bizzXceleration: Performance, Value and Profit

Well with a lot of the economic news and analysis posted we can segue back to business analysis but let's keep in mind that one feeds the other - a fact, for example, that all the most lauded names in value investing have lost sight of. And paid some terrible penalities for. Again the mantra: Economy - Industry - Company. In other words you can never neglect the macroecon news in general but right now the metastasizing worldwide economic slowdown is driving everything. Just to put it in context and remind you we offer up this little tidbit from the WSJ:

Personal Income Falls, Sentiment Is Weak  Falling personal income and weak sentiment suggest consumer spending, the juggernaut of U.S. economic growth, could be headed for the first sustained decline in nearly two decades. "Consumer spending is poised for a major slowdown," Wachovia Corp. economist Mark Vitner said in a note to clients.

Auto Industry Outlook

The executives of Detroit have been wrestling with the consequences of decades of bad decision making - struggling might be a better word. They've trimmed up their legacy costs by taking retirees off the healthcare gravy train and re-negotiated their labor agreements. They're also downsizing to reduced total sales and much smaller market shares, among other major moves we'll talk about. Unfortunately they didn't anticipate as bad a downturn as they're getting and left key decisions very late in the game. It wasn't until about late Spring apparantly that they true magnitudes of the downdraft came to them. This chart shows YOY% changes and absolute auto sales for two timeframes. The first strategic oopsie was that these guys set themselves up for a 16million unit sales year with the downside being 15mil when you read their annual strategy presentations. They started to change that to 14mil with a headge in some cases, primarily Chrysler's team, for 13mil. Well as you can see those were wildely optimistic. And - if you find any credence to any of our economic analysis - shouldn't have been a surprise. In fact when you look at these numbers - a point we've made before - 16mil is aberrational. In fact they should have been strategically re-building themselves to make money at 12-13mil. But actually the situation is even worse than these charts make it appear.

 Mike Donnelly over at CEO Economic Update put together this fascinating chart a while back where he takes the same long-term timeframe but adjusts sales by looking at the % of the workforce buying a new car. While my charts would indicate major strategic problems and a dismal outlook Mike's tell you that the industry has crossed a major tipping point into a whole new buying environment. One that they are, despite all the headline announcements NOT positioned for. Nor one that they appear to be anticipating yet.

Auto Industry Business Performance

One of those key announcements is that all the majors will start making smaller cars in the US and will do so rapidly by first selling marks they're already making in Europe while they invest in and ramp up domestic manufacturing capabilities. Two things struck us as really total astonishing about this. First, that they could make announcements with such short timeframes for serious transitions, which imply they've had the capabilities for years but have avoided committing to them. And second that they waited until the wall was knowcked down on them and ignored the handwriting for as long as they could. The old George Carlin joke that "the '60s were good to them" seems to be entirely true and, sadly, they just now seem to be enterring into the drug rehab program from whatever they were smoking since then. On a strategic and operational basis they're facing three clusters of challenges. First, they've got to survive the next 3+ years, not 1-2 like they keep saying, and find the financial wherewithal to keep themselve alive. That by itself looks extremely unlikely, at least for all of them. Can you spell bankruptcy - which would be a disaster for them and us. Second they have to start selling and then making decent sized, high-quality and appealing small and mid-size cars asap. Preferably in 3-5 years or sooner. Bear in mind the design and development cycle for cars is 3-6 years long so shortening it up is a huge problem and they'll have to depend on what they can quickly lay they hands on that's already in the pipeline or production. Third, in the long-run, they need a complete re-tooling of operations, development and the product/market mix which again requires money they haven't got. In a previous post we pulled all this together using our performance analysis framework to assess the industry on the whole and the individual players, with the results you see here. Which may turn out to be too optimistic even yet.

Paradoxes of Performance

Charlie Rose recently did a three evening set of interviews on the Auto Industry starting with a session on design which was very interesting and encouraging. More so if we thought something would come out of those discussions quickly enough to have an impact. The set concluded with Bob Lutz talking about design in general at GM and the Volt in particular. GM's versions of a high-stakes, high-reward, very high-risk "Manhattan" project. Gutsy and courageous and illlustrating a return to their roots IOHO. But the most interesting and valuable was the middle show which was an hour-long interview with Rick Wagoner. Talk about a guy facing enormous pressures and coping well. And starting to do some of the right things. We urge you to watch that one in particular and reach your own conclusions. But some of ours would include a sense of sadness and shock that he rationalized the commitment to big SUVs and cross-overs as the result of the CAFE standards and the unwillingness of Americans to buy and the unintended consequences of too low gas prices. A nice thesis but one that falls on the simple fact that Toyota, Honda and Nissan have been very good mid-size and smaller cars that are attractive, appealing, high-quality and innovative and profitable for years. And as a result have started in one part of the auto industry ecology and gradually taken over more and more of it. Hondo in particular illustrates what happens when you define a strategic vision, translate that into good design and back it up with superb operational execution and functional capability. In their case that's particularly true of their commitment to flexible manufacturing which gives them a capability to switch what they make from what's not selling to what is. If you want some interesting backup on these assessments watch the several prior interviews with Wagoner and notice the evolution of the rationalizations and explanations !

The bottom lines here are that the Auto Industry is facing as big or bigger a set of challenges as the Finance Industry who we've taken such "joy" in bashing, runs a serious risk of bankruptcy in the near-term, faces major investment requirements to switch over their product mix and more to re-engineer their operations. All told they may in fact be an even less appealing investment than the Finance Industry ! Auto Industry Failure Odds

Strategic Outlook

How Bankruptcy Would Wreck GM and Chrysler Car sales are in a tailspin on account of $4 gas and a swooning economy, and as usual, the Detroit automakers are suffering more than their competitors. Overall, sales are down about 11 percent so far this year, according to J.D. Power & Associates. But at the Detroit 3, sales are down an outsized 18 percent. The biggest reason is an over-reliance on big trucks and SUVs and a dearth of small cars that consumers actually like. Ford has been hit hard, but looks to have enough cash to ride out a worst-case downturn and survive until 2010, when the market should rebound and recent labor cutbacks will start to pay off. But cash-flow problems are more precarious at General Motors and Chrysler, where analysts think a Chapter 11 filing is a serious possibility if the car business stays weak through 2009. To some, that seems like no big deal: Other companies, including four big airlines, auto-supplier Delphi, and retailer Kmart have used bankruptcy to rein in bloat, slash costs, and get healthier. But for GM or Chrysler, declaring bankruptcy would be more like slashing their own tires. Customers would flee, consumers would be unsympathetic, and the government would probably do little to help. Here's why bankruptcy would be such a dire scenario for any one of the Detroit 3: The automakers, by contrast, don't have a major problem funding their pensions. And they've already negotiated deep wage and job cuts with their unions, and cut billions in costs. "They're not being crushed by wage and benefit costs," says Mark Oline of Fitch Ratings. "It's about revenue and products now. It's a business model issue." Bankruptcy might allow Chrysler or GM to offload some debt--but it wouldn't do anything to increase revenue, speed the arrival of must-have new products like slick compact cars and family-oriented crossovers, or fund technology breakthroughs like GM hopes the Chevy Volt plug-in hybrid will be.

Big Three Auto Makers Seek More Help From Washington  Battered by high gasoline prices and weakened earnings, the Big Three auto makers and their suppliers are now seeking significantly more help from Washington in the form of government-backed loans than the $25 billion they had previously been authorized to receive. The $25 billion in loans were approved as part of an energy bill last year, but now General Motors Corp., Ford Motor Co. and Chrysler LLC will need "well north" of that, a GM spokesman said. The loans have yet to be funded. Following an extreme run up in gas prices that has crushed U.S. vehicle demand, auto executives are now making the case that Detroit could need far more money in order to fund critical initiatives. "There's a real urgency in that all of the progress we have made on these new vehicles could come to a standstill if we can't get capital at reasonable rates," the GM spokesman, Greg Martin, said, without giving a specific figure. People familiar with the discussions said there is no consensus dollar amount that auto executives are demanding at this point. Various reports have suggested the domestic auto industry now seeks between $40 billion and $50 billion. The auto maker's would like to have a funded plan in place by the end of 2008. Unlike the federal Chrylser bailout of 1979, under which the government backed $1.5 billion in loan guarantees so the auto maker would avoid skidding into bankruptcy, the current initiative is positioned as a way to make the Big Three more competitive in a global technology race in which they could otherwise be unable to effectively participate in. The companies are struggling financially and hope to use the loans to accelerate the development of new technologies and vehicles.

Car buyers' satisfaction with US brands stumbles U.S. car buyers are growing less satisfied with their purchases from domestic automakers while their Asian and European competitors continue to improve, according to a recent survey. Consumer satisfaction with U.S. auto brands slipped as Lexus and BMW tied for first place, followed by Toyota and Honda, according to the University of Michigan's American Customer Satisfaction Index released Tuesday. General Motors Corp.'s Buick and Cadillac brands, and Ford Motor Co.'s Lincoln and Mercury lines, fell from their No. 2 perch at a time when U.S. companies are struggling to outshine their competitors and reverse their shrinking sales and market share. That's an unsettling sign for domestic automakers, said Claes Fornell, the University of Michigan business professor who heads the annual survey. Traditionally, U.S. brands improve their customer satisfaction scores each year, just not as much as their overseas counterparts. Now, the domestic companies' ratings are declining while their competitors' scores continue to climb. "This is somewhat of a double whammy here," Fornell said. "The struggling companies are getting an even tougher road in the near future. The question also is do they really have the resources, the cash here" to adapt. Still, the auto industry has maintained a good reputation overall. Customer satisfaction has increased steadily over time and its overall score of 82 - unchanged from the high set a year ago - is higher than many other industries the index tracks. In addition, just 11 points separate the best-scoring brand from the worst, but domestic automakers are having the hardest time adapting to high gas prices and a shift in demand toward more fuel efficient vehicles, and that is manifesting itself in weaker customer satisfaction.

Key Players

Owner Gives Executives Time to Fix Chrysler The smallest of Detroit’s Big Three, Chrysler — which also owns the Jeep and Dodge brands — is famous for its big V-8 Hemi engines and rugged sport utility vehicles, and was woefully short of the fuel-efficient cars that consumers wanted. As a result, its sales in the United States are down 23 percent this year, more than twice the industry average. And its market share, as high as 13 percent in 2007, fell below 9 percent last month. Adding to its difficulties, Chrysler is still recovering from a painful divorce a year ago from its German partner, Daimler, and is in the midst of a huge restructuring under its new owner, Cerberus Capital Management. With all Chrysler’s problems, the industry has been rife with speculation about whether Cerberus would decide it had made an ill-timed bet and sell the company. But top Chrysler executives say they are determined to fix the company, and Cerberus executives say they will get the chance. Their plan hinges on a wave of new offerings beginning in 2010, and a mix of cars better suited to the times, to help spur another comeback for a company with a long history of them. Since Cerberus acquired Chrysler one year ago, the automaker has been a cost-cutting machine. It has announced the elimination of 28,000 jobs, sold $500 million worth of assets such as real estate and a California design studio, and cut shifts and plants that reduced its North American manufacturing capacity by more than a million vehicles. Chrysler is not revealing its overall savings, and as a private company it doesn’t have to. With limited access to financial data, analysts are skeptical of its overall health.

Chrysler Seeks Partnerships To Expand Globally  Chrysler LLC will aggressively pursue partnerships with other auto makers to expand its global reach, and its president dismissed the idea that joint ventures may damage the value of Chrysler's own brand.Mr. LaSorda pledged that every joint venture will either produce an entirely new vehicle not already in Chrysler's lineup or it will be limited to a slightly modified car or truck made or designed by the partner but that doesn't compete with an existing Chrysler model in the same market. Chrysler also announced a $1.8 billion investment to convert one of its two Detroit plants to build a car-based crossover vehicle based on a design developed with Daimler AG's Mercedes-Benz. That vehicle will replace the aging Jeep Grand Cherokee and retain its name yet will include a more fuel-efficient V-6 "Phoenix" engine when it hits showrooms in 2010, Mr. LaSorda said. Mercedes won't build vehicles at the Detroit plant but expects to use the same platform architecture to make its own vehicles, he said. That effort, Mr. LaSorda said, will be augmented by a series of other partnerships to take advantage of Chrysler's expertise in truck and minivan production in the U.S. At the same time, Mr. LaSorda said, Chrysler will make small cars in new markets with foreign auto makers.

GM invests $500 million, bets small car can make money General Motors Corp on Thursday said it would invest $500 million to build a new fuel-efficient, small car the automaker says will show it can make money in head-to-head competition with its Japanese rivals as it fights to return to profitability. The new Chevrolet Cruze, which also will be sold in Europe and Asia, will be built at GM's Lordstown, Ohio assembly plant, a facility once threatened with closure that also makes the suddenly hot-selling Chevy Cobalt and the Pontiac G5. "We are here to stay, and today's announcement is the latest evidence of our commitment," GM Chief Executive Rick Wagoner said at an event to mark the investment. Wagoner, who unveiled a full-scale model of the Cruze at the Lordstown plant, said the new compact would get "significantly" better mileage than the most efficient Cobalt it replaces -- pushing it toward 40 highway miles per gallon. That gain, he said, would allow GM to move closer to meeting new federal fuel economy standards and to hike sticker prices. Raising prices on the car would allow GM to make money on its launch, something it has not done with the Cobalt. Cobalt sales have jumped 16 percent this year, making the small car a standout bright spot in a GM line-up that still tilts heavily toward the SUVs and trucks that American consumers are abandoning in the face of high gas prices. The new investment marked a dramatic reversal of fortune for 4,600 workers at GM's sprawling Lordstown, Ohio plant who had been told just two years ago their jobs could be lost under a GM plan to send small car production to Mexico. But a cost-cutting labor contract that United Auto Workers union officials negotiated with GM and the boom in small car sales saved the Lordstown plant, GM and union officials said.

• GM Plans Formal Talks for Sale of Hummer

For GM, what might have been According to recent interviews with parties involved in the discussions, as well as a confidential analysis prepared for the deal that was obtained by Fortune, the tie-up could have produced as much as $10 billion in operating earnings per year for GM (GM, Fortune 500) by 2011. That's a pretty attractive number for a company that has rung up $18.7 billion in losses in just the first six months of this year and needs to borrow $10 billion to $15 billion just to stay in business until 2010. But the alliance's savings might have come at a steep price for GM's senior management. One proposed strategy called for a "repopulation" of GM's executive ranks with outside talent. That presumably would have forced some incumbent managers out of their jobs - a shocking development at a company where executives seem to enjoy lifetime employment regardless of their performance. The strategy also called for the creation of a 30- to 50-person SWAT team separate from day-to-day management that would drive the implementation of the pact - another huge blow to GM's status quo. What is clear is that the proposed pact represented bold action - something GM has long needed but so far been unwilling to take.

Toyota Executive Predicts Gradual Recovery in U.S. Sales  A top Toyota Motor Corp. executive predicted U.S. auto sales will eventually return to about 17 million cars and light trucks, but he said it will happen more gradually than auto makers originally hoped. To support his forecast, Bob Carter, group vice president and general manager for the Toyota division at Toyota Motor Sales U.S.A., cited the rising U.S. population, which he said would increase by 32 million to roughly 332 million in the next 12 years. His assumptions also include gasoline stabilizing at $3.50 a gallon through 2010 and then climbing after that, possibly above $5 in the longer term. He also expects the restoration of full-size light-truck sales to two million vehicles. The estimate for truck sales this year is 1.45 million vehicles, down more than a million from its peak in recent years. Mr. Carter's comments at an industry conference Thursday will contribute to a continuing debate over the true demand for cars and trucks in the U.S. marketplace. Starting in 1999, auto makers sold roughly 17 million vehicles, establishing a trend that many claimed to be the new norm. Now, several analysts argue that level was an artificial height, achieved through extreme incentive programs and cheap gasoline that were both unsustainable in the long term. Even if the 17 million figure is reached and exceeded, most auto makers expect it will take at least several more years. Mr. Carter said recovery could start in 2010, but the 17 million mark might not be hit until 2020. In the interim, the Big Three auto makers of Detroit especially are expected to struggle in North America through at least next year, prompting concerns about whether the manufacturers will have enough cash to weather the storm. The uncertainty comes as other, once-growing auto-sales markets in Europe, China and Russia have begun to soften. Based on trends this year, the current estimate for 2008 U.S. sales of cars and light trucks is at or below 14 million, well under the 16 million figure considered healthy by the industry. Today, the auto industry is in a "perfect storm," buffeted by rising costs and slumping orders for new vehicles, Mr. Carter said. But he added that "turbulence is always going to be a part of this business." Mr. Carter said he has changed his thinking about the nature of the current drop in U.S. sales. Once he believed that a sharp drop in sales would be followed by a dramatic increase, forming the shape of a V on the sales chart. Now, Mr. Carter said, he thinks the trend will look like the Nike logo's "swoosh," with a more gradual recovery not taking real hold until 2010.

• Toyota to cut 2009 sales forecast to 9.8 million units

Even Toyota Trims Goal in Shift From Big Vehicles Even Toyota is not immune to the slowdown in the global economy.The Japanese company, which is battling General Motors for the title of the world’s largest automaker, cut its sales forecasts on Thursday, warning that higher fuel costs and a slowdown in the United States and Europe would probably hold back the auto business at least through 2009. “We have been going at top speed up to now,” the Toyota president, Katsuaki Watanabe, was quoted by The Associated Press in Tokyo. “It is time to set more cautious targets.” The Japanese group, which includes Daihatsu Motor and Hino cars, now expects to sell 9.7 million cars and trucks in 2009, 700,000 fewer than its previous forecast. That is still 2.1 percent higher than the 9.5 million Toyota expects to sell this year. A big reason for the more bearish outlook is the 10 percent reduction, to 2.7 million vehicles, in Toyota’s 2009 sales target for the United States, where Toyota has invested heavily in trucks and sport utility vehicles. Those have fallen out of favor as consumers shift to smaller vehicles that get better gas mileage.Toyota said it would also be cutting production in Britain and Poland to bring output in line with slipping demand in Europe. Toyota is only the latest of the global automakers to acknowledge suffering as inflation and economic weakness in their major markets undermine consumers’ buying power, and high gasoline prices cause a shift toward more fuel-efficient, and in many cases, less profitable, vehicles. Auto sales are slumping in the world’s two most important markets, North America and Western Europe. American auto sales fell 10.6 percent from a year earlier in the January-July period, according to Ward’s Automotive Group, as the rate of decline accelerated in the second quarter. Western European sales fell 2 percent in the first six months, according to the European Automobile Manufacturers’ Association.

Honda Stays True to Efficient Driving During the glory days of big pickups and sport utility vehicles, one automaker steadfastly refused to join the party. Despite the huge profits that its competitors were minting by making larger vehicles, Honda Motor never veered from its mission of building fuel-efficient, environmentally friendly cars like its Accord sedan. But in today’s fuel-conscious automotive market, Honda is reaping the rewards for its commitment. No major automaker in America is doing better than Honda, whose sales are up 3 percent for the first seven months of this year in a market that has fallen 11 percent. By comparison, General Motors is down nearly 18 percent, Ford Motor has dropped 14 percent, and Toyota has slid 7 percent. While competitors are scrambling to shift their product lineups to build more small vehicles and slash their bloated inventories of trucks, Honda can barely keep up with demand, particularly in the subcompact category. Sales of its tiny Fit have soared 79 percent so far this year, and interest in the vehicle is so strong that Honda accelerated the introduction of the 2009 model, which will go on sale Tuesday. Honda’s focus on fuel efficiency is paying off on the bottom line as well. The Japanese automaker reported a record profit of 179.61 billion yen ($1.68 billion), during its fiscal first quarter that ended in June, an 8.1 percent jump from the previous year. Sales of Honda’s crossovers, minivans and pickups have dropped this year along with the overall market. But the surge in sales of its cars has more than made up for the shortfall. Unlike many other automakers, Honda has been able to capitalize on the switch in demand to cars because of the flexibility of its assembly plants. Honda, Better Off Than Most

Possible Futures

Auto Makers Take Own Ways Designing Fuel-Efficient Cars  Auto makers are angling to carve out their own niches in fuel-efficient design, from expansion of the gasoline-electric hybrid technology already available in the Toyota Prius to the new plug-in hybrid vehicle known as the Volt under development by General Motors Corp. Hot off its success with its Prius sedan, Toyota Motor Co. said Friday that it would make hybrid engine systems available on all of its models by 2020. Ford Motor Co., which has few hybrid options among its vehicles, plans to double its hybrid-vehicle lineup and production next year. And Honda Motor Co. said last week at an industry conference in Traverse City, Mich., that in 2009, it will import a new hybrid to compete directly against the Prius in the U.S. market -- and at a lower price. The Chevrolet Volt still is scheduled to go on sale in 2010, and its chief designer, Bob Boniface, gave the Center for Automotive Research's management briefings seminars an early look at the most recent styling changes adopted to create a sleeker front end and to extend its range on battery power through better aerodynamics. The Volt will be able to go at least 40 miles on its lithium-ion battery, but the vehicle also will contain a small gas tank that would recharge the battery if necessary. Consumers would be able to recharge the vehicle at home using a conventional household outlet. The auto industry has scrambled to meet shifting U.S. consumer demand toward small, fuel-efficient cars and away from trucks and sport-utility vehicles. Even though gasoline prices have recently retreated from above $4 a gallon, most auto makers have said they consider the shift toward small cars to be more or less a permanent change in the overall mix of vehicles customers want. And the companies intend to build them. Toyota and Ford have said they haven't been able to build enough hybrid vehicles to meet consumer demand. Though most auto makers are assumed to lose money on hybrids, Toyota's Bob Carter, head of North American sales, said in an interview that his company makes a profit on its Prius hybrids, which recently exceeded sales of one million units globally.

Jaguar's Great Leap Forward When Ford sold Jaguar to Tata, it left behind a major new design. For 30 years, Jaguar design has been mired in what Aaron Bragman, an auto analyst for Global Insight of Troy, Michigan, calls "English drawing-room style"—as in, conservative sedans and sports cars accented with traditional wood and leather. The average Jaguar buyer was almost 60, and they were mostly loyalists who'd owned the cars before. The stodginess was somewhat understandable, since for many years the managers at Ford Motor had a host of other problems to tackle. After paying $2.5 billion for the fabled British carmaker in 1989, their first task was to fix the horrific quality of the cars. There were also thousands of excess workers, ancient factories, and outdated, expensive production methods. Ford added new models in order to expand sales, but the S-Type midsize sedan of 1998 was only a modest hit. The X-Type compact sedan, launched in 2002, was savaged by critics. Plans that called for more than doubling Jaguar sales—to 200,000 a year, across four models—were left in the dust. Two years ago, the company decided Jaguar—by then hemorrhaging cash—would have to become a much lower-volume maker of more exclusive and expensive cars. Then this month, Ford completed its sale of Jaguar and Land Rover to India's Tata Motors for far less than Ford had paid. Now, a brand-new model is charged with blowing that dusty old image into the weeds and reviving Jag's old reputation as a maker of fast, beautiful cars that cost less than the competition. Launched in the U.S. just three months ago, the XF midsize sedan is the first Jaguar with avant-garde styling in, well, decades. View slideshow.

Auto Makers to Make Public Push for Loans Executives at Detroit's Big Three auto makers are considering making a more public push to lawmakers in the near future as they seek about $50 billion in low-cost loans that would greatly overhaul their product portfolios, people familiar with the matter said. Top executives at General Motors Corp., Ford Motor Co., and Chrysler LLC -- each racking up significant losses as industry sales decline -- will likely wait until after Labor Day, following this summer's political conventions, to travel to Washington for meetings on the loans, these people said. They are expected to soon give a more concrete figure to Washington in terms of what size of a loan package is needed, they said. The heads of GM, Ford and Chrysler started making highly-publicized trips to Washington a couple of years ago in order to press the case for aide from lawmakers and other decision makers. Health care costs, energy policies, and foreign exchange had been key issues Detroit was seeking support on. But now, as high gasoline prices have boosted demand for fuel-efficient cars, the auto makers and some domestic parts suppliers are seeking low-interest loans to help them ramp up fuel-efficient car and truck development. Because GM, Ford and Chrysler are rushing to meet stricter emissions regulations being imposed in coming years, they feel they can easily put the entire sought-after $50 billion in assistance to work in current and future product plans. Last year, Congress passed an energy plan that would lend $25 billion to auto makers for fuel-efficient development, but that plan has not been funded. Now, the domestic Big Three are quietly pushing for about twice that amount because of the dramatic decline in demand for their most profitable products -- trucks and SUVs.

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Well let's take another little trip into economic reality. After the break you'll find three sets of readings excerpts collected: Overall Domestic Economy, Key Data and the International Economy. After two major economic posts earlier this week (GDP, Jobless Claims, Markets, Oh My: Still Tipping Over !,Tech Trends II (Analysis): What're the Drivers and Outlooks) we should be in a position to build on them and move forward. The single most important economic number that came out this week, IOHO, was the consumption and personal income data, which we'll dive into in a minute. The other thing though is that we need to take a careful look at this giant data conspiracy theory about distorted GDP numbers that's going around. So we're going to spend some time on that. The other thing we want to mention is the international news which we've been covering extensively, and apparantly popularly. While the world's economies continue to slow and the only thing that kept us out of a recession was growth in exports the factor that's really getting neglected is the return of really ugly geo-politics. And not just the point we made earlier that Russia's Georgian foray cuts off Central Asian oil, nor the fact that Iran, Syria, et.al. just got more room to maneuver because the chances of coordinated world policy against there adventures just went out the window. No...the OTHER thing you need to start worrying about is cold war-like tensions in the international economy as Russia starts retaliating for all the perceived slights it's received and starts trying to damage its' trading partners in pursuit of nationalist mercantilism, ala the 17thC ! Which has already started BtW. Think about it - and then remember however painful you think globalization has been remember that cheap WMT lamp from China wouldn't have been possible without international trade agreements and stability & peace. Let's hope this doesn't get to damm ugly indeed.

GDP and the Anti-Conspiracy

There's the most amazing meme that's circulating about the GDP numbers are bogus because the estimate of inflation built bears no resemblance to what people experience. The issue is a tad complicated and we'll do our best to de-construct it here (having just spent five hours on data collection and analysis). What's really scary is how widespread and virulent the attacks are getting from normally sound sources who pride themselves on being data-grounded: Alan Abelson on Barron's front page(Sizing Up Sarah), Barry Ritholz at BigPicture (GDP: Lowest Inflation Rate in 5 Years)and Jeff Saut in a BNN interview. It doesn't get more sound, data-driven and respectable mainstream than that. And unfortunately as best we can tell they are all grossly in error thru failing to exercise a little due diligence. Menzies Chin of EconBrowser (Why Does It Feel Like a Recession?)put us on the right track and we'll take our shot at an explanation. This should be a tempest in teapot if everybody were looking at real GDP on a YoY basis and ignoring the headlines. Instead it's turning into a Cat5 storm making landfall, at least in terms of noise obscuring understanding. So without further ado...we give you

Output, Purchases and Trade 

 The key difference lies between what we make and what we buy. GDP is the sum of all domestic economic activity. When you add in what we sell abroad and subtract what we purchase the result is Gross Domestic Purchases. Now we bet the data to death and ran it back to 1929 and the root of the apparent discrepencies lies in the fact that GD Purchases are now much larger than GDP and the difference has never been this large in history (which btw explains trade balances, doller weaknesses, savings shortfalls and on and on...this exercise is worthwhile just for that understanding !). The top chart in this composite shows GDP vs Purchases the difference. Notice that it confirms everything we've been saying, and the readings reinforce, about exports having been our salvation. The real catch here in the arguments over inflation is that domestic inflation is under control - this is not a wage-spiral. It's an import largely due to rising commodity prices, and potentially from bad monetary policies abroad. For the first time in our history the rate of inflation domestically vs foreign purchases is not only seperating. It is diverging in magnitude and direction. Fortunately the BEA does us the favor, which is hard, time-consuming and expensive, of developing price indices and deflators for every major component of the national accounts including these. Which leads us to the third part of the chart - the YoY% changes in GDP and Purchases. Like we've been saying GDP weakened from Q1 to Q2 with growth dropping from 2.5% to 2.2%, which doesn't yet meet our definition of a growth recession. Oddly enough, right about the time oil prices rode the rocket, it was in lock step with Purchases right up until 2007. When it began to diverge, i.e. the economy we experience day-to-day, began to weaken faster and more than GDP was telling us. And from Q307 it's been getting much worse much faster. For the last four quarters the respective growth rates are GDP (2.8,2.3, 2.5 and 2.2%) and GDPurchases (1.7,1.4,1.1 and 0.4%). A growth recession by any measure. Too bad that all the sturm und drang that's floating around will cause so many to miss what's really going on but at least you read it here ! :)

Consumption and Recession

While the GDP data may not fit the definition of growth recession just yet it will. As we can pointing out, it's trade (exports) you-know-what :). And as this little sidetrip make crystal clear enormously more so than even we were arguing. It should be beyond question that domestically we're in or headed for a real recession and, as the rest of the world tanks, well...you know the rest. The real key indicator is what happened with real consumption. Here's our normal comparisons of Consumption and Real Consumption - monthly back to 99 and, given the seriousness of the situation, quarterly back to 1960. Notice that the drop in real spending is seriously below the '01 recession, almost as bad as the '90 recession and appears to be headed for a drop as bad as the 1980 or 1975 recessions ! Now that's scary. And notice that the whole Tipping Point argument is reinforced by how steeply and rapidly it's dropping on that scale.

This has been a very unusual cycle in many ways with a prolonged slowdown, that many ignored, a lack of organic, self-sustaining growth in the aftermath of the Tech Bubble's investment bust and the Leveraged Liquidity Bubble, which is now managed but not finished. Unfortunately that slowmotion slowdown is beginning to turn into a real cyclic downturn. Now our best guess was that we were looking at growth around 1% in Real GDP thru 2010. But if we seriously cross this tipping point and a self-reinforcing consumer-driven downturn gets going things could get seriously ugly. 

Domestic Economy

The economic growth mirage Despite all the talk about the U.S. economy falling on hard times this year, experts are predicting that the economy grew at a more solid pace during the second quarter. The government will release an update to the second-quarter gross domestic product report Thursday. Economists surveyed by Briefing.com are forecasting an increase of 2.7% in the quarter, up from the 1.9% growth first reported last month. The GDP is the broadest measure of the nation's economic activity. Economic growth between 2.5% and 3.5% is typically viewed as the norm for a healthy economy. But that doesn't mean that the United States has avoided a recession, some economists say. In fact, there are growing concerns that weakness will extend through the rest of this year and even into 2009. Among the factors behind the likely upward revision to growth in the second quarter: More business inventories than originally estimated and improved trade figures. The trade picture was helped by reduced spending on imports other than oil and by strong exports due to a weak dollar that made U.S. goods more attractive overseas. This may also prove to be fleeting. "With slowing of economies abroad, that gain from trade doesn't look sustainable," said Keith Hembre, chief economist with First American Funds. With all this in mind, several economists say they are certain the U.S. is in recession and that no one should be fooled into thinking otherwise by a strong second-quarter GDP report. That's because it will be hard for the economy to rebound until the housing, banks and credit markets start to recover from the upheaval of the past year. "This is a head fake," said Kevin Giddis, managing director of investment bank Morgan Keegan, about the expected rise in GDP. "You have to reach a bottom in housing before you'll see a turn."

U.S. Economy Grew Faster Than Estimated in Second Quarter on Export Gains The U.S. economy expanded at a faster pace than previously estimated in the second quarter, helped by surging exports and a smaller decline in inventories. The 3.3 percent annualized increase in gross domestic product from April through June was higher than forecast and compares with an advance estimate of 1.9 percent issued last month, the Commerce Department said today in Washington. The economy grew 0.9 percent in the first quarter. Record exports and the temporary stimulus from the tax rebates prevented the economy from stalling as housing slumped and companies cut expenditures. Consumer spending is now waning and slower growth abroad dims the outlook for foreign sales, signaling last quarter will be the year's highpoint. ``The overwhelming story is that the export numbers have offset this domestic weakness in consumer spending and business investment,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. Outside of exports, ``we have a domestic recession.'' The smallest trade deficit in eight years was the biggest contributor to growth. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year. The boost from trade may wane in the rest of the year as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter. Private economists aren't the only ones taking a dimmer view. Federal Reserve staff also ``marked down'' the central bank's forecast for growth in the second half of 2008, according to minutes of the Federal Open Market Committee's Aug. 5 meeting released this week. Fed policy makers also said recent reports pointed to ``softer export demand,'' according to the minutes.

• "Export Driven" Q2 GDP Revised Up to 3.3%
• Economy shows vigor, but seen flagging, Spring's economic rebound unlikely to last,
• Strong GDP Report 'High Watermark' for U.S., Not Sign of Upturn, Economist Says

Export Strength Can Make Growth Feel Like Recession The U.S. may have just completed one of the most unsatisfying 3%-growth quarters ever. That’s because the source of almost all that growth, net exports, doesn’t have the same kind of effect on employment and purchasing power that sectors more sensitive to domestic demand do, meaning the economy still may feel like a recession even if — in a gross domestic product sense — it’s still growing comfortably. “In a technical sense, [export and domestic demand] are created equal, but just in the sense of judging the health of the economy they’re not created equal,” said Abiel Reinhart, economist at J.P. Morgan Chase.Last month the government estimated that GDP grew a modest 1.9%, at an annual rate, between April and June. But government statisticians didn’t yet have the June trade data then. With those figures in hand, Wall Street economists say GDP probably grew 3% or even higher last quarter. Even averaging in a subpar first quarter the economy still grew around 2%, at an annual rate, in the first half of the year.Barry Bosworth, an economist at the Brookings Institution, explained the dichotomy between how GDP growth looks and how the economy may feel to households this way: “if you’re looking at the output data, the economy’s holding up surprisingly well,” thanks largely to exports. However, Bosworth said “if you were just looking at the employment data, you’d be concluding that the U.S. is in a recession.” The U.S. has lost jobs for seven-straight months. Of course, if it weren’t for exports, that recession call would be a no-brainer. “GDP excluding the foreign sector, you’ve had pretty bad numbers,” noted Reinhart. To be sure, “whether you’re selling to a domestic consumer or abroad, it’s still production,” Reinhart said. But differences between export versus domestic production still matter for consumers and their purchasing power. Even if the prices of many goods and services U.S. exporters produce are going up, they’re not keeping pace with the prices of things Americans import, due largely to the huge spike in energy prices. Indeed, according to government price data, prices of U.S. imports swelled 20.5% in the 12 months ending June, while export prices increased only 8.6%.“It’s a terms-of-trade effect,” explained Bosworth. “When you measure (household) wages .. in terms of their output prices it looks good; when you measure it in terms of the things they want to buy, it looks bad,” he said. “What we export buys less and less in terms of imports,” agreed Josh Bivens, economist at the Economic Policy Institute. That’s “one reason why the economy maybe feels worse than headline GDP says,” Bivens said, since a reduction in purchasing power is offsetting the growth in GDP. That trend may persist as the economy goes through a necessary rebalancing brought on by the weaker dollar. “We’re starting from a place where we’ve done far too little manufacturing production,” Bivens said. To reverse that “we’re going to have a couple of years where consumption drags behind GDP,” Bivens said.

• Why Does It Feel Like a Recession?

Key Economic  Data

Unemployment: Continued Claims over 3.4 Million The DOL reports on weekly unemployment insurance claims: In the week ending Aug. 23, the advance figure for seasonally adjusted initial claims was 425,000, a decrease of 10,000 from the previous week's revised figure of 435,000. The 4-week moving average was 440,250, a decrease of 6,000 from the previous week's revised average of 446,250. And continued claims are now above 3.4 million for the first time since 2003. The advance number for seasonally adjusted insured unemployment during the week ending Aug. 16 was 3,423,000, an increase of 64,000 from the preceding week's revised level of 3,359,000. By this measure, the economy is clearly in recession.

Consumer Spending in U.S. Slowed in July as Prices Rose Most in 17 Years Spending by U.S. consumers slowed in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power. The 0.2 percent rise in purchases matched forecasts and followed a 0.6 percent increase in June, the Commerce Department said today in Washington. Prices rose by the most in 17 years. Americans, faced with rising unemployment, soaring food and fuel costs and falling home values, are cutting back on big- ticket items like automobiles and furniture. The federal tax rebates, the bulk of which have now gone out, will no longer keep spending, the biggest part of the economy, going, economists said. ``The consumer is going to be in worse shape by year-end,'' Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said before the report. ``You can expect much slower growth in the third quarter and even slower in the fourth.''

Retail Group Sees Slow Sales Well Into 2009 U.S. sales will stay sluggish through the holidays and well into next year, despite hopes consumers would get earlier relief from higher food and fuel prices, the National Retail Federation said on Thursday."We are very, very cautious about the rest of the year. We don't foresee a turnaround until at earliest the second half of next year and even that may be a bit optimistic," spokesman Scott Krugman said during a call with analysts. Consumers who find their budgets pressured by rising prices and a housing slump "are clearly concentrating on the essentials," Krugman said. The NRF will release a holiday forecast next month. Overall retail sales are expected to slow, with total growth for 2008 at 3.5 percent compared with last year's 3.7 percent increase, Krugman said.

How a housing fix backfired Back in February, Congress passed into law a quick fix for the housing market. Unfortunately, it hasn't done much good. As part of the economic stimulus plan, lawmakers raised the limit on the size of home loans mortgage giants Fannie Mae and Freddie Mac can guarantee, from $417,000 to as high as $729,750 in some of the most expensive U.S. markets. That was supposed to bring down mortgage rates on jumbo loans and help goose sales in cities across the country - mostly on the East and West coasts - where even outhouses go for close to half a mil. So just how much help has this change been for homeowners? Not much. Six months ago, the rate on a $500,000 30-year fixed mortgage was 6.73%. Today the rate today is only slightly lower at 6.69%. No surprise then that the housing market is still stuck in reverse. But rates haven't fallen for those hoping to get a larger mortgage, and they've actually risen for everyone else. The average rate for a mortgage of $417,000 or less is now at 6.57%, while loans larger than that have rates about 0.12 of a percentage point higher. Sure, the spread narrowed, but only because rates are going up for everyone. Several factors are at work. Since Fannie and Freddie look shakier than ever, fewer investors are willing to buy their bonds - even with the government's guarantee. And the raised caps forced the mortgage giants to spread their limited capital across a much larger market of mortgages. Add in the new fees that Fannie and Freddie have tacked on to their mortgages since the housing crisis hit, and most borrowers are paying more than they were six months ago.

Fundamentals of Residential Real Estate Market Bottoms My best guess is that we are two years away from a bottom in RRE prices, and that prices will have to fall around 10-20% from here in order to restore more normal price levels versus rents, incomes, long term price trends, etc. Hey, it could be  worse, Fitch is projecting a 25% decline. Not all of the indicators that I put forth have to appear for there to be a market bottom. A preponderance of them appearing would make me consider the possibility, and that is not the case now. Some of my indicators are vague and require subjective judgment. But they’re better than nothing, and keep me in the game today.  Avoiding the banks, homebuilders, and many related companies has helped my performance over the last three years. I hope that I — and you — can do well once the bottom nears. There will be bargains to be had in housing-related and financial stocks.

• Heads Out of the Sand, Homeowners!

International  Economy

Russia: Cold turkey on U.S. chicken Russia could cut poultry and pork import quotas by hundreds of thousands of tons, the country's agriculture minister said Wednesday. The move could hit American producers hard and comes amid heightened tensions between Moscow and Washington over the war in ex-Soviet Georgia. "It is time to change the quota regime and reduce imports, which have unfortunately built up in recent years," Alexei Gordeyev told reporters, according to the ITAR-Tass news agency. He said domestic producers could make up the shortfall if imports were reduced. Any substantial cuts would likely have a significant impact on U.S. poultry producers, for whom Russia is the biggest market. Russians sometimes refer to U.S. poultry imports as "Bush's legs," a reference to the frozen chicken shipped to Russia amid economic troubles following the 1991 Soviet collapse, when the current U.S. president's father was in office. Earlier this week, Prime Minister Vladimir Putin backed proposals to freeze some of the agreements - particularly in agriculture - relating to its efforts to join the 153-member World Trade Organization. Officials claim Moscow agreed to certain conditions with member countries in return for their help in fast-tracking Russia's entry. "Agreements signed more than three years ago as part of the negotiations on WTO accession are unfortunately no longer in Russia's interests," said Gordeyev. "To put it mildly, we've been deceived."

The Best Central Banker in the World Today Imagine a country whose central bank responded to growing inflation by raising interest rates, strengthening the currency and trying to win investor confidence. This may be shocking to some U.S. investors, but proper monetary policy is still being practiced. Just not here in the United States. I’d give the award for Best Central Banker in the World Today to Mexico’s Guillermo Ortiz. This is a story that truly ought to be better known. Mr. Ortiz has now been at the helm of the Mexican central bank for over ten years and despite many obstacles (consider that 70% of Mexicans don’t even use banks), he’s emerged as the anti-Greenspan. Mr. Ortiz previously served Finance Minister where he helped clean up the mess surrounding the peso devaluation in 1994. Make no mistake; the Mexican economy has its share of problems. Growth is slowing and inflation is on the rise. Of course, much of this is understandable considering their raucous, hung-over neighbors to the north—nearly 80% of Mexico’s exports go to the U.S. The thing about finance, public or private, is that it’s really an issue of establishing confidence. If investors think you’re serious, then they’ll invest with you. So far, Ortiz seems to winning the battle of establishing credibility. The yield on Mexico’s long-term benchmark bond recently fell to its lowest level since June 6. Mexico is a country with many deep rooted economic problems, however, the country has taken many steps in the right direction. For example, the election of the pro-market government of Felipe Calderon (cue Larry Kudlow) is helping to bring long-overdue economic reforms like privatizing the oil industry. Unfortunately, Calderon supports some poorly considered ideas like price controls. Unlike the United States, the Mexican government seems to be serious about fiscal discipline. Their legislature...er, not so much.

Chinese Companies Turn From Stock Market to Bonds Corporate China is turning to debt now that its years-long love affair with stocks is on the rocks. Many of mainland China's major companies are issuing billions of dollars in corporate bonds, even as the rest of the world shies from debt. Investors are encouraged by expectations of a rising yuan, which would goose returns for foreign bondholders and also helps Chinese firms issue bonds on less-costly terms. Less-established, cash-strapped Chinese companies, which had been counting on initial public offerings that were scotched by declining stock markets around the world, are finding hedge funds to be the lender of last resort, although the loans sometimes come at a heavy price to the borrower. China's ailing stock market, skittish bank lenders and Beijing policymakers hoping to tame growth and slow inflation have curtailed other routes to raising capital. After nearly doubling in 2007, the benchmark Shanghai Composite index is down more than 55% this year. Mainland China's corporate-bond issuance has jumped almost 53% this year to date from the same period in 2007, with Chinese companies selling about $25 billion in bonds, according to Thomson Reuters. Bankers say their China pipelines remain flush for the next few months. "We are expecting issuance to be twice as big as it was last year," Mr. Ge said. China's bond market is still tiny in comparison to the U.S., which has sold $1.2 trillion in bonds this year. Still, issuance in the U.S. is down 41% from last year, according to Thomson. In Japan, corporate-bond issuance has fallen 6% in dollar terms. The credit crunch has reduced demand for higher-yielding, higher-risk debt, while corporations of all stripes have come under pressure to reduce the amount of debt on their balance sheets. China has helped send Asian corporate bond issuance to record levels. Proceeds from corporate debt sales in Asia, excluding Japan, stand at $91.01 billion so far this year, up 3.6% from a year earlier, according to Thomson.

India's 2Q Economic Growth Slows to 7.9 Percent India's economic growth slowed to 7.9 percent in the April-June quarter from 9.2 percent in the same period last year amid a slump in manufacturing, the government said Friday. Growth, which has averaged 8.8 percent over the past five years, is at its slowest pace since 2004, government data showed. The decline in the growth rate was widely anticipated and comes after months of monetary tightening, as authorities have tried to reign in surging inflation. "These are numbers that shouldn't surprise," said Saumitra Chaudhury, a member of the Prime Minister's Economic Advisory Council and chief economist at the credit rating agency ICRA Ltd., a Moody's affiliate. "When you have monetary tightening, you do get lower growth. That was expected," he said. "But it's not terribly low; 7.9 percent is still high by historical standards." The benchmark Sensex index jumped 3.7 percent to 14,564.53, as some investors had been bracing for worse numbers. Banks led the rally on moderating inflation figures released Thursday. "Sentiment took a robust turn," said Gul Teckchandani, an independent financial advisor based in Mumbai. "Personally, I'm cautiously optimistic." Second-quarter growth, however, was far shy of the 10 percent growth rate Prime Minister Manmohan Singh said India needs to achieve. "Our economy must grow at the rate of at least 10 percent every year to get rid of poverty and generate employment for all," Singh said, speaking on India's Independence Day, Aug. 15. In 2005, 456 million Indians -- 42 percent of the population -- were living on less than $1.25 a day, according to the World Bank. Subir Gokarn, Standard & Poor's chief economist for the Asia-Pacific, said such bounding growth is not likely to return to India until the government embraces tough reforms to encourage private investment in infrastructure and to liberalize the labor market.

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Let's pick up where we left off with dissecting the outlook for Technology, having started with the computer industry per se, segued into a deep dissection of the environmental pressures and side-tripped into economic data, it's probably time. We're going to try and weave three major strands together because the reinforce one another. First, what're the trends in the Telemediatainment Industry, how does Dell's surprising performance illuminate that and what's the future of content. You might recall our mantra is Economy - Industry - Company. In other words don't fight the tide because you'll drown. Or put differently Dell's results are more about a growing worldwide downturn than they are about them. On the other hand once you're caught in a riptide you'd better be a good swimmer. There are some great wars going on right under our noses that'll create challenges and opportunities in all these areas.

Telecom Stack and Industry Trends 

You might recall this graphic which shows how the Telemediatainment Industry is structured from the networks that provide the bandwidth for distribution to the applications, services and content that create and deliver value to the end users and their growing myriads of alternative end-point devices. After the break you'll find the readings excerpts organized roughly along these lines. Here are a few observations to go with.

1. Networks - the traditional phone business is dying but the replacement, wireless, is saturated in this country and Europe so the "future" likes in finding new applications/services to drive higher usage. The iPhone was a revolutionary cusp point trigger and no everybody's going gang busters after smart mobile devices, from INTC to MSFT to HPQ to ATT. You name it they're chasing it. At the same time you still need some sort of pipe into the home and the fatter the better. The cable guys were winning 'cause they had lots of spare pipe but it turns out it doesn't scale. Which indicts this whole argument and makes the operating companies new infrastructure investments brilliant, courageous and risky. Ivan Seidenberg may be the next hero.

2. Mobility - as the result of all this everybody is going after the next big platform - MID or Mobile Intelligent Device. This is literally a center piece in the annual strategy presentations of all the companies named. It's also why Apple's 3G announcement coupled with the open software platform for applications is so game-changing. Even mighty IBM has announced a major packaged solution to after large-scale mobility opportunities; though in their case they're bundling stuff they've been building at in services engagements. In any case welcome to the brave new world.

3. Content Wars - at the end of the day consumers and businesses will judge value not by bright shiny things but what you've done for them lately. In other words by the entertainment or business value of the applications, content and information. They theory being that ubiquitous and cheap bandwidth would make any content deliverable anywhere/anytime/anyhow...the 4A's. Which if true completely turns over the entire business model of the traditional media. And one which they're struggling to proceed with. And haven't figure out as yet.

Dell's Results and Implications

At the end of the day the relative performance of any of these players will depend on developing the right strategy, the right operating capabilities and delivering results thru superb execution. Earlier we took a very deep dive into Dell and argued that a major re-engineering was well started there and the early indicators were promising. We stand by those conclusions and think, in fact, that yesterday's earnings results bear them out in a way. But it also illustrates the power of the mantra. At the time we suggested Dell was a target to keep on the front-burner, not a purchase, because the economic and industry situations said otherwise. We stand by that argument as well and consider yesterday's results - when you dig into them - to bear it out. AND, most importantly, serve as a model for the kind of investigation that one needs to do into any of these players. Powerpoints are one thing, delivery is another. When you do dig in you'll find that many of their product, market and geographic initiatives resulted in outstanding growth, absolutely and relatively. They got hurt on gross margins and operating margins. The latter especially because they have quite a ways to go in re-factoring their operations. But they appear to know that and are moving "smartly ahead". Which is not what the press coverage or analyst comments would have you believe. In effect Dell is investing in market share, this time on a sounder strategic footing with more aligned products and services, and taking the penalties to buydown future gains. They call that value-investing don't they ?

Magic Answers and Zuckervision

One executive who admits he doesn't know the answers but is running a tight ship while investing in explorations of the alternatives if Jeff Zucker of NBCU, which just had a great real-time lab test with the Olympics. As well as their on-going experiments with HULU in conjunction with FOX. There are two Charlie Rose interviews that we recommend as the best candid discussions of the issues and challenges facing the industry and what they're doing about it. These are a bunch of smart guys who have taken the first, in some ways biggest and hardest step. They've recognized that change is required AND they're doing something about. That includes Zucker, Peter Cherin at FOX and Bob Iger at Disney - who helped kick start this whole thing with his early commitment to iTunes for movies. We forget how revolutionary iTunes was for music and how big a leap going from music to video was and is. But unlike the old-line industries of movies, newspapers & magazines and music these guys are out there doing all the right things to find out what works, test many alternatives and invest in the experiments. This is as big a structural change for them as the creation of their media was when it was born. Most of the traditionalists are loosing or have lost. We think these guys will figure it out but you decide for yourselves.

Jeff Zucker on Charlie Rose

Peter Chernin on Charlie Rose  

Network Problems

Comcast to Make Monthly Internet Use Cap Official Comcast Corp., the nation's second-largest Internet service provider, Thursday said it would set an official limit on the amount of data subscribers can download and upload each month. On Oct. 1, the cable company will update its user agreement to say that users will be allowed 250 gigabytes of traffic per month, the company announced on its Web site. Comcast has already reserved the right to cut off subscribers who use too much bandwidth each month, without specifying exactly what constitutes excessive use. Customers who go over the limit are contacted by the company and asked to curb their usage.Comcast floated the idea of a 250 gigabyte cap in May and mentioned then that it might charge users $15 for every 10 gigabytes they go over, but the overage fee was missing in Thursday's announcement. Curbing the top users is necessary to keep the network fast and responsive for other users, Comcast has said. Comcast stressed that the bandwidth cap is far above the median monthly usage of its customers, which 2 to 3 gigabytes. Very few subscribers use more than 250 gigabytes, it said. A user could download 125 standard-definition movies, about four per day, before hitting the limit. The cap is also above those of some other ISPs. Cox Communications' monthly caps vary from 5 gigabytes to 75 gigabytes depending the subscriber's plan. Time Warner Cable Inc. is testing caps between 5 gigabytes and 40 gigabytes in one market. Frontier Communications Co., a phone company, plans to start charging extra for use of more than 5 gigabytes per month.

AT&T’s Rivals Are Happy to Attack Over iPhone’s Network Woes Apple sold more than a million iPhone 3G cellphones its first weekend — with some stores running out — and two million more since then, analysts say. But its July debut has been nothing less than a public relations headache for AT&T, with eager buyers complaining about dropped calls and poor network connections. Some fingers point to Apple, which has tried to deflect the complaints. But many others point to AT&T’s cellular network. Whatever the source of the problems, AT&T’s rivals, long irritated by all the attention the iPhone has received, are on the attack and happy to exploit the discontent. “A phone is only as good as the network it’s on,” said a full-page Verizon Wireless newspaper ad on Thursday, lobbing a shot at AT&T’s 3G, or third generation, high-speed network. A Verizon executive sent an e-mail to Wall Street analysts last week: “So much for a ‘new’ way of doing business at the old AT&T — your father’s phone company.” For AT&T, the nation’s No. 1 wireless carrier, which exclusively offers the iPhone, the situation is especially tricky because the stakes are so high. Apple’s customers are largely forgiving of any foibles of the iPhone’s maker. But wireless companies like AT&T and Verizon are afforded no such a luxury. The 3G network is supposed to make it easier to surf the Web and watch videos online. With nearly 90 percent of all Americans owning a mobile phone, there is little room to grow and these rivals can ill afford to lose customers. Further aggravating consumers, neither company has fully explained why calls were dropped and the network was slow. Theories abound, which is causing even more confusion — and finger-pointing. Is it a problem with the phone itself? Richard Windsor of Nomura Securities surmised in a research report that a new radio chip made by Infineo

Mobility Platforms and  Wars

Platform Wars: Battlefield Mobile During the “platform wars” of the 1980s, tech companies duked it out over which computer operating system would emerge from a crowded field. Now there’s a new platform war being waged, but this time the battleground is mobile devices. The bad news for businesses looking to standardize on a winner: The most likely outcome is multiple survivors. Many businesses initially saw mobile devices as a way to check email and make calls on the go. But it’s become clear over the last few years that these devices are small computers, capable of accessing the Web and running software just like a PC. The software piece is the challenge for businesses: As in the PC world, software written for one platform doesn’t run on another. This isn’t really a problem for PCs, since just about every business runs Microsoft Corp.’s Windows operating system. But the mobile-device world is still fragmented: Many businesses use Research In Motion Ltd.’s BlackBerry, but hardware that runs Microsoft’s Windows Mobile operating system are gaining in popularity. Apple Inc. is storming onto the market with its iPhone and associated software, and Google Inc. is about to enter the field with its Android operating system for mobile devices. Operating systems from Palm Inc. and Nokia Corp.’s Symbian PLC are also popular. In fact, rather than consolidating, the number of platforms for which developers can write mobile-device software keeps growing, says Benjamin Gray, an analyst at Forrester Research. That’s a challenge for businesses, in part because workers increasingly want to be able to choose the device that they think is the best fit for their life.

Intel thinks small with Atom chip, but how big is the risk? At Intel Corp.'s big developer conference this week, the chip giant was extolling the virtues of its newest little chip called the Atom.The Atom has surprised both company executives and analysts with its popularity among hardware makers. The chip was introduced in March and is aimed at an emerging market of very low-cost mobile devices, especially in developing countries. The Atom is helping foster this new category of portable devices, which Intel calls mobile Internet devices, or the lovely acronym MIDs. One product area is NetBooks, which are essentially smaller laptop computers with fewer capabilities than a full machine but offer increased functionality than a smart phone. Big factors driving interest in the chip is its low power consumption, lower-cost and ability to run software that is compatible with Intel's standard chip architecture, known as the x86. And even though the chip is inexpensive, it provides decent margins for Intel, and customers can use it to create Internet surfing devices that sell for as low as about $200. With the efficiencies resulting from its latest manufacturing process, Intel can yield about 2,500 Atom chips from one silicon wafer, compared with a relative yield of only several hundred units of its larger chips. But the Atom, as Intel is quick to point out, is not as powerful a processor as its other chip families. But the risk for Intel is that a growing slice of the market may find that a $10,000 car is all they need. The bulk of growth for the PC sector today is coming from developing countries, which are passing over desktop computers in favor of smaller, cheaper laptops. Indeed Intel executives admitted that they would not be working with 80% of their Atom customers if they did not have their cool little chip. If Intel succeeds with the Atom, it could make an interesting business school study on a company dealing with the classic "innovator's dilemma," a conundrum faced by many technology companies, as well as other industries. Leaders in their market often get caught off-guard by new disruptive technologies that are typically cheaper and "good enough."

Mobile Devices for Enterprise Apps, Part 1The emergence of smaller, more powerful handheld devices and the spread of high-speed mobile networks have enterprise software developers scrambling to meet demand for portable versions of their flagship applications. Research In Motion got a jump on the market with the BlackBerry's secure and reliable e-mail delivery capabilities. Competitors, including Motorola ,Nokia and Sony Ericsson, are all vying for a share of the market. Given recent enhancements made to the iPhone, Apple has to be added to the list of contenders. But is the current crop of smartphones and PDAs really up to the task? The biggest names in enterprise software -- Microsoft , Oracle and SAP prominent among them - are developing more powerful portable versions of their applications. Business intelligence (BI), customer relationship management (CRM) and enterprise resource planning (ERP) applications are notoriously and somewhat necessarily heavyweight applications, however, and mobile enterprise users -- primarily salespeople and field servicestaff -- are looking for more than simply scaled-down, lightweight versions of them. "Besides apps that are used for e-mail and personalized contacts and calendar, we're seeing some additional traction amongst CRM apps -- sales, field service. There are also sparks of interest amongst inventory management and logistics apps," Forrester Research principal analyst Peter Marston told CRM Buyer."From a features and functionality standpoint on the CRM apps, organizations aren't looking for the applications to do complicated algorithms, rather they are looking to the mobile apps to provide field users with more customer related information, such as service call information that the customer has asked for in the past, and what sorts of things that a customer has purchased before."

IBM Kicks Mobility Play Into High Gear IBM has undertaken an aggressive foray into workforce mobilization with the release of a software and services bundle that allows users to access robust enterprise applications on handheld devices, while providing companies with the services needed to support an ever-more-scattered army of employees. IBM has rolled out a mobile software and service offering that builds upon several announcements it made earlier this year at the annual RIM Wireless Enterprise Conference. The offering, called "Mobility@Work," is a package of new software tools that allow developers to run existing desktop applications on a mobile device, together with new mobile consulting services aimed at helping companies implement and manage a mobile work environment. Built on open standards, IBM's software can be used with most mobile platforms including BlackBerry, iPhone, Windows Mobile and Symbian. These new products build on IBM's existing mobile software offerings -- such as IBM Cognos 8 Go! Mobile, which lets users view and interact with BI data. IBM has also expanded its relationship with AT&T, Sprint and other wireless carriers to provide broader e-mailaccess to customers who use IBM Lotus Notes and Domino software on their handheld devices. AT&T and Sprint have certified for use IBM's Lotus Notes Traveler software, which replicates Lotus Notes e-mail, calendaring and personal information management data on select smartphones. The devices from AT&T that have this capability are the AT&T 8525, AT&T Tilt, Moto Q Global, Palm Treo 750, PantechDuo (Mustang C810), Samsung Blackjack, and Samsung Blackjack II (i617). Sprint is including it on its HTC Touch, HTC Mogul, Samsung Ace, Palm 700W and Palm 800W. With this multilayered mobility rollout, IBM is positioning itself for an anticipated surge in demand for corporate mobile applications, Dunderdale said.

TV vs Internet: the Content Wars 

Saving TV When Harbert talks about television, it’s with the sober clarity of someone who has looked at life from both sides now and has seen that only one business model is working. Cable networks target just those viewers who want what they have to offer. Broadcast networks want everyone. And the business of wanting everyone has never been worse. At the end of last season, ABC, CBS, and NBC reported their smallest combined audience ever, an event that has become a gloomy yearly occurrence. Meanwhile, cable—counting both basic channels and pay services like HBO and Showtime—now receives 55 percent of the total viewership. It may be time to perform an autopsy on network TV, which some have pronounced officially dead at age 60, the victim of a lifetime of big spending, hard living, and bad planning. Here’s the coroner’s report: The evening newscasts have been mowed down by cable’s heat, spin, and round-the-clock immediacy. In prime time, nobody watches reruns anymore—and reruns, along with syndication, used to be the only way comedy and drama series, the heart of a network’s prime-time business, made money. (The way they make money now is...well, the networks will get back to you as soon as they figure that out.) Conversations about the future of television tend to vault way past next week or next year into a world where schedules don’t exist and 10,000 programming options are all available at any moment, half of them fully inter­active. (Not enjoying this episode of Law & Order: Moonbase? That’s okay—you can change the plot!)  It sounds like fun. But in reality, the number of cable channels has topped out. And the number of households that subscribe to basic cable—about 65 million—hasn’t budged for a decade. That’s roughly 58 percent of all American TV households and it’s a much higher percentage of the total households that advertisers actually care about. People who have something to sell are attracted to viewers who have already demonstrated their willingness to buy something (like cable TV). The cable business is booming: Annual advertising revenues have jumped from $8.1 billion in 1997 to a projected $28.6 billion this year. So before the death knell tolls, let’s consider some ways broadcast TV might be reborn. Creating substance-free shows because you think your audience has no attention span is a sucker’s game. And streaming shows for free is, so far, doing a lot more for viewers than it is for a network’s balance sheet. Instead, the networks should try to make TV shows for people who want to watch TV shows. There seems to be no shortage of viewers out there: For all the hand-wringing about how new media are sapping television’s audience, the average viewer of online video in April watched fewer than eight minutes a day. By contrast, the average household has its TV on for eight hours and 14 minutes daily. That’s a record.

Is the Internet finally killing TV? More than 80 million Americans have watched a TV show online. By 2013, a research group says, scheduled programs will account for less than half of all video viewed. Is this the summer that the Internet finally kills television as we once knew it? Most industry observers are stopping short of that prediction, citing some significant hurdles still in the way. But the growing number of new deals and new devices being announced suggests that a profound change in the way people watch video -- and what video they watch -- is under way. The line between "television" and video via the Internet already has blurred and may disappear in coming years. At least one industry analyst has declared "TV is dead" and welcomes Americans to a new age of video everywhere. Increasingly, Americans are watching video when they want to, and on the screen that suits them at the time. And more programming is from new sources that threaten to unlock Hollywood's domination of content. Video is now delivered on displays and devices of every shape and size, from gigantic theater screens and ever-larger home projector screens to flat-screen HDTVs and from desktop and laptop computer monitors to tiny personal screens such as those found on iPods and mobile phones. Meanwhile, NBC Universal is touting its coverage of the Summer Olympics in Beijing as "the single most ambitious digital event coverage ever." Along with video coverage on several of its cable TV networks, NBC is streaming 2,200 hours of live competition in 25 sports on the NBCOlympics.com Web site.

 A Surprise Winner at the Olympic Games in Beijing: NBC The Olympics has become the hottest event of the summer, drawing an average audience of about 30 million a night on NBC, far beyond the network’s expectations. After a string of disappointing years in prime time, NBC executives had high hopes for a turnaround with the Beijing Olympics; but those hopes were tempered by a string of concerns. Would China display some of its repressive political tendencies and potentially embarrass NBC? Would a protest or incident mar the feel-good atmosphere? Most of all, would enough viewers show up to justify the $894 million NBC Universal paid for the American television rights? With so many concerns, the network’s sales department felt compelled to scale back the ratings guarantee it offered to advertisers. The network also withheld some commercial inventory for use as what is known as make-good ads — free commercials offered to compensate advertisers for under-delivery of an audience. They won’t need them. The Beijing Games have become the hottest event of the summer, with numbers that so far have been certifiably big — far beyond the network’s expectations. The Games have drawn an average audience of about 30 million a night on NBC itself, millions more on NBC’s cable channels, 30 million unique visitors to NBC’s Olympics Web site, 6.3 million shared videos from the coverage streamed on the site and an ultimate profit that network executives project will surpass $100 million. Late last week, the chief executive of NBC Universal, Jeff Zucker, released the additional inventory to clamoring advertisers, especially movie companies hungry to put their latest releases in front of viewers. “We don’t have any more costs, so that will go straight to the bottom line,” Mr. Zucker said. He also argued that the success of the Games showed the future of network television might not be quite as dismal as had been forecast. “It’s a great story for network television,” he said. “This proves the pipes still work.” He added, “When you have an event that transcends popular culture, the only place you can aggregate these audiences is network television.” Not surprisingly, some competitors agree. Leslie Moonves, the chief executive of CBS, who sent a note of congratulation to Mr. Zucker last week, said in a telephone interview, “Anybody who doubts the viability of network television after this is nuts.”

• NBC's Online Snub, Web Audience for Games Soars for NBC and Yahoo

NBC Universal president and C.E.O. Jeff Zucker has a lofty goal: to rescue television. But saving the industry will mean the end of business as usual. Despite overseeing NBC, the network of Cheers, Seinfeld, and Friends, Zucker is relentlessly focused on the future. He is unsparingly harsh about the prospects for broadcast television—gloomier than any other TV executive out there. In his view, the era of growth in network TV, the period of the megahit, is over. Growing his business, then, means investing in cable, digital video, mobile—anything other than network TV. In cable, Zucker has gone on a multibillion dollar acquisition spree, buying Oxygen last year for $925 million, the Weather Channel in July for $3.5 billion and, moving into the international markets, a $150 million stake in India’s fast-growing NDTV network this year. In digital media, he acknowledges that nobody is sure how digital content will be displayed, viewed, and, most important, monetized. So he’s trying just about anything to see what sticks. In March, he partnered with Fox to provide NBC content for free on a video-streaming site called Hulu. And he’s experimenting with all sorts of new distribution channels, with screens of all sizes in unexpected places—spooning out a few minutes of NBC content to video displays on gas pumps and in the back of taxicabs.  As he scrambles to do all this and to prepare for NBC’s Olympics coverage, Zucker is in a vise. Just as he needs to spend his way out of network TV’s crisis, he’s facing pressure from above, as his bosses at General Electric are demanding that he keep costs down and produce higher profits. To cut costs, Zucker has dramatically reduced the number of pilots that NBC produces each season—a move that hasn’t gone over well in hidebound and spendthrift Hollywood. Whether it’s because of the outside pressure from G.E. or his own internal drive to counter critics who say he’s risen too quickly, Zucker is clearly the fastest-moving mogul in television. He has taken the lead in articulating the fears of many other media executives and stating candidly that he is not sure what will work. “I would rather be honest about the realities of this business, whereas so many people want to just sweep that under the rug and perpetuate what has been,” Zucker says. “Look, we don’t know what’s gonna work. Predicting what the media world is gonna look like in eight years is incredibly daunting. I defy anybody to do that.”

Posted by dblwyo at 01:41 PM | Permalink | Comments (0)

Well the markets are just roaring ahead this morning in combination with yesterday's durable goods numbers and today's surge in GDP and drop in weekly jobless claims. Lest you think we're absolutely nuts we're going to parse out the revised GDP data so you can see what's going before resuming the scheduled dissection of the Tech Industry outlook. Since our assessments there were based on slowing growth, declining domestic capital spending, a slowing worldwide economy and the disappearance of huge declines in the dollar they're rather intimately coupled, indeed !

Now as you probably now by this time we prefer YOY% changes because it steps away from seasonality and makes patterns and trends much clearer. But we're going to start with a slightly more traditional view which is closer to what you'll see in the media. But first let's let someone else set the stage for us - and note that this isn't the only person to make these observations.

U.S. Economy Grew Faster Than Estimated in Second Quarter on Export Gains The U.S. economy expanded at a faster pace than previously estimated in the second quarter, helped by surging exports and a smaller decline in inventories. The 3.3 percent annualized increase in gross domestic product from April through June was higher than forecast and compares with an advance estimate of 1.9 percent issued last month, the Commerce Department said today in Washington. The economy grew 0.9 percent in the first quarter. Record exports and the temporary stimulus from the tax rebates prevented the economy from stalling as housing slumped and companies cut expenditures. Consumer spending is now waning and slower growth abroad dims the outlook for foreign sales, signaling last quarter will be the year's highpoint. ``The overwhelming story is that the export numbers have offset this domestic weakness in consumer spending and business investment,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. Outside of exports, ``we have a domestic recession.''

As it happens we entirely agree with this assessment and will also point you to EconPics for a detailed breakdown ("Export Driven" Q2 GDP Revised Up to 3.3%) and CalculatedRisk to get the straight skinny on the unemployment claims picture (Unemployment: Continued Claims over 3.4 Million ). Between them they may help disabuse you of some the notions being put about by the headlines. Though, to be fair, the various commentators and stories have gotten it more right this time than in years....which is a major indicator in itself. EVERYBODY is starting to see the weakness in the domestic and international economies and we're no longer shouting in the wind. Taking a look at the traditional QtQ growth annualized a few points - yeah, we did grow, notice that we also were kissing cousins to a recession in late '06. And investment continues to tank, largely due to real estate BUT capital investment is slowing rather abruptly as we spent a whole bunch of time arguing yesterday.

If we go back to our preferred YoY% change charts what you see is pretty much what we've been saying - GDP is slowing, there was no big YoY jump but just a continuation of the slowdown, employment continues downward and Consumption doesn't look good at all. Though the rate of decrease may have stopped accelerating. We'll see how the revisions work out and what the trend turns into. With declining real wages, dropping employment and no stimulus you can expect future Consumption to start hitting real negative numbers. So, rather as usual around here, the headlines were fun but there's no real change in the patterns or trends and therefore we stand by our outlooks.

Speaking of which what about the Investment picture - which we're so concerned about for its' own sake as well as for the impacts on the Tech Industries. Well, repeating a chart from yesterday but using the revised data, again no surprises. Investment continues to head south on the back of terrible real estate spending and slowing business investment. Sorry no joy there either.

As Mr. Silvia noted it was the surge in Net Exports that saved us this time around and we are more than likely in a domestic recession. What do you think happens when the worldwide slowdowns catch up with us ? Or, alternatively, what's going on in the structure of the GDP numbers ? That's a question we take apart quite a bit more after the break by looking at the YoY changes in each of the major components. And, we would argue very strongly, something you need to understand for your own job, business and investment planning and decision-making. Does the tipping point still show up in the data ? We think so but check it out for yourselves. Please. 

Major GDP Component Revisions

What we've done is taken one of our standard charts that looks at YoY changes in each of the major GDP components and compares it to the overall GDP change. And instead of looking at several quarters of data we only compare the prior GDP to the current revision numbers. BtW, and for the record, let's get some of those numbers straight. On a YoY basis real GDP went up $249B, or 2.2%. Which is actually less than the Q1 increase of $291B and 2.5%. In other words the real economy actually slowed further, no matter what the headlines told you. The two biggest revisions that should just leap out at you are that Exports were much higher and Inventories didn't drop as far. After that though you should notice the scariest revision - estimated Capex dropped significantly !

Component Contribution

This next chart looks at each component's YoY change as a % of the GDP change - in other words how much did each contribute to the increase or decrease in GDP. Sometimes some rather revealing numbers pop out when you take a careful look here. For one thing the stimulus wasn't as important as we thought since Non-durables and Services contribution wasn't as large. And the damage from RI not as bad. Fascinatingly though, while trade was the critical component, the % contribution was slightly smaller than in the preliminary numbers. Hmm...that's interesting isn't it ?

Component Aggregate Impact

Another way to look at the component impact and figure out what's going on with the business cycle is to take a look at the cumulative impact. Bear in mind as we work our way across the components we are also working our way around the economic feedback loops. In other words Capex is responding to prior quarters demand - positively or negatively. So, as we add up the changes, what do we get ? Mr. Silvia is righter than he knows - across all the Consumption and Investment components growth was effectively zero. We are in or as close to a domestic recession as you'd care to get, though we're going to get closer. Indeed it was Trade and only trade that saved the day. In other words unless the rest of the world keeps buying more of our stuff while the dollar stops falling and they trip over into their own recessions we haven't got anywhere else to look.

Aggregate % Contribution

This next chart may simply be telling the same story as the last one but using % instead of numbers. But two things might be pointed out. First off when you look at these % Trade didn't give us that big a change despite the revisions - it was as good as it was in other words. No surprises. On the other hand the drop in the aggregate impact of Services consumption and Capex are NOT encouraging, at least IOHO. In fact that drop in Capex's contribution is really pretty discouraging, like we previously mentioned. The word was scary wasn't it ?

 So bottomlines there - the various members of the commentariat are beginning to see the light, for one thing. For another real economic growth continued slowing, not increasing. For a third, pra for trade. And forth pray that all those buybacks start going into equipment purchases 'cause capital spending is really looking to start tipping over. We'd have to conclude that the answer to "are we still tipping over" is a strong yes. Wouldn't you say ?

Posted by dblwyo at 11:27 AM | Permalink | Comments (0)