bizzXceleration: Performance, Value and Profit

It's time to play another broken record or three on the international economy. Can we get away with putting the "de-coupled" meme to bad, (oops) we meant bed, and moving on and beyond "yeah, right !". It turns out as the US slows so does the rest of the developed world and then the developing world. NOW...beyond normal cyclic behavior and linkages all the foreign economies have a collection of their own problems which are enormously worse than ours. Not least of which is Inflation brought about by exponentiating oil and commodity prices. And the Dragon and the Elephant are biting their own tails. Besides which Inflation in these areas are much worse for them given the impact on the typical consumer's marketbasket. After the break you can find various headlines and exhibits that even on a quick skim will support most of these arguments. Perhaps the one you should pay attention to is the Bank for Int'l Settlements (the central bankers central banker) who just today said the international economy is near a major tipping point. Which Kenneth Rogoff points out means that the risks to sovereign wealth is in growing and potentially serious jeapordy ! Whee, watch out below. The third article that represents a game-changer is the recent WSJ portrait of two senior Saudi oil players who are the exemplars of the emerging "Peak Oil" vs "Tech Will Fix" schools of future planning. This could be really important.

But just to put some context on all this we indulged our penchants for actually looking at the data and then building a nifty little multi-part composite chart. And, as usual and something we kicked ourselves for not digging into earlier, it turns out that de-constructing the standard mythologies reveals some very interesting things indeed. In the top you see int'l trade growing as part of the economy but not really taking off until the '90s. Beyond globalization though notice that while trade was more and more important the trade deficit didn't really take off until around '98. The mid-chart shows the mix of Imports and notice that despite mythologies to the contrary Oil is not the thing that's really killing us. When you look at the Import/Export Balance by those same groups the picture gets even more interesting. It turns out that, except for Autos, the US is still a major manufacturing powerhouse with significant trade and exports in both Industrial and Capital Goods. On the other hand Autos are as big a "problem" as Oil ! Imagine that !! And the real problem is Consumer Goods imports.

Now there's a lot hiding in the background about how trade works that deserves some future discussion but let me share the classic accounting identity from Macroeconomic Theory. Note: this is neither a theory but follows from the basic definition of the national income accounts; i.e. it's not open for debate. AND the data support it as well. That little equation ? Savings-Investment = Net Imports. When we save less than we spend we end up importing more than we export for one thing. And for another we end up having to borrow the money for investment and spending. That seems to be jive pretty well with the charts...at least IOHO ! 

Big Picture

BIS: Economy Nears 'Tipping Point' (WSJ) The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said. In its annual report, the central bank for central banks said the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control." "Over time, this could potentially even lead to deflation," it said. For central bankers from around the world gathered in Basel for the BIS annual meeting Sunday and Monday, the report made for chastening reading. Not only does it highlight the difficulty of the dilemma facing central banks confronted with slowing growth at a time when inflationary pressures are rising, it also lays much of the blame for their predicament at the feet of the central banks themselves. The BIS said that in the early part of this decade, central banks had failed to set interest rates high enough to restrain an unsustainable credit boom. It added that if a repeat of the current financial crisis is to be avoided in the future, central banks must be prepared to keep interest rates high even when there are no obvious signs that inflation rates are about to pick up. It also suggested that regulators make banks set aside more capital during boom times -- an approach that could curb their risk-taking and lessen their need to pull back on lending during busts.

Weak economic reports hurt yen and euro against dollar (WSJ) The dollar rose against the yen and euro Monday after disappointing economic reports in the euro zone and Japan transferred investor concerns to economies outside the U.S. The euro tumbled against other major currencies after the widely watched Ifo survey showed that business sentiment had fallen to 101.3 in June from 103.5 in May, well below forecasts. A weak euro-zone Manufacturing Purchasing Managers Index extended the euro's decline. It showed activity in the euro-zone economy fell to its weakest level in five years during June. In a Japanese survey, large companies were more pessimistic about business conditions in the April-June quarter than they were during the previous quarter.

Watch Out for Sovereign Debt Risk Optimists say that emerging-market defaults are a thing of the past. Emerging markets today, the argument goes, are relying more on domestically issued local currency debt, both inflation-indexed and non-indexed. This means their debts are far more stable and reliable than in the recent past, when a much larger share of government debt was issued externally and denominated in hard currency. This argument is wrong. In the past, the combination of high levels of domestic debt and inflation surges has often proven deadly for both foreign and domestic investors. Just look at Argentina today, a country not nearly as prosperous as its abundant natural resources would warrant. If external debt holders think that abuse of domestic debt holders is no cause for alarm, they should think again. Governments do not usually cheat holders of only one type of debt. In April, we published a National Bureau of Economic Research paper based on centuries of debt data from many countries. We found that most countries default on external debt only a bit less freely than on domestic debt. That is, contrary to popular belief, domestic debt holders are not necessarily a cushion for "senior claimants" holding externally issued debt. Emerging markets could be in much greater trouble than the optimistic consensus suggests. If today's tepid growth in the U.S., Japan and Europe begins to take hold in emerging markets, Argentina's miserable indexed bond holders may soon have company.

How to see world economy through two crises [Chart] Two storms are buffeting the world economy: an inflationary commodity-price storm and a deflationary financial one. Last week I argued that exchange-rate regimes were a link between these distinct events. This week, let us look at how to sail on these storm-tossed seas. The place to start is with the world economy as a unit. The more globalised economies become, the more appropriate it is to think of the world economy in this way. So what have we learnt about the world economy as a whole? The answer is that it is running into limits on resources, at least in the short term. Our civilisation is based on fossil fuel. But since the end of 2001, the real price of oil has risen some six-fold. Today, the real price is higher than since the beginning of the previous century. Against this difficult background, what are the right responses and how should they be distributed, across the globe? These need to be divided into the short term and the longer term. In the short term, the biggest monetary policy requirement is a tightening in emerging economies, many of which now have strongly negative real interest rates. A precondition for such a tightening is a relaxation of exchange rate targeting. Monetary tightening is less obviously necessary in high-income countries, though the US Federal Reserve may have cut too far. As important is letting the jumps in energy prices pass through, so forcing the needed adjustments in energy use. The beneficiaries of the subsidies offered by many emerging countries are overwhelmingly in upper-income groups. In the medium to long term, the biggest priority is to release energy constraints on growth. This means increased public and private investment in energy research, particularly in renewables. The challenge is huge, but must be met. The shocks are large. But the more significant one is the high price of energy. The financial crisis was an avoidable stupidity. Rising prices of energy are a bitter reality. The world must adjust to this unpleasant new threat. How imbalances led to credit crunch and inflation

Regions & Countries

Euro Zone Business Activity Falls Business activity in the euro zone contracted for the first time in five years, according to a closely watched business survey, as high oil prices, a strong currency and the threat of rising interest rates take their toll. Business activity in the euro zone contracted for the first time in five years, according to a closely watched business survey released Monday, as high oil prices, a strong currency and the threat of rising interest rates take their toll. The unexpectedly sharp drop in the euro zone's Purchasing Managers Index and a decline in Germany's Ifo Index of business confidence, also released Monday, suggest the global economic slowdown is now seriously affecting the 15-nation euro zone. That will complicate the European Central Bank's job of reining in inflation, economists say. A sharp fall in French business activity contributed particularly to the drop in the index. Even in Germany, Europe's largest economy, the survey suggested recent economic strength is fading. The euro zone's other main economies, Italy and Spain, are already experiencing pronounced economic downturns. The German Ifo Index fell by more than expected to 101.3 in June from 103.5 in May, hitting its lowest level since December 2005. German companies told Ifo, a Munich-based economics institute, they expect business conditions to deteriorate in the coming six months. Soaring oil prices are increasingly hurting the German economy, said Ifo President Hans-Werner Sinn. Germany's key manufacturing industries expect their export business to slow in coming months but not to collapse despite the high euro, he said. The euro-zone economy had until recently proved remarkably healthy in the face of slowing U.S. growth, financial-market turbulence, high energy prices and the euro's strength. That resilience appears to be fading.

• Contraction Possible in Germany (WSJ) German consumer sentiment worsened, a survey showed, while the government warned that the economy could stagnate or even contract this summer.
• U.K. Economic Growth Revised Down to 0.3% as Services Slump to 12-Year Low
• Europe Business, Consumer Sentiment Drops to 3-Year Low; Retail Sales Fall
• French First-Quarter GDP Growth Revised Down to 0.5% as Spending Stagnates

Harvard, Buffett Have Bad News for Asia Bulls: William Pesek There's much relief that Asia is holding its ground as the U.S. economy slows and credit-market woes humble Wall Street's biggest names. While asset markets are heading lower from Tokyo to Jakarta and Shanghai to Mumbai, healthy economic growth has confounded the pessimists -- so far. The knock-on effects are coming, just more stealthily than many expect. Asia is unlikely to get off easy even if the U.S. skirts a recession. The region hasn't decoupled from America as much as some would say. The worst-case scenario -- a prolonged U.S. decline -- could be devastating, particularly at a time when record oil and food prices are hurting Asian households. Billionaire investor Warren Buffett laid it out in a June 25 Bloomberg interview. He's unsure when the U.S. will recover. The idea that Asia will continue to display an impressive immunity to U.S. events ignores how dependent China is on the American economy. It also ignores how reliant Asia is on China's 10 percent growth. Slowing U.S. demand will chip away at that country's export-driven expansion exponentially.

China's Exports Threatened by Rising Costs These pressures are felt by enterprises across China. But none have been hit harder than the companies that feed the vast global appetite for inexpensive goods such as toys, household goods, shoes and clothes. Manufacturers of low-cost products have been a key engine of China's economic miracle, helping to turn the country into the world's No. 2 exporter after Germany. For years, these companies continued to grow by expanding their volumes and trimming margins to undercut the competition. As material and labor costs rise and China's currency strengthens, these manufacturers are among the least able to absorb the costs. The transformation is most apparent in the boomtowns that tied their fortunes to making one product cheaply, from Guangdong province in the south to Honghe's environs in the Yangtze River Delta. Many of these manufacturing centers have seen hundreds if not thousands of factories and workshops close in recent months, industry executives say. In Shengzhou, a city near Shanghai that claims to make one-third of the world's neckties, manufacturers are trying to hold a united front to boost prices. Dongguan, in Guangdong, is seeing makers of toys, shoes and brushes close shop. While painful, such difficulties could usher in a more mature phase of China's economic development. The country's sweater industry, like many others, is arguably overbuilt: Honghe is one of at least six Chinese cities claiming to produce more than 100 million sweaters annually. In such low-cost sectors, analysts predict a coming wave of consolidation that could boost efficiency. They say companies will also be forced to innovate so they can compete on factors other than price.Many Chinese economists and officials think the country has relied too much on cost-cutting and simple production models to boost exports.

India Steps Up Inflation Fight (WSJ) India's central bank raised its key rate a half point to 8.5% and increased banks' reserve ratio, in further moves to curb accelerating inflation. India's central bank raised its key short-term interest rate and the amount of cash banks must keep in reserve, employing both its chief inflation-fighting tools after price rises recently reached a 13-year high. The move was the latest in a months-long campaign by the Reserve Bank of India to curb the impact of rising food prices and the government's recent decision to remove some energy subsidies, which increased most fuel prices by about 10%.Wholesale price inflation, the chief benchmark of Indian prices, touched a 13-year high of 11.05% in the week ended June 7, more than double the central bank's comfort level of 5.5% for the year ending March 31, 2009. This time last year, annual inflation stood at 4.28%.

Dubai's $82 billion aerospace gamble Blessed with fewer oil and gas reserves than its neighbors, Dubai has long had to find other ways of making a living. For centuries not much more than a staging post and pearl-diving port along ancient Middle Eastern trading routes, it has most recently reinvented itself as a playground for the super rich, with a focus on extravagant Las Vegas-style real-estate projects such as the world's first seven-star hotel. A history of success at pulling off such grand schemes has emboldened Dubai of late. After diversifying its economy into real estate, tourism and financial services, it's recently turned its attention to the loftier aerospace sector. And why not? For a sheikdom at the crossroads of Europe and Asia, awash in cash and eager to have a say on the global stage, aerospace could be just the ticket, allowing it to parlay its ideal geographic location and rising international profile into an industry that will create jobs and support its economy in the long term. According to consultancy McKinsey, the Gulf economies need to create more than 4 million jobs over the next decade for its citizens. More than 350,000 new jobs could come from the aviation sector by 2015. While a chunk of the industry likes to portray Dubai as a somewhat clueless teenager indiscriminately spending daddy's money on vanity projects, it would be a mistake to dismiss the emirate's plans too hastily. "The level of ambition and the money and willingness to support it is staggering," said David Stewart, head of the European practice of consultancy AeroStrategy.

Issues: Food, Materials, Oil

Yes, We Will Have No Bananas  ONCE you become accustomed to gas at $4 a gallon, brace yourself for the next shocking retail threshold: bananas reaching $1 a pound. At that price, Americans may stop thinking of bananas as a cheap staple, and then a strategy that has served the big banana companies for more than a century — enabling them to turn an exotic, tropical fruit into an everyday favorite — will begin to unravel. The immediate reasons for the price increase are the rising cost of oil and reduced supply caused by floods in Ecuador, the world’s biggest banana exporter. But something larger is going on that will affect prices for years to come.That bananas have long been the cheapest fruit at the grocery store is astonishing. They’re grown thousands of miles away, they must be transported in cooled containers and even then they survive no more than two weeks after they’re cut off the tree. Apples, in contrast, are typically grown within a few hundred miles of the store and keep for months in a basket out in the garage. Yet apples traditionally have cost at least twice as much per pound as bananas. Americans eat as many bananas as apples and oranges combined, which is especially amazing when you consider that not so long ago, bananas were virtually unknown here. They became a staple only after the men who in the late 19th century founded the United Fruit Company (today’s Chiquita) figured out how to get bananas to American tables quickly — by clearing rainforest in Latin America, building railroads and communication networks and inventing refrigeration techniques to control ripening. The banana barons also marketed their product in ways that had never occurred to farmers or grocers before, by offering discount coupons, writing jingles and placing bananas in schoolbooks and on picture postcards. They even hired doctors to convince mothers that bananas were good for children. Once bananas had become widely popular, the companies kept costs low by exercising iron-fisted control over the Latin American countries where the fruit was grown.

Iron Deal to Lift China's Steel Costs (WSJ) Rio Tinto and BHP won an 85% increase in the benchmark price for iron ore after months of negotiating with China's top steelmakers. For Rio Tinto, the deal will boost profits and help it fend off BHP or force BHP to boost its takeover offer. After months of negotiating with China's top steelmakers, miners Rio Tinto PLC and BHP Billiton Ltd. won an 85% increase in the benchmark price for iron ore, a major ingredient of steel, indicating that steel prices world-wide are likely to stay high and fanning further concerns about inflation. The price increase, which tops the amount that Brazilian rival Cia. Vale Do Rio Doce received, is retroactive to April, meaning steelmakers that purchased iron ore from BHP and Rio Tinto will have to write a check for the difference, which is likely to be in the billions of U.S. dollars. The deal was settled between the miners and Baosteel Group Co., China's largest steelmaker, but it generally applies to all steelmakers that buy iron ore from the two. Prices for steel across the globe have been rising dramatically, doubling in some cases, as costs of iron ore, coal and other raw materials have increased. A backlash by steel buyers, especially those in construction materials, is getting stronger. Some countries are increasing export taxes to encourage local cheap steel to stay at home, while other countries, such as Turkey, Italy, India and Russia are staging protests and work stoppages and passing legislation that freezes steel prices.

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As usual many of the headlines got the underlying realities wrong last week and as usual we're going to dissect a couple of the key data sets for your edification and amusement. After the break you'll find several (a large collection) readings on the Economy, the current cycle, key indicators (Oil, Housing, Confidence, State Budgets, Inflation), the multiple divergent reportings on last week's Harvard's annual Housing Study (whew and whee...did the all read the same report...sometimes you wonder) and a last more strategic excerpt on the Oil strategic situation. Skim them all but the first on why this has been an extraordinarily feeble recovery, what the reasons are and what it means for the future is something you need to internalize big time. It is ENTIRELY consistent with things we've been saying for years, all our analysis and everything posted on this blog since its' genesis. And NOT factored into people's thinkings or policies. The two headlines that we consider, beyond that, to be most important are the reports that Consumption surged and that Dow Chemical is raising it's prices...again !

Consumption

 These composite charts almost speak for themselves - rather than surging REAL personal consumption grew 2% YoY, slightly above the 1.9% last month but a) as low as it was during the '01 nadir and b) on a steepening downtrend that begin tipping over in the Fall though c) not (yet) dropping as sharply as it has in past major recessions. As you can see looking back at the patterns to 1980 (which are quarterly). So tell me again about that stimulus package and what great things it's doing for us !

Inflation

Inflation is a whole other kettle of fish and isn't being well-discussed by and large in either the MSM or the blogosphere; though a few commentators, e.g. Larry Summers, are getting it more than right. Core inflation, which is still important, is not taking off. Which means that inflationary pressures per se are NOT getting built into the economy. On the other hand headline inflation for both the CPI and PPI - which is what you see in your bills - is far above a comfort level. Nonetheless the Fed is likely right in that a slowdown and the accompanying demand destruction will likely lower that as well. We'd better hope so because Inflation is largely due to our importing it from abroad via rising commodity prices, particularly oil. Which are having a worse impact on more fragile foreign economies, especially in the developing world where food and fuel are much bigger proportions of the consumption basket. Then again Europe is experiencing more inflationary pressures than we are as well. The problem is that there's not much the Fed can do about this other than struggle to contain it with higher interest rates which have their own dangers. On the Gripping Hand something we've been afraid of for a long-time is coming to pass in that companies can no longer absorb the price increases for materials, supplies and energy and are beginning to pass them along. As you can up until '04 CPI, CPIx and PPI were moving together and largely benignly but then PPI took off in terms of cumulative growth like a rocket. Largely due to Oil. The chickens are coming home to roost but unfortunately they were hatched on the fringes of an atomic test sight and are big, ugly, misshapen mutants who could eat us up. I'd rather watch a bad scifi flick anyday than live thru this one. 

Economy: Big Picture

A Feeble Recovery: The fundamental economic weaknesses of the 2001-07 expansion  Evidence is mounting that the U.S. economy is in a recession. If this is the case, a complete business cycle from 2001 through the end of 2007 (or perhaps the start of 2008) is now on the books, and the economic performance of the current decade can be held up in comparison to that of past business cycles. By almost all measures, the most recent expansion was the worst since WWII. A variety of recent economic data now show a pattern consistent with the start of a recession. Since 1951, three consecutive months of job declines have always been signals of a recession; the U.S. employment rate declined for the first three months of 2008. Furthermore, the unemployment rate rose from 4.4% in March 2007 to 5.1% in March 2008. Economic output also began decelerating in the fourth quarter of 2007 to a 0.6% annual rate, an anemic pace that continued into the first quarter of 2008. Several of the internal indicators in the recent gross domestic product report—including consumption of goods and business investment—saw outright declines. Other monthly indicators—including industrial production and payroll employment—peaked in either the fourth quarter of last year or the first quarter of this year. Real income (less transfers) has been flat since last September. While it will be many months before an "official" recession is declared, evidence shows that the economic expansion that began in 2001 has almost surely ended.¹ Furthermore, if these trends continue, the start of a new recession will likely be dated either at the end of the last quarter of 2007, or at some point during the first quarter of 2008.² Finally, financial market turmoil, housing price declines, and higher energy costs are all likely to place continued downward pressure on the macro economy, thus leading to a longer period of diminished economic activity. Safely assuming that the expansion ended near the start of 2008, we can compare this cycle's performance to those of the past. The bottom line of such a comparison is that the economic performance from 2001 to 2007 was anemic by most measures, especially in regards to the labor market. For the vast majority of American households—that is, those who depend on earnings derived from the labor market for the bulk of their income—the economy has been seriously mismanaged. Rankings Table Graphic By most widely-accepted and honest measures, the most recent economic expansion should receive a failing grade. Measures of total output, investment, consumption, employment, wage and income growth, all rank at or near the bottom when compared with past business cycles.Worse, these anemic results have been accompanied by rising inequality as well, meaning that the bulk of the (historically weak) gains have accrued to a small sliver of the population. This makes the fruits of the current recovery even smaller for the typical working family. For most American families, this has been a fundamentally weak U.S. economy for some time, and it seems poised to get much worse. Now is the time for a new direction in economic policy. Family Income Trends

• Employment Outlook: Where Have All the Jobs Gone ? Fewer jobs were created because companies were more fearful and therefore careful about hiring and capex. There were more fearful because of growing worldwide competition and the impact on profits of inlfation. This represents a fundamental change in the job strenght of the economy. Which leads to the 2nd sub-chart which shows the consequences of the Red Queen Effect - you know running faster and faster to keep up ? Well the population grows about 1.5%/year so any new jobs below that level means a drop in per capita hiring. When you factor in productivity growth the rough rule of thumb is that the economy must create 150K job per month (450K/Qtr) to keep the Queen in place or she falls behind. We've been falling behind. Net new jobs (New Jobs-450K) dropped abruptly and sharply this last quarter, which is scary and dangerous. Over time (here since 1980) you can look at aggregate new job creation, that is the running total of Net new jobs, and see where we stand for the strategic health of the economy and what consumer demand might look like.

Economy: Realities

This Recession, It's Just Beginning So much for that second-half rebound. Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal. It ain't gonna happen. Not this summer. Not this fall. Not even next winter. This thing's going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We're caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of. Only this will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations. In explaining why that second-half rebound never occurred, the Fed and the Treasury and the Wall Street machers will say that nobody could have foreseen $140 a barrel oil. As excuses go, blaming it on an oil shock is a hardy perennial. That's what Jimmy Carter and Fed Chairman Arthur Burns did in the late '70s, and what George H.W. Bush and Alan Greenspan did in the early '90s. Don't believe it. Truth is, there are always price or supply shocks of one sort or another. The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes. The last hope for a second-half rebound began to fade earlier this month when Lehman Brothers reported that it wasn't as immune to the credit-market downturn as it had led everyone to believe. Lehman scrambled to restore confidence by firing two top executives and raising billions in additional capital, but even that wasn't enough to quiet speculation that it could be the next Bear Stearns.

• The Muddled Economic Outlook
• Consumer Confidence Tumbles to 16-Year Low

Professor Duy: "This Is Not Good" Tim Duy has another great post on the Fed being caught between inflation and recession: This Is Not Good. Here is his conclusion: This is a no win situation...which way will the Fed turn? The Fed will hold the current policy in place until policymakers becomes sufficiently distressed by the impact of energy price inflation ... Note that market participants are increasingly aware that the Fed’s default policy for the time being is higher inflation, as evidenced by the rise in 10 year TIPS breakeven levels to 254bp today. In theory, the best outcome is to find is a sweet spot that allows global growth outside of the US to decelerate while avoiding a free fall in the Dollar. In the absence of such equilibrium, the US economy can hobble along only as long as the following three conditions hold:

Oil, Housing,... 

Envisioning a world of $200-a-barrel oil. As forecasters take that possibility more seriously, they describe fundamental shifts in the way we work, where we live and how we spend our free time. Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil. With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to "significant bankruptcies and store closings,"… The fee increases on the ferry would be nothing compared with the added cost of transoceanic shipping if oil goes to $200. Some experts say high energy costs are altering global trade and slowing the pace of globalization. "To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."

Housing Abyss: The Worst Is Ahead The housing crisis is entering a new and frightening stage. On June 24, Standard & Poor's announced that the S&P/Case-Shiller 20-City Home Price Index had fallen more than 15% in April from a year earlier. Adjusted for inflation, the decline is the biggest since 1940-42, according to data collected by Yale University economist Robert Shiller. The risk for the financial system and the economy is that the price drop, already horrifying, will start feeding on itself. When home values fall low enough, hard-pressed homeowners become less able or less willing to keep paying their mortgages. That forces lenders to repossess homes and then dump them back on the market at fire-sale prices, which depresses prices further and leads to even more foreclosures. That process has already started in parts of Arizona, California, Florida, and Nevada.

• New Home Sales: Worst Selling Season Ever There was no Spring this year. This year saw the smallest increase in sales from the Winter doldrums, to the Spring selling season, since the Census Bureau started tracking new home sales in 1963. Usually sales increase in the spring - but not this year. The previous worst spring on record was 1982 - in the midst of a severe recession, with 30 year fixed mortgage rates at 17%, and close to double digit unemployment. In 1982, sales picked up late in the year as interest rates declined sharply (30 year fixed rates fell from 17% to about 13% at the end of the year).

• Has Housing Bottomed? Whether there are opportunities right now in the housing market, with Patrick Newport, Global Insight and Matt Garrison, Coldwell Banker [this vidclip is largely for commodity relief especially when one of the talking heads says he’s expecting New Home Sales go up !]
• Home Prices Fall Record 15.3 Percent: S&P/Case-Shiller, Update: Ratio Median House Price to Median Income (2008 Report), Holy Snikes! New Home Sales Fall 40.3%
• Existing Home Sales: Not Seasonally Adjusted
• Sortable Chart: Case-Shiller Prices in 20 Metro Areas

Americans are REALLY stressed out Never in the last 40 years have your fellow citizens been so worried about their financial condition.  In layman's terms, they are freaked out. The Consumer Confidence index measures two primary questions.  How are you today, and what are your expectations for the future. This chart shows the second question; "What are you expecting?" Lining up your neighbor's expectations to what actually occurred later, has always been the most accurate prediction of what's down the pike for the economy. Since July of last year, this index has plummeted. Americans have gotten more and more worried about how they will pay for gas, how they will deal with falling home prices, how they will pay for food, whose price is rising faster than they've seen in a generation.  All this adds up to changing consumer behavior which has already wreaked the housing sector, is in the process of destroying domestic auto production and is cutting deeply into retailers, recreation providers and airlines.  In the next 12 months at least a million Americans will lose their jobs, and 2-3 million over the next 24 months. How the policy makers at the Fed can take this news in stride is astonishing.  Here's Chairman Ben Bernanke on June 9.  "Indeed, although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. " On June 9th, he knew the above chart was at 47, just barely above the previous all time low of 45 in 1973.  And he knew that unemployment had jumped 1/2 percent higher. Today of course the index drops even lower to 40.9.  To suppose the result won't be a recession on the scale of 1973 or 1980 stretches the imagination. 

State, city layoffs: 45,000 and counting A squeeze on tax revenues could force local leaders to cut tens of thousands of more jobs. That could add to the nation's economic woes. The latest hit to the economy could come from state houses and city halls as state and local governments across the nation find themselves in their worst budget crisis in years due to the economic slowdown. With revenue from sales and income taxes falling and property tax declines looming on the horizon, states, cities and towns have already laid off tens of thousands of government employees and many expect more job cuts ahead. The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year and far more are likely in the months ahead as public officials struggle with trying to balance their budgets. All but four states are set to begin their new fiscal years on July 1, which means that tough decisions will have to be made soon. Economists say that cutbacks in jobs and spending by local governments could be a major drag on the overall economy in the last half of this year. There are 29 states, including California, Florida and Ohio, facing a combined budget shortfall of at least $48 billion in the fiscal year that starts July 1, according to the Center on Budget and Policy Priorities (CBPP), a liberal think tank. The National Association of State Budget Officers estimates that spending by all 50 states will be up 1% in fiscal 2009. But that would be the third lowest increase in the past three decades. There are nearly 20 million state and local government employees in the country. So a 1% decline in employment at cities, towns, schools and states would result in a job loss of almost 200,000 people, a much larger amount than we've seen from battered sectors such as automakers or home builders in the past two years. Even in states, towns and cities not yet laying off people, hiring freezes and early retirement packages are now common, said Robin Prunty, senior director in the public finance department of credit rating agency Standard & Poor's.

Dow Chemical Raises Prices for Second Time in a Month The Dow Chemical Company said Tuesday that it was raising prices for the second time in a month to offset a “relentless rise” in energy costs, a sign that companies may increasingly have to pass on price increases to their customers. The increase of as much as 25 percent — the largest in the company’s history — comes after a 20 percent rise last month that the company said did not go far enough given the continuing surge in energy prices. Dow, which makes products ranging from pesticides to plastic wraps, also said it would impose freight surcharges of $300 for each truck shipment and $600 for each rail shipment beginning Aug. 1 in the United States. In addition, it will scale back production in plants across North America and Europe.

• Dow Chemical Raises Prices Dow Chemical will raise prices by as much as 25% and will implement freight surcharges, with Andrew Liveris, Dow Chemical CEO

Housing: Multiple Reactions

Over the horizon, a housing recovery The current housing market is bleak: home prices and sales are plummeting, foreclosure proceedings are skyrocketing and mortgage rates are on the rise. When will things be better? A new study from the Joint Center for Housing Studies of Harvard University, "The State of the Nation's Housing 2008," finds the country poised to see an increase in housing demand over the next decade. "The good news is that we still have a growing population," said Nicolas Retsinas, director of the Joint Center for Housing Studies and one of the study's authors. "As long as you have more households, more people are going to need places to live." Social trends - people getting married later and divorced more often - are making single-person households the fastest growing household type, the study finds. In addition, a long-term net increase in potential home buyers will be driven by demographic factors: the aging of "echo boomers" into adulthood, an increased life expectancy for baby boomers and projected annual immigration of 1.2 million. From 2010 to 2020, the number of households in the United States will grow by an average of more than 1.4 million per year, the study finds.

Shaky job market threatens housing recovery Slump, worst in generations, still hasn't run course, report says. And if job losses accelerate in coming months, it could take even longer for local markets to regain their footing, said Nicolas P. Retsinas, director of the university's Joint Center for Housing Studies. Job losses could be "the last shoe to drop, but a pretty heavy shoe," he said in a telephone interview. The center releases its "State of the Nation's Housing" report each year, and not surprisingly, the 2008 edition gave a grim prognosis for housing markets throughout the country.In short, local markets are dealing with drops in housing starts, new home sales and existing home sales -- corrections that are rivaling the deepest slowdowns since the World War II era, the center reported. On top of that, the fall in home prices and the rise in mortgage defaults are the worst on record since the 1960s and 1970s. See the Joint Center for Housing Studies Web site. All this adds up to a downturn that is "the most severe that we have seen," Retsinas said.

Housing Study Says Worst Isn't Over (WSJ) Harvard's annual housing report gave a grim prognosis for housing markets throughout the country. It predicts the housing slump, already shaping up to be the worst in a generation, still hasn't run its full course. Report: US housing slump a prelude to recession

Revisiting the Underlevered American Household But I also found his column instructive in that it forced me to more carefully articulate some ideas I had been kicking around for a while. One year later, that process still resonates with me. Here's my takeaway from our debate last year: 1) Always pay attention to statistical anomalies: They are invariably informative. If for no other reason, they make you think about how we gather and use data. In the "under-levered case," I had to consider different time frames, chew over context. I thought it was important that the savings rate went negative for the first time in three quarters of a century. That oddity got my attention -- and for good reason. Since then, the economy has likely slipped into a recession, and the Dow has fallen 12%. …5) Real, inflation-adjusted income matters: Despite real income being negative, as a nation, we took a long time to adjust our consumption habits. Consuming more than earnings has significant repercussions.  Instead of seeing wage gains being used to raise living standards, we consumed Household equity as if it were actual income. There is an enormous difference between borrow and spend, versus earn and spend. Which is precisely what the negative savings rate was warning those how were paying closer attention . . .

More on Oil

'Oil shock' stems from fears of future shortfall: consultant A "shortage psychology" in oil markets is overshadowing news of fresh discoveries and falling demand to drive oil prices to record levels, the head of influential energy consultancy Cambridge Energy Research Associates said Wednesday. "A lot of what's going on in financial markets is not just looking at Nigeria but looking at the shortfall in supply three, five years down the road," said Daniel Yergin at a Senate Joint Economic Committee hearing in Washington, which was Webcast. Investors are viewing future oil supplies through the prism of expected high-demand growth in China and India, which "tends to be the end of all discussions," he added.These concerns -- that global oil supplies won't be able to keep up with the rapid industrialization and consumer-spending growth of emerging markets -- are overshadowing other fundamental factors that would typically dampen oil prices.These include discoveries of potentially large oil fields in Brazil and a drop in some developed countries' demand for oil, which tend to be "discounted" by the market, according to Yergin. Instead, the market is wrestling with a much thinner gap between supply and demand that had been customary for decades in the past. Curbing expectations for future supplies, the cost of developing new oil and gas fields has more than doubled over the past four years due to a shortage of oil-field professionals and raw materials, he noted. The sum total of global supply disruptions, including frequent oil-pipeline attacks in Nigeria, has amounted to a loss of between 2 million to 3 million barrels a day, Yergin said.

Posted by dblwyo at 08:55 AM | Permalink | Comments (0)

Now that all the market excitement has gone away it's time to return to our roots and talk about business performance some more. Specifically the Auto Industry whom we don't mean to abuse to much but have done so before and will likely have future opportunities. Actually, all things considered, we hope so. Oh wait...the Industry employs 13 million people and is 4% of the GDP. And Goldman just said sell GM after it, or because or something, reached a 53 year low. We'll leave it to you to graph out the stock prices of the Failing 3 but's pretty scary. We've covered the industry several times before and actually had both good and bad things - good in that they were finally gingerly sneaking up on their fundamental requirements for deep structural changes. Bad in that they were sneaking up, were kidding themselves about the state of the industry and economy and we thought they were going to get body-slammed real bad. Ahem....

After the break we've got our little collection of readings from which there are some primary take-aways. Detroit has finally conceded - knowing and doing are two very different things mind you - that the future is NOT pickups and they need to change their model mix. And they're also willy-nilly converting to the high church of not 16 million in annual sales. More interestingly they're starting to be willing to tackle the kind of revolutionary changes needed to survive. The example being GM's Volt - which could be a real game changer. And is the kind of innovation that made Detroit great. The sad things in all this is there's plenty of talented people who knew what was wrong, know how to fix it but opted for incrementalism because the didn't feel the boiling water. No matter how many dashboards run back how many years. One of our favorite quotes suggests that the Industry can't survive at 14 million cars for two years. Check out the chart - they did just fine for three decades between 13-14mil !!! What misplaced fantasy of lease-financing, discount subsidies and over-production of ancient models nobody really wanted made them think it was graven on stone ?

The problem is that the let themselves get trapped in a corner by their own manufacturing - though admittedly there have been major improvements. Here's one of the things that have gotten them into three decades of up and down. When TOY created (actually borrowed from Westinghouse) their Production System (TPS) the changed the traditional economics of manufacturing. Before the lowest unit cost was from processes, then assembly lines and then batch manufacturing. So you made money by keeping the lines running at any cost and shot for enormous scale. By moving to more flexible, cellular manufacturing TOY could run their lines in much smaller sizes, they got lower unit costs and they kept getting better and better. This may seem a little arcane but manufacturing competence is one of the two core requirements for Detroit's success. Just as much as software development should be Redmond's. In all cases start falling down, or loosing ground big time on those core capabilities, and you're writing out your own death warrent. When Kirkkorian put money into GM a while back I though he was nuts because GM was dodging the issue; contrawise when he put money into Ford this spring I thought he was a darn smart risk-taker because Ford under Mullaly is starting on those changes. Now in a matter of a few months everybody's conceeded. Do they have time ? The need to make money at 12-14Mil cars - in fact they need to defend their turf in much smaller corners than that.

Bear with us on this one - it should be worth your while but amateur graphic artists that we are, using PPT and trying to capture ideas in 3D and then blog 'em leaves some challenges open. Nonetheless with a little imagination and sympathy this may be clear - the Auto Industry (or - we emphasize - any) is driven by the key dimensions of its' ecology and their dynamics. Here the dimensions are vehicle type, customer socio-graphic and car size. Detroit had this space all to itself but the Japanese got in in the econo-box and used manufacturing excellence to expand into the rest of the space while Detroit kept retreating to Pickups. The Japanese even did an end around by attacking the flank and creating their own luxury models. When you give up marketspace you lose economies of scale. If you lose economies of scale you need to change your own processes and economics but Detroit was trapped and kept retreating. When you loose marketspaces to a competitor who can make money in smaller niches thru better products where their profit and returns are higher at any concievable scale they become cash-flow generating machines. And you become profit-sucking machines. Instead of milking SUVs and Pickups for profits, x-subsidizing the rest of their products and brands and fighting rearguard Detroit would have been better off re-investing in development,manufacturing, marketing, distribution, logistics and everything else.

They're smart people who're backed into a corner and if they don't make it they'll take a chunk of our economy with them. Not good. As an investor though these are the strategic issues to consider,  unless you want to go back and ride the old roller-coaster with the old Kirk. BtW our two prior posts on the Industry had some interesting charts that flesh out this picture and assessment. (Auto Industry:Boil, Boil, Toil and Trouble) 

GM Reacts to Sales Slump GM plans to extend the summer shutdowns at six plants and boost sales incentives to clear its bloated inventory of large vehicles. The auto maker will also raise prices on its 2009 models by 3.5% on average. Expanding its efforts to address a steep decline in sales of pickup trucks and sport-utility vehicles, General Motors Corp. plans to extend the summer shutdowns at six plants and to offer more sales incentives to clear its bloated inventory of large vehicles. The company will also raise prices on its 2009 models by 3.5% on average, equal to about $1,000 per vehicle, to help cover increased commodity costs, additional vehicle content and fuel-economy technology. GM is continuing to revamp its entire product portfolio and production schedule amid the sharp decline in the sale of pickups and sport-utility vehicles as consumers skip the gas-gulping large vehicles in favor of smaller cars at a time of $4-a-gallon gasoline. GM shares, which hit a 33-year low on Monday, were down 6% at $13 in recent trading. GM's production changes come three days after Ford Motor Co. announced plans to further slash production of large vehicles and delay the release of its redesigned F-150 pickup truck by two months. Chrysler, the other major U.S.-based auto maker, has also said it will scale back production of large vehicles. The Big Three Detroit auto makers have long relied on trucks and SUVs to sustain themselves. The recent dramatic decline in sales of large vehicles has heightened concerns that U.S. auto makers could face increased financial pressure as they burn through cash at a quicker rate. Auto-Parts Firms Face Trouble As Car Makers Retool Production

Nissan's Ghosn: Tough Times Nissan Chief Executive Carlos Ghosn sought to allay fears about the company's declining share price Wednesday, saying the damage was coming from soaring oil costs, a U.S. economic slowdown and other factors that were hurting all automakers. Ghosn, who also serves as head of the Japanese automaker's alliance partner Renault SA, told a shareholders' meeting that a stagnant Japanese auto market and rising steel and materials costs were also to blame. Nissan shares have fallen 37 percent over the last year and a half and 14 percent since the start of the year. On Wednesday, they dipped to 895 yen ($8.30). In outlining Nissan's five-year plan through 2012, Ghosn vowed that Nissan would continue to grow in the years ahead by expanding in emerging markets such as China, Russia, India and Brazil. He acknowledged, however, that the same kind of growth cannot be expected in the traditional markets of the U.S., Europe and Japan. But he said Nissan has good strategies that will not be changed because of share fluctuations. He outlined to shareholders some of those strategies, including Nissan's cheap "entry-level car," promised for 2011, to respond to the needs of emerging markets. The company is also working on a zero-emission electric vehicle to address ecological concerns, Ghosn told more than 2,000 shareholders gathered at a convention center in Yokohama, southwest of Tokyo. The cars Americans love best

Electro-Shock Therapy GM, he tells me, is taking an industrial organization designed to grind out incremental improvements and repurposing it for a technological leap. “I spend 20 percent of my time being a psychologist and counselor,” he says. “I tell people, ‘Yes, there’s a lot of risk. And, yes, that’s OK.’ “It’s not a program for the faint of heart.” When one of the world’s mightiest corporations throws everything it’s got at a project, and when it shreds its rule book in the process, the results are likely to be impressive. Still, even for General Motors, the Volt is a reach. If it meets specifications, it will charge up overnight from any standard electrical socket. It will go 40 miles on a charge. Then a small gasoline engine will ignite. The engine’s sole job will be to drive a generator, whose sole job will be to maintain the battery’s charge—not to drive the wheels, which will never see anything but electricity. In generator mode, the car will drive hundreds of miles on a tank of gas, at about 50 miles per gallon. But about three-fourths of Americans commute less than 40 miles a day, so on most days most Volt drivers would use no gas at all. Because it will have both an electric and a gasoline motor on board, the Volt will be a hybrid. But it will be like no hybrid on the road today. Existing hybrids are gasoline-powered cars, with an electric assist to improve the gas mileage. The Volt will be an electric-powered car, with a gasoline assist to increase the battery’s range. With the Volt, GM—battered, beleaguered, struggling for profitability—hopes to re-engineer not just the car but the way the public thinks about cars, the way the public thinks about GM, and the way GM thinks about itself.

• Can the Volt Save GM? Can the new fuel efficient Volt save General Motors? Erich Merkle, of IRN, and CNBC's Phil LeBeau discuss.

Goldman Cuts GM, Other Auto and Parts Cos. Goldman Sachs downgraded General Motors Corp (NYSE:GM - News) to "sell" from "neutral," and added the stock to its "Americas Sell List," saying the main risks for the automaker included likely equity dilution, dividend cut and cash burn. GM shares, which have lost 47 percent of their value since the start of the year, were down nearly 8 percent at $11.81 before the bell on Thursday. Analyst Patrick Archambault, who also cut his ratings on Lear and Tenneco, said he expects GM shares to continue to underperform as market fundamentals deteriorate which exacerbates liquidity concerns. He cut his 6-month price target on GM stock by $8 to $11. "We think GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company's dividend," Archambault said.

• GM at 53 Year Low A look at how the company has been performing in the past 20 years, with CNBC's Phil Lebeau

Posted by dblwyo at 02:27 PM | Permalink | Comments (1)

Just in case you hadn't noticed the markets got slammed pretty badly today - look up the states anywhere you look. In a spirit of Schadenfreude we could of course try variations on "told 'em so, told 'em so" but that might be a working definition of hubris and brings back memories of old Greek sayings (whom the Gods wouldst destroy...and so forth) so we won't. On the other hand given several of the immediate prior posts (Technology Industry: HPQ/EDS, PCs and Prospects,Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St.,Crime, Punishment, (Profits) and Outlooks: High Noon at the Street ?) which reflected long-running themes of ours a certain level of Prescience might be claimed. That's vulnerable to the same hubris charge though. And to tell the truth we were actually very surprised - probably as much as anyone. While we expected the bear rally to fade we didn't expect it this soon or this much - and who knows what happens tomorrow or next week, after all ? BtW the accompanying graphic is drawn from a composite of two different time periods using StockCharts.com's "Market Carpet" tool. It captures 10-days from early May to the most recent two weeks. Kinda speaks for itself.

So, if we're surprised, was it all luck ? The next graphic is a chart of the SP500 that was one of our amateurish efforts at Technical analysis. The color coded price levels id'd various barriers that had to be reached/breached for the market, which we argued was in a bear rally and was going to top out, had to go thru to settle the issue one way or another. And discussed in this post. So we might be forgiven the argument that it wasn't entirely a matter of luck, though today's surprises certainly are.

What we think is going on are three important things. First off there was widespread mis-readings of the states of the credit markets and of the economy, as well as the consequences that would be working themselves out. Second - our primary point from the "Fear and Loathing" post - is that a major (and we do mean major) re-thinking of the outlook is going on by Mr. Market and all his assorted minions. Bob Pisani captured it perfectly this morning commenting from the trading floors rather early in the day - "the Traders aren't waiting for the analysts or economists to call a recession....they've decided the whole second half outlook is wrong". And the Lord spaketh and the scales fell from mine eyes and lo, I could SEE !

Setting aside the extent of our surprise, and that nobody should be pontificating about a short-term random process where the Gods can here you, after we net all that out there's the matter of a little work. Specifically building and exercising a collection of tools, toolkits and habits of thought for trying to look beneath the headlines. After the break we go a little more in history and review a few of them. The primary goal is to provide a shopping list for you to explore and possibly use. Our real goal here is to present this stuff in such a way that you can go out and independently verify it and apply it yourselves. So we're always happy to be learning and refreshing the tools.

But it might behoove you to read on thru and check it out for yourself. You'll find four things: 1) our Market key factors summary from late April (btw again - just to peak your interest one of the conclusions there was to sell into the rally and position for a downturn, circa Apr29 or so. Somebody might have made some money that way), 2) the most current version of the Market Factors summary from last Sa. which all of a sudden seems to hold up reasonably well, 3) a Macro Risk Factors chart which summaries the major economic barriers we see/saw which is also holding up reasonably too. And 4) a bit of a review on the current Business Cycle and its' major components with particular attention to Capex vs Consumer Spending. The reason being that the two primary triggers of today's catastrophe were the sudden change in perspective on the Financials and on Technology. Now frankly we think the latter is overdone and ahead of itself given the lags between consumer slowdowns and capex declines but we'll take it. And the former is over-due now that everybody's downgrading everybody else because, guess what, a slowing economy means trouble in Financial City and more write-downs, etc. etc. The table kinda bookends the day starting and ending with the AP, "OMG" stories intersperced with the key headlines plus the URL for the CNBC vidclip with Pisani. After all the cheerleading we especially love the "short stocks" notion from CNBC of all people !

Market Assessment Summary: April08

The graphic is a summary of how we saw the major factors playing out back then. As a technical sidebar you have to click on the graphic to expand it - and may have to click again. But then it may be worth reading somewhat carefully (each row btw has the current and previous assessments for comparison). Hopefully it's readable and makes sense. The Table looks at Structure, Fundamentals, Technicals and Sentiment and for each it summarizes the Situation, provides a ranking grade to Evaluate things and lists some major surprises that need to be watched for. We'll point out that many of the surprises are coming to pass - in other words paying attention to deep currents in Structure and Fundamentals has some merit. We also point out the short, throw-away in Technicals about "selling into the rally". Space is at a premium obviously.

Market Assessment Summary: June08

Here's the most recent summary almost literally hot off the press. In case you're curious or want to dig into the notions and approaches some more discussion is in Models, Metaphors, Musical Chairs and Market Outlook , which lays out our thinking and sources. And first seriously exercised here: WRfest 11Nov07: SEE changes and Cusp Points(Markets). So that gives you several samples to do the compare and contrast on and decide if we're smoking something funny - and if you want any.

Bigger Picture: Economy, Markets, Consumers, Business

Those market assessments in turn point back to a deeper look at how the economy is playing out and what the risk factors are there and then specifically how Consumers and Businesses are likely to be impacted. And to impact back on the economy in their turns. The E/M/C/B assessment equivalent is summarized in another table and, IOHO, seems to be holding up fairly well. The related discussions and explanations are in Filterring the Non-Linearities: Sorting the Risk Factors

GDP and the Business Cycle

You can check the key postings tables or economy archives for the history of discussions on GDP and business cycles but we built a new composite chart to link up some key factors to point to the next level down in this toolkit building and assembly process. The top sub-chart shows GDP, Consumption(PCE) and Industrial Production. Notice that PCE has taken a sudden sharp downturn. The middle sub-chart links PCE to Employment and the sum of changes in Wages + Employment - the primary determinant of future consumer demand. Notice what's happening to Employment. The final sub-chart links GDP and Investment broken out into Residential, Structures and Soft/Equip (Capex). Notice that only Structures are doing well and RI is cliff-diving. Now the key question is what happen to Capex.

GDP Component Analysis

Which gets to this next set of charts which breaks out the key components of GDP in Consumption and Investment in an unusual way and makes for another busy little chart that might be extremely valuable to you after a bit of study. The top sub-chart shows the YoY delta between Q107 and Q108 for each component. Notice how far and fast major Consumption elements have been dropping. Now notice that Capex dropped as well - which given the lags in business cycles is a warning sign and brings us full circle back to the NDXisater today, believe it or not. The middle sub-chart shows the % contribution of each component to the YoY change in GDP. So for example Consumer Durables contributed only 2% to GDP growth, a far cry from normal. What does that say about the outlook for consumer related industries and their stocks ? The third sub-chart is even more interesting because it shows the cumulative contribution %, i.e. we add up each component to get a running total. Normally Consumption increases much more than overall GDP - notice how fast it's dropping. Now what about Capex ? We think the handwriting is on the wall, frankly. Finally, notice that Net Xports contributed 46% of the Q1 increase in GDP - partly resulting from a weak dollar and partly from declining domestic demand for imports (oil excepted of course). What happens if/when the $ strengthens ? Or we get a serious slowing in foreign economies as is incresingly visible ? The last prop gets kicked out from under ?

And there you have it - a soup-to-nuts journey thru the analysis toolkit so you can look at the charts and make your own decisions. But we would suggest stepping back from today's surprise factor and asking two key questions:

1) Given what these charts and tables are telling us how much of a surprise should any of this have been ? But conversely clearly a lot of folks were surprised who shouldn't be because doing this work is their job - for which they are handsomely compensated indeed. Hmmm..

2) So, using the charts and your own judgment what do you think looks like the general trend of things ? And wherever you come out with your judgments who's sitting in what other chairs in this musical ? How many of them are going to be surprised by things that should be perfectly visible ?

BtW - a final note. If you'd like to see our faint-hearted attempt at an investment strategy built off this stuff try this:This One's for Jay: Investing Strategies for a Dicey Market

Posted by dblwyo at 05:55 PM | Permalink | Comments (0)

Well putting put up this rather large collection of Finance Industry readings wasn't the planned next step but it segues so naturally from the prior post on market outlooks. Not just because obviously, because the two are so tightly intertwined. But also because if our perspective an a major shift in sentiment is correct when you couple that with the emerging vicious feedback cycle between the economy, credit and losses the Finance Industry is about to get called out. Again..big time. Just in case you missed it a couple of prior posts set out the context and summarize the situation and might be worth re-visiting (Markets and Financials:4 Year Crunch, Broken BizzMods, Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St.) though both are consistent with things we've been seeing and saying for months. So consider the table reset, as the case may be.

After the break you'll find some readings on four major aspects of the outlook for the street: Culture and Crime, Industry Outlook, Lehman and other Players. There was a whole slew of bad news for specific companies last week with large layoffs being announced, more write-downs, more capital raising and so on - and we haven't even see the downturn and those losses start yet ! Wow, deja vu' all over again. Two of the outlook articles are particularly amusing - particularly for afficinadoes of the Marquis, black humor or schadenfreude - the industry's write-offs SO FAR have wiped out profits since 2004. Except for the senior executive escapees. Wrap all that together and you also saw a bunch of bad news on the criminal side of things - not just the indictments against two senior BSC guys either but a big slew of FBI filings against mortgage fraud actions. If this all gets rolling it may make the aftermath of the Tech bust (remember Enron and the rest ?) look like patty-cake. A final piece of macro-new....the pressures for re-regulation are mounting rapidly and exponentially. After all when a Rep. Treasury Secretary who's an ex-CEO of Goldman starts pounding that drum...well we'd say that a broad consensus has been built up.

Other than that we'll just let you skim the readings - between their headlines and what we've already laid it all much pretty much screeches for itself. Going to be interesting though to see what happens, won't it ? One thing we're particularly fascinated by is this whole "business model" discussion - as in broken business model. We've heard and seen that meme really getting traction  just in the last few weeks. As you may know from reading along here we certainly believe it's true.

Bon Appetit' 

Culture, Crime and Punishment

`Cityboy' Unmasks World of Analysts Pushing `Gibberish,' Wrong Stock Bets As a utilities analyst at Dresdner Kleinwort, Geraint Anderson was advising clients how to invest. At the same time, through an anonymous London newspaper column, he was telling readers how analysts wrote ``utter gibberish.'' Anderson, 35, announced on June 2 in his Cityboy column in TheLondonPaper that he'd quit and ended a 12-year stockbroking career: ``I've been wasting my precious time for far too long, working my sweet a** off in a rat race with no end in sight.'' He revealed his identity in the newspaper this week. While for 22 months he used his column, the newspaper's most popular, to describe colleagues as ``degenerate'' and himself as ``boring the pants off clients,'' Anderson also was writing a book about London's financial workers. ``Cityboy: Beer and Loathing in the Square Mile'' will be published next week, and scourges brokers through composite characters and banks. ``We didn't invent greed, us City boys, but we have certainly become its finest exponents,'' Anderson said in an interview. He was ranked the No. 1 stock picker in the U.K. and Ireland for utilities by StarMine Corp. in 2005. London `Cityboy' Says Greed, Arrogance Rife in Banks

Our Tarnished Banking Titans Until about a year ago, the main complaints about investment banks concerned conflicts of interest. By collecting all kinds of financial business under one roof, they created all kinds of opportunities to take advantage of customers. Investment-bank brokerage departments execute buy and sell orders on behalf of outside clients, supposedly at the best price possible. But the proprietary trading desks make money by trading the banks' own capital; the temptation to use knowledge of outside clients' strategies to boost prop-desk profits is, shall we say, considerable. Long-Term Capital Management, the hedge fund that blew up in 1998, was partly a victim of brokers who were copying its trades, making them impossible to exit in a crisis. In 2000, the tech and telecom bubble burst, revealing further conflicts of interest. But the bursting of the credit bubble has conjured fresh concerns: not about banks' treatment of customers, but of their own money. We now know that the models banks have used to measure their investment risks are flawed, to put it charitably. They base assessments of future risk on how markets have performed in the most recent few years, so the inflation of a bubble causes the models to proclaim that the world is growing more stable. Even more bizarrely, the models factor in market behavior only during normal times -- explicitly excluding the most extreme 1 percent of past experience.

Hundreds Swept Up in Mortgage Fraud Arrests More than 400 real estate industry players have been indicted since March -- including dozens over the last two days -- in a Justice Department crackdown on incidents of mortgage fraud nationwide that have contributed to the country's housing crisis. The FBI put the losses to homeowners and other borrowers who were victims in the schemes at over $1 billion. Since March 1, 406 people have been arrested in the sting dubbed "Operation Malicious Mortgage" that saw 144 cases across the country. Sixty people were arrested on Wednesday alone, including in Chicago, Miami, Houston and a dozen other regions policed by the FBI. In a separate sweep, two former Bear Stearns managers in New York were indicted Thursday, becoming the first executives to face criminal charges related to the collapse of the subprime mortgage market. Across the country, reports of mortgage fraud have soared over the past year as the subprime mortgage market collapsed and defaults and foreclosures soared.Banks reported nearly 53,000 cases of suspected mortgage fraud last year, up from more than 37,000 a year earlier and about 10 times the level of reports in 2001 and 2002, according to the Treasury Department's Financial Crimes Enforcement Network. The most common type of mortgage fraud was misstatement of income or assets, followed by forged documents, inflated appraisals and misrepresentation of a buyer's intent to occupy a property as a primary residence. Over the last several months, the FBI has been investigating an estimated 1,300 mortgage fraud cases -- including 19 involving subprime lending practices by U.S. financial institutions. The Justice Department also is expected to ask Congress for more money to help combat mortgage fraud as part of a larger funding request to curb white collar crime and violent crime.

Two Sides to Every Story Make Wall Street a Parable in Cioffi Tale at Bear The arrests of former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin yesterday show how Wall Street bankers may look out for themselves while hiding bad news from customers. Cioffi, 52, and Tannin, 46, were charged by federal prosecutors with misleading investors about two hedge funds whose collapse last year helped ignite the subprime-mortgage crisis. A companion Securities and Exchange Commission civil suit accuses Cioffi of redeeming $2 million from the funds while Tannin mocked as ``silly'' at least one investor who wanted to get out. In the credit meltdown this year, at least 24 proposed class-action lawsuits have been filed since mid-March against brokerages over claims that investors in auction-rate securities were told their holdings were almost as liquid as cash. The Bear Stearns action ``has similarities with the research-analyst cases, where the government tried to prove analysts said one thing privately but said something different publicly,'' said Michael Missal, a former SEC lawyer now with Kirkpatrick & Lockhart Preston Gates Ellis LLP in Washington. The SEC alleges that Cioffi and Tannin downplayed the risk in their investments. While the funds' monthly summaries typically said about 6 percent to 8 percent of their portfolios was directly tied to subprime mortgages, an internal report in April showed that total exposure, including indirect bets on mortgage-backed securities, amounted to about 60 percent, the SEC said. The men misled clients about the funds' performance and holdings after one of them lost money for the first time in February last year, prosecutors said. During a meeting in early March, Cioffi urged Tannin and two colleagues not to discuss difficulties with others, according to the indictment. Campbell Reviews Charges Facing Ex-Bear Stearns Managers, Cioffi Fund Hoisted in Vodka Toast With Tannin Began Bear Stearns Endgame

Crime and delusion on Wall Street Prosecutors allege two ex-Bear Stearns hedge fund managers misled investors. Perhaps, but Wall Street has long been kidding itself about the credit crunch. The case against Cioffi and Tannin will take a while to play out. But what's clear today - and appears to be central to the managers' defense - is that the Bear Stearns managers were far from alone in failing to warn investors of the sea change in the credit markets. Indeed, top guns on Wall Street have spent a lot of time deceiving themselves about the depth of the mortgage mess. The bad news at Bear should have warned others on Wall Street to dig into their exposure to risky mortgage-related bets. Yet even as the collapse of the High Grade funds was being dissected in the press, other big subprime-writedown losers such as UBS (UBS), Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500) remained in denial - initially underestimating eventual losses and eroding investor confidence by citing supposedly unforeseeable market conditions. Top execs were forced out at all three firms. Even now, a year after the High-Grade funds started to wobble and months after the house cleanings that cost Chuck Prince and Stan O'Neal their jobs, those simple lessons are still being learned. At AIG (AIG, Fortune 500), CEO Martin Sullivan was forced out after he oversaw two record quarterly losses just months after blithely reassuring investors the insurer's subprime exposure was limited. At Lehman Brothers (LEH, Fortune 500), two top execs were demoted last week after the firm insisted it wouldn't need to raise more capital to offset future losses, only to later do so twice. In both instances, the firms claimed they had a handle on their mortgage-related problems, only to admit otherwise later - at great cost to shareholders. Now Cioffi and Tannin will serve as the criminal test case. And however it ends, the events of the past year have shown that people who should have known better were all too willing to be misled.

Breakdowns and Rebuildings

Big brokers threatened by crackdown on shadow banking system A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system. Big brokerage firms like Goldman Sachs, Lehman Brothers, Morgan Stanley and Merrill Lynch, which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation. The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve. While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress. Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage. Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.

Read It Here First: Half of Wall St. Profits Are Gone (So Far) Last year, we looked at the issue of risk adjusted gains for the S&P500, and most especially for the Financial sector. At the time, Financials were the largest sector in the S&P500, and had what were described as legitimate, sustainable, normalized risk-based earnings. Since then, we have learned that their earnings were anything but. And, they are no longer the largest S&P500 sector, having been supplanted Technology in Q2 2008. Societe Generale's Jame Montier notes that, even with the loss of leadership, financials remain an exceptionally large component of the market itself. As the chart below shows, today's 17% of market cap may be well off the high of nearly 25% but remains a long way above the levels before this bubble started: CHART Note the correction in Financials in 1987, 2000 and then again in 2007-08. The gains in these big run ups appear particularly vulnerable -- much more so than the rest of the market. These are likely a function of the 35X leverage employed. Note also that a good part of the rise over recent decades has been fueled on assumptions about risk that turned out to be incorrect. The NYT discusses this:"Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.

The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.

But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices. Worldwide, the reckoning totals $380 billion, much of which reflects a plunge in the value of tricky mortgage investments."

The write-downs are ongoing, and if we are to believe what the Philly Banking Index -- now making multi-year lows -- is implying: We are not nearly through this. That chart above also reflects the US moving from an industrial economy to a services based one. The underlying question is how much mean reversion will happen as deleveraging occurs and risk management returns to normalized levels. CHART

Analysts Slash Bank Estimates as Credit Worsens It's not just banks that have persistently underestimated the scope of the credit crisis afflicting them. So have the Wall Street analysts paid to warn their clients what to expect. Since the start of the year, analysts have slashed their earnings estimates on Standard & Poor's 500 (^SPX - News) financial companies by a respective 41 percent, 28 percent and 25 percent for the second, third and fourth quarters, according to Lab Thomson, a Thomson Reuters research publication. Merrill Lynch & Co's Edward Najarian was the latest to turn more downbeat, amid mounting credit losses and growing uncertainty over banks' abilities to preserve capital and pay out dividends. He slashed his earnings estimates for 12 U.S. banks by an average 22 percent for 2008 and 19 percent for 2009. Najarian joins rivals at Credit Suisse, Deutsche Bank Securities Inc, Goldman Sachs & Co and Lehman Brothers Inc among those in June to slash their outlooks for banks and project more capital raising.Regional banks may face at least three further rounds of capital raising, Credit Suisse said. Goldman, meanwhile, projected that U.S. banks will raise $65 billion of additional capital to cope with credit losses.

• Merrill calls capitulation on bank stocks, slashes outlooks Analysts at Merrill Lynch on Friday said investors appear to be capitulating with regards to banks stocks, frustrated into selling them down to levels below their real values as the credit crisis continues to wreck balance sheets. The analysts also slashed their earnings outlooks for several large regional banks and said they will continue boost loss reserves and cut dividends.

More big bank dividend cuts lie ahead 7:33am:  After a sharp selloff in their stocks, some think BofA, Wachovia and other high-yielders may need to cut their payouts before long. Falling bank stock prices are a warning to investors not to get too attached to those fat dividend checks. The latest struggling lender to sock shareholders is Cleveland-based KeyCorp (KEY, Fortune 500), whose shares tumbled 24% Thursday after the bank said it would slash its quarterly dividend in half to conserve $200 million annually. But with inflation worries driving up interest rates and house prices still tumbling, the market is betting Key won't be the last bank to cut its dividend. Unusually high dividend yields could point to coming dividend cuts at banks ranging from giants Bank of America (BAC, Fortune 500) and Wachovia (WB, Fortune 500) to regionals such as Fifth Third (FITB, Fortune 500) and Regions Financial (RF, Fortune 500). The yield is the result of dividing the annual stated dividend payout by the current stock price. A higher number is typically better for investors, of course, because it means a bigger income stream relative to how much they've invested. But in a credit crunch-obsessed market, a high dividend yield can actually be a warning signal. That's because an increase in the bank's dividend isn't the only factor that can cause the dividend yield to rise. So can a decrease in its stock price. And with banks facing sharply reduced earnings prospects due to rising credit losses and tightening lending standards, a high yield can spell trouble ahead.  Bank Industry Stock comparisons (chart)

• Following the Money Selling in regional bank stocks has intensified today. Details with CNBC's Matt Nesto.

Lehman  Rex

Lehman chief feels the heat Callan used Monday's conference call with analysts and investors to tout the firm's efforts to cut risk by reducing the size of its balance sheet. Callan said Lehman was able to rid itself of $130 billion worth of its assets during the second quarter, in a move she told investors meant that Lehman's deleveraging was complete. That's fine as far as it goes, but it's worth noting that the big push reversed just three quarters' worth of asset growth. Lehman's balance-sheet slimming act brings the firm's asset base down to $650 billion - on par with its size at the end of last year's third quarter, ended Aug. 31. In other words, all Lehman has succeeded in doing so far is returning its balance sheet to the size it was at the beginning of the credit crisis last summer.Take note, too, that as the credit market storm was gathering strength, Lehman was adding billions upon billions of dollars in assets. Savvy investors would likely be very interested to know what Lehman's top execs saw that led them to vastly expand their balance sheet even as other investors were backing away from risky debt. Questions about Lehman's handling of the credit crisis have been building for some time. Lehman's Callan had assured investors and the media in March that a $1.9 billion preferred stock sale "took care of our full-year needs" for funding. But several weeks later, as the rumor mill spun furiously with questions about Lehman's health, the firm raised an additional $4 billion. On Monday, the firm raised another $6 billion. All told, survival comes at a stiff price: Investors might suffer up to a 30% dilution, assuming full conversion of the preferred securities into common stock. Lehman's unanswered questions,

So How Did Lehman Delever? A Not-Very-Pretty Possibility The markets responded positively today to Lehman's announcement of its second quarter results, its provision of a financial supplement that gave more detail on its balance sheet exposures and how they had changed over time, and its investor conference call, The stock was up over 5% of the day, although its closing price of $27.20 is still below the offering price last week of $28.00. First, we'll deal with a few anomalies, then we'll get to what is admittedly a rumor, but one if true with pretty serious implications. The last, looming mystery is how Lehman delevered in a crappy credit market. Their quarter ended in May, and March, thanks to the Bear meltdown and the worries about Lehman, would not have been a good time to sell assets. Similarly, one would have expected sales to be concentrated in certain sectors of the market where pricing was more favorable. Lehman went to great pains to show that the sales were spread across product and said they were not concentrated in the highest credit qualty assets either. I received an e-mail from a former Lehman MD yesterday. I am not able to independently verify it, so be warned that this falls in the category of a rumor.

Lehman's Fuld comes out swinging Despite Fuld's confident tone, it's clear that executing a recovery at Lehman won't be easy. Fuld noted that Lehman has a "track record of taking market share coming out of difficult cycles," and finance chief Ian Lowitt and operating chief Bart McDade - the officers who replaced Callan and Gregory - promised the firm would deploy recently raised capital to boost revenue and bring profitability back into line with investors' expectations. But analysts noted during the question-and-answer session that Lehman has a long way to go before its results match up with those promises. Oppenheimer analyst Meredith Whitney asked how the firm could produce a projected 15%-or-so return on equity, reflecting annual profits as a proportion of the firm's net worth, with its quarterly revenue at a recent level of around $4.2 billion. Lowitt conceded that Lehman wouldn't be able to hit that return-on-equity target with revenue at current levels. He said Lehman hopes to get its quarterly revenue up into the $5 billion range, reflecting nearly 20% growth. How does Lehman expect to produce this sort of growth in such a difficult market? Lowitt wouldn't say, noting that "markets continue to be challenging." He also declined to offer a timeline for bringing the ROE figure up to par, though "we're very confident we can get there," he said.

Other Players 

S&P cuts Bank of America to sell from hold Standard & Poor's Equity Research on Friday downgraded shares of Bank of America Corp. to sell from hold amid worries about the mortgage portfolio the bank will inherit when it acquires lender Countrywide Financial Corp. on July 1. "We take unfavorable note of the large Countrywide option-adjustable rate mortgage portfolio that Bank of America will inherit, since we believe this portfolio has yet to be stress tested," S&P said in its action. The agency also said it expects BofA to "significantly" increase its loss provisions to reflect a weakening U.S. consumer and predicted a dividend cut. S&P cut earnings estimates for 2008 for the bank by 51 cents to $2.16 and reduced its target price by $9 to $24.

Goldman, Morgan Stanley Fixed-Income Earnings Mask Reliance on Commodities On Wall Street, where just about everyone has lost confidence in financial assets, Goldman Sachs Group Inc. and Morgan Stanley are making money the old-fashioned way: Buying and selling commodities. Goldman and Morgan Stanley are expected by analysts to report the best second-quarter earnings of the world's biggest securities firms this week, having limited their losses from the collapsing credit market. They also lead Wall Street in commodities trading, where crude oil futures doubled in the past year and the price of products from gold to corn soared to record highs. Surging prices are attracting investors, as well as companies hedging their positions by buying derivatives. That's played to the strength of Goldman and Morgan Stanley, which dominate the market for commodity derivatives. The two New York-based companies accounted for about half of the $15 billion of revenue that the world's 10 largest investment banks generated from commodities last year… Goldman Earnings Drop Less-Than-Estimated 11% After Gains in Commodities

Willumstad, AIG's New Chief, Says `Nothing Off Table' in Turnaround Plan -- Robert Willumstad, American International Group Inc.'s new chief executive officer, says ``nothing is off the table'' as he tries to win back shareholders' confidence in the world's biggest insurer. Willumstad said he'll meet with AIG's unit heads, business partners and regulators to get a better feel for the company, which has $1 trillion of assets. He worked almost 40 years in banking before joining AIG and was part of Sanford Weill's team that created Citigroup Inc., the biggest U.S. bank by assets, from the 1998 merger of insurer Travelers Group and Citicorp. Jamie Dimon, who also worked with Weill, now runs JPMorgan Chase & Co., the third-largest U.S. bank. Property and casualty insurers in the U.S. may pay more in claims and expenses than they collect in premiums this year as rates drop for commercial coverage, Fitch Ratings said June 11. Insurers cut prices for workers' compensation, commercial property and aviation coverage amid competition for revenue after lower-than-average hurricane losses in 2006 and 2007. AIG made 3.1 cents for every dollar of property and casualty premium it collected in the first quarter, compared with 12.5 cents a year earlier. The decline was driven by losses at its mortgage-insurance unit, which reimburses lenders when borrowers fail to pay. The mortgage unit may be unprofitable the rest of this year, AIG has said. Returns from private equity and hedge funds have been declining because of gridlock in the credit markets. First- quarter income from so-called alternative investments shrank to $197 million from $1.22 billion a year earlier, AIG said in May. The company said hedge funds were ``real laggards.'' Behind the CEO ouster at AIG

Citigroup Will Have `Substantial' Further CDO Writedowns, Crittenden Says Citigroup Inc., the biggest U.S. bank, will have ``substantial'' additional writedowns on its holdings of debt linked to the subprime mortgage market, Chief Financial Officer Gary Crittenden said. The second-quarter markdowns related to subprime mortgages won't be as large as the $6 billion recorded for the first quarter, Crittenden said today on a conference call with investors hosted by Deutsche Bank AG. ``We will continue to have substantial additional marks on our subprime exposure this quarter,'' Crittenden said. ``We may continue to see the magnitude of the marks decline, as the exposures that we have have declined.'' Citigroup has booked more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. Chief Executive Officer Vikram Pandit, who took over as CEO in December, outlined plans last month for the company to reduce assets by $400 billion over the next two to three years. The company's subprime holdings include collateralized debt obligations, or CDOs, which are securities packaged from pools of loans and bonds. Crittenden said on the call that Citigroup may also have to write down the value of assets backed by so-called monoline insurance companies such as Ambac Financial Group Inc., after they were stripped of their AAA credit ratings.Citigroup last quarter recorded a cost of $1.5 billion to account for the reduced likelihood that the insurers will be able to pay. The company may record a ``similar'' cost in the second quarter, Crittenden said.

• Report: Citigroup to slash investment-banking jobs

Merrill Shares Fall on Rumors of Profit Warning Merrill Lynch & Co (NYSE:MER - News) shares fell 5.5 percent Friday on rumors that the investment bank may issue a profit warning and take additional write-downs on its mortgage holdings, traders said. The rumors also weighed on U.S. and European stocks.The world's largest brokerage is due to announce second-quarter results next month. Investors are concerned about its performance after peers including Lehman Brothers (NYSE:LEH - News) and Morgan Stanley (NYSE:MS - News) posted weak results this week. Merrill has recorded more than $30 billion of write-downs since the 2007 third quarter and has raised more than $12 billion of capital.

Posted by dblwyo at 06:50 PM | Permalink | Comments (2)

With all due apologies to Tom Wolfe ( Tom Wolfe's 'Bonfire' Returns as Heartburn) the last few days have seen, IOHO, the beginnings of a major sentiment shift in Wall St.'s grasp on economic realities as the notion that the worst isn't over but rather just beginning. We're not entirely there yet but the actions of several key indices indicate a major attitude adjustment is likely beginning. The Schadenfreude part comes because there's nothing, from GDP & business cycles, to accelerating Housing problems, to unemployment, to credit contagion metastasis to deterioration in the performance of the financials that we haven't discussed here, often extensively and for weeks or months. Beyond the S-factors (puns implied intended) the important thing is that this is thru no special merit of ours. Rather, just a repeated, careful, systematic and systemic look at how things were playing out. In other words anybody with a little work, a smidegeon of discipline and a decent toolkit - which we've tried to demonstrate - could do this for themselves and reach their own interpretations. C'est la guerre.

Just to put a point on it though here are some very recent headlines: Tech Stocks: Apple, Yahoo tumble with sector, Goldman Cuts Financials and Discretionaries, Citi Halfway Through Cutting 6,500 in I-Bank: Source, Goldman Cuts Financials, Admits Upgrade a Goof, Sentiment Shifts: Credit Crunch Isn't Over, March Wasn't 'The' Low Questions ? :)

After the break you'll find a, again IOHO, decent collection of excerpts including the most recent Barron's Roundtable and some fun stuff from Jubak and on the analyst wars; as well as a dissection of the smart money. Overall these commentators seem to come to similar conclusions which means that there is a SEE change, a crossing of the cusp point, potentially in the offing. One of the most interesting "tells" for how Mr. Market is feeling is the Tech stocks which have been running ahead of the rest of the pack until the last few days when they've been leading to the downside. BtW - in case you missed it, as most seem to have ,we did a deeper dive on the major factors why the Tech outlook is likely poor (Technology Industry: HPQ/EDS, PCs and Prospects) which might be well worth re-reviewing.

All together then it seemed like time to update our overall Strategic Market Assessment based on our four factor model but we're going to start with a little chart just to set the mood. The central chart is the NDX which you'll notice is settling on a sideways move (the 200/50-Day MAs are converging) until very recently. At the top is the VIX index of volatility options - the fear and loathing part - which you'll notice has an interesting correspondence of rising as the NDX tanks and conversely. The bottom shows the SP500 and the SP500:NDX ratio. As the SPX has faded the NDX hasn't and the resulting "outperform" ratio has risen significantly. If we're right in our assessments of the economic, capex and tech outlooks that's really ripe for a major cusp point shift...along with what appears to be an accelerating down drift in the markets.

So...the major bottom line we see is things have been going on much as we've been discussing but there's been a major sentiment shift in the last week or so; which leads us to this updated assessment. BtW - the before and after are contrasted from our last update so you can where we've shifted our views (old= higher row). You can find the previous Assessment Table and post (WRFest 27Apr08(Market): Three Steps to Two Views) by clicking thru.

Markets

Bad News for Stock Bulls in U.S. After bouncing up and down since January's big downdraft, broad stock-market indexes are nearing the end of the second quarter with percentage losses in the mid- to high single digits for 2008. The question on the minds of many investors is whether a hoped-for second-half rally can take the market back into positive territory. But one of the many obstacles facing the stock market is that, by some key measures, it is close to what is known as "fair value." In other words, stocks aren't supercheap, but they are not expensive either -- they are right about where they ought to be for some time to come. If those readings are accurate, investors should keep their hopes for a modest rebound. The Standard & Poor's 500-stock index closed Friday at 1360.03, and most analysts see it ending the year between 1400 and 1500. While that would represent a gain of roughly 3% to 10% from here, an S&P at 1400 would be down between 4% and 5% for the year, and an index at 1500 would be up only a bit more than 2%. Where the market ends up depends on how much companies earn during the rest of the year and what price, or multiple, investors put on those earnings. Historically, the multiple depends to varying degrees on investor confidence, interest rates and inflation. The other big uncertainty remains the earnings outlook, specifically the degree to which financial companies, which accounted for a third of the market's earnings in recent years, will continue to post big losses. Earnings for the sector are expected to plunge again in the second quarter before recovering in the second half of the year, leaving the sector's earnings down 10% for the year. Many strategists dismiss mean forecasts of 8.2% gains for the index as a whole this year, based on estimates for individual companies, as unrealistically high. They also question expectations for 2009, when earnings are predicted to rocket 20% to $110 a share. "A lot of people are thinking that they can reassemble the earnings machine for financials, and I have my doubts," says Mr. Trennert. High energy costs, meanwhile, cut into profits, especially in industries that consume a lot of fuel, and in companies that use oil-based products as raw materials. Mr. Trennert believes 2009 will actually be worse for earnings than 2008, in large part because of slowing growth outside the U.S. Based on his earnings expectations, Mr. Trennert thinks fair value for the S&P 500 will be 1480 at year-end 2008 and then just north of 1300 for 2009. The 2009 estimate, "is one forecast I hope I'm wrong about," Mr. Trennert says. Market valuations chart (graphic).

11 Top Experts Weigh In on the Economy When the [Barron’s] Roundtable last met Jan. 7 with the editors of Barron's, our distinguished panelists minced no words: This year would be difficult to dismal for the economy and stocks, as the bubbles in housing and credit unwind. So far, so good (er, bad). Most still feel that way about '08, and even '09, though a handful see the skies clearing at last, even for decimated financial and home-building shares.In the pages ahead, we've distilled the latest views of the Roundtable crew. We hope you're enlightened, amused and provoked by them to discover your own truths about markets. And, should you disagree with any of the opinions expressed herein, please, no tomatoes. Analysts estimate the S&P 500 will earn $89.27 this year. Strategists say $79.25. If we use $84.25, which is in the middle, the P/E is 16. The market is fully valued. On a dividend-discount model, as well, it is efficient. In January and February we had the greatest opportunity to buy name-brand technology stocks since the Long Term Capital debacle in 1998. We bought Oracle [ORCL] at 12 times earnings, Texas Instruments [TXN], KLA-Tencor [KLAC], Xilinx [XLNX]. There are no more pockets of opportunity. We're ignoring consumer-discretionary stocks. Everyone is recommending financials. We aren't. We have the lowest weighting in financials since I started Delphi. The only major brokerage we own is Goldman Sachs [GS], because they seem to have weathered the storm. Elsewhere in the industry, the bloodletting continues. The meltdown in housing also is ongoing. The stock market won't get out of its own way until the banking system regains transparency. This also overhangs S&P earnings. The unwinding of the housing bubble is killing the economy. Household net worth is dropping for the first time in five or six years. The average family income in America is $48,600. For Main Street, this is a recession. Real GDP growth in 2008 and '09 is going to be weak, at 1% to 1.5%.

 Stocks in U.S. Show Negative Return on Inflation Gain Inflation is eliminating the rewards of owning U.S. stocks.Surging commodity prices have eroded earnings and spurred the Federal Reserve to consider raising borrowing costs just as equities are trading at their most expensive in four years. Standard & Poor's 500 Index shares yield 0.22 percentage point more in profits than the interest on 10-year Treasury notes, the smallest advantage since 2004, data compiled by Bloomberg show. The last time corporate earnings returned less versus bonds, the index posted its first quarterly decline in more than a year. The 39 percent advance in oil, 61 percent jump in corn and 41 percent climb in rice pushed the UBS Bloomberg Constant Maturity Commodity Index to a record this year. That's squeezing profits as raw-material costs outpace consumer prices by the largest margin since the 1970s. Companies in the S&P 500 will earn 7.7 percent less in the second quarter than a year ago, according to analysts' estimates compiled by Bloomberg.

Shanghai Surprise: China's Stock Boom Deflating Ahead of Olympics China's Shanghai Composite tumbled 6.5% overnight and has now fallen 11 of the past 12 trading days. With the index now down more than 50% from its all-time high in October, it's clear the conventional wisdom about China "holding up" the market before the Olympics was wrong -- as it often is. Darren Chervitz, Co-Manager of the Jacob Internet Fund, has taken an unconventional view of China, long expressing concern about the sustainability of its economic boom -- especially in the face of a U.S. slowdown. But Chervitz notes the action in Shanghai does not necessarily correlate to the performance of Chinese ADRs like Sina.com and Sohu.com, which are among his fund's biggest holdings.

Bond Sales Soar in Europe as Companies Plan for Worsening Credit Markets Companies in Europe borrowed more money from bond investors in the past three months than in any second quarter on record, paying the highest interest costs in a decade on concern credit conditions may deteriorate further. Sales jumped to 252 billion euros ($391 billion) from 227 billion euros in the same quarter of 2007 and from 149 billion euros in the first three months of this year, according to data compiled by Bloomberg. Bouygues SA, the world's second-biggest construction company, and U.K. phone company BT Group Plc led this week's sales of 18.4 billion euros, 43 percent higher than the weekly average for the past year. Treasurers at investment-grade companies are borrowing at yields averaging 6.4 percent, the highest since Merrill Lynch & Co. began tracking the data in 1998, to avoid the risk of having to pay even more as a slowing economy and accelerating inflation threaten corporate earnings.

Five things that will pave the way for a downside disconnect My grandfather taught me many things, one of which was to always think positive. As a financial professional, I'm careful not to confuse that perspective with blind bullishness. As we edge toward the midpoint of the calendar year, the bovine have reason for optimism. Despite credit contagion, debt unwinds, structural smoke, geopolitical risks and a housing abyss, mainstay market proxies are down only mid-single digits. I've learned a few things over the course of my career, three of which currently warrant particular attention. First, the reaction to news is more important than the news itself. Second, stay humble or the market will do it for you. Third, discipline must always trump conviction. With those lessons in tow, I wanted to explore another topic, one that few people have a motivation to discuss. It's the risk of a seismic equity readjustment, a possibility that has much higher odds than most people currently foresee. The market is fluid and multi-linear, which is a fancy way of saying "things can change and they often do." Still, the ingredients for a downside disconnect exist, conditional elements that, when brewed together, could combine for a toxic ride that will come to define 2008. We're currently standing at a crossroads, with inflation on one side and deflation on the other. Given the recent rhetoric from government officials -- jawboning the dollar last week and attempting to quell rate fears yesterday -- it seems like that conundrum in coming to bear. Perception is reality in the financial markets. If the collective mindset shifts from "the worst is behind us" to "we're between a rock and a hard place," the comeuppance will be swift.

The next stars of the stock market The dependable sectors and stocks of the past 5 years have faded. And the reasons they're past their prime hint at where to look for the next market leaders. The current market is starting to look a little tired. It's getting harder and harder to make significant money in the stocks and sectors that have led the stock market in performance over the past five years. It's time to think about the next market, to think about what stocks and sectors might be most profitable to own over the next five years. I don't think the overall stock market is out of the woods quite yet. A successful test of the March low wouldn't remove all my worries about stocks -- given what looks like an extended bout of interest-rate increases around the globe between now and the first quarter of 2009 -- but would lower the odds that we still have a big bear market ahead. If stocks continue to give ground, as they have since the May 1 closing high at 13,010, and the indexes fall through their March 10 lows, then the market still hasn't found a bottom. And I'll remain worried that we're in the early stages of a bear market with the worst quite possibly in front of us. But when I say this market is looking tired, I'm actually talking about something quite different from these hopes and worries about the direction of the general market. All markets, rising and falling, have sectors and stocks that outperform the market. We say that these sectors and stocks lead the market. In a rallying market, they outperform all other stocks. In a falling market, depending on the severity of the overall decline, they either fall less or actually go up in price when other stocks are falling. For the past five years or so, this market has been led by energy and commodity stocks with occasional important contributions from gold and transportation stocks. Stated in this way, these three points are all negative. They tell us why the leadership stocks of the last market are looking tired now. But they also hint at where to look for the next market's leaders:

Mayo Gets to Citigroup First While Whitney `Loves' Being Everyone's Oracle The call sent Citigroup shares reeling -- down 11 percent in seven trading days. The analyst had downgraded the stock after citing investor dissatisfaction with Citigroup's senior management and saying Chairman and Chief Executive Officer Charles Prince should resign. The analyst in question was Michael Mayo, a stock picker at Deutsche Bank -- not Meredith Whitney, the Oppenheimer analyst who has become the toast of Wall Street since her own report on Citigroup. She downgraded the stock to ``underperform'' from ``neutral'' on Oct. 31 after calculating in a research report that the bank's dividends for the third quarter of 2007 exceeded its profits. She also said the bank needed to raise $30 billion in capital. Mayo, 45, gave his negative assessment of Citigroup more than two weeks before Whitney's. He downgraded the stock to a ``sell'' from a ``buy,'' the best call on Citigroup for the 12 months ended on March 31, according to data compiled by Bloomberg. Citigroup was not Mayo's first bold, contrarian call. In 1999, he was a banking analyst at Credit Suisse First Boston. At the height of dot-com mania in the spring of 1999, he issued a ``sell'' rating on all banking stocks when he saw that the merger boom was slowing and problem loans were growing. The stocks did fall dramatically in the next six months. Mayo was fired in September 2000.

When the 'smart money' gets stupid Do fund managers think for themselves? A recent example shows that sometimes even the biggest guns don't. But there are still ways to protect your investments. Examples of misfires by big hedge funds or acquisitive corporations have abounded in recent years. It's unsettling, though, to find out that sometimes the smart money doesn't even seem to try very hard. After all, one assumes the big investors engage in detailed fundamental research, undertaken by talented and knowledgeable analysts, or that they rely on ultrasophisticated mathematical models. Maybe both. The mistakes occur, we assume, when the analysis rests on flawed assumptions or the models overlook important factors. Or when the manager's ego simply runs out of control. But a recent article in the Financial Times cites an even more troubling reason: Sometimes the analysts and mathematical models aren't even consulted. Instead, the big shots occasionally invest simply because their buddies are doing so. That said, how can one know that a mutual fund manager, too, isn't simply using a follow-the-leader investment strategy? One way is to look at the fund's portfolio and see whether it closely resembles the relevant index or the portfolios of other active fund managers with similar mandates. A fund that differs isn't necessarily going to succeed. But at least you're getting some independent thinking for your money. To gain more insight, take a look at the manager commentaries included in annual and semiannual fund reports, and often provided more frequently on fund company Web sites. Mutual fund managers should be able to explain clearly and persuasively why they are buying or selling -- or holding on to -- the securities in their portfolios. Does their reasoning sound logical and thoughtful? Do the moves fit into a well-established, well-articulated strategy? Or does the manager seem to be providing run-of-the-mill reasons to justify buying a popular stock that lots of other people already own?

Posted by dblwyo at 08:48 AM | Permalink | Comments (0)

There's actually not much going on in the Oil Markets/Industry that's not a natural consequence of all the factors we analyzed recently (Oil Industry I (Readings): Prices, Fundamentals, and Big Oil Futures, Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions) so we won't spend a lot of time reviewing the bidding. Barring this little summary to jog your memories.

IOHO there's plenty of oil available for both exploration and production which is, very painfully, trapped behind political barriers where it is inaccessible to the world markets for development. And since ~90% of the world's reserves are controlled by national oil companies or countries that's critically important. Equally important the oil that's in front of those barriers is trapped behind other barriers - mostly ones of short-sighted malfeasance on the part of those governments. By and large they've drastically under-invested in existing fields and milked current production to support domestic political agendi - hence we're trapped for years in a world where Supply < Demand, though the Saudi are entirely correct that current supply does in fact meet current demand. The really interesting thing, given that this is likely a fundamental structural change in the marketspace, is whether or not we'll actually develop a concerted national energy policy, unlike the previous narrow passages. We've met the enemy Pogo ! (a "Little Fri. Night Levity": Energy Policy Collage,n Search of a Nat'l Energy Policy: Check the Mirror Pogo).

The readings below (just) further buttress these arguments. The big news, supposedly, over the weekend was the emergency meeting between producers and consumers called in Riyahd (a family irony here btw - my cousin worked in very heavy construction and was a principla advisor on the construction of the port a couple of decades ago - small world, eh ?). As it happens not much progress was made. The real news over the weekend is that the violence in Nigeria took more off the table than the Saudi's put on by a big margin. And the REALLY big news from last week was Israel's rehearsal of a massive long-ranch strike against some unknown, un-named and likely target. Don't know about you but if somebody was threatening to use their newly developed nuclear capabilities to wipe me off the face of the earth in every public forum, including the UN, I'd certainly consider doing something ahead of time.

In the meantime consider the accompanying chart as your context setter. The central chart is world oil prices which seem to be roaring ahead - btw something Jim Hamilton pointed out this is not just fundamentals + geo-political risk + speculation. It ALSO includes a "resource economists" exhaustion premia - in other words if we think major new reserves are unlikely and existing ones declining then oil in the ground has an increasing value. Nobody appears to be discussing that but when you include it it's not entirely clear that oil is in fact over-priced on long-term fundamentals. Or not as much as folks would have you believe. As you can see the price continues to roar ahead and, from the RSI, is not being over-bought. Hmmm... Meanwhile the CRB Index is also rising but relative to the Oil price not as fast - which also tells us that demand may be dropping for Commodities, ceterus paribus, a tad but Oil continues to be its' own special case. Double hmmm...

So where's a working energy policy when you really need one ? 

Oil  Outlook  Readings

Saudi Arabia Assesses Oil Options As Saudi Arabia prepares to host a summit of oil producers and consumers Sunday, it finds itself without its usual leverage over oil markets. Concerned about the long-term impact of soaring prices, Saudi Arabia is limited in its ability to do much about it. The world's largest oil supplier does have two blunt weapons in its arsenal if it wants to try to beat down soaring oil prices to assuage the growing outcry over pump prices in world capitals. It can open its spigots wider to put more crude on the market, and it can sharply discount that crude to get refineries to lap it up. The question is whether even a temporary surge of discounted Saudi oil would be enough to reverse the most bullish oil market in decades. And if so, would the price remain lower for long? Some industry analysts say that such a strategy, if it is employed, might not have a lasting effect and could even risk pushing prices higher if Saudi Arabia doesn't find willing customers for the additional oil at a time when demand is beginning to erode. This is especially so given that most of Saudi Arabia's excess capacity consists of heavy and high-sulfur crude, which is harder to refine into high-end products like gasoline, and therefore is much less in demand. An effort to artificially bludgeon prices down, they say, could magnify the very concerns that have helped drive prices up in the first place -- above all, the worry over the reliability of long-term supplies. It would also mean delving into Saudi Arabia's already thin spare capacity, which has been another goad for upward prices. One thing that nearly all sides agree on: the market isn't hankering for additional oil. Saudis May Be Strapped for Oil, Near Full Capacity

Can Saudis back output promise?  It won't be enough for Saudi Arabia to say it's going to boost production at the gathering of oil producers and consumers this weekend, it'll have to prove it -- and that might not even be enough to quell the world's record-high crude-oil prices. Saudi Arabia, the world's largest producer of oil, is expected to announce on Sunday that it will raise its production level by 200,000 barrels per day starting next month to lift total daily production to 9.7 million barrels per day, according to media reports. Representatives from Saudi Arabia and other major oil producers have been widely quoted as saying that there is no actual global shortage in oil supplies and some have even said that demand is slowing, so it's a bit of a struggle to make sense of the expected move. World oil demand was seen at 86.6 million barrels per day for the first quarter of 2008, while world oil supply in the first quarter was at 87.2 million barrels per day, according to data from the International Energy Agency. In the bigger scheme of things, a Saudi oil output increase can be seen as "necessary, but not sufficient," Sieminski said. Prices will "start to recede when the markets become convinced that demand growth is slowing down and supplies are starting to pick up." The Saudis are right in saying there is no current shortage, but the markets are worried about balances 3 to 5 years from now, he said. "They want to do everything they can to at least put a cap on prices," said Vera de Ladoucette, senior director of Middle East Research at Cambridge Energy Research Associates. It's not really in the Saudis' long-term interest to have prices that high, she said. "That might kill demand and trigger research for non-oil solutions for transportation." Capital costs have risen dramatically, more than doubling in three years, she said. The global supply and demand balance for oil is tight and while there is no need for more oil, crude inventories are lower than they were a year ago and spare capacity is limited, said de Ladoucette, who's based in Paris. So "you have basically all the elements to justify high prices, but not that high."

Oil: Fundamentals Trump Rhetoric from Saudis, Politicians, Barron's The much ballyhooed Saudi oil summit came and went this weekend with a pledge from the hosts to increase daily production by 200,000 barrels, which just isn't enough supply to bring prices lower. (Notably, 200,00 barrels is the same amount as production lost at a Shell installation in Nigeria after rebel attacks last week.) This weekend also brought a Barron's cover story declaring oil to be in a bubble that's ready to pop. After an overnight rally in London, oil prices were recently declining in New York as the dollar rallied - a stronger dollar being just one factor Barron's cited as a possible killer of the oil boom. But for me, the story recalls the old saying: "If 'ifs' and 'butts' were candy and nuts, everyday would be Christmas." Also, bubbles rarely peak when 'everyone' is calling for their demise, as Henry and I discuss in the accompanying video. When reading and hearing the chatter about the "oil bubble" about to pop, consider another old saying: "Markets can stay irrational longer than you can stay solvent," as was the case with tech stocks in the 1990s or housing earlier this decade. Finally, $100 oil isn't exactly cheap, as Barron's concedes. With all the talk about speculation driving the market and politicians recommending all sorts of bizarre and anti-market "solutions," the bottom line is still the bottom line: Oil supply is not keeping up with demand and no amount of rhetoric from OPEC or U.S. officials can change that fundamental truth.

Why Brazil Isn't Ashamed to Exploit Its Oil One reason for Mr. Gabrielli's optimism is last year's discovery of the offshore Tupi field, which is said to contain between five billion and eight billion barrels of black gold. Another, equally important reason is that, according to Mr. Gabrielli, neither environmentalists nor Brazilian politicians have raised concerns about exploiting oil in the waters off the Brazilian coast. That's quite a contrast with attitudes in the U.S., where offshore exploration and development has been all but shut down save in the Gulf of Mexico. One company official explains the difference by saying that Brazilians understand the importance of energy to their future, while Americans do not. I have another theory. And mine fits the pattern of resource development – or lack thereof – all over the Western Hemisphere. It comes down to this: Where government has the property right, restrictions on development tend to be low. But when the private sector is the owner, environmental concerns blossom. Exhibit A is Petrobras. Not only did Mr. Gabrielli say there is no appetite for stopping offshore projects in his country. He went further. "Brazil has one of the freest and most investor-oriented regulation in the world. Even freer than the United States of America," he said, referring to the climate for oil exploration. That may be so, but it would be interesting to know why, given Brazil's prominent embrace of socialism. It could be that the country is changing. After all there is now private-sector competition in the oil industry. Yet it is also worth noting that the Brazilian government has a 58% controlling stake in Petrobras's voting shares and 32% of its total shares. This means that some of Petrobras profits go straight to the government's bottom line, giving the politicians more money to spend on bribing their constituents. At least Petrobras is a well-run, publicly listed company that has to answer to shareholders. Pemex, Mexico's state-owned oil monopoly, has a history as a notorious polluter yet is seemingly exempt from political pressure to clean up its act. Mining provides an even better window on this contradiction. Bolivia, Venezuela and Cuba all boast aggressive, state-owned mining operations. Yet neither the nongovernmental enviro-movement nor the political class utters a peep to object.

Quest for Oil: Where to Look Is the Question The oil industry is turning up the heat on Congress to open up more federal land to oil and natural-gas drilling, arguing that will do more to cut energy prices than new taxes on industry profits. But environmentalists and Congressional Democrats opposed to that tack are firing back with a new challenge: Drill what you have. For years, political and environmental obstacles have limited the oil industry's access to large swaths of U.S. territory, most notably the Arctic National Wildlife Refuge in northern Alaska. Democrats have tended to support restrictions on access to sensitive lands and focused on other ways to drive down prices: reining in speculators; punishing the OPEC oil cartel; and funding research on alternative-energy sources, possibly via a windfall-profits tax on oil companies. Industry backers, including many Republicans, say the answer to high prices is increased supply and that the way to do that is to drill in areas now off-limits. Now, voter anger over soaring gasoline prices is shoving this perennial dispute to the top of Washington's energy agenda. On the New York Mercantile Exchange, benchmark crude for July delivery fell $1.88 Friday to settle at $134.86, near its all-time high. Last Monday, the average retail price for a gallon of regular unleaded was $4.039, according to the Energy Information Administration. A recent Gallup poll shows 57% of Americans support opening up new territories to drilling, while a Wall Street Journal-NBC News poll conducted this month shows 59% of Americans saying Congress should take the lead on responding to high gas prices. Although high prices are giving the oil industry a new opportunity to make its case for greater access to domestic petroleum, the industry's allies in the Democratic-controlled Congress have so far had little success. Last week, a House panel voted against lifting a decades-old ban on drilling in the outer continental shelf. The industry and its backers say such arguments reflect a fundamental misunderstanding of the oil industry. Companies don't know how much oil is under the lands they lease, so they buy up large swaths in the hope that a fraction will work out. Much of the area that isn't producing, they say, doesn't have oil or gas in commercially viable quantities.

Why Is Oil So High? Pick a View People who have spent their careers tracking the ups and downs of the global oil markets say their compasses are spinning. Oil prices rise for reasons they cannot quite fathom, and where prices will be a year from now has become, literally, anybody’s guess. Those uncertainties have left regulators, oil companies and suppliers uncertain whether increases in supply or declines in demand will affect prices as they have in the past. Some wonder whether the market is broken in some way, creating a bubble of artificially expensive oil. “This whole industry has absolutely been turned on its head,” said Stephen Schork, who edits an energy newsletter. For the first time since oil drilling began in the 1850s, the price has climbed for seven consecutive years. Old rules of thumb and assumptions that once helped traders foresee the direction of prices no longer seem to work. For example, since the oil shocks of the 1970s, a weak American economy used to mean lower prices. But during a period of sluggish growth in this country the price of oil has kept rising, to about $135 a barrel. Energy experts offer radically diverse predictions for the coming year, ranging from $60 oil to $200 oil. Beyond that, however, there is broad disagreement about the role of speculators in oil markets — particularly a new breed of financial investors, including pension funds and hedge funds, who view oil and other commodities as just another way to make money, like stocks, bonds and real estate.

• Oil’s Perspective on What’s Behind the Energy Crisis

China Shocks With 18 Percent Fuel Price Rise; Oil Falls China will announce a surprise increase of about 18 percent increase in retail gasoline and diesel prices effective from Friday, the first increase in eight months, two industry sources told Reuters. "Yes it's real. They are going to raise the prices. We were told to wait in the office to receive the official notice," said a fuel sales official with top refiner Sinopec Corp. The sources said gasoline and diesel prices will rise by 1,000 yuan ($145.5) per metric ton. China last raised pump fuel prices in November. The move in November took many market watchers by surprise as Beijing has repeatedly vowed to rule out "near-term" price increases to fight decade-high inflation. Oil prices fell $3 a barrel on Thursday on the news because demand from China has been one of the main factors driving oil prices to a record near $140.

Deals With Iraq Are Set to Bring Oil Giants Back Four Western oil companies are in the final stages of negotiations this month on contracts that will return them to Iraq, 36 years after losing their oil concession to nationalization as Saddam Hussein rose to power. Exxon Mobil, Shell, Total and BP — the original partners in the Iraq Petroleum Company — along with Chevron and a number of smaller oil companies, are in talks with Iraq’s Oil Ministry for no-bid contracts to service Iraq’s largest fields, according to ministry officials, oil company officials and an American diplomat. The deals, expected to be announced on June 30, will lay the foundation for the first commercial work for the major companies in Iraq since the American invasion, and open a new and potentially lucrative country for their operations. The no-bid contracts are unusual for the industry, and the offers prevailed over others by more than 40 companies, including companies in Russia, China and India. The contracts, which would run for one to two years and are relatively small by industry standards, would nonetheless give the companies an advantage in bidding on future contracts in a country that many experts consider to be the best hope for a large-scale increase in oil production.

Israel shows abilities for Iran strike A large Israeli military exercise this month may have been aimed at showing Jerusalem's abilities to attack Iranian nuclear facilities. In a substantial show of force, Israel sent warplanes and other aircraft on a major exercise in the Eastern Mediterranean early this month…How Iran would retaliate if it comes to war, Iran Would Respond to Any Attack by Israel With `Heavy Blow,' Cleric Says

• The Israeli Air Force (Video 04/27/2008 ):The Israeli air force ? the best in the Middle East ? has to prepare for anything says one of its officers, because if Israel loses just one war, it will cease to exist. Bob Simon reports

Posted by dblwyo at 07:43 AM | Permalink | Comments (0)

At this point we think we can probably put the de-coupling thesis to bed but perhaps not. In any case it's putting itself to bed. Over and above all that, no matter what worries we think we've got about growth and inflation, they are worse abroad. In fact both the major developed and developing economies are experiencing much worse problems on all fronts. Growth in Europe and Japan is worsening but their inflation problems are worse yet with some of the highest readings in many years. The pressures this will put on their economies and the ECB will be tremendous. Given that Europe, Japan, Canada and Mexico are still our biggest trading partners these troubles will, more than likely, soon be reflected in our own exports numbers.

There will be a fascinating dynamic play out in the currency markets however. Inflation means that the ECB and BoE need to raise rates which will put down-pressure on the $. Slowing growth will lessen US imports and put an opposite pressure on. On the other hand as long as US savings rates are low (negative actually) the US will still have to import foreign currencies to support our spending habits - this is the continuing long-term structural issue (Goldman Sachs VP calls for U.S. global policy restructuring ) that will be with us for a long time.

Meanwhile the developing economies are taking their shares of the worldwide troubles but sharing in their own unique ones. Despite the fact that growth prognostications are still astounding by historical standards in China, India, et.al. their problems is that extremely high growth is vital to holding their societies together. A fall in growth in China from 11% to 8% actually means a great deal of social unrest for example.

An interesting meme that's been given a great deal of circulation abroad is that the Fed's low-rate policies are, in effect, exporting inflation ! LOL !! Not only can foreign Central Banks manage domestic inflation problems but that's there job. Unfortunately  political constraints are more severe in most of these polities so the severity of inflation controls thru interest rate increases required are not likely to be put in place. Thereby creating a viscious cycle which will exacerbate all the other problems. 

International  Economy

Inflation in Europe Accelerates More Than Estimated to Highest in 16 Years The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said today. The rate for May is higher than the 3.6 percent estimate published on May 30. Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a ``serious challenge'' to economic growth, officials from the Group of Eight nations said yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.

Stevens v. Bernanke Australia's central-bank governor shows how to deal with U.S.-induced inflation. The biggest problem in emerging economies isn't "the credit crunch about which we hear so much . . . but inflation." So said Glenn Stevens, Australia's central bank governor, to a business crowd in Melbourne Friday. It's too bad U.S. Federal Reserve Chairman Ben Bernanke wasn't in the audience. Unlike his Fed peer, Mr. Stevens has ruthlessly resisted inflationary pressures. Since taking office in September 2006, he has raised Australia's benchmark cash interest rate to its current 7.25% from 6%. That's a 12-year high, and it has elicited yelps from homeowners, most of whom have variable-rate mortgages. It has also ruffled political classes on both sides of the aisle who support easy money policies. Mr. Stevens sees more price pressure on the horizon in Asia, thanks to strong growth in China and "very low" regional interest rates, which generally mirror those of the Fed. That's the key message of Mr. Stevens's speech: The Fed's actions are putting emerging-market policy makers in a tough spot. That's evident from Vietnam's decision last week to lift interest rates for dong-denominated loans to 14% from 12% to stem inflation. India, Indonesia and the Philippines have also raised rates recently. China, for its part, is raising bank reserve requirements to rein in credit growth and has allowed the yuan to revalue at a faster pace to avoid importing more inflation. The Federal Reserve has a global responsibility, setting monetary policy for what can loosely be called the "dollar bloc" that includes much of Asia. Asian policy makers now have to work to restrain the inflation that the Fed has unleashed, and Australia is setting a good example of how to do it.

Hang Around 73 Years for Final Check From India: Andy Mukherjee Markus Rosgen, a Citigroup Inc. equity strategist in Hong Kong, has turned the commonly used metric of dividend yield on its head with interesting results.The inverse of dividend yield is, of course, the price of a share divided by its most recent payout. The measure can be thought of as a dividend-payback period, with a 5 percent yield implying a 20-year horizon for return of capital to the investor discounting any gain or loss from a change in the stock price. Well, the answer is almost 73 years for the MSCI India index, which makes the third-biggest Asian economy ``the most expensive market in the region,'' Rosgen and his colleagues, Elaine Chu and Brian Li, said in a report yesterday. When the outlook for capital appreciation is clouded -- as it is now, by high food and fuel prices, a global credit crunch and dinner-table talk of stagflation -- it's quite natural that investors will look for stocks that have more assured payoffs. … most investors would rather own a short payback asset,'' the Citigroup researchers say, identifying Pakistan (16 years) and Taiwan (22 years) as more attractive than not only India, but also South Korea (54 years) and China (39 years). The inverse of the payout yield is a crude measure because it supposes that a company's cash flows won't change in the future, an assumption that holds for mature enterprises in developed economies, but not for their fast-growing rivals. Even so, a payback period that's too long could be an important clue that prices are unsustainable. ``India with a 113- year payback in January 2008 was just a generation too far for most investors,'' say Rosgen and his colleagues. Sure enough, the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has declined 30 percent this year in U.S. dollar terms, the fourth-worst performer in Asia after Vietnam, China and the Philippines. With inflation at its fastest in seven years, Indian interest rates may have to climb still higher. If Indian equities are at present vulnerable to interest rates because of their duration, then the chances of a drop in the index are high. Credit Suisse Group's forecast is for the Sensex to fall to 13,000 by the end of this year, a further 16 percent decline from the current level. Another relevant example may be of Taiwan, which, like India, had a dividend-payback period in excess of 100 years: in 1997 and in 2000. It seemed that investors would wait for two or three generations to get their money back. That show of patience proved to be ephemeral and Taiwanese companies had to increase their payout ratios, Rosgen and his colleagues noted in a research note they wrote in January. Comparison of equity duration among Asian nations

Euro-zone economy stalled in June, early data indicates The Munich-based Ifo Institute's monthly gauge of German business sentiment posted a larger-than-expected June drop to 101.3 from a reading of 103.5 in May. Consensus expectations were for a more moderate decline to 102.3, according to a Dow Jones Newswires survey of economists.German firms "have assessed their current business situation clearly less favorably than in the previous month, and they are more skeptical regarding the six-month outlook," said Ifo Institute President Hans-Werner Sinn, in a news release. "The sharp hike in oil prices is evidently becoming an increasing burden on the German economy." Meanwhile, a preliminary purchasing managers index for the manufacturing and service sectors across the 15-nation euro zone pointed to a contraction in activity in June, according to news reports. The composite PMI reading fell to 49.5 from a reading of 50.6 in May. Forecasts were for a slight drop to 50.5.

Rising Prices Can Harm Exporters at Home Rising commodity prices are creating complex challenges for commodities exporters as they struggle with social tensions and policy dilemmas. The complications highlight an economic phenomenon: Export booms have troubling side effects.

There were several new data series released last week, including Housing Starts, PPI, Industrial Production and Unemployment Claims. By and large the bad news continues unabated but continues to be discounted - part of the problem seems to lie in normal "cognitive dissonance" - much of the news has been so bad for so long and mis-represented in the headlines that people are jaded, faded and numb. We're not going to dive into every one of the series - some of the excerpts do a nice job of that for you. But we do want to focus on two - IndProd and Claims - as well as take a step back and get a little perspective.

What we're seeing - and this is important IOHO - is that the slowmotion slowdown that's been visible for a very long time is both continuing and starting to accelerate downward. The other thing we see in all the data is that a gradual deterioration, unlike recent downturns has weakened over much longer time-periods rather than turning abruptly downward as people are looking for. Making everyone vulnerable to "boiled frog syndrome". The third thing we're seeing in both the more ponderous quarterly data and the higher-frequency monthly/weekly data is an increase in the aforementioned downtrend. Finally - perhaps the most important thing - NONE of this appears to be being reflected in key decision makers thinking. Or at least they aren't telling us how and where it is. Admittedly two different things. In other words, after all the effort we've made here to discuss the construction and design of dashboards to filter incoming headlines into useful information and help in decision-making we'd guestimate that most of the stuff you hear and read is still based on what people see today looking in the rearview mirror. Not on what they could see today looking at how the currents are running. 

Which means there are going to be some very surprised decision makers, then investors and then employees and other stakeholders in the future if our assessments are anywhere near correct. You might want to re-examine the prior posts on the big picture econ data (Economic Outlook: Demand Declines, Bad News, & Wealth) and the HF indicators (HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption).

Industrial Production 

 All of these points are, we think, illustrated and reinforced by the 3-part chart on Industrial Production which shows IndProd, Capacity Utilization and GDP changes on a YoY% basis on either a monthly or quarterly basis. The bottom sub-chart runs back to 1980 for all three so you can how closely coupled and in what relationships in the business cycle while the middle runs back to 1990 for a deeper dive on recent downturns. If that establishes the argument about structure, pattern and trends sufficiently then the top sub-chart is very interesting where both IndProd and CapUtil have recently tipped abruptly downward, after an anomolous and unexpected period of uptick in the Fall and Winter. Which we finally figured out was the increase in exports.

Unemployment Claims

Similar themes and confirmations emerge in the Unemployment Claims data - which you may have trouble finding in this form as we had to go thru enormous gyrations to convert the weekly data into monthly and quarterly data. But the results are interesting and worth the effort, again IOHO. Following a similar approach the bottom chart is quarterly back to 1968 and Claims (both Initial and Continuing) are shown on a reversed scale vs GDP.The middle chart almost perfectly makes our point about a seriously weakening job market and economy but one that's doing so in a slowmotion fashion (which we think is linked to how weak the so-called "recovery" was). It shows Initial (ICSA) and Continuing (CCSA) Claims and makes the point that both are telling us the same thing NO MATTER WHAT the week-to-week headlines say. Therefore the top chart focus on just the Continuing claims and the trends. Any surprises.

So as you skim over the excerpts in the readings keep all this in mind as your filter for interpreting what they have to say. You might want to particularly pay attention to the Duke/CFO survey where the CFO's are finally beginning to see what we see !  

Is the U.S. Really in a Recession? Why does anyone still think that the US economy is in recession? But is America really in recession? Experts seem to think so, including Alan Greenspan, Warren Buffet, George Soros and Martin Feldstein, the chairman of the National Bureau of Economic Research (NBER), the academic committee in Boston that determines business cycle dates. But where is the evidence for this belief? To be sure, housing and finance, two important parts of the economy, are in serious trouble. There is a world of difference between a dislocation confined to only one or two parts of the economy, such as housing and finance, and a generalised economic decline. The difference between a general recession and a sectoral slowdown is not just a semantic quibble. For businesses and workers, a slowdown is a period of weak growth, modest job losses and disappointing profits; a recession is marked by mass unemployment and widespread bankruptcies. Most importantly, consumer spending has remained robust. American consumers, far from cutting back to bare essentials as was expected by bearish commentators after the credit crunch, are actually increasing their spending. The evidence of this, contained in the strong retail sales figures for May published last Thursday, was by far the most important economic news of the past few weeks. Yet these figures received almost no media coverage and little market attention. Yet May's retail sales figures revealed a picture completely at odds with conventional wisdom about the US economy.

• U.S. Producer Prices Increased 1.4% in May, More Than Economists Estimated
• Housing Starts in U.S. Fell 3.3% Last Month to 975,000 Pace, 17-Year Low
• 2008 Recession: That’s All, Folks?, Merrill's Rosenberg: Recession Confirmed
• CFOs optimism rises for now but signs point to further declines

Weekly Unemployment Claims Here is another look at unemployment claims. According to the Department of Labor for the week ending June 14, initial unemployment claims were at 381,000, and the 4-week moving average was 375,250. The first graph shows the continued claims since 1989. Continued claims declined this week, but have been trending higher and are still above the 3 million level. Notice that following the previous two recessions, continued claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

Philly Fed: Manufacturing "Continued weakening", "Cost pressures widespread" Here is the Philadelphia Fed Index for June activity released today: Business Outlook Survey. Note the special question at the bottom on prices. The average expected price change this year is 5.4%! This graph shows the Philly index vs. recessions for the last 40 years. There are a number of times the index was below zero without a recession - so the reading today doesn't mean the economy is in recession. However it is very likely that the economy is already in recession. From the release, weaker conditions and higher prices : “The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased slightly, from -15.6 in May to -17.1 this month. The index has now been negative for seven consecutive months. “

Economic rebound at least a year away Economic woes are expected to continue until at least mid-2009, and things may get worse before they get better, according to a quarterly survey of chief financial officers.The quarterly Duke University/CFO Magazine Global Business Outlook study found 71% of more than 1,000 CFOs surveyed said the U.S. economy will not begin to rebound until 2009. And 54% think the turnaround will happen by next summer at the earliest."This could be the longest slowdown since the double dip recession of 1979-81," said John Graham, director of the survey. There was some positive news from the survey: Overall, optimism rose slightly from the previous quarter.Still, financial chiefs from a broad range of public and private companies hold a grim view of the economy and attribute their pessimism to a tough jobs market and rising inflation. Weak consumer demand and high fuel costs also topped their concerns.CFOs said difficulty in attracting and retaining high quality employees is their the top concern, followed by the difficulty of planning in the uncertain economic environment. Accordingly, they expect employment to fall another 0.2% in the next 12 months. A net 324,000 jobs have already been lost in 2008, the worst start to a year since 2002, when the U.S. economy was just coming out of the last recession. As the economy sheds more and more jobs, businesses said they are increasingly worried about the fallout of rising prices and mounting layoffs. With soaring fuel and food prices, 45% of companies said they have passed along rising costs to customers in the form of higher prices.

Two Bubbles, Two Paths  LATELY more and more people have been questioning the received wisdom about what a central bank should do when confronted by an asset price bubble. That piece of wisdom, shared by Alan Greenspan and Ben S. Bernanke, the former and present Federal Reserve chairmen, holds that deliberate bubble-bursting is something between impossible and dangerous — and thus best avoided. Instead, according to this view, the Fed should let bubbles burst of their own accord, and then be prepared to mop up after. This strategy has modest objectives. It is not intended to prevent bubbles, or even to limit the price collapse when a bubble bursts. Rather, it is designed to limit collateral damage to the rest of the financial system, and especially to the overall economy. The Fed executed such a mop-up-after strategy with great success when the tech bubble popped spectacularly in 2000. Despite the destruction of roughly $8 trillion in paper wealth, not one financial institution of any size failed, and the ensuing recession was so mild that I call it “the recessionette.” In taking up these three arguments, it’s crucial to distinguish between two types of bubbles. The first, what I’ll call “bank-centered bubbles,” are speculative excesses caused or principally fueled by irresponsible — you might say crazy — bank lending. The housing-mortgage bubble was an obvious and painful example. But in other asset bubbles, bank lending plays a minor role, or none at all. The tech-stock bubble was a dramatic example of this second type.I would argue that the central bank’s proper role is fundamentally different in the two types of bubbles. Here’s why:When bubbles are not based on bank lending, the Fed has no comparative advantage over other observers in distinguishing between rising fundamentals and bubbly valuations. It may see bubbles where there are none, or fail to recognize them until it’s too late — or probably both. There are two main conclusions: First, when bubbles are not based on bank lending, the mop-up-after strategy still looks pretty good. When it comes to bank-centered bubbles, however, there are many more things that a central bank can and should do. But raising interest rates to burst the bubble is probably not one of them.

$1.555 Yesterday the Bureau of Economic Analysis released its estimate of the U.S. current-account deficit for the first quarter of 2008. The lead sentence said: “The U.S. current-account deficit--the combined balances on trade in goodsand services, income, and net unilateral current transfers--increased to$176.4 billion (preliminary) in the first quarter of 2008 from $167.2 billion (revised) in the fourth quarter of 2007.” Today’s currency trading closed at $1.555 per Euro. That’s not a record low, but the dollar has fallen dramatically over the last five years. What’s the connection between yesterday’s report on the current-account deficit and the weak dollar? You can see the current account’s steady erosion in the following chart. The dollar has not fallen as precipitously, but the trend is the same: Downward. Once again, why? Because we are so fond of importing goods from the rest-of-the-world. We are continually willing to offer more dollars for a Euro (and other currencies) so that we can buy more goods denominated in Euros (or other currencies): Whether that’s autos or oil. Then the rest-of-the-world reluctantly accumulates those cheaper dollars that it acquires by selling goods to us. Occasionally, such as in the early 1980s and late 1990s, the rest-of-the-world enthusiastically invests in the U.S. That temporarily drives the dollar’s value up as the rest-of-the-world purchases dollars to buy into our stock market. But when the boom ends, the dollar’s value falls. One way or the other, the current-account deficit grows. If you update the chart above in your mind’s eye with the latest current-account-deficit of $176.4 billion, you will notice that the current-account-deficit’s plunge has temporarily halted. That’s typical for an economic slowdown here. You can see that the line heads north in recession, as falling U.S. incomes reduce U.S. import demand. Recovery from recession has always resuscitated our desire for imports and restarted the current-account-deficit’s slide. The dollar’s deterioration may also abate for a while as we purchase less from abroad. But that’s small relief from a long-run trend. If you want what the rest-of-the-world sells, you will offer more of your currency to purchase a unit of their currency. That’s what we have been doing for some time.

Goldman Sachs VP calls for U.S. global policy restructuring As the world's economies become more globalized and the U.S. dollar competes with a stronger euro, America needs to restructure its global policies to attract more foreign capital, Robert Hormats, vice president of Goldman Sachs International, said Wednesday. The next U.S. administration will need to make "important policy changes to take advantage of new global opportunities," Hormats said during a speech at an Asian banking and finance conference at the San Francisco Federal Reserve Bank. Those changes include realizing the U.S. needs to accelerate improvements in its trade balance to reduce dependence on foreign money, boost competitiveness by reasserting the Doha Round global effort and be a leader in global policy creation, he said. The collapse of U.S. domestic savings, compounded by a widening trade deficit and increased consumer borrowing, have contributed to U.S. dependence on foreign capital, Hormats said. "Exports are rising at a much more rapid rate than imports," Hormats said, citing that 95% of the world's consumers now are outside the U.S. "About one-third of the profits of S&P 500 companies come from activities abroad." Hormats also said the Doha Development Round, a set of international negotiations to promote free world trade, is stalling, and the U.S. needs to take initiative to open global markets for goods and services. "If this round falters, and I think in the current moment there's a good chance that it will ... then the U.S. and other trading nations would do well to devote their efforts to improving -- and ensuring firm adherence to --- existing rules and dispute settlement procedures," Hormats said. He said the U.S. needs to focus on improving itself economically, but it also should become a leader in crafting international economic policies.

Posted by dblwyo at 06:50 AM | Permalink | Comments (0)

Now that we've got all this machinery listed, cataloged and presented it might be time to apply a bit of it so that's what we propose to do with the Tech Industry news from the last few weeks. A lot of that's either gadgets, related to Telecom or the Yahoo Wars...all of which we'll come to in separate posts. Here we'll focus on a couple of things in the classic mainstream of the industry - where the primary big news that caught our eye in the last few weeks is HPQ's acquisition of EDS. Before we comment on that per se this is our time to talk about the industry in general.

When you look at the analysts consensus forecasts for Q4 it's the Tech industry they expect to save the day. Earlier this year the bottom-up estimates were 20% for Tech and 29% for Telecom. It'll be interesting to see how/when/where/if these other industries follow the financial guys who've been madly revising downward. There are two sets of problems you need to think about. First there are some major breakages in the logic regarding economic fundamentals. Second there are further breakages with regard to the analyst's methodologies.

But let's start with a chart on the NDX and, pardon the experimentation, it's a "Point and Figure" chart which may be as new to you as us but does offer up some interesting perspectives. A column of X's indicates a day where the price rose a pre-set amount and O's the converse - start a new column when certain limits are exceeded. The result is almost a pure price trend chart though dates are indicated by numeric/letter entries where 1=Jan...Oct=A and so on. And this one you really do need to click thru on. The chart on the left is a daily chart that runs back ~ Oct peaks while that on the right is a weekly chart that runs back to '06. Interestingly the shorter-term chart didn't quite break the uptrend this last week - the innate sentiment in favor of Tech is therefore intact. Yet on the longer-term chart there is a significant downtrend and the software suggests a bearish target of 1760 ! But that's only a 9% drop from here. 

The Fundamental arguments that have floated around are that spending will still occur on Big Tech because it helps companies save money. Got some bad news for folks - I've made those decisions and sold to those who day and that is not the way they think. When things tighten up they cut capital budgets and live with what they've got. So here are the four exposures on fundamentals: 1) a slowing economy which is likely to tip over will lead to a downturn in capex with the normal lag; i.e. Tech spending will be pressured and the signs are already in the surveys. 2) For some players the "consumer shift card" has been played,e.g. Apple and iPod/iTunes. Please - consumer spending is going to be the first and is already headed for the basement. 3) Foreign sales are the next shibboleth - based on currency conversions and de-coupling. Well as a matter of fact many of the majors have shifte large chucks of business into the int'l economy - a major structural shift in fact. But it's still not their dominant businesses and they've enjoyed a revenue runup mostly based on currency effects not jumps in unit sales. 4) On top of which it turns out that not only is de-coupling mythological but the BRICs et.al. are experiencing their own unique set of problems in addition to slowing growth; e.g. Europe. C'est la vie for that arguments set - does the earnings estimate hold up ? Do you think it'll be "just" a 9-10% if it doesn't ? 

The key to re-thinking earnings is coupling economic fundamentals with company performance analysis - which is where the analyst community should come in but, with some notable exceptions, generally doesn't. Earlier (Readings (Earnings): The Real Earnings Realities that Ain't...YET) we'd gone thru a long, careful and documented dissection of some of the characteristic flaws of analyst work that might be worth reviewing. Aside from the fact they are often wrong they also tend to lag the realities and all too often their work is biased because it's based on management prognostications. Which in turn are all too often looking backward to the last quarter instead of the readily discernible general trends that should govern business outlooks. In other words executives are telling folks how it is and was - not reading the tea leaves about how the currents are running. Which was, at the end of the day our whole point with the "Dashboard" series. 

Which leads us to this next chart which is a little more traditional and uses ETF's as proxies for various Tech sectors starting with the common index of IXN - Global Technology stocks which turns out to track the NDX almost exactly. On the top are IXN, IGV - Software and IGW-Semiconductors. The bottom is more Telecom oriented with IGN-Telecom Equipment, WMH-wireless provides and mfg., FDN - Internet players (GOOD, Yahoo, et.al.) and TTH - telecom service providers. On the whole everybody has enjoyed the benefits of the bear market bounce AND the tech mythologies, particularly software which'll power thru any possible downturn of course. This whole discussion reminds us of nothing so much as the discussions circa '05 about how the homebuilders were safe this cycle 'cause they'd been careful to maintain the health of their balance sheets and not over-invested in land. Think about the metaphor there for a bit...please !

If our economic outlook has any validity to it the estimates of Tech earnings are wildly overdone due to a lack of sensible business analysis coupled with grounded economic fundamentals. Potentially an textbook case in why our mantra makes sense. Which then leads us to the pick good companies who'll do well as survivors in any downturn and prepare yourself to pick them up as/when/if we go thru a significant adjustment. Which in turn leads to the HPQ/EDS news. Which was a real puzzler to a lot. There are two key questions, perhaps three here. First can Hurd apply his strategy-based execution improvement magic to EDS which sorely needs it having kept tripping over it's own feet for years. Two - out of necessity EDS targets the big companies for advanced and complicated services - is there enough HP business there to grow a well-running EDS's revenue ? Or, converesly, can EDS bring in HP behind it on it's client base ? HP has a large enterprise component but that's not been its' primary emphasis so this represents a real strategic addition, if not a shift. And, I guess, third, EDS has done very poorly at building an international presence and capacility unlike IBM, in particular, or Accenture. If that can be developed and leverged there some real potentials. In any case HP is both an extremely well-run company which also has a very thoughtful and considered strategy by line of business. IOHO they go on any value oriented investors shopping list, post downturn of course. 

After the break, in addition to some excerpts, you'll find pointers to some recent vidclips on CNBC with some analysts who actually reinforce much of what we're arguing for here. Worth your time. Bon Appetit'. 

Technology

Hewlett-Packard Agrees to Acquire EDS -- Hewlett-Packard Co. agreed to buy Electronic Data Systems Corp. for $13.2 billion to take on International Business Machines in computer services. The company said full-year profit and sales will top its earlier goals. Hewlett-Packard will pay $25 a share in cash, or 33 percent more than EDS's closing price May 9, before the companies disclosed they were in talks. Combining with EDS, founded by H. Ross Perot in 1962 with $1,000, would help Hurd more than double revenue from services as PC shipment growth slows worldwide. Hurd can cut ``a significant amount of cost out of EDS'' by reducing jobs and combining data centers, he said. The purchase will more than double Hewlett-Packard's annual sales in its services unit to almost $40 billion, making it as large a business as PCs. Research firm IDC predicts that PC shipment growth probably will slow to 13 percent worldwide in 2008 from 15 percent last year, dragged down by waning demand in the U.S., the largest market for the machines. The executive cut more than 15,000 jobs in 2005, and squeezed costs from data centers, pensions and real estate to save another $3 billion a year. He also has reinvested in the business, adding 2,000 salespeople last year and spending about $7 billion on acquisitions, mostly to bolster Hewlett-Packard's software business. Hewlett-Packard's services group reported sales of $16.6 billion in its latest fiscal year, compared with $22.1 billion for EDS. Even combined, that revenue would still trail IBM's.

• BizTech: Three Reasons H-P/EDS Might Fail, BizTech: H-P Aims to Be Big Services Player, BizTech: Leaders Love H-P/EDS, Deal Journal: A Look Back at EDS
• Talks Put H-P Veteran Livermore in Spotlight

• Hewlett-Packard Investors Say Hurd May Struggle to Squeeze Costs From EDS

Why HP's Deal Is a Head-Scratcher The tech giant's $14 billion purchase of EDS may not be enough to help it catch up with rival IBM. When Hewlett-Packard (HPQ) announced its $13.9 billion acquisition of tech services giant Electronic Data Systems (EDS) on May 13, pundits heralded it as a bold move by HP CEO Mark Hurd. In one stroke, it seemed, he had put HP on a stronger footing with market leader IBM (IBM) in the fiercely competitive tech services business. Together, HP and EDS will create a services giant with $38 billion in revenues, compared with IBM's $54 billion. Yet a closer look at the deal raises questions about Hurd's strategy and choice of dance partner. EDS, which was founded by H. Ross Perot in 1962 and pioneered the practice of taking over corporations' computing operations, was slow to respond in the early 2000s to the threat of nimble Indian rivals offering services at sharply lower prices. Revenues stagnated, and EDS racked up huge losses. Eventually, the company increased its overseas hiring, and bought control of an Indian company, MphasiS. But even now MphasiS operates independently, with its own sales force and customer base. So this deal may not change the game when it comes to one of the most important factors in tech services. The top-tier services companies need large, low-cost, global workforces, and their operations need to be tightly integrated so employees with diverse skills collaborate smoothly. IBM, Accenture (ACN), and Indian companies such as Tata Consultancy Services lead in this effort, while EDS and HP have lagged.

Job cuts likely in HP's overhaul of printing group Hewlett-Packard Co. is reshuffling a highly profitable division that makes computer printers and ink cartridges in a shake-up likely to trigger job cuts. In an internal memo sent Wednesday, the world's largest technology company said it will pare its printing and imaging group from five to three business units. The shift will meld together the imaging group's units responsible for ink jet and Web solutions aimed at consumers and small businesses and will combine its laser jet and enterprise operations catering to corporate customers. The reorganization, expected to take effect Aug. 1, will enable HP to "reduce complexity and eliminate duplication" while focusing the printing and imaging division on its biggest growth opportunities, according to the memo from Vyomesh Joshi, who oversees the affected operations. As part of the overhaul, HP will "rebalance resources as necessary in order to meet the needs of the new structure," said company spokesman Ryan Donovan. He declined to estimate how many workers might be laid off. Job cuts have been a recurring theme at HP since it hired Mark Hurd as chief executive three years ago.

Brazil Buys More PCs Than TVs, Bolstering Hewlett, Dell as U.S. Sales Slow Brazil ranked as the fifth-largest PC market last year as bank credit offers, installment plans and growing prosperity fueled purchases, especially among low-income consumers. The shift is a boon to Hewlett-Packard and Dell Inc., the world's top PC makers. A tax break for PC makers has allowed them to cut prices and compete with unregulated sellers whose so-called gray- market machines dominated the market. ``You have a consumer market that's exploding as people have more access to credit,'' said Mario Anseloni, managing director of Hewlett-Packard's Brazil division. ``That's transforming the whole economy.'' Demand in Brazil is helping PC makers expand revenue as U.S. spending slows. Hewlett-Packard, which generates two-thirds of its sales outside the U.S., may disclose fresh evidence of the trend today when it reports second-quarter results. Sales grew 11 percent to $28.3 billion in the period, according to a preliminary report last week.

Posted by dblwyo at 05:42 PM | Permalink | Comments (0)

Different people blog for different reasons. As I've explained my primary purposes are, obviously, as a bit of marketing but the level of effort is hardly justifed by the impact. Other than the real motive - "because it's there and I wanted to" - my goal is to introduce a point of view and associated tools that emphasize a deeper look and appreciation for the whole topic of what makes a business work better. And to use the blog as a testbed for some of my ideas, tools, perspectives, etc. The other benefit is that writing is more than a bit of discipline itself and forces one to try and be organized.

You'll have to judge for youselves of course whether those goals are being satsified and what the value to you is. However the number of readers appears to have reached a relative small but reasonable number - on the order of 400-500/day on the whole, nothing in comparison to say BigPicture or CalculatedRisk - of readers. That's satisfying.

The running stat that is gratifying however is the amount of time you apparantly spend in reading these posts; which admittedly tend to run on while trying to both beat a topic or thought thread into submission and often contain some measure of added value with the associated collection of readings. Which may in fact be the primary value.

Anyway the typical blog seems to get about 30 sec. per post while mine seem to run in the 5-7 min. range. Given that there's at best one/day and each usually contains the equivalent of several small posts that's probably reasonable.

But in any case your readership is appreciated. THANKS. 

Posted by dblwyo at 02:07 PM | Permalink | Comments (0)

David Hilbert was one of the great 19/20C mathematicians and one of the greatest of all time. Back in 1900 he proposed a list of 23 problems, ten of which he presented at a major conference, that id'd major challenges for the field and, aside from his own direct contributions, shaped the agenda of math since then. And much of modern science inasmuch as many of the problems turned out to have major real world application and/or impact. A few years ago I proposed my own list of Hilbertian problems to my colleagues in the SCM/Logistics world as worthy of being on the research agenda because they were critical challenges for business. Hilbert had a lot more success than I however. Well as a capstone to this series of posts on key challenges for Business, which started with the question(s) of dashboards and decisions we're coming full circle to my e-friend Tim Walker's opening the door to the Hilbert problems of business(What are the “Hilbert Problems” of business? ), excerpted below. And don't kid yourselves that this doesn't matter - aside from the minor concern that the central foci of this blog is business performance improvement. In over 45 years GM's stock has a negative gain, Ford's impetus from it's hard-bought transformation in the 1980s has disappeared and the steady, sustainable performer - Toyota - has kicked both their butts. Where to from here ?

Business Hilbert Problems

Fortunately my list is shorter and probably not as intellectually difficult. On the other hand these problems are hard, difficult to solve, involve more than a guy with a pencil in a room, will help define the health of major companies, the well-being of millions and the long-term success of major economies. So they might be worth wrestling with :). Consider the chart at right, repeated from our assessment of the Auto Industry, as a graphic encapsulation and application example of an approach.

1) Organosclerosis - all organizations that are successful reach a point where they are insulated from external pressures, internal agendi become the dominant decision-making criteria and self-interested political decisions replace a focus on value. What kind of management system is required to correct these historical and innate tendencies - other than Darwinian sortation ?

2) Integration - no single factor determines the success of an enterprise. It needs to integrate the strategy and business model with the operational execution capabilities and establish a management system that holds the responsible parties accountable against realistic operating plans. How do we migrate from our decades-old set of isolated and conflicted functional silos to a more synergistic enterprise ?

3) Execution - most companies are competent or better on a few core disciplines but often neglect developing the full suite of functional capabilities to where they should really be. A growingly classic example is MSFT who's core discipline is Software Development but after the Code Red fiasco delivered an emasculated Longhorn to market based more on market power and coercion than enhancing customer value. How do we ensure, ala Billy Beane's A's, that we get as good a "player" in each position for the "game" we want to play at an affordable and value-effective price ?

4) Innovation - execution is all well and good but once you detox history and transform current capabilities, like a shark, you need to figure out how to swim into the SEE of the future.(Sailing Into the Storm: From Execution to Innovation) What's the best way to go about designing and implementing continuous innovation as a fundamental core competency of the enterprise ?

5) Leadership and Humanity -at the end of the day business is a team sport. And as Red Auerback taught us and the new Celtic have demonstrated you need great players with superb skills who play for the jersey they're wearing. Which requires Leadership which communicates, management systems that measure and reward real contribution and provides an environment that respects, in all senses, the individual as an adult (Aholes, Shirkers and Performance: a Draft People Principles Policy ). What HR, Communication and Leadership development approaches are best suited to the enterprise we're envisioning here ?

Now we've taken a shot at some of this before (Performance Assessment Basics: Five Fundamental Factors) as well but after the break you'll find a culled set of readings that address some of these issues from Big Picture approaches to key functions to critical operating infrastructure (HR, IT) to Innovation to Leadership and Team-building. At the end of the day we repeat though - this really matters. About as much as anything in the world does, ceteris paribus :) ! Put another way if the Iranians blowup the ME and our world economy it's likely different principles will become the order of the day. But check out the two Auto industry charts - long-term stock performance and our diagnosis of their challenges and deficiencies and translate those into jobs, economic growth and well-being. 'nuff said ?

What are the “Hilbert Problems” of business?  In 1900, German mathematician David Hilbert — one of the world’s most eminent mathematicians at the time — gave a famous lecture to the International Congress of Mathematicians. In his talk and in a related article, he laid out 23 problems that he took to be fundamental for his discipline to address in the 20th Century. What will be the ends toward which the spirit of future generations of mathematicians will tend? What methods, what new facts will the new century reveal in the vast and rich field of mathematical thought?These problems, Hilbert thought, were some of the the biggest, most central challenges facing mathematicians. Cracking any of them would constitute a major achievement for any mathematician, and indeed for the world of mathematics as a whole. Hilbert’s grouping of the problems fixed them firmly on the agenda of the mathematical world, and in the hundred-plus years since then, many of the problems have indeed been resolved. (You can see a full table of them here.) Now, I don’t know about you, but I confess that I am not lying awake nights trying to pierce the veil of the Riemann hypothesis. My mathematical endeavors played out after I finished freshman-level calculus (and please don’t ask me to perform any differential equations now). But I do wonder what the equivalent of Hilbert’s 23 problems are for the business world.So, all that to ask this: What are the fundamental problems that business needs to crack in the 21st Century?

Business Strategy and Models

Blow up your business model Revenues sank from $14.4 million in 1997 to $6 million the next year. CEO Brad MacDonald cut his staff from 200 to 11, and sales stagnated for the next five years as he fended off bankruptcy. MacDonald knew Medifast had to rethink its business model. He decided that shaping up the firm would require a different distribution method: selling directly to consumers, not physicians. Medifast took the leap, investing in a call center to handle customer service and adding new e-commerce functionality to its Web site. As a result, after falling to a low of $3.9 million in 2000, sales climbed to $5 million in 2001. McDevitt liked MacDonald's direct-sales strategy. But he knew that Medifast had to beef up its marketing to make the new model work. So he poured funds into online and print direct-response ads. The firm also started "Take Shape for Life," an Avon (AVP, Fortune 500)-style multilevel marketing program that allows customers to earn commissions as vendors. Take Shape for Life brought in revenues of $15 million in 2003, its first year. By 2007, the firm's overall sales had shot up to $84 million. Medifast soon faced a slew of new challenges. The $40 billion weight-loss industry has always been glutted with small players, most of which wind up getting crushed by heavyweights such as Jenny Craig and Nestlé's. But the competition has grown more intense in recent years. Medifast's rivals, including LA Weight Loss and NutriSystem (NTRI), have bulked up their marketing spending as national obesity rates - which are still high - leveled off.

Soccer Giants Borrow Beane's `Moneyball' Formula to Win Champions League Forget the Brazilian street kids juggling soccer balls with their bare feet. The sport's next big star may be a mathematician. Chelsea and Manchester United, who meet in the Champions League final May 21 in Moscow, are among the English Premier League teams recruiting professors and computer wizards to crunch statistics, find the best players and gain an advantage over their opponents. The stakes are high: the winner of Europe's club championship can net as much as $160 million. Soccer coaches are following the lead of Billy Beane, the general manager of Major League Baseball's Oakland Athletics who was featured in the 2003 U.S. bestseller ``Moneyball.'' The book detailed how Beane used overlooked statistics to grade players and build a contending club with one of the lowest payrolls in baseball. Baseball, which centers on the matchup between the pitcher and batter, is rife with statistics. Fans memorize them, Web sites are devoted to them and historians use them to compare players from different eras. It's more difficult to dissect soccer, a complex web of passes, headers, tackles and shots by 22 players, said Ed Sulley, who leads a team of six analysts at Bolton Wanderers. Bolton analysts track statistics such as how long it takes a player to control balls teammates knock to the turf with their heads, where his corner kicks are most likely to go, and the percentage of forward passes he completes.

Why Clinton Lost To Obama. Obama Designed A Better Campaign. There are many reasons why Hillary Clinton lost the Democratic Party nomination to Barack Obama but perhaps the most important is that the Obama campaign’s use of modern principles in design thinking and web social networking was superior to Hillary’s traditional approach of marketing metrics and personal networking. There are important lessons here not only to people in politics but to managers in business. The new is defeating the old. Lesson #1— New digital networking is better than old personal networking. Lesson #2— Voter experience is more important than marketing metrics. Obama’s campaign, especially his speeches, was designed to evoke powerful emotional responses of hope and change from primary voters. There was strong bonding and loyalty between Obama and his organization and voters. Hillary succeeded in doing this with older Boomer women, but not with other voters. She relied on polling research and marketing and metrics to guide her campaign, offering programs of help to dozens of slices of voters. It was transactional—something for each and every segment. In the end, emotional bonding trumped transactional promises. Designing a better voter experience was more important than numbers generated by market/polling research. Lesson #3- Gen X is more powerful and imporant than the Boomer generation. Hard as it may be to accept for the dominant and dominating demographic, the boomers, it's influence in society is waning. The even larger (by a smidgen) Gen X generation, with its own net-centric ways of organizing and communicating, is starting to take control of US society. The message to politicians and managers alike is simple: Don't play old King Canute and stand on the shore telling the tide not to come in. The Gen X tide is inevitable and overwhelming.

Key Functions

Biting the Customer Hand That Feeds Us Let’s think about the customer for a minute–not your customer but you, the customer. What isn’t working for you? Peter Drucker, the famous management writer who coined the term 'knowledge worker' once said, “The purpose of a business is to create a customer.”  Is that really the purpose of our companies? Or are we focused intently on our navels? Do we milk a product with needless modifications long past its useful life? Do we hide from customers behind mind-numbing, anger-inducing telephone trees? Do we leap out of small print and shout, “Gotcha!” at our most loyal customers? Recovering from a customer-be-damned spiral requires a new mindset or course, but this means more than cute slogans framed and hanging on the wall. We need a broader perspective: We need to see our business as an extended enterprise, that is, one that doesn’t begin or end at our four walls. What this means in a global, knowledge-based economy is that what we need to know very likely resides on the outside. Most smart people don’t work for us. It is no longer about dictating terms to a supplier, but rather learning what the supplier might know that we don’t. In the same spirit, are we ignorant of what our customers know? We haven’t been terribly good at listening to them. We often lack an “operational” picture of our customers. That means we don’t see what the customer does with our offering, and how and why. This is not about a customer’s SAT score. This is about aligning our business to the needs of the customer.

Four words Make big promises; overdeliver.If you can define great marketing in fewer words than that, you win. "Big promises": treating people with respect, improving self-esteem, delivering results, contacting as often as you say you will but not more, including side effects in your planning, delivering joy, meeting spec, being on time, connecting people to one another, delivering consistency, offering value and on and on. Caring. The stories involved in your promises matter. That's often what people are buying. This is the first place that the equation breaks down. Marketers often make big promises that appear to be unrealistic or are delivered in ways that don't match the worldview of the prospect. Marketers get carried away with themselves and focused on their greatness and forget to tell a story that people enjoy believing. And sometimes, they make promises that are too small to get our attention. Boring promises are hardly worth making.
"Overdeliver" means doing more than you said you would, which is the secret to word of mouth. Here, of course, the pitfall is obvious. You made too big a promise and you did your best, but no, you didn't overdeliver, not really. You didn't amaze and delight and yes, stun me with the incredible results of your offering. Just because it's only four words doesn't mean it's easy! What do you know?, Magically delicious, Let's put on a show

Just In Time -- If Supply Chain Management is the Answer, What's the Question? In a sense, Boeing has succeeded in changing the way we think about supply chain management, but unfortunately, not in a good way -- the Dreamliner nightmare is threatening to set back the cause of supply chain management by several years at least. I'm not referring to the production problems, parts shortages or even technological snafus that have derailed the project. What troubles me the most is how quick Boeing has been to blame its suppliers for every missed deadline, insisting that the suppliers weren't up to the task of delivering components and finished sections on time. And then we have the U.S. automotive industry, which keeps shooting itself in the foot every time it seems like maybe, just maybe, they've finally figured out what they've been doing wrong. In Detroit, the idea of collaboration between the OEMs and suppliers usually boils down to: "If you'll keep your prices as low as we want, then we'll continue to buy from you." Certainly, that's not the way it always works, but for the most part, the idea of working closely with suppliers seems to be completely foreign to their standard operating procedures. "Foreign" is the operative word in that sentence, since some Japanese automakers have done quite well with that type of win-win relationship, often symbolized by the idea of the keiretsu, or joint partnership. The Detroit Three automakers, on the other hand, apparently see greater promise in pursuing lose-lose relationships.

Shrink rapped It is difficult to gauge quite how much waste—known as “shrink” in the industry's jargon—there is. Oliver Wyman, a consulting firm, puts the figure at 8-10% of total “perishable” goods in America. The Food Marketing Institute, an industry body, says such sales totalled $196 billion in 2006. That means food worth nearly $20 billion was dumped by retailers. In a report published on May 14th, the United Nations estimated that retailers and consumers in America throw away food worth $48 billion each year, and called upon governments everywhere to halve food wastage by 2025. Stop & Shop looked across its entire fresh-food supply chain and reduced everything from the size of suppliers' boxes to the number of products on display, which fell by almost a fifth. Last year the chain cut shrink by almost a third, saving over $50m and eliminating 36,000 tons of rotten food, while improving customer satisfaction. Other retailers would do well to follow Stop & Shop's example—or watch as shrink takes an even bigger chunk out of their profits.

Manufacturing’s “Make or Break” Moment Manufacturing is at a crossroads. In one sense, there have never been better prospects for the makers of products than there are right now. Innovation is rampant; capital is available; technological changes have enabled new materials and manufacturing processes; and the global standard of living is steadily improving, enabling billions of consumers to buy new and existing products. Because of the complexity of these interrelated threats, it is pos­sible that whole industries will continue to disappear from developed regions such as the United States and Europe. But there is also the counter­example of leading manufacturing companies, farsighted enough to view their factories, supply chains, logistics and procurement programs, inventory cycles, and labor management as strategic assets. These include Tetra Pak (the packaging giant), Novartis, Lego, Procter & Gamble, Boeing, Toyota, and a significant number of others, large and small. Perhaps the most striking characteristic of such companies is their persistence as attentive innovators of operations. They treat manufacturing experimentation as a source of knowledge for improvement, and their solutions interact in a virtuous circle that reinforces its own impact.

Infrastructure (IT, HR)

8 Things We Hate About IT You may think that hate is too strong of a word for feelings toward a corporate department. I don't. Yesterday, I was interviewing an executive on his perceptions of IT and he couldn't spit his frustration out fast enough. He said, "In the quest of getting things organized, they are introducing a bunch of bureaucracy and, in the process, they're abdicating their responsibility for making sure the right things get done." This is completely typical of management's frustration—no, management's hatred—of IT. It's hard to remember the time when criticizing IT was controversial. Now, it's ceased to be even interesting. The now-classic HBR article "IT Doesn't Matter" resonated so clearly because it underscored the pervasive belief that IT mediocrity is the norm. And how bad is an industry's reputation when a major outsourcer, Keane, can get away with insulting its target market with the slogan, "We Do IT Right"? It's not personal—nobody hates the people in IT—it's the system that's broken. And here's the rub: IT doesn't like it either. One global Fortune 200 CIO describes leading IT as "a sucking vortex." So let's do something about it. In the spirit of confronting brutal facts honestly, and then developing deeper insights that will allow us to chart a new path—here's my take on what we all hate about IT.

Why We Hate HR  After close to 20 years of hopeful rhetoric about becoming "strategic partners" with a "seat at the table" where the business decisions that matter are made, most human-resources professionals aren't nearly there. They have no seat, and the table is locked inside a conference room to which they have no key. HR people are, for most practical purposes, neither strategic nor leaders. I don't care for Las Vegas. And if it's not clear already, I don't like HR, either, which is why I'm here. The human-resources trade long ago proved itself, at best, a necessary evil -- and at worst, a dark bureaucratic force that blindly enforces nonsensical rules, resists creativity, and impedes constructive change. HR is the corporate function with the greatest potential -- the key driver, in theory, of business performance -- and also the one that most consistently underdelivers. It's no wonder that we hate HR. In a 2005 survey by consultancy Hay Group, just 40% of employees commended their companies for retaining high-quality workers. Just 41% agreed that performance evaluations were fair. Only 58% rated their job training as favorable. Most said they had few opportunities for advancement -- and that they didn't know, in any case, what was required to move up. Most telling, only about half of workers below the manager level believed their companies took a genuine interest in their well-being. This, friends, is the trouble with HR. In a knowledge economy, companies that have the best talent win. We all know that. Human resources execs should be making the most of our, well, human resources -- finding the best hires, nurturing the stars, fostering a productive work environment -- just as IT runs the computers and finance minds the capital. HR should be joined to business strategy at the hip. Instead, most HR organizations have ghettoized themselves literally to the brink of obsolescence. They are competent at the administrivia of pay, benefits, and retirement, but companies increasingly are farming those functions out to contractors who can handle such routine tasks at lower expense. What's left is the more important strategic role of raising the reputational and intellectual capital of the company -- but HR is, it turns out, uniquely unsuited for that.

Innovation

Is Innovation Headed Offshore? To those worried about America's ability to compete in the 21st century, the trend is alarming: Just as key manufacturing industries fled offshore in the 1970s and '80s, U.S. companies are now shifting more engineering and design work to low-cost nations such as China, India, and Russia. Surely, innovation itself must follow. Apparently not, according to a new study published by the National Academies, the Washington organization that advises the U.S. government on science and technology policy. The 371-page report titled Innovation in Global Industries argues that, in sectors from software and semiconductors to biotech and logistics, America's lead in creating new products and services has remained remarkably resilient over the past decade—even as more research and development by U.S. companies is done offshore. One drawback is that most of the conclusions are based on old data: In some cases the most recent numbers are from 2002. And while the authors of the report make compelling cases that U.S. companies are doing just fine, thank you, none of the writers addresses today's burning question: Is American tech supremacy thanks to heavy investments in R&D also benefiting U.S. workers? Or are U.S. inventions mainly creating jobs overseas? A few years ago, most people took it for granted that what was good for companies was good for the greater economy. But the flat growth in living standards for most Americans during the last boom has raised doubts over the benefits of globalization.

Nokia Fosters 'Instability' Nokia's reorganization highlights a growing challenge for companies: how to continually prepare for change -- even when things seem to be working well.

What crisis?  Worries that America is losing its edge in science and technology are overblown. The report demonstrates that America is still the world's science and technology powerhouse. It accounts for 40% of total world spending on research and development, and produces 63% of the most frequently cited publications. It is home to 30 of the world's leading 40 universities, and employs 70% of the world's living Nobel laureates. America produces 38% of patented new technologies in the OECD and employs 37% of the OECD's researchers. There is little evidence that America is resting on its laurels, according to RAND. Developing countries such as China and India may be boosting their science and technology muscle faster than America. But they are starting from a low base. America is outperforming Europe and Japan on many performance measures: in 1993-2003 America's growth rate in patents averaged 6.6% a year compared with 5.1% for the European Union and 4.1% for Japan. One reason for America's angst was that the growth of federal spending on R&D slowed significantly with the end of the cold war. It only grew by 2.5% a year in 1994-2004 compared with a long-term average of 3.5% since 1953. The trouble with this statistic is that America has lots of sources of R&D spending: federal money accounted for only $86 billion of the $288 billion that it spent on R&D in 2004. Spending on the life sciences is increasing rapidly, a reasonable bet on the future.Others worry that non-US citizens now account for 41% of science and engineering PhDs. But this is arguably a sign of America's continuing world domination: the world's brightest people are gravitating to the world's best opportunities. A higher proportion than ever of these paragons want to make their homes in the United States.

Leadership and People

Founders' Hubris Fuels Corporate Drama Lots of business dramas over the years have involved strong-willed company founders who couldn't let go in their 60s or 70s. Put much-younger founders into the mix, and tensions can be even greater.There's no shortage of ambition among corporate top lieutenants. But if they collide with a founder who mightn't yet have reached age 40, that's a recipe for management upheaval. It's also likely to provoke intense anxiety among investors, customers and employees.Anyone attending The Wall Street Journal's D: All Things Digital conference last week saw how challenging such human interplay can be. Three famous high-tech founders -- Microsoft Corp.'s Bill Gates, Yahoo Inc.'s Jerry Yang and Facebook's Mark Zuckerberg -- took the stage for separate appearances. Each was joined by his company's most powerful nonfounding executive.While all the speakers did their best to make nice, it didn't take a Geiger counter to sense that offstage, each management team might have a few issues to work out.

Team building in paradise Some 200 Seagate Technology employees have spent the past several months preparing for this week. They've been riding bikes through the streets of Malaysia and Thailand, hiking the hills of Northern Ireland and Hong Kong, running in Silicon Valley and Colorado. They've flown a dozen hours or more from around the globe, taken a gondola ride up the face of a cliff, and gathered in a restaurant overlooking Lake Wakatipu. Many of these Seagaters -Type-A engineers, hyper-educated Ph.D.s, brilliant MBAs - are accustomed to being the smartest, most confident people in any room they walk into. But tonight they're jittery. It was bad enough knowing that in a few short days they'll compete in a 40-kilometer adventure race through the heart of Middle-earth. Now the CEO just told them that they're all gonna die. And he wasn't smiling when he said it. Of course Watkins isn't trying to kill his charges. But he is making them uncomfortable as a way to open their minds. He thinks Eco week, which Seagate has been holding since 2000, helps build a more collaborative, team-oriented company. He also thinks it teaches his people something about priorities.Yes, everyone in this room will die - at some point. But before then they'll face important choices about where to work, what to believe in. Choices, really, about change and ultimately happiness.

Work Matters: my favorite blog on HR, Leadership, Workplace Environment and "Managing by the Facts" . In particular note Bob's outstanding "15 Things I Believe" list.

The Master Speaks

Drucker's Teachings Find Following in Asia Peter Drucker is making a posthumous comeback. It isn't happening in the U.S., where the Austrian-born management scholar spent much of his career until his death in 2005, at age 95. While most of Mr. Drucker's 39 books remain in print, they aren't fixtures on American best-seller lists, as they were a generation ago. In China, however, Mr. Drucker is the man of the moment. In the past few years, devotees have created 14 Drucker academies, in Beijing, Shanghai, Xian and other Chinese cities. Their curriculum draws extensively on Mr. Drucker's writings, so thousands of students can quickly grasp the management essentials needed for China's booming economy. Mr. Drucker's old-school values like integrity and humility play well in China, says Henry To, chief executive of the Drucker academies. Mr. Drucker spent much of his career as a consultant and professor studying big, well-known American companies. Based on their experience, he urged managers to set clear objectives, to value employees and customers, and to define their mission as more than just making a profit. Other Asian countries also are embracing Mr. Drucker's work. Last week, Drucker enthusiasts from around the globe met at the Drucker School of Management in Claremont, Calif. They discussed their efforts, through various Drucker Societies and a university think tank called the Drucker Institute, to spread his ideas. Some of the most detailed presentations came from boosters in South Korea and Japan. In Korea, chief executives of sizable companies meet periodically in book clubs to discuss Mr. Drucker's work and how it applies to their companies. Japanese devotees publish a journal called Civilization and Management that tries to apply Mr. Drucker's ideas to current-day problems. By contrast, U.S. attendees at the conference seemed more inclined to look backward. They giggled about Mr. Drucker's ability to outsell "The Joy of Sex" in the 1970s. Former students and colleagues shared memories of their time with him. The phrase "We miss him" was heard repeatedly. Bob Buford, chairman of the Drucker Institute, voiced concern that American business audiences tend to be faddish, rapidly switching their attention to whatever scholar or commentator seems freshest. That makes it harder to keep Mr. Drucker's work in the public consciousness at home.

The Dashboard and Decisions Series

 Data, Dilemmas, Dashboards and Decisions

Dashboards for the Real World: Economy, Markets, Industry, Company

Key Postings IV: Business Analysis Foundations

Key Postings V: Industry Analysis - Enterprise, Industry Ecology, Evolution

Key Postings Vb (Technomediatainment): Maturities, Barriers and Disruptions

Key Postings VI: Company Level Business Analysis

Posted by dblwyo at 05:25 PM | Permalink | Comments (0)

Let's pick up the thread of our listings of key postings with the finale - specific company analysis. At the end of the day the central focus of this blog, even if/when the weight of postings seems to indicate otherwise, is on improving enterprise performance. Hence our repeated mantra of Economy - Market - Industry - Company. Now you might be asking yourself why does that matter ? Other than that's how we all make our livings directly or in-directly (public organizations may make society more effective but it's still companies who make the squirrel cages go round - puns and images intended).Just to put a point on it consider this recent chart of GE's market performance as well as some recent headlines and excerpt:

"GE at 4 1/2-Yr Low as Broker Wants More Unit Sales General Electric Co (NYSE:GE - News) shares fell for a fourth straight day on Monday after J.P. Morgan cut its rating on them to "neutral" from "overweight." The shares fell 2 percent to $28.55, after touching a 4-1/2 year low early in the session on the New York Stock Exchange. J.P. Morgan said the second-largest U.S. company by market capitalization needed to sell off wide swaths of its operations to restore investor confidence."

 Frankly we think that whole line of argument is absolute unsinn based on not understanding the business - and if we don't pay analysts for that then what justifies their compensation (and GE's investor presentations are very clear and to the point so no excuses). Nonetheless Immelt and crew screwed up badly by not being better at economic analysis and in planning ahead for its' impact on their company. And the headline/story certainly captures the enormous pressures they're under, justified or accurate or not.

If GE is one of the better and more well-run enterprises with an enviable track record measured at least in decades what does that say about understanding performance for the non-GE's of the world ?  As usual we have some graphics for you to consider where we've been categorizing at least the "headline" companies, so everybody can dig into and verify the background if you choose, over the last several years using our enterprise performance criteria. The first graphic is, shall we say, the mal-performing companies. Now sometimes they migrate...sometimes even to the well-performing list....and back ...or visa versa as well. That is they start out as good and then a failure to adopt turns a Dell from exemplar to trashcan.

Consider this second graphic which shows the relative better performing companies in appropriate categories. You might also want to notice that to balance out the tables we moved "Strugglers and Stragglers" to the good chart. Now these charts aren't absolutely up-to-the-minute but you'll notice that GE is one of the few, IOHO, who's in the sustainable column of demonstrated excellent performance - no matter what the market's short-term impressions might be. And darn few others. On the other judging from a recent post (Dell Computer: It Ain't Your Grandfather's Beige Box) Dell might be in the process of re-inventing itself. They're certainly doing a lot of the right things, or so we've judged. On the other hand Starbucks probably deserves a significantly revised entry indeed.

After the break you'll find the table of company specific postings, including the long series on Home Depot that kick-started the whole effort and a prior analysis on Citi. And just as a reminder the analysis uses the "framework" and relies on a lot of industry analysis as well. For example our analysis of the state of play in the Finance Industry leveraged and adapted the model developed to analyze Citi. Partly because their investor relations reports were so good and gave us all a great picture of the major components of the whole industry. Comes full circle. Which is another way, btw, of saying that the key postings on business and industry analysis are be used here to do specific companies. Need the framework to do the analysis - a blueprint and checklist. Need to the analysis to validate and verify the framework.

Over time we hope to add more companies to the inventory but meanwhile here's Home Depot, Citi and Dell. Which are also a retailer, a bank and a manufacturer which links back to the and provides insights on any other Retailer, Bank/Finance, Manufacturing or Tech company. Consider that as well. 

Posted by dblwyo at 05:29 PM | Permalink | Comments (0)

In this collection of readings excerpts we combine Markets and Financials because the underlying issues are so inter-twined. As usual the same talking head debate continues - is the worst over ? And what would trigger an uptick in the market ? But the game has changed on several fronts and two of the critical things we've talking about for months are now common currency memes and being reflected in almost every discussion we read or hear. The two ?

Credit  Crisis to Broken BizzMod

1) The Credit Crisis has morphed into an on-going credit crunch where key players are now talking about seeing things take the next 2-4 years to work out. We refer you to the accompanying graphic charting the propagation of the contagion that we've used before. (Finance Ind(Readings): Barbarians, Fixes and Outlooks) Interestingly one of the chief new naysayers is Bob Doll, CIO of Blackrock, who's earlier assessments that the worst was over has changed to the most pessimistic 2-4 estimate. It turns out that what he meant to say was that the breakdown was over and now we're into the longer-running de-leveraging and risk re-pricing. Oh...now you tell me. :)

2) Which leads to the new key issue/meme - the broken business model of the financial industry.(Finance Ind II(Readings): Fundamental Breakage in the BM) In the excerpts we've collected a bunch of key CNBC vidclips that talk about Investment Banks, Private Equity, the re-structuring of the LBO business, a bursting Hedge Fund bubble and some of the consequences.(Finance Ind III (Readings): Private Equity Futures - from Golden(Gilt) to Iron Age) The interview with James Stewart on long-term business model breakage is especially worth listening to IOHO. But the one you should/must listen to is Meredith Whitney's - who's assessment, based as it is on deep industry analysis, wide familiarities with the key companies and players and very deep analysis still, strangely enough, sounds a lot like ours.

Market Assessment 

How this is playing out in the markets is fascinating. The "will we go, will we stay, Jimmy Durante" theme remains with us...all based around an apparent lack of clarity with regard to the economic outlook. A surge in Unemployment took out the market week before last and good news on Retail Sales brought it back this last Fri. Good news which, when you parse it out, is anything but.(HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption) We've highlighted four key technical indicators in the chart and you'll notice that despite Fri's surge that we didn't recover all that much ground.

Just for fun here's the 1-year weekly and 5-year monthly charts presented as simply as possible with a little trading trend stuff thrown in. Continuing our usual interpretation we don't see any signs in either of these that the markets are pricing in anything serious in our economic future. If you do please let us know. A point, btw, made in several of the excerpts. Notice on both that we got back essentially to the 200-day MA after correcting a mild 10% correction and that we're still barely busting the long-term lower bound on the trend.

Sector Comparisons

When you de-compose the overall market into sectors (having covered the int'l situation and emerging economies jointly in the prior post) an interesting picture emerges in the short/intermediate-terms and the longer-run. Here we've divided the SP sector ETFs into the worse and better performers. As you can see the only real pain is in Financials (XLF) - what a surprise - with Con. Discretionary (XLY) doing poorly and Healthcare (XLV) not feeling the love while Con. Staple (XLP) is holding up reasonably well considering what the economic numbers are telling us. On the other hand the vaunted strong performers aren't, over a year, doing that well either whether it's Technology (XLK), Industrials (XLI) or Materials (XLB). Only Energy (XLE) is still going gang-busters. If any theme emerges it's that Energy still has a good story and nobody else does but nobody's admitting it as yet.

Then when you shift your perspectives to the longer-term it gets even more interesting. Over the long-term the story's consistent but still not "pronounced" - that is we haven't seen the clear emergence of a strong direction, let alone one that matches up with our views on the economic outlook. Over five years Finance has essentially given up all it's gains - and if you belive the BM discussion (puns intended) there's a lot worse to come. Of the Weak group nobody's done particularly well. Of the Strong group only Energy has truly been an outstanding performer while the rest have done decently well. In the last five years we had, perhaps, three-five dominant investing themes. Real Estate that went bust but made money. Emerging Markets which are shifting rapidly. Energy and Commodities - still rolling along. The New World Economy - while true that would appear to be shifting somewhat as well. And then what ?

Markets

The worst may be behind for Wall Street - or not Wall Street puzzles over whether market has hit bottom and what catalyst might trigger rebound. Not long ago, it seemed like the worst was over. As the first quarter wound down, the credit crisis appeared to be easing, the housing market seemed like it might get some footing and Wall Street was growing confident that it had finally found a bottom after months of volatility. No one expected oil would shoot up 30 percent in just three months. But Stovall notes that investors tend to be more flexible that pinched consumers. "The confidence of Wall Street, I believe, fluctuates more rapidly than the confidence of Main Street," he said. "You can't really compare one to another." Barring some new shock, Stovall thinks the market has likely touched, or at least come close, to its bottom. "If we haven't gone any lower as a result of all these worries," he said, "it would have to be some new worries that have yet to be anticipated." Wall Street is about to get a host of new information that will help it decide what direction to head in. Investment banks start reporting second-quarter results Monday. May producer price and industrial production data, along with new housing figures will come in starting Tuesday, and the Federal Reserve's next decision on interest rates comes the following week. If that combines to even a modest positive, Stovall said, investors might start to take some chances that could boost the market.

Interest-Rate Derivatives Signal That Banks' Credit Woes Likely to Worsen Interest-rate derivatives traders are betting banks' difficulties obtaining cash to fund holdings and shore up balance sheets will worsen. The difference, or spread, between the three-month dollar London interbank offered rate, or Libor, and the overnight index swap rate, traded forward three months, is greater than similar spreads expiring this month, according to data tracked by Credit Suisse Holdings Inc. Derivatives trades are showing that while global markets have rebounded since March, the worst may not be over for banks after racking up $387 billion of losses and writedowns from mortgage-related securities since the start of last year. Lehman Brothers Holdings Inc. has tumbled 18 percent in the past two days on concern it will require outside funding to shore up its balance sheet. The three-month Libor-OIS spread traded forward to June 16, the date the June Eurodollar futures contract expires, was 67 basis points yesterday, while the forward spread corresponding to the September Eurodollar expiration was 72 basis points. The difference between Libor, which is an average rate based on a daily survey of 16 banks by the British Bankers' Association, and the OIS rate indirectly measures the availability of funds in the money market. Forwards give expectations for the future. The increased difference is primarily due to traders exiting ``soon-to-expire positions'' earlier than usual, amid questions over Libor's reliability.

Credit Recession May Last 2-Plus Years: Strategists A "credit recession" sparked by a downturn in the U.S. housing market and excesses in structured finance may last more than two years, and the financial sector may undergo "massive consolidation," according to two leading Wall Street strategists. The downturn may last for "two, two and a half years" which may help lead to a healthier market, Jack Malvey, Lehman Brothers' (NYSE:LEH - News) chief global fixed income strategist, said during a conference in New York. "Structured finance is not new. It is the case in credit that (the market) hungered to get in this space 20 years ago," Malvey said. "This is the biggest blowup that we've had.

FASB Bombshell: FAS 140 to Eliminate QSPEs The "qualified special-purpose entities" (QSPE) -- those not unlike Enron-style SPVs in which many leveraged financial institutions have been placing transactions that may turn into giant losses -- may no longer be allowed to be used for that purpose. At least, that is the concern if a new FASB rule (FAS 140) gets passed. To grossly oversimplify, Banks have been using QSPEs to effectively boost their leverage and hence, their return on capital. Without the balance sheet constraints of the old days, banks were encouraged to create assets -- by making lots of loans they shouldn't have -- that could, in theory, be sold off later. It hasn't quite worked out that way. QSPEs can have legitimate purposes -- but they also can obfuscate the true financial condition of a bank or broker. The purpose is not to simply hide losses off balance sheet, but to get those assets off balance sheet so leverage/Tier 1 capital ratios look better. Essentially you can be much more leveraged than you appear, so that ratios like ROA and ROE look stronger than they would if they weren’t employed. The author of this above article wonders if "The migration of exotics to the balance sheet may be inevitable." If he's correct, it bodes poorly a quick recovery for the financials. They have years worth of leveraged derivatives on their books, and writing them down won't be quick or painless.

Asset-Backed Market Depreciates With SEC Drive to Impose `Scarlet Letters' Regulators' plans to add a letter to credit ratings of asset-backed debt may constrict the $4.6 trillion market and choke off consumer credit at a time when Federal Reserve Chairman Ben Bernanke wants more lending to bolster the economy. The U.S. Securities and Exchange Commission may recommend this week that Moody's Investors Service, Standard & Poor's and Fitch Ratings include a new designation to the scale created by John Moody in 1909, according to people familiar with the plans. The changes may force investors to reassess the way they gauge the risk of securities backed by mortgages, student and auto loans and credit cards, said the person, who declined to be named before the announcement. The action could force banks to add capital to guard against losses or curb lending. The SEC staff is recommending giving ratings companies two choices, the people familiar with the agency's plans said. One option is to publish a report on how they came up with each ranking and how it could go wrong. The other would add a designation distinguishing the assessment of asset-backed debt from a corporate bond. The International Organization of Securities Commissions, a Madrid-based association of global regulators, issued a code of conduct on May 28 recommending a change in ratings codes for structured finance. Moody's said in February it may add ``.sf'' to assessments to signify structured finance. S&P said a day after the IOSCO announcement that it may add an ``s'' to rankings

More Financial Turmoil For the past year, we have been advising investors to steer clear of the Finance sector. As we noted yesterday, Lehman was in the market buying shares as they fell 9%, according to the WSJ: Why a company in need of additional capital is out buying shares requires a little explanation for the uninitiated: Any deal for a capital infusion will be based on share price. The firm is likely seeking to shore up that price -- and a bit of confidence in management -- through open market purchases. Although this strategy reduces the total shareholders dilution (what % the new buyers get) in the long, run, it has potential to be very problematic. Indeed, this strategy proved to be disastrous in the 1929 crash: The 1929 situation had as a key factor the Trusts cornering stocks, implementing short squeezes, aggressively plying rumors, and engaging in other unsavory trading situations. These came on top of more than a decade of stock gains. In the present case, the situation is based on highly leveraged financial companies, complex derivatives, and collapsing housing market. So while many of the elements are very different, the one consistent parallel between the two periods is the excessive usage of leverage by banks and brokers. The bottom line: We remain wary of the Financial sector, for reasons I have enunciated over the past year. There are likely more write downs coming, more capital raises and dilution -- and lower finacial share prices.  For those who believe the crisis is in its 9th inning, best of luck to you . . .

BlackRock's Doll sees credit crisis lasting 2-4 yrs Fund manager BlackRock expects the global credit crisis to last another two to four years as a weakening U.S. economy triggers more writedowns by banks, its chief investment officer for equities said on Monday. The prediction was one of the starkest so far by a global investor about the length of a crisis that began last year with the collapse of the U.S. subprime mortgage market, roiling financial markets. The turmoil has led the $1.4 trillion money manager to be underweight on financial shares.Doll, an ex-Merrill Lynch executive, said the worst of the crisis has passed after the Federal Reserve-led rescue of crippled investment bank Bear Stearns in March, but warned a slowdown in the United States threatens more credit-related problems in the months and years ahead. "We've seen the worst of it in terms of crisis, writeoffs, but there is still more to come," Doll told a group of reporters during a visit to Singapore. "A slowing below-trend growth in the economy will expose more of them. Whether it is in the mortgage area...or in other consumer loans, auto loans, credit card loans -- there are more writeoffs to come."

Whitney Tilson: Fairfax can offer a port in the post-bubble storm In Irrational Exuberance, published in 2000, Yale economics professor Robert Shiller defines a speculative bubble as "a situation in which temporarily high prices are sustained largely by investors' enthusiasm rather than by consistent estimation of real value". Such phenomena have become all too familiar in the past decade as markets have lurched from bubble to bubble, in internet stocks, housing and - most likely today - commodities. Because human nature plays such a central role in speculative excesses, it is inevitable that such manias will recur. This inevitability makes it important for investors to understand why bubbles happen - if for no other reason than to limit the damage inflicted on their portfolios by the next one. Crucial lessons in all this are: make your own decisions independent of what the crowd is doing; rely on your own estimate of intrinsic value rather than a stock's current price to tell you what it is truly worth; frequently challenge your investment assumptions, and enlist others you respect to do the same; and learn from your mistakes. Post-bubble periods can provide opportunities for smart value investors, as indiscriminate selling hits stocks of even the best companies in out-of-favour sectors. I would like to report such opportunities in the financial and real estate sectors today, but I cannot. Bottom-fishing requires believing the bottom is near, which I do not think it is with the unfolding mortgage and credit crises.

Timothy Geithner Gets It Right  Geithner's address to the powers-that-be on Wall Street this week showed the firm grasp that he has on what needs to be done to get us past our present difficulties. It should soothe frayed nerves and relieve the thick anxiety. First off, Geithner met with 17 major firms in his office Monday afternoon to discuss plans to form a clearing house for trillions of dollars in complicated derivatives contracts. The sooner this can be accomplished, the better off we will be. Bringing credit default swaps (CDS), which have been negotiated party-to-party without any transparency, into the sunlight of exchanges will reduce the scale of counterparty risks. Everyone on Wall Street knows what they don't know, but they don't know who owes what amounts to whom. They don't have a record of counterparty transactions. It's still one big opaque maze until Geithner can obtain agreement from 17 strong-willed firms. In the meantime, Croesus suggests you ponder Geithner's frank message to the financial community. Geithner spoke of the continuing fragility of the system and warned that "confidence in the markets depends on confidence in the management of the institutions." The process of deleveraging can cause damage, he suggested. "Crisis begets regulation and regulation can beget crisis," he added, revealing that he himself recognized how tricky it will be to get just the right amount of finetuning into the diverse structure of the markets.

Posted by dblwyo at 08:38 AM | Permalink | Comments (1)

The challenges facing the International Economy are mounting rapidly, largely as the feedback results of its' own successes over the last decade. The primary one being that the de-coupling thesis has not, is not and will not hold up. Most of the major emerging economies are beginning to slow and will likely continue to slow further as demand from the US and the rest of the developed world drops. Which is not to say that growth is down to the levels of the developed world...China is looking at, for example, moving from 10-11% growth to 8-9%. But when your entire social compact is based around maintaining job growth to absorb the 3/4 of your population living in the 10thC and you get that big a slowdown you have a problem.

The real proximate problem however is accelerating inflation, which apparently in a matter of months, has gone from a constant, but low-key problem, to a serious challenge. And, all things considered, a serious threat to economic growth and socio-political stability. Living on the margin as these economies do the sudden jump in oil prices and the ripple effects on food prices create serious threats to their economies and societies. 

After the break you'll find the most recent outlook information for these economies, including the build-up of a major backlash against trade and globalization. While not getting much headline attention this, ironically given the sources of their prosperities, could be the worst long-term consequence. You'll also find extensive discussions of the inflation problem and the implications for economies and markets plus discussions of the overall Oil situation. Interestingly the CEO of BP has recently come out with his firm's assessment of the strategic situation - which is nearly identical to ours that we covered in our review of the Oil industry and energy outlook. That is reserves are widely available except that they're trapped behind political barriers which result in under-investment of major proportions in exploration and production. And those aging oil fields accessible to the world markets are dying rapidly with resulting declines in output. The net result being continued Supply/Demand imbalances for a long-time. Finally there's a couple of excerpts on the continuing deeper challenges in economic development with Indian, Russian and Argentinian examples.

Back in the late Fall and early Winter we strongly suggested that it was time to get out of the Emerging Markets investments. Make no mistake - the EM's have succeeded in cracking the code on development and made a once in a generation, or perhaps, lifetime crossing of the barrires to sustainable growth. But that's done. Now, albeit in a much different regime, they face a coupled world economy, domestic growth slowdowns and rising inflation. All which is either showing up or will show up in their markets. Here we use our standard trick of proxying key markets using ETFs - depending on which tools you have access to the actual market indices will tell an even scarier story, e.g. Shanghai. The ETFs are EEM(emerging markets), EEB (BRICs), FNI (Chindia), GXC (China/Shanghai), EWZ(Brazil), EPI(India) and RSX (Russia). The top chart is weekly for the last year while the bottom is monthly for four years. Notice that our "poster child" of an ill-founded bubble, China, is indeed deflating. And that "no problems, mate" alternative Brazil is still roaring ahead. Given huge institutional changes in Brazil and relative success in controlling inflation that's understandable. But the talking heads belief that a country who's growth and prosperity is built on commodities exports to China will continue to roar seems dangerously short-sighted to us. Consider yourselves warned - again. If you want to play the intermediate-term trading opportunities so be it...Brazil is probably the last one really remaining.

Global Outlook

World Bank Cuts Global Economic Growth Forecasts, Citing Oil, Food Prices Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and the subprime credit crisis, the World Bank said. Developing countries should be less affected, with their economies expanding on average 6.5 percent, down from 7.8 percent, the Washington-based lender said today in its Global Development Finance report released in Cape Town, South Africa. ``The slowdown in high-income countries has become more apparent since the end of 2007,'' the bank said. ``The continued strength of domestic demand and imports in developing countries is helping to cushion the global effects of the slowdown in high- income countries.'' In January, the World Bank forecast global growth of 3.3 percent for this year, while the International Monetary Fund in April predicted 3.7 percent. The growth outlook has deteriorated as record oil and food prices stoke inflation and trim output. Oil traded in New York jumped to a record $139.12 on June 6.

Asian Economic Miracle Is at Risk All Over Again Depending on whom you ask, China is either on the verge of a big slowdown or an inflation surge. Some worry Asia's second-biggest economy faces both risks. China's situation suggests Asia is on the cusp of its worst couple of years since 1997. From Seoul to Jakarta and from Beijing to New Delhi, officials are grappling with a rapidly worsening inflation picture. It would be nice if there was less concern about the phenomenon and more action to address it. Asia may be nearing the point of no return -- one where the region's so-called economic miracle goes off the rails anew. Asia isn't about to revisit the darkest days of 1997 and 1998. It was then that speculators tested central banks' resolve to defend currencies. Thailand's devaluation in July 1997 set in motion a crisis that suspended the Asian miracle. It prompted investors to leave Asia and sent contagion around the globe. A decade later, Asia faces the flipside of that experience. The turmoil of the 1990s was about deflation and recession; the situation today involves overheating. Central banks may already be remiss in a different way than they were during the last crisis: They are falling behind the inflation curve. Bottom line: Interest rates need to go higher in many economies. With household expenses rising, Asia may very well overheat unless central bankers do their jobs. The longer they delay, the bigger the costs to long-term prosperity and the bigger the risks of disappointing investors. Asia has thus far withstood the U.S. credit-market debacle remarkably well. If that was the only threat in the global financial system, 2008 might have been a much better year for the region. Oil at more than $135 a barrel and record food prices have conspired to restrain growth and worsen inflation.

Free-Trade Era May Be Near End as Job, Food, Growth Concerns Fuel Backlash After six decades of ever-expanding international commerce, the high tide of free trade is ebbing. As tens of thousands of South Koreans protest U.S. beef imports, rising commodity prices push nations to keep more food for domestic consumption and the U.S. chooses a new president who might be less supportive of free trade than his immediate predecessors, the world may be facing the end of a cycle that began in the immediate aftermath of World War II. Fueling the backlash is a convergence of trade-related anxieties: national-security concerns, worries about food safety and sufficiency, the desire to protect local jobs and the environment. In addition, the benefits of trade are often widely dispersed -- think low prices at Wal-Mart -- and entail high adjustment costs, including the loss of manufacturing jobs. Reservations about a new WTO agreement have grown into a general aversion to free trade in many countries, including France and Italy, where cheap imports are blamed for job losses. That's causing some governments to rethink their pro- trade policies. Most important is the U.S., the world's largest economy and biggest importer. Democrats, who took control of Congress in 2007, have postponed a decision on a trade deal with Colombia by amending so-called fast-track authority, which guards against amendments and filibusters and requires a timely vote.

Inflation

Inflation's Bite Worsens Around World Inflation worries are heating up around the world and jolting financial markets in the process. Inflation worries are heating up around the world and jolting financial markets in the process. On Tuesday, China's stock market was the latest to feel the blow, with the benchmark Shanghai Composite Index tumbling by 7.7%, to its lowest close this year. The drop came after the government announced steps to remove cash from the financial system in an attempt to tamp down inflation. A year ago, in a group of 24 large developing nations tracked by Bank of America, about three-quarters were either meeting or staying below their inflation targets. Today none of them are. Skyrocketing energy and food prices are particularly acute for countries with large numbers of people living in poverty. But there are other inflationary forces at work which preceded the recent surge in commodity prices. Many developing economies have experienced a flood of capital inflows, leading to an overheated investment climate and piles of reserves. They've also seen rapid growth in domestic demand and lending, plus tightening labor markets. The inflation spike is sparking concern among investors. After years of benign conditions, emerging markets "actually are getting riskier,"… Central banks across the developing world face a critical test. Many haven't taken aggressive steps to tighten monetary policy, say economists and investors, and have resorted to temporary measures like price controls on consumer goods such as flour and gasoline to tame inflation. Governments seeking to dial back costly subsidies risk angering their populaces. Investors are punishing stocks, bonds, and currencies in other countries that are already experiencing runaway inflation -- or where rising prices combine with other economic vulnerabilities. Inflation menace threatens Asia decoupling story,Double-digit inflation? 

Inflation from Asia: The next crisis Rapidly rising prices across the continent are the biggest danger for the global economy right now. And things could get much worse in the coming months. Inflation is out of control. Even by wildly understated official measures, prices are climbing at two -- or more -- times government targets. And with central banks printing money and flooding the financial markets with cash, inflation is going to get a whole lot worse before it gets better. In the United States? No. At least not yet. Look to Asia if you want to see runaway inflation now. In China and India, inflation looks like it's headed for double digits. Even with the financial crisis that started in the subprime-mortgage market still far from over, I'd rate runaway inflation in Asia as the greatest danger to the global economy. Moderately slowing growth in Asian economies as a result of higher interest rates imposed to fight inflation wouldn't be good for a global economy already burdened by slow growth in the United States. In this scenario, Asian stock markets would continue to sell off as investors reacted to the prospects of slower growth. But I still think that's better than the alternative. If these countries ignore their inflation problems until inflation has built up even more momentum, they will face solutions that resemble the very strong medicine Vietnam is about to swallow. That would cause a much bigger drop in global trade and global demand, as well as much bigger drops in regional and global stock markets. It also would increase the odds that one of these countries could get in so much trouble that global stock markets would go into panic mode.

Threat to growth and stability India, China and Turkey hit hardest by rising prices. Brazil tops short list of nations that have had success in containing costs. High inflation, and in some cases hyperinflation, battered emerging markets in Latin America, Eastern Europe and Asia in the 1990s. Since then, inflation has been steadily declining until a few months ago, when energy and food prices started breaking record, pushing inflation higher and higher in the developing world. Food makes up a much bigger part of the inflation basket, and disposable-income spending in emerging markets than it does in developed countries. For example, food accounts for more than 30% in Argentina, Malaysia, Russia, China, India and the Philippines. The other major contributor to inflation is the price of energy. The industrialization of fast-growing emerging markets requires tremendous amounts of energy resources, such as oil, natural gas and coal. Another cause of inflation "is that a period of relatively loose interest rates in the developed world has resulted in a weak U.S. dollar," said Nicholas Field, London-based fund manager for global emerging market equities at Schroder Investment Management. Weakness in the dollar has boosted the price of dollar-denominated commodities like oil. Most vulnerable to an inflation hit are major food and fuel importers, such as China and India, strategists said. China's consumer-price index, a key measure of inflation, hit 7.7% in May, down slightly from 8.5% in April, but still fairly high.

Oil/Energy

Why oil prices will tank But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb. The oil bulls are correct in their explanations of why prices have jumped, to a record $138.54 a barrel on Friday. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital." But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance. Watchdog cuts oil demand outlook

• Oil Industry I (Readings): Prices, Fundamentals, and Big Oil Futures
• Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions

 Plenty in the tank The problem seems to be getting to enough of the oil that is known to exist.  “WE’RE not running out of hydrocarbons,” insists Tony Hayward, the boss of BP, one of the world’s biggest listed oil firms. Enough oil has already been discovered around the world, Mr Hayward says, to maintain consumption at current levels for another 42 years. As he recently put it, humanity has guzzled through 1 trillion barrels, but has its next trillion already lined up, and could probably unearth a third trillion if it really applied itself. Why then, are oil prices hovering over $130 a barrel? Mr Hayward blames poor policy-making or, in his florid phrase, “the madness of men”. Some 80% of the world’s oil reserves, he says, are in the hands of state-owned oil firms, which tend to allow firms like his only limited access. He believes that if these riches were fully exploited, the world could easily produce 100m barrels a day (b/d) or more. That’s a big increase on last year’s figure of 82m b/d, and a level that other oilmen, such as the boss of Total, another big Western firm, think impossible. At first glance, BP’s own data seem to support the gloomier case. The firm reckons that global output fell by 130,000-odd b/d last year. Worse, proven reserves also fell, by about 1.6 billion barrels. This suggests that the world is consuming oil faster than it can be found—a worrying thought, even if reserves are large.

Development Challenges

India's Future Rides on 76-Year-Old `Metro Man' Elattuvalapil Sreedharan, popularly known as India's ``Metro Man,'' is the managing director of Delhi Metro Rail Corp., which operates the newly built world-class subway that's transforming the economy of India's capital, New Delhi. It's also improving the city's air quality, altering its social life and even influencing norms of individual behavior. Funded by government equity and debt and a soft loan from the Japan Bank for International Cooperation, a $2.3 billion, 65- kilometer (40-mile) section of the project was completed in 2005, three years ahead of schedule. Not just that: The stations are clean and spacious; littering is almost non-existent; people wait their turn at the metal detectors; the trains are comfortably air-conditioned even during peak office hours; the waiting time is short; and trains are punctual 99.9 percent of the time. Delhi Metro has been such a hit that real-estate values have already risen along the planned routes for the second phase of the project in which an additional 121 kilometers of tracks are being laid at a cost of $4.3 billion. There's so much of Sreedharan in the success of Delhi Metro that one wonders if India will be able to replicate it elsewhere, especially in projects run by the government, which doesn't attract top talent anymore. Letting the private sector take the lead seems to be the only realistic option for India to ease its acute shortage of infrastructure -- roads, ports and power stations -- even though it may ultimately be a costlier option for the taxpayer and the consumer. If only India had 100 more public servants of the caliber of its Metro Man.

Crude tactics BP’s boss, Tony Hayward, tries to unravel the curious goings-on at TNK-BP in Russia. WHEN your Moscow office is raided by Russia's security services, a court in Siberia imposes an injunction on your staff and your work permits are denied, you can tell you have upset someone. But who, and how? That is what BP, a British oil firm which owns 50% of TNK-BP, a joint venture with a Russian firm, has been trying to find out. So what is behind the hostility? People close to BP say the Russian oligarchs are up to their old tricks again, and are trying to exploit Russia's weak institutions and take control. Russian business practices can be (and often are) shockingly crude. But the Russian shareholders claim to have a genuine grievance. They say BP treats TNK-BP as a subsidiary, rather than an independent company run for the benefit of all shareholders. They say BP cares more about its oil reserves than costs or profits. TNK-BP provides 40% of BP's replacement reserves and 25% of its oil production. The Russians would like TNK-BP to expand abroad, but that would turn it into a rival to BP. In any other country this would have been an ordinary shareholder dispute, but in Russia, politics always get in the way.

Argentina Loses Investors at Fastest Pace Since 2000 on Economy, Protests Argentina's stock market is losing foreign investors at the fastest pace since 2000 on concern accelerating inflation and a three-month farmers strike will curb economic growth and corporate profits. About 1,000 emerging-market funds sold $157 million in Argentine stocks through May, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. That's more than the $118 million average daily trading on the Buenos Aires stock exchange and the biggest outflow since 2000, the year before the government's $95 billion debt default. Argentina's Merval index lost 4.7 percent over the past year, compared with a 27 percent rise for the Bovespa index in Brazil. WestLB Mellon Asset Management's Bill Rudman sold Telecom Argentina SA, the country's second-biggest telephone company, as he cut Argentine holdings last month to 0.5 percent of the total $3 billion of emerging-market equity he manages, from 2 percent. The agricultural protests over higher export taxes, food shortages and street demonstrations are holding back investment. ``We felt particularly the farmers strike and friction in the country was accelerating what might be the next crisis,'' said Rudman, the Latin America manager at WestLB Mellon in London. ``Argentina risks being ignored by investors, becoming just a residual within the emerging markets.''

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

Judging by the market's reactions Friday all our economic troubles are over again after we narrowly escaped disaster. Wrong - and typical of the widespread, endemic mis-understanding of how business cycles work, where we're at and what the indicators are telling us. Most of which is capture in the GDP and related economic data charted at right.

1. We're not in a recession but the Economy is slowing to the point of tip-over. Consumption (PCE) has turned sharply south. Indicators of future demand are showing serious damage.

2. The Housing crisis is far from over and we're entering the next round. The $500B+/quarter of stimulus from the Home Equity ATM is gone and a 1-shot $150B stimulus is NOT going to replace it anytime soon.

3. The Credit Crisis has been resolved as a crisis that threatened the collapse of the markets but it has morphed into the Credit Crunch where higher loan standards will see major contractions in credit availability resulting in a lower money supply effectively.

4. High energy prices are not osmosing thru into final wages or other prices but are narrowly focused and are effectively a tax on consumption and a drain on profits. Leading to lowered demand and declining margins and earnings. And therefore lower hiring and capex spending outlooks.

5. Long-term interest rates are rising due to downward pressures on the dollar which is contributing to rising oil prices and necessary to keep the flow of foreign investment coming into the country.

6. Primary consumer demand indicators are slowing sharply in current indicators. And future demand, which is best captured by the changes in Real Wages plus Employment is negative. As Employment - a lagging data variable remember - begins to drop consumers have NO fallback and will continue to decrease their spending demands.

After the break you'll find a variety of readings backing all this up which we recommend to your attention. Topics covered include the Outlook, Key Sector/Indicators, a deeper dive on the continuing and accelerating Housing crisis and the outlook and impacts of drastic declines in Wealth.

Several prior posts present an integrated and composite picture with charts and graphs and everything. They cover the "big picture" of the macro-economy and multiple sets of our key high-frequency indicators - including some we normally don't cover but got to much favorable and terrible interpretation by the media and other commentators to let stand as headlined. They include:

Business Cycle Status and Outlook:

• The Great Circle: Where We're At in the Business Cyle
• Real GDP: How Good are the Numbers ?
• Crossing the Ripping Point: Breaking Down GDP Components

High-Frequency Indicators:  

• Economic Dashboard: Current High-Frequency Indicators
• Current Economic Outlook: HF Indicators vs the Business Cycle
• Behind the Misperception Veil: What's that Data Behind the Curtain ?
• HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption

Outlook 

Why It’s Worse Than You Think But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11. As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food, and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low. Fed: Economy 'generally weak', Fed official tough on inflation, More financial peril ahead

• Roubini on Retail Sales and Recession  

OECD Again Cuts U.S. Outlook The OECD's acting chief economist urged the Fed and the ECB to leave rates on hold for the rest of the year. The U.S. Federal Reserve and the European Central Bank should leave their interest rates on hold for the rest of the year to boost growth and contain inflation, the acting chief economist for the Organization of Economic Cooperation and Development said. In an interview, Jorgen Elmeskov said the Fed should significantly tighten monetary policy beginning in the middle of next year, while the ECB should stay on hold until the end of 2009 to hit its target of reducing inflation to slightly below 2%. Mr. Elmeskov spoke as the OECD released its annual economic outlook. That report predicted that economic growth in the U.S., Europe and Japan will slow significantly through the rest of 2008, before picking up again in 2009. Tighter lending standards, falling housing prices and much higher commodity prices should cause growth in the U.S. to stall almost completely through the rest of 2008, the OECD said. The same factors will drag on annual gross-domestic-product growth in Europe and Japan, but not as much, the OECD said, predicting growth of 1.7% in both the euro area and Japan in 2008, compared with 1.2% in the U.S. Stronger growth should return by the end of 2009, the OECD said, based on assumptions that banks won't further restrict their lending standards and that the effects of a sharp decline in housing prices will fade.

Key Sector/Indicators 

Service sector growth eases A key survey of service sector executives released Wednesday showed business activity rose at a somewhat slower rate in May, even as employers cut payrolls and prices continued to rise. The Institute for Supply Management's (ISM) non-manufacturing index fell to a reading of 51.7 from 52 in April. Economists were expecting a reading of 51, according to a consensus compiled by Briefing.com.A reading above 50 indicates growth in the sector, and a reading below 50 represents a sector-wide decline. "This report is consistent with the slow growth we're seeing in 2008," said Wachovia economist Sam Bullard. May marks the first time the index declined - albeit very slightly - since its January facelift. Prior to January's report, the non-manufacturing index was only based on business activity, but it now equally measures business, orders, employment and supplier deliveries. The reading for business activity in the service sector rose to 53.6 in May from 50.9 in April. The service sector encompasses the retail, transportation and health care sectors. It also includes sectors that have been hit hard by problems in the economy, including finance, real estate and construction.

Unemployment Rate Jumps to 5.5 Percent in May- The government reports the nation's unemployment rate jumped to 5.5 percent in May -- the biggest monthly rise since 1986 -- as nervous employers cut 49,000 jobs last month. It was a dramatic sign of a deeply troubled economy. The big jump in the unemployment rate surprised economists who were forecasting a tick-up to 5.1 percent. Payroll losses, however, weren't as deep as the 60,000 that analysts were bracing for. Still, job losses in both March and April turned out to be larger than the government previously reported. Employers now have cut payrolls for five straight months. The 5.5 percent rate is relatively moderate judged by historical standards. Yet, there was no question that employers last month sharply cut jobs in manufacturing, construction, retailing and professional and businesses services. Those losses swamped gains elsewhere, including in the education and health fields, government and leisure and hospitality. The government said the number of unemployed people grew by 861,000 in May -- rising to 8.5 million. The over-the-month jump in unemployment reflected more workers losing their jobs as well as an increase in those coming into the job market to look for work, the Bureau of Labor Statistics said. A year ago, the number of unemployed stood at 6.9 million and the jobless rate was 4.5 percent.

Stimulus Checks Bolster Retail Sales Sales at U.S. retailers rose an unexpectedly sharp 1% last month, suggesting consumers spent a chunk of their government economic-stimulus checks. But rising prices and a weakening labor market could mean the boost to the economy will be short-lived. Retail sales, a key gauge of consumer spending, rose twice as much as expected in May to $385.4 billion, the Commerce Department said. Sales in April and March were also revised upward. Excluding the weak auto sector, sales were even stronger. Economists React: Consumers Say 'What Me Worry?'

Real Estate

Foreclosures Hit Record High -- and More Coming Foreclosures surge to a record high -- late payments, too, signaling worse to come. The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too -- an alarming sign that the housing crisis and its damage to the national economy may only get worse. Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices -- extending a vicious cycle. Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away. In fact, Americans' equity in their homes -- usually their single biggest asset -- now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up. Both the rate of new foreclosures and late payments were the highest on record going back to 1979. Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June. Toll CEO: Housing depression, Existing Home Sales: Turnover Will Slow, Case-Shiller: Real Prices off 21% from Peak

The Next Real Estate Crisis With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due. That was the catch to option ARMs; borrowers were offered low initial payments that would recast higher after several years. Many home buyers thought they could resell their homes before their payments increased. But instead, many of them got trapped. According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said. Option ARM reset schedule previous and revised (BW Graphic).

Wachovia: CRE Slump is Here The faltering housing market and generally sluggish pace of the overall economy are finally taking a toll on the commercial real estate market. Demand for office, industrial and retail space is waning, sending vacancy rates higher and property prices lower. Real private nonresidential construction is expected to moderate in the second quarter and continue to slide under the weight of tightening underwriting standards and slower economic growth. Here is my fairly long Non-Residential Investment Overview with similar conclusions. Also - this coming slump in CRE is one of the reasons the FDIC and the Fed are so concerned with bank failures later this year.

Business Outlook

NFIB Index Points to Higher Increase in Jobless Rate Small business owners are not optimistic about the current state of the economy. "The National Federation of Independent Business Index of Small Business Optimism fell 2.2 points to 89.3 - a recession-level reading, and the lowest index reading since 1980," said NFIB Chief Economist William Dunkelberg. "But the current low readings have not been accompanied by the declines in real spending and hiring as was the case in past recessions," he said.   There was a modest decline in employment in May (seasonally adjusted). Six percent of the owners increased employment by an average of 4.7 workers per firm, and 16 percent reduced employment an average of 2.9 workers per firm, virtually identical to the April numbers. More firms are reporting deteriorating sales trends than sales gains, quarter over quarter. The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months was down two points, falling to a negative 11 percent (seven points worse than September). Unadjusted, 23 percent of all owners reported higher sales, and 38 percent reported sales lower.

Bigger U.S. bank failures may be coming - FDIC Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday. An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry. "There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."

Wealth vs Demand

Americans $1.7 trillion poorer Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings. Meanwhile, the amount of equity people have in their homes fell to 46.2%, the lowest level on record. The net worth of U.S. households fell 3% to $56 trillion at the end of March, according to the Federal Reserve's flow of funds report, which was released Thursday.The value of real estate assets owned by households and non-profits declined by $305 billion, while financial assets fell by $1.3 trillion, led mainly by a $556 billion drop in stocks and a $400 billion decline in mutual funds. The first quarter's decline follows a $530 billion drop in wealth in the fourth quarter of 2007. Until then, net worth had been rising steadily since 2003, climbing nearly 31% over those five years. During the bear market of 2000 through 2002, household's net worth dropped 6.2%. The recent declines, however, may not affect consumer spending, said Michael Englund, senior economist with Action Economics. Americans have actually spent more in recent months, particularly at the gas pump as fuel prices soared. Americans "are spending everything in their wallet and borrowing more," Englund said. "But because the pump takes so much more of their dollars, they are buying fewer T-shirts." Still, as people feel begin to feel poorer, the growth in consumer spending may slow, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "When wealth goes down, consumers will cut back some," he said. "There will be a drag on spending."Household debt grew by 3.5% in the first quarter, down from 6.1% in the fourth quarter. The growth of home mortgage debt, including home equity loans, cooled to an annual rate of 3%, less than half the pace of 2007. Consumer credit, which includes credit cards, rose at an annual rate of 5.75%, the same as the 2007 pace. The fact that consumers continue to borrow against their homes, even as they decline in value, shows how troubled Americans are.

Wealth Evaporates in U.S. as Fuel Prices Clobber McMansions, SUV Makers ``Our whole economy reflects the relative costs of energy: the cars we drive, the houses we occupy, the kinds of factories we have and the equipment in them,'' says Dana Johnson, chief economist at Comerica Bank in Dallas. ``I'm expecting relatively large changes in all of these things.'' The loss of wealth could be a double whammy for the U.S. economy. In the short run, it depresses demand as homeowners save more and spend less, and companies fire workers. Longer run, it curbs productivity growth, as firms shift their focus from increasing worker efficiency to reducing energy costs. ``At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. ``The change in energy prices makes a portion of the capital stock obsolete,'' says Richard Berner, co-head of global economics at Morgan Stanley in New York. ``That will depress demand.'' He sees the U.S. economy growing at a sub-par 1.4 percent next year after expanding just 1 percent in 2008, held back by a variety of forces that include the destruction of capital resulting from the rise in energy prices. Zandi at Moody's Economy.com says permanently higher fuel costs will depress productivity growth during the next three to five years as companies retool to boost energy efficiency.

House Prices, the Wealth Effect and the Cash-in-Hand Effect House prices are collapsing, which means that homeowners’ equity in their houses is plunging. According to Federal Reserve flow-of-funds data, homeowners’ equity dropped by $399 billion quarter-to-quarter in Q1:2008 and $880 billion year-over-year – both record absolute declines (see Chart 1). The drop in homeowners’ equity contributed significantly to the $1.7 trillion decline in household net worth in the first quarter (see Chart 2). Economists refer to something called the “wealth” effect. It is hypothesized that households tend to spend relatively more of their income when their wealth is increasing and vice versa. Mind you, households do not have any more cash in hand to spend when the value of their stock portfolios or houses go up. They are just wealthier “on paper.” Active Mew has slowed to only $114 billion in the first quarter of this year – the smallest amount since the fourth quarter of 1999 (see Chart 3). There is no doubt in my mind that active MEW, which actually puts additional cash into the hands of households, played an important role in boosting consumer spending in this past expansion. And there is no doubt in my mind that the recent and likely continued decline in active MEW will play an important role in retarding consumer spending in this recession. Q1 2008 Mortgage Equity Withdrawal: $51.2 Billion

Americans enter new cycle as tough times alter spending habits Wondering how consumers are coping in such a troubled economy? Look at what's selling instead of which sales are tanking.  As consumers muddle through all that is plaguing the U.S. economy, they have battened down the hatches and sharply shifted their spending habits, turning to money-saving options that run the gamut from transportation to health as they find ways to pay for dramatic increases in gasoline and food. What emerges is a new paradigm of consumerism that some experts believe will live long after this economic crisis is resolved. "Suddenly consumers are focused on buying what they have to have as opposed to buying what they want to have," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment-banking firm. "This is a permanent change for Americans, who will face a declining standard of living over the next 20 years," he added.

Posted by dblwyo at 08:24 AM | Permalink | Comments (0)

We're going to interrupt the previously scheduled discussion on dashboards, data, and decisions to focus on some real data and what it means. Oh wait....is that an interruption or a continuation ? In any case we will be a broken record with a brief interlude on something we seem to do every month - compare and contrast the headlines on retail sales with the reality of the underlying data. And as usual the cast of usual suspects (CalculatedRisk, BigPicture) had something to say on these lines. The good news is we found another sorta blog (CEO Economic Update) who really gets it and dug beneath the headlines to look at the de-construction of same:Inflation wipes out the Retail sales report.

Last time we talked about HF Indicators (Behind the Misperception Veil: What's that Data Behind the Curtain ?) it was with an unusual set, i.e. slightly different from our standard dashboard (Current Economic Outlook: HF Indicators vs the Business Cycle) focused on Consumption, Investment, & Future Demand. This time we're going to focus, after the break, on the other 1/2 of the standard set - the Monetary, Inflation and Interest Rate indicators.  What's that  Harry Potter phrase about mischief  ?  Well here it's Mischief  Discovered as we try to unravel the linkages between  rate  spreads,  shrinking money bases, the CPI/PPI gap,  inflation, the dollar and oil prices.

Real Retail Sales - Deconstructed: 

As you've no doubt heard Retail Sales was up a whopping 1% MtM ! Glory Alleluia !! And core inflation was flat. Of course sales was up 2.5% YoY, which is really a continuing downturn. And core inflation was 2.3% - higher than the Fed's upper limit - while overall CPI continued over 4% YoY. BUT this was the month that the rebate checks that we're going to save us all went out. How is that nominal Retail Sales continues to slow ? This is good news ? Is that all there is ? Take a good look at the rather busy little multi-part chart (sorry - trying to over-compress my dashboards ?). On the top is our standard nominal vs real Retail Sales, the latter being down -1.4% !!

We got curious so we hand-transcribed gas sales, deflated it ourselves and backed it out of retail sales and created some quarterly numbers (another first hear btw :) ). That's the middle chart which is worth some careful scrutiny. First off since 1992 real Retail Sales and xGas sales have move in tandem - and Gas sales have followed along the cyclic pattern, with a lag. Until the last two quarters when gas has turned into a moon rocket while sales looks like an Acapulco cliff-diver.

When you shorten the horizon and dial-up the granularity that latter pattern comes out even more clearly in the 3rd sub-chart (sorry about label/color switch). Notice that the two are definitely opening out like the jaws of a set of clippers (pun & metaphor with Freudian overtones intended) about to snip something off. Two more things to notice at the monthly granularity level that could be really important. YoY Retail Sales xGas is now pulling away from Retail at an accelerating rate. Think about that for Retail Stores, Consumer Discretionary spending or even Staples (ding, ding what's the XLP doing ?) and future demand ? Here those blades a swishing, swishing 'round the bend, they're coming...never mind. Big build up .....real Gas sales on a monthly YoY basis are also slowing !!

People are diverting their spending as best they can into gas and energy and it's still going down ! BtW real Sales xGas was down -2.6% and has been negative since Oct. Wow, what a surprise. Levels last seen since, and lower than, the downturn of '01 - and here's the real rub. The length of negative real sales declines is already exceeding by several months the one during the downturn. 

HF Indicators: Rates, Money, Inflation,  Oil  and  Exchange

1. Rate Spread and Monetary Base:  the top sub-chart shows the spread between 3Mo AA's and Treasuries and the 10YR Treasury and FedFunds. The former is narrowing but still elevated above where it was by over 50 bps - indicating that the credit crisis is dissipating but we're still suffering after-shocks. The latter, which normally shrinks as the economy slows, has risen abruptly and rapidly. Indicating either serious fears of inflation, an economic boom about to start or something else. This could be important. Also shown is the inflation-adjusted YoY% change in the Monetary Base (r.h.s.). Which, despite all the hand-wringing and gnashing about rapidly increasing money supply, continues in seriously negative territory, ~ -3.5% ! Which is what you get when the economy is headed into the you-know-what. Which also knocks the inflation thing on it's head a bit. And tells us that slowing money velocity is indicating the credit crisis is morphing into the credit crunch as lending standards continue to tighten.

2. CPI, PPI, & 10Yr - as we mentioned the CPI is running about 4% YoY which is definitely not good though not the disaster various commentators would have it (btw - all this controversy on government index mis-construction goes away when you look back at long-term trends and YoY changes). What is more than a little scary is the very elevated level in the PPI (our estimate for this month btw) which continue to run over 11% YoY. The evidence is that Inflation is not spreading into Wages, consumer goods and certainly not the core. From this discussion it would appear to be concentrated in a few areas. Which also means that the CPI-PPI gap is a measure of the profit and earnings pressures building up in the commercial sectors of the economy. Something we've been noticing for a long...long time. In other words inflation is not setting in or metastasizing into the economy as whole - if anything everybody just keeps sucking it up. What we're seeing is a very narrow concentration that's implicitly a huge tax increase on consumption. And another on profits. with all that means for future demand and growth.

The other fun thing is that the 10Yr rate is still down quite a bit from it's peak, though it's picked up in the last few months. Again...not a strong inflationary pressure signal; more an ebb back from the flight to quality perhaps ?

3. Exchange Rate and Oil Prices: Mischief Resolved, if not Ended ?!

The last sub-chart shows YoY changes in the trade-weighted dollar exchange rate and oil prices. Notice that since Aug07 they've definitely been moving in opposite directions at what appear to be accelerating rates. At least until the last few weeks for the Dollar, who's decline has flattened. Nonetheless when the $ goes down oil prices do go up over and above the base cost increase. Similarly we start importing inflation as the prices of inputs increase in addition to energy. The other thing to bear in mind - and we ask you to recall the Chairman's eloquent remarks about the Fed "noticing" the need for the $ to stay strong - is that rates go up if a) one must attract foreign investment, b) your currency declines so that c) one needs to pay more for the money rental. Remember that sudden jump in the 10Yr-FF spread and the "other" explanation ? Well here it is.

They used to call it seignorage back when the Baron's strong right-arm was the arbiter of value. Now it's his check-writing hand that matters. Look it up - you might be amused by the definition in this context. Ah, what the heck...

  "a government revenue from the manufacture of coins calculated as the difference between the face value and the metal value of the coins"

Posted by dblwyo at 05:50 PM | Permalink | Comments (1)

Two industries where we've ended up taking particularly deep dives are Technology and what we're calling Technomediatainment - the emerging composite of Telecom, New Media, Entertainment and Consumer Electronics. After the break you'll find the usual summary tables with all the previous posts in these areas separated into those categories.

The two industries are interesting for their own sakes, as exemplars of the approach we take to business analysis and for the implications and impacts on the broader markets and economy. The first two Tech posts focused on the market situation and pointed out with slowing Capex spending (thereby linking back to our "understand the context" theme of coupling to economic analysis) that the unusual performance of the Tech indices was unlikely to continue. An argument which seemed to  first be born out from Oct to Mar and then wrong as the NDX/Nasdaq bubbled up over the SP500. Notice however that, literally today, the NDX is now moving in concert with or lower than the S&P. Interesting, eh what ? That question will be settled by whether or not earnings hold up unusually well - something we don't think will happen as the Economy continues to tip over but which is likely to lag other indicators.

Exactly how the Tech & Techno enterprises perform will result from the confluence of changes in industry structure, the emergence of new products, services and solutions and the performance of individual companies. All of which is discussed in more detail in these prior posts by some of which can be briefly reviewed here.

Technology

1. Industry Structure - Technology per se is essentially a commodity, at least on the bottom part of the stack. On the top part, the applications/content/solutions portion, there's still lots of room for value creation. The former assertion leads to the wave of consolidation we've been seeing among the platform providers and middleware vendors. The latter on-going challenge leads to the struggles of the application vendors as well as the emergence of SaaS, e.g. Salesforce, to try and fill in that gap. The biggest untapped opportunity is to provide reasonably sophisticated business applications to the grossly under-served mid-market.

2. New Frontiers - the  Application Space. The interesting thing is the continuing challenge on the part of vendors, customers/users, analysts and service providers still wrestling with the multi-decade old "two cultures" problem where Tech guys like bright shiny things and resent adult supervision. Contrawise business guys just want it to work but aren't willing to invest the hard...hard work in learning enough about Tech - at least in terms of end-use - to provide the guidance, participation and supervision required. That btw also means that those invidual user enterprises who can and do learn how to manage their Tech investments will continue to enjoy a sustainable competitive advantage. Sadly and surprisingly that's the same list of the "Usual Suspects" it's been for decades, e.g. Fedex, WMT, et.al.

Technomediatainment

1. Industry Structure - the key factor here is the rapid convergence of the various networks to a common infrastructure based on the same "stack" that underpinings the Internet and creates the strategic opportunity for XoIP where IP = Internet Protocol and X = Data, Voice, Video, etc. etc.

2. The Techno Stack - this shift creates huge opportunities for the Equipment Sector and the Service Providers (Phone and Cable companies). It also enables a revolution in the New/Old Media and Consumer Electronics companies, an exemplar of which is Apple's successive introduction of the iPod and iPhone. Which are really digital consumer electronics that are complete end-to-end solutions that are destroying the underpinnings of the old analog world in both media and consumer electronics. Whee...we're having fun now.

Winners and Losers: the Undiscovered Country

The separation between the winners and the losers will be between those who establish an on-going, sustainable and repeatable innovation capability and those who do not. And we DON'T just mean invent new crap but also execute on the delivery of those inventions. The relevant operating distinction between invention and innovation is whether or not you deliver it and make money in the process. Clever is fun but doesn't count. This will get interesting in all the sectors of these industries but is particularly fascinating to watch as as the New Media companies adapt to the "Content Wars". The series of posts on Innovation walk thru the general requirements and characteristics involved - here illustrated by contrasting pathways. So where do MSFT vs YHOO fall ? How 'bout Dell vs HPQ ? Or Nintendo or AAPL ?

Anyway...that's certainly not all the accumulated graphics digging into various aspects of these Industries. And definitely all the discussions, analysis and readings. If anything strikes your fancy you'll have to follow the pointers below to dig in some more. Bon Appetit' indeed. We are definitely living in interesting times. 

Posted by dblwyo at 05:50 PM | Permalink | Comments (0)

 Here we continue building, categorizing and summarizing the Business Analysis Toolkit/Dashboards by taking a deeper dive on certain key Industries. In our view to understand how a particular enterprise is going to perform one needs to understand its' context - the environment and ecology in which it lives. On the broadest level that is the geo-political environment - think of it as the equivalent of the climate, weather, terrain and so forth.

Then there are the broad Economic trends and condition which define the ecology within which it must function. A set of challenges which are usually shared by all firms within a particular industry.

And there are always many characteristics common to all firms within an industry. For insiders there will be huge differences in individual companies. Yet, in our experience, firms in a particular industry have more in common than their differences; something they are usually often not willing to admit publicly. Yet something they all recognize and deal with - after all, otherwise there wouldn't be industry conferences would there ? Years ago I got involved with the periphery of IBM's efforts to establish a common reference framework for all its' manufacturing operations. This took years of heavy investment in the large teams. And one of the biggest barriers they faced was the argument of every division and every plant that they were different. Yet, despite stubborn opposition, the central team managed to hammer out a common, shared process model of the general manufacturing enterprise. A model which we then proceeded to test across many other manufacturing industries and sectors. We mirrored and replicated that experience across many other industries as well including Retail, Distribution, Transportation, Finance and Healthcare.

What we found was that there was/is/will be a commonality of approximately 80% in processes across an industry. And that the differences usually lay, or should lay, at the detail level. Yet at the same time those processes were vastly different in name, structure, organization, staffing, etc. So one can't blindly impose the common framework on each firm. Rather the common framework provides a template or blueprint to use as a starting point for analysis, customization and configuration.

It also and most importantly provided a blueprint of things that should be being done even when they weren't. And that was the most telling finding of all. In fact what we found was that there were a lot of innovative ideas that carried, at least potentially, across industries. And offered major new sources of innovation and advantage. Just as one example the Airline industry built its' business models around a process called "Yield Management" - getting the last marginal dollar possible for the last marginal seat. Well a manufacturer couldn't implement Yield Management the same way that an airline could because the products were so different. But the underlying enabling processes required of market analysis, demand forecasting, adaptive pricing and customizing product mix and availability to narrower markets did apply. Ditto for retailers.

So when we analyze industries in our posts this is the underlying approach that's built into our discussions.

1) Industries share a common set of problems and challenges.

2) Industries share a common framework or blueprint that defines the collective best practices and "to-be" vision of the things they should be doing.

3) That common baseline can be used to evaluate the industry as a whole and individual players within the industry. Further elements of that baseline are "sharable" across industries; or can at least be used to analyze opportunities and risks.

4) The industry also shares a common ecology in terms of industry structure and dynamics that defines the shared environment different firms must compete in.

5) The ideal enterprise and the industry ecology are dynamic, constantly evolving and are inter-dependent.

6) By understanding the current and evolving status and characteristics of the enterprise and the industry one can anticipate many of the pressures, opportunities and future paths of both an industry and a particular firm.

We'll have to see how that holds up as time goes on but in the tables after the break we've listed and commented on the prior posts on several key industries. Hopefully this serves a couple of purposes. First, if you're interested in tracking down some ways of analyzing a particular industry this should make it easier. Second it's a catalog of industry analysis tools, approaches, readings and other resources. We hope you find it useful and valuable.

Below you'll find the pointers to the prior posts on Airlines, Autos, Retail, Oil/Energy and Finance Industries. We will point out that the headlines this week and last are strangely congruent with the discussions and guesstimations in these prios however. In other words, not to put to fine a point on it, the analysis seems to be holding up reasonably well so far. Which may argue that there's something to the approach, perhaps ?

Posted by dblwyo at 05:49 AM | Permalink | Comments (0)

O.K. we've finally combed back thru all the postings and followed up on the promise/threat to collect the various priors together. It turns out there's enough across a range of topics and domains that the "Business Analysis" tables will get split across three seperate posts. Here we're going to focus on the general approach to Enterprise Performance Analysis, specifically five major clusters - or continuing to beat our control system metaphor to death - consoles/dashboards:

1) Enterprise Performance: why it matters and the impact, including tables categorizing various headline companies into the good, the bad and the ugly as well as some interesting commentary from Carl Icahn.

 2) Financial Engineering: a key component of the last several years has been under-investment in hiring and capex and the largest investment in buybacks in decades. What's the impacts and implications for earnings outlooks ? And most especially - for long-term performance ?

3) Business Environment: businesses control what's inside their walls and must cope with the externals but, as should be very clear by now since it's the whole point of the dashboard argument, understanding how the wind, waves, and currents are setting is essential. 

4) Business Analysis: checklists, blueprints and frameworks along with associted readings and a guide to Warren Buffett's master class on business performance analysis. What are the elements, how do they work together, what should you be looking for and how do you go about looking. Tnink of these as performance blueprints and evaluation templates.

5) Functions and Issues: the enterprise consists of key fucntions like Customer Service, HR or Technology. From time-to-time we'll take a deep dive on a specific function or issue to understand what it is and how it should work vs generally does. Among other things this section includes some interesting work on HR and Innovation as well as Strategy. 

In the table below you can think of the postings detailed below as being the ones behind the left-hand column (sorry if there's some formatting problems - it's better after the break):

Posted by dblwyo at 06:13 AM | Permalink | Comments (0)

The prior post was really about filterring and structuring data into information and presenting it in form and way that makes decision-making easier. It was also, and perhaps more so, about the decision-making process itself. We can't help a lot with the latter, particularly in light of our own struggles therein :), other than provide the sort of excellent reading excerpts on the processes and methods. With the former we're doing our our best to build dashboards and control rooms that are accurate, simple, easy-to-grasp and help with decision-making. Perhaps, to continue the analogy, we're even trying to go so far as to help you build your own war room for the areas we think belong in a control center: the Economy, Markets, Industries and Companies analysis and frameworks. As well as details and tools.

Toward that end we've accumulated quite a bit of machinery. Any time you want to backtrack, other than checking the Category archives which you'll notice are structured down our control center design principle components :), or using the search function, the Key Postings category provides a short(er) list of some of the machinery we've found ourselves re-visiting over and over again. The Key Post tables is a complete list structured according to dashboard principles of many of the key posts and/or current refreshes. A dashboard/user manual for the control room if you will. 

Of course part of the question is just how one designs the dashboard - what instruments, what do they look like, and how are they laid out. And then there's the control room bigger quesiton - what consoles with what instruments, operating proceedures and so on and so on. Well it's not a "control loom layout" per se but here's our shot at depicting the control room in two parts.

The first part is the Economy and Markets room which has three multi-panel consoles and each console has multiple indicators on it. We haven't put up the detailed inventory of these postings but they'll be up shortly. Hopefully this'll make finding previous posts and machinery that's still relevent and useful much easier. It turns out there was a lot more of it than we knew - funny how stuff builds up when you keep plugging away at it.You can find the Key Posting Tables which list all the detailed discussion in that category archive. And then there's a complementary Business Analysis/Industry/Company "control panel" as well.

Both tables are posted after the break. We hope this is helpful in sorting out the various resources and tools that have built up on the blog. 

Economy/Market "Control Panel"

 Business Analysis "Control Panel"

Posted by dblwyo at 06:07 AM | Permalink | Comments (1)

We harp a lot around here about the differences between the underlying data and the headlines; and about the associated dilemma between today's data, underlying or not, and the context. What does it really mean in terms of trends, timeframe, pattern and change points ? What we've found over and over again is that people tend to look at today's unfiltered data, extrapolate it into the future in their heads rather than based on some deeper analysis and then be surprised when the world turns out differently than they expected. What's needed is some way to collect, filter and present that data in a user-friendly, easily grasped and accurate format. A dashboard in other words that captures the essence of a particular problem. Take another look at yesterday's post on the most recent economic data and take a look at the charts...if those aren't "dials" about the health of the economy we don't know what is. The trick to a dashboard, which historically didn't come about by accident and wasn't perfected overnight - more like decades if not a century - is that it's based on understanding the underlying "machine" in question, sampling the right data and presenting it in the right way.

The immediate trigger for these thoughts was yesterday's post on the real data behind the curtain but the real trigger was an exchange with Tim Walker of Hoover's expressing concern about whether or not people were spending too much time worrying about the economy instead of doing their jobs. Now on the surface you'd think that we, with our constant Economy-Industry-Company mantra, would be far apart on this; and we are to some extent. The point being that one can NOT ignore the economy nor the industry as it will swamp you best efforts in a blindside. On the other hand if you spend all your time obsessing about headlines, especially distortionate ones, at the expense of performance that's equally bad. Perhaps worse. Tim and I didn't finally resolve our little discussion so this is a continuation.

Have you ever gotten off the highway in a strange/new city ? And been overwhelmed looking at the street signs, power/telephone lines, traffic patterns, etc. ? Too much data, no filters and no information. But as you get familiar with the street and the patterns you can start looking for the key data - your brain (& this is biological btw) creates a filter that focuses on the key & changing elements in the overall pattern. The same way a lifeguard scans for splashes not every swimmer. The catch is that building the right filters has to be suited to the job. Too simple and you don't get enough of the right information. Too complex and it takes a lot of time to learn the data and acquire the interpretive and decision-making skills required to "fly the plane". The complex, busy and massive cockpit dashboard may be heard to learn - but is it required for the problem ? As well of course as being right, minimal, and well-designed ?

And when you need a Dashboard that covers all the relevant information across a variety of key areas and indicators now you're scaling from simple problem dashboard to Moonshot operations control center. Yet, as GE/Immelt learned and demonstrated with their last quarterly announcements, lack of the proper control is deadly dangerous. Think about it for a minute - GE is a well-run, famously controlled company led by a CEO whom Warren Buffett describes as one of the best. And they got blindsided by economic and credit forces they didn't anticipate or position for. And yet many of those forces were visible and publicly analyzed for a long-time, e.g. real estate as CalculatedRisk handles it. Obviously GE didn't have the right kind of super-dashboard or war room for the size and complexity of their organization. Read the Wiki description of the flight control center and all the myriad functions embodied in it to get an idea of what it takes to fly a shuttle mission. And then consider the analogy/metaphor/model to a global business.

It's one thing to design and build the right kind of control room but entirely another to use it correctly. As a bit of a stretched analogy bear in mind that ALL of the functions in NASA's "little" room are required just to fly orbital missions. For the scifi spaceships of our dreams that entire team, the data, monitors and computing power have got to show up onboard the trip thruout the journey. Contrast the "panel" in MS Space Simulator to the reality of NASA's FCC and ask yourself what's reasonable ?

We've been having a little fun with the dashboard analogy and the pictures but hopefully it's clear this is a really serious business. The sub-text beyond just understanding the problem well enough to design and build the instruments for the dashboard(s) and the right dashboard(s) for the war room is what then ? You, the operations director, have to be able to interpret that information flow, make decisions, evaluate changes and then decide & act again. In a continuous and on-going loop. That's a matter of training, experience, skill and attitude. Especially attitude.

Perhaps the hardest thing in all this is finding the right decision-making patterns and training you mind to them and then sticking with that discipline. After the break you'll find an interesting collection of readings on the importance and impacts of failing to come to grips with these problems to explain why this is important. Followed by some interesting stuff on how our minds work and how filter/dashboard building is so difficult mentally along with some complementary stuff on self-development and sustainable discipline. And ending with a suggestion of some hard-won rules of thumb to get you started. We particularly like the selections on the psychologies of misjudgement and how practice is required to implement change. 

You might want to reconsider yesterday's post: Behind the Misperception Veil: What's that Data Behind the Curtain ? as dashboarding exercise ! :) Take a look at the set of charts again and think of them as speedometers, power status indicators and the like. How's your/our spaceship doing btw ? 

Data, Decisions and Consequences 

Economic forecasting: How’s the weather for YOU? [UPDATED]  Just when you think you’re getting a grip on how badly the economy’s doing, something — a good day on Wall Street, a favorable economic indicator, etc. — gets people wondering whether things aren’t quite that bad. It’s hard to know what to think about where the economy’s headed. But clearly . . . it ain’t that good. Especially since I’m a business-news junkie, I have to be careful not to spend too much time reading the economic tea leaves. And given my interest in 20th century history, it would be fascinating to spend all day deciding whether I agree with the IMF that the current financial crisis is the worst since the Great Depression. But who cares? Sure, economists do, and regulators should. Talk about the chances of a recession with your friends over dinner, if it interests you. Button up your portfolios, if you haven’t already. (Although it’s a wee bit late, by this point.) But you know what? It’s not worth that much worry — not for most people. I submit that most of us are better off more or less ignoring macroeconomic data as it applies to us personally. Sure, think about what it means in terms of your company’s strategic and tactical approaches. Lean times call for different measures — both offensive and defensive — according to what business you’re in, and according to what business function you perform. But does it genuinely matter to the marketers and product managers sitting around me here at Hoover’s World HQ whether we’re technically in a recession or not? No. It’s enough to know the basic trajectory and how it affects our customers. And it’s still more important to serve customers well and to act on their feedback. I know I’m not telling you anything you don’t already know, but given the flood of financial reporting that threatens to drown us, it bears repeating: the macro-economy is usually nowhere near as important to your career as the quality of your relationships with your customers and the quality of your business execution from day to day.

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.

·         Industrial Strength Insight on industrials, with Larry Bossidy, former Honeywell CEO and CNBCs Joe Kernen.

• Economic Task Force Discussing the markets, with Matt Zeman, LaSalle Futures Group; CNBCs Rick Santelli and Steve Liesman.
• Government's 'numbers racket' is about to blow up in our faces

A look back at Wall Street's go-go days of 2007 Believe it or not, there was a time -- another era, really --when negative "exposure" on Wall Street was something that occasionally happened when a banker drank too much at the closing party for another multibillion-dollar merger. That would be about 12 months ago. It seems like a long-gone age. The issues facing Wall Street last spring would be petty annoyances today. Just a year ago, mergers and acquisitions were at an all-time record, brokerage profits had rocketed into uncharted territory, the Dow Jones Industrial Average was floating in the rarefied air above the 13,500 level and was soon to move above 14,000. The Nasdaq Composite Index was creeping above 2,600. So much was going right, it seemed we had to make up our problems. Little did we know that soon our creations would be wiped away with chief executives and fallen banks. A year ago the mortgage and credit crises were just a bad dream. We knew trouble was looming -- inflated home prices were skewing the consumer market, and cheap cash fueled a private-equity buyout boom unprecedented in history. Guys like Cayne, O'Neal and Mack were making a tidy profit off it all. Who, other than Blankfein, knew the coming write-downs would eliminate the last two years' worth of profit? Today we predict $200-a-barrel oil and another $100 billion in credit write-downs at major banks. Home prices have further to fall. The buyout boom has slowed. Wall Street will lay off another 30,000, including 9,000 combined from Bear Stearns and Lehman Brothers Holdings Inc. A regulatory crackdown outlined by Treasury Secretary Henry Paulson, the Federal Reserve and Congress threatens to curb Wall Street's ability to leverage balance sheets and profit from risk taking. Foreign ownership and diluted shareholders give the Street a watered-down feel. There's more doom and gloom on the horizon than milk and honey. All we can do is hope we're wrong -- just like last year.

Stick to your guns! 7 economists who can't make up their minds There are some unwritten rules for all economists. 1) Be careful when predicting a recession, you don't want to be wrong, so be really certain you are correct. 2) Don't predict 50-50 coin toss outcomes. When you annouce you think there is a 50% chance of recession, you are saying a) you don't know and worse b) you don't have an opinion. 3) If you do make a recession call, DON"T change your mind a month or two later and say we will avoid a recession.  Economists SHOULDN'T let their forecast bounce around from one month to the next. 4) If you have flip flopped.  DON"T flip back again and call a recession again. Generally the community obeys rule #1, which is why they take so long to call a recession.  It's embarrassing but many violate rule #2.But now I have evidence of folks failing #3.  The first hint was the WSJ survey that showed fewer economists believe a recession will hit.  But now we've got names.  Wachovia, I'm looking at you. Yes that is correct, Wachovia's chief economist and his team were adamant we would avoid a recession for a long time (defensible and following rule #1) by December of 2007 they still had the chance of recession at a tiny 30%. In February they violated rule #2. They said it was a 50-50 chance.In March they became believers and switched their forecast from maybe it will happen to maybe it won't, to all but certain (95% chance) a recession will occur, and they kept it at 90% in April. In May, Wachovia violated rule #3.  They switched their forecast to "most likely a recession will not happen."  (45% chance)  If their clients are basing production from their forecast how do they make this on, off, on change? Wachovia is stuck now. After violating rule #3, will they change back yet again violating rule #4? and declare we are in a recession?   Remember the confidence number we got earlier.Full caveat, I personally like this economist (John Silva), and know him to be an excellent professional. But come 'on! Stick to your forecast.

Filter and Dashboard Building

Blind to Change, Even as It Stares Us in the Face Our visual system’s inability to detect alterations to something staring us straight in the face is known as change blindness. The phenomenon that Dr. Wolfe’s Pop Art quiz exemplified is known as change blindness: the frequent inability of our visual system to detect alterations to something staring us straight in the face. The changes needn’t be as modest as a switching of paint chips. At the same meeting, held at the Italian Academy for Advanced Studies in America at Columbia University, the audience failed to notice entire stories disappearing from buildings, or the fact that one poor chicken in a field of dancing cartoon hens had suddenly exploded. Beyond its entertainment value, symposium participants made clear, change blindness is a salient piece in the larger puzzle of visual attentiveness. What is the difference between seeing a scene casually and automatically… In both cases the same sensory information, the same photonic stream from the external world, is falling on the retinal tissue of your eyes, but the information is processed very differently from one eyeful to the next. What is that difference? At what stage in the complex circuitry of sight do attentiveness and awareness arise, and what happens to other objects in the visual field once a particular object has been designated worthy of a further despairing stare? Visual attentiveness is born of limited resources. “The basic problem is that far more information lands on your eyes than you can possibly analyze and still end up with a reasonable sized brain,” Dr. Wolfe said. Hence, the brain has evolved mechanisms for combating data overload, allowing large rivers of data to pass along optical and cortical corridors almost entirely unassimilated, and peeling off selected data for a close, careful view. In deciding what to focus on, the brain essentially shines a spotlight from place to place, a rapid, sweeping search that takes in maybe 30 or 40 objects per second, the survey accompanied by a multitude of body movements of which we are barely aware: the darting of the eyes, the constant tiny twists of the torso and neck.