bizzXceleration: Performance, Value and Profit

And while we're on the subject of tolling bells, Thanksgiving and all the little details that make life interesting this collection of business related readings has some real highlights. The prior WRFest posting sketched the general environment - not positive and lots of supposed "suprises" coming out of the woodwork. So the question remains who's going to do what ? In particular all those companies that though the good times would roll and bought back their shares are now experiencing a rapidly growing exposure to profit and cash flow problems. If you read nothing else read the excerpt from the WSJ on that (and also it's worth going back to review a prior post on the flood of liquidity and buybacks -Market Drivers 3 (Buybacks):Investment, Hiring, Nah...Bonus, Bonus, Bonus !.

Accompanying that is a little something pointing out that YoY earnings flipped negative for the first time in a long time. Several companies caught our eye for one reason or another from Cerberus to GM to Chipotle to Airbus, who continues to experience really rocky times. But the two links we'd really like to draw your attention to are the one on HP and the other on the application software market. In case you haven't noticed app software is a) where the value of computer systems resides - the rest if plumbing. And b) without ever having really delivered on it's hyped-up promises reached saturation and maturity so that c) there's been a lot of consolidation going on. Unfortunately that consolidation hasn't meant any benefits for customers....whoopsie ! If anybody thinks Tech has a rosy future they first need to work thru that little conundrum - how to get the APP S/W industry to actually deliver value. We're all open to suggestions.

On the other hand one of THE drums we beat around here is that a good strategy & business model are essential, a good management system vital but where the rubber meets the road is making it happen - execution, execution, execution. HP turned in a quarterly earnings report that was just sterling - firing acrosss the lines of business and geographies though interestingly it was servers that were beginning to take off while printers are experiencing continued profit pressures. And HP is certainly back in PC's as well.

At the end of the day this is about Hurd coming in and putting an operating plan in place, communicating, making sure it was executable and then establishing accountability for performance. Hopefully we'll get a chance to dig into this further and see what the details are but it's worth carefully reviewing the HP link and then ask yourself two key questions:

1. How did they make it work and can they keep it up ?
2. How does everybody else compare ?

Business

Big Buybacks Begin to Haunt Firms High-profile companies are cutting back on share buybacks amid pressure from a slowing economy and deteriorating balance sheets. Driven by billions of dollars in share buybacks, record-setting buyouts and a wave of mergers, the amount of stock in the market shrank by hundreds of billions of dollars in the past four years. With the supply of stock down and demand strong, the market rallied. Now, as the economy slows and credit markets buckle, high-profile companies are cutting back on buybacks, and some wish they held on to the cash they gave back to shareholders. The reversal of the trend exposes a flaw in the buyback strategy -- many companies bought high and are selling low. From the third quarter of 2002 to the second quarter of this year, more than $1.5 trillion of shares in nonfinancial companies has disappeared from the stock market through buybacks, mergers or buyouts, according to the Federal Reserve. The number hit a peak during the second quarter of this year, when nonfinancial companies retired a seasonally adjusted net $192.5 billion of shares. Some of the money to buy the shares came from the credit markets, where companies raised $156.5 billion in the quarter. Now, some investors worry that dividends and buybacks will go from a positive for the market to a negative, as a slowing economy and deteriorating balance sheets put pressure on a host of companies.

• Have Companies Feasted on Debt? It is clear many homeowners borrowed too much during the mortgage boom that unwinds daily before us. What's less clear is whether companies have done the same.

• ·         S&P 500 Profit Flips Negative for Q3, Read it here 1st: Profits Flip Negative for Q3

Greed Trumps Fear as Kravis, Schwarzman, Black Get Banks to Arrange CLOs After sticking banks with more than $300 billion of leveraged buyout debt, New York-based Kohlberg Kravis Roberts & Co., Schwarzman's Blackstone Group LP and Black's Apollo Management LP are raising money for collateralized loan obligations that will buy the assets for as little as 95 cents on the dollar. Morgan Stanley, Citigroup Inc. and their Wall Street competitors, which reaped a record $8.4 billion in fees from the buyout firms in the first half of 2007, financed at least seven private-equity CLOs in the past two months, while cutting off other managers, according to data compiled by Bloomberg. KKR officials said they accounted for about 40 percent of the funds created since August. ``Private equity firms are such big repeat customers that they can demand investment banks'' serve them, said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York.

• Mortgage Market Collapse Claims Newest Victims as Wall Street Lawyers Exit

Indian automaker goes for Jaguar Indian automaker Mahindra & Mahindra Ltd. is among the three final bidders for Ford Motor Co.'s Jaguar and Land Rover units, a person who has been briefed on the negotiations said Tuesday. Mahindra, which has joined private equity firm Apollo Management LP to bid for the British automakers, is competing against another Indian automaker, Tata Motors Ltd. (Charts), and U.S. private equity firm One Equity Partners LLC, said the person, who requested not to be named because the talks are private. Tata and the private equity firm have been previously identified as possible bidders for the luxury car operations. All three bidders were meeting Tuesday with the British government, labor unions and Ford about the sale, the person said.

As Software Firms Merge, Synergy Is Elusive  The voluminous deal activity in the software industry has meant a bonanza for shareholders. Customers, however, are left with unanswered questions about their future as the companies flesh out their integration plans. The issue of what customers experience after a big tech merger is once again coming to the fore as the software industry undergoes its latest wave of consolidation. As the big software companies flesh out their integration plans internally, customers on the outside are left with unanswered questions about their future. It often takes years for software makers to integrate all the products they have bought -- if they manage to at all -- making it hard for customers to decide what to buy in the meantime. Some customers worry about losing negotiating power in the long run as the number of product choices dwindles. And all the dealmaking can crimp a CIO's ability to plan, since it's unclear which software makers will survive.

Companies

Economy Conspires to Dog Cerberus United Rentals Sues Over Collapsed Deal; Chrysler Loans Stall Cerberus's termination of the deal, coupled with turmoil in some of its other investments, shows how even Wall Street's most-respected names are being battered by upheaval in the credit markets and economy at large. The ordeal is a turnabout for Cerberus, which had spent years distancing itself from its once bare-knuckle image. In the summer, it earned kudos for how it handled the tricky financing of its Chrysler buyout. Its earlier purchase of General Motors's financing' arm, GMAC, was a sign that it had truly arrived. Life in the big leagues has proved tough. Cerberus declines to explain why it backed away from United Rentals. A slate of investments related to the subprime-mortgage business have proved difficult. Compounding matters is the fate of a $4 billion sale of bank loans tied to the Chrysler deal, which was to take place this week. It will likely be postponed, a person familiar with the sale says.

GM's Wagoner Has Short Honeymoon The meltdown in the mortgage market and slumping car sales have combined to sour General Motors Corp. Chief Executive Rick Wagoner's brief honeymoon with Wall Street. The auto giant's stock has fallen 39% since it reached a three-year high of $43.20 a share a month ago on the strength of cost cuts tied to its new labor contract with the United Auto Workers. As auto sales have continued to falter, trouble has erupted on other fronts, including a big bet on subprime-mortgage lending made on Mr. Wagoner's watch

Coffee clash at McDonald's The fast-food chain wants to move full steam ahead into the growing market for specialty coffees with cappuccinos and other espresso drinks. But first it must bring reluctant franchisees on board. After the success of its upgraded drip coffee -- which even managed to snag a thumbs-up from testers at Consumer Reports earlier this year -- the fast-food chain known for supersize meals is gearing up for a massive expansion into the world of lattes. Restaurants will offer lattes, mochas, cappuccinos and espressos with a choice of different flavorings and milk. Industry watchers say the drinks will cost about 50 cents less than at Starbucks (SBUX, news, msgs) But as it tries to cash in on the fast-growing specialty coffee market, the world's largest restaurant chain is already finding itself at odds with the unlikeliest of groups: its own franchise owners. A full-court press by McDonald's couldn't come at a worse time for Starbucks, the world's largest chain of coffeehouses, which is struggling with rising dairy prices, growing competition and flattening store traffic in the United States.

Burrito Chain Assembles A Winning Combo Chipotle has built itself into one of the hottest fast-food chains in recent years by rejecting almost every technique on which the industry was built. The company doesn't advertise on TV or franchise, and executives aren't concerned about long lines. Chipotle Mexican Grill has arguably become the country's most successful fast-food chain in recent years by rejecting almost every major technique on which the industry was built. Not only does it not show the product, it doesn't advertise on television. It doesn't franchise. It has some of the highest ingredient costs in the industry. And its executives aren't especially concerned that customers wait as long as 10 minutes in lines that routinely stretch out the door. Of course, consumers are fickle when it comes to restaurants, making it difficult for chains to maintain success over time. Chipotle's narrow menu could make it hard for the chain to hold customers' interest. But Mr. Ells argues that the menu is more varied than it appears because of the many ways in which the ingredients can be combined. The chain's founder says he sees potential for Chipotle to do in fast food what Whole Foods Market Inc. has done in the grocery industry: popularize natural foods by selling them in an appealing environment. But Chipotle hasn't been able to secure as much naturally raised meat as it would like. Ann Daniels, the executive director of purchasing, says the company simply can't get suppliers to produce enough.

Investors May Want to Drop Whole Foods Whole Foods Market's investment story is a lot like the goods on its shelves: Pricey, but so compelling that people keep going back. Whole Foods shares are 17% above their 52-week low, currently trading at 30 times projected 2008 per-share earnings. This hefty valuation is despite a share price that has fallen some 22% from a high in October, as investors became jittery when a consumer slowdown hit other high-end food retailers such as coffee purveyor Starbucks Corp. They believed that sluggishness could slam growth at the rapidly expanding grocery chain. Bulls argue that its pricey valuation is less of a reflection of 2008 earnings -- which they agree will be lackluster because of the high costs of integrating Wild Oats -- than a big earnings revival expected in 2009. That is when some analysts expect the Wild Oats acquisition to bolster earnings in a big way. Still, paying 30 times forward earnings for the promise of rapid growth more than a year down the line can test even the most loyal Whole Foods patron, especially when that valuation is more than double that of traditional food retailers Kroger Co. and Safeway Inc. While the same-store sales growth of those bigger grocers lags behind that of Whole Foods -- Kroger's was about 5% in the latest quarter while Safeway's was 3% -- the difference in their gross margins is starting to narrow as Whole foods' costs increase and its rivals beef up their higher-margin, natural-food offerings. Kroger's gross margins are about 24% and Safeway's are about 28% in their most recent quarters; Whole Foods' are about 35%.

How Unilever Is Thinning the Ranks Consumer-products giant Unilever has cut thousands of jobs in the past two years and plans to cut 20,000 more by 2009. To carry out the sweeping reorganization that started with layoffs of half of Unilever's 1,200 senior executives in 2005, Chief Executive Patrick Cescau has turned to Head of Human Resources Sandy Ogg. The company's goal isn't just to cut fat but it is to change job descriptions in a company long known for being bloated and slow. Mr. Ogg has brought to Unilever a performance-ranking system for jobs and employees that he developed as a top human-resources executive at Motorola Inc., where the former U.S. Navy officer worked before joining Unilever in 2003. Mr. Ogg's system lists the company's top positions by criteria such as sales, profits, and operating costs. Mr. Ogg and Unilever's executive committee have rewritten job descriptions to create fewer, more powerful posts. To select employees for the new jobs, Mr. Ogg used a grid with financial performance of the employee's division on one axis and six leadership skills on the other. The leadership skills were selected to reflect Unilever's priorities, Mr. Ogg says. One ranks managers on "action not debate," because the company had often gotten bogged down in internal discussions about strategy.

H-P Issues an Upbeat Forecast Hewlett-Packard Co. posted a 28% rise in profit and a 15% jump in revenue for its fiscal fourth quarter and issued a stronger-than-expected forecast, highlighting how the technology giant has expanded despite its size and recent market turbulence. The Palo Alto, Calif., company's outlook contrasted with recent guidance from some other technology companies. This month, Cisco Systems Inc. Chief Executive Officer John Chambers said U.S. tech spending might be "lumpy." Wireless-tech maker Qualcomm Inc. gave a lower-than-expected outlook, helping to spark the stock market's recent tumble in technology shares. H-P, a tech bellwether because of its broad product portfolio that includes printers, personal computers and tech services, said its fiscal 2008 operating earnings would be $3.32 to $3.37 a share, above Wall Street estimates of $3.27 a share. It said its fiscal 2008 revenue would rise 7% to $111.5 billion, above Wall Street forecasts of $109.5 billion, according to Thomson Financial. H-P said its board authorized an additional $8 billion of share repurchases, a sign that the company thinks its stock is undervalued, and it declared a regular cash divided of eight cents a share on its common stock. The company has made similar moves in years past as a method for offsetting dilution from its employee-stock-benefits plan. H-P in the Stall Zone

Web War III Google is in over its head by taking on Ma Bell's descendants. Google is worried about what you'll see on your tiny cell phone screen someday -- it might not be Google! The much awaited Android software package was the search giant's way of trying to establish in the mobile wireless world the enviable position it enjoys in the fixed Internet world. Maybe instead of looking ahead to wireless, it should be looking over its shoulder and worrying more about what you'll see on your giant HDTV. Get ready for a free-for-all around the idea of convergence of, loosely, TV and the Internet. Players angling for advantage are too many to count, from Microsoft to Babelgum. But we wouldn't overlook the telephone companies, Verizon and AT&T, who just happen to be Google's nemeses in the wireless world war too. Verizon's Ivan Seidenberg is finally getting a few nods for his expensive approach, laying fiber right into millions of homes. This would enable -- if households need it -- 100 megabit speeds for dense, interactive media. AT&T has taken a cheaper approach, rolling fiber into neighborhoods but relying on the existing copper for "last mile." Your existing phone line is capable of carrying more and more data thanks to new compression technologies. When they're done, the telcos will have not just the preferred platform for delivering high-def, on-demand and interactive services. They'll have several advantages over their would-be rivals, whether Google or Microsoft or the cable companies. One is their history as phone companies, in the form of systems for billing and tracking individual customers in their usage. A second is their choice of technology: Unlike cable or satellite, true Internet TV means delivering individualized TV streams to each user on demand, rather than broadcasting the entire spectrum of channels to the user's set-top box.

Airbus May Cut Research Spending as Dollar's Decline Passes `Pain Barrier' Airbus SAS may cut its 2 billion- euro ($3 billion) research budget to trim costs as the dollar's decline becomes ``life threatening'' for the world's largest planemaker, Chief Executive Officer Tom Enders said. The dollar-euro rate has ``passed the pain barrier,'' Enders told Airbus works-council representatives in Hamburg, Germany, yesterday. Unions said today that with record orders secured this year the comments were ``absolute nonsense.'' Airbus is cutting 10,000 jobs after it lost 572 million euros last year before interest and tax, compared with Boeing's profit of $3.81 billion. Wiring problems put the A380 superjumbo two years behind schedule at a cost of $6.8 billion, the A400M military-transport is running a year late, prompting a 1.1 billion-euro charge, and the A350 widebody was redesigned five times to win airline approval, pushing deliveries five years behind Boeing's rival 787 Dreamliner. The job cuts Airbus is seeking through 2010 are part of a restructuring plan aimed at making the company profitable and competitive. The so-called Power8 program assumes an exchange rate of $1.35 to the euro, Ohler said today. Still, Airbus has already won record orders this year and EADS this month reported a smaller-than-expected loss after aircraft pricing was firmer than anticipated. Friedrich said Airbus needs to review its discounting policy if it can't make a profit given current demand and that Enders must be explicit about what measures are planned or risk destabilizing the workforce.

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Welcome back - hope you had an excellent Thanksgiving. Mine was and thanks for asking. Oh, yeah while last Fri. may have got our hopes up one would have to say today's markets take the edge off. As the quote goes, "Ask not for whom the Bell tolls, it tolls for thee". And there were quite a few tolling last week, some in such interesting keys that we may have crossed some thresholds. Below is our regular summary of the Markets and Economic news with several key themes serendipitously highlighted in the General section.

Before commenting on those we'd like to draw your attention to some markets and economic news which continues and expands several themes we've been playing (to wit an already slowing economy IN a growth recession with a long way to go in Housing and accelerating problems in the Credit Markets as the vast sets of structured instruments unravel).

The biggest shots across the bows were the announcements last week from Freddie and Fannie after they post multi-$B losses AND told us that they'd need to raise new capital. The first was very definitely not good but the latter is really scary. To which one needs to add in a couple of pieces of int'l news. For one thing the credit contagion appears to be spreading to some of the Asian countries, seperately from any economic linkages. And the spreads in the European commercial paper markets are widening back out, indicating rising risks and increased chances of yet another seizure in the worldwide credit markets. The central characteristic of all this that's still underplayed is that breakdowns in the credit markets are NOT limited to sub-prime and are more due to leverage and structure combined with bad under-writing diligence than the latter alone. Again we'd refer you to our post on the "rocks in the pool" model of spreading credit problems:Stages of Denial: Acceptence ? Not Yet .

The other big shot, in its' own way as significant, is the Fed's move to change its' reporting from 2 to 4X/year and also to include more information, including a 2-year economic outlook plus the ranges around that outllook. As we've discussed before the natural speed limit of the economy is 3% or north, and anything less is actually a growth recession. Well the Fed (!) is now telling us their outlook thru 2010 is for less than 3% growth.

Which brings us to the General section which nicely summarizes and re-presents/represents our themes. First is a great FT column explaining why a growth recession is a problem and then how it's spreading around the world. Followed by two interesting posts, one from the BigPicture and the other from the WSJ, commenting on the markets' YTD performance and how certain key bellweather companies are getting badly hurt (BP's example are Citi and HD - in the latter case we could say we told you so but our intent was to focus on performance improvement and understanding the problems, not critisizing where it wasn't merited. Citi though is another thing entirely). Which nicely sets up the Journal's point about needing to focus on company performance (also buttressed by the postings on buybacks to be covered in the next posting on Business). The final link is to a WSJ editorial on improving enterprise performance by using the PE mantra by Robert Pozen. While he makes some very good points our argument is that there's too much attention to financial engineering and not enough to improving the business. A point we made a couple of weeks ago and which is co-listed with the link.

In the midst of all these things to not be thankful for we'd still urge you to stop and consider what you have to be grateful for. If nothing else that you have the time, wherewithal and capabilities to worry about these sorts of things puts you in a better position than 90% of the human race in terms of well-being. As Warren Buffett put it's the birth lottery. 

General & Special

Who will pick up the thread after the great unwinding? Is the US going to experience a recession? Two answers must be given to this question: nobody can be sure; and it does not matter. A much more important question is whether the US economy continues to experience a “growth recession”, by which is meant a lengthy period of sub-trend growth. The answer is that it will. The standard US definition of a recession is two quarters of negative economic growth. This demands both too much and too little: too much because it requires an absolute fall in output, which is an infrequent event in a growing economy; too little, because it is consistent with rising unemployment and declining capacity utilisation. But a lengthy growth recession is likely to be far more disturbing even than a sharp recession, provided the latter ends swiftly. Most analysts believe that the trend rate of growth of the US economy is around 3 per cent a year. Growth at below that rate, then, is a growth recession. This year, the expectation is for growth of about 2 per cent. Next year, suggests the consensus, it will be a little above 2 per cent. That would mark a cumulative shortfall of about 2 per cent of gross domestic product over two years. So the US is already in a growth recession.

Midday Tidbits — Turkey Edition Special

·  The biggest gobbler this year in the Dow Jones Industrial Average is faced with the possibility of losing more than half its value in a year, which just doesn’t happen that frequently (General Motors managed it in 2005). It’s Citigroup, which, coming into today, was off 43.6% on a year in which the wheels basically came off the franchise. The next-closest competitor for this year’s dog is Home Depot, off 30% coming into today’s trading.

·  Taking apart the 10 sectors that comprise the Standard & Poor’s 500-stock index, the worst is, predictably, the financial sector, which have shed 21% of their value, as the large banks, brokerages and mortgage lenders were beset with credit issues. Consumer discretionary stocks rank second-worst with a 13.6% decline headed into today’s trading.

·  If you’re still long this stock, well, good luck to you. ACA Capital Holdings may have its credit rating cut further, which would force banks to take on about $60 billion in collateralized debt obligations, according to a J.P. Morgan analyst. The shares were lately down 28 cents to 82 cents, after already losing 92% this year.

Four at Four: Finding Bulls, Avoiding Turkeys

·  In certain environments, distinguishing between one stock or another doesn’t seem all that important. The tech bubble of 1997-1999 was a heyday for many an undeserving company, and the recent run-up in financials (one that ended earlier this year) produced big rallies in a multitude of different shares. But in a more challenging environment, such as the one the market currently resides in, finding bull markets within choppy trading conditions becomes difficult. Even as industrial shares, in general, suffer, one such bull market can be found in Deere & Co., which reported a strong quarter and posted expectations for 2008 that looked good to investors, helping the shares to a 6% gain today. The stock is up 20% since the beginning of July, comparing favorably with Caterpillar’s 13% decline. Now, the two companies are different (Deere is more involved in agricultural businesses, which are doing better than construction at this point), but it does illustrate that the entire market isn’t poisonous. “What you try to do is find where the growth is in the economy,” says Scott Vergin — large-cap growth portfolio manager at Thrivent Investment Management in Minneapolis. “There are pockets of strength out there, and it’s not all this big disasters as the financials are.”

·  Looking at the Dow industrials today, there aren’t too many pockets of strength. All but one stock (GM) ended down in a sour session, one where investors leaned even harder on the likes of brokerages, oil and the industrial shares. But really, weakness abounded across the spectrum today as investors deal with the reality of the current and forthcoming earnings environment, which isn’t a strong one. Within the S&P 500, the average negative surprise in the third quarter was a 13.9% shortfall, the largest negative surprise for one quarter headed back to 1990, according to Merrill Lynch data. Still, Merrill notes that it remains difficult to shake analyst optimism. Fourth-quarter earnings estimates have fallen dramatically during the third quarter, to a growth estimate of 1.3% (from original estimates of 11.3% growth), but 2008 estimates still sit at a lofty 13.8%. Surveying the landscape, Wall Street researchers still come to the same conclusion: blue skies, smiling at me, nothing but blue skies.

Target-Proof Your Company  The increasing number of buyouts of public companies by private equity -- 202 this year (so far) from 35 in 1997 -- is putting more pressure on corporate boards to enhance shareholder value. Although private equity funds are currently on hold because of the credit crisis, they are very large and will return to action. During the hiatus, public companies should improve their performance and avoid being a future target by taking a few pages out of the private equity play book. Of course, some private equity deals have succeeded because of excess leverage, quick flips or onerous fees. However, several careful studies, including research published in the McKinsey Quarterly in 2005, have shown that the majority of companies acquired by private equity funds have outperformed thanks to substantially improved operations and better designed incentives. A broad analysis of this outperformance reveals five key factors. While some may be unique to the privately held company, public directors should ask the following five questions, and consider the extent to which they can apply the answers to their particular company:

Think Like a Private Equity Guy ? No, Think Like An Owner !

Markets & Investing

A whisper in your ear from City gurus Without further let ado, let me hand over to a couple of my favourites, starting with Teun Draaisma, Morgan Stanley's chief of European equities. "We do not wish to bet against the growth spillover effects of the financial crisis anymore. Will the credit crunch lead to a US recession? This is becoming increasingly likely. Can the rest of the world decouple? We would not count on it. "The risk-reward for equities has deteriorated. We are now overweight cash, neutral equities, and underweight bonds. "We have not seen the usual end of cycle excesses yet (meaning the rush by small investors to buy stocks, and mega mergers) but with the financial crisis not improving we are not so sure any more whether we will get to see those excesses. The end of this cycle may well be more like the last but one (late 1980s), just as a character trait often jumps one generation. That would mean that the equity fizzles out in the next few years. "What is new is the duration of the deepening financial crisis. It is still true that our recession-risk indicator suggests a mid-cycle slowdown, not a recession, while our earnings growth leading indicator suggests decent growth next year. These indicators do not capture the credit market situation fully, however, and many recessionary indictors are on red.

Freddie Mac Shares Plunge After Mortgage Company Posts $2.02 Billion Loss Freddie Mac fell 29 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage-finance company posted a record loss, warning of a possible dividend cut and the need to raise capital. The worst housing slump in 16 years caused ``significant deterioration'' in the third quarter that will continue through year-end, McLean, Virginia-based Freddie Mac said in a statement. The net loss was $2.02 billion, or $3.29 a share, three times what some analysts estimated. Freddie Mac and the larger Washington-based Fannie Mae, created by Congress to foster American home ownership, have lost $41 billion in market value this year as mortgage defaults and foreclosures rose to record levels. The companies, which own or guarantee 40 percent of the $11.5 trillion U.S. home loan market, will have less money available for new mortgages. The company ``almost in the immediate future'' will announce how it will increase capital, including the possibility of reducing its fourth-quarter dividend by 50 percent, Syron said in a conference call with investors. Freddie Mac also hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as advisers. Should a dividend reduction fail to help meet capital reserve requirements, Freddie Mac may consider limiting growth, slowing purchases in its guarantee portfolio and selling preferred stock or convertible preferred stock, the company said. Freddie Mac cut its portfolio by $29 billion in September and October, Piszel noted in the interview.

·          Bank of America's Investment in Countrywide Now Shows Loss of $858 Million

• ·         Freddie Mac May Need to Raise as Much as $6 Billion to Stem Capital Slide, Freddie, Fannie seek a few billion

·          Credit-Default Swaps on European Banks Rise to Record on Subprime Concern

·         U.S. 10-Year Bond Yield Below 4% for First Time Since 2005 as Stocks Drop

·         Japanese banks suffer 230 bln yen in subprime losses: report

At Subprime `Survivors Conference' It's Too Early to Tell Who'll Survive They dubbed it ``The Survivors' Conference.'' In early November, 2,000 people who handle asset- backed securities for a living crowded into a ballroom at the JW Marriott hotel in Orlando, Florida, just 3 miles from Disney World, to hear speaker after speaker explain why 2008 may be their worst year ever. The subprime crisis, which has claimed the jobs of three chief executive officers and prompted more than $45 billion in writedowns at the world's biggest banks, may end up spilling into 2009. ``These events tend to become deeper and play out longer than most people initially expect,'' says Michael Mayo, an analyst who covers securities firms at Deutsche Bank AG in New York. ``This is one of the slowest-moving train wrecks we've seen.'' The tumbling U.S. housing market will continue to inflict the damage. Mortgage-backed securities and collateralized debt obligations containing those securities are falling in price and won't find their footing anytime soon. That's because most of the subprime mortgages, which provide collateral for $800 billion in securities, have yet to go bad, says Christopher Whalen of Hawthorne, California-based Institutional Risk Analytics.

Credit 'heart attack' engulfs China and Korea The global credit crisis has hit Asia with a vengeance for the first time, triggering a massive flight to safety as investors across the region pull out of risky assets. Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives. "This is a severe warning sign," said Hans Redeker, currency chief at BNP Paribas. "Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyse the whole global economy," he said. Korean and Chinese three-month yields have fallen from 4pc to 1pc in a matter of days in a eerie replay of events on Wall Street in late August when flight from banks and the US commercial paper markets caused yields on three-month Treasuries to falls at the fastest rate ever recorded. Asian investors appear to be opting for deposit accounts with government guarantees. It is unclear what prompted this latest "heart attack" in the credit system, though rumours abound that Asian banks have yet to own up to their share of the expected $400bn to $500bn losses from the US mortgage debacle. Stock markets were battered across the region. The Hang Seng index in Hong Kong fell 4.15pc, while Tokyo's Nikkei slumped to the lowest level in a year and a half, dragged down by the shares of the 'Seven Samurai' exporters. Asian jitters set off fresh turmoil on Europe's credit markets. The iTraxx index measuring default insurance on bank and insurance bonds hit an all-time high of 63.5.

Europe Suspends Mortgage Bond Trading Between Banks  European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders. The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today. Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded banks pay the highest interest premiums on covered bonds in five years.

Wealthy Nations in Gulf Rethink Peg to Dollar For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent. Because countries such as the UAE, Saudi Arabia and Qatar sit on large reserves of U.S. dollars, their decisions will have repercussions beyond their borders. If they move away from their strict dollar pegs -- perhaps following Kuwait, which earlier this year switched to a basket of currencies -- it could undermine demand for dollars and encourage others to diversify their holdings. Many nations have already created sovereign wealth funds to invest their holdings in a broader array of assets. The countries of the Persian Gulf are struggling with the impact of their own good fortune as rising oil prices bring a windfall. Normally, when the price of a country's major export rises, that pumps up the local currency, which helps restrain inflation. Instead, much the opposite has happened. As the price of oil has skyrocketed in recent years, Gulf currencies tied to the dollar have fallen relative to other currencies such as the euro and British pound, making many of their imports more expensive. The UAE and Qatar have suffered some of the worst inflation, as the oil gusher has triggered a building boom. In Qatar, inflation hit 11.8% last year, and the International Monetary Fund estimates it will average 12% this year. This week, officials in Doha, the capital, raised taxi fares by a third. Both countries depend on an army of guest workers from South Asia and elsewhere, who send much of their income to their families back home. As costs go up, these workers are spending more of their salary on basic goods and have less to send. What's more, the falling dollar erodes the value of the Gulf currencies against the workers' home currencies, meaning their remittances don't go as far.

No measure of risk A new U.S. accounting rule requiring banks to give detailed data on assets valued purely by mathematical models sheds light on the quality of their numbers, but has little value in assessing their risk exposure. Figures required by rule FASB 157 have generated keen interest among investors anxious to assess the reliability of bank reporting and ascertain exposure to losses on U.S. subprime mortgage-backed securities and other instruments shunned by the market since the credit crisis began. Journalists and analysts have begun citing banks' Level 3 assets and comparing them with total assets, but accountants caution against reading too much into the FASB 157 figures. "You can't draw a correlation between a high number for Level 3 and a bank's degree of risk," an accountant for a major European bank said. She said, for example, that credit derivatives may require little or no cash up front and so have a small carrying value in the figures, but might expose a bank to significantly more risk than a cash investment in the top tranche of a loan product, the full value of which would go into Level 3. The first bank auditor said a more informative number in the 157 table is a bank's net transfers in and out of Level 3 versus the other categories since the credit crisis kicked off.
 

Economy

Fed sees economy slowing in 2008 The Federal Reserve said that the decision to cut a key interest rate last month was a "close call," according to minutes from that meeting released Tuesday. But in a new economic outlook, the central bank also lowered its growth target for the economy in 2008, raising hopes that the Fed will cut rates again when it meets in December. The Fed indicated in an addendum to its minutes that it now expects the economy to grow at about a 1.8 percent to 2.5 percent rate next year, down from a forecast in June of 2.5 percent to 2.75 percent growth. The Fed also issued relatively sluggish growth targets for economic growth in the next two years. The Federal Reserve governors and Federal Reserve Bank presidents indicated that they anticipate the economy to grow at a 2.3 percent to 2.7 percent clip in 2009 and at a 2.5 percent to 2.6 percent rate in 2010.  Fed Lowers '08 Growth Outlook, Calls October Decision to Cut Rates `Close'

·          U.S. economy in meltdown MarketWatch economist Irwin Kellner says the U.S. economy is reeling from a one-two punch of plunging real estate values and a full-blown credit crunch that might not be alleviated with additional rate cuts. Home building remains weak October's activity skewed toward multifamily segment. Construction begun on single-family homes slips 7.3% in October, but a surge in apartment building pushed overall figure up 3%. But pact of building permits the slowest in 14 years. Why U.S. actually needs a recession Seventeen benefits from an economy going through "slow-motion train wreck."

• Paulson on Housing My point isn't to embarrass Paulson, but to show how far behind the curve he has been on housing and the credit crunch. If modification standards are a good idea, he shouldn't be talking about standards, he should be proposing standards. At least he realizes that housing in 2008 is going to be much worse than 2007. Paulson Shifts on Mortgages U.S. Treasury Secretary Henry Paulson, warning of a potentially significant increase in home-loan defaults in 2008, said in an interview that the mortgage-service industry should help large groups of borrowers qualify for better loans. The statement was a shift from his prior view against a group approach.
• Commercial Property Now Under Pressure The value of commercial real estate is starting to decline because of the credit crunch, according to a Moody's report.

·         Pimco's McCulley Says Fed May Cut Rates to Below 3% on Recession Concerns

U.K. Economic Growth Unexpectedly Slows as Services, Manufacturing Falter U.K. economic growth unexpectedly slowed to the weakest pace in a year during the third quarter as service industries cooled and factory production stalled. Gross domestic product rose 0.7 percent in the three months through September, the Office for National Statistics said in London today. It previously estimated 0.8 percent, which was also the median of 31 predictions in a Bloomberg News survey. The annual growth rate was 3.2 percent, the most since 2004. European service industries from airlines to banks expanded the least in more than two years in November as a U.S. housing slump increased the cost of credit globally and oil prices approached $100 a barrel, a separate report today showed. Bank of England Governor Mervyn King said Nov. 14 that the U.K. economy may slow ``sharply'' as higher borrowing costs pinch spending. The central bank increased the benchmark interest rate five times in the year through July, while banks have hoarded cash and raised rates for lending to each other on concern about losses from mortgage-backed securities in the U.S.

Balancing market freedoms Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including him, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis. As one of the economists who helped create today's newfangled securities, I must plead guilty: These new mechanisms both mask transparency and tempt to rash over-leveraging. Why should non-economist readers care about these technicalities? Because the policy tools that served so well for Alan Greenspan's Federal Reserve and for the Bank of England now have to be changed. Today, central bankers and U.S. Treasury cabinet officers cannot know whether current interest rates are too high or too low. This is surprising, but true. The safest bond interest rates are indeed low. But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory. The situation is not hopeless. New, rational regulations that discourage predatory lending and rash borrowing could help a lot. Also, as we learned during the Great Depression, the government's treasury and its central bank must be both the lenders of last resort and the spenders of last resort. Speculative markets will not stabilize themselves. The best policy is actually the middle way: not too much freedom for market forces, and definitely not too little freedom. Global markets have moved into a new epoch. China, India and even Russia and Ireland are currently growing at almost twice the pace of the United States and the core countries of the European Union. Gone are the days when an American president could command ocean tides to come in and go out.

Posted by dblwyo at 12:12 PM | Permalink | Comments (0)

Peter Drucker had a saying, "...change the people or change the people" and we've been seeing a lot of that and will be seeing more and more of it as the problems in the Finance industry are worked out. If you'll skim the readings below, as well as the prior post, one theme stands out to me - at the heart of all these problems was a major breakdown in the asset securitization "technology" cause by a combination of profound lack of understanding, a set of incentives that made pumping any business instead of good business the road to greedy gains (& everybody knew it and knows it who's involved) and the joint failures of competence, governance and execution on fundamentals, e.g. Risk Management, that were supposed to lie at the core of the executives capabilities. Change the people indeed. Like the prior post we'd have to say the extensive discussions and analysis from last week's WRfest still applies (WRFest 11Nov07(Business): ....performance is reality) and will be THE theme for a long time to come. 

The three listings in the General section bear this out and are specially recommended. One is a Bloomberg interview with John Thain where he reminds us of nothing so much as Mark Hurd as the latter was taking the reigns at HP. Let's hope he has similar success 'cause MER sure could use a dose of hardnosed execution these days. Along with the whole rest of the Finance industry.

They're not the only ones facing Ch...ch...changes though and below you'll find pointers to challenges in the Auto industry (including the big ones popping up at Chrysler so far), retailing facing the accelerating slowdown (there's a particular fun piece on HD in case you read our earlier post: Performance Re-visited: Another Trip to HD's Woodshed) and the continued emerging challenges in the Tech industry, in general and specifically. For example Starbucks is making some of the biggest changes in its' history by planning a major marketing campaign as it faces slowing growth, maturity of it's business model and increased competition, e.g. MickeyD's. Similarly Apple has gone gang-busters with the iPhone but ATT hasn't backed it up with a network that provides the proper level of support. The iPhone and Google's new open-source phone software platform are huge shots across the bow.

We recently heard Richard Armitrage, ex-Deput Secretary of State, outline what it takes to make something go: 1) a workable vision that you communicate to everyone, 2) execution and 3) accountability. He was, of course, speaking in a different context (US foreign policy) but put the essence of good management and govenence in one pithy sentence.

We went on a little longer but, again, we'll point to the introduction to our framework and suggest that the times are going to sort companies out into two buckets. Those that do and survive and those that don't.(Think Like a Private Equity Guy ? No, Think Like An Owner !)

Meanwhile have a great holiday ! 

General & Special

John Thain’s Strategic Agenda: Bloomberg TV interview

As Bank Profits Grew, Warning Signs Went Unheeded We should have known something was strange. The banks were doing a lot better than they should have been doing. When the history of the financial excesses of this decade is written, that will be a verdict of financial historians. There were signs that banks were either lying about their results or were taking large risks that were not fully disclosed, but investors were oblivious. What were the signs? Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up. By that light, nothing was going right in 2006 and early this year. The yield curve was inverted, or at best flat. And credit spreads were at historic lows. Risky loans, whether to subprime mortgage borrowers or junk-rated corporations, were readily available at rates that seemed to assume there was only the slightest risk of default. And yet the bank stocks were buoyant, and so were reported profits.

Business

Subprime test Did the securitization industry fail its first major test? Some say the process helped fuel subprime lending excesses. Others argue that the long-term benefits are so important that they justify the risk.

VW Takes Lead in Resale-Value Rankings The Big Three auto makers still lag behind Japanese and European rivals when it comes to predicted resale value. Detroit's big three auto makers have gained ground in recent quality surveys, but a leading vehicle-price resource says American brands still lag behind Japanese and European competitors when it comes to predicted resale value -- a critical measure consumers use to decide whether a car is a smart buy. Boosting resale value is an urgent task for Detroit's auto makers. With data about used vehicle values and predicted resale values -- also known as residual values -- widely available on the Internet, consumers can fairly easily factor likely resale value into a buying or leasing decision. Detroit's auto makers have suffered in such comparisons because they have tended to push for share by overproducing, then slapping on big discounts or selling vehicles in bulk to rental-car companies. Those tactics undermined resale values for models on the road and the predicted resale values used by finance companies to set lease payments on new cars. Detroit's Big Three have recently slashed production of even hot-selling items in an effort to boost residual values.

Aggressive markdowns this holiday season aren't guaranteed, as retailers have taken steps to cut costs and inventories. The economy is weakening, crude oil is near all-time highs and subprime mortgage woes are snagging home-buyers and Wall Street traders alike. Time for aggressive Christmas markdowns? Not so fast. The annual stare down between consumers and retailers isn't a guaranteed win for consumers this year, industry watchers say. In the past, high costs and poor inventory planning gave retailers little choice but to quickly slash prices if the holiday shopping season started slow. Last December, caught off guard by a price war over flat-panel televisions, Circuit City Stores Inc. tumbled into the red after it was forced to refund part of the purchase price of HDTVs. During Christmas 2000, retailers loaded shelves in anticipation of a strong selling season only to dramatically cut prices when bad weather and economic worries kept shoppers away. At Gap Inc., fourth-quarter profit that year tumbled 34% while Nordstrom Inc.'s profit dropped 59% as a result of the early and deep markdowns. But after several years of retail mergers and low interest rates, most large chains have stronger balance sheets this year. Many retailers have taken steps to boost profit margins by cutting staff to reduce labor costs and adding pricing and planning software. Slowing sales growth since mid-2006 has curbed expectations -- and inventories.

American Airlines's `Hidden Asset' May Top Carrier's Market Value AMR Corp.'s American Airlines, the world's largest carrier, and its U.S. competitors are sitting on frequent-flier plans that may be worth as much as the airlines themselves. Demanding an upgrade on their investment, some shareholders want the programs sold. American's AAdvantage program, with more than 57 million members, may fetch as much as $5.7 billion, according to a Morgan Stanley estimate. That's almost the same as AMR's market value. Bear Stearns & Co. projects United Airlines' Mileage Plus may go for as much as $22.8 billion, more than four times the value of parent UAL Corp. Airlines could boost shares by 20 percent to 27 percent by unloading the units, Morgan Stanley says. Investors say selling the mileage plans would help reverse this year's 18 percent drop in airline stocks amid a 51 percent rise in jet-fuel prices. While airline executives have resisted giving up exclusive access to their best customers, they are now considering activist shareholders' demands to copy the 2005 spinoff of Air Canada's Aeroplan, which has passed its parent and grown to about the same market value as Northwest Airlines Corp.

Advertising: Web Videos Stealing TV Viewers, and Marketers WHY are fewer viewers watching the new fall television series? Perhaps because they are too busy watching video online. As broadband service becomes more available at home, the growing prevalence of video programming on the Internet is catching the attention of consumers — not to mention marketers and media companies.

Ethanol Bust Makes Losers of Bush, Gates, Archer Daniels Midland in 2007 Ethanol, the centerpiece of President George W. Bush's plan to wean the U.S. from oil, is 2007's worst energy investment. The corn-based fuel tumbled 57 percent from last year's record of $4.33 a gallon and drove crop prices to a 10-year high. Production in the U.S. tripled after Morgan Stanley, hedge fund firm D.E. Shaw & Co. and venture capitalist Vinod Khosla helped finance a building boom. Even worse for investors and the Bush administration, energy experts contend ethanol isn't reducing oil demand. Scientists at Cornell University say making the fuel uses more energy than it creates, while the National Research Council warns ethanol production threatens scarce water supplies. As oil nears $100 a barrel, ethanol markets are so depressed that distilleries are shutting from Iowa to Germany. An investor who put $10 million into ethanol on Dec. 31 now has $7.5 million, a loss of 25 percent. Florida and Georgia have banned sales during the summer, when the fuel may evaporate and create smog.

The end of the tech stock party  Despite the uncertainty, this much is clear: We won’t soon see a run in tech stocks like the one that just petered out. Break out the orange juice and aspirin: Wall Street’s tech party is officially in hangover mode. Investors don’t have to look far to see the signs. Apple (AAPL) shares are down 14 percent from their high of $192 earlier this month. Google (GOOG) shares are down 15 percent, and Research in Motion (RIMM) 22 percent.

Of course, it’s hard to feel too much pity for long-term holders of these feel-good stocks, since their recent tumbles have merely put them back at their September and October levels. But now is a good time to face a sobering truth: It will be many months before the markets throw another another tech party like the one that just ended — and holiday sales could be the best gauge of how bad things will get.

Companies

Chrysler mulls dealer cuts Chrysler is considering wide-ranging branding changes that would streamline its product offerings and eliminate as many as 1,000 dealers, The Wall Street Journal reported Friday. A plan currently under discussion calls for Chrysler dealers to sell all of the automaker's passenger cars under the Chrysler name. Dodge dealers would sell only pickup and commercial trucks, and Jeep dealers would sell only Jeep and sport-utility vehicles, three dealers familiar with the discussions told the Journal for its online edition. One of the dealers said the proposal was just one of several being considered, and that the company hoped to have a decision in place by the end of the year, the Journal reported. The dealers asked not to be identified because the plan has not been released publicly. The plan would allow Chrysler, which seeks to return to profitability by 2009, to drop some of its overlapping products. That in turn would eliminate underperforming dealerships carrying excess inventory and using incentives that cut into profitability. Messages were left after hours Friday with Chrysler spokesmen.

Home Depot Third-Quarter Net Falls as Drop in U.S. Home Sales Slows Demand Home Depot Inc., the largest home- improvement retailer, reported lower profit and cut its full- year earnings forecast after the U.S. housing slump reduced sales of kitchen cabinets and appliances. Home Depot said it will take a ``cautious stance'' on completing its $22.5 billion share buyback because of the volatility of credit markets and housing sales. Third-quarter revenue of $19 billion missed the $19.3 billion average estimate of analysts in a Bloomberg survey. Chief Executive Officer Frank Blake is spending more than $2 billion this year to improve customer service and the appearance of stores in a bid to reverse market-share losses to Lowe's Cos. Sales have declined for two straight quarters amid the worst housing slump in more than a decade. ``It'll take Blake about five or six quarters to turn the corner,'' said Burt Flickinger, managing director of Strategic Resource Group in New York. Net income fell to $1.1 billion, or 60 cents a share, in the quarter through Oct. 28, from $1.5 billion, or 73 cents a year ago, Atlanta-based Home Depot said today in a statement. Revenue a year earlier was $19.6 billion. Home Depot lowered its full-year earnings forecast from continuing operations to a decline of as much as 11 percent. Previously, it expected a drop of 7 percent to 9 percent.

Wal-Mart Net Beats Estimates as Retailer Offers Earlier Holiday Discounts Wal-Mart Stores Inc., the world's largest retailer, said quarterly profit rose more than analysts estimated and boosted its full-year earnings forecast after luring customers with holiday discounts. Wal-Mart shares rose 3.3 percent in early U.S. trading. Wal-Mart accelerated markdowns and promoted itself as a low-price destination as retailers braced for what may be the smallest holiday increase in five years while consumers face higher food, fuel and housing costs. To lure customers, the retailer cut prices on 15,000 items and started promoting toy discounts for the holidays in the beginning of October. ``Wal-Mart's having a tough time getting out of its own way,'' Burt Flickinger, an analyst at Strategic Resource Group, said today in an interview before the release of earnings. ``They're under pressure and it's no longer a growth company.''  Sales for the three months that ended Oct. 31 climbed 8.8 percent to $90.9 billion, Wal-Mart said. Revenue, which includes membership fees, rose to $91.9 billion. Sales at stores open at least a year rose 1.5 percent. Comparable-store sales declined 3.7 percent for home goods and 7.4 percent for apparel in the three months through August, dragging down overall results, the company said at its annual analyst meeting last month. Consumer electronics, where Wal- Mart has added Dell Inc. computers, rose 4.6 percent in the period. The same-store sales increase of 1.4 percent through October is trailing last year's gain of 2.1 percent, the smallest in at least 27 years.

At Starbucks, Too Many, Too Quick? For years, Starbucks Corp. has been able to throw up new stores, sometimes placing them across the street from each other, while sales at older stores still climbed at break-neck speed. But in the past year, the growth in Starbucks same-store sales revenue and number of transactions in the U.S. has slowed. When Starbucks reports earnings today, investors will be closely watching to see if growth in the average number of transactions per store, which essentially measures customer traffic, declines for the first time since Starbucks began disclosing the number three years ago. The concern is that the company has been adding locations so quickly that the new stores are cannibalizing the old ones to the point where the chain can't increase its same-store sales at the rapid pace to which investors have grown accustomed. In the past year, shares of Starbucks have fallen about 37%. More broadly, Starbucks's recent attempts at expanding its brand have had mixed results. While its strategy to sell music has been a hit with customers -- baristas recently gave customers free songs from iTunes with their coffee -- the films it has promoted in stores have had only minimal box-office success. Some analysts say the chain has fallen behind on creating enticing new beverages and its breakfast sandwiches have created little excitement. Investors knew that Starbucks's U.S. business would eventually mature. But they'd hoped that the chain's international business would be churning out strong profits that would pick up the slack. That hasn't happened yet, in part because Starbucks is still spending to build stores and other infrastructure in new overseas markets, which has slimmed international profit.

·         STARBUCKS'S PER-STORE TRAFFIC in the U.S. fell for the first time since the company began disclosing the figure. The company cut its earnings estimates for 2008 and said it is launching a national TV campaign. 

·         Starbucks' bitter brew

McDonald's Eyes Ballooning Coffee Market McDonald's Corp. executives came out swinging when they announced their assault on the comfy world of coffee shops. After the success of its upgraded drip coffee -- which even managed to snag a thumbs-up from testers at Consumer Reports earlier this year -- the fast food chain known for super-size meals is gearing up for a massive expansion into the world of lattes. "We want to move from beverages as an accompaniment to being a beverage destination," Don Thompson, president of McDonald's USA, said in a meeting with analysts Tuesday. "Our speed, our convenience, the value that we can afford to customers without quality comprise will make us a formidable player." Restaurants will offer lattes, mochas, cappuccinos and espressos with a choice of different flavorings and milk. Industry watchers say the drinks cost about 50 cents less than at Starbucks. But as it tries to cash in on the fast-growing specialty coffee market, the world's largest restaurant chain is already finding itself at odds with the unlikeliest of groups: Its own franchise owners.

Chrysler mulls dealer cuts Chrysler is considering wide-ranging branding changes that would streamline its product offerings and eliminate as many as 1,000 dealers, The Wall Street Journal reported Friday. A plan currently under discussion calls for Chrysler dealers to sell all of the automaker's passenger cars under the Chrysler name. Dodge dealers would sell only pickup and commercial trucks, and Jeep dealers would sell only Jeep and sport-utility vehicles, three dealers familiar with the discussions told the Journal for its online edition. One of the dealers said the proposal was just one of several being considered, and that the company hoped to have a decision in place by the end of the year, the Journal reported. The dealers asked not to be identified because the plan has not been released publicly. The plan would allow Chrysler, which seeks to return to profitability by 2009, to drop some of its overlapping products. That in turn would eliminate underperforming dealerships carrying excess inventory and using incentives that cut into profitability. Messages were left after hours Friday with Chrysler spokesmen.

McCaw Bets Again on Wireless Frontier Craig McCaw got rich betting on cellphones when they were still brick-size gadgets. These days, he's rolling the dice on another untested concept: a nationwide high-speed wireless network based on WiMax technology. His company, Clearwire Corp., is trying to cobble together a network to give customers fast, affordable Internet access for laptops and mobile devices in their homes, cars, commuter trains -- almost anywhere. Other wireless carriers in the U.S. and abroad are testing WiMax. But because the technology is unproven, and because it would require carriers to build expensive new transmission networks, many carriers have thus far opted to try to enhance their existing cellular networks to offer better Internet connections.

IBM's Blue Cloud: The Tipping Point for Enterprise IT as Service And so it is today, with IBM's announcement of Blue Cloud -- an approach that not only talks the services talk, but walks the services walk. We are all at the tipping point where IT will be delivered of, by and for services. If Google, Yahoo!, Amazon and eBay can do what they do with their applications and services, then why shouldn't General Motors? Or SMB XYZ? So the king of mainframes and distributed computing moves the value expectations yet again -- to the pre-configured cloud architecture. The standards meet the management that meets the utility that gets the job done faster, better, cheaper. Slap an IBM logo on it and take it to the bank. The future of IT is clearly about the efficiencies and agility of the grid/utility/Live/fabric/cloud/SOA/WOA thing. There can be no turning back. I believe Nick Carr is coming out with a book on this soon, The Big Switch: Rewiring the World, from Edison to Googleand IT, and IT is by no means irrelevant this time. IBM's Blue Cloud, arriving in the first half of 2008, will use IBM BladeCenter servers, a Linux operating system, Xen-based virtualization and the company's own Tivoli management software. Nothing about this is terribly new. Sun Microsystems has been talking about it for years. HP is well on the way to making it so, given its Mercury and Opsware acquisitions. Citrix has an eye on this all too. Red Hat has its approach. Amazon is game. Google is riding the wave. Even Microsoft has hedged its bets.

Memo to Michael: Dell's Report Card Since Your Return Congratulations. Your recent acquisitions -- including Wednesday's buyout of Everdream -- were all solid moves. You may recall that back in February, I wrote a memo highlighting 10 Ways to Fix Dell (DELL). Let's review each point of that memo to measure your progress so far.

My 10 key recommendations in February included:

The iPhone's broken connections Nearly five months have passed since Steve Jobs unleashed his flashy iPhone upon the world, and the sleek, do-everything gadget has met his ambitious initial sales targets and then some -- so far, more than 1.5 million have been sold. And despite all the prelaunch hype and fear mongering, you don't hear many gripes that the novel, finger-driven user interface doesn't work, or that videos look crummy, or that the battery doesn't last long enough. If anything, most of the iPhone's features have exceeded technological expectations, because in reality, it's a miniature Macintosh that happens to be a cellphone. Still, the iPhone frenzy seemed to evaporate more quickly than it built up, and these early days have turned out to be what euphemistically might be called a "learning experience" for everyone involved -- the customers, its wireless service provider, and especially Apple. What's so different about the iPhone? In an acronym: AT&T. Given the nature of the cellular phone industry today, Apple had no choice but to link up with a wireless network. AT&T (Charts, Fortune 500) was the most eager of the service providers and the easiest to persuade to concede -- in return for exclusivity -- the absolute design control that Jobs requires. While the terms aren't public, Apple also appears to be getting a sizable cut of the monthly service revenues. Nevertheless, it was a Faustian agreement, given the spottiness and sluggishness of AT&T's wireless coverage and the stubborn ingenuity of many of Apple's customers who want better performance. Apple recently estimated that a whopping 250,000 -- nearly 20% -- of the iPhones purchased so far haven't been activated for AT&T accounts. In other words, if they are in use, they've been hacked.

Posted by dblwyo at 04:48 PM | Permalink | Comments (0)

We've taken the weekend Readfest and pushed it out a couple of days because last week's listings and discussions were so extensive. And also because of the holiday - let me wish everyone a Happy Thanksgiving. While you may not think so if you're reading this you've probably got a lot to be thankful for compared to many in the world, or even this country.

The markets continue to gyrate, today in particular. But by and large we'll stand by our assessment and summary from the last go 'round: WRfest 11Nov07: SEE changes and Cusp Points(Markets) on the market situation. There's been a lite menu of economic news but wider spread recognition of the slowing economy and rising risks. Again we'll go with last week's summary of the situation on the economic front: WRFest 11Nov07: Paging Cinderella..Your Coach is Here(Economy) . The charts and discussions in both those posts are worth reviewing IMHO.

What added fuel to the fires last week and so far this is the growing recognition that the problems in the credit markets are not just sub-prime but do in fact represent a major breakdown in the new "technologies" of securitization. Which we are far from understanding. Jan Hartzius of Goldman traces thru some of the consequences when he points out that with potential losses of $200B in write-offs that the leverage built into the derivatives means something like $2 Trillion, yes that's Trillion with a T, will likely be pulled out of the credit markets. The one thing I think everybody's still missing is that more than one asset classs was bathed in the waters of securitization and baptized with multiple layers of leverage on it's way down the chain of players. NOBODY is talking about those risks as yet - at least in public. For a refresher try these: Stages of Denial: Acceptence ? Not Yet, The Sound of the Next Shoe: Corporate Debt.

As usual the MSM reported the monthly numbers and made headlines out of the core but in fact inflation is picking up rather rapidly and economic growth continues to slow, and the pace may be picking up judging by industrial production and retail sales. Given that there's a big meme running around about de-coupling saving us all the warnings signs of slowdown in Europe and Japan are important to pay attention to. Which is not to say that the developing countries aren't in fact beginning to lead independent existences.

The stand-alone development of the world's other economies will be the dominant feature of the world scene for the next few decades and has produced more real gains in the last two for the world's poor than at any time in history. A great deal of that is due to the growth of sound institutional foundations in various countries, for example Turkey. China and India are re-enterring the world economy at a level they haven't been at, relatively speaking, since the early 19th century when they were the two largest, most productive and most prosperous places in the world.

The other analogy to keep in mind, and this is important whether your an investor, employee, PE guy or what, is that the other closest analogy to what's going on is the rise of the US in the late 19th C. Eventually everyone was, and is, better off. But if you were in the "old world" the adjustment processes were pretty rocky.

Now, all that said, demand from the BRICs et.al. for our exports is still not sufficient to offset what's coming. Nobody bothers to look at the numbers. All decouplings really means is that they're getting more self-supporting. So for a review of what's coming you might want to go back to Slowmotion Slowdown: More On GDP .

Meanwhile have a great holiday. Bon Appetit' ! 

Markets & Investing

Enron all over again Everything was supposed to be different in the post-Enron era, wasn't it? Yet here we are just six years after that calamity, and it feels as though someone hit rewind. Start with the headlines about off-balance-sheet entities known as structured investment vehicles, or SIVs (or sieves, as some wags are calling them). As Gertrude Stein never said, an off-balance-sheet vehicle is an off-balance-sheet vehicle is an off-balance-sheet vehicle. Just as Enron's off-balance-sheet vehicles were propping up its stock price by camouflaging the company's real financial results, so SIVs were inflating the credit market by providing demand for the complex securities created out of mortgages and loans used to finance buyouts. Like Enron's off-balance-sheet vehicles, SIVs were invisible to those on the outside--and to many on the inside--until they weren't. When times were good, these creations made money for their sponsors, but when times changed, they became a problem for the rest of us. It's a little bit like "heads I win, tails you lose," which is pretty much how a former Enron executive described that company's off-balance-sheet vehicles.

• Wall Street playing with more funny money The increase in 'Level 3' assets among big Wall Street banks is an ominous trend. Banks' exposure to illiquid, hard-to-value assets jumped sharply higher in the third quarter, a development that deepens concerns about the transparency and strength of bank balance sheets. Recently, banks have been required to show in financial statements which of their assets and liabilities rarely trade and are therefore valued according to in-house estimates. These so-called level three assets ballooned at banks in the third quarter as markets for many mortgage-related assets seized up, with Merrill Lynch posting the highest increase - a nearly 70% jump - in its level three assets from the second to the third quarter, according to a Fortune survey. It might sound like an increase in assets is a positive thing for a bank. But no financial institution wants to record a big increase in illiquid assets, because pricing and selling them is difficult and, if the credit crunch persists, many of them could be a source of large losses in coming quarters.
• Wall Street's money machine breaks down The subprime mortgage crisis keeps getting worse-and claiming more victims. Two things stand out about the credit crisis cascading through Wall Street: It is both totally shocking and utterly predictable. Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages. Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes. As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times. The crisis of confidence has exploded beyond Wall Street, driving the dollar to record lows - and helping send the prices of commodities, especially oil, soaring to historic highs. The results could be devastating for the U.S. economy. And it's far from over. As stunning as today's losses are, more carnage lies ahead. Wall Street banks are holding tens of billions in risky securities on their books, and no one seems to have any idea what they're worth. In conference calls and press releases, banks have been changing their estimates of the value of these assets.

Containment Has Failed Wrapping one’s arms around the depth and breadth of this credit crisis remains a difficult thing, if only because it seems to require bigger arms every week. Every other day or so, another analyst determines that such-and-such bank will lose exponentially larger sums of money than the last; another economist has a larger estimate of writedowns or losses and how much of a hit the economy will take as a result.

MBIA, Ambac Ratings Jeopardy May Cost AAA Investors, Issuers $200 Billion The crisis of confidence in bond insurers that bestow top credit ratings on debt sold by borrowers from the New York Yankees to Citigroup Inc. may cost investors as much as $200 billion. The AAA ratings of MBIA Inc., Ambac Financial Group Inc. and their five smaller competitors are being reviewed by Moody's Investors Service and Fitch Ratings. Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets. ``We shudder to think of the ramifications,'' said Greg Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. ``You have politicians, taxpayers, municipalities, states. It just opens up a Pandora's box. That is a huge destabilizing force.'' The ratings companies said New York-based Ambac, FGIC Corp. in New York, and CIFG Guaranty of Hamilton, Bermuda, have a high or moderate chance of being told to add capital or forfeit their top status. Fitch and Moody's said MBIA has a low risk of a downgrade. Borrowers would see their costs increase if they lose top rankings.

Merrill, Citigroup Push Finance Borrowing Costs Above Industrial Companies For the first time in at least a decade, the world's biggest financial institutions are paying more to borrow in the corporate bond market than the average company. Bonds of banks, brokerages and insurance companies yield 1.49 percentage points more than U.S. Treasuries, matching a record high set in October 2002, according to indexes compiled by New York-based Merrill Lynch & Co. The average industrial company bond trades at a yield premium of 1.34 percentage points. Investors are demanding extra compensation for the risk of owning Citigroup Inc., Merrill Lynch and Barclays Plc on concern that the $50 billion in losses already reported from subprime mortgages will increase. The total damage may reach $400 billion worldwide, Deutsche Bank AG analysts said this week in a report, and Wells Fargo & Co. Chief Executive Officer John Stumpf said the housing market is the worst since the Great Depression.

GE Bond Fund Investors Cash Out After $200 Million of Losses on Subprime A short-term bond fund run by General Electric Co.'s GE Asset Management returned money to investors at 96 cents on the dollar after losing about $200 million, mostly on mortgage-backed securities.

Economy

Recession in the offing? MarketWatch economist Irwin Kellner says signs of recession are proliferating, especially on the consumer side. America's vulnerable economy Recession in America looks increasingly likely. Can booming emerging markets save the world economy?

• Manufacturing Sector May Be Facing Recession A leading manufacturing think tank now sees at least a 50% chance of a general U.S. recession next year, with the factory sector itself almost certainly facing the r-word. The Manufacturers Alliance/MAPI’s new quarterly economic outlook points to a “confluence of challenges” that are bedeviling the economy, from the housing collapse and rising oil prices to slowing employment growth and slumping consumer confidence. “This is the grimmest outlook we’ve had for the economy since the last recession,” says Daniel Meckstroth, the group’s economist. The Manufacturers Alliance, based in Arlington, Va., is a public policy group whose members include many large multinational manufacturers.

·         Economists expect the credit crunch weighing on U.S. markets will take some time to play out. The credit crisis weighing on markets still has some time to play out and consumers may have a tough slog ahead, according to economists in the latest WSJ.com forecasting survey. But confidence in the Federal Reserve's ability to navigate the rough economic waters remains high. When asked about the credit crisis and related market turmoil, more than half of the economists said it was about half over, while 25% said it still is in its early stages. 

·         Industrial production nosedives Industrial production plunged in October by the largest amount in nine months, reflecting a big drop in utility output and continued troubles in auto and housing-related industries. The Federal Reserve said that output at the nation's factories, mines and utilities fell by 0.5 percent last month, a much worse outcome than had been expected. The October decline, the biggest since a similar drop in January, was led by a sharp plunge in output of electricity and natural gas due to warmer-than-normal weather during the month. Also contributing to the weakness was the third straight drop at auto factories and further weakness in industries producing lumber, appliances and other products tied to housing.

• FedEx Cuts 2Q, Full-Year Outlook- FedEx Corp. cut its earnings expectations for the fiscal second quarter and full year, citing soaring fuel costs and a troubled U.S. freight market.

Economic Slowdown Shows Fitzgerald Got It Wrong as Rich Restrain Spending F. Scott Fitzgerald had it wrong: In a slowing economy, the rich aren't that different from everyone else. Affluent consumers, pinched by shrinking stock portfolios, falling property values and smaller bonuses, are behaving like their less-well-off peers: They're reining in spending. That portends a steeper slowdown than originally forecast for the U.S. economy, or even a recession, because the richest fifth of American households accounts for almost 40 percent of consumer spending, the main engine of economic growth. Now, the slumping stock and real-estate prices that followed have attracted the attention of the more-affluent -- which might have surprised Fitzgerald, who wrote in his 1926 short story ``The Rich Boy'' that the very rich ``are different from you and me.''

Credit-Market Losses May Cut Lending as Much as $2 Trillion, Goldman Says Goldman Sachs Group Inc., the largest U.S. securities firm by market value, said losses from slumping credit markets may reduce lending by $2 trillion. Losses related to record U.S. home foreclosures using a ``back-of-the-envelope'' calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief economist at Goldman in New York, wrote in a report. The effects will be amplified as banks and hedge funds that borrowed to finance their investments scale back lending, according to the report. Goldman's Hatzius said his report is based on a ``conservative estimate'' of investors cutting lending by 10 times the loss to their capital. Investors realizing half of the potential losses, at $200 billion, would have to scale back lending by $2 trillion, he said. Goldman's U.S. economic forecasts already assume lending will fall by $1 trillion over the next two years, or half of the potential loss to the economy, the report said. The New York-based bank expects U.S. growth to slow to 1.9 percent in 2008, less then the 2.4 percent median forecast of 70 economists surveyed by Bloomberg News this month. Deutsche Bank AG, Germany's biggest bank, also said in a report this week that credit losses may be $400 billion. That's equivalent to ``one bad day in the stock market,'' or 2.5 percent of the value of U.S. equities, Hatzius wrote. ``No serious analyst would argue that a 2.5 percent equity market decline will make an important difference to the economic outlook,'' Hatzius wrote. ``So what's different about the mortgage credit losses? In a word, leverage.''

Consumer Price Index in U.S. Rises 0.3 Percent: Core Rate Up 0.2 Percent Consumer prices in the U.S. rose in October at the same pace as the prior month, led by increases in fuel costs that threaten to boost inflation and slow growth. The cost of living increased 0.3 percent in October, as forecast, the Labor Department said today in Washington. So- called core consumer prices, which exclude fuel and food costs, rose 0.2 percent for a fifth month. Gasoline and heating-oil prices started rising in late October and have continued higher this month, suggesting fuel costs will remain a concern. Still, the damage higher energy bills may inflict on spending and investment will keep the Federal Reserve focused on ensuring the expansion is sustained. So far this year, prices are rising at a 3.6 percent rate, compared with a 2.4 percent rate through the first 10 months of 2006. Core prices are rising at a 2.3 percent pace, compared with a 2.8 percent pace in the same period a year earlier. Today's report showed energy prices climbed 1.4 percent, the most since May. Gasoline prices also increased 1.4 percent and electricity costs increased 1.5 percent, the most since January.

S&P: Mortgage turmoil to worsen in 2008 The chaos in the mortgage markets is only going to get worse in 2008 and will put a dent in U.S. mortgage bank earnings, according to a report released Tuesday by Standard & Poor's. Next year will be the worst for mortgage bank earnings since the 1990s, the ratings agency said. Loose lending standards, especially to people with shaky credit, are at the heart of the problem. During the period from 2003 to 2006, nonprime mortgage originations increased 150 percent, Alt-A originations rose 550 percent and second-lien home equity loans went up 133 percent, while conforming loans saw a 47 percent decline in originations, S&P said. In 2007, mortgage correction has curtailed origination activity, with a 21.9 percent drop in originations in the third quarter. Through the first nine months of 2007, $1.980 trillion of mortgages were originated, down 12.4 percent from the first nine months of 2006. Some estimates show a 20 percent drop in originations in the fourth quarter, S&P said. Originations in 2008 will plummet further, possibly not exceeding $1.5 trillion, S&P said.

Trouble brews in China and world awaits tremors As worries mount about a downturn in the United States, there are increasing signs of trouble in China, too. Despite the Chinese government's efforts to dampen growth, the breakneck expansion has continued. If the Chinese economy overheats, what will it mean for the rest of the world? The official inflation rate in China has risen to 6.5 percent, and some economists think the real figure is much higher. If demand for labor, equipment, raw materials and energy outpaces China's ability to find supplies, prices could shoot up uncontrollably and shock the economy: a hard landing. How bad is the inflation problem? Part of what makes it a problem is that no one really knows.The vastness of the economy and the prevalence of black markets add to the difficulties. But Sung explained that China's exporting success was bound to have increased its money supply, so more cash is chasing the scarce resources in the economy and driving up prices. The problem may already have gotten out of hand. Even if the Chinese government keeps trying to slow the economy down - and there is some debate about how serious its efforts have been - there's no guarantee of a soft landing, said Nariman Behravesh, chief global economist of Global Insight, an economic forecasting company.

Money Is Key to Solving Many of China's Puzzles China is an oil importer and crude prices have quintupled since early 2002. Prices of other commodities imported by China -- such as copper -- have shot up, too, in the past few years. Why have they failed to make any dent into China's current- account surplus, which may widen to a staggering 12 percent of gross domestic product this year? In a recent study, Mussa looks at China's balance of payments as a monetary phenomenon, an approach ideally suited to countries with pegged currencies, and the Chinese yuan, for all practical purposes, is still tied to the U.S. dollar, having risen just 9 percent since a small revaluation in July 2005. The key idea is this: Assuming Chinese residents' demand for purchasing power -- the sum of currency and bank deposits -- is rising in tandem with economic expansion, there's growing pressure on the Chinese monetary authority to create more money. But base money -- the sum of currency and reserves that banks keep with the monetary authority -- is the central bank's liability and must be matched by its domestic and foreign assets. But in fast-growing developing countries, most notably China, the approach of the central bank is to buy foreign assets -- say, U.S. Treasuries -- to prevent appreciation in the currency. Since the resultant growth in base money may spark inflation, an attendant practice is ``sterilization'': The central bank sells local bonds to deny people the purchasing power they want. The net result is high investments, even higher savings, low consumption, more than $1.4 trillion in foreign-exchange reserves and a bloated current-account surplus despite a rise in the price of imported commodities. All of this is happening simultaneously because the central bank is repressing people's demand for money. With GDP growing at an annual pace of 11.5 percent in the third quarter and the inflation rate rising in October to 6.5 percent, the highest in a decade, the People's Bank of China is predictably stingy with base money.

·         Group of 20 Urges More Currency Flexibility From Emerging Asian Countries

·         Arabs' Dollar Losses Increase Pressure to Sever American Currency Linkage

The economic boom in emerging markets is changing the rules investors have used to guide decisions, complicating an already tricky environment and forcing many to rethink their worldview. It used to be that stocks in emerging markets were cheaper than U.S. stocks and vulnerable to a U.S. slowdown; that bonds in those places offered much juicier yields; and that a weak U.S. economy put downward pressure on prices for commodities like oil. Many of these rules are now being ditched by investors because places like China, India and Russia are growing rapidly despite troubles in the U.S. The emerging markets, it seems, have emerged and are forcing investors to rethink their worldview. In one reversal of a longstanding trend, shares of emerging markets have begun trading at a premium to those in developed markets. At the end of October, the stocks that make up the MSCI Emerging Markets index were trading at 18.5 times their earnings for the previous 12 months. In comparison, the stocks in an MSCI index that tracks developed markets around the world were trading at 16.5 times earnings. Three years ago, the stocks in the emerging-markets index traded at roughly 12 times their prior year's earnings, while developed-market counterparts traded at nearly 18 times earnings. "The whole set of rules that starts with the U.S. as the prime mover of all things economic is clearly under duress right now," says ING Investment Management economic adviser James Griffin. The International Monetary Fund estimates that while U.S. gross domestic product will have grown 1.9% this year, down from 2.9% last year, growth in the rest of the world will be on par with last year, with other advanced economies growing 3.7% and emerging-market and developing economies growing 8.1%.

The risk is that as investors throw out old assumptions about what drives the world economy and markets, they will overreach in formulating new ones. That is what happened during the dot-com bubble of the late 1990s, when notions of how technology would change the world ran away from reality. Analysts already worry about a bubble in Chinese stocks.

Turning point for Turkey For nearly a month, Turkey has been on the brink of launching a military offensive into