bizzXceleration: Performance, Value and Profit

Over the last several months we've been hammering away at various aspects of business performance from individual companies to whole industries to structural trends and disruptive changes in the macro-environment. Before going on to finish some deep dives we figured it was time to pause for an inventory and survey of some key results, findings and concepts. The graphic is our Table of Contents - or more accurately a structured inventory of the topics we repeatedly turn to because we think these are the key elements that MUST always be kept in mind when evaluating a business and it's performance. A downloadable PDF version is available by clicking on the highlight.

When we inventory the actual posts in key topics the major themes are the series on Corporate Governance and Social Responsibility - at which so many have failed so badly, obviously including the Finance Industry which is worsening a bad situation by denial, the Auto Industry going down the Maelstrom it created and taking the livelihoods and lives of so many with it but also many others. Which leads naturally to questions and assessments of Enterprise Performance - which was the focal topic of the last post so we won't repeat our and BCG's indictments. A key strategic issue is the scope and scale of disruption - not just within the firm but at the Industry, Economy and Geo-political levels; and how badly most are prepared or preparing for the multiple cusp points we're all going to be crossing over in the next few years. The downloadable PDF version of this inventory is also available by clicking on the highlight. Sadly we confess that the blue-highlighted titles which should take you to a post don't since we haven't figured out the technique/technology that well. In the inventory though you'll find pointers back at key exemplars of companies who are adapting (WMT, GE) and industries who are struggling or worse. Including Autos and Finance but also, and perhaps surprisingly, Technology.

Guidance From the Master

In the rest of this post we want to spend some time focusing on key concepts and arguments that have accumulated in all those posts, starting with core principles that should guide business performance but don't appear to. For those principles we've looked to our own work and techniques, Warren Buffett and, most especially Peter Drucker. When Prof. Drucker passed a few years ago the WSJ had a nice review of some recent survey work and gifted us with this summary of his key arguments (from which we think at least two key ones are missing but we'll circle back later). Now we've also taken the liberty of creating a collection of this and other principles as well as other key charts from these posts that is also downloadable. In it you'll find major graphics on Principles (Drucker, Buffett, ours), the composite mantra of "situationally aware" business management that monitors and acts on Geo-politics, Structural Changes, Economic Cycles and Enterprise Performance. Consider that a Table of Contents which has some key charts in each area. For example on industry structural change (Autos, Finance, Energy, Technology) and on a blueprint for analyzing business performance, based on our BizzXceleration Framework. That starts with simple questions and heads toward the engineering assessment tools. "Elements of Business Performance" is downloadable - happy reading.

Situational Awareness: Monitoring the Environment

The accompanying graphic is probably pretty terrible by Edward Tufte's standards let alone by Seth Godin's. Sorry about that but our key message is not so much as the specific content as trying to show all the things in one ideographic composite that a business must monitor and act on. The "Elements" download actually has the separate components plus additional ones so if you want to dissect them, again, dload the file. After all if you actually hired a consultant to do the work and customize it for your situation it'd cost a lot of money :) ! These are the major domains in which the world is under-going major structural changes, and only one of them is under the control of management. They are, moving around the clock, the Geo-political Macro-environment, the Economic Crisis, Structural Changes in industries and the nature of business and the key components of the integrated and performing enterprise.

Welcome to the Storm: Scope and Scale of Disruption

Just to put a point on it, flat-footed as most have been caught, you have to wonder how many executives, investors or other stakeholders are really thinking about how many things are changing by how much. We've tried to map out what's going on in this graphic to illustrate those points. Most management teams have grown up with a lot of churn and turmoil inside their firms but it's been a long-time indeed since this many things have been disrupted this much, this fast. We've defined five levels of disruption that are going on simultaneously: 1) within the firm, 2) the need for treating the firm as a whole, not just piece-parts, 3) industry and sector changes, 4) worldwide economic changes and 5) geo-political changes. It's a sad fact that most efforts, such as they are, are confined to #1 and ignore the other, and more important four ! AT least IOHO !!

Business Performance and the Whole Enterprise

Like we said the key between things that can't be controlled but must nonetheless be managed to is the way the firm faces these changes. To wrap-up the introduction let's return to the words of the Master on what the primary tasks of management should be. It doesn't get any clearer than that, does it ? Management is charged with turning the component parts of the enterprise into a whole that's more than the mere sum of the parts. Ask yourself, for example, why the USA Olympic Basketball Team did so well this last Olympics and so poorly in '04 ? It's because the latter was a collection of individual stars who played their own game for their own advantage. The former was a team where every player was focused on the performance of the entire time. The results tell the story. The same is true of the enterprise. But that was just one tournament - a business is much bigger than a sports team and exists for a lot longer. No decision taken today can exclusively focus on today's best advantage, nor on tomorrow's. Each decision must act to maximize the sustainable performance of the enterprise on a balance between the short- and long-runs. The fact that Detroit is now a black hole of subsidies, job losses and collapsing local economies as expedient short-term decisions bring home the consequences of ignoring the long-term impacts would seem to prove the argument.

After the break you'll find some more key exhibits along with discussions on several of these key points, if not all of them. But the bottomline here is that we are crossing over the boundaries into an era of the biggest changes in the macro-environment and performance requirements in many decades. A crossing which will impact us all and one for which we're seeing little concern or preparation.

We hope you find this summary, wrap-up and interpretation helpful. It's the end-result of several months of work here and, taken all together, we hope it provides a useful toolkit for evaluating business performance in turbulent times.

...continued after the break.

Continue reading "Bidding Review: Macro-environment, Disruptions, Business Performance" »

Posted by dblwyo at 06:21 PM | Permalink | Comments (1)

As we work our way thru the business, finance and policy news, and wrap it in our interpretations and frameworks - hopefully to make more sense of it - two central questions keep taking center stage. First - how are businesses and their leaders reacting - are they adaptive and resilient or are they standing around flat-footed and shell-shocked ? So far the answer is more of the latter than the former. Second, how are they positioning themselves for the future - do they understand that there are multiple firestorms ripping thru the economy, even society, and their industries and are they prepared and preparing to deal with the consequences ? Again the answers we can see aren't encouraging. While we've been working thru Finance as a whole and sector by sector as the exemplar of all this they aren not an isolated, single case. Every industry faces these changes and pressures. We could, for example, dive into the next obvious example as GM and Chrysler teeter on the the edge of bankruptcy and every major worldwide player is threatened. But we're going to dive into an investigation of the strategic outlook for the Tech Industry by asking those two questions of it. The answers are no more pretty than for anyone else.

Tech vs the Downturn

Let's start with this busy little composite chart which, by presenting multiple data on multiple timeframes, is meant to tell an integrated story of where we're at, been and will be in economic and industry terms. The top shows the relationship between GDP, Industrial Production and Capex. IndProd has fallen off a cliff which tells us that Capex has a long way to go down. Not surprising given that it's a leading indicator. The LL corner contains two charts that break down these indicators so you can see Capex and it's two components (Equipment/SW and Commercial Real Estate - Structures). This downturn is worse than anything we've seen, not surprisingly, and much worse than the Tech Bust with a long way to go judging from these charts. In the LR corner we take a more granular breakdown and you can see how severe things are. Now imagine how much worse things are going to get.

Industry Responses and Pressures

In the prior post on Tech (Tech Industry Refresh I (News): Boxes to Software to Phones - OUCH !) we reviewed the current news and status of the Industry and used our "stack" pictures to help sort and filter things as well as provide an interpretive framework. After the section in the readings where ALL the various analysts groups are finally catching up with economic realities the next section presents a cumulative set of readings that look at various components and how they are performing and reacting. The graphic is another (commercial) depiction and expansion of the stack that shows us how industry solutions build on network and computing platforms to deliver business-driven solutions, if they do. No one buys Technology for the pure fun of it, or at least they shouldn't. In actual point of fact too many technologists fall in love with "bright shiny things". Which is a major part of the continuing gap between value required and value delivered. The other major part is the lack of business involvement and responsibility. Tech folk can pretty much build anything you want but to get it, and get it right, you have to invest the time, effort and energy in deciding on goals & strategies, requirements and working to drive those into the actual design and construction of solutions. Which isn't, and hasn't been, happening - there are no clean hands here.

The Continuing Performance Shortfall - the Business/IT Gap Lives

 For that gap to be filled and value-created solutions to be created four things have to happen. Clear strategies have to be developed on the Business and IT sides of the house. And business operating execution and realities have to be reflected in the detail design and development of IT products and solutions. Now as it happens the controversy that erupted a couple of years ago over whether or not IT was a commodity is directly related to these problems. The bottom part of the stack, where the IT community are the business experts, has become a commodity because the existing requirements are satisfied and more. The top 1/3 of the stack, where the two communities have to come together is NOT a commodity. Anything but. As the example of the list of usual suspects (WMT, Fedex, Tesco, Zara, et.al.) continue to show us IT investment driven by a deep understanding of business requirements offers a sustainable competitive advantage. Especially if the organization leans to be continuously innovative. Oddly enough we first addressed these cultural breakdowns almost exactly a year ago (WRFest 16Mar08(Tech): DLS's, Two Cultures and the Breakdown) along with the associated consequences for commoditization (WRFest 30Mar08(Tech Industry): Commodization, Consolidation, Consequences).

Requirements vs Functionalities: Consequences of Maturity

In that latter post we introduced a concept that's at the heart of all this, in the Tech and other industries, as a matter of fact. That's the question of whether or not a particular solution meets, is less than or exceeds customer requirements. Stop for a minute and ask yourself whether or not you computer and your software fits into one of those categories. For example we run on WinXP which is robust and reliable (though we confess to dearly missing OS2 for it's multi-tasking, industrial strength robustness and overall reliability. Think of it as mainframe in a box). And we use Office2K software because those versions of Word, Excel and Powerpoint not only do all we need done but exceed our requirements by about 80%. Our suspicion is that you are no different. Now think about the implications - though each tech company and sector would need to be individually dissected. Consider Oracle for example. Databases are commodities so competition reduces to a couple of major players (IBM and ORCL plus some small-scale open source and MSFT's offerings). On the other hand they've never managed to create much breakthru thinking or value on their applications. So without innovation you end up with effective maturity because solutions to customers needs aren't forthcoming. That results in industry consolidation, default maturity and saturation, a lack of new sales and them "coasting" on their legacy installs and collecting maintenance fees as their key strategy. Yet because new sales are lagging badly the legacy is eroding and customers are looking for alternatives. We think you can apply these tools to every company (and have the ambition to do so at some point but....).

MSFT as Exemplar: the Value-Gap

Not to pick on another favorite whipping child but let's consider MSFT. Not just because everybody loves to do that but because they also represent a lot of the problems with the Industry in general. And just to put a point on it after years of mega-buck investment in Longhorn we got the sterilized VISTA OS which represents the removal of about 3/4 of the previously announced new features and was slow, under-integrated and didn't work on most platforms. So much so that there was a concerted effort that was partially successful to retain on-going support for WinXP. Then we were presented with a set of deceptive marketing programs and mis-leading public positioning when in fact MSFT executives knew that Vista was broken. Which is all implicitly admitted by their announcement of Win7 ! The graphic is extracted from their last set of major annual analyst presentations and is their strategic vision. The top sub-chart id's the mega-trends that are supposedly changing the market. While they're all true do any of them speak to solutions - or just the bottom of the stack ? The middle chart id's the four major sectors they're choosing to pursue. Commercial software - where's the beef ? Without the mad cow infections ? Open source is dismissed with faint praise of course. Advertising and Commercial Electronics - these are areas where MS's culture, skill set, market position, etc. etc. will provide breakthrus in value delivery ? And are big enough soon enough to move the earnings dials ? We don't think so. We're looking at a company trapped into "mining" it's legacy reserves, just like an oil company over-pumping a declining field.

We don't mean to pick on MSFT in particular, though we certainly savor the opportunity of course, but ask our standard enterprise questions: what is the "Theory of the Case" ? That is in the immediate future, the short- and long-terms and structurally for each line of business and product family what are your capabilities, strategic intent and resources ? Can you make the case for credible value delivery ? That question should be being asked and analyzed for each company and sector IOHO ! On the whole we're arent' seeing the kind of re-thinking and renewal from the Technology Sector, the supposed home of innovation and adaptive resilience, that we see from Mickey D's or WMT etc. Though in fairness IBM appears to have found ways to maintain it's reserves in the commodity spaces though not finding new ones while Apple is the main counter-argument. (WRFest 27Apr08(Tech Ind): Innovators, Survivors & Also-rans,Tech Industry:APPL vs MSFT vs YHOO Wars ).

In the readings section we end with a pretty complete inventory of prior postings that provide other readings, tools and frameworks and interpretations that reinforce many of these points. You may want to consult them as appropriate.

Continue reading "Tech Industry Refresh II: From Downturn to Re-structure to Re-engineer ?" »

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

Well last week should have been another stunner, beginning as it did with the biggest extension of the biggest bailout since the GD and ending with the largest regulatory re-thinking since the cumulative total of GD and intervening decades legislation and regulation. REALLY stop and think about that for a moment - almost EIGHT DECADES of incremental change has been compressed into sixty days. Or being slightly more fair 120 going back to Sept and the TARP kickoff. Five weeks ago everybody wanted to hang Geithner for malfeasance and lack of detail, now he's a genius and a hero. Be careful what you ask for too ! Pundits and interests on the left, right, up and down are all choking, albeit more quietly, on these details. Yet nothing should be a surprise since there's a clear pathway from Bush Administration decisions and recommendations, including Paulson's tentative plan from last spring (btw on of the key readings is a FT oped by Henry supporting a regulatory overhaul that looks like this one on a worldwide basis). Of this set of initiative what's most important - the economics, the financial technicalities, the politics or the popular reaction ? Actually all of them !! What's still missing is a context to help organize, categorize and organize our thinking about these myriad complexities so we're going to take our best shot at explaining what's going on. And make no mistake - these are enormous changes, mostly for the better IOHO, long over-due and the Finance Industry and it's role will never be the same again. The last three decades of business models, strategies and profit/performance relationships are gone forever ! We ended the last post with the accompanying cartoon to capture the popular reactions to date and so we start there. Now lets dig into the strategic context.

Helmet Laws and the Public Good

My personal reaction to seatbelt laws was they were unnecessary interferences in private decisions; as we used to say in the rock climbing game when the tourists went round the back side of difficult climbs, started down ravines and went splat in the parking lot that's how you sort out the riffraff and wannabees from the folks who belonged there. Ditto for motorcycle helmet laws and cellphone laws. All of which have become widely adopted. Now for anyone who's almost been run over by some weekend shopper chattering away (in our case one nice lady looked us directly in the eye and then almost ran us over and didn't even notice !) these laws begin to make more sense. Take at look at this YouTube clip and ask yourself what level of responsibility was displayed by the rider. Then ask whether or not the law made sense. Without a helmet this guy would have been history. Here's the policy implication - if the only person to be hurt had been the rider then sobeit. And if irresponsible riders had to post insurance for the bucket and mop brigades required for cleanup as well the public costs would have been balanced out. The realities are lots of folks continued, continue and will continue to act irresponsibly and the costs are not restricted just to them but impact the general public. There's the general principle - when the costs to society greatly exceed the cost to private individuals regulation is our only recourse.

Keep On Breathing: the Financial Circulatory/Respiratory System

What does that say about the Financial System ? If you go back to the Congressional testimony in the summer of '07 on executive compensation one can only characterize the responses of the boards, chairmen and compensation committees as being beyond tone deaf. And as publicly irresponsible as a drunken motorcyclist driving thru streets full of school children. We have at least $180B invested in AIG to date trying not to save the company but save the world economy; literally. (If you check out several of the last posts that show the credit and equity markets and economic data that should now be beyond challenge we hope !!!). The credit breakdowns and crisis is often compare to a terrible plumbing problem with rusted and clogged pipes, frozen values, and bad water. A fair analogy if you consider that it's not just a house but the whole neighborhood and town. A better analogy we think, that represents the complexity and inter-connections is how your circulatory system takes oxygen and energy and gets it into your system until it reaches the cellular level where a complex and inter-connected set of metabolic and bio-checmical reactions keeps you going. Credit has been called the lifeblood of the economy and, in some senses, that's almost literally true. It's pervasive, systemic and systematic involving inter-actions at the most minute and granular levels on up to grand flows of macro-systems. To tell that story we've composited a graphic that traces thru the flows of the circulatory system as a model and metaphor.

Supreme Truth and Systemic Poisonings

Back in 1995 the Aum Shinrikyou cult put Sarin gas into the Tokyo subway systems to purify things and bring on the new world, since they were an elect and spiritual elite who had deeper insights into the mysteries of the Universe. Now there are many good people in the Finance Industry but the leadership, perverse incentives and lack of controls combined with the "deeper grasp of the mysteries" of financial engieering led the Finance Industry as a whole to effectively mimic the cult's actions. Only instead of 5,000 people who were affected locally we had six billion who are effected globally. For nearly three decades the Industry has argued that it was capable of self-responsible adult supervision, that is it wouldn't drive recklessly, didn't need to wear helmets and was performing both a privately profitable and public good service. That turns outs out to be entirely false to fact. And, judging by the shell-shocked lack of leadership in response to these disasters the industry isn't stepping up to the plate to help re-formulate the proper "helmet laws" so society is going to do it for them. Which is truly unfortunate on many levels and in several ways. First off we truly do need a finance industry to help mobilize and allocate capital; much of human progress is built on the gradual evolution of capital markets, at least indirectly. And there's still going to be huge profit potentials for well-constructed, designed and operated financial institutions as a result. The question really becomes which ones.

Can You Hear the People Singing ?

 As Peter Drucker pointed out almost forty years ago businesses are social institutions and cannot survive or prosper if the societies of which they are a part are not also healthy and prosperous. Enlightened self-interest would, for a responsible adult, motivate businesses to encourage the welfare of the broader society. Or at least not damage it. Drucker identifies three major goals or responsibilities of the effectively managed business: 1) deliver an effective service that creates value - in the case of businesses this means making a profit that is sustainable in the long-run, i.e. balances short- and long-run decisions. Then, 2) operates efficiently and effectively by making work productive and the worker achieving. In other words by making sure that work is logically designed but also recognizing that people are social animals and to be effective one has to account for the non-economic dimensions of the business as a social institution. Finally, 3) act in a socially responsible manner to ensure that society is doing well (or as we put in an earlier post make sure that the prey populations are sustainable and self-renewing). Social responsibility requires two things - first when the activities of your business impact the broader society move to reduce the harm. For example when you create a pollutant act to clean it up before society forces you to do it. Second, identify broader social problems that are connected to your business and act proactively to eliminate them before they become so bad that society has to. The classic example is the Auto companies and Healthcare, which they've known is a competitive problem for six decades yet failed to pursue the social remedies of regulatory and insurance overhauls required.

Farther and Farther Behind the Curve

In particular Drucker points out that denial and fighting rear-guard actions to prevent regulation when it's in the interests of society and your company is a management failure, grossly counter-productive and irrational in the long-run. Paraphrased, either change the regulations or change the regulations !

Let me translate that: if business operations create a problem that individual businesses cannot solve because of the profit impacts and therefore require general regulation it is the fundamental responsibility of management to proactively engage in working with other institutions to craft the legislation and regulation. To fail to do so is irresponsible, malfesant and a gross failure of managerial leadership.

The Finance Industry would never be the same again after testing their engineering skills to destruction. But after the social damage they've done society cannot allow them to self-supervise. Something they should have been addressing for the last thirty years; there have been plenty of warning signals. Instead they chose to pursue the path of lobbying for greater and greater freedom which led to greater and greater risk-taking. Pursuing the analogy it's as if the Aum cult kept making more sarin.

The question is what happens now ? We'll take that up in another post but here's a hint: get out in front and help shape things or get run over by the Juggernaut. Two more: you won't like the alternatives AND if it gets out of control nobody will win.

Continue reading "Helmet Laws vs Adult Supervision: Re-Regulation & Finance Industry Futures" »

Posted by dblwyo at 08:57 AM | Permalink | Comments (0)

The title is deliberate not a really bad typo, thought it started out Freudian and became an accurate label. We are in a nasty situation and badly discombobulated but the BOOBs are making it worse by piling on like the mobs in a Roman arena looking for blood. There's very little example of adult behavior in the last couple of weeks from the Finance guys to Congress (can you believe 'ol Hang 'em High Chuck ? This is a US Senator ?). Fortunately for us the adults are concentrated in the Administration and other places of power and seem to be doing their best to channel the anger while continuing to do their jobs. We seem back to an event-based and interrupt-driven reactionary posting cycle but as we tried to point out this firestorm is really dangerous. Much as it would satisfying to let your neighbor go up with his house it threatens yours, the neighborhood, the town and the state. Literally ! No hype. In fact just to jar your lizard-brains a bit let me re-use a graphic we created in trying to convey the extent of the credit market carnage and the risks when we created a composite of screen-shots from the movie Virus. (Back to Stalingrad: Containing the Contagion, Moving Forward ?) Ask yourself just how angry are you ? Willing to die along with your neighbor angry ? Or willing to save your family now and revenge later ? Remember, revenue is a dish best served cold !

Listen to Uncle Ben

This post started out to quickly draw your attention to some really critical vidclips we ran across where you can see some adults in action, including Ben Bernanke, Tim Geithner, Pres. Obama and three local politicians (Ahnuld, Bloomberg and Rendell) all of whom are focused on constructive, calm and reasoned ways to deal with a crisis that's not going to be magically over. With the AIG Firestorm continuing to rage we ended up postponing, letting the last post run and adding some more readings excerpts. But let's start with Uncle Ben's discussions of the crisis, the risks last Fall and now, what it'll take to fix things and what the outlook is. You really owe it to yourself to watch this, even take notes IOHO. He says it a lot and tells you more, especially if you listen carefully and for the human inside the Chairman. This interview is, btw, historically unique and Sixty Minutes had done a great public service. We also included some other clips from Barry in LA to Sec. Geithner at the recent WSJ "Future of Finance" conference, which is on C-Span. That one is about as important - true to form the media didn't hear what he was saying and the talking heads and politicians have not helped AT ALL. Both these guys are about as angry as we are, but are doing something about it, know what to do and have a much more realistic grasp on the emotions and politics than they are given credit for. The word that comes to mind is MATURITY.

Surviving Stalingrad: Just How Bad Was It ?

Last Fall as the wheels were coming off the wagon we compared the emergency efforts of the Fed and Treasury to Stalingrad. We should have compared it to the Battle of Moscow because that was a last ditch effort that saved Russia, and was pulled off by a miracle. Back then we talked about the collapse of Western Civilization, being we thought a tad hyperbolic but "truthy". One of the most startling, among many, learnings we had listening to Uncle Ben was that in fact it really was that close. For example there was no authorization for the government to inject capital into a private enterprise and, when it turned out LEH's books were god-awful, they had to let it go. The TARP included such authorization and was passed about two days before AIG blew up. If LEH destroyed the markets can you imagine what would have happened if the orders of magnitude AIG had gone south ? Great Depression indeed !! It was that close. The last post (Burn the Witches: Private Outrage, Public Policy and Butterfly Effects (Updates)) discussed the fiscal and monetary situations and how close to the edges we were so we won't repeat but take a look at this market chart. The markets crashed 20% in Oct. and almost went kaboom again in Nov. as all the ramifications of how deep the doodoo was were absorbed. Ben is right - we were on the edge. There's another little learning hiding here though. We were able to decode the situation and get it right, AT THE TIME, not by special insight or brilliance but by stepping back and applying logic. Instead of trying to read tea leaves if the pundits would apply some logic and data they too could be informed, instead of inflaming. (Oh, btw, we also share some key trading bloggers insightful recent posts on how real this rally is as well).

Some More Adults: Schwarzenegger, Rendell, Bloomberg

At the same time, roughly, that Ben was doing Sixty Minutes these guys were on "Meet the Press" trying to explain why this situation was dire, why they supported the Rescue Bill and budget proposals and thought it was good for the country. Not sure to be honest they've honed their act in terms of getting simple explanations and metaphors developed but this is three responsible officials on the firing line who have come together in a constructive, moderate, pragmatic and bi-partisan way to do what's best for their constituents and the country. Would that more were like them. Oh please !

Putting out the Firestorm to Deal With the Contagion

Circling back to our key concern at this point, is revenge worth the costs ? In the readings you'll find these clips and some others. You'll also find some readings that "walk back the cat". That's a phrase from the military intelligence world that's used to describe the process of working back thru an event and figuring out what went on, who was involved, what they did, how they did it and  any why. We use the examples of BAC's purchase of Merrill, the Citi rescue and then excerpt extensively from Geithner's WSJ OpEd piece on the plan he's put forth. There are serious questions about it but, in the spirit of applying logic, it follows along the lines he outlined five weeks ago and should have been expected, it's as good as anything and stands a decent chance of working. It's also our best bet and will be adjusted to the circumstances. There's no magic answers here, it'll take skill, guts, discipline and perserverence. It'd help if a bunch of yahoos weren't standing around riding the fireman while they're trying to save our lives. For my own sake I hope the Yahoos go back under their rocks until they find something constructive to contribute before the whole neighborhood goes up and takes me and my family and friends along with it. Nothing but enlightened self-interest here folks !

NPR on Anger Management:Update

Does Getting Angry Make You Angrier? Anger seems to be the emotion of the moment. The president says he's angry. Members of Congress say they're angry. The public, we're told, is angry.But should angry people act out how they feel? The popular idea is that venting your anger helps get rid of it. There's even a woman in San Diego who makes money helping people do that. But now, psychologists are saying that venting does more harm than good.

Continue reading "Prof. Ben Addresses the Lizard-brain: Steady-hands Vs DiscomBOOBulations (Update)" »

Posted by dblwyo at 03:28 PM | Permalink | Comments (0)

First off if it's not clear we hope you took at least two fundamental points away from the prior post: 1) we've got a long....g way to go in this business cycle, it's just started and eyeball inspection tells you it's gonna get deeper and uglier. And 2) the last two week's rally is a bear market sucker's rally not founded on realities but triggered by the Pandit Put and whimpering out with the Big Ben (not)Bang. Which roughly translated means it's time to go inverse. The third major sub-theme is that we are utterly dependent on public policy, both in the US and around the world, for triage, damage repair, stimulus and recovery and long-term restoration of growth. Which hides a fourth - public policy is co-dependent between political leadership and the "will of the people". Before trying to walk rationally, and we hope, rigorously thru the various policy aspects and consequences we need to do some emotional (lizard-brain) level-setting. Accordingly we appeal to those great diagnosticians of the public pscyhe, Monty Python, who in one simple five-minute vinette capture and encapsulate everything from crowd psychology to false positive leadership to letting apparent logic mislead you. We really do think you ought to watch the whole clip to ground the rest of this post !

There are three things at play here: 1) downturn in the economy vs fiscal stimulus policy, 2) broken credit markets vs monetary policy and credit "fixes" and 3) political will, games and leadership. Of the three the most important at this juncture is the third. We say juncture because the Administration and the Fed are taking almost all the right steps IOHO (btw all the smart punditocracy who're so smart should dig into the details and come up with alternatives if they're so much more brilliant than the guys on the hot seats; as TR puts it, "there's nothing like stepping into the ring's blood and dust yourself" or something to that effect !). All that said we say juncture because the AIG bonus screwup is serving as a lightening rod for the fears, uncertainties and massive distrust of our private sector leadership. Who in fact failed us miserably. We spent a whole post (Predator Prey Symbiosis: Crisis, Leadership and Values) discussing why their behaviors were immoral, reprehensible, severely damaging the public well-being and violated the essential foundations of the social contract. All well and good. And the sensible pundits, e.g. Joe Nocera, et.al. of the NYT, who're trying to inject a few notes of rationality into the "burn the witches" anger are doing their best. But nobody is getting the whole picture right, again IOHO. The problem is that, as an essentially social species, we rely on trust between members of the same tribe to function and for twenty years or more that trust has been increasingly abused. The net result is a poisoning of the ecology on which we all rely. So here's the bottomline, so-to-speak; the anger is entirely justified even if counter-productive. Until it's bled off or re-directed our risks of doing something self-damagingly stupid are going to increase. In other words the single most important economic and financial datum to watch is whether this firestorm blows out or turns into a populist conflagration and takes us with it. The latter we give a low probability but an increasing risk. Unfortunately the former is also low - about all we can hope for is that the lid is kept on the pressure cooker long enough to bleed off the over-pressure and give the substantive programs some time to work.

Economic Policy

In the readings you'll find another collection that looks at various policies designed to get the economy going again and repair and re-start the credit markets, both in the US and around the world. At the end you'll find a bunch of excerpts that speak to the mini-essay we just wrote on the political challenges. As we said in our last post (History Review to Look Ahead: Markets, Economy & Business Trifecta) getting the economy going again is the fundamental strategic priority; and doing it in such a way that it becomes first self-sustaining and then gets back on a growth is the intelligent way to go about it. In the last set of readings we pointed you especially to two Econtrary essays by Paul Kasriel discussing fiscal policy during the Great Depression and the role of smart vs. stupid public spending. Public spending that subsidizes increased consumption is a "bad" idea. Public spending that invests in re-vitalizing the capital base (infrastructure, new inventions and innovations, education, healthcare, etc.) could put us back on the vanished Golden Path. To re-prove that fundamental argument we've created a composite chart from one of Paul's essays that shows how the economy was doing during the GD; the main point here is that a recovery was underway until the triumphal return of economic orthodoxies (at least of the time) caused budget tightening and the return of Phase II. Coupled with the really abysmal monetary policies of the time...well we'd really not want to try and dig our way out of this by starting WWIV, the strategy we defaulted to last time we were in a mess this serious ! Here's one more sad and dangerous set of facts for you on the international front. The rest of the world is actually in worse trouble now than the US. And is by and large facing more discombobulated policy responses, Europe in particular. In fact the only two countries where the leadership is stepping up to the plate are China and the US. Europe looks set to dis-coordinate itself into a disaster and Japan is in worse shape. So either we make this work or kaboom !

Monetary Situation

Speaking of credit markets, monetary politcy and central bank fixes take a look at this composite chart which shows the behavior of key interest rates from Jan08 to now and YtD. The rates charted include the TED spread, the 3Mo Treasure (IRX) and the 10Yr Treasury (TNX). TED is the different between Libor and IRX. Notice how rough it was last year leading to the catatstrophic levels reached in the Sep/Oct timeframes and how "repaired" it got as disaster was averted. While the wheels got kept on the wagon it's still wobbly and in fact started wobbling worse earlier this year but again appears to be improving. We're a long way away from having restored credit markets; in fact we're still in the Triage and emergency field medical care stage. Hopefully the upcoming Treasury plans will be the equivalent of getting to the MASH, in combination with the Fed's huge quantitative easing program and special facilities like TALF designed to credit flowing to consumers and small businesses again. Then we can start working on re-engineering the architecture of the entire set of regulatory frameworks (one of the most interesting essays excepted below is on by Sec. Paulson calling for just that. Stop and think about that...ex-GS CEO, ex Rep. Sec....lightening rod and he says it needs major re-constructive surgery...wow !).

The Peasants are Revolting

Let's close by re-iterating our starting point with some personal ancecdotes. Talking to my friends and neighbors for months now they're still in denial and shock but moving rapidly toward anger. In fact two close friends, both experienced executives of long standing, who pay some attention but not a lot to financial and economic affairs both went out of their way to share their feelings with me recently. Or more accurately chose me to vent their outrage out. If two business executives of decades of experience and fairly conservative in their outlook at that PO'd think how the populace in general feels. Like we said the Monthy Python clip is not really humorous in these circumstances. And all to many of the pundits are wanting to weigh the witch against the duck and burn here if she fails the test (to really get both the joke and the indictment you have to watch the clip). But you should be watching the political news just as much as the economic news...it's NOW as important for the market and economic outlook.

UPDATEs: One of the truly startling things (cf. the excerpt on the revival of Ayn Rand's popularity) is the combination of near criminal malfeasance, utter social and political tone-deafness and willingness to sacrifice the public trust (with the attendent violation of implicit fiduciary responsibilities and breaking the Social Contract) that Financial executives specifically and many executives in general are still committed to (committed...now there's a word !). The world is changing, the peasants are about to burn down the castle and they appear to be still planning the next dinner party. Check out this post from

Bob Sutton: Oblivious Rich Assholes

Seth Godin:The myth of big salaries (it's all marketing)

Tim Walker: “It’s going to take some patience.”

Breaker, Breaker. We got us a convoy !

Continue reading "Burn the Witches: Private Outrage, Public Policy and Butterfly Effects (Updates)" »

Posted by dblwyo at 06:38 PM | Permalink | Comments (0)

The title is a play on the last one and a famous epigram of the greatest of the Greek Stoic philosophers, Epitectus:

We should act as we do in seafaring: “What can I do?”—Choose the master, the crew, the day, the opportunity. Then comes a sudden storm. What matters it to me? my part has been fully done. The matter is in the hands of another—the Master of the ship. The ship is foundering. What then have I to do? I do the only thing that remains to me—to be drowned without fear, without a cry, without upbraiding God, but knowing that what has been born must likewise perish. 

That might be taken as a bit fatalistic or depressing until you parse it out some and realize it says to bear up with fortitude as long as you're able and before you get in trouble do your darndest to make sure all the preparations are in place. And if you pick a bad boat with a terrible captain and then insist on sailing into the teeth of a hurricane at least don't whine about it. If you're a previous reader you've hopefully gotten the correct impression that we have a definite point of view here that's centered on providing the right tools to forecast the weather, build or pick the right boat and captains and sail with style, grace and profit. The prior post laid out our macro mantra with pretty pictures and everything. A key part of that was Industry/Company analysis and we had an opportunity today to run the deep framework by a friend who's a Wall St. analyst. His questions turned a scheduled hour into a really tough but enjoyable three and we ended with a key one: how do you use this approach to make investment decisions ? Can you show a link between stock prices and business analysis ? You can consider this post part of our answer and the graphic below the illustration !

 We think at this point it's absolutely clear that we've shown that the economy drives business, that good businesses generate profits which result in earnings. Then you have to ask are the earnings you read about sustainable, the result of structural capabilities ? Or the artifacts of flukes or financial engineering ? In all our passes at Industries (Auto, Finance, Tech, Retail) and Companies (Dell, HD, WMT, Citi, GE, et.al.) we applied the same approach over and over again. The last post laid out the ginormous graphic of the macro-mantra and dove into the Geo-politics and Economy while the two preceding ones dealt with the Markets - and have sadly all too accurate. We did a little digging around, and perhaps giving ourselves some benefit of the doubt, matched stock prices to prior recommendations and/or assessments. And captured the results in the next graphic.

Proof of the Pudding: Recommendations vs Results

 Back last summer we took a pretty deep dive on Wal-Mart and tried to draw everybody's attention to one of the most far-reaching, fundamental and effective re-engineering transformations we've ever seen or heard about. In some ways at least on a par with what US military forces did in re-thinking their Iraq strategy and doctrines. And in that same Sept. 5th post we also suggested that you Sell ! Now that results of that look almost mystic and we admit the timing was fortuitous but the logic was not. The Street was concocting tall tales that WMT had created some new magic that would let it esape unscathed and we disagreed. Similarly in Aug we published a strong....strong Sell Tech recommendation after warning in the Spring and last Fall (of '07 that is) because our economic analysis suggested that capex spending would tip over in normal cyclic behavior. On the Industry front our first pass on the "Death of Wall St. As You Know It" was last March, preceded by storm warnings and we've been using the Auto Industry as our poster child of organosclerotic suicide for almost 18 months. Perhaps we're being a little overly generous but if you backtrack we'd argue not to much so, even when we didn't scream run for the door as we did with Tech and WMT. You can judge.

The Simple Questions Repeated

In the readings below you'll find yet another collection of business related readings that start with an excerpt from Buffett's latest letter (two actually) using his summary of the economic situation to kick-start and then comparing Immelt, Buffett and a key VC as exemplars of good management (btw IOHO both Immelt and Warren are getting bad press that exagerates their actual failings unreasonably). Let's go back to a previous graphic and put it as clearly and simply as we  can manage:

1. What is the fundamental value of the business ? Is it aligned with the market opportunity ? And carry that down into Divisions, Product Families, etc. for large businesses.

2. Are the Marketing and Sales functions aligned with and reinforce the business strategy and model ? Can they explain themselves to the market and the customers ?

3. Are the Core Operations (Software Development for MSFT, Logistics and Store Ops for WMT, or Design and Manufacturing for GM for example) capable of delivering on the promises ? Are the key support functions what they need to be ?

4. Are clear goals set, resources honestly allocated and people held accountable ?

By and large you can judge most of this from a careful reading of the business and trade press backed up by a review of the annual report, SEC filings and analyst presentations. DELL's troubles for example were predictable when they started cutting corners on customer service - a fundamental part of their value proposition ! Contrawise, as you'll read below, Exxon has been husbanding and hoarding resources for years and now has huge cash reserves to start buying up reserves. Or again Carol Bartz has on-boarded at Yahoo and appears willing to put the kind of adult supervision and good business practice in place that they've lacked for years. And on and on.

You can pick the right boat and the right captain who can sail these storms. There is NO REASON to resign ourselves to our fates ! Or so we think. Try it...you may like it. Or at least please drown quietly without excessive whining.

Continue reading "Good Boats, Good Captains: Applying the Investment Mantra for Profit" »

Posted by dblwyo at 08:40 PM | Permalink | Comments (0)

Well sorry we skipped a day but things got a little distracting. Feeling sorry for myself running without more than three hours/night monitoring Armageddon - my portfolio, not the markets, I mean. Now imagine how the guys doing the real work feel - they've been running that way for months and the last two weeks have taken up the intensity levels to where they must feel like Stalingrad would be a better alternative. Speaking of which we'll take back our comparison - we're not on our way to Kursk, though that'll come. The enemy got new supplies and staged a major counter-attack, broke thru our lines and threatened to devastate our rear-area and throw us back instead. We'll illustrate what we mean by that but let's start with a little dark humor, in the context of things. Don't know if you can make it out so click on the picture and watch the bear get shot out of the tree and bounce off the trampoline. Pretty funny but maybe not entirely accurate. Here's an alternate version with soundtrack and replays and a complementary version of the drunken bear out for a walk. More accurate we'd say and even funnier.

At this point if you're reading this your probably aware that we've had a second "interesting" week in a row but you may not know how interesting. We'd like to read you into the picture, address some of the badly mistaken memes floating around, especially in the blogosphere, and talk a bit about both emergency policy choices & politics and the outlook. We'll save a deeper dive on that for the future though. Unfortunately to tell you why the memes are wrong we need to scare you to death first which will also help you understand the policies and politics as well.

Market Breakdown

The market chart is a composite showing the Dow over two 5-day periods, F-Th and M-F. Up until Th around 3pm the decline in the markets appeared to be accelerating. Good for those of us with bear bets though we ended the week where we'd started, dead on breakeven. If you were just getting here from Mars or farther you'd think nothing had happened last week. Instead of the biggest changes in the US and world financial system since the 1930s. The Dow broke thru 10,500, or -8%, and was accelerating lower. Armageddon indeed until the 3pm news/rumors of a major systemic bailout got out and saved the day and created a gap up on Fri. Notice that after the gap the markets went nowhere. The real problem wasn't in equities though - it was in the credit markets.

 This next composite chart shows you what happened AFTER the world's central banks coordinated a major injection of fund after the takeover of AIG. The 3Mo Treasuries, normally running along with the other short-term rates around ~2%, dropped to ~0%. That's a market collapse rate and came about as funds were pulled from everything and put into the shortest term Treasuries. The good news is that at least everybody thought they'd still work - consider the alternatives to that ! Now these charts may be a little dry, abstract and academic. Let's try and bring it home with a more evocative and emotionally convincing comparison. This next picture is taken from the 1995 movie Outbreak and convey exactly what happens when a case-by-case approach (LEH, MER, AIG, ...) suddenly breaks down into metastasis and turns into a contagion.

 Any questions - 24 hrs, 36 hrs, 48 hrs, kaboom ! Well the lockdown of the credit markets was freezing about that fast and the stakes were, and are, are about as serious as it gets. Are you scared yet ? You should be ? There's a huge outpouring of teeth-gnashing in the blogosphere about socialism for the rich and nothing for the normal folks. Let me tell you - we were all going to be starving in dark and soon if this had spread. This wasn't socialism this was courageous and imaginative performance to the highest standards of public service under enormous pressures and terrible conditions. Be glad these people are smart, skilled and have big brass ones. This is what we mean when we say systemic risk ! Get it now ?

 Burn the Witch, Burn the Witch

One of the other memes making the rounds is that this is somebody's fault and the witch hunters are out in force looking for the guilty to hang. Now don't get me wrong, there's plenty of blame to go around and some very senior and responsible people made some really stupid decisions in the name of greed and hubris. And are paying the penalties. The evil Greenberg, he of the founding of AIG who laid the groundwork for that company's devolution and implosion lost $14B in 24 hrs. Lots of folks suffered and are suffering similar levels of impact. Nor are these bailouts. The proposals on the table will be buying up bad assets to be sure but for mils (= $.00001) on the dollar; even if they're only re-sold eventually for pennies and our return as taxpayers is pennies, our returns will be in the orders of magnitude. Not to mention we get to keep a functioning economy. Everybody's criticizing the dancing bear for how badly it's dancing instead of appreciating the miracle of it being able to dance at all. Nor are anybody's hands particularly clean. Yeah there were regulatory breakdowns but at every link in the chain nobody held a gun to anyone's head and forced them into making greedy and stupid decisions. There's a legal doctrine called last clear chance - who had the last clear opportunity to prevent a disaster. Lots of folks. And you can't regulate away greed, stupidity or humanity. Bear that in mind.

What we need at this point is to keep the wheels on the little red wagon and keep them turning so we have a shot at slowly and painfully working our way out of this mess. The way to judge the politicians and other commentators is not by their finger-pointing and witch-hunting fervor but by their constructive contributions. So far the track record is poor to worse. 

On the other hand the single worst track record and most directly responsible parties are "we, the people". First off those directly involved who made stupid and greedy decisions at every step in the chain of co-dependents. And second all of us who indirectly benefited by consumtion being articially propped up by the Housing ATM so we could all buy more than we could afford. If you'd really like to see real socialism run with this decision that this is all somebody else's fault, nobody is self-responsible and we should burn the witches instead of fixing the problem.

We got ourselves into this mess by tolerating these behaviors, encouraing the systemic leveraging of greed and now are about to repeat the same mistakes in reverse by going with the loudest and easiest to grasp but mistaken correctives. Congratulations - if you keep doing the same things you get the same outcomes as they say. 

Continue reading "Back to Stalingrad: Containing the Contagion, Moving Forward ?" »

Posted by dblwyo at 01:50 PM | Permalink | Comments (0)

Well in case you hadn't noticed today was a bit bad in the markets, led down by the financials as the realities of the dreaded credighetti monster re-surfacing, with more bad news from LEH, FNM and FRE. The latter were down 22% and 25% respectively. As were Financials (-3.6%) and Consumer Discretionary (-1.7%) in general. Not surprising in light of our thinking but the really interesting headlines were on Lowe's, which closed up slightly (.16%) on better than expected earnings. Consider the following headlines (from Marketwatch, AP) and especially the emphasized line:

Housing malaise eats into Lowe's net Lowe's Cos. said Monday that its second-quarter profit fell 7.9%, hurt by the housing market downturn, which cut into demand for cabinets, countertops and other big-ticket purchases.  Results, however, exceeded analysts' estimates, thanks to strength in seasonal sales as homeowners restored lawns and outdoor landscaping after last year's drought in much of the country. The No. 2 home-improvement retailer also benefited from the U.S. government's stimulus checks, which aided its comparable sales by as much as 1.5 percentage points, more than it projected. It also gained unit market share at its fastest pace in eight quarters as many independent operators closed shops, Chief Executive Robert Niblock said on a conference call with analysts.Despite better-than-expected results, Lowe's third-quarter profit forecast missed analysts' estimates as the retailer expected a continued challenging housing market into 2009, especially in regions such as California, Florida and the Gulf Coast. It also said it is evaluating the number of stores it plans to open for next year in light of the current sales environment. It said it will announce the final number next month. Sales rose 2.4% to $14.5 billion as the company opened in more locations. Same-store sales, or sales at stores open at least a year, dropped 5.3%.

• Lowe's beats 2Q estimates, despite profit drop

 Along with a lowered outlook you'd think that would hardly be a reason to bid up the stock. As usual what we think is going on is that the lack of grasp on the nature, timing, structure and lags in the business cycle completely escape everyone in general. For example the new meme is that while the world is headed in the tank the US is potentially headed back up. BtW - that differential explains the dollar bounce along with interest rate gaps...watch out. But other than that one line nobody gave the most important retail statistic much attention.

Let us offer up another stat that will be completely ignored - no coverage whatsoever. Real weekly wages were updated by the BLS after the CPI release. Guess what...they were down -3.1%. In fact for the last six months the figures are: -1.4, -.8, -.9, -.7, -1.1,-2.5 and -3.1% ! Remember our "Tipping Point" discussion - well it certainly looks like it's here IOHO. We're going to spend the rest of this post digging thru some big picture economic data to try and read ourselves into a more realistic, data-grounded context. Hopefully in such a way that you can reach your own conclusions. 

GDP vs Consumption

Let's start with a comparison of GDP and Consumption (PCE) back to 1980. Take a gander at this little chart which shows the YOY% change in the two. If there's any doubt about this being cyclic speak now. We'll draw your attention to the teeny little tail where both, but especially consumption, have dropped below the trendline. Now ask yourselves - what recent data you've seen, or read here, would indicate that's going to turn around ? We think the more relevant question is what will the downturn look like - '01, '91 or earlier ?

Recession vs Growth Recession

You might recall that the Fed's current published forecast calls for growth thru 2010 of less than 2% - in fact they're counting on it to reduce inflationary pressures. When the economy grows at less than its' full employment potential think of that as a "growth recession". More importantly translate that out of geekspeak and into pain indicators. That means lost jobs, lowered spending, bad earnings pressures, you name it. Just to put that in context we ran back to 1960 or so and ranked downturns as Recessions (<0%), Week Growth Recessions (0-1%) and Growth Recessions (1-2%). And ended up with this fascinating chart. Note: if you believe our measures we almost experienced a growth recession at the end of '06 but were saved by the oil price drop and saw one again this last couple of quarters. But we are, in fact, now in a growth recession !!

If you'd really like to dig a little more into what's going on we put together some more economic cycle charts running back to 1960 where possible so you can see how the economy (GDP), Consumption and Investment relate and what links to what in the lag structure. We also - and this is especially important - look at the key drivers of future consumption demand. Which are growth in employment and real wages. Like we said at the start that news is getting worse fast. See what it means and keep reading (and of course click to enlarge the charts). 

BtW - the most interesting and potentially useful chart on Wages, Employment and future demand is the last one :) ! 

Continue reading "LT Business Cycle De-construction: Time to Pay the Piper" »

Posted by dblwyo at 03:23 PM | Permalink | Comments (0)

Fascinatingly the markets are up today, led by Financials of all things. Will wonders and delusions never cease ? This despite the fact that, other than WMT earnings, all the economic news was unremittingly bad: foreclosures are up 55%, new house prices dropped -7.3%, continuing jobless claims accelerated and new claims were unexpectedly high and consumer inflation jumped 0.8% MtM, a 17-year high ! None of that sounds like the outlook is sanguine in the sense of good. Anyway, as threatened, we're going to revisit the outlook and consequences for corporate earnings and what it means for the market. Tracking which posts get the most attention, equally strangely if not more so, the diagnosis of a schizoid market attracted more attention then the careful dissection of the profits outlook (Talkin Profits: Economic Outlook, Earnings, Business Performance ?) and what the rapidly deteriorating economic outlook means. To put a point on it if we are indeed crossing a tipping point and starting into a consumer-driven downturn, as is now being widely recognized, ignoring profits and the current market valuations is dangerous to your financial health. On the grounds that perhaps we haven't made it entirely clear why you really care we're going to build a longish post walking thru various aspects of profits, earnings, PE's and the outlook. Just as one example most of the downturn so far in the S&P is due to Financials. If the economy turns over, as we expect, none of that is priced in.

Economy vs Markets

Just to set the stage let's start by considering the long-run relationship between the economy and the Markets. The meme is that markets are forward-looking though the WSJ noted that hasn't been true recently - as in the last decade ! Actually it's never been true. This multi-part chart shows the YoY% changes in GDP and the SP500 on top and the % growth in both since 1951. To our eyes the markets are still far ahead of where the state of the economy would justify their current levels.

Earnings Outlooks

Hopefully the prior post put enough evidence on the table about the structural relationships between the economy and profits that we can take it as given. And the translation between Profits and Earnings will also be taken as understood. That being the case the fundamental valuation equation we like is Graham-Dodd's: PE = (8.5 + 2*Growth)* 4.4/AAA-Yield. We'll dig into that a little later but taking it as a starting point the question becomes what are earnings expectations. And, much more importantly, do they make sense in view of our economic outlook. Take a look at the following chart which reproduces S&P's bottoms-up collection of analysts earnings prognostications and take a careful look at a) the revisions by sector and b) whether or not you believe the outlooks. And to put another point on it the two sectors that are up today and driving the market are Financials and Consumer Discretionary - with the big debate about a bottom in Financials raging onward (Riding the Storm - NOT: Breakdowns, Culture & Malfeasance in Finance).

 Now if you're readers of this blog and these two sets of earnings estimates hang together for you you can probably stop reading. But if thinking that the Financials (in read) and the Discretionary and Technology outlooks (in yellow) have some questions that should be asked below we walk thru some valuable issues of PE and valuation that should be reflected. And aren't IOHO.

Continue reading "Profits, Earnings, PEs and Outlooks: Why You Should Reall....lly Care" »

Posted by dblwyo at 10:54 AM | Permalink | Comments (0)

We interrupt our regularly scheduled posting to warn you that our early storm warning system has detected more early signs of bad credit weather. Over the weekend our alert news monitors found a new wave of back-on-balance sheet adjustments, Fannie Mae issued worse than expected news, both GSE's (FNM, FRE) announced that they would be restricting new mortgage loans and guarantees. And (H/T CalculatedRisk) Fannie's conference call tells us that the books closed in June but there were significant deteriorations in July MORE THAN THEY ANTICIPATED when putting together their books. As you can see from the early warning reserve dashboard Fannie has both upped its' reserves and doesn't begin to cover its' risks. Making a huge Treasury equity investment increasingly likely, indeed mandatory to keep them from sliding into major default (dare one say the BK-word ?) and at least threatening to follow Merrill in throwing existing stockholders to the wolves of insolvency.

What's It All Mean: the Vicious Circle Grinds On 

 

Continue reading "News Alert: Vicious Credit, Economy, Market Cycle Spotted" »

Posted by dblwyo at 11:28 AM | Permalink | Comments (0)

We've crossed the one-year anniversary of Cramer's famous "rant that shook the world" and despite the amusement factor we need to ask how it played out ? More importantly how is it going to play out ? Aside from watching Mr. Cool loose it completely a deeper amusement can had by contemplating the gap between the catastrophe created by the financial community and their willingness to blame everyone but themselves and look for rescue from the Fed and the government. A rescue necessitated by the catastrophic risks of the complete collapse of the markets and seizing up of the world economy. While Cramer's Rant first brought these "technical" issue to broader awareness the problems escalated from their and are on-going. The saving grace is that the Fed was finally able to find a set of innovative instruments that got the machinery working again - obviously not something they did overnight but had been thinking about for years. As was the Treasury under Paulson. Hats off to both those institutions and their leadership. Nonetheless they've "only" averted collapse - not done away with the need to rework and manage the credit crisis. For your listening pleasure and a look back check out the vidclip.

The point remains that we are barely thru the early part of this re-pricing of risks, de-leveraging and the resulting destruction of specious financial business models and dealing with the vicious feedback cycle between a slowing economy, loan losses, tight credit and more writeoffs. After the break you'll find a short selection of excerpts that reinforce these points - the most important of which is that months after many of us have been shouting out about it and years after the truly knowledgeable began warning the tsunami is beginning...beginning we say...to be apparent more broadly. Here we're going to walk thru several of the elements you need to keep in mind graphically. We do recommend reviewing Red Sky Mornings, Investor Take Warning: More Finance Industry for a discussion of the Finance Industry and its' broken business models.

Loan Situation 

The place to start is with the level of activity in loans. The chart below shows the most recent Fed banking activity statistics for several loan types. You might want to read it clockwise starting in the UL where total Loans & Leases plus Loans & Investments are shown on the left with the YoY% change in Loans on the right since 1980, giving you a good view of the cyclic relationships. The UR shows Commercial loans just lipping over, Consumer loans not doing badly and Real Estate loans nose-diving. As we'd expect for the latter. The next two charts show all the major types and the aggregate compare since 1980 and 1998. On our reading a bubble we didn't know about in Business Loans is beginning to pop.

Credit Tightening and Money

A natural consequences of banks drawing down their reserves is that they have much less to lend. Which should in turn be reflected in loans but so far not much. Where it is beginning to show up is in the inflation-adjusted monetary base, i.e. the effective money supply that lubricates the whole massive economic engine. As you can see below, and we've discussed before, real growth in Money has been and continues to be negative. And has been declining rather rapidly for some time. The Fed can lower short-term rates all it wants but markets are markets and will tighten as standards are increasingly tightened. What the Fed can do is keep the wheels from falling off but it can't force them to turn.

The middle sub-chart shows real money growth as -3% while the other charts wrap some bigger picture monetary and rate indicators around it. The top shows various spreads with the 3Mo-Treasury spread showing continued fear and weakness, the AA-Bas commercial spread showing quality fears and the 10Yr-FF spread showing a steeping yield curve. The latter is normally a sign of either inflation fears or a growing economy yet the bottom sub-chart shows inflation and TIP spreads. While headline inflation has been painful the worldwide slowdown is likely to do exactly what the Fed anticipates and lower commodity prices. Hence the TIP spread over non-inflation-protected bonds is around 2.5%. Inflation aint' the problem - fear, uncertainty and doubt are. Otherwise known as a metastasizing credit crisis that continues to be ever-present in the markets.

More Rocks in the Pond

The credit crisis was started by problems in sub-prime mortgages and related synthetic debt instruments but it was just a catastrophe waiting to happen. Now we're beginning to see other problems succumb to the same pressures, starting with Alt-A quality mortgage loans as well as Option ARM resets. Lined up behind those private real estate loans are all the commercial real estate loans, then various consumer and business loans and so on. Consider the graphic below which tries to conceptualize what the continued tremors roiling thru the market mean for more asset class rocks to topple into the credit pond and keep it churning.

 As one "rock" toppled it rippled up the entire chain of instruments built by leverage, greed and bad business practices and destroyed the underlying asset base. When the process works in reverse that's de-leveraging. Worse the ripples from one chain's breakdowns immediately spread to other credit markets, even ones that weren't necessarily adjacent in the sense of being technically linked. The Fed's new instruments appear to have prevented these topplings that would turn into a tsunami that drowned all us "innocent" bystanders but hasn't stopped the process. And the reverberations impacted other assets classes, each with their own sub-components, e.g. bonds, equities, etc. We didn't really realize how bad it could be until Bear-Stearns collapsed but now with Merrill and Lehman almost aground on the rocks it's clear what the consequences are.

An Example: Option ARM resets.

Just as one small example consider the next wave when Option ARMs, adjustable rate mortgages where the loanee has the option of deferring part or all of the payment until a cap is reached, are likely to do as they reset. Reset meaning that that rates are going higher so payments will and the expectation is that defaults are going to rise unmercifully. The lefthand shows just resets. And they aren't really going to start hitting until early '09 and then they build and build thru '09, '10, '11 and into early '12. Yet insiders and, now, the financial press are seriously worried about the default levels we're seeing now. The right-hand side shows the increase in payments - and if nothing else - what's that going to do to consumer budgets ? And therefore consumer demand. Recovery, schmovery. Thain was interviewed on CNBC and let slip one telling quote: "if there are not more problems there wont' be any more writedowns and we won't need to raise more capital. but if....". You know the rest.

Ripples and Credit Metastasis

As a closing note we leave you with this graphic which tries to trace some of the links between various instruments coming under pressure, bank writeoffs and the resulting tightening of credit. And then link it back into the economic consequences to establish a feedback process. Yes, judging by the readership stats, you've seen and looked at it before. But if Option Arms are just one tiny piece of a piece in the chart below what happens then ?

The final reading is Jim Jubak's most recent column discussing how Merrill's recent stock sale to raise capital destroyed the investment positions of everybody, especially the multitude of small stockholders, except Temesek. He's right but what's he's forgetting is that without capital MER was going to run aground and nobody would get anything. Put the pieces together - more rocks, more ripples, more write-offs, fewer loans, tighter credit, slower economy. Whaddya get ? And where's that leave MER, LEH, and so on and so on.

Continue reading "Cramer's Anniversary: Continuing Credit Metastasis and Economic Outlook" »

Posted by dblwyo at 05:25 AM | Permalink | Comments (1)

Sometimes you work to a plan and sometimes you get interrupted by events. If you can put the events into the context of the plan we call that interrupt-driven event-managed, the sine qua non of aglity and resilience :). In this case the plan was to take forward the prior economic discussions and apply the implications to various business sectors. The last two days of market gyrations, Merrill's stunning announcements and some serendipitous inside scoop from Big Picture cause us to change course...a little. Consider the following excerpt from a recent post:

 Merrill's $5.7B Write-Down, $8.5B Share Issuance My (naive) question: "Wait a second -- didn't Merrill just report last week? How did they not disclose a $5.7 billion dollar whackage?"Merrill guy's by-the-book-answer: "Earnings were the 17th; The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week." I think:  "yeah, sure it was."  Frickin weasels. 

Other Merrill guy says: "Geez, the stock is gonna get hit tomorrow" (ya think?) The stock closed Monday at $24.33, down 55% year-to-date. Merrill woman: "When do we buy this?" CDO guy: "When it hits $15" Me: Ouch!

Only that wasn't quite how it played out. The markets nose-dived yesterday and got another nosebleed today from re-climbing back to their previous altitudes. As Barry occasionally puts it ...WTF !!! Take a look at the accompany 10-Day composite chart of the SPX and NDX and tell me it all makes sense you. Particularly in light of the last two posts on the domestic and international economic situation (Note: trade talks have collapse - NOW that's really bad news as we discussed). No way that all makes sense. The commentary yesterday was that the IMF report on Housing troubles was the trigger and the running unsinn today that better confidence was the re-trigger. BS ! But let's put those arguments to bed.

WTF 1: Real Data on Confidence and Housing Prices 

The first composite chart shows U of Mich. consumer sentiment on a YoY% and absolute basis. Notice that YoY changes are as bad or worse as the Volcker-Reagan surprise short-stop of the economy that broke inflation. But on an absolute basis they're as bad as we've seen in nearly 30 years. Headlines may talk about MtM improvements but in actual fact these haven't been worse in a long...long time.

Now, courtesy of Calculated Risk consider the composite of Housing prices based on this morning's SP Case-Shiller reports. Ditto...they also are about as bad on both an absolute and YoY basis as we've seen in a very long time. Much worse if you think thru the absolute numbers we'd think that there's a long way to go before a semblance of normalcy returns to the housing markets....years of future pain. Now everybody may be getting jaded.

WTF 2: What Really Happened ?

On the basis of those charts plus Merrill's stunning anouncement, which follows right on the heels (that's deliberate - heels as in slimebxxx not heals as in fixes or even heels as in bringing up the rear) of MER's recent earnings announcements which said "we're under control, don't need more capital and no more write-offs. Sheesh.... Several reactions.

1. If they didn't know this was coming a few days ago their grasp of their own situation is sadly deficient and the company is completely out of control (which should also make you wonder about the rest of the industry).

2. If they did know it was coming and weren't ready or refused to couple the two together that's borderline malfeasance. If the deception was deliberate it's beyond borderline and on a murderous cattle raid that should start a war.

But wait, there's more.

3. Yesterday's news should have been insufficient to trigger the major drops we saw, especially since it was triggered and driven by financials. If it was/is true then today's more credible news on the economy PLUS MER's announcements should have seen an even bigger drop.

4. It looks like the details of the announcement got leaked out all over the place without being formally and publicly announced yesterday. That, I believe, satisfies the technical definition of criminal. Now we're beyond bad companies and into bad judgement and bad behavior - can you spell integrity.

5. Oh BtW, as long as we're having several WTF moments - the recent fantasy rally was based on the Financials having seen reality, admitted it and cleaned it up. So much for that notion.

Who do you think can trust to tell anything resembling the truth at this point ? Now there's a question you should never have to ask. It's one thing - not a good one IOHO - to spin-doctor to keep the patrons from stampeding in the fire. It's entirely another to tell them there was no fire, there is no fire and anyway it's out. And leave the building while leaving them there watching the movie.

After the break are some readings you might want to consider on this business picture designed to survey the depth and breadth of the breakage as well as provide some guidances for finding candidate truth-tellers. 

Update: BNN comes thru again with the best, substantive and human discussions that'll actually do you some good instead of being more tainment than info

 Scott Peterson reports on Merrill Lynch & Co.'s plans to raise $8.5B by selling stock.

 BNN speaks to Janet Tavakoli, president, Tavakoli Structured Finance Inc.

Continue reading "Bad Times, Bad Behavior: Merrill, Malfeasance, Markdowns, Markets" »

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

If the last post didn't convince you that you care about long-term economic performance perhaps this will add some fuel to the fire. Or not - in which please feel free to browse the archives :). In one of those strange little pieces of serendipity that happen from time to time a couple of Dallas Fed economists recently published a piece on the long-term improvements in our wealth and well-being and were immediately taken to task by one of our favorite major bloggers Barry Ritholz of BigPicture. Who called them hackonomicists for their pollyanish views. Where Barry failed to uphold his usual high standards of data verification and analysis is where is own ox got gored - their conclusions didn't agree with his so obviously it was without merit. We'll leave you read both pieces but will suggest that both sides of the argument have merit, neither is completely right and in the sturm und drang the critical question is left drowned in the noise. First off the Dallas boys re right - we have had quite an uppath in this century. But Barry has a point of what have you done for us lately ? The question that should be on the table is how did we get here, can we keep on this path, and if not, how do we fix it ?

LT Economic Performance

Which are, in fact, the questions we suggested in the last post are important and which we want to start on here. Just to set the record straight you'll notice that GDP since the '50s has grown from $2T to almost $12T in real terms while population has shown an equally astonishing growth from 150mil to over 300mil. In other words US population doubled in about sixty years - and if you think that was all native US population "organic" growth think again and check your math. Immigration has been a recent major factor in our prosperity as much as it ever was in history. Just to put a point on things the second sub-chart shows GDP, Population and GDP/Capita normalized to 1952, i.e. set to the same scale, so you can get a sense of what's done well. GDP/Capita has tripled in these decades - a truly astonishing performance.

The fundamental questions we should be asking are:

1) what are the sources of our prosperities ?

2) what are their likely futures and ?

3) how do we make sure that we get the right things things in place to improve our chances ?

BtW - just for fun here's four links to the Dallas boys piece, Paul Krugman on '90s policy failures (whose diagnosis we think flawed but worthy), Barry's polemic and a great little piece on human capital breakdowns:There's a Price to Economic Pessimism, Behind the Bush Economic Bust, Hackononics, Part II, America's Human Capital Is Tested

Continue reading "Bears of the Apocalypse II (LT Econ): Who's Fault is this Mess ?" »

Posted by dblwyo at 09:41 AM | Permalink | Comments (0)

We hope you've been having a great holiday weekend. Here in the Northeast the weather's been a tad cloudy, rainy and cool with intervals of rain and sun to break it up. Nonetheless it's a major holiday weekend and the midpoint of the summer for many. And the midpoint of the year for many investors who've been prompted to take stock - along with various media mavens. Particularly now that it's clear that the worst isn't over, the word bear is being freely bandied about and the "Lost Decade" of zero returns has been re-discovered. This isn't just about angst, agita and schadenfreude however because the real underlying economics, beyond the market gyrations, mean a whole lot to a lot of people: as in jobs, livlihoods, prospects for their children and outlook for the country. So, it being our 232nd birthday, it seemed like a good time to step back and reflect a bit. Although the Economist with its' typical flair and sense of humor does well at setting the stage with the "Four Bears of the Apocalypse".

However Jon Markman's recent column in MSN Money does one of the better jobs IOHO of summarizing things:

Bad times for good companies Even household names such as Coca-Cola are getting drubbed in this ugly market. Many careful savers and investors are vulnerable, and the trouble isn't close to being over. The collapse of market value since autumn has actually wiped out years of progress, putting all but a few big companies' returns for the decade below zero -- an extraordinary development that has jeopardized thousands of families' financial plans and possibly soured an entire generation on the stock market. Indeed, it's fair to conclude now that the bear market of 2000-02 never really ended and that the 2003-07 period of modestly higher returns will look from a historical perspective like a twitch of life in a moribund carcass. Although the story of what's gone wrong in this Lost Decade has been well documented, by myself and others, fresh evidence suggests the last pages of this sad history have not yet been penned -- not even close. For after months of denial that anything was seriously wrong, a few leading government, banking and industrial executives have decided in recent weeks that it's time to come clean and acknowledge that the collapse of the greatest credit bubble of all time will leave profits and price-to-earnings multiples impaired for years.

• Profits & Profit Margins, That Was The Week That Was, Profits drop by record amount

• Barron's: The Bear's Back, Back in the Pool, Bearish battalions  , Lost Decade

 The URL pointer sets are to a) a very nice set of longer-term perspectives on the market and corporate profits by BeYourOwnEconomist that are worth reviewing and b) a selection of recent articles/postings on the return of the Bear (Barron's, Economist, WSJ) for the most recent re-discovery of potential long-running flaws. We propose to dig into this rather thoroughly, having touched on it before (Long-term Market Performance: It Sure Ain't What You Thought !) and noticed that in the last couple of weeks, as the markets went traveling in a handbasket, that our posts on the markets and economy were fairly popular. (Quite a Day: Prescience, Schadenfreude, Luck or Toolkit ?,Boys, Wolves, Broken Records III: Market Schizonphrenia Runs Amok ?) Given the scope of the issues we're going to shoot for a 3-parter. Part I - long-term market perspectives, Part II- long-term economic perspectives and Part III - Next Big Thing and Boiled Frog syndromes. (Our equivalent to a House episode :) ).

After the break this Part will take a pretty deep look at four different sets of market and market vs economy performance chart sets that we think are worth a tad of contemplation. What you'll find if you read on is four things: 1) a look at long-term real market performance, 2) a comparison between market and economic performance, 3) the critical importance of long-term economic performance on both the cyclical and secular performance of the markets and 4) some surprising and scary implications for the future. Which'll be discussed more fully in Part II.

Continue reading "Bears of the Apocalypse I: Long-term Market Performance Perspectives" »

Posted by dblwyo at 03:23 PM | Permalink | Comments (0)

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

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

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

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

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

Continue reading "Quite a Day: Prescience, Schadenfreude, Luck or Toolkit ?" »

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

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

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

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

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

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

Continue reading "Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St." »

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

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

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

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

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

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

Continue reading "Dashboards for the Real World: Economy, Markets, Industry, Company" »

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

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

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

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

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

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

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

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

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

Continue reading "Data, Dilemmas, Dashboards and Decisions" »

Posted by dblwyo at 10:32 AM | Permalink | Comments (0)

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

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

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

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

Continue reading "WRFest 27Apr08(Market): Three Steps to Two Views" »

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

The title quote is (again) from Mr. Kipling's If and parts of it go like this:

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;

If you can fill the unforgiving minute
With sixty seconds' worth of distance run --
Yours is the Earth and everything that's in it,
And -- which is more -- you'll be a Man, my son! 

It's not entirely clear that many are indeed keeping their heads nor looking at the facts as they are. By and large the outlook is still too, entirely too, sanguine and fails to grasp the full extent and scope of the on-going tsunami's in Housing and the Credit Markets and what that'll do for the Finance Industry. Nor what's happening with the core economy - let's all not forget shall we that there's a real economy turning down out there with consumption starting an Acapulco cliff diver's warmup routine. On the other hand of those few who get it in their/our attempts to shake out some of the complacency we may get a little too alarmist. Yes these are serious problems that carry grave and serious risks with them. But we've coped with worse before and in recent memory.

The long-term outlook is in fact not bad. Certainly we have strong markets, a robust and innovative economy and a skilled and educated workforce. All of those things need to be better of course. But the question is will we keep our heads and make it so. Or panic and huddle in the blankets in the basement ?

We could summarize, explain and interpret the following readings but the titles and excerpts seem to follow, IOHO, pretty much carry themselves. While they're all worth clicking thru on to read the whole that last two (first from Jesse Eisinger of Portfolio who holds up the doom is coming end of things and next from Warren Buffett who holds up the we can cope, it's not that bad and keep your  head up and your powder dry end) are especially worth reading in their entirety. 

Continue reading "IF You Can Keep Your Head: Readings & Perspectives" »

Posted by dblwyo at 03:22 PM | Permalink | Comments (0)

There's a couple of things going on that caused us to dig into long-term market performance, using the SP500 as a proxy. The big one, which'll we'll dig into shortly, is it's earnings seasons and we anticipate a large dose of cold water in the face as reality meets the analysts. A different and surprising tack is how does the current market compare to long-term performance trends. Oddly we were led to that by all the hoorah about Citi's performance where Weill has been claiming sanctity because he generated such wonderful performance. That turns out to be even more ill-founded than future earnings outlooks. But in the process we stumbled across some perspectives we thought worth sharing. So we're going to start with a short-term lookat the SP500 but follow up with some very long-term ones back to 1950.

If you'll take a gander at the busy little chart at right (we apologize for the business if it's too excessive but wanted in this case to take advantage of some tools). In prior posts we talked about the steps and stumbles as the market gradually worked its' way down the staircase of the credit crisis and associated realities. If you look at the base chart you'll notice, among all the information, that the 50-day MA was still pulling away from the 200-day but has recently flattened. Driven largely by (our alternate title) April Fools where UBS doubled its' writedowns another ~ $19B but raised capital ! Sheesh. We don't want to spend immense time here but notice the flags and pennants. As we mentioned we saw three forming. The last two got busted to the downside but 4/1 saw the upside "surprise" all the bottom-callers were looking for. Which seems to be coming under pressure. Whether the rally holds will depend on how views on earnings evolve. But let's shift gears a LOT and look at real market performance over the long-term.

Below you'll find charts dissecting long-term market performance and returns in four different ways going back to 1950 and some, we think, very surprising conclusions. Our bottomline is that the era of highest performance was the '50s and early '60s. And that performance was driven by huge increases in economic performance which are unlikely to come again. But take a look for yourselves. 

Continue reading "Long-term Market Performance: It Sure Ain't What You Thought !" »

Posted by dblwyo at 12:38 PM | Permalink | Comments (0)

In the last 10+ days we experienced four major changes in the way the world works that haven't gotten the attention they deserve. Though all of them made the front page of the WSJ with long, in-depth and excellent articles. And several other places as well. So let me try and point them out as a prelude to follow-on detailed discussions but first ask a key question - how do you boil a frog ? Surely everybody's heard that joke by now but the sad part is my first time was over two decades ago by a speaker talking about changes in the world and business. Guess what - they all happened by and large, nobody payed any attention and everybody was "surprised" when the tipping points were crossed. Just as they've been surprised by the economic data and market disruptions of the last few months. We'll probably get the same reaction from our review and discussion of those four things but once more into the breech, dear readers. Our friend at Non-Sequiter pretty well captures it though.

Just in case you missed it here are the four things and an appropriate headline (we'll put up more detailed excerpts in our readfests so don't take notes). And it's not as funny, so may not hit home as hard and be dismissed as too intellectual but the chart at right is a repeat from an earlier post on business strategy. And it deserves another looksee because it provides a pretty good blueprint and checklist of the big picture you ought to be a little aware of. Especially with all these deep structural changes. Remember those frogs ! 

Continue reading "Five "Funny" Things on the Way to the Market" »

Posted by dblwyo at 06:59 AM | Permalink | Comments (2)

He in this case being the Rminator and while he's not necessarily in the house that's his engine your hear revving up. Today's economic news was the release of Feb. retail sales data. As we, and others have been expecting, it was down. With the Commerce Dept. estimating it dropped 0.6% MtM though they estimated a 2.4% YoY increase in nominal sales. Much more importantly estimates of real retail sales showed a pretty severe drop. My e-friend CalculatedRisk estimated a drop over 1%(Real Retail Sales). Using a different, simpler but consistent method we estimated that YOY sales dropped -1.45% for Feb. and the 3MoMA was -.84%. In any case the particular monthly number isn't as important as they trend which is captured in the chart at right. In the top you see real and nominal sales which have been trending downward on the whole since early '06. The interesting thing to notice is that there was a late pickup in nominal sales in late '07 due to inflation but now it's headed down. Consequently the real sales line is dropping much more steeply. We've been making the points about business cycles, lag structures and where we're at. This gives us an excellent idea and you can see it. And the bottom shows sales since Jan93 and we'll make the obvious point. Real sales has dropped about as much as it did at the bottom of the '01 mild recession. And if we're right about the cycle well, "argh...Captain you're strainin' the ingines...I cannah hold her".

In other word we're very early in the downturn part of the cycle but from these charts arresting the decceleration doesn't appear likely; and we're early days yet. To keep hammering on that point - where will real sales go if they've already fallen as far as '01 and we're early in even a mild downturn ?

But let's dig into things a little more with a refresh and update of our pool of high-frequency economic data after the break. 

Continue reading "He's Back: Retail Sales and other H.F. Scary Data" »

Posted by dblwyo at 11:57 AM | Permalink | Comments (0)

1. The economy is in a downturn that's a natural characteristic of business cycles but which threatens to tip over into something much worse as consumer demand slows and the credit crisis threatens to seize up.
2. Credit markets are normally the lubricant that allows for the smooth functioning of the cycle, up and down, but the normal predictable patterns in the overall market and the stable relationships between markets, which are not a given but the result of market equilibrating forces, are as badly broken as they've been in the post-WW2 era.
• Comparable examples of credit collapse would be 1929, 1912, the 1870s, 1920ish in Britain under Churchill and the problems in the 1890s. The situation is that serious. 
3. If the credit markets are not repaired, including order write-downs, de-leveragings, re-pricing of risk and huge losses necessary for a return of normalities then the economy is at serious risk of major...major problems. (that's a euphemism btw but I'm superstitious)

And apparantly our judgement on the situation is not entirely an isolated one. From the WSJ's "Market Blog" we have this little tidbit:

Continue reading "Galt vs the Fed II: Credit Disequilibriums, Broken Markets and Economic Implosions" »

Posted by dblwyo at 06:36 PM | Permalink | Comments (0)

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

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

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

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

Continue reading "$Trillion Losses: the Minsky Moment Continues" »

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

A friend of mine has suddenly paid some small measure of attention to the arguments we've been making about the problem portfolio we face and the likely outlook for the business cycle, as opposed to the headline reporting. And - thank goodness - started investigating his portfolio and investment strategies. Actually he's not quite the first - another friend called us a month ago on a business trip, and while talking to us, used his Blackberry to re-shuffle part of his. Boy, I sure hope I got that write. Now at the time we also suggested that the real time to pay attention was in Dec. but better late than never, we always say.

Obviously our view is that there's a long way to go to bring valuations into line with the business cycle and enterprise performance outlooks but we've been wrong, or at least badly timed, before; and surprised of course that the Universe didn't fit our "model" :). But all in all it seemed like a good time to translate the thrust of our arguments into some investing strategies (bearing in mind that blind advice on the web is potentially worth what we're paying for, this is intended as a representative exercise for you to go do your own homework and any negative consequences are on your own head. A suprise upturn of course we expect to get a cut :) ). In the process we'll point you to PoliticalCalculations SP500 return calculator which you ought to have handy.

Continue reading "This One's for Jay: Investing Strategies for a Dicey Market" »

Posted by dblwyo at 04:35 PM | Permalink | Comments (2)

A few posts back we jokingly referred to the various reactive posts that went up last week because of the flood of important news stories. Those included real retail sales, Buffett's buyout offer for the bond insurers, GM's really terrible earnings and more. In trying to make sense of that swirl we referred to all the "non-linearities" where one thing was linked to another. We thought it might be helpful to have a single point-of-view where all that discombubulation was brought together in one place so here it is. The chart below looks at the major problem categories and then briefly summarizes their status thru several stages. First stage is the basic situation, second is the next level of concern and impact and so on. Each cell here probably deserves its' own post, and in fact has already gotten several. But then we'd back to multiple inter-twining issues and seeing the whole picture where everything's linked to everything else would be difficult. Maybe even impossible. Let's see if this helps. Click on the graphic for a larger picture of course.

Give some thought to each cell, what evidence you have to agree or dispute it but also take them all together. This is the information set, so-to-speak, that lies behind yesterday's post on what the cycle might really look like. In particularly start in the upper left-hand corner for the key initial question. And then look at the lower right-hand corner for the bookend question:

1. Is the economy at a slipping point, not immediately apparant in the data but visible by looking at trends and structural patterns, where consumer spending will "tip over" ? And rattle the rest of the house of cards. We don't think it's guaranteed but the risk factors are climbing exponentially.
2. Will the retreat of these tides expose deep fault lines in consumer, bank/finance industry and businesses that could crack and make things much worse, even ? We're pretty sure that all these faults exist in what many thought was bedrock but whether they can be prevented from cracking is the real question. We're not only going to find out who was swimming naked but who was swimming just above the sharp rocks and coral reefs. And there will be a lot of sharks (problems) that'll be attracted by blood in the water. 

Posted by dblwyo at 12:22 PM | Permalink | Comments (0)

Over the weekend a friend asked me what the result of the stimulus package was likely to be and how important it was. While we've asked and answered that question before we ginned up a little graphic to make things a little clearer. And also to make clear what the alternatives are likely to be, how it relates to history and why the "over-sanguinity", coining a word, of most market and economic commentators is likely to be severely mis-placed. Below the line you'll find an earlier chart that looks back to the investment bust and the consequences for the cycle. And, as it happens, three respected and respectable commentators just popped up this morning with dead on observations. All of which we suggest you skim. But let's start with this chart which lays out things the way we see them.

As the legend explains it the black line is the base case. Now we've deliberately left off the  vertical numbers because if base line growth is, say, 2.5% then the whole chart rotates left so the trend line points up. That gets back to the basic point that a growth recession where GDP growth is < 1% will be as painful as negative growth.

UPDATE:  Barry Ritholz over at TheBigPicture has a nice little riff on what is a recession, where we might be at and some real world stories. This kinda puts all this abstract chartsmanship in context.

Continue reading "Debating the Business Cycle: Alternatives, Risks & Catastrophes" »

Posted by dblwyo at 09:32 AM | Permalink | Comments (0)

Before we dive into the H.F. data the other big news was this mornings' release of the Non-Farm Payroll (NFP) reports. This release included a major revision to the data and estimates based on a closer look at tax and actual employment data. Note: this is not a critiscism of the Bureau of Labor Statistics. This stuff is really hard and they a darn good job with the resources they have for a very difficult to track and manage indicator. We mention that, because if you've been following along over the last year either here or several of the major blogs or economists, the big deal was the Birth/Death Adjustment model which would got a major update based on the detailed data. Rather surprisingly the BLS has actually been pretty accurate.

At the end of Dec the old numbers estimated a total employed labor force of approximately 13.9 million vs a revised estimate of approx. 13.5 million. Looked at another way, two different methods actually, between Jan98 and Dec07 the net difference in new job creation was about -375K. Not bad for government work. Not bad at all.

 So that means we can move on to looking at the trends, patterns and turing (oops, clever Freudian typo - NFP is not a Turing Test. We meant turning) point structure. And as always we prefer the YOY% changes for understanding these factors - which works out well because there's no perceptible differences visible in our charts. Which means that everything we've been saying for the last year or so holds up pretty well. As you can see in the charts.

The first sub-chart shows YOY% change and total employment from Jan00 to Jan08 while the second goes back to 1980. In the latter, which is very nice to have for perspective, you can see the changes in Employment exactly follow along with changes in the economy. Zooming into the shorter time-horizon we can the decceleration in Employment continuing and increasing. Something we've also been flagging for almost a year now but then who are we ? The funny thing about actually looking at the data and being, as Bob Sutton calls it, "evidence-based" is good for actually understanding what's going on. Unfortunately it makes you both an outlier and does little good for your social life as a result. :)

Continue reading "More on Payroll Data: the Employment Outlook" »

Posted by dblwyo at 11:50 AM | Permalink | Comments (0)

It's been quite a week for economic data with the release of preliminary estimates of Q407 earlier this week and monthly payroll numbers today. Given the slew of data arriving all at once we're going to put up several posts parsing it out, starting with the GDP data. As you may recall the headlines for the last several quarters have focused on annualizing QtQ changes and getting everybody excited - though to judge by the markets which seem to be in the midst of that bear market bounce we've been talking about. The question is is the bounce warranted by the underlying economic fundamentals ? (UPDATE: bounce, bouncing around so far....)

As usual we prefere YOY% changes for reasons we've gone into several times. So the headline numbers for GDP for Q2-Q4 were 3.8%, 4.9% and 0.6% respectively. The first two of which got everybody all excited about how good things were. The actual annual growth, using the YoY approach, was 1.9%, 2.8% and 2.5% respectively. Neither as good as the headlines had it, as usual, nor bad. And when you look at the accompanying charts the trend is definitely not favorable. The first sub-chart shows GDP, PCE and Investment in real terms. Notice Consumpton (PCE) continues its' gradual downtrend while GDP and Investment have recovered their big dips from earlier in the year to get back on a slowing downtrend as well. Congratulations !

Since Investment is the accelerator and the Wild Card here the second sub-chart breaks it down into its' three main components. Residential, Structures and Equipment/Software. RI continues to accelerate a dive off the cliff and since it's a major component and ALWAYS leads cyclical turns that's a critical obeservation. Structures show a great continued uptick but are in fact both the smallest part and are playing catchup from a severe downturn in the last recession. Real business spending upticked but again merely returns to a downtrend. So we're definitely not in a recession but perhaps the key word is yet. That depends on Consumption. 

Continue reading "More on GDP and Economic Outlook" »

Posted by dblwyo at 10:22 AM | Permalink | Comments (0)

At the end of the lost post we laid down a, perhaps the, challenge for these interesting times:

"As this sorting goes on the real winners will be the firms and industries who have an effective business model or who re-invent one. Finding them will be the interesting challenge. "

So how does one go about sorting things out. Well there's our interesting little mantra of economy - industry - firm but we thought, beyond that, we'd appeal to the words of the Master. Mr. Warren Buffett himself. Now there's several ways to do that from reading any of the several books that've come out, to reading Warren's annual stockholders letters. Which are btw online at the Berkshire web site and entirely worth your time. And he's made several invaluable and wisdom filled visits to the Charlie Rose program. Two other interesting sources are another of our favorite blog sites and the AAII. 

• NotMakingThatUp (Jeff Matthews): this is the last of a ten part series on Jeff's attendence at the annual BRK meeting. Also if you'll search Jeff's site there are several other interesting posts that are well worth your time and attention:Pilgrimage, Part X: On The Cheap
• Another is this introduction to the AAII's Buffett Screen

 We strongly suggest follow-up on those but fortunately modern technology has given us an even better starting point. Back around 1998 Warren made a major appearance at the founding of the Graham-Buffett school of Security Analysis, the speech/Q&A was recorded and now it's posted on YouTube as a 10-part vidclip set. Each of the parts is well worth watching, pondering, taking notes and re-watching. In fact as part of our prep work, obviously in addition to reading the previously mentioned materials, we watched the set twice. Being slow it took us a while to catch on to the "take notes" part as well as the little gems and insights that we've heard no where else.

Continue reading "Masterclass: Buffett on Investing and Business Analysis" »

Posted by dblwyo at 02:51 PM | Permalink | Comments (0)

Some years back (you might want to know I grew up out West where this was not unusual) I found myself hiking around a Forest Service campground in the early evening when it was already pretty dark. And started hearing bear noises from across the valley. Which is all the encouragement one needs to beat a hasty retreat back toward the "safety" of the campground and the car. On the way back from somewhere up the trail there came the sounds of a large bear snuffling around in the bushes, or so I thought. Scary. Shortly though I heard the sounds of a small bear BEHIND me on the trail. If close bear noises are scary hearing the sounds that tell you there's a pretty good chance of being on the trail between mom and a cub move it up a couple of notches...like 2-3 orders of magnitude. Now to tell the truth I don't know whether that was the case because I made every effort not to test it. One of the decisions in my life that still makes some of the most sense - after all I'm still hear (Freudian typo btw) and not too badly damaged to tell the story.

Well we've been hearing bear noises for some months now. If you've been really smart and disciplined you've acted on the "across the valley" noises. If not then there's a cub behind you and it sounds like mom's in front of you.

But these last few days, or week (Note: not weeks), we've definitely been hearing mom and the cubs. It's time to get off the trail. Fortunately Jim Jubak has put together one of the most sensible columns on re-positioning yourself that's out there. It's below the line along with an earlier column from Tim Middleton. Normally my suggestions are to read this stuff, think it thru and then apply it to your own circumstances. Now my advice is to follow it.

One caveat - watch the technicals, e.g. the Bollinger Bands and the 50-day and 200-day MAs. It's quite likely we'll get a bear market bounce. But once the short-term denial wears off we'll be back in bear country. Now is a good time to get heavy on cash and short-term bond funds. But if there's a bounce my personal opinion is that there will be no better time to get into inverse ETFs or mutual funds. 

Continue reading "The Growling of the Bear: Strategic Positioning for a Down Market" »

Posted by dblwyo at 08:56 AM | Permalink | Comments (0)

A friend and I were discussing the current situation, or "mess" as he calls it and he asked a very pertinent and simple question. Also a very difficult one yet as crucial as it is hard. While I'm not sure an easy answer will roll forward here there are some approaches. Here's the original question:

"Now, I have an interesting and difficult question for you to work around.  Can you propose what kind of scenarios we might see in the resolution of all the mess?  Who will wind up being the biggest losers? the biggest winners?"

Continue reading "Winners & Loosers: Rubble Sorting" »

Posted by dblwyo at 12:17 PM | Permalink | Comments (0)

The prior posts surveyed the general economic and market situation and the investment performance situation. Here we'd like to continue that theme and fortunately ran across several interesting sources and stories that reinforce the argument. Links and excerpts are continued below the line. A fascinating WSJ article finally extends the enterprise value argument by looking at current results vs future performance expectations. The graphic example points at MickeyD's but please take note that it was strategic re-thinking and operational improvements that led to changes in future value, current valuations and stock improvements.In other words the way to translate our model of enterprise performance assessment is now explicitly linked to stock performance. But,we'd strongly emphasize, the key is the performance improvements, not pandering to short-term street expectations. Below are some equally fascinating links to analyst expectations which seem, in this light to be wildly mis-judged, to the liklihood of very large increases in corporate bankruptcies and, fresh today, two financial columns that outline strategies that conincide exactly with our overall outlook, sector analysis and individual performance analysis. We also provide linkages to applicable prior posts.

Just to explore this whole topic we ran an interesting experiment on LinkedIn by posting a question on expectations on enterprise performance. So far the response has been rather small - which may be a sampling problem. We'd also suggest that it's serious awareness problem. And, as today's headlines illustrates, early warnings are easy to ignore. The "surprise" downturn in Employment has been visible for months yet everyone is shocked, simply shocked :). Anyway if you can get to linked in check out the question for yourselves. Better yet leave your comments on your expectations here !

For another perspective we'll point to the performance of the SP500 over the last several years, especially PE Ratios (for why they're excellent indicators of eventual long-term performance try here or here. Anyway if you'll pop up the chart at left you'll a "stunning" climb in EPS coupled with a more than stunning compression of PE rations. Now you ask why might that be - could the market have figured out that earnings and profits are in fact not organic, are held up by buybacks and buyouts and not likely to be sustainable ? We'd argue that's a fair assessment and, willy-nilly, that any investment you're considering should be subject to the same value questions. How are they doing now and why ? And what are the likilhood of future improvements ?

Those are the questions that put you on the path to finding value investments that'll provide strong returns. And the heart of the discipline is seeing clearly what's coming, how performance is related and evaluating current strategic position and operational capbilities as well as future ones. Suitably adapted of course for sectors or other asset classes :).

Good luck and good hunting ! 

Continue reading "Ganesh Filters III: Analyzing Businesses Blueprints" »

Posted by dblwyo at 03:32 PM | Permalink | Comments (0)

Now that we're past New Years and off to such a "good" start with the market it might be time to cast our minds back to this time last year and use that as an aid to look forward. We'll let the Hindu deity Ganesha set our tone - partly because it's amusing, partly because how many elephant-headed deities are consulted about the market and partly because his job includes being the deity of obstacles. Both removing and setting them. And it look like he's provided us quite a set to play with for the coming year. He's also the patron of arts and sciences and the deva of wisdom and intellect. Which would seem to make him perfect for the current situation. A good summary of the situation and outlook comes from today's NYT:

In the Land of Many Ifs For months, the American economy has been assailed by a wave of troubling news, from plunging housing prices to the soaring cost of oil, provoking gloomy talk of a possible recession. Yet so far the economy has found a way to shrug it all off and keep growing. How much longer can the expansion carry on? As a new year unfolds, analysts expect a verdict soon: Either the negatives finally metastasize and drag the economy down, or a fresh source of growth emerges, helping to sustain consumer spending despite the ongoing worries about housing and tight credit. 

Continue reading "We Can See Clearly Now: Retrospect/Prospect" »

Posted by dblwyo at 02:26 PM | Permalink | Comments (0)

In the two prior posts we worked thru the nature of the business cycle and our current situation and then looked at the recurrant cyclical patterns. The latter worked thru Consumption, GDP and Investment as well as linking in Employment. Previous posts were referenced in the business cycle post as well as some useful background readings. By this time if you've been playing along you've got a pretty good idea of how the thing works, why it's important and what data to watch and what it'll tell you. In other words how to turn a swarm of data and headlines into useful information. Now it's time for one more pass to look at more current, high-frequency data that will keep you more in the loop and might, potentially, allow you to have a feel for what could be coming. The table at right presents the last several months of key data elements we've found worth following and the associated charts are in the read-on section. But let's set the stage with a couple of interesting excerpts, one from Alan Sloan and the other from Paul Kasriel.

Continue reading "WTWW Part 3: Jitterbugging - the High Frequency Indicators" »

Posted by dblwyo at 09:06 AM | Permalink | Comments (0)

The prior post laid out the "Weigh the World Works (WtW)"  by putting up a model of the business cycle, it's general time patterns and referenced some background readings along with some prior posts that illustrate the applications. We'd like to continue that line of investigation here by addressing the last of the four key questions. The first on Consumption and the second on Investment. As you probably know Consumption is approximately 70% of the US economy, though far lower a portion of other developed economies and far...far lower of the major developing economies. Investment, taken all together, has run about 14% of the US economy. The engine therefore that drives the economy is consumer spending while investment is the super-charger that acclerates it. That is if businesses anticipate a need for additional capacity thru capital spending and hiring. These in turn feedback on consumer spending by increasing Employment and Wages and so on. Of course that means that the feedback loop can run in reverse just as well. That's why everyone should be so concerned about how well Consumption, Investment, Employment and Real Wages hold up. It also explains why the ability of consumers to sustain their spending thru MEW resulted in a very abnormal spending pattern where Consumption has held up much better than post-WW2 experience would have suggested.

Continue reading "WtW Part Deux: Patterns, Cycles & Indicators" »

Posted by dblwyo at 02:54 PM | Permalink | Comments (0)

Part of today's posting plan was to put up an overview of our interpretation of the Fed's strategic outlook and discuss some of the problems they face - and us with them. The prior post was an updated addendum survey of recent policy actions and market assessments of same. While some few are balanced the emphasis is on few. A recent commenter had some nice things to say about our efforts and called our attention to Paul Volcker's historic efforts that broke the back of inflation. That created a benign regime for the last 25+ years but is no longer the world we face (cf. this earlier list of readings on the credit market particularly Uncle Alan's survery of the very long term structural changes - a must read to understand how the deep currents are flowing underneath your feet).

UPDATE: my favorite financial columnist Mr. JJ has some interesting things to say about LIBOR and freezing debt markets. If you'd like a little background more lightheartedly than myself start with that :) ! Seriously does put the core problem clearly and simply - it's inside baseball as he says.

To understand, as best we might, how those currents will flow and what the Fed is, IMHO, trying to do about it we need to understand a bit about how they see world and the problems they face. However, let me admit a major sense of amusement (a bit of black humor here) that everyone's been screaming at the Fed for months about "inflation ex-inflation" but now that the credit crisis is here big time that's back burnered in favor of screaming at them to cut rates, cut rates and cut rates. Amusing for beyond the obvious reasons too - the world is changing and the screamers haven't grasped that yet. Equally amusing was the screaming to raise rates more rapidly 2-3 years ago to prevent a bubble in housing assets & prices - which in the new world meant longer-term interest rates that were in fact held down by the new structural factor of a world awash in liquidity, credit & leverage; about which the Fed could do little. And ignores the fact that calls for rate increses in '03/'04 would have been in the midst of the start of the Iraq war ! Again the grasp on reality and deep structures is truly astounding here. We MUST understand these deeper structues and currents and how the Fed sees them (much better than the commentariat btw) to understand how the world is moving and how to navigate it. Which is our goal here.

Below the line we'll dive into this in some more detail with charts and pictures and everything and start with a quick summary of the points we'd like to make:

Continue reading "Credit Mess and the Fed: Understanding the Strategic Posture" »

Posted by dblwyo at 02:32 PM | Permalink | Comments (2)

A while back we built a simple little picture of how the credit problems in sub-prime were rippling across the various links of leveraged/structured debt instruments. And how those ripples were spreading to linked cross-markets, e.g. commercial paper, and how other debt instruments were likely to be subject to the same risks of structural breakdowns. The chart at right (which we just re-linked the jpg too [Th:2100]) shows the small rock thrown in the sub-prime corner of the pool and - at least conceptually - the ripples away from. The notion being that as Housing values value and/or ARMs reset more rocks will topple and some pretty big boulders are lined up.

THE question is what's the line up of rocks and boulders in the other asset classes ? And will the ripples from mortgages spread and topple more of them ?

Continue reading "More on the Credit Crisis: the Rocks in the Pond "Model"" »

Posted by dblwyo at 01:57 PM | Permalink | Comments (0)

Seeing the elephant is an old phrase borrowed, I think, from the British Army and used by many armies now and refers to one's first experience of something new and shocking. In their case combat - which is about as shocking as it gets. Fortunately our experiences aren't going to be on anything like that level. But still the Elephant here is learning that for the first time the old linkage between GDP, Profits and organic economic growth appears to be frayed to the breaking point (Dr. Pangloss Treating Goldie: Markets, Profits & Earnings, The Heart of the Matter: Profits vs Earnings ? ).

But first a small confession. My early religious training was in economics and after spending several years as a novice and then a few more in monastic retreat (otherwise known as grad skul) I went apostate and joined the real world. Now economics would tell us that any industry or product that gets a large return/profit must be serving someone somewhere. Yet as the share of Financial companies in profit has gone from 10% to 20% to, in just the last few years, 30% I begin to find myself turning into a modern Physiocrat. They were some of the earliest formal economists and started with the argument, in late 18th C France, that the only true source of wealth was Agriculture. Given the structure of the economy at the time they had a point if not a case. But other sectors like trade, manufacturing and finance were important contributors who's outputs made the functioning of the agricultural sector more efficient - thereby raising overall output and producitivity. Nonetheless I still find it difficult to believe that Finance contributes so much to the effective functioning of the economy that a 30% share of returns is warranted. Oh well...

Back to the Elephant and this time we'll go to the central cathedral of capitalism the Wall St. Journal - specifically it's recent reporting on quarterly profits and earnings. Which, BTW, they report as net operating income, NOT EPS ! 

Continue reading "Have You Seen the Elephant ?: More on Earnings" »

Posted by dblwyo at 08:53 PM | Permalink | Comments (0)

If you look back over the last two Weekly Readers they both might be said to converge on key question - where will earnings go ? Or broken down a little more will businesses continue to generate profits and will those turn into reasonable earnings ? And earnings growth in particular ? Earlier (Dr. Pangloss Treating Goldie: Markets, Profits & Earnings) we'd taken a pretty hard look at that question and found that Profits were strongly correlated with GDP growth and Earnings (ala S&P reported earnings/EPS) were strongly correlated with Profits. It might be worth your time to re-vist those charts and arguments because they lay a foundation for this discussion.

But we're presented with yet another conundrum - if the economy has been slowing why have earnings been growing ? As a partial answer let me quote from the earlier posting:

We can only conclude that with the lid screwed down on spending companies are making plenty of money, grabbing a growing share of the economy and, one guestimates, spending it on buybacks to keep the stock prices up and help out with EPS numbers. Which doesn't lead one to a great deal of confidence in organic growth of revenue, profits and earnings.

Stop and think about that for a minute - earnings may be going up but it's not because the economy or business is doing better. Somewhere under all the large pile of stock prices and reported earnings is a very large elephant. And he wouldn't appear to be a very well-groomed, well-behaved or benign one either.

We're definitely not in Kansas any more - so much for fundamentals. It's all about the finances and cash flow ?

 If you believe that argument, or at least think it raises some serious questions, then we thought it'd be worth looking into some more. Basically when we say growth is not organic what we're arguing is that EPS growth is NOT the result of growth in revenue or profits - rather it results more from throwing cash flow and borrowings at buybacks while screwing down the lid on expenses, hiring and capex spending.

Having set the table let's take a look at what some National Income accounts can tell us about the shares of profit from various sources. An idea we stole from Paul Kasriel and the Northern Trust economics team in their last US Economic Outlook (which we highly recommend reading for this and other reasons). 

So let's go elephant hunting. 

Continue reading "The Heart of the Matter: Profits vs Earnings ?" »

Posted by dblwyo at 01:39 PM | Permalink | Comments (0)

We'll have to see how the various themes play out over the next few days and several weeks. There's a couple of ways to think about this but one analogy I've heard (BigPicture, Minyanville, et.al.) is to think about the market as being lifted by four engines. But unlike a big jet the theory being that all four need to be providing power. Of course what are the four engines is a bit open to question and definition ( Disturbing Trends: Dividends & Earnings):

" Over the past few years, I have noted (repeatedly) that despite record earnings (Quarter after Q of double digit year-over-year gains), increasing dividends, M&A activity and rich Share buybacks, stocks have been very rangebound. The analogy I favor is that each of those four items are an engine of a 4-engined plane. With all four spinning mightily, most indices are about where they were (give or take a percent) 2, 3, or 4 years ago. Only the Dow is above its 2,000 highs.The danger of this four engined craft is that if any of the engines fail, the plane can be expected to lose altitude. Not crash into the mountains in a fiery conflagration, but seek a lower altitude before regaining stability."

 Todd Harrison of Minyanville ( Measuring the market action that props up profits ) likes to look at his four table legs of Technicals, Psychology, Fundamentals and Structure (i.e. Dollar devaluation vs asset deflation). Actually there's a lot to be said for each. And they both make a good checklist of things to think about. Now Todd's column is very recent while Barry's is from lact Oct. which gives us another perespective.

I've also heard the four factors listed as Fundamentals, Technicals, Sentiment and Pscyhology so if we're not careful we'll end up with a 4 X 4 X 4 array of factors - which sounds intriguing but a little hard to work with. Maybe a little simplification and synthesis might be in order ? First off, we're all pretty agreed that Fundamentals are important and they're based on earnings which is in turn based on company performance and the economy.

Continue reading "Models, Metaphors, Musical Chairs and Market Outlook" »

Posted by dblwyo at 08:04 AM | Permalink | Comments (0)

 This started out to be a straight-forward post on the shift from an economically driven market environment to a financially driven one. It's important - and is widely recognized if not diagnosed and analyzed - that "liquidity" is behind a lot of what's been going on. It's turned into a three part set looking at the markets & the economics of liquidity (here ) and on the role of credit and leverage (here). The third leg of the stool that's pumping lots of cash into stocks AND pulling large/huge amounts of stock off the market is corporate buybacks using all that excess case from profits that aren't going into capital spending or hiring. Or dividends for that matter (personally I'd rather get the money back and decide for myself). Just to put it all in perspective, and maybe confirm that indeed things are a little unusual, take a look at the Fed data on "net equity issuance". It looks to me as if it started the '90s in neutral, grew slightly negatively until '98 (from stock options at technology firms ?) and turned back toward neutral. And then started sharply downward in '04 just about the same time the LBO buyout was coindicidently turning sharply upward.

Continue reading "Market Drivers 3 (Buybacks):Investment, Hiring, Nah...Bonus, Bonus, Bonus !" »

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

One interesting "benefit", as we shift from a cash & carry economy to a carry and (created) cash financial one, is that globalized markets allow many folks to borrow in low-rate markets (Japan) and put those assets to work in higher-rate ones (US, but anywhere actually). The Japanese Central Bank is thinking, after nearly two decades, of raising rates but they've got a lot of room to manuver. Meanwhile the European Central Bank and the Bank of England ARE raising rates as their respective economies recover. That's not helping the dollar any but in the meantime there's a lot of cheap money around.

Continue reading "Markets Drivers 2 (Buyouts): the Carry to Cash Economy" »

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