bizzXceleration: Performance, Value and Profit

The prior post carved out a bunch of interesting international economic stories though linking them to a general US perspective. As part of broadening our perspectives we ought to consider how business in the world is changing. We've been saying for several years that the re-emergence of China and India back onto the stage of the world economy is really the biggest structural change we've seen since the early 19th C. Back around 1820 or so did you know that they were the two largest economies ? And further that various indicators of per capita income and general health and welfare put them ahead, particularly China, who up until ~ 1830 could have made a case for being perhaps the most successful socio-political system for the longest period of time. Or at least had a heck of a good argument.

Well various folks are giving lip service and now more to that. For example both Jim Rogers and James Fallows have moved to China as have a lot of ex-pats but it's not entirely clear to me that people appreciate how we're evovling toward a multi-polar world - their attention is deficient if you will. Not that most don't know and acknowledge that the BRICS are important but they still think of it as a bi-polar link. WRONG ! In a multi-polar world the other nodes can link with each other. So after the break you'll find some fascinating stories about major business news from China and India - some among many we'll point out. For example did you know that a major reason Lucent, Nortel, Ericsson, et.al. are still struggling despite being in the midst of a new internet-driven telcom equipment buildout is that Huawei the Chinese manufacturing has been increasingly competitive with cheaper products with approximate quality. BtW - telecomm tech and gear is rocket science if you don't think these guys are moving up the value-ladder quickly !

But check out the first excerpt which provides a general perspective. 

A Rising in the East By the year 2030, 361 million Chinese -- more than the entire current population of the U.S. -- will meet the World Bank's classification for middle class: the people who "buy cars, engage in international tourism, demand world-class products, and require international standards for higher education." China may be, in this sense, a bellwether. Analysts at CLSA Asia Pacific Markets estimate that, by 2010, 50% of Southeast Asia's population will live in the region's cities, many having moved there only recently in search of better jobs and better lives. According to Nielsen Co.'s most recent global survey of consumer confidence, the Asia Pacific region generally is the most optimistic in the world. India in particular, after Norway, is home to the world's most upbeat consumers. Such hopefulness tells us something new. Westerners are well aware that China and India -- not to mention Singapore, Taiwan, Hong Kong and South Korea, the so-called Asian Tigers -- have undergone a process of modernization, raising their standards of living by exploiting, to varying degrees, the dynamics of a modern capitalist economy. But there has been a shift, too, in the way that the people of Asia view themselves and their future. Such a shift, Kishore Mahbubani argues in "The New Asian Hemisphere," will have profound effects on Asia's approach to the rest of the world and, just as important, on the world's approach to Asia.

Mr. Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore and a former senior diplomat, attributes the region's economic growth to a kind of free-market domino effect that began in the 1860s, when Japan began to adopt the economic practices of a modern industrial society. Over time, he says, the "seven pillars of Western wisdom" -- free-market economics, meritocracy, pragmatism, a culture of peace, the rule of law, an emphasis on education, and a willingness to pursue advances in science and technology -- have helped to give many Asian countries a new (and newly competitive) structure. But old habits die hard. Singapore, for instance, may be among the world's least corrupt countries, but its neighbors cannot even begin to make such a claim. Many Asian elites, Mr. Mahbubani concedes, wish to preserve traditional systems of privilege and legal inequality, but they know that "it is impossible to build a modern society and a modern economy without a modern rule of law. This is the pill that all Asians will have to swallow, bitter though it may be in the early years of application."

Developing Countries

China May Unveil Plan to Shake Up Telecoms China may unveil long-awaited plans for a restructuring of its massive telecommunications industry as early as next month, state-run radio reported. If the plan proceeds as outlined in the brief report yesterday, it would consolidate China's six big state-run telecom operators into three, with the surviving entities allowed to offer a full-range of services instead of being divided among fixed-line, mobile and other offerings now.Such a move, which analysts have been predicting in recent months, also could pave the way for the government to issue licenses for advanced, "third-generation" cellular services -- another long-awaited move that could unlock new orders for global equipment vendors. The restructuring plan would affect some of the world's biggest listed telecom carriers, including China Mobile Communications Corp., parent of Hong Kong- and New York-listed China Mobile Ltd., which boasts more users than any other wireless operator. The parents of two other listed companies, wireless carrier China Unicom Ltd. and fixed-lined operator China Netcom Group Corp. (Hong Kong) Ltd., would likely be merged, while the parent of China Telecom Corp. would absorb one of two wireless networks now operated by Unicom, the radio report said.

China Power-Grid Suppliers Glow The freakish storms that ravaged much of China late last month had a silver lining for at least one group of companies: those that make power-transmission equipment. These companies are likely to get a short-term boost as China repairs hefty damage to its electricity grid. And longer term, analysts say, the business should benefit from tens of billions of dollars in planned government spending to upgrade the grid to handle the booming Chinese economy. Some of the sector's biggest companies are multinationals, though two Chinese suppliers are gaining market share. Tebian Electric Apparatus, based in the western territory of Xinjiang, was already the world's third-largest producer by output of electric transformers after ABB of Switzerland and Siemens of Germany in 2005, the latest year for which data could be obtained. Baoding Tianwei Baobian Electric, based in Hebei province, is also a big producer of transformers -- critical parts of a power grid that perform tasks such as adjusting voltage.

Tata's global alliance At India’s DefExpo defense show this week, Tata announced a string of tie-ups with foreign manufacturers from the United States, Israel and Europe that set it apart from other emerging Indian defense manufacturers like Larsen & Toubro (L&T) and Mahindra & Mahindra. Tata group is becoming well known around the world for its low cost car, its bids for the Jaguar and Land-Rover brands, and for taking over Europe’s Corus steel company. Now it is emerging as the Indian market leader in a new area – defense equipment. The company is transferring India’s proven ability to produce low-cost software and international-quality auto components and cars to the defense and aviation industries, persuading companies like Boeing (BA), European Aeronautic Defense & Space Company and Israel Aerospace Industries that they can benefit by buying from India.

Resources Shine in India In many economies, investors pursue growth plays in technology, retail and telecommunications shares. In India, there is a new growth sector, and it is one that may not readily come to mind: shares linked to mineral resources and agricultural commodities. As India's once-hot stock market has rapidly cooled, many bellwether stocks -- such as Bharti Airtel, India's largest wireless operator, and information-technology titan Infosys Technologies -- are languishing. India's benchmark Sensitive Index, having risen 47% last year, closed Friday at 17349.07, down 15% since the start of the year. That could help other, lower-profile stocks come into fashion, some analysts contend, especially as iron-ore and food prices are rising globally. Many resources-related and agricultural-commodities companies are at an earlier stage in their development than India's bigger and better-known industries, analysts say. The sector has also been more affected by unpredictable short-term government policies, such as export restrictions or import duties, meant to control prices in the domestic market. Moreover, not many mining and commodities concerns are listed. India's resources sector "remains highly untapped considering its huge potential," says Ketan Karani, vice president for research at Kotak Securities in Mumbai. India has substantial reserves of minerals such as bauxite, iron ore, copper and zinc, but the commercial exploitation of these riches remains at a relatively low level. Much of the sector is still state-controlled, and political, social and environmental opposition often stymies efforts to develop new mines, given that many prospects are in tribal or forested areas. But with a surge in the demand for steel -- for which iron ore is a key ingredient -- and other metals from China and India itself, India's mineral production and exports have been increasing significantly in recent years.

 

Posted by dblwyo at 10:00 PM | Permalink | Comments (0)

We can talk about interesting weeks and too much news but regarding the latter the word tsunami come figuratively to mind. Especially as the talking heads and punditocracies oscillate back and forth on us. So given all the interesting stories we not only want to split them up but also want to parse them into more digestible chunks and keep some perspective. The word of the week is stagflation but to summarize it simply and clearly nonsense.

Yes the economy is turning down and yes we've been generally been labeled bearish and yes it's likely to get worse. But neither unemployment or inflation are likely to get as bad as the '70s. It's going to be painful and unpleasant to be sure. AND ripple around the world bet let's set the base case here. And as a reminder as you read the news clips after the break keep the chart to the right in mind which shows the various cycle alternatives and where we're at. [The detail explanations and more readings are in this previous post].

The first set of readings include source names like Krugman, Summers, Roubini and Wolfe who by and large converge on "this is going to hurt but not real bad". Now to be fair there are serious downside risks of which the most dangerous is that we stumble into something deeper and that cracks the fault lines in the financial and credit markets. Which is the most dangerous risk and could be beyond painful.  Speaking of perspectives there are a couple of other things to bear in mind about the status of the international economy.

The rest of the readings review the lessons from Japan's political and policy failures that led to a "lost decade". That's the danger we need to worry about and the Fed is doing everything they can to avoid it. However the aftermath of all the cumulative screwups over the last nine years will be with us into the next administration. We strongly suggest you use grounded economic policy as a major decision-making criteria for picking your candidate - if we can fantasy that good economic sense is an option of course.

The other fantasy that's been put to bed is the decoupling notion but what's still not come out is that the coupled downturns may also put pressure, perhaps severe ones, on the developing economies of China and Russia especiallly. Thought Brazil, India, et.al. won't be immune. So two final excerpts point to some of the major fault lines that are beginning to show. Another thing to start factoring into your long-range business, investing and other plans, e.g. if somebody offers you a job which depends on the health of these economies you'd better have a failsafe option.

General & Special

Don’t Rerun That ’70s Show If history is any guide, we should be looking at an extended period of economic weakness, probably extending well into 2010 or beyond. Will the next president be the second coming of Jimmy Carter? Given Thursday’s economic headlines, full of dire warnings about the return of 1970s-style stagflation, you might think so. Realistically, though, the parallels between the problems facing the U.S. economy now and those of the late-1970s aren’t that strong. That’s the good news. The bad news is that the economy probably will look similar to, but worse than, the economy that undid the first President Bush. And it’s all too easy to see how the next president could suffer a political fate resembling that of both the elder Mr. Bush and Mr. Carter. That said, I don’t believe we’re really facing anything comparable to 1970s stagflation. For one thing, we’re less dependent on oil: America has more than twice the real G.D.P. it had in 1979, but consumes only slightly more oil. For another, there’s no sign of the wage-price spiral that once drove inflation into double digits — in fact, wage growth has been declining even as inflation rises. What’s much more likely is that we’ll have an economy like that of the early 1990s, only worse. The difference is that the problems look a lot worse this time: a much bigger bubble, more financial distress, deeper consumer indebtedness — and sky-high oil prices added to the mix. So if history is any guide, we should be looking at an extended period of economic weakness, probably extending well into 2010, and quite possibly even longer. Can the next president do anything to avoid that outcome? In terms of straight economics, the answer is a clear yes. To this day, it’s not clear what Mr. Carter could have done differently: stagflation is a problem with no good solutions. But weak spending is a treatable condition. A serious fiscal stimulus plan — one that emphasized public investment and aid to Americans in economic distress rather than across-the-board tax rebates, which many people won’t spend — could do a lot to ease the country’s economic pain.

Politically, however, it’s hard to see this happening.

• Summers on Stagflation Inflation must be monitored carefully, but were a long way away from the stagflation of the 70s, says Lawrence Summers, former Treasury Secretary and former Harvard University president.

• America’s economy risks mother of all meltdowns, Washington’s rescue cannot end crisis

• Who Are These People Surprised by Economic Data? The WSJ on gross domestic product and initial jobless claims: "Stocks fell Thursday after weaker-than-expected economic readings and earnings reports underscored the potential for a recession." Weaker than expected? WTF? I keep hearing people talk about this "negativity bubble" -- but from where I sit, the media, traders, analysts are still too optimistic -- perhaps way too optimistic. We have had 4 rallies over the past few weeks of nearly 200 Dow points in a given day. That doesn't sound like excessive pessimism to me. Ask yourself this: Is the greater fear getting stuck with stocks that move lower -- or missing any rally?

INTERNATIONAL ECONOMY 

Lessons from Japan's 'Lost Decade' Washington and the financial sector would do well to study the past — to avoid repeating the errors of 1980s bad-loan crisis in Japan. With profits at U.S. banks and thrifts at a 16-year low in the fourth quarter and U.S. consumer expectations at a 17-year low in February, financial headlines often read more like history lessons. As American banks dig out from under their mountain of bad debt, analysts say policymakers would do well to remember Japan's string of mistakes as it grappled with its own bad-loan crisis, after the late 1980s bubble economy burst and left financial institutions burdened with massive levels of bad loans. The bungled cleanup plunged Japan into its so-called "Lost Decade" of stop-and-go recession. There are no quick fixes, say bankers. And counting on one could well make matters worse. "Lessons of what not to do from it are far more plentiful than the what-to-do sort," said James Malcolm, now a London-based strategist at Deutsche Bank. He was a Tokyo-based economist with a different investment bank at the height of Japan's crisis in the late 1990s. "Basically, it's inevitable that people want a quick and painless fix, but the reality is, it's going to be slow and painful so you've got to provide a supportive policy environment, and push forward with restructuring the markets." It's critical that U.S. banks and government policymakers face up to facts, analysts say. Recent data make it hard not to.

Policy challenges mount for China But making investment bets on the stated policy of the People's Bank of China requires much more than just a leap of faith. After being told to expect lending curbs as bank reserve ratios were hiked to 15%, instead loans grew at blistering 16.7% year-on-year in January, up from December's 16.1%. Put another way, China's commercial banks lent 803 billion yuan or two thirds of their lending quota for the first quarter in January. This has left investors and analysts scrambling for answers. Has the tightening policy been ignored, abandoned or is plain not working? Have we gotten to the stage where policy by dictate is now a blunted instrument as China's newly commercialized banks chase profit? Official word remains that there has been no policy shift and there is likely to have been some front loading of loans, but more answers are needed. The NPC meeting in March is expected to provide some more policy detail.  In the meantime, the fiscal, trade and lending policy challenges facing China's leaders are piling up whither growth, inflation, exchange rate? On the one hand, Beijing is facing renewed calls to relax spending and trade policies. The construction, transport and agricultural sectors hit by the recent monster snow storm that caused $15.4 billion in damage need emergency funding. Meanwhile exporters are feeling the pain of a weaker U.S. market and rapidly appreciating yuan squeezing margins even though China racked up another strong trade surplus in January. On the front page of the South China Morning Post over the weekend was a story of factories fleeing the Pearl River Delta as new labor contract laws added to existing financial strains. One estimate said 10,000 processing factories could leave this year. Meanwhile, the gorilla in the room for Beijing is still inflation. This week, January inflation data will be released and is expected to top 7%.

• Crash course The long slump in China

Putin Makes Medvedev Suffer Inflation Jolt as Wage, Price Pressures Mount The shadow of inflation is threatening Russian President Vladimir Putin's economic legacy and complicating the decisions facing chosen successor Dmitry Medvedev. Russia's prosperity is built on nine successive years of expansion, a sixfold increase in average incomes and almost $500 billion of currency reserves. They contribute to Putin's inability to contain consumer-price growth, which overshot its target in every one of his eight years as president except 2003. Medvedev, 42, the likely winner of the March 2 election, must find ways of containing inflation that accelerated to 11.9 percent in 2007. Failure to do so may trigger unsustainable wage demands, squeeze consumer spending and dent company profits. At the same time, Medvedev will have ``no real tools'' for meeting an annual inflation target of 8.5 percent, said Anton Struchenevsky, an economist at Moscow's Troika Dialog brokerage. Monetary policy isn't effective because, 17 years after the collapse of the Soviet Union, Russia hasn't developed a fully fledged consumer-credit market. Mortgages are few and credit-card use is in its infancy outside the biggest cities.

Posted by dblwyo at 04:10 PM | Permalink | Comments (0)

On the theory that if you're going to take the trouble to analyze somebody's work and comment you might as well post the work instead of restricting it. Today's WSJ had an interesting "Ahead of the Tape" pointing out that other than Financials earnings were holding up well. Reasons for which we've discussed extensively before.Grading the Takehome: Bottoms, Earnings & Outlooks,Review the Bidding, Count the Cards: EPS Growth Rates,Have You Seen the Elephant ?: More on Earnings. These are btw worth reviewing in their own for some differentiated perspective on the earnings outlook from what you may be hearing on bubblevision. Now we may be wrong but at least we've laid out the argument with data and our feeble attempts at logic. Feel free to disagree but given stories like this you should have an alternative toolkit for compare and contrast.

The parts that caught our eye was the discussion of how well Tech earnings are doing and how poorly their stocks are in general. Here are some relevent excerpts with our 4-Part assessment of some fundamental problems after the break.

 Earnings Slump Still Confined:Technology earnings have been an important, and potentially overlooked, bright spot. In the latest earnings season, the technology sector has been the Best in Show. But tech stocks have been treated more like mutts.Fourth-quarter earnings of technology companies in the Standard & Poor's 500-stock index are on track for a 26% increase from the prior year, according to Thomson. That makes it the best performance of any sector in the index. Even computer maker Dell, which has struggled to compete with rival Hewlett-Packard, is expected to report healthy operating earnings growth today, at 36 cents a share, up from 30 cents a year ago, a 20% gain.There have been some scares, but 76% of tech companies beat analyst estimates for the fourth quarter, according to Thomson.
Taken together, tech earnings have been 5% higher than expected. Yet the tech-stock-focused Nasdaq Composite index hasn't benefited much. Though it has recovered 2.5% from its late-January low this year, it lags behind the S&P's 5.4% rebound and the Dow's 6% comeback. And the Nasdaq is still down 18% since Oct. 31.Could investors be missing an opportunity?

 BtW just by way of compare and contrast consider the following headline from Bloomberg: Dell Profit Misses Estimates as Retail Expansion Falters; Shares Decline.

Not to mention Sprint, et.al. But we'll pick up all that coverage in the next Readfest. 

Posted by dblwyo at 06:44 PM | Permalink | Comments (0)

Well the markets are down so far today on yet another testimony induced swing, just as yesterday they swung upwards (which made the 4th day in a row for a "Tale of Two Fantasies" to triumph experience and analysis, but that's another topic). Actually the Chairman was stunningly clear and, in our interpretation, entirely conistent with our assessments which we want to re-draw your attention to. Particularly since data and events have been bearing us out and are likely to continue to do so. Below the line you'll find an excerpt from a WSJ econblog post summarizing his testimony yesterday which is well done. You'll also find a selection of CNBC vidclips showing not only the testimony but the questioner,which is often even more interesting. That's all below the break.

The WSJ summary focues on the economic information while much of the testimony, while covering that ground, really focuses on the credit mess, the regulatory breakdowns and the institutional failures in the Finance Industry and regulatory communities. If you haven't the time to listen too all of these at least listen to the opening one with Rep. Barney Frank. Among other things you'll hear and intelligent and informed man who displays a good understanding of the problems and causes and is already thinking about how to approach them. Most of the other Congressment display similar smarts. Which should be encouraging as should their convergece on similar diagnosis.

But let's set the context and review the bidding a bit - almost all of which is consistent with both Bernanke's testimony and the questions. Let's put it another way - all the things we've been talking about here for weeks and months ared dead on what the most responsible parties see. Yet none of this is being reflected in broader understandings, particularly on the Street. As Barry Ritholz put it...surprise, surprise, WTF do you mean surprise !

1. The economy is slowing though the Fed hopes for an uptick later in the year their l.t. outlook is for below trend growth thru 2010 ! They recognize all the weakness and risks to the downside as well as growing inflationary problems. Those problems will be reduced as the economy slows and it's a tradeoff they are accepting.

• Housing continues to worsen and the outlook is NOT clear. IOHO we've got a long way to go as we've previously mentioned.
• Credit markets are badly damaged and the contagion is NOT contained.

2. The primary reason for the breakdown in the credit markets is that the people creating the loans (the originators) passed them onto to others instead of keeping them. The others (the distributors) in their turn re-packaged the loans into various synthethic investments which where very...very highly leveraged and passed on to more links in a chain of re-packages and distributors.

• The Origin-Distribution model DID provide more access to capital to a wider range of users BUT did not disperse, share or reduce risks. In fact it seems to have increased them thru a viscious feedback cycle of perverse incentives in the finance industry and regulatory failures to adopt fast enough to these new instruments.
• Because the chain of financial actors created a situation where the reward was based on maximizing the flow of deals (originations) instead of the solvency and soundness of the origination they made their money by lowering standards of prudent business practice to nearly nothing at every link in the chain.
• These deficiencies need to be addressed with major regulatory overhauls because the Finance industry has proven the reverse of reliably self-governing. In fact, we would argue that, in fact, they enshrined s.t., narrow interest thinking as an idol and made demonstrably bad strategic decisions that will haunt the players, the markets and the economy for a long time.
• These institutional breakdowns in the Finance industry have been recurring regularly for amost a decade in one major screwup after the other and demonstrate poor strategy, bad business practice, major leadership failures and terrible corporate governance in the sense of sound management systems and practices.

That's our summary analysis of the testimony and question suitably embellished by our previous analysis of the Fed's strategic sitution, the structural under-pinnings of the credit crisis and economic analysis. What we think it means is that the downside risks are serious though manageable but there is also more bad news to come for which most remain un-prepared. And that the overall situation is sufficiently fragile and exposed to structural fault lines that surprises could lead to much more serious consequences. On the other hand, despite the alarmism, this is NOT the '70s all over again. Inflation is neither out-of-control nor are expectations built in nor is their the bargaining power to make it so. Neither are we facing a major and severe long-term downturn but one that could go of for some time and be very painful. Just not life-threatening. But then that sort of attempt to arrive at a balanced view doesn't sell advertising does it ?

Analysis of Major Themes in Bernanke’s Testimony Here is a look at Federal Reserve Chairman Ben Bernanke’s statements in today’s congressional testimony on major economic themes, followed by commentary from economists.

·  Monetary Policy

Bernanke: A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures. In particular, the FOMC will need to judge whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation as well as the risks to that forecast. Although the FOMC participants’ economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.

Comment: The takeaway message is that further easing is probable, and there was nothing in the tone of this testimony to shake market expectations from the 50bp cut in the Fed funds target (to 2.50%) that is expected on March 18. Essentially, the FOMC’s strategy is to “cut and hope”, trusting that lower short term interest rates will help the economy regain its footing, and that incipient inflation pressure will prove to be short-lived. While not a perfect strategy, it is probably the only viable course at the moment, and it is one that is already well-discounted by financial markets. –Joshua Shapiro, MFR Inc.

·  Inflation

Bernanke: Consumer price inflation has increased since our previous report, in substantial part because of the steep run-up in the price of oil… The higher recent readings likely reflected some pass-through of energy costs to the prices of core consumer goods and services as well as the effect of the depreciation of the dollar on import prices… The projections recently submitted by FOMC participants indicate that overall PCE inflation was expected to moderate significantly in 2008, to between 2.1% and 2.4% (the central tendency of the projections). A key assumption underlying those projections was that energy and food prices would begin to flatten out, as was implied by quotes on futures markets… Further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month.

Comment: The [Fed’s] 2010 central tendency forecasts for inflation seem to show a de facto inflation target. This helps to explain why the Fed seems less concerned about the near term inflation outlook, about which they have little control, and more concerned about the medium-term outlook which shows a modest deterioration in their “target” inflation rate since October. –Drew Matus, Lehman Brothers

·  Housing

Bernanke: The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries.

Comment: Global Insight is projecting that the downside risks to growth mentioned by Bernanke will become more apparent as the first quarter progresses… The huge drag to growth from negative dynamics in the housing market, which recently have showed no signs of abating, will become more apparent in upcoming reports on real growth. These indicators point in the direction of a “mild recession” in the first half of 2008. –Brian Bethune, Global Insight

·  Risks

Bernanke: The risks to this outlook remain to the downside. The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.

Comment: Although the words stagflation and recession appear nowhere in Bernanke’s testimony, the discussion of downside risks to the growth outlook and upside risks to a higher inflation outlook have both a stagflationary and potentially recessionary feel about them. –Bear Stearns

CNBC Vidclip Selections

Bernanke on Economic Growth

Bernanke on Risk Rep. Spencer Bachus, R-Ala., asks Fed Chairman Ben Bernanke about the price of risk.

Bernanke on Mortgage Regulation Rep. Tom Price, R-Ga., asks Fed Chairman Ben Bernanke about the lack of regulation in the mortgage market.

Bernanke on Credit Regulation Rep. Melvin Watt, D-N.C., asks Fed Chairman Ben Bernanke about credit regulation.

Bernanke on the Dollar Rep. Randy Neugebauer, R-Texas, asks Fed Chairman Ben Bernanke about the value of the dollar.

Bernanke on Inflation Rep. Ron Paul, R-Texas, asks Fed Chairman Ben Bernanke about his monetary policy and economic growth

Bernanke on Monetary Policy Rep. Gregory Meeks, D-N.Y., asks Fed Chairman Ben Bernanke about monetary policy.

Posted by dblwyo at 12:36 PM | Permalink | Comments (0)

Well spreading the news excerpts does give us some chance to slice and dice 'em. Here we'll focus on the technology news, some of which we've either already mentioned and/or have been covering for a few weeks now. Primarily that the various analyst shops (Forrester, Gartner, et.al.) have abruptly lowered their spending outlooks for '08. Below you'll find the first outlook that anticipates a negative growth rate for Q208. Bear in mind these surveys are based on bottom-up work talking to IT departments so they reflect reality on the ground but a reality which tends to lag big picture economic cycles. By combining that with our top down look at macro-trends you get a bookend perspective - and those trends have been suggesting declining capex outlooks for a while now. So when John Chambers shows up on CNBC and says things are going well he's talking about the quarter just past and the sales activity and order stream he can see right then. NOT an outlook - keep that in mind.

The other little thing we thought we'd insert into our discussions is a way to sort and filter the tech news as the jumble of acronyms floats by. So we're going to introduce you to the infamous "stack" picture of how all the pieces in the tech industries fit together. Then to show what it's worth talk a little about some industry examples, e.g. Oracle's merger spree and then try to apply it to this week's stories. You'll have to judge whether this is useful or not.

Thinking in "Stacks" 

If you'll take a look at the picture on the right we provide a very simple version of the infamous stack, which you may have heard folks refer to. The stack is all the things you need to make a computer (or a phone for that matter work). Simple but a powerful sorting hat because it'll tell you who's in what House and how they're linked. The PC on your desk incorporates the top four layers. Likely an Intel/AMD processor which then has to have a bunch of other chips, power supply etc. IBM's announcement today of a major new mainframe will define the new large-scale server standard for some time. To make that PC or server work you need an Operating System (OS) which on your PC is likely Windows but on the server is something called MVS, or Multiple Virtual System. All this hoorah about Google's huge server farms and virtualization software - well the big guys have been doing it for three decades and your life depends on it in the sense that most banks, airlines, etc. are running on very large servers.But all the OS does is let the machine talk to itself it's what's called Middleware (MW) that sits between the machine and the applications that lets interesting things be done. So when Oracle buys BEA what you're seeing is a further consolidation in the MW space where BEA was the first provider of a Java application "server", i.e. a software machine commercially even though Java was created by Sun. Unfortunately BEA wasn't able to match IBM's inventiveness over the last decade and has lost those wars. In fact if you take IBM's analysts reports apart their growth engine for several years, for profits as well, and anticipted to be in the future is software. And when they say software they mean middleware. Finally the thing you talk to is the application - though you can debate for example whether or not a spreadsheet is an application or middleware in a sense. But when somebody talks about ERP, CRM, Sales Automation, etc. etc. they're talking about big bundles of code sitting on top of the MW that actually process the data, talk to the user and get things done.

Using the Stack: a Little History 

Just as a little bit of history Oracle got it's start in life as a MW company by introducing the first commercially viable relational database management system (DBMS) which was invented by IBM but...well you've heard that story. Now though IBM's DB2 is the dominant player, at least in some circles. As the DBMS market matured though Oracle moved up the stack to start creating business applications using their database software. An approach many mimiced or had done first in other forms. But building an application on top of a DBMS is easier, faster, higher quality and more flexible than building all the functions into the application. So when you heard about all those ORCL acquisitions in the last several years, e.g. J.D. Edwards that was one big application company with some o.k. applications buying a smaller one with great apps. Here's the rub though - they're technically incompatible. What Oracle did was buy markeshare in a maturing (slowing market). And now faces the problem of either continuing to invest in all those incompatible application portfolios or re-write them to a common standard. Which'll take billions in either case. And bear in mind they're making most of their money these days off of maintainence fees instead of selling new apps. SAP on the other hand continues to grow itself organically with judicious acquisitions to fill in small holes. It's also gotten a major leap ahead of Oracle by building it's own middleware so that it can re-develop its' ERP suites on a common and sharable platform. Meanwhile Oracle's me-too project "Fusion" isn't going so well. 

We could go with either or both companies or switch to HP, MSFT, Dell, Intc, etc. stories. Or talk about the Telecom Wars, Verizon, ATT vs each other or the cable guys. The convergence of voice and data that allows the big Telcos to migrate from their old switched network to the new IP networks but at the same time opens them up to competition from the cable guys. Or we could compare HPQ vs IBM vs Dell and find out that they play in very different parts of the stack and in very different markets.

But as you read the stories below you can use the stack to analyze and interpret each one of them. And should because it fits that little piece into a larger whole. 

Interpreting the News

The first except talks about slowing spending which we don't really need to interpret but just for fun we'll call it the shrinking stack sydrome. Where it's important though is the reactions in the markets where the major players in the tech stocks are not only getting hit but hit hard because too much hot air got blown into their balloons - as in this'll never end. But the stack and the size of the market pie change all the time so, for example, the story about toys which are increasingly using embedded chips to become more intereactive and controllable thereby opening up a whole new set of end-markets for the tech guys as well as finding new avenues for the toy makers who were running out of one more warm fuzzy (maybe). Since the toys also now connect to computers (what does that say about culture change) with 2 year olds in front of them...well ?

As some of these technologies have changed they've cause other industries to change enormously as well - Media & Entertainment will never be the same again though it's not clear what it will be. The forms, content, applications etc. are still in an accelerating rate of flux. A couple ofthings to remember though...first off this exact thing happened before. The Media businesses got locked into their old "stacks" and thought they world would never change. Newspapers were defined as we still know them in the late 19thC - notice that when they first went online they imitated that layout. The only challenge they faced was the introduction of whole new stacks, radio and TV, which didn't seem to do too much damage though print journalism shrank considerably as TV caught on. Now they're all having to move to the same stack and nobody's coping very well.

The ripples from all this show up in the news stories where the Yhoo/MS merger war is really a strategic debate about what's the best way to turn Internet eyeballs into advertising money. Notice that paying for media access, where you're paying for the large set of resources that gather, report, write, edit, etc. the content which will NOT go away, is a model invented by old...old media. So this debate is over whether or not putting ads around content you want to see (display) or as the result of a search is the best model. Several of the next stories fit right into this line of inquiry - two on the NYT and whether or not it has a future.

The story on the wireless firms offerring flat rates is a big.....big deal, in at least two ways. First off it means that the "old" fixed line into your home might be going away and secondly that they're anticipating new forms of competition they're not telling you about from VoIP on wireless data networks which could replace their proprietary and expensives ones over time. And the other "Pipe War" is the ones between the cable companies and the phone companies over who gets to control your house because you sure don't need two fat pipes.

Technology Industries Readings

Corporate IT Spending Goes Negative Overview: ChangeWave’s latest corporate IT spending survey points to a negative growth rate for 2nd Quarter 2008 – and confirms U.S. business spending has already entered into a recession. A total of 2,013 respondents involved with IT spending in their organization participated in the survey, conducted February 11-15, 2008. 2Q 2008 IT Spending: Nearly one-in-four respondents (23%) say their company’s IT spending will decrease (or there will be no spending at all) in the 2nd Quarter – 3-pts worse than the previous ChangeWave survey in November 2007. Only 15% say spending will increase – an unprecedented 9-pt drop from previously. A Picture of Negative Growth: As seen below, the percentage projecting decreased IT spending for 2nd Quarter 2008 is far greater than the percentage projecting an increase. You have to go all the way back to August 2001 to find the last time a ChangeWave corporate IT spending survey projected negative spending growth.

• Three of the Nasdaq Four Horseman Are Limping Apple (AAPL), Google (GOOG) and Baidu (BIDU) -- three of the NASDAQ FOUR HORSEMAN -- have been coming up gimpy since their FusionIQ timing sell signals (triggered at much higher levels several weeks ago). These stocks have fallen precipitously since those Sells.

Small world increasingly a virtual one The furry animals of Webkinz helped jumpstart the craze two years ago, and now, "I'm seeing every single toy down to pre-school," that connects to the Internet, said Jonathan Samet, publisher of the Toy Book and Toy Insider. Kids play differently than even five years ago, and it's evident at the American International Toy Fair, which kicked off Sunday. With kids sitting behind computers as early as 2 years of age, technology is playing a larger role in toy designs, with toy makers creating a number of virtual worlds to nurture pets, create fashion shows, race cars, and dress dolls. Internet plug-in toys make a physical toy virtual with a USB port that connects to a PC or a special pass code that comes with a toy and is typed in at a specific Web site. The larger U.S. toymakers, Mattel Inc., Hasbro Inc., and Jakks Pacific Inc., all have something for 2008, whether it's a new product or a refresh of a popular toy. Mattel is making Barbie more virtual, while Jakks and Hasbro are pushing further into the pet kingdom.

 

Microsoft's play for ad display Courting of Yahoo is a $44.6 billion bet that plain, old display advertising will rebound online, yield bonanza. Is there a method to Microsoft Corp.'s madness? The answer most often is yes. In the case of Microsoft's courting of Yahoo Inc. to the tune of more than $40 billion, the software giant could reap huge benefits in plain, old display advertising on the Internet. Market demand for such ads, Yahoo's forte, are expected to grow sharply for several reasons. Faster broadband connections open up the potential for "rich" media -- defined as video or anything other than just static display. Further, companies that have resisted Internet marketing in the past have started to, sometimes grudgingly, warm to the medium. They're often more comfortable with display or video advertising compared with search ads, which are links generated through Web searches. In many instances, companies find display advertising more conducive to their purposes. As a result, they're likely to stick with that method as they make the shift to online campaigns.

Open ware policy Microsoft reiterates it's moving toward opening software to outside developers. Microsoft Corp. on Thursday responded to continued regulatory scrutiny by reiterating promises to make information about its products more easily available to software programmers, while vowing not to sue those who use such information for noncommercial purposes. The move underscores an ongoing shift for the tech behemoth, as it has sought recently to present its technology as increasingly open to outside developers and compatible with competing products. It also comes only days before delegates from an international standards body are scheduled to convene in Geneva to discuss Microsoft's Open XML file format, which has been derided by critics as insufficiently accessible. Rivals have long complained that Microsoft has jealously guarded its intellectual property, while elbowing competitors out of the computer-software market. That's raised the ire of antitrust officials, particularly in Europe.

Netscape founder on newspaper deathwatch Andreessen has always been a blunt, plainspoken guy. He grew up in a tiny town in Wisconsin, and although he moved to California in 1993 to make his fortune, he maintains a Midwestern intolerance for pretense (and, apparently, fancy lunch spots). He's a legend in Silicon Valley for having founded and sold, by age 36, two billion-dollar companies: Netscape Communications (unloaded on AOL (TWX, Fortune 500) in 1998 for $4.2 billion) and Opsware (a server-management company that HP (HPQ, Fortune 500) bought last year for $1.6 billion). Now he's going for a three-peat: But Andreessen keeps circling back to the media business. I used to think he was obsessed because his browser stuck a shiv in old media, but it goes back further than that. One of his first hacks as an undergrad at the University of Illinois in 1992 was diverting cable to his SGI workstation so that he could watch CNN. Most of the 30 investments he's made since are in media-related startups. Then he went back to his computer and launched a kind of fatwa that was immediately broadcast in the echo chamber of the blogosphere. "I can't take it anymore," he wrote on his blog (blog.pmarca.com). "I hereby inaugurate my New York Times Deathwatch, which will continue until the last Sulzberger has left the building." The piece goes on to rip apart the Times' business strategy top to bottom, attacking everything from the techno-illiteracy of its board of directors (which boasts experts in marsupials and snack cakes but almost no expertise in the Internet) to its recent per-copy price hike. "When you have an obsolete, inconvenient physical product that nobody wants in an era of universal online access, the appropriate strategy is clearly to raise the price," he snarked. (He's not the only one gunning for the Times. A coalition of hedge funds just bought up 10% of the company and wants to install four of its own candidates on the board.)

From Gray Lady to gossip sheet Western civilization may have ended Thursday when the highfalutin New York Times lowered itself to the rank of shrill tabloid with its piece on John McCain. The Times published a front-page story suggesting -- wink, wink, nudge, nudge -- that the presumptive Republican favorite's campaign staff tried hard to keep lobbyist Vicki Iseman away from McCain during his 2000 run for the White House. McCain's people were concerned that her proximity to the Arizona senator might spark suspicions. I don't know what the Times hoped to accomplish when it ran this story. It had worked so hard to climb out of the shadow of Jayson Blair, the former Times reporter who fabricated many stories and became a poster child, along with the Times, for journalism's ills a few years ago. Thirteen months ago, Times Executive Editor Bill Keller couldn't disguise his satisfaction when he told me that he felt "a little vindication" after the 2006 elections because the Times had been attacked like a "pinata." Now, the Times is back under a cloud. The Times violated a basic tenet of journalism: Either you have the story, or you don't. If you have the goods, put the story on page one and shout about it from rooftops. If you don't, delete the flimsy, unsupported stuff. Like my professors at the Medill School of Journalism used to preach: When in doubt, leave it out.

Wireless Firms Offer Flat Rates There's some good news for people who spend a lot of time on their cellphones. Three of the nation's largest cellphone companies are rolling out plans that charge a flat rate for unlimited calling, a significant departure from the traditional model, in which consumers purchase "buckets" of minutes. The new plans cost more than most traditional options and are aimed at the heavy user, a customer that wireless carriers compete fiercely to land. The new plans are a sign that cellphone companies are willing to experiment with the minutes-based model that has underpinned the industry for years. The carriers are increasingly looking at voice as a commodity and viewing data services like text-messaging and Internet access as the major sources of revenue growth.

Comcast Wins Skirmish, Girds for War Fix the easy stuff first. That's what Comcast did last week, when it shrank management bonuses, reinstated its dividend and canceled a pay plan offering five years of posthumous rewards for company founder Ralph Roberts, who remains a director at age 87.Those actions helped touch off a rally in the cable company's beaten-down stock. Talk of a shareholder uprising evaporated in a hurry. But Comcast still faces big challenges. It is torn between two groups of shareholders -- those who like management's ambitious plans to conquer new markets, and those who want the company to return more cash to investors through dividends and stock repurchases. Can Comcast CEO Brian Roberts, Ralph's son, satisfy both camps? He says he can. To do so, though, Comcast will need to emerge as a profitable winner in a dogfight over how American consumers will get television, phone and Internet services. In such battles, underlying technologies change rapidly, in ways that are expensive and unpredictable. As rivals race to install costly new systems, they are hammered by price wars, rapid obsolescence and a need to keep restarting the cycle. All the while, contestants burn through billions of dollars of capital spending and marketing outlays every year.Consider other industries with similar challenges. The computer disk-drive business was famous for short product life cycles and "profitless prosperity" until that industry consolidated. The paper and airline industries have been trapped in that predicament, too. Competing in those fields is like running on a treadmill -- lots of sweating, not much progress.

Posted by dblwyo at 01:16 AM | Permalink | Comments (0)

Well the Markets have bounced up three days in a row, at the last minute and on some fantastic (and the emphasis is on the "fantasy" part) news that Ambac was going to be rescued, save it's rating and, today, that IBM is buying back $15B. Given that Ambac apparantly has several '00s of $Bs in exposure a $3B rescue doen't seem like it saves the day. As for IBM it throws off so much cash that what else is it going to do ? It's not growing the company in either revenue or profitability after all. A tightly run ship who's financial health is beyond impeccable so it won't need those funds when the crap really hits the fan but we still have to wonder if that's the best use of it.

Meanwhile back in the real world the economic news is unremittingly bad and accleratingly worse from inflation to Housing. Here's an interesting interview by Barrons/WSJ with Robert Shiller which we strongly urge you to watch. Below the line you'll find both some other charts that put what he's saying in context (courtesy of our e-colleague CalculatedRisk of course) plus some collected readings.

Schiller had a lot of simply fascinating things to say about both how bad it is and how much worse it's likely to get, in that low-key and restrained academic fashion that makes it hard for the intervier get soundbites. But this one really....really tried. We counted at least four major times where the question is what our lawyer friends call leading, i.e. a setup, telling the interviewee what the expected comment is. The first setup which we couldn't believe it was so distortionate was asking whether we werent' seeing price declines slow or stop. What Shiller replied was a) in fact the rate of decline was accelerating as b) people's psychology and expectations come more into line with reality. And c) that all he hoped for was that not that they'd stop declining but that the rate would stabilize or slow. He went on to add d) that housing was way overbuilt, the peak was like nothing we'd seen since '51 (remember WW2, vets and the VHA ?). And as a consequence e) we likely had a long way to go since this boom had been going on since the early '90s and would have as far to run down. Now stop and think about all that for a moment, a K-R Moment as in Kubler-Ross. You know denial, anger, acceptece. These days I'd settle for getting as far as anger since everybody keeps looping back to denial.

If this is the thinking on the street you know why were're trapped in a sideways market looking for the Messiah of the 2nd Half Recovery to come save us while the news just keeps going on. In the sense that bad news is being ignored and teensy, tiny little pieces of good news push up the market you'd have to say that it's all priced in, right ? Of course what's priced in is not the realities that some of us see all around us though. 

Now our friends over at CalculatedRisk have their own appreciation of how things are going. In particular they just put up some interesting charts on housing inventories and inventory seasonal patterns which we've combined here with another of his charts on the Case-Shiller housing prices on a YOY basis. Which you'll please notice are a) negative and b) sharply sloped downward; that's Shiller's downward acceleration thing you know. The other thing you need to know is that the inventory patternas are normalized so each year starts at a 100 where that 100 is based on the prior year's end. Housing inventories are normally pulled off in the Winter and put back on as the sales season starts up. What you see is two things. First in '06 and '07 built up relatively far more than in previous years. And this year is starting with an even larger uptick.

Just to set the stage we'll also re-post (posted here) an earlier composite chart we borrowed from CR that lays out the strategic BigPicture so you can get a better idea of what it all means. The first part shows the relationship between New Home Sales and recession. It also makes very clear Shiller's comment about the length of the boom and the abberational size of the boom. The 2nd part shows ResInvest as a % of GDP with CR filling in an extrapolation. Now IOHO that's conversative since it doesn't capture the need to work off all the excess inventories that have been built up. In other words the downturn here could be as unique and large as the bubble;in fact shouldn't it be ? The 3rd part shows how long after downturns bottom it takes for prices to reach their floors and start creeping up again. Given that we're really just seeing the pscyhological adjustments begin that suggests we've got a very long way to go.

As far as we can tell NONE of these realities are reflected in the consiousness of more than 90% of the commentators yet there they are in about as simple a graphical form as you can get. Talk about getting stuck in denial !

READINGS

S&P/Case-Shiller Home Prices Fell 9.1% in December Home prices in 20 U.S. metropolitan areas fell in December by the most on record, reflecting the deepening housing recession, a private survey showed today. The S&P/Case-Shiller home-price index dropped 9.1 percent from a year earlier, after a 7.7 percent decrease in November. Nationwide, home prices fell 8.9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record keeping. Prices may fall further as would-be buyers hold out for bargains and foreclosures add to the glut of unsold properties, extending the worst housing slump in a quarter century. Shrinking home values and credit restrictions threaten to reduce consumer spending and push the economy into a recession. ``Home prices are headed lower,'' Michael Moran, chief economist at Daiwa Securities America Inc. in New York, said before the report. ``With demand soft and inventories still high, there will be pressure on prices to keep declining.'' December's drop was the 12th monthly decline in a row and the biggest since the group began keeping year-over-year records in 2001.

• Existing Home Sales and the Economy Existing home sales fell 0.4% in January to its lowest level in a decade but still better than expected. Dean Barber, of the Barber Financial Group, and CNBCs Rick Santelli and Diana Olick share their insight. January Existing Home Sales, More credit costs seen weighing on banks, brokers.

·         Home Foreclosures in U.S. Surged 90% in January After Mortgage Rates Reset Bank seizures of U.S. homes almost doubled in January as property owners failed to make higher payments on adjustable-rate mortgages. Repossessions rose 90 percent to 45,327 last month from the same period a year ago, RealtyTrac Inc. said today in a statement. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent.

 

Posted by dblwyo at 12:42 PM | Permalink | Comments (0)

Literally back in the real world. Despite all the on-going storms and thunder there is a real world out there of real companies not involved in financial engineering; though subject to (victimized by ?) it. Again there was a huge amount of relevent news that's going to impact a lot of things. Below you'll find our selected excerpts with stories from the oil, airline, steel, auto, retail and aircraft manufacturing. They're all interesting but a couple or three are harbingers.

Exxon is getting to the point where it's not replacing its' reserves - partly from increased problems with accessing foreign fields but also because of the increased difficulties in finding new, large fields that are economic. Think about that one for a while.

Meanwhile various mearger frenzies continue including the airline industry (which we waxed on at some structural detail) and continued evolution of the worldwide steel industry, Mittal in particular. The Auto industry just moves from one "challenge" to another. A couple/three interesting stories there as well - from Ghosn's naming it recession to an interesting story on Hyundai's Superbowl Ads to Chrysler's increased off-shoring of engineering and R&D. Now those last two we think are particularly important because they not only represent increased globalization but sophistication in both directions. In fact IOHO the Hyundai ads were the best ones on the Superbowl - not for viewer entertainment but from getting bang for the bucks. Everybody laughed or cringed at the others but  Hyundai's a) served notice that they were seriously in the game and were credible and b) got the biggest response that way from viewers. The next time you're in a parking lot test this yourself - see the Mercedes lined up next to a Bimmer next to a Lexus next and so forth down to a Hyundai. That bridges $120K to $20K but we don't see that much difference in fit and finish let alone features and quality. Hmm...indeed. 

Traditional Industries

Is Exxon Mobil Going Dry? Like the rest of its big oil brethren, Exxon Mobil is having a difficult time replacing its reserves. The Texas titan barely replaced the amount of oil and gas it produced last year -- its worst showing ever. If Exxon boss Rex Tillerson can't reverse the trend, his company could run dry within a generation.

Airline Merger Frenzies (II): Network Structure, Costs and Strategic Outlook There have been three interesting (or more) stories on the rapid airline feeding/merger frenzy that's bubbling up before our eyes as the result of intractably higher fuel costs. Like every other strategic initiative since '00 this one too will NOT fix the underlying problems. Which won't stop the mergers nor prevent the financial community from providing the liquidity ammo necessary to bring it about on the theory that it will. Earlier we'd posted a first pass (Airline Merger Frenzies (I): Deep Cost Structure, Restructuring & Outlook) explaining how the hub-n-spoke network route structure was the deepest underlying factor in airline's lack of profitability and failures, since the end of WW2 btw, to earn their cost-of-capital. Excerpts from the three stories are below but here's an excerpt from a strategic assessment we wrote in '04 both predicting the consolidation and its' likely failure.

The M&A Forge (WSJ '06) Flush with cash and anxious to take advantage of interest rates that are still near historic lows, corporate and private equity buyers turned 2006 into one of the most explosive years on record for both the number and size of transactions -- a total deal volume of about $4 trillion. Why in most industries do you find some companies thrive doing deals while so many others stumble? Beyond Mittal in the industrial sector, witness the acquisition success of Nestlé in food, Cisco in technology and the Royal Bank of Scotland in financial services, to name just a few. Our research shows that the most successful opportunists share a set of characteristics that they have consciously developed over time. The winners tend to make mergers and acquisitions central to their strategies; they study and learn from their mistakes; they nurture M&A as a core competency; and build a team to preserve institutional knowledge. They tend to focus mostly on small and medium deals, not blockbusters. And when they do pursue megadeals, they only do so when it is both strategically and organizationally appropriate.

Mittalic magic Lakshmi Mittal built the world's biggest steel firm from scratch—at internet speed. The answer was neither: Mittal Steel was a company from everywhere and nowhere, which helps to explain why its integration with Arcelor to form ArcelorMittal, the world's largest steelmaker, went so surprisingly smoothly. Most mergers fail: from AOL Time Warner to DaimlerChrysler, the corporate landscape of the past decade is littered with wrecks. Just as surprising was the way in which Mr Mittal managed to overcome opposition to the deal from the business establishment and the French government—and has now gone on to increase profits in the new firm's first full year.

Ghosn Says US Auto Market in Recession The head of Nissan Motor Co. said even if the United States is not in recession, its auto industry is. "We are very lucid on the situation of the industry that there is a recession in the United States, at least in the car market," Chief Executive Carlos Ghosn told reporters, saying automakers face rising costs for iron ore, precious metals, aluminum and other materials. "These represent risk for the industry," he said. Ghosn, who is also president and CEO of Renault SA of France, expressed optimism that the market will improve. The American auto market "will not stay in recession for a long time," he said. U.S. car and light truck sales totaled 16.1 million vehicles in 2007, the worst year in a decade, and sales are expected to slip this year as well. Ghosn said the cost of raw materials, increasing for the fourth straight year, must come down. Earlier, Ghosn told students at Seoul's Korea University that global automakers need to focus on emerging markets. During a visit to South Korea to meet local Nissan and Renault officials, Ghosn said growth in countries such as Russia, China, India and Brazil will be key.

Hyundai Super Bowl Advertising Yields Highest Positive Impact on the Brand Hyundai's Super Bowl advertisements did the best job of boosting brand opinion according to two leading marketing research firms. The Nielsen Online MegaPanel Survey, post- game study showed that 43 percent of respondents had improved their opinion of the Hyundai brand -- the highest of any automotive advertiser. In addition, in comScore's 2008 Super Bowl post-game survey, Hyundai garnered a 45 percent increase in net brand improvement, the highest figure of any Super Bowl advertiser.

Chrysler Begins Engineering Overhaul Six months after taking the helm at Chrysler LLC, Chief Executive Officer Robert Nardelli is beginning to move forward with his first major reorganization at the auto maker: a broad shake-up of its engineering operations. In coming months, Chrysler will expand operations at engineering centers in China and Mexico and will prepare to open others in India and Eastern Europe as part of a push to internationalize a company heavily dependent on its home market in North America. Mr. Nardelli is betting the overseas centers will help Chrysler cut engineering costs and move it forward in sourcing parts and selling vehicles in big developing markets. Chrysler has been slow to move engineering work abroad, a cost-saving measure that other auto makers around the world are increasingly adopting.

Wal-Mart Evades Global Woes as Net Rises Fiscal fourth-quarter profit rose 4% at Wal-Mart Stores Inc. as cost-cutting and strong international gains helped the world's largest retailer sidestep many of the troubles dogging its rivals in a soft U.S. market. The Bentonville, Ark., retailer felt the drag from energy and housing earlier than many of its department-store and grocery rivals, and began paring its U.S. store-expansion plans, trimming inventories, and boosting marketing efforts that emphasized low prices. Better marketing and fewer markdowns in the final quarter lifted gross margins to 23.5% from 23% a year ago despite a broad retail slowdown that triggered losses elsewhere. U.S. same-store sales, a measure of market-share gains, rose 1.7%, compared with a 1.6% gain in the same-quarter last year. Wal-Mart's Strong Earnings Can't Beat Back the Doubters

• No Satisfaction at WMT (CNBC vidlink) Although Wal-Marts sales stand out among other struggling retailers, its not keeping its customers happy, with Adrianne Shapira, Goldman Sachs; Claes Fornell, University of Michigan Business School; and CNBCs Melissa Francis.

Airbus Expects '08 Plane Orders to Halve Airbus said Wednesday it expects half as many orders for new planes in 2008 as it got last year after receiving record orders in recent years and amid slower global growth. John Leahy, Airbus' chief salesman, said at the Singapore Airshow that the European planemaker is likely to sell about 700 planes this year, down from more than 1,400 orders last year. The 700 planes that Toulouse, France-based Airbus wants to sell will include more than a hundred A350s, a redesigned widebody 300-seat jet, and about 30 units of the A380, the world's largest commercial jet. Korean Air Lines Co. said Monday it will buy three more double-decker A380s on top of its existing order for five of the world's biggest commercial jets. Leahy said the past three years have been the peak of plane orders and that manufacturers were now ramping up production to deliver them. Airbus had about 3,600 planes in its order backlog, he said, about the same number as its U.S. rival, Boeing Co. Together, the rivals won a record 2,754 orders last year. The biggest challenge the companies face is getting planes off their production lines fast enough to meet demand. At the end of 2007, the two companies together had enough airplanes on order to keep their factories busy for about five to six years. Both companies have faced delays in deliveries. Airbus's first A380 was delivered nearly two years late last fall -- a delay that slashed profits at parent company EADS. Chicago-based Boeing last month said the inaugural flight for the 787 would be delayed up to three months, pushing delivery of the first plane into early 2009 -- the third time the airplane has been delayed.

Posted by dblwyo at 05:00 AM | Permalink | Comments (0)

Last summer George Magnus of UBS asked whether or not we were at a Minsky moment. That is a situation when leveraged borrowing had progressed from sound borrowers (who can repay) to speculative borrowers (betting on cash flow) to Ponzi borrowers (guess !) and we were about to proceed with the reverse unraveling. As the previous and many other posts here have argued not only wasn't the credit market contagion NOT confined to sub-prime, or even housing-realated, markets but there were many rocks and then boulders which would topple into the ponds of the credit markets. And the effects would be self-reinforcing as the various ripples from those topplings impacted not just adjacent markets but distant ones as well. In this recent FT 3-part interview George updates his outlook and it is anything but sanguine, in the modern sense of the word. The old sense of sanguinary was bloody - as in the aftermath of a major battle. We use it in that sense. The vidclips can be reached thru clicking on thru the picture and we HIGHLY recommend that you do so. The interview is pretty non-technical but the numbers and consequences are startling.

Below the line we've gone back over the last several months posts and collected up a bunch of the critical readings related to these issues. Including one that introduces the original Minsky Moment phrasing (BTW - for the record the person who really first started talking about Minsky-like problems was Paul McCulley of PIMCO and he did it back in '06.) We also re-list the links to our prior posts on the credit crisis, perverse incentives and the "rocks in the pond" model.

While it's tempting with short-term satisfactions to indulge in some schadenfreude we'll postpone that for this evenings scotches...yes that's plural. This is too severe a problem, spreading too rapidly to be fully savored (our previous labeling was Ebolatization of the credit contagion and we used the movie of the same name as our model. That still seems to be accurate IOHO !).

BTW - this is a 3-part interview and you really should watch all three, you really...really should. And HT to Barry Ritholz for posting this before we got to the FT today as well. Anyway if you'll listen to all three you'll hear George pretty well - we actually exactly - concur in that marvelously understated British way with our take on the credit markets, the economic outlook, the worldwide slowdown and the market's lack of awareness. Or that's what we think we heard. You decide - because you will one way or another !

READINGS

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

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

Some major prior readings: Weekly Reader 19Aug07: Markets & Investments

The Minsky Moment Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.Many of Minsky’s colleagues regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting. In trying to revive the economy, President Bush and the House have already agreed on the outlines of a “stimulus package,” but the first stage in curing any malady is making a correct diagnosis.

Bookstaber Asks: Where Were the Risk Managers? What a mess. With multibillion dollar trading losses, we are starting to see heads roll. Citigroup is losing its longtime fixed-income head Tom Maheras and several of his lieutenants. Merrill is continuing in its approach to managing human capital, bringing in new blood and losing experienced hands in the fixed income business. Oh, and they are putting someone into a Chief Risk Officer role. Talk about closing the barn door….  Other firms have fared very poorly but so far without executing any of the troops. Morgan Stanley layered a heart-stopping $390 million one-day loss in its proprietary trading desk on top of far bigger losses on leveraged loans and the like. This loss in Process Driven Trading was similar in timing to the losses at Goldman’s Global Alpha fund, AQR and other quant hedge funds. Which pretty much tells us that what this secretive group at Morgan Stanley was up to was a not-so-secretive strategy: They had a lot of capital riding on the same sort of momentum and value versus growth quant equity strategies as the rest of the gang. What I don’t understand in all of this is that for all the mention in the press of the risk takers, there is not a single mention I have found of the people who are supposed to be overseeing the risk. If you are the Chief Risk Officer and everything blows up, don’t you bear some responsibility? To get the idea of the CRO job, let me tell you a bit about myself. Although I am older and have a slight build, I am an Olympic athlete. My event is the shot put. I consider myself a top notch athlete in this event. I work out like the other competitors, follow a high protein diet, steer clear of performance enhancing drugs and train at the local track. The only trouble I have is when the Olympics roll around every four years, because it turns out that for an Olympic athlete, I am not very good. But then, that is only an occasional blip in my otherwise Olympic-worthy regimen.

MAJOR PRIOR POSTS

More on the Credit Crisis: the Rocks in the Pond "Model", Rocks, Ponds, Perverse Incentives: More on Credit Contagion

• Understanding the Credit Crisis: More Readings & Resources,The Fed and the Credit Crisis: More Readings & Resources,The Fed & the Credit Mess: Readings II

Credit Mess and the Fed: Understanding the Strategic Posture

Posted by dblwyo at 12:14 PM | Permalink | Comments (0)

Earlier we put up a readfest (WRFest 23FEb08(Business Strategy): What the Future May Hold ?) focused on business strategy, including a view of our strategic concept/context chart. Judging from the performance of the Finance Industry as a whole most of the arguments we made were and will continue to be ignored. But as stakeholders (investor, employees, suppliers, customers) we don't think you. Eveventually and ultimately. Now the WSJ has kindly joined us in our finger-wagging prescience with a fascinating story about strategic awareness really matters. Rather then wait to put up a shorter excerpt we're posting a longer one now. There are many lessons and examples cited here. The question for you becomes - as a stakeholder - do you know where your stake is tonight ?

UPDATE: More credit costs seen weighing on banks, brokers Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.  Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cosall the way up to a whopping $12 billion projected for Citigroup Inc.

The Coming Leveraged Debt Write-Downs

Subprime Lessons Hit Home for CEOs  Executives far from Wall Street are finding lessons in the subprime-loan meltdown. Among the insights: Don't chase a boom without planning for the bust and ensure that incentive systems don't encourage excessive risk.

As mortgage lenders imploded and stock prices swooned last summer, a light bulb went off for Tim Houlne, chief executive of a Texas call-agent provider: "Bubbles always burst." Mr. Houlne's realization attests to how, far from Wall Street, executives in other industries and their advisers are finding management lessons in the subprime-loan meltdown. Among the key insights: Don't chase a boom without planning for the bust. Make sure subordinates feel safe delivering bad news. Ensure that incentive systems don't encourage excessive risk. And don't gloss over complicated details.

"Every five to 10 years, there's a mess of this sort," says Richard Coughlan, a management professor at the University of ichmond. "Leaders would do themselves a great service if they would study the failures of the past and learn from them." By contrast, in the finance industry, many firms continued to pursue subprime-related business long after the first signs of a housing slowdown.

That's a familiar pattern to veterans of the technology boom of the 1990s and the ensuing bust. During the boom, telecom companies rushed to install miles of fiber-optic lines based on predictions of an exponential need for capacity… Instead, he suggests that executives plan new initiatives before the current wave crashes. Toyota Motor Corp. did this well during the 1990s, Mr. Kanazawa says. While Toyota and its peers chased the then-hot sport-utility market, Toyota also developed its hybrid Prius. Its 2000 U.S. launch ran counter to conventional wisdom at the time. But as gasoline prices rose, Toyota's move looked prescient.

Jim Bradford, dean of Vanderbilt University's Owen Graduate School of Management, sees another lesson in the subprime woes: Make sure subordinates feel comfortable delivering bad news -- promptly. It's possible that earlier strong warnings of mounting subprime problems may have helped top bank executives react better. Mr. Bradford speaks from experience. Before entering academia, he was CEO of glassmaker AFG Industries, a unit of Japan's Asahi Glass Co. He tried to foster a candid environment by also praising and promoting people who disagreed with him or who brought him bad news. That candor helped thwart disaster at least once.