 12 percent this year. Tata Group, with interests in steel, automobiles and software, and Aditya Birla Group, whose main businesses are in commodities, say they may start brokerage and other financial services. India in May became the third emerging stock market after China and Russia to surpass $1 trillion in value as the economy grows at its fastest pace since independence 60 years ago. Experienced local traders are attracted to Indian firms because they get the chance to guide the destiny of the company and share its profits, said Ma Foi's Balaji.
Business
(***???) How top companies breed stars You couldn't be blamed for rolling your eyes when American Express chief Ken Chenault says, "People are our greatest asset." CEOs always say that. They almost never mean it. Most companies maintain their office copiers better than they build the capabilities of their people, especially the ones who are supposed to be future leaders, and for decades they've gotten away with it. But now their world is changing profoundly - and at long last we're going to find out which self-proclaimed people-cherishers actually mean it. Of the many powerful forces driving companies to develop leaders more effectively, the most important is the world economy's long-term shift from dependence on financial capital toward human capital. Even given the credit crunch, money for investment is more abundant than ever. It isn't the scarce resource in business anymore; human ability is. Companies are finding that the advantages of building a reputation for developing talent are greater than they may have thought - "a first-pick advantage," as the RBL Group calls it, an edge in attracting the cream of college and business-school students. By continually attracting the most promising graduates and then developing them, these firms become higher-performing organizations, enhancing their ability to attract the best - a self-reinforcing cycle that makes the company more dominant every year. A close look at the companies on our list reveals a set of best practices that seem to work in any environment. These companies operate in every kind of industry and are based all over the world. But what's most striking are traits they share - specifically, nine practices that combine to create world-class leadership development. [Top Companies for Leaders ]
Numbers Game Won't Die, Even If Net Income Does In just a few years, corporate balance sheets and income statements may look a lot more like today's cash-flow statements do, with separate sections showing operating, financing and investing activities. Net income as we know it might no longer be the bottom line, replaced by a more inclusive line called total comprehensive income. Even earnings per share might disappear from the face of the income statement. When beating Wall Street analysts' earnings estimates became all the rage during the 1990s, companies responded by managing their earnings to give the analysts what they wanted. When the market's demands shifted, and it became popular to fixate on, say, operating cash flow as a gauge for earnings quality, companies found new ways to manipulate their cash flow.
Cross-Border Deals Take New Direction Western multinationals may have pioneered cross-border mergers, but the latest chapter in globalization is being written by a new breed of deal makers from places like Russia, China, Brazil and the Mideast with an appetite for acquisitions in the developed world. The recent deals mark a fundamental change from only a few years ago, when nearly all the investment flow went from the developed world to the developing one. This year could be on pace to be the first ever in which companies and investment funds based in developing countries spend more on mergers and acquisitions in the developed world than vice versa. The trend, which is expected to continue, could accelerate in the wake of the recent turmoil in global credit markets. Credit woes have put the brakes on the takeover frenzy led by Western multinationals and private-equity firms in the past three years. Of course, the vast bulk of cross-border deals continue to take place between companies based in the industrialized West. But many companies in the developing world have ready access to large pools of capital at relatively low cost in their home-country debt markets, which means they can step up their buying sprees.
Worst Wall Street Quarter Since 2001 Tempered by Timely Goldman Sachs Gain Wall Street's third quarter would be the worst since 2001 if it weren't for the timely sale of a power company by Goldman Sachs Group Inc. Bear Stearns Cos. probably will report a 41 percent drop in earnings per share, Morgan Stanley may post an 11 percent decline and Lehman Brothers Holdings Inc. may say profit fell 5.1 percent, according to a Bloomberg survey of analysts. Goldman's earnings probably jumped 33 percent after a gain of as much as $1 billion from the sale of Horizon Wind Energy LLC. Fixed-income trading, the industry's biggest source of revenue, faltered as sales of mortgage and asset-backed securities dropped 36 percent in the quarter, Lehman estimates. Banks also stopped financing new leveraged buyouts, which provided $8.4 billion of fees in the first half, as they struggle to clear a backlog of $350 billion in loan commitments. While revenue from takeover advice, stock trading and underwriting probably rose, it may not make up for writedowns to reflect the declining value of corporate loans and mortgage bonds.
GM and union continue marathon talks Negotiators for the United Automobile Workers and General Motors resumed bargaining Saturday after a marathon session that went past a midnight contract deadline. GM's 73,000 workers at local unions nationwide were told to wait for updates rather than strike. Several major issues appeared to remain unresolved in the talks, notably whether GM would establish a health care trust that would be administered by the union. The trust, which would require tens of billions of dollars in financing, would assume responsibility for $55 billion in liabilities for GM's active and retired workers and their families. Along with the trust, the union is said to be seeking job guarantees for its workers who remain after GM completes a restructuring plan that calls for it to cut 30,000 jobs through 2008. The size of GM's work force is now a small fraction of where it stood in 1990, when it had 320,000 workers. That is 50 percent more than GM, Ford and Chrysler now employ collectively. Contracts between the union and the Detroit auto companies officially expired at 12:01 a.m. Saturday, but the negotiations continued at GM, which was selected by the union as its strike target on Thursday.
Airbus Bets on Composite Frame for A350 In a switch that could make Airbus's next jetliner more competitive with rival Boeing Co.'s new 787 Dreamliner, the European plane maker plans to build the frame of its planned A350 model from advanced composite materials instead of metal. The lighter structure -- similar to that of the Boeing plane -- reduces fuel consumption, increases a plane's range and reduces wear on key parts such as landing gear. The shift also cuts the need for costly maintenance inspections. For months, Airbus had been telling customers that attaching skin panels made of carbon-fiber composites to an aluminum-alloy skeleton was superior to Boeing's method of making both the frame and fuselage of the Dreamliner from composites. Airbus intends to complete its designs of the A350 late next year. It expects to deliver the first A350 in 2013. Although Boeing recently said it expects as much as a four-month delay in the planned first flight of the Dreamliner, the Chicago-based aerospace company still is hoping to deliver the first Dreamliner on schedule in May.
Boeing's Tall Order: On-Time 787 Boeing Co.'s top leaders say it is possible to overcome a nearly four-month delay in the 787 Dreamliner program and deliver the first jet on time in May. Industry observers and a number of the plane's suppliers say it would be the aerospace equivalent of hitting a hole in one on a golf course. After running into a critical shortage of aerospace fasteners to hold the airplane together, Boeing was forced to delay the first flight of the Dreamliner from August to what now looks like sometime in mid-November to mid-December. Company officials surprised many people in the aerospace industry -- including some of Boeing's suppliers -- when they said two weeks ago that they nevertheless still plan to deliver the first airplane on time.
My 'Stupid Business' Europe's leading low-fare airline CEO has choice words for his competition, politicians, environmentalists and others. There's a bit of P.T. Barnum in Michael O'Leary, the chief executive of Irish low-fare air carrier Ryanair. He's pulled such stunts as driving a tank to a competitor's headquarters to declare a price war and dressing up as the pope to promote new routes to Rome. Most recently, when Britain's Advertising Standards Authority said Ryanair was incorrectly claiming that its flights were faster and cheaper than the Eurostar train for traveling between London and Brussels, he sent the frowning officials a copy of "Mathematics for Dummies." Along the way, he's built Ryanair into Europe's largest airline by passenger volume and, along with such rivals as easyJet, transformed travel on the Continent. Most of Ryanair's rivals? "Doomed." Mr. O'Leary has plenty more to say about all of these people and more, but the difference between him and other airline executives is as good a place to start as any. "Generally the problem with the airline industry is it's so populated with people who grew up in the '40s or '50s who got their excitement looking at airplanes flying overhead," Mr. O'Leary explains in his spartan office at Dublin airport, dressed not in fatigues or papal robes but his usual blue jeans and open-collar shirt. "They wanted to be close to airplanes. You know, I wasn't. Mercifully I was a child of the '60s and a trained accountant, so aircraft don't do anything for me.
Is a Web Bubble Bursting? The rise of Internet video is prompting fresh forecasts that global Internet traffic could double every 100 days. A researcher who debunked the hype behind the first bubble, though, says traffic growth may be slowing world-wide. Remember the catchphrase from the late 1990s, "Internet traffic is doubling every 100 days"? Well, the true growth rate was around 100% annually. The Internet-stock bubble burst when investors realized telecom companies had spent hundreds of billions of dollars building capacity that wasn't needed. Now, the rise of Internet video is prompting fresh forecasts that -- you guessed it -- global traffic could double every 100 days. Trouble is, Internet traffic growth may be slowing world-wide, according to the researcher who debunked the hype behind the first bubble. Andrew Odlyzko, a professor at the University of Minnesota, has collected data showing traffic growth has fallen to more like 50% per year.
The slowdown might be temporary. The adoption of Internet TV could be stunningly fast. Or the Chinese could develop Korean patterns of extraordinarily high Internet usage. But if subdued growth set in for years, many of the victims of the last downturn could be in for a second helping. Communications carriers Level 3 Communications and Global Crossing, for example, are two surviving former highfliers. They are heavily in debt and their operating profits don't yet cover interest payments or needed capital expenditures. Slowing traffic growth could damp revenue growth -- making it harder for them to manage their debt loads. There could be indirect casualties as well. Less data traffic means less demand for the telecom equipment that carries it. Cisco Systems boss John Chambers, who has said video could cause Internet traffic to grow as much as 500% annually, would be proven too optimistic. Companies with high stock multiples, such as Juniper Networks, which trades at 45 times estimated 2008 earnings, could see their stocks fall. Of course, measuring traffic is tough, and the future is anybody's guess. But if investors get caught again, they'd have only themselves to blame.
Garmin Shows Difficulty of Spotting Growth Stocks The trick for growth companies is trying to figure out when the growth is about to end. That little exercise is more of an art than a science, and has stung more than its share of investors who have either held on too long only to watch the stock price fall, or made a prematurely bearish bet against a company's rising fortunes. There is no better example of this than Garmin Ltd., best known for its global-positioning systems and portable navigation devices. For more than a year, the company has confounded critics who thought it was vulnerable to competition and falling prices, which it is. Or should be. But so far, in the face of rapidly falling prices and mushrooming competition, Garmin's performance has continued to set its own course, with its stock more than doubling in the past year. The company is doing so well that six weeks ago, in reporting its last quarter, management boosted earnings and revenue forecasts for this year. So why, in the face of this, would anybody gamble that reality is catching up with Garmin? Well, for one thing, while sales and earnings are forecast to be higher than original expectations, the guidance for operating margin -- an important measure of how much money a company really makes -- was unchanged. And by year's end, margins are expected to fall in the fast-growing auto/mobile sector, which last quarter generated 68.4% of Garmin's revenue.
Pondering a New PC Now I'm finding myself paying attention again -- only this time, there's a difference. My old recipe -- buy a reasonably current Dell, minus accessories -- no longer holds much interest. And that's because of Apple. The Windows and Apple worlds, practically matter and antimatter not so long ago, now coexist and overlap in all manner of ways. Readers Endorse Switch to Apple Last week's column on pondering a new PC, and the possibility of throwing over Windows for Apple, brought in a tidal wave of forum posts and email -- and more evidence that the consumer-PC market is turning in Apple's favor.
Free IBM Software Is Bid to Challenge Microsoft Office Resuming an old rivalry, International Business Machines Corp. is launching a software giveaway that takes aim at Microsoft Corp. on the office desktop. Today, IBM plans to post on the Internet a package of its own software with applications that square off against components of Microsoft's ubiquitous Office suite -- a word processor to rival Word, a spreadsheet to go up against Excel and business-presentation software as an alternative to PowerPoint. IBM's latest move is aimed chiefly at boosting its Notes software, which includes email and instant messaging, as a rival to Microsoft's Outlook email software. By introducing Symphony in an internationally recognized information-display standard called the Open Document Format, IBM also hopes to boost acceptance of that standard, which doesn't work well with Microsoft products. Because Symphony will be available free in the latest edition of Notes, it should get a look from organizations around the world, which have 135 million Notes users. Users will be able to use Symphony to view and edit a spreadsheet or write a presentation without having to open a new application.
Sony Delays 'Home' Virtual World In a sign of the enormous challenges that Sony Corp. continues to face with its PlayStation 3 videogame console, the company outlined a belated strategy Thursday to boost demand by working better with third-party videogame publishers to improve its lineup of games. A cautious Sony also delayed until next year the launch of a virtual-community feature called "Home," which it hopes will build excitement for the PS3. The PS3, which is packed with sophisticated technology such as a powerful processor and a Blu-ray disc recorder, was one of Sony's most highly anticipated products when it was conceived. But it has been a big disappointment so far, suffering first from a delayed launch last year and then from slow demand because of its price and lack of good titles. The PS3 has been significantly outsold world-wide by both Microsoft Corp.'s Xbox 360, which was released a year earlier, and Nintendo Co.'s Wii, which has attracted a broad base of more casual and novice players.
(***)The Accidental Thief Amid mounting theft and other merchandise loss in recent years, retailers face a daily battle against scam artists. But let the customer beware: With security on high alert, even law-abiding shoppers can fall under suspicion. I learned that on a recent family shopping trip to the Kmart in Bridgehampton, N.Y. By going through the checkout line with a pair of flip-flops I had mistakenly placed in the wrong box, I joined the ranks of thousands of shoppers detained or arrested each year -- in my case, accused of trying to cheat the store out of $8. Pronounced guilty on the spot, I soon learned there is no presumption of innocence in retail, and that's pretty much how the system is intended to work. For my part, I had no intention of trying to pull a fast one on the store, from which my extended family purchases prodigious quantities of household items, kids' toys, and beach paraphernalia. I needed a box because there was no box or price tag for my merchandise to begin with. On this particular Saturday in August, I was looking through piles of flip-flops -- most of them not in a box or the wrong size for their box -- with my step-daughter-in-law and 8-year-old step-granddaughter. There was no employee around to help. I found the perfect orange pair in size nine for another family member and looked around for their box. The only box marked size nine had tiny toddler-size shoes in it; since they seemed to be in the wrong box, I removed them and placed my nines inside. I didn't look at the price on the box. (I don't scrutinize prices in Kmart, assuming they are a bargain compared to, say, Neiman Marcus.) While my two family members went to one register, I took my haul, including the flip-flops, to another counter; between us we spent more than $800.
Home Depot CEO says no job cuts planned The Home Depot (NYSE:HD) Inc. doesn't plan to make any broad-based job cuts or reduce the number of its core retail stores in the face of a persistent housing slump that isn't expected to improve anytime soon, Chief Executive Frank Blake said Friday. Blake told The Associated Press in an exclusive interview that the Atlanta-based company's focus on customer service means more employees, not fewer, will be needed.
