bizzXceleration: Performance, Value and Profit

the  opinion of the markets, they aren't very ugly either. And nowhere near as ugly as was apparently feared by all and sundry. When you look at the YoY% changes they actually don't appear to be too bad. At least until you dive into them. The table at right shows the QtQ% changes and their annual equivalents. As you likely know we prefer the YoY% changes as being more revealing. So here and after the break we're going to dive in quite a bit more. Actually in two separate passes. This one looking at the time series and a follow-up, in a reasonable time, taking apart the major component changes. Cutting to the bottomline when you look at the numbers we'll say that the slowmotion slowdown appears to continue. It's when you look at the indicators of future demand that it starts to get ugly. And when you break down the component changes it gets real ugly.

Overall GDP

Let's start with an overall look at GDP, Consumption and Employment. Just looking at this chart it doesn't look so bad, does it ? Except of course for Employment which, at least to our eyes, looks to be beginning the kind of significant downturn that we've seen in past recessions. Again the difference between our interpretation of the data and the market's would seem to be a difference in understanding cycle patterns and time lags. As the economy slows consumption turns down and then GDP which leads to downturns in employment and investment. Which further lowers consumption and the cycle starts reinforcing itself. So we'll repeat - this is early days yet. The recession isn't here. But boy do the red flags look like they're going up the flagpoles all over the place. Some of which are RI continuing to fall off a cliff and Capex turning negative ! OOPs !!

The bottomline is an overall continued slowing of the economy with increasing weakness in Consumption and Investment being an increasing drag, especially of course Residential Investment. But even Capex is turning down. The indicators of futre demand, job and wage growth, are (as we've mentioned in detail before) really showing severe strains which you can expect to see in future demand decreases. And to ripple thru the rest of the economy over time as the downturn accelerates. Below you'll find more specifics on Employment, Consumption and Investment that's consistent with this view. Take a look. 

Employment

Let's start by re-examining the trends in Employment using the aggregate net increase in jobs. We measure the net increase by whether or not new jobs are greater than 150K/month, our figure of merit for the breakeven level required to stay even on population and productivity growth. Aggregate employment growth is simply the running total. In the top sub-chart you can see Employment beginning to slow seriously but in the bottom Net New Jobs looks to be going over a cliff. Definitely not encouraging for the future outlook.

Consumption Demand

Our favorite indicator of future demand is the sum of the YOY% changes in Real Wages and Employment. Bearing in mind that it's early days yet, and that Employment is just beginning to tip over the cliff, this chart shows the changes in W+E. Given the return of Inflation and the resulting sharp decline in Real Wages W+E is showing a real nosedive. All those anecdotal stories in the press and backyard fence discussions you've been having are right as can be. We're starting to see serious building pressures on consumption. With, if you believe our analysis, lots worse to come. But even looking at the QtQ changes Consumption growth of ~1% is something to write home about - just not in a good sense. Mom, they say we're going up to the Line tomorrow so I'd don't know when I'll be able to write....

Investment

The other major component of future demand is Investment. Which is showing a pretty serious drop on a QtQ basis though from this chart it would appear to be holding up relatively well on a YoY basis. Both are likely correct. That is we're in a slowmotion slowdown that is ABOUT to tip over. And since Investment lags GDP which lags Consumption you wouldn't expect to see the same kind of downturn as you can see in earlier recessioins until later. 

Posted by dblwyo at 09:24 AM | Permalink | Comments (0)

Here's an interesting accumulation of Tech-related readings (after the break) that are worthwhile in their own right but also are perfectly illustrative of many of the themes we've tried to strike here. Both for the Tech Industry itself and for it's inter-actions with the larger economy. Most of us, myself included, have this wonderful, romantic view of the Tech Industry as being its' own thing running on an internal dynamic. Unfortunately most of the major names are now mature companies struggling to find the NBT (next big thing). Worse many of them are experiencing severe organo-sclerosis in their core disciplines. Tech is not the only industry driven by Innovation however. In fact it is more central to the Pharmaceutical and Aerospace industries than what we traditionally think of us tech. And, as I hope we've established, innovation is returning as a fundamental requirement for survival let alone prosperity. Put all this together and you have two broad mis-conceptions to adjust:

1. Patterns of Innovation: Once a company or industry matures it is no longer driven by internal dynamics, e.g. the famous "S-curve" of fame and fortune. Worse when a company is used to living on the curve it gets both complacent and, with growth, harder to manage. Often its' core disciplines deteriorate as well, so that one ends up with desperate gamble after desperate gamble to recover the glory years. There are however key players who have managed, thru discipline, execution and insight, to find sources of renewal. 

2. Business Cycles: one you're off the curve then you become just another capital "equipment" supplier (or consumer supplier for those migrating into the entertronics industry). Which means normal business cycle consequences begin to show up. In this downturn, which we've barely seen the beginnings off, first consumer demand will slow and turn down, likely severely. And companies will cut their hiring and capital expenditure plans. All of which we're beginning to see and more of which is coming. As IT budgets are constrained what do you think happens to IT spending and tech industry outlooks ? Wouldn't ask the analysts on the Street :)

The trick is to sort out the survivors from the also-rans who are going to struggle. And then sort the survivors into the so-so's and the real men. As you skim over the readings we think the portents for the future are pretty clear. Which means in terms of evaluating investment and performance we're back to asking Economy - Industry - Company questions. You're hopefully looking for the companies with the skill, chutzpah and resources to gain new high ground. And IOHO those are the folks who've re-made or are re-making themselves. Those will be the buying opportunities after we get thru this current unpleasantness.

A perfect contrast is AMD vs Intel. The former had a hit but failed to follow-up, sustain it or execute. Instead it made an acquisition gamble looking for the easy fix. In stark contrast Intel transformed itself by building on it's base skills in chip design and manufacturing as well as operational excellence and is now extending those capabilities to whole new markets. (We can't recommend some of the last investor presentations highly enough btw). MOT is the perfect poster child for what we've called decliners in the charts. IBM on the other hand could serve as the example, if not exemplar, for the sustainer.

The real interesting contrast is APPL vs MSFT. There are a lot of readings below but consider what we think is the most fascinating and powerful contrast. At it's heart MSFT is a software company and it's most fundamental  discipline should be product development. Yet it delivers Vista late, emasculated, bloated, missing an ecology and buggy. What Longhorn was going to be and what Vista became reduces in large part back to Code Red - when internal development broke down almost completely and they had to do emergency surgery.

In contrast Apple made a decision to create a new, elegant, powerful and portable OS that not only drives Max OSX but the iPod and iPhone because it's modular, componentized and scalable. (Shades of NEXT and it's object-oriented OS and application platform). That means that every product Apple makes runs the same software base and therefore can share applications, within limits of course. So MSFT is wrestling its' own kudzu and Apple has created a self-sustaining, evolving and growing eco-system. Which holds the most promise for the future do you think ?

Of course there's many a slip 'twixt cup and lip and MSFT is still a huge, tightly run profit machine and Apple will need to sustain it's innovations with the NBT on top of this wonderful foundation. Which merely makes it easier and more likely. But it's looking like Apple joins Cisco and Intel in that pantheon of folks who've made the necessary cultural changes to embed innovation in their DNA. (Sailing Into the Storm: From Execution to Innovation)

Outlook

The trouble with tech The turmoil on Wall Street gets all the attention these days. But guess what? Silicon Valley isn't faring that much better. AMD warned Monday evening that its first-quarter sales will be lower than analysts' forecasts. The chipmaker blamed "lower than expected sales across all business segments." Making matters worse, AMD said it would also cut 10% of its workforce. There are a couple of issues at play here. For one, being second-best in the tech sector is often not good enough in the eyes of investors. Dell is facing a tough challenge from HP Motorola is getting hurt by Nokia. But industry leaders are having a tough time in this environment as well. And despite this gloomy news, Arnie Berman, the chief technology strategist with Cowen & Co., said that he's concerned that sales and profit forecasts for technology companies this year may still be way too high. They may be the exceptions. Berman expects a tough year for tech stocks. However, he thinks that 2008 looks a lot like 1994 for the sector ... which could be good news for longer-term investors. In 1994, the tech-heavy Nasdaq fell 3% on economic concerns but surged 40% in 1995 following strong demand for personal computers, cell phones and software. This time around, Berman believes that healthy demand for Internet video services and mobile broadband technology will drive a tech bounceback in the coming years.

Wake up and smell the recession Some trends are making this slowdown a bit different from the last time around, but I think this mini-boom is definitely coming to an end. Netscape co-founder Marc Andreessen, who is now behind another startup called Ning, wrote in his blog that the company's April round of venture funding gave the make-your-own social network company a stunning post-money valuation of $560 million. He said the net round of $60 million would enable Ning to accelerate its growth "to make sure we have plenty of firepower to survive the oncoming nuclear winter." Comments from savvy executives like Andreessen and a pep talk given by Web 2.0's Tim O'Reilly, are signals of the tough road awaiting Internet companies looking for venture funding, especially those with hackneyed, me-too ideas, or products that really amount to features rather than stand-alone companies.

Manufacturers

AMD Cuts Follow Intel Restructuring Advanced Micro Devices Inc.'s plans to jettison 10 percent of its work force are the latest sign that the seesaw battle between semiconductor rivals Intel Corp. and AMD has taken its toll on both companies. The news comes as momentum in the notoriously volatile semiconductor industry has turned for the moment against AMD, whose own momentum just a couple of years ago was a major factor in a major restructuring by Intel. AMD had not been a player in the lucrative server market until the company launched its first Opteron chip in 2003. Armed with the energy-efficient chip, AMD stole away valuable market share from Intel and eventually captured about a quarter of the worldwide server market. The competition hurt Intel, whose profits slid sharply, the result of losing customers to AMD and furiously cutting prices to keep older chips competitive. But now it's AMD that's fallen on hard times as it confronts intensifying competition from Intel, which has regained some lost market share with a powerful line of new chips and has lowered its costs with a new manufacturing process. Meanwhile, some of AMD's most important products are viewed as out-of-date. Lengthy product delays for AMD's new Opteron server chip, a product critical to the company's financial recovery, have hurt its competitiveness. Technical glitches pushed back the chip's full release for months after the official launch in September. AMD is also struggling to digest its $5.6 billion acquisition of graphics chip maker ATI Technologies Inc., which AMD recently said is worth about 30 percent less than when it was acquired. AMD views the acquisition as a key way to attack Intel and incorporate better graphics capabilities into its chips. Graphics are now a key battleground for chip makers as more and more Internet surfing involves video and as the graphics requirements for computer games are heightened.

Has AMD shot itself in the foot with ill-timed acquisition? In addition to a "challenging" economy and intense competition from a much bigger rival, Advanced Micro Devices Inc. seems to be still be struggling from its ill-timed and costly acquisition of ATI Technologies. Last week's earnings showed that the Sunnyvale chip maker is suffering, in part due to Intel's lead with its quad-core microprocessor. AMD lost money in all of its business segments, including graphics, where ATI was supposed to provide a big boost. The theory was that while the deal may have made sense to give AMD a new technology advantage against arch-foe Intel, the company was ill-equipped to afford such a deal. Time seems to have proven those naysayers right so far. Since the deal closed in 2006, AMD has had to take hefty financial charges associated with the deal, including a whopping non-cash impairment charge in January of about $1.63 billion, an acknowledgment that the chipmaker paid too much for ATI. The business of semiconductors is a cash-intensive one that requires huge fixed costs to keep a company's massive chip-making plants running. AMD is a rare U.S. chipmaker that also owns and operates some of its own manufacturing plants, even though it has been talking about embarking on an "asset light" strategy for many months (whatever that means). But as a result of the debt AMD incurred to buy ATI, the company now is even more highly leveraged with $5.1 billion in debt, some associated with the ATI acquisition, which was part cash and part stock, and its big manufacturing plants.

Update: AMD to Exit Noncore Businesses When a company starts shedding businesses to try to refocus on a core strategy, that’s usually code for: “We’re in serious trouble.” AMD’s numbers look bad, and for months there’s been little in the way of good news. On the other hand, AMD still has numerous partners, and a less-distracted company could find a way to succeed against its giant and chief rival, Intel. In fact, it could be more like the AMD of old: small, scrappy and a burr in the side of what some see as the overconfident Intel—an unlikely scenario, but certainly a situation worth watching.

Intel 1Q sales, sunny guidance surprise Wall Street Investors knew Intel Corp.'s profits would fall sharply in the first quarter because memory-chip prices had slid. What surprised Wall Street was how well the chip maker's core business in microprocessors held up. Intel's shares jumped more than 8 percent Tuesday after the technology bellwether reported first-quarter profits that matched analysts' subdued expectations, along with sales that were slightly better than estimates and topped the company's first-quarter record. A sunny forecast that kept profit-margin predictions for 2008 intact also helped boost the stock by signaling that the Santa Clara-based company expects to protect its profits despite falling memory-chip prices and fears of a slowdown in technology spending. Analysts lowered their profit estimates for Intel last month after it warned that plunging prices for NAND flash, a type of memory chip widely used in consumer electronics, hit the company harder than expected. Intel had only recently entered that market. Tuesday's report reassured investors worried that global economic jitters had harmed Intel's microprocessor business, which accounts for the bulk of its sales. Intel's gross profit margin -- a key measure of its ability to control the cost of making its chips -- is expected to be 56 percent, plus or minus a couple percentage points, higher than its gross profit margin of 53.8 percent in the first quarter. For the year, Intel expects a gross margin of around 57 percent, same as its previous forecast. Intel and AMD, which is to report first-quarter results Thursday, both have been hurt by their intensifying competition with each other. Intel finished cutting about 10,500 workers, or 10 percent of its work force, last year in a move to shore up profits amid fierce competition with AMD. Intel 2008 Investor Meeting

Texas Instruments Profit Forecast Misses Analysts' Estimates; Shares Drop -- Texas Instruments Inc., the second- largest semiconductor maker in the U.S., forecast second-quarter profit that missed analysts' estimates as demand for mobile- phone chips slows, sending the shares lower. The company predicted profit of 42 cents to 48 cents a share, missing the 49 cents estimated by analysts in a Bloomberg survey. Earnings and sales for the first quarter also missed analysts' lowered projections. The forecast heightens concern that a U.S. economic slowdown is curbing mobile-phone demand, especially for high-end models that can play music and surf the Web. Nokia Oyj, the world's biggest wireless-phone maker and Texas Instruments' largest customer, reported earnings last week that missed estimates and predicted a market slowdown.

Motorola tries to find the bottom Expect another glimpse of the ongoing collapse of Motorola's phone business when the company reports first-quarter earnings Thursday. Motorola, the No. 3 handset maker, has already outlined in recent weeks some of the more dreary details of its steady slide: 2,600 jobs cuts, a plan to jettison the money-losing mobile phone unit in a spin off to shareholders, and a search for a handset chief to help stabilize if not rebuild the business. Some investors are banking on the assumption that, once a giant like Motorola has fallen, it's only a matter time before it gets up again. While the Wall Street consensus calls for Motorola to lose a mere penny a share in the second-quarter, that improvement is likely to come from the company's cost-cutting campaign and not from a turnaround in its core businesses. Motorola has some deep-seated problems, among them a stale lineup of phone and the lack of any potential blockbusters in the pipeline. Until it can come up with a hit, Motorola's downward spiral will likely accelerate, says Ed Snyder of Charter Equity Research.

Motorola miracle worker wanted The wireless giant's handset business needs a genius to turn itself around. Last month, Motorola (MOT, Fortune 500) set out to find a new CEO for its mobile phone business after Greg Brown was named head of the entire company. While Motorola isn't publicly talking about its search, it begs an obvious question: Who could possibly want this gig? Talk about a seemingly hopeless assignment - one that only a fool would accept.The challenges facing Motorola's mobile phone business are daunting. The company has been unable to capitalize on its blockbusters, most recently the Razr, the ultra-thin folding phone that was introduced in 2005 and eventually sold more than 100 million units. Last year Motorola lost the No. 2 slot to South Korea electronic giant Samsung - and risks losing its third place ranking to Sony Ericsson. Brown said in late March he would spin off Motorola's handset unit to shareholders sometime next year after a bruising battle with corporate raider Carl Icahn, who had amassed a 6.5% stake in the company and was agitating for change. But a breakup alone won't solve Motorola's main problem: making popular phones that churn out steady profits, which is a challenge that experts say require a top-to-bottom overhaul of the company. The toxic situation would understandably repel all but the hardest chargers.

IBM 

IBM: Strong gains for Big Blue IBM's sales numbers were boosted by ongoing weakness in the dollar, since deals done in other currencies now translate into more greenbacks. IBM said its revenue would have risen just 4% if not for currency fluctuations. Even so, this marked the second straight quarter that IBM showed relative immunity to broader economic troubles, especially those in the financial services sector, its largest customer segment. IBM's chief financial officer, Mark Loughridge, said the performance reflected the company's balance between international and U.S. revenue, and the fact that IBM gets about half its money through contracts with recurring, annuity-like revenue streams.

Cloud Computing Gains Steam With New I.B.M. Gear I.B.M. is entering the market for Internet-focused data centers with computer systems designed to reduce power consumption sharply and take up less floor space.The move by I.B.M., which the company planned to announce on Wednesday, is the most recent sign that the major computer makers are beginning to compete aggressively to supply Internet companies and others with the specialized hardware needed for so-called cloud computing. In the cloud model, data centers with vast stores of information and processing resources can be tapped from afar through a personal computer, cellphone or other device. The pioneers in cloud computing have been Internet companies like Google, Yahoo, social networks and online game services, which have often designed their own data centers. The Internet companies’ requirements are growing, but mainstream corporations are also increasingly interested in cloud data centers, opening up a large potential market. But analysts and customers who have tested the I.B.M. product, called iDataPlex, said the company had taken an original approach that seemed to place it ahead of rivals for now. I.B.M. says its systems consume 40 percent less power than standard servers, and are designed to pack more than twice as many computers into the same space. The I.B.M. systems, analysts note, have an innovative water-cooling mechanism, so they do not heat up a data center, thus eliminating the need for most air-conditioning.

Apple

Investors take a bite out of Apple Computer and consumer electronics giant Apple announced fiscal second-quarter sales and profits on Wednesday that beat Wall Street's expectations thanks to a 51% increase in Macintosh sales.But the stock dipped slightly after-hours as Apple gave sales and earnings guidance for its third-quarter that may have disappointed investors. regular trading. The pullback could be due to Apple's forecast for its fiscal third-quarter. The company said that it expects sales of $7.16 billion, roughly in line with consensus estimates of $7.2 billion. But it also said it expects earnings of about $1.00 per share, significantly below expectations of $1.10 per share. Investors shouldn't be too surprised though since Apple consistently is conservative with its guidance.

Apple's OS Edge Is a Threat to Microsoft A recent upgrade to the Mac operating system moves Apple closer to challenging Microsoft for overall computing dominance, even in the corporate market. The 20-year death grip that Microsoft has held on the core of computing is finally weakening—pried loose with just two fingers. With one finger you press "Control" and with the other you press "right arrow." Instantly you switch from a Macintosh operating system (OS) to a Microsoft Windows OS. Then, with another two-finger press, you switch back again. So as you edit family pictures, you might use Mac's iPhoto. And when you want to access your corporate e-mail, you can switch back instantly to Microsoft Exchange. Taken together, these seemingly unrelated moves are taking the outline of a full-fledged strategy. Windows users, in the very near future, will be free to switch to Apple computers and mobile devices, drawn by a widening array of Mac software, without suffering the pain of giving up critical Windows-based applications right away. The easy virtualization of two radically different operating systems on a single desktop paves a classic migration path. Business users will be tempted. Apple is positioning itself to challenge Microsoft for overall computing dominance—even in the corporate realm. It all started with Mac OS X, the multi-core, multi-processor platform officially released in 2001. Based on "Mach," a university UNIX research prototype, Mac OS X represented a clean break with the computer industry's uniprocessor past. The modular new OS allowed Apple to condense its core task management function into a tiny computing kernel. That kernel has proved easily adaptable across the entire Apple product line, from highly complex servers all the way down to the relatively simple iPod Touch. Such modularity allows Apple to add whatever functions are necessary for each product environment—all while maintaining cross-product compatibility. By contrast, Microsoft has held on to an OS tethered to the 1980s, piling additions upon additions with each upgrade to Windows. With last year's arrival of Vista, Windows has swollen to 1 billion bytes (a gigabyte) or more of software code. The "Mach" kernel of the Mac OS X, however, requires less than 1 million bytes (a megabyte) of data in its smallest configuration, expanding modestly with the sophistication of the application.

MSFT

Vista's 11 Pillars of Failure While the public's attention seems to be swinging toward Windows 7 (the next iteration of the OS)—a topic I'll address in the weeks ahead—the fact of the matter is that Vista remains. And it seems that the OS now has two distinct groups of users. One group happily uses Vista, with few concerns or complaints. In fact, many of them are baffled by all the grumbling. The other group is the fist-shaking Vista bashers who condemn each and every flaw the OS exhibits. The latter group is by far the most vocal and easily drowns out the former group. Its complaints stem from the anti-Microsoft backlash, which reflects dissatisfaction with the company's history, business practices, tactics, and bogus announcements. Much of the disgruntlement, however, can be attributed Vista itself—and the poor marketing job done by Microsoft.I mention the bogus announcements above because, at some point, you do get a little tired of Microsoft making exaggerated promises and then never coming close to delivering the goods. In the case of Vista, it has to do with the three "pillars" that were announced early on. The OS really delivered on only one of the pillars, and that pillar was nothing but Windows dressing: Aero, the resource hog and performance sapper.With the "pillars" in mind, I decided to take a look at the 11 reasons why Vista remains on shaky ground:.. I could probably put another dozen items on this list. The point is that it's a big list already. With all the resources in the world at Microsoft's disposal, you have to wonder why the company cannot get everything right even once. Vista Drags on Microsoft, How to Keep Running Windows XP

Microsoft Reveals a Web-Based Software System Microsoft is preparing to take its most ambitious step yet in transforming its personal computer business into one tied more closely to software running in remote data centers. The software giant announced on Tuesday a data storage and Web software system, called Live Mesh, that is intended to blur the distinction between software running on the Windows operating system and an elaborate array of services that will be delivered to a growing collection of electronic gadgets. Live Mesh is Microsoft’s late entry into a rapidly growing market described as cloud computing. Microsoft refers to its strategy as “software plus services.” However, the new vision is built on Web-based software that will help deliver entertainment as well as business software to devices like Microsoft’s Xbox game console, to Zune music player, to cellphones running Windows Mobile software, even to Apple’s Mac computers and other consumer devices in the home. The company now believes that no single device will dominate the Web-oriented consumer electronic world of the future. The Live Mesh system, however, is viewed by the company as a software platform in the data center for an evolving array of services, ranging from remote control of computers and electronic devices to data storage. Microsoft also hopes that software and service developers will create applications based on the service.

Microsoft Says Third-Quarter Earnings Fell 11%, Gives a Measured Forecast Microsoft Corp. said profit declined 11 percent and gave a measured forecast for this quarter as sales of Windows software fell short, sparking concern about a slowdown in technology purchases and sending the shares down 4.4 percent. The world's biggest software maker said sales of Windows for PCs sank 24 percent and revenue from its online advertising unit came in at the low end of its projections. Microsoft's report contrasted with positive comments from chipmaker Intel Corp. and computer company International Business Machines Corp. The results stoked concern that corporations are tightening their belts as the U.S. economy cools, even after a report from researcher IDC showed PC sales exceeded forecasts in the quarter. PC shipments rose 15 percent, Framingham, Massachusetts-based IDC said this month. Microsoft had forecast as much as 11 percent. Windows sales fell to $4.03 billion in the quarter. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor, predicted $4.3 billion. Sales of Office word-processing and spreadsheet applications trailed forecasts slightly as well.

Microsoft Corp., whose Windows software dominates the personal-computer market, fell 4.6 percent in early U.S. trading after sales slumped, casting doubt on whether PC demand can hold up in a slowing economy. The world's largest software maker reported a 24 percent drop in sales of Windows last quarter and forecast earnings that may miss analysts' estimates, breaking a streak of positive reports from Intel Corp. and Google Inc. More PC sales are coming from developing economies, where software prices are lower and piracy is more common, dragging down Windows revenue.

Behind Microsoft's Earnings Analysts hung crepe for hours after Microsoft (MSFT) announced it quarterly results. Revenue did not grow enough and earnings were light. Sales were actually down at the company's three huge divisions: client, servers, and business. Most investors did take heart in the company's 2009 forecasts of better days.What may have been lost in the mayhem is that Redmond has two emerging business, both of which they have been in for years, which are starting to show promise. Just as important, neither is directly related to software.After half a decade and billions of dollars in losses, Microsoft's game division, driven by the Xbox 360 and Halo 3 video game, posted an $89 million profit on almost $1.6 billion in revenue. Sales were up by 68%. A year ago the unit lost money. The revenue makes the "device" operation almost half the size of the company's server business and it is growing much faster. Almost all Wall St. observers denigrate Microsoft's online business where the revenue comes mostly from MSN. The operation still loses a lot of money, but its revenue grew 40% year-over-year. That is at a rate close to Google's (GOOG) and one which is much better than Yahoo!'s (YHOO). Steve Ballmer has threatened to walk away from the Microsoft bid for Yahoo!. He says that his company can get along without the portal. The revenue from the MSFT online division don't prove that, but it at least gives the statement some credibility. Everyone who understands Microsoft knows that it cannot live off of pre-packed software forever. There is, now, some glimmer of hope that it has a device business which could be very successful and an online business with an impressive growth rate. Wall St. says that Microsoft cannot "go it alone" online. That is exactly what they said when the Xbox went up against the Sony (SNE) Playstation earlier in the decade.

Posted by dblwyo at 06:19 AM | Permalink | Comments (0)

Here's our update for the market outlook and situation with the readings (after the break) divided into three sections. One on the nature of the recent rally, then on whether or not the "crisis is over and the third on analysts outlooks. Each of these touch on topics we've explore in depth before so each section has prior posts also included for your review and refresh. The bottomline, IOHO, is that the "Market" appears to think the worst is over and the upcoming/current mild recession is already fully priced into valuations and outlooks. On whether that's true or not rests the largest gap we can remember between the Street and the rest of the world of informed observers we've ever seen. On the state of the Finance Industry and whether it's over please see the prior post listed below. On whether or not we've seen the worst of the economy please...please recall the prior post WRFest 26Apr(Economy): Between the Gust Front and the Storm. To the extraordinarily distinguished list of economists and observers who think that a) we're just headed into the real beginnings of the down cycle as of this monring you can add Warren Buffett. The key point here is the one El-Arrian made....now we're just seeing the real economy turn over and it'll take the financial economy with it. Think about it.

 For how that's playing out, the debate between the two diametrically opposed views, consider the chart which shows the SP500 on two views. One is the 2 Steps and Jump view we've been exploring for some time where each time the market looked like it was "bottoming" some other unanticipated surprise popped up to take it down. Until this last time when the April Fool's surprise of a massive UBS write-down and re-capitalization led insiders to conclude that things were hunky dory. Our minds our boggled (in the prior post you might want to look at the excerpts on UBS's internal report - gross incompetence is the best summary of their own words. One has to think they aren't alone). The second sub-chart shows how the debate is playing out with what we've argued is the lull before the real storm with the emergence of a sideways trading range. With this week's momentus economic data upcoming this'll get really interesting indeed.

To complement that we've update our Key Factors Table which looks at the Structural, Fundamental, Technical and Sentiment Outlook situation. Since it's been a while from the last update the prior observations are included for comparison as well as the current ones. The delay was from more than laziness since until recently most of our assessments were holding up well. Now the only real change is further deterioration in the real world drivers combined with an improvment in Sentiment. Go figure ! :) But feel free to violently disagree with all of these observations - but we suggest doing it systematically (and disagreeing with, for example, Jim Jubak, et.al.).

Also please note that for each major Factor we show last month's entry above this month's update, with key changes and/or issues highlighted in BOLD. But what we see is hidden risk factors mounting, being ignored and short-term optimism triumphing yet again over underlying deep factors.

Markets Readings

Don't trust this market rally Although stocks' recent movement has been up, they're trading in a fairly narrow range. Now that they're near the top of it, expect them to head down again. We're still in a bear market. How, you ask, can that be when the stock market has rallied so strongly from its March 10 closing low? As of the April 23 close, the Standard & Poor's 500 Index ($INX) was up 8% from its 1,273 close of March 10. Hey, stocks even climbed above the Jan. 22 low of 1,311 in this rally. Because, as reassuring as this rally may have been, and as profitable as it was for investors who were on board, it hasn't been strong enough to reverse the downward momentum that's been in charge since the S&P 500 topped out at 1,563 on Oct. 9. This rally has failed to break through resistance at 1,400 on the S&P 500 several times this year: on Feb. 1, Feb. 26, April 7 and April 18. The same thing happened Thursday, April 24, as the S&P hit 1,397 at 3:05 p.m. ET, then pulled back to close at 1,389. That's not what happens in a trend reversal from a bear-market decline to a bull-market upswing. Until we see a move strong enough to take the market decisively above that level on the S&P 500 -- and through comparable levels on the other major indexes -- all we have is a rally in a longer bear-market trend.

• WRFest 18Apr08(Markets): Whee....What a Rush ! Sucker's Rally ?!
  

China Stocks Are a `Sell,' Analysts at Morgan Stanley, Credit Suisse Say China's shares are a ``sell'' even after the government stepped in to support the world's fourth- biggest stock market, according to Morgan Stanley and Credit Suisse Group. Corporate earnings growth this year may disappoint…The 17-year-old Shanghai Composite Index fell 0.7 percent today. It surged 9.3 percent yesterday, the most since Oct. 23, 2001, after the government lowered the tax on stock trading in the latest action to stem a market slump that wiped out $1.7 trillion of market value. ``Given earnings deceleration, we do not think such a rally can last,'' Morgan Stanley's Lou and Gui wrote. ``The government's cut of the stamp duty seems to suggest that it is running out of silver bullets.'' The benchmark CSI 300 Index plunged as much as 39 percent this year to become the world's second-worst performer amid speculation government steps to quell inflation would hurt corporate profits. The Shanghai Composite tumbled as much as 41 percent in that time. The slump sparked official moves to bolster equities. China in December tripled to $30 billion the amount overseas institutions can invest in yuan-denominated stocks and bonds. Two months later, regulators ended a five-month freeze on the sale of new mutual funds.

• ·Jubak’s Journal: Trouble in China Stocks in Shanghai are in the grip of the bear with prices down 50% from their high. New rules haven’t calmed investors as they worry about a big jump in the supply of shares.

Crisis Continued

Stock Market `Fire Sale' Burns Investors as Debt Costs Rise to Decade High A stock market fire sale at the cheapest prices in 13 years is burning investors as companies turn away from the highest credit costs in more than a decade. Corporations in the U.S. and Europe must repay $1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc. show. As the cost of borrowing for investment-grade companies climbed to 2.35 percentage points above government debt in the past year, firms such as Wachovia Corp., Wesfarmers Ltd. and Imperial Energy Plc are selling shares for an average 14.7 times profit, Bloomberg data show. That's the lowest since at least 1995. Today, companies from National City Corp. and Royal Bank of Scotland Group Plc to non-financial firms such as Eaton Corp. and Diamyd Medical AB announced offerings or said they may sell shares. The cost of borrowing for companies with credit ratings between AAA and BBB- at Standard & Poor's, which averaged 0.86 percentage point above government debt during the last five years, has since surged to the highest since at least 1997, data compiled by Merrill Lynch & Co. show. The credit-market collapse that triggered $290 billion in banks' losses and extinguished demand for everything from commercial paper to securitized debt precipitated the jump. Businesses have sacrificed shareholders as the cost of paying dividends decreased to a six-year low versus interest on bonds. The difference between the extra yield investors demand to buy investment-grade bonds from companies tracked by New York- based Merrill and the dividend yield of stocks in the MSCI World Index narrowed to 0.4 percentage point this month, from 1.42 points a year ago. The last time paying dividends cost the same as bond interest was in December 2000, preceding an increase in new shares issued in the following 12 months, Bloomberg data show. The same increase now would put almost $800 billion of new equity in global markets in the next 12 months as cash-strapped companies tap investors to repay debt and fund operations. The potential fundraising would exceed the amount companies have raised in each calendar year via share sales since at least 1999, according to Bloomberg data. Financing with Debt Gets More Costly for Companies

Trichet Says Financial-Market Correction Is `Not Over' as Lending Stalls European Central Bank President Jean-Claude Trichet said the financial-market crisis is not over as banks remain reluctant to lend, while he indicated policy makers are still intent on keeping inflation in check. The ``present significant market correction is not over,'' Trichet said in the foreword to the ECB's 2007 annual report published in Frankfurt today. While overnight interest rates have been successfully returned to ``stable levels,'' Trichet said ``tensions remain'' at longer maturities in the money market.
Lending to all but the safest borrowers has declined as the world's largest banks and securities firms, buffeted by the collapse of the U.S. subprime mortgage market, have reported $290 billion in credit losses and asset writedowns since the start of last year.

U.S. Treasury's Steel Says It's Premature to Say Credit Crisis Is Ending Treasury Undersecretary Robert Steel said it's premature to say that financial market turmoil stemming from tightening credit conditions is near an end. ``This is going to take a while to work through, and the improvement from here won't be in a continual line,'' Steel said in an interview on Bloomberg Television's ``Political Capital with Al Hunt,'' to be aired today. While progress is being made, he added, ``there will be some bumps and fallbacks.'' Falling house prices and rising mortgage delinquencies have slowed U.S. growth, disrupted credit markets and led to $309 billion in credit losses and asset writedowns by the world's biggest banks and securities firms since the start of last year.

• Econo Smackdown Discussing the rise in CDO Defaults rates, with CNBCs Steve Liesman and Rick Santelli
• Center of the Storm Some research on derivative losses and which banks are holding the bag, with CNBCs Steve Liesman
• Why won’t the financial crisis end? It turns out the bankers who bought derivatives based on mortgages didn’t read the fine print, says MSN Money’s Jim Jubak. Now they’re learning that the senior investors who bought the safest pieces of the deals can grab all the cash flow and force other investors to sell.

Readings (Finance): It's Over, It's Over...Yeah Right

Analysis Schmalysis

What's an Analyst Worth? Not Even a Penny a Share as Estimates Prove False This earnings season may expose how much Wall Street analysts rely on guidance in making estimates, as the credit crunch and weakening economy make it harder for companies to meet or beat the numbers. At least 27 companies have matched or topped Wall Street estimates in every quarter since 2000, including Coach Inc. and Starbucks Corp., according to data compiled by Bloomberg. General Electric Co. ended a 32-period winning streak on April 11. Goldman Sachs Group Inc. called GE and other early misses ``a sign of things to come,'' saying it expects more companies to fall short of first-quarter estimates. In good times, companies often use the flexibility of accounting rules to choose when they book revenue and costs, creating an impression of predictable earnings, said Thomas Russo, a partner at Gardner Russo & Gardner. The economy's decline and the freeze in credit markets are making that harder.

• Schwab Asks Who Needs Analysts After Biggest Flub When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever. It's no wonder investors don't trust analysts, says Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion for clients. Merrill Lynch & Co., Bank of America Corp. and the rest of the securities industry aren't losing credibility because of anything sinister. The problem is they didn't get their math right after credit markets froze nine months ago.

• And now, for research that you can trust ... As earnings seasons go, this is one to be forgotten. There has been almost no good news, from an investor perspective, yet the markets have surged and swooned as if banks and brokerages were sinking into or emerging from the mortgage massacre. If you were hoping that analysts would put it in perspective, good luck. Followers of Wall Street are treated to a pattern of earnings previews, the earnings reports themselves, the management's spin in a conference call and then analysts' interpretations. In other words, a cycle of disinformation, sifting through the confusion, new B.S. and then trying to figure out what just happened. Citigroup Inc.'s recent results fit the mold. Expectations were exceedingly low. Citigroup basically met them, and then warned that it could get worse. Chief Executive Vikram Pandit said layoffs and more losses were on tap. Analysts appeared completely baffled. S&P Equity Research spoke for the research community when it lowered its estimates, again, and affirmed its hold rating. There didn't seem to be a shred of good news in the report, and yet the market reacted positively every step of the way.This process has made two ideas clear: First, no one knows when all this will end. And second, wouldn't it be nice if some institution reported a profit or loss and we just moved on?

• Readings (Earnings): The Real Earnings Realities that Ain't...YET

• Business Performance II (Readings): Performance, Pain and Prospects

Posted by dblwyo at 02:55 PM | Permalink | Comments (0)

Our normal sequence would call for taking up the market situation but that's not only too depressing, for several reasons, but Sun. seems more suited to reflection on big issues. So we're going to focus on Innovation. Now hopefully some previous posts have established the motivation for that, and they're listed below the break, but in discussing sad, not so sad and good stores about business performance a couple of themes emerged. One of course was good execution and another was balancing strategy with operations. But if you review some of the readings sustainable long-term performance, by which we mean growth in revenue, profits and earnings, also requires adaptability and invention. Innovation in other words. And when you look at the examples from HPQ to P&G you can see where this is all born out. And conversely when you look at the sad stories where the counter-examples also support the argument.

But in case you need more more convincing or, better yet, you'd like to see it explained by somebody with a real track record of both sustained performance and sustained change management we'll point you at the recent appearance of A.G. Lafley on Charlie Rose. IOHO this ought to be required listening in every MBA program and executive suite in the country. As well as by every analyst mistaking this quarter for infinity and beyond. Another interesting exercise is look over the recently published list of the Fortune 1000 and see who ranks where by revenue, profit and return. You'll have to do some eyeball work as the story behind the ranking won't just jump out but a couple of themes emerge. One of course is energy and hot commodities. Another is folks who've been franchises and moats, e.g. WMT and MSFT, who continue to enjoy the fruits of the legacy for now. But you'll also find some of our exemplars moving up those ranks as well. The other thing you'll notice is that ten years it was all about "technology" per se. Now it's about changing the way you do business, bring products to market and is beginning to appear across leaders in all industries.

There's a lot of confusion about innovation, especially as distinct from invention and raw R&D. We define Innovation as the ability to create new products, services and business models that deliver value to the customer profitably. And sustain that over a period of time. Enterprises that can do this are rare but they are the ones who'll do more than merely prosper in the coming storms. And notice some of the subtleties. Innovation is not number of patents, % of revenue spent on R&D or any of those similar metrics. Heck, by those measurements Ford is an innovative company. But what has it to show for it ? Or the Auto Industry in general.

We were happy to hear Mr. Lafley not only has a similar view but is very eloquent both on how hard it is and how important. But also on how becoming an innovative company requires a fundamental change in every aspect of the company. In other words this is NOT about what happens in the lab but the ability to look at the market, develop new products, make them and then delivery them. And then repeat.

After the break we'll share some of the conceptual framework we've developed over the last several years for what's required, what the typical problems are and what an integrated approach to innovation should look like. At the end of the day this matters to investors, stakeholders, employees and any other related party because the closer a company gets to these "Should-Be" ideals the more likely it'll be on the list in another ten years, or 20...or 30 or....well you pick your horizon. One warning note - right now US companies have something of an advantage in this business "software" but our friends in China, India and elsewhere know that and are taking steps to improve their own capabilities. 

Product Development As-Is

The problem with most organizations is that innovation is viewed as an isolated, stove-piped process which occurs, to the extent it does, within the confines of the R&D organization. Which is itself isolated from marketplace and customer realities and disconnected from the downstream activities that turn bright idea into invention into profitable innovation. The picture of things as they are looks something like the chart at right. All to often the way products are improved or created starts with a "bright" idea (or just history for that matter) which is thrown over the wall to Design and Development. The result is then forced thru a manufacturing (make) and packaging process and then Marketing puts lipstick on the pig while Sales is handed the fun task of forcing it down the throats of the customers. In those few sentences we've just summarized, for example, the typical process in the Auto Industry. Which, sadly as some of the earlier readings,e.g. the story of the Taurus, show that they in fact know better. But don't do it on a sustainable basis.

The Capabilities vs Knowledge Gap

The primary reason is that companies tend to focus on what they've done, if for no other reason than it's what they know, have the current capabilities (here labeled technology) that've built up over years and decades, it's what they've always done and, worst, have interests inside the company who're invested in continuing to do things as they've always been done. Most of the bad performers on our previous lists suffer from this Customer Requirements vs Inherited Capabilities Gap. Whether it's software companies building applications that don't meet customer needs, auto companies building cars that no one wants to buy or pharmaceutical companies making yet one more variation on old, tired drugs the inability to match marketspace value to capacities is the most fundamental barrier to Innovation. We'd even go so far as to argue that this describes the content generation processes (WRFest (Telemediatainment): The Content Who Would Be King) of the media and entertainment industries. Compare Disney and Pixar for example to the last bunch of multi-$M bombs :) !

The Three Gaps

That fundamental gap is composed of three major breakdowns. The first and most fundamental breakdown usually lies in a lack of understanding of how customers actually function. That is a lack of understanding of how their businesses work in commercial and industrial sector or how customers live their lives in consumer sectors. So the first thing to repair is the focus on internally generated ideas with learning those things. In other words replacing "not-invented-here" with "how it works really". Related to that is the Marketing gap where most enterprises go to market with the story they want to tell rather than the story that explains how they'll benefit their customers. This btw is a great index that any outside observer can use to judge how truly customer focused any company that claims to be innovative is. Do they truly understand and talk to their customers the way those customers would like to be talked to ? The twin of the breakdown in Marketing is a parallel breakdown in Sales where yet another salesman shows up to talk about the latest brochureware. As a friend of mine said, "no matter how busy I am any salesman who's there to talk about solving my problems will get time. But most of them are there to sell me another pig in the poke where I have to figure out what it's worth". Successfully innovative companies sell (and service and support) to their customers value propositions.

How It Should/Could Work

The chart at right shows how Innovation should work if it's done right. Here what you see is an integrated, closed-loop and end-to-end view on Innovation. Which strangely looks more than a bit like what Mr. Lafley discusses in his interview. It starts with analyzing the markets and customers, translating that into a deep description of the real needs and characteristics of those customers and then turning those into high level product designs. That's then passed on to operations in an integrated, not throw it over the wall fashion, where manufacturing and delivery requirements are incorporated at the earliest design stages. Not as after-thoughts. In other words innovation involves putting all the relevant disciplines onto the same team and operating concurrently, with feedback and feed forward. Not as one isolated stovepipe after the other. Again something Lafley emphasizes strongly.

Finally, with this deep understanding of the customer, the entire Go-to-Market and Service/Support operations inherit a basic of customer value propositions. The other thing that happens is that each stage is used as an information gathering and feedback mechanism to make sure that innovation is continuous and adaptive. Finally, as Lafley continuously emphasizes, you have to organize around these sorts of processes.

Companies that put these sorts of innovation capabilities in place, invest in them and maintain them will be the ones who will establish long-term survivability and prosperity. These are the ones you want to invest in or work for or work with. Good luck.

Previous Posts

Performance Assessment Basics: Five Fundamental Factors

Business Performance II (Readings): Performance, Pain and Prospects

Business Performance III(Readings): Sad Stories, Good Stories & "Fixes"

Posted by dblwyo at 03:56 PM | Permalink | Comments (0)

When a big....big...big storm is moving thru it's often preceded by smaller storms that make people think they've seen the worst, particularly because there's often a pause.. Well we're in such a pause now between the gust fronts in the financial markets  that scared everybody and the real economic storm that you can hear growling over the horizon. Now if you've been reading along on this blog any time at all you'll know that this has been our position for months, many months in fact. Just as a sidebar we'd like to re-draw your attention to two category archives. In the Key Posts are priors that we think put up a sustainable piece of machinery or analysis that we find ourselves referring to over and over again. Any time you're looking for something here on Minsky moments, credit markets, business cycle structure, etc. you might check there first. Supplementing that is the sub-category of Key Post Tables which has a limited number of tables pointing to all the critical posts in a particular area, e.g. Economy, Market Analysis, usw. structured in a logical order with some annotations. Consider it our "guidebook" if you will. It turns out there's quite a bit of accumulated machinery that's been published and once we found ourselves loosing track well... Anyway the point being that you can search out all the gust front analysis there if you like.

After the break are this week's economic readings, which we won't review in detail, but leave to your skimming. Instead we'll point you to the bookends - the the first two excepts plus some vidclips on CNBC and the last four in a sub-section on Commentators. The first two pieces are a FT column by Mohammed El-Arrian of PIMCO in which he says shortly, eloquently and directly what we've been putting so much more crudely. All we've done is survive the breakdown in the credit markets and freed up the machinery for a normal cyclic downturn. A downturn in which we are in the very early stages of. BtW - if you read the very extensive posting on the state of the Finance Industry the bottomline there is that as the economy weakens a whole new wave of writedowns and loan losses is about to go ripping thru their balance sheets. All this capital raising they've done merely patches the damage from their own self-inflicted and occasionally fatal wounds. Think about it.

The second starter post we'll call out is Immelt's assessment of where we're at in which he argues, now like others, that this is going to get a lot worse. Now we happen to think that Immelt has done a magnificent job of re-structuring and re-positioning GE, as we've made clear. You might note that Warren Buffett shares our opinion, calling him one of the best CEO's in America. Which makes the clip all the sadder because it's clear that Jeff and GE, who appeared on Rose last summer with a fairly sanguine outlook which they repeated in their Q4 investor presentations and outlook. The sad part - there's nothing going on now that we and others didn't see thru the use of simple, readily understandable tools. In other words Immelt & GE, like a lot of other CEO's and therefore investment analysts, tends to be looking at the economy he sees now on the surface. Not at the deeper currents that are perceivable thru a bigger toolkit. He's likely learned that lesson but he's also likely to be in the vast minority. On how and why this works you might want to re-skim last weekend's reflective postsing in the Enterprise Performance archive that talk about earnings, analysts and performance. 

The ending bookend are four commentators observations that begin with the standard view of it's likely over and work their way thru to why it's not and what's next. Needless to say we want to make sure you understand that the first of the four is there for contrast and the last three for substance. But between them they capture the Yin to the Yang.

Now we'll also admit that reading El-Arrian's column actually made us sad. Our comments may sound a little schadenfreudish but aren't so intended. Rather we're reviewing priors to make our case that if we, who're not professionals and don't get paid for this and use simple tools then the guys who in fact make their livings or control many $Bs of companies and many Ks of jobs and lives certainly ought to be doing better than this. On a final note we've posted links to five CNBC videos which taken all together will take you less than an hour to watch. We've finally figured out CNBC - watch the talking heads for amusement and the occasional insight or bon mot but understand their book, i.e. their biases. Pay real attention to folks like CEOs or hard-nosed observers like Wilbur Ross who really have something to say. In this case we've never seen a more steller cast. The co-host was Joe Stiglitz, they had another Nobel prize winner as a guest (Bob Engle) and Bob Hormats from G-S also co-hosting. Their guests also included El-Arrian, Roubini et.al.

IF YOU TAKE AWAY NOTHING ELSE AND DO NOTHING ELSE WATCH THOSE VIDEOS ! TAKE NOTES !! AND THINK ABOUT IT !!! PLEASE 4! :) 

Economy

Why this crisis is still far from finished During the past few weeks we have seen a growing number of market participants predict an end to the dislocations that erupted last summer and claimed victims throughout the financial system and beyond. While their predictions are understandable, they are premature. The dynamics driving the disruptions are morphing and may again move ahead of both the market and policy responses. The optimistic view is based on two distinct elements. First, that the de­leveraging process is reaching its natural end as valuations stabilise and institutions come clean about their losses and raise capital; second, that a series of previously unthinkable policy responses have been effective in restoring liquidity to the financial system. Yet, consistent with what we have seen since last summer, the dislocations are entering a new phase. As such, bold reactions on the part of policymakers may, once again, prove to be too little and too late. Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption. During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system. Economic data in the US have taken a notable turn for the worse. Most im­portantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses. While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks. It is thus too early to declare the end of the turmoil that started last summer. Instead, during the next few months we may witness a new phase of dislocations, led this time by the real economy.

Housing's great depression - GE's Immelt General Electric CEO Jeff Immelt said the U.S. economy is in the worst condition since the burst of the dot-com bubble and that housing hasn't been in such dire straits since the Great Depression. Less than two weeks after the conglomerate shocked investors with a profit warning and revealed that its first-quarter earnings had unexpectedly fallen 6%, Jeff Immelt said things could get worse for the U.S. economy. Immelt told shareholders at the company's annual meeting that because of current conditions, GE will increase its planned cost cutting from $2 billion to $3 billion. Many investors felt broadsided because GE said as recently as March that the company would see profit and revenue growth of 10% in 2008. The company now projects earnings to be 5% or less. Immelt said GE executives are making changes in the company's operations and planning, including more internal forecasts, with Immelt reviewing the reports weekly. "In the last five or six years, I've sold $50 or $60 billion of business," he told reporters Wednesday. "I've acquired $70 or $80 billion of business. This has probably been the most active portfolio change in the history of the company and it would be hard to find another industrial company that's done anything close to what we've done." Under Immelt, GE sold off the company's plastics and insurance businesses and has been increasing its market share in emerging markets, such as Asia and Latin America.

Recession threat rising - economists The odds the country will fall into its first recession since 2001 are rising sharply. Thirty percent of economists now believe the economy will shrink in the first half of this year, up from 10% who thought this in January, according to a survey being released Monday by the National Association for Business Economics, known by its acronym NABE. Under one rough rule, if the economy contracts for six straight months it would be considered in a recession. Many economist and the public believe we are in one. Even Federal Reserve Chairman Ben Bernanke recently acknowledged, for the first time, that a recession is possible. Forecasters "were notably downbeat about their own companies and the overall economy," Simonson said. The majority of forecasters polled - 51% - thought the economic growth during the first half of this year would clock in between zero and 1%, which would still mark a feeble showing. Sixteen percent pegged growth in the first half at between 1 and 2%, while only three percent put it at between 2 and 3%. No forecaster believed growth during this period would exceed 3%. The economy nearly stalled in the last three months of 2007, growing at a pace of just 0.6%. Many analysts say the economy's normal growth rate should be just over 3%.

• Target Credit Card Net Charge-Offs Rise to 8.1% Annual Rate

UPS, FedEx Shipping Decline Signals No Significant Rebound From Recession Falling shipments at United Parcel Service Inc. and FedEx Corp., which together deliver 80 percent of packages in the U.S., show the economy is in a recession and unlikely to rebound this year. UPS, whose domestic volume has outperformed the gross domestic product for almost a century until last year, said April 8 that deliveries dropped in the first quarter. UPS also said earnings for the three months through March will miss its previous projection by as much as 7.4 percent, just the third time the Atlanta-based company has made a new forecast that was below an earlier one. FedEx's U.S. shipments dropped 2 percent last quarter, and the company said last month it would have ``limited earnings growth'' this year because of the slowing economy. Both companies are also struggling with soaring jet-fuel, gasoline and diesel costs after crude oil surged 80 percent in the past year.

Many states appear to be in recession as deficits grow Many states appear to be in recession; tax revenue is dropping and deficits are growing. The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that's true for the nation as a whole, a survey of all 50 state fiscal directors concludes.The situation looks even worse for the fiscal year that begins July 1 in most states. "Whether or not the national economy is in recession -- a subject of ongoing debate -- is almost beside the point for some states," said the report to be released Friday by the National Conference of State Legislatures. The weakening economy is hitting tax revenue in a number of ways: People's discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house. The situation is grim in Delaware, with a $69 million gap this year, and bleak in California, with a projected $16 billion budget shortfall over the next two years, the report said. Florida does not expect a rapid turnaround in revenue because of the prolonged real estate slump there. By mid-April, 16 states and Puerto Rico were reporting shortfalls in their current budgets as the revenue those budgets were built on -- typically, taxes -- fell short of estimates. That's double the number of states reporting a deficit six months ago. The NCSL said the news is even worse for the upcoming fiscal year, with 23 states and Puerto Rico already reporting budget shortfalls totaling $26 billion. More than two-thirds of states said they are concerned about next year's budgets.

Housing

Existing Home Sales Fall as Housing Slump Continues Sales of existing homes fell in March, the seventh drop in the past eight months, as the spring sales season got off to a rocky start. The median price of a home was down compared with a year ago, and some economists predicted home prices could keep falling for many more months given all of the troubles weighing on housing, from a severe credit crunch to a rising tide of foreclosures. The National Association of Realtors reported Tuesday that sales of existing single-family homes and condominiums dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units. The median price of a home sold last month was $200,700, a decline of 7.7 percent from a year ago and the seventh consecutive year-over-year price drop. It was also the second biggest decline following a record 8.4 percent drop in February. These records go back to 1999. Patrick Newport, an economist with Global Insight, said he believed existing home sales would keep declining for another six months with home prices falling well into 2009 given all the headwinds facing the housing market from tight credit to rising job losses and sinking consumer sentiment.

• From CalculatedRisk: March Existing Home Sales, More on March Existing Home Inventory, DataQuick: California Foreclosure Activity Up Sharply in Q1, More on March New Home Sales,

• Why Haven't Existing Home Sales Fallen Further? Clearly new home sales have fallen faster than existing home sales. Based on various reports, it appears new home builders cut their prices quicker than most existing home sellers. So why have new home sales fallen faster than existing home sales? There could be a number of possible explanations:… Whatever the reason - and I'm always a little skeptical of the NAR's numbers - existing home sales are still above the normal range. The second graph shows annual existing home sales and year end inventory. As the NAR recently noted 2007 was the fifth highest sales year on record. If the red columns (inventory) is as high as the blue column (sales) - something I expect to happen this summer - then the "months of supply" number will be 12. The third graph shows the annual sales and year end inventory since 1982 (sales since 1969), normalized by the number of owner occupied units. This graph shows that inventory is at an all time record level by this key measure. This also shows the annual variability in the turnover of existing homes, with a median of 6% of owner occupied units selling per year. Currently 6% of owner occupied units would be about 4.6 million existing home sales per year. This indicates that the turnover of existing homes - March sales were at a 4.93 million Seasonally Adjusted Annual Rate (SAAR) - is still above the historical median. This suggests that sales of existing homes could fall significantly more in 2008.

Yale’s Shiller: U.S. Housing Slump May Exceed Great Depression Yale University economist Robert Shiller, pioneer of Standard & Poor’s/Case-Shiller home-price index, said there’s a good chance housing prices will fall further than the 30% drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15% since their peak in 2006, he said. “I think there is a scenario that they could be down substantially more,” Mr. Shiller said during a speech at the New Haven Lawn Club. Mr. Shiller, who admitted he has a reputation for being bearish, said real estate cycles typically take years to correct. Home prices rose about 85% from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Mr. Shiller said. “Basically we’re in uncharted territory,” he said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.” Many people became convinced that housing prices would increase 10% annually, a notion Mr. Shiller called crazy.

No help for 70% of subprime borrowers Seven out of 10 seriously delinquent subprime mortgage borrowers are still not getting the help they need to keep their homes, according to a report released Tuesday by state officials working to stem the foreclosure crisis. "We're still way behind," said Iowa Attorney General Tom Miller, who helped form the State Foreclosure Prevention Working Group, a coalition formed last year by 11 state attorneys general and bank regulators.The coalition is working with lenders and companies that service mortgages to try to keep people from losing their homes. It drew its statistics from 13 of the 20 major servicer companies, which handle about 58% of all subprime loans.More than 1 million of those loans, or nearly 25% of the total, were delinquent as of Jan. 31. And foreclosure proceedings have begun on 300,000 of them - an 8% increase since October.

•  State FC Prevention Working Group Report The State Foreclosure Prevention Working Group released its second report on loss mitigation efforts yesterday, and frankly it is just as disappointing as the first one. I see our colleage PJ at Housing Wire has already blown his stack over it. Allow me to pile on; someone has to. The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.
• Credit Suisse Forecast: 6.5 million Foreclosures by 2012

Commetators

Why the sky isn't falling on Wall Street Are we at the start of a deep recession and a crushing decline in stock prices? And however serious the problems, how can you best protect your investments? I'd argue that if you apply a little long-term thinking to the worries that are keeping you up at night, you may well conclude that the outlook for your portfolio isn't so bad - and in fact, that it may even be mildly encouraging. Bear markets that are set off by a shock can be severe. The Great Depression of the 1930s, the stagflation caused by the oil crisis in the 1970s and the real estate bust in Japan in the 1990s all crushed stock returns for years. Other gloomy forecasters take more measured positions, but many still believe that the decline in housing prices is at best half over. They expect that stocks will suffer another significant decline and that any near-term rebound in prices will prove only a temporary respite. I'm inclined to agree that the outlook for the economy is more encouraging than most investors seem to think. For one thing, it appears likely that most of the damage has been done and that stock prices today reflect what are now widely recognized problems. Moreover, while you can find similarities between the three big shocks of the past 80 years and today's situation, none really matches present circumstances. As for how big a decline might be, past bear markets have split into two categories: those in which blue chips drop by an average of 22% and much bigger declines in which the drop averages 39%. The S&P 500 has been down as much as 18% from its October high, so I don't expect much more downside. That said, my optimistic outlook for stocks does rest on two reasonable, though by no means surefire, assumptions.

Comments on Roubini Interview Yesterday I posted three videos of an interview with Professor Nouriel Roubini on Canadian TV. Professor Roubini believes the U.S. is currently in a recession, and that the recession will be deep and long - "the most severe recession and financial crisis that the US has experienced for decades" - lasting 12 to 18 months. I agree that the economy is probably already in a recession, but I think Roubini may be too pessimistic. My view is the recession will be less than severe (with unemployment peaking at less than 8%), although I agree the effects - especially related to employment - will probably linger for some time. Let me point out a few points in the interview where I believe Roubini is too pessimistic…Roubini: "The worst is ahead of us"

What Do They Know That We Don’t? The stock market is up but the economy is down. Why? The customary explanation: The economy in general, and corporate earnings in particular, are set to rebound in the second half of this year because the good news - in the form of falling interest rates, tax rebates and surging exports – will more than offset the bad news – in the form of weak housing and rising gasoline prices. Maybe so, but today’s Wall Street Journal entitled “Firms ‘Notably Downbeat’ on Economy,” provides reason for doubt: “U.S. companies, burdened by worries about slow sales and tighter credit, have turned pessimistic, a new survey shows… “Companies in several industries, including manufacturing, telecommunications, finance, and retailing, reported falling profit margins and slumping demand for their products during the first three months of 2008, according to a quarterly survey by the National Association for Business Economics…… So much for the experts. What do ordinary folks think? The chart below measures the Conference Board’s survey of consumers’ confidence in the economy. You can see the last entry in the chart was about 90. Now update it with the most recent reading: 64.5 in March. That’s just about where the economy was at the bottom of the last downturn when our invasion of Iraq began. If it slips below 60, we’re in real bad news. Makes you kind of wonder what the stock-market optimists know that no one else knows.

As loans dry up, so will economy Those who say that the worst banking news is already out are more wishful than watchful. Take a look at what happens when businesses can't borrow what they need. Credit is the fuel of industry, and it is a vanishing resource despite a campaign of unprecedented swiftness by the Federal Reserve to slash short-term interest rates. As it disappears from the landscape, so, too, will hopes of a broad, lasting recovery. This is a relatively new phenomenon in America, which is why it is so hard to comprehend. Few investors have seen the effects of constricted credit, as banks until now adeptly summoned, bottled, distributed and marketed it. Credit has been like an aquifer that businesses figured they could depend on to be there when they needed it -- maybe more expensive at some times than others, but always available. Yet banks' egregious greed and misdeeds of the past few years have made credit dry up, and so they're keeping what they can get to themselves. The banks seem to be under the impression that hoarding capital to shore up their balance sheets will return them to health, but my sources believe they are badly mistaken. By refusing to lend to businesses as they did before the advent of exotic and expensive derivatives, they risk killing their own business as well. If this is true, as I suspect, then banks' recent mild recovery will be short-lived, and investors should continue to avoid them. The central problem… is that banks have entered a time of secular, not cyclical, change that will keep them from regaining their place atop the food chain for the next few years. It's this shutdown of the securitization market that is showing up now on banks' balance sheets as a big smokin' hole. Despite many bank executives' wishful comments to the media over the past few weeks that "the worst is behind" them, the business that supported million-dollar salaries to 25-year-old bankers fresh out of graduate school is dead.

Posted by dblwyo at 04:58 PM | Permalink | Comments (0)

With network convergence, the shift of consumer electronics from analog to digital technology and new tools for content generation and management we're seeing a major evolutionary event emerge in front of our eyes. And are participants willy-nilly. But are we knowledgeable ones ? Gaining ground on that is helped a bit by framing the changes. What we're seeing is the Telecom industry going thru network and service changes, and increased overlap with Media and Entertainment, shifts in Consumer Electronics and the growing force of things like games in the later. In my mind that leads to the re-labeling of the new industries as Telemedia and Entertronics. The individual components will remain by thes new hybrids are also forming. And at the end of the day it'll be all about the content - who creates it, how it's packaged, who distributes it, over what kind of networks and where/what/when it's delivered.

In case you haven't noticed in the last 18 months we've seen ginormous changes in the way content is presented on the Web. People talked about Web 2.0 which was really just extensions and developments on the capabilities of the existing capabilities into social networking, collaboration, etc. IOHO what we're seeing now is something truly deep - a fundamental re-think of how content is presented. Which is accompanied by a change in who the players are. It started with Iger taking over Disney and striking up a deal with Apple for content distribution - thereby becoming the first major media player to seriously embrace the web and begin the landslide beyond small-scale participants. The other big change, which we first really noticed about two years ago, was that content generators were beginning to really re-think presentation instead of just adapting the formats and thought processes inherited from prior generations. Now things are much more inter-active, non-linear, multiply connected and wide open. And we're seeing it just in the last couple of months. The first example was Amazon's re-think, the WSJ has done some really good stuff over the last year or so but now it's spreading like wildfire. And a great example is Hulu. 

All of a sudden a huge wealth of old and new content is readily available on-line in a decent intercface with more coming.Now personally I think some of it needs to be worked on, more is needed and they've already exceeded the limits of managing the sortation and searching. In other words they need a much better content architecture and information management capability. But when you look at the quality of the material, as opposed to say one more YouTube amateur nightmare, content quality matters. And when you've said that you've said it's about the people, skills, money, networks, resources and management capacities to create, build and distribute content. This is the REVOLUTION folks. Just in the last month I've been able to re-discover Dougie Howser, Babylon 5 and Studio 60 (Fair Disclosure: my TV went away a couple of years ago and I've been online for things like Rose, etc. for that long). Here's one my favorite S60 episodes which proves the point. Sadly the show went into a nosedive after the creator moved away from exploring deep and great issues and started writing to his personal troubles. But while he was on a roll he was looking at US culture, what it takes to run a creative business, Corporate America, the wasteland of TV all inter-woven with personal stories. It could have done for culture and the corporate world. Sorry about the sidebar. Now wait - that is the point. It's all about the content !

Now it's going to be about the Value Chain the emerges and evolves for the Telemediatainment Sector(s). Consider the picture at right which shows the ecology of that value chain as it was. To get an idea of how it will be "simply" add more major "Distributors" to the framework. We'll take a deeper dive sometime in the future but the excerpts below should be looked at in this context. The Telecom industry faces huge demands for bandwidth and shifts in types of service, which'll impact the Equipment providers. Major Web 1.0 content providers (Google, Yahoo, Amazon, AOL) are showing widely varying ranges of adaptability and innovation to old challenges and new ones. Yahoo in