bizzXceleration: Performance, Value and Profit

We're going to take a quick pass thru the economic situation, markets and - picking up on last post's theme's - talk a bit about business resilience or not, as the cases may be, with examples. Last week's payroll employment data seems to have convinced folks that what we've been saying for months about non-existent green shoots, a weak outlook, a drawn-out recovery and a de-leveraged jobless future is in fact what's the outlook. Interestingly you need to tear yourself away from the US and major foreign business and financial news and listen to BNN; in the readings you'll find some selected vidclip URL's that are NOT there by accident and we highly recommend them all but especially the two *** ones. The market has bounced on PEs not on earnings and that's the story of the moment with the longer-term implications of all this still being struggled with. As we've tried to make clear this is a matter of responsive adaptation in the shorter run and adoptive innovation in the long. Also in the readings you'll find some specific cases on how well that's working and the brave new world we're all facing. The NYT did provide a superb graphic slideshow illustrating how a business cycle works which, if you'll click thru on the graphic, you'll be taken to. Watch it and think about it. We've talked about business cycles a lot and even provided a tutorial earlier so were particularly happy to see this; a superb use of new technology that gets the story right (NB: we've also notice that the YoY meme is really getting much wider spread use as well !).

Back to the Future: Employment & Consequences

This little gem of three composited charts tells multiple inter-locking stories with the top part showing the YoY% changes in Employment and Unemployment since 1998 monthly. Like we've been saying, a leveling off in the rate of decline is NOT a recovery, and you can see both the steepness and depth of the decline as well as the slight leveling - though Unemployment continues to worsen. Folks are starting to pick up on the differences between unemployment in folks actively looking for work and those pushed out of the labor force (Many Left Uncounted in Nation's Official Jobless Rate). That rate of unemployment is 16.3%. Those points are reinforced in a longer-term context in the 2nd sub-chart which shows Employment dropping -4%, Hours Worked -6% and Unemployment increasing by 70% !!! If you think the consumer is coming back any time soon think again. Worse yet the 3rd sub-chart gets back to our long-running theme about how weak job creation was during the recent "recovery" (reaching almost -4 million jobs in the hole) and how disastrous it's become. We're now about -12 million jobs in the hole. REALLY think about that - how long will it take to even get back to breakeven ? Bearing mind that unemployment will keep increasing for some time - perhaps thru all of next year ? What can we say except OMG X 2. First time for the numbers and second because almost nobody gets it.

Market Realities Return

The green shoots and China will save us theories led to a major bear rally between March and May though we've gone nowhere since then. In the last few days (largely on BNN again admittedly) we've heard pundit after pundit talk about the same things we've been jabbering away at. And in the last week we've seen a bunch of market analysis on the likely breakdowns in the market, for which you'll find another bunch of URL addresses to reinforce that point. If there's one must watch please watch the online vidclip presentation of MarketClub's tool demo assessing the SP500. Wonderful. Here's two SPX charts compounded to make our points, which are nearly identical. As you can in the top chart the critical level is about 880, which we busted yesterday on weak volume. If that keeps up, depending on how earnings run, then we can expect things to run down. But where ? In the lower sub-chart we look for some natural limits using Fibonacci limits. A first bottomline here is that you should be on the sidelines - as we said last major market post - take your money off the table ! The next stopping point is ~840, which we consider likely. If that's breeched the downward momentum will build and running down to 780-790 is highly likely. Depending on how things look, the news is running and what the sentiment is that might be breech as well. If that happens then we're back in the where's the bottom in a long-run sense. A question extensively previously considered but if you want to look at an updated long-term chart click thru. Which we recommend and you can't say you haven't been warned ! :)

Business Reactions and Performance

 Recent earnings estimates have been extensively revised downward, which you can see by consulting the S&P Earnings Estimates. They're calling for earnings of $55.54 and $74.02 in '09 and '10 with PEs of 16.55 and 12.42, which leads to estimates for the SP500 of 919. In other words a flat market at best, though if you use our Graham-Dodd approach lower PEs, like 10 or less, are appropriate. But even so that's telling us two major strategic things, actually three. 1) There's a lot of risk in valuations, 2) the recent runup was the limit for two years (and possibly more if you go with our pessimistic outlook) and 3) real earnings in a terrible economy are going to be the critical determing factor.

Gee, somehow or another we've circled back to business performance, short- and long-run. Our recurrant mantra is understand the strategic context (Economy and Geo-Politics), understand how each Industry is trending and then understand how each company is dealing with the things it cannot control and the things it can, now and for the future. There's a vidclip in the readings of Ivan Seidenberg being interviewed on Rose which is as perfect an exemplar of this sort of balanced thinking. The take on the current secular trends and how Verizon is being positioned is outstanding but the look ahead to the worldwide future of the Telecom Industry is worth the time.

In the readings there are some specific examples for your skimming pleasure. The section starts with some examples like a Greek Shipping company as well as Apple, talks about the Finance Industry which is the exact opposite of an industry adapting well. They're still locked into the way things were, not the way they are or will be. The lack of effective response and thining ahead can only be described as stunning. Then we have Rio Tinto, the Australian mining company who road the commodity boom into worldwide acquisitions sprees starting to spin off pieces as the result of the downturn. Talk about foresight and mis-readings ! NOT !! We spent a whole long post taking apart the Auto Industry but the outlook for sales is abysmal but the triple tsunami is the growing capabilities of the rapidly developing world, e.g. China's acquisition of Opel and the fact that India has turned out a great car in the Nano. Sadly it would appear that the kind of innovative adoptiveness required is more on display outside the developed world than in it. A theme enormously reinforce by Saab's moving to migrate production of the Grippen to Brazil - really.....really....really think about what that says not just about opportunity but about capabilities. Aircraft are among the most complex and demanding products in the world - advanced fighter aircraft are another order of magnitude. Meanwhile pharma sales are going to decline in the developed world so Big Pharma is looking outside the US, which has been its development base since it's founding. Now the Rapidly Developing Economies are very exposed because they are so export oriented to the downturn and future weakness. But in the long run.... ? Well...we'll leave it at that because we think the implications are both obvious and taken apart in depth and detail in the last post.

Continue reading "Brown Shoots, Weak Markets, Resilient Business ?" »

Posted by dblwyo at 11:41 AM | Permalink | Comments (0)

Another tumultuous week or more in the markets, the economy, the public policy arenas and the general public (do the words, "kill all the financiers, the devil will know his own" as a paraphrase of several historical quotes ring any bells ? People are very angry and justifiably so. We're going to come back to Technology while we review the markets, economic and business situations and use that as a set up for a follow-on post on the public policy and that anger. Which, however justified, is also very dangerous. The readings reflect the agenda of course but start off with a little history review by sampling and excerpting some previous posts from Jun08 to Feb09. Partly on the "told ya so" but mostly to hold ourselves accountable AND to see how past prognostications held up. It's called back-testing and, on the whole, we under-estimated the depth of the breakdown BUT called the trends, outlooks and structural weaknesses pretty well. In other words we didn't drink our own koolaid as much as we should have. But hopefully that history review strengthens our arguments here !?

Start with the Markets

We've got a lot of ground and want to minimize space so the graphics will be a little shrunken (click to enlarge). The UR sub-chart shows a 5Day intra-day chart and the impact of the Fed's $1T quantitative easing this week....which had disappeared by COB Friday ! The biggest policy move the Fed has undertaken in generations peters out in a trading day !! Now IOHO the markets are/were in a bear market sucker's rally and had reached the end of the upward in any case. The UL corner is a 3Mo daily chart and uses some more technical indicators to map this out. Notice that the Slow Stochastic at top (the sine wave indicator) calls these turning points very well. Super-imposed over the recent down and up cycle is a natural rythm indicator, the Fibbonacci (using naturally occurring patterns in number theory and nature but widely recognized by traders so self-reinforcing) that shows the Fed uptick failing around 800 and the bear rally faded and returning around the magic 775. The question then becomes if this doesn't break back above 800 on re-testing where away from there ?

Look at Economic Realities

A friend reminded us of another famous Warren quote: "in the short-run markets vote but in the long-run they weigh". In other words Mr. Market is more a giddy adolescent going with the popular opinions but in the long-run adult sobrieties return (particularly if the mandantory 12-step programs are working right) and judgments based on best interpretations of fundamentals rules. And by fundamentals, in these circumstances in particular, we mean economic fundamentals at a cyclic, structural and policy-driven timeframe. One such deep reality is Employment, the engine that drives Consumption which in turn drives the Economy. In the RH chart the depth and duration of the Employment downturn is compared across the post-War cycles. Obviously we're exploring dangerous new ground, and extrapolating by curve-matching, are very earlier in what promises to be a steep and long downturn. The LH charts look at long-term trends back to 1980 and a key measure is net new job creation in the aggregate; that is jobs created > 150K/month. This was a weak and jobless recovery because organic growth never took off but as you can see net new jobs is as abysmal as it's been in nearly 30 years !! (NB: this means the Administration is right btw - unless we get thru this downturn AND get back on a sounder strategic foundation the economy will just continue to weaken). We won't dive into but will point you to this chart borrowed from CalculatedRisk for the Strategic Housing Outlook. Don't expect that to repair anytime soon either.

Back to Markets: LT Refresh and Review

The joint answer on Markets, both from a technicals and fundamentals basis, is that seeing a 4-handle on the market should NOT come as a surprise. A point we re-made as recently as March 1rst but have been raising for some time (cf. the history review). We consider that highly likely no matter what happens but containing and repairing the damage and then returning to growth depends on three critical factors: 1) repairing the credit markets and re-factoring the Finance Industry, 2) re-stimulating the Economy and 3) re-factoring the the foundations of the Economy onto new long-term sources of growth.(Disruption vs Innovation: Change, Response, Resilience) If you look back at the first market chart and consider the bottom half what you see is a bear-market process that worked out from Oct07 to Sep08 (not shown) that then imploded as the credit markets broke down. Then a new equilibrium was reached (the "Tradeable Box") that was broken earlier this month when the real economic realities sank in. We're not convinced that it's sunk in very deeply however...hence the 4-handle warning.

Naked Swimgers: Business Principles vs. Performance

We left the Freudian typo in the header because our fingers led us from the intended "naked-swimmers" to "naked-swingers"; as in people who substitute immediate gratification for long-term value-creation based on principle. In the final two readings section we have a few excerpts on basic principles of business management and leadership that have been left in the closet, so-to-speak, for years. Now we're going to find out who the good companies are who've been following them or those who're good enough to self-repair. The two key blog posts are from our e-friends Seth Godin and Bob Sutton. Seth sketches the critical concept of 1) focus on value-creation and 2) the execution plan to make it happen while Bob adds 3) make sure the company is the kind of place people want to work for where people are treated with respect and held accountable for their performance in a fair and just environment. That's how you get high-performance in bad times ! (Aholes, Shirkers and Performance: a Draft People Principles Policy)The sad and really....really dangerous parts of this are that many executives were caught flat-footed and ill-prepared and are now shell-shocked and slow to respond. They're scrambling to catch up to a dangerous situation, still don't get it and the "enemies" decision-curve is faster and tighter than theirs. (Good Boats, Good Captains: Applying the Investment Mantra for Profit, WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize)

The two most critically important readings are the excerpts from Paul Kasriel of Northern Trust in recent Econtrarian essays. The first tells us what really went on with economic growth and public policy in 1929-39 while the latter debunks (destroys) the mythologies of savings, thrift and long-term economic performance. Your take-aways should be 1) stimulative fiscal policy is a survival necessity but 2) if we can lay the foundations of long-term growth properly then, as Consumers shift from Spenders (Swingers) to Savers we'll fund a healthy growth path like we haven't seen since the 1950s !!!

Continue reading "History Review to Look Ahead: Markets, Economy & Business Trifecta" »

Posted by dblwyo at 08:10 AM | Permalink | Comments (0)

We've titled this post a snapshot, which it is, but have a couple of other intents as well. As a snapshot we've collected the Economic (US, World, Policy), Markets (Outlook, Strategies) and selected Business news together so you have a single perspective or dashboard. The second purpose is to build on the prior four posts to reinforce the key points from 1) it is possible to use economic/business analysis to predict market trends, to 2) the state of the economy (worse than anybody was crediting it as usual) to the centrality of business performance and good executive leadership (as well as the impact that malfeasant leadership has on company, industry and - NOW - economy-wide performance). As two builds on one we also circled back with an implicit update of some key posts, thinking of our mantra and the need to understand Industry trends. As you go thru the readings below, which follow that organization, you can slot them and also backtrack key relevant prior posts. For example in poking at Credit Markets continuing troubles we point back to some key posts and ditto for the Auto, Retail, Tech and Energy industries as well. Our hope is that you'll take a little time to at least skim the readings (click on the title to go the original) and fit tham back into this skeleton and then wrap the machinery around them. A really critical point we'd like to re-iterate comes from reading the David Levy interview wherein he points out that they knew that Housing was busted in '05 and expected a downturn in '06 as a result but were surprised because the snakeoil salesmen kept on pumping out mortgages, MBS's, leverage, etc. To the point of our last post note that folks like MER, LEH and C went triple-down in '06 and '07 forming new departments to put more into an area that was clearly going to blow up. Part of the reason was in the flood of chaotic headlines it's nearly impossible to filter and structure the noise into signal and then build up a coherent information picture. So, at the end of the day, our real goal is to help build the Dashboard that allows you to do that, as the start of the readings point out with listings of prior summaries !

Anyway, and pardon the compression this time, but we're going to invest most of the rest of this post in updating some econ charts.

High-Frequency Update: Warren Says..."went off a cliff"

We closed the last post with a composite of the HF indicators we track and hadn't updated since at least Nov. on the grounds that the big picture and lower-freq stuff was enough, e.g. GDP. Anyway Warren - no kidding ! In the UL corner Consumption indicators are now all pointing negative (we've had to change the scales on all these charts btw); real retail sales in particular is bad. But before you go thinking PCE is o.k. look at the UR chart. Worse the Investment and future Demand indicators are also tanking, except for real Wages.

Tanking Indeed: Economy Since 1960

Before you go thinking that's real good news and/or, say, the drop in Consumption doesn't look bad compared to that in Sales take a look at this next composite which shows Real vs Nominal Sales (so much for Inflation), Sales vs Consumption and Consumption vs GDP. Guess what folks they're all diving off the cliff as badly as they've done since 1960. In the top and middle charts you can see Sales and Consumption have already dropped as much or more than at any other time in that period. If we're right about our position in the Business Cycle - that is we're still early - we've got a lot longer and deeper to go. So in the bottom chart you can expect GDP to keep on truckin....or divin as the case will be.

The other side of that coin is that while we may get a Bear Rally here (hard not to mention that today ain't it ?), and clearly the Markets have desperately wanted some excuse don't go going long. After all our discussions of reality, Triage and kabooms we were very amused to see that the WSJ had a major attention grabber with "Dow 5000 ?" and the Street's strategists and soothsayers have started admitting that earnings are going to be abysmal (~ $40 ?) and PEs are going to 10 or worse. Gee, where have we heard all that before. Even our boy Cramer burbled something like Dow 5235 we seem to recall.

That also means that the pressures on businesses to get their acts together are just going to mount and mount and mount. It also means that the primary driver of the Markets and the Economy right now are really big picture stuff, that is policy. Without the Stimulus package plus the efforts to rescue, re-vitalize and re-engineer the Credit Markets and the Financial system we really would be looking at GDII. What's really puzzling and amusing about all this is all the "not in my backyard" talk from the Street Denizens. Best exemplified by Rick Santelli's "Chicago Tea Party" rant here "reported" by Jon Stewart on Comedy Central. Aside from the readings below on policy topics we aren't going to dissect this any further - except to say the "talking your book" or pursuing your narrow self-interest at the public expense seems pretty obvious. (Predator Prey Symbiosis: Crisis, Leadership and Values) And VERY ironic coming from a bunch of Traders (and you can figure out what Freudian typo we are tempted to there) who've spent the last decade benefiting from all the stuff they're no attacking.

We are also not going to take another deep dive on the markets except to say, first, that we stand by our last major post on the subject:Round & Round She Goes...Paying the Market Piper (UPDATE).  And to point you to this chart where despite today's euphoria things aren't looking all that good. Though personally we desperately want a bear rally that's at least 20% so we can re-position ourselves not having read our own tea leaves on the Feb. 9th tankings and being afraid to get in after it got going downhill so fast and hard.

No, what we'd really like to ask you to do is pay close and careful attention to the excerpts in the Markets readings that talk about a) not yet, b) companies are getting hurt we didn't expect and c) (MOST ESPECIALLY) how to start thinking about finding the good companies and putting on your Watch List. Which leads us to the Business section readings, which try to span the waterfront as examples of this sort of thinking from Finance to Technology. And we repeat - you'll find detailed deep dive links for most of these.

1. Finance is in the worst shape it's been in and has gotten kicked worse than Tech. Every rule of thumb that was built up over the last 30 years is now out the window because a new industry will have to be re-built from scratch.

2. Retail and Consumer Products (Circuit City and Sony): if there's a poster child of how not to do it in the last ten years CC is it. Dig into their decisions and find the companies who are doing the opposite. After what is now years attempting to overcome internal resistance at Sony Stringer is finally getting the oomph he needs to do a Ghosn. We'll see whether or not he can pull it off but talk about internal agendii and organosclerosis setting the stage for a possible near-death experience...wow and whee. Can you imagine Sony mimicking CC ? Think about that for minute !

3. On the other side of the coin Mullaly at Ford has a worse external problem but started doing the right things early - but pay close attention to the article. His biggest problem was persuading existing management to become responsible adults and start telling the whole truth and nothing but the truth. Of the Big Three F has the best chance of pulling off survival in our humble estimation but is going to have to do some really good storm-sailing. BtW - the three prior posts on the structural deficiencies of the Industry might be worth your while as specific diagnostic tools for them and generally for what it takes to be a successful manufacturer.

4. The next stop is the Oil Industry which is, this time, trying now to NOT do something stupid and lay off all the skilled people they let go last big implosion that hamstrung them for decades. Our exemplar of a perfectly positioned company (Oil or any other industry) is XOM which didn't go running after deals or reserves and is no sitting on a huge cash hoard which puts it in the position to snap up those all over. Brilliant and disciplined - see it is possible to be forthoughtful, tough, brave and make the right value-creating long-term decisions. That btw makes XOM a real candidate for your wish list.

5. And finally Technology - which has never really recovered from the Tech Bust and is now facing the severe downturn we tried to warn about last August. Well....we'll see who's been swimming naked and who've been getting in shape, won't we.

So keep your powder dry, watch out for hostiles...there's a passle more coming down from the Hills and start looking for opportunities. And to keep abusing the metaphor...hope enough Calvary get here in time !

Continue reading "Snapshot in Time: Economies, Markets, Businesses" »

Posted by dblwyo at 01:42 PM | Permalink | Comments (0)

Continuing on the theme of slowing capital spending combined with increased pressure on foreign economies we turn our attention to the Tech Sector. And with the NDX down 1.4% so far today on the heels of Apple's surprise this might be even more timely than anticipated - purely accidentally of course. Which nonetheless reinforces the point that, at the end of the day, the state of the economy and general business matter even for a superb innovator like Apple. If this keeps up consider this an early fore-shadowing of a future buying opportunity.

Just to put a point on it consider the accompany multi-company chart graphic, which shows pairwise comparisons of key tech bellweathers. The top contrasts the NDX with CSCO where Chamber's honesty and directness has led to a more serious decline in Cisco's stock than many techs so far. Meanwhile the new and the old (AAPL, IBM) show two companies that have held up very well but highlight key concerns with consumer spending domestically, the likely downturn in capex and the issue of foreign demand. Which leads one to the next pair of GOOG and MSFT both of which blindsided with lower than expected performance. The final pair is also a new and old contrast in the software business showing Salesforce.com vs SAP. Both of which holding up well. Lots and lots of issues hiding there as well that get to the heart of the Tech outlook. Besides the general the key question there is how will spending on softward hold up as the economic malaise grows and extends worldwide ? One might suspect future surprises in store - unless of course the thesis that software spending saves money in a downturn holds it up. Not a thesis btw that's historically well-grounded. Which leads us back to yesterday's international economic outlook summary (Economy (Int'l): Re-coupling Redux and Deterioration Accelerations).

How all these conflicting forces play out is illustrated after the break with another set of worthwhile readings excerpts, starting with Cisco but then comparing and contrasting INTC vs AMD. There you get an almost perfect contrast between innovative strategic transformation PLUS superb execution and scale verses self-inflicted foot-shooting. But the real poster child for bad execution is Sprint which continues to suffer tremendously from terrible customer service problems.

The other interesting pair of excerpts is on the transformative nature of Apple's recent iPhone announcements which change it from a very smart customer gadget to a new computing platform. A fundamental game-changer that's not being widely recognized as yet but calls for strategic re-positioning on the part of all the players involved. Jim Jubak is one of the few widely read commentators who gets it and his discussion of GOOG vs NOK vs AAPL highlights some interesting aspects. And creates a list of future buying candidates that you need to table for evaluation.

The final excerpt discusses Kleiner's strategic shift to green tech investing and away from its' traditional base - which could serve as the exemplar for the paradigm shift emerging in the VC community and is worth thinking about. 

Continue reading "Readfest(Tech Indstry): Playing it Again, Same...oops Sam" »

Posted by dblwyo at 11:18 AM | Permalink | Comments (0)

Having reviewed Markets and the Domestic Economy that led us to the on-going disruptions in the Finance Industry. Notice despite decent JPM performance and not bad from Wells Fargo that a lot more results aren't as encouraging. Not to mention in other industries. Nor the collapse of Indy-Mac, the "bankruptcy" of FNM and FRE and the on-going threats in the Auto Industry. Most of which is "dashboarded" by this composite chart of some key companies and industries (GM, F, Airlines, Hombuilders, Retail and the Con. Disc. sector). Again what's continuosly surprising from these charts is that folks are surprised. At the same time they illustrate several key themes we've hammered more than a few times. Key ones of which are a) business performance matters, incredibly much.(Business Hilbert Problems: Fundamental Factors of Performance) And b) the Economy-Industry-Company mantra is alive and well. We've previously dissected some of these industries in particular, for their own sake and as representative exemplars of key strategic issues (Retail Industry: Plus Ca Change...or Bend Over and Kiss...,Once More Into the Breech: 3 Decades of Auto (Industry) Delusions, Life and Death in the Air: Carriers, Manufacturers, Realities). After the break you'll find these stories, trends and arguments carried over into the Industrial Sector (Dow, GE, aircraft manufacturing), the Auto Industry (Honda, GM, BMW), Retail (Saks, Starbucks, Tesco, office-supply) and logistics services (FDX/TNT).

GDP Components and Outlook

As you skim over these excerpts we'd ask you to keep the accompanying chart on YoY changes in GDP components in mind. It offers, IOHO, some deep insights into the pressures that are slowly emerging and evolving on each of the major sectors. Just as a reminder the top sub-chart shows the YoY changes in each component while the middle one shows the % contribution (impact) on the YoY change in GDP. And the bottom shows the running total. Look at Consumer Spending for example which has been shrinking rapidly and who's contribution likewise. The two most important things to think about are the decrease in Capex as businesses tighten up - what one would expect as capital spending begins to follow the normal cyclical pattern - and Net Exports. Which have really been the sole source of relatively good news. Which raises the interesting question of whether the accelerating downturns in foreign economies will allow that to continue. Which we don't think it will - bad news for GDP in general but specifically for the Tech Industries who've shifted so much of their business offshore. And one then has to ask what're the implications for the Tech stocks, eh ? As well as any realistic grasp of these trends is priced into the markets !

Continue reading "Readfest (Business): Back to the Future, Revisiting Old Themes" »

Posted by dblwyo at 01:33 PM | Permalink | Comments (0)

Well we've had our apparantly isolated opinion about the economic situation and outlook - that is we're not in a recession, we are early in the cycle and the real downturn is just beginning. Also that Housing has a long way to go to bottom out, the credit crisis has morphed into a credit crunch and credit restraint will link and feedback with bad loans to accelerate a slowdown. A view shared only by folks...never mind...you've seen our little list. Anyway just consider the feedback loop implied by this chart as loan standards are growing increasingly stringent and put it together with Dimon's comments.

But apparantly it's really....really official now because Dimon of JPM has basically come out and confirmed all that. Actually we're sorta serious - we're just watching the game with our little white chip. He's got a big stack of blue and red and gold ones. Here's what Magister Jaime had to say:

JPMorgan Chase CEO: Recession is Just Beginning JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning. "Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started." "We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."

 After the break we've got our usual collection of readings excerpts for your skimming pleasure starting with Prof. Feldstein's point that .6% GDP growth was QtQ changes and doesn't mean that in fact in Q1 things didn't slow down rather abruptly and drastically. A point we'd support from our own figures and stats btw. The other recent economic indicator that got people all excited entirely out of reason was a monthly drop in jobless claims. Below you'll find an interesting chart from Northern Trust that pretty well shoots that one in the head. As well as a superb Economist must-read on the state of the Housing market. Aside from being short and very nicely done it's the first major MSM piece we've seen the recognizes what CalculatedRisk and a few others have been telling us for some time - there's a long way to go in the Housing downturn...especially measured by prices.

There's also a section on the World Economy where Europe is beginning to slow appreciably while the credit crisis impact on lending appears to be spreading there as well. The last few readings speak to some major trend issues that are really worth paying attention to. First off the other data that was misread was exports where growth appears to be slowing. But more importantly are two big structural changes that are beginning to emerge. One is the confluence of major problems that need worldwide management to deal with, meaning that all the risks are increasingly on the downside. The other deep changes is the continuing slow erosion of the dollar's status as the default world currency. This won't happen overnight or even in a few years but it is beginning with possible serious consequences for our freedom of manuver in monetary policy. 

Continue reading "WRFest 11May08(Economy): Jaime Spoke, Anybody Listening ?" »

Posted by dblwyo at 03:24 PM | Permalink | Comments (0)

With us getting swamped with this and that we didn't get the separate Int'l economic news up last week so this is a double dose. On the other hand that leads to the concatenation of some very interesting stories. By this time we'll presume that no reader here is a fan of the de-coupling thesis ? So the real question, aside from the minor detail of horrendous inflation leading to exponentially rising food prices and socio-political collapse (so much for the end of History, too), is what's happening ? And where are things headed ?

Below you'll find stories on Europe, Asia, Japan, India, China and Turkey. In literally a matter of a few weeks various authorities have gone from benign and sunny on Europe's outlook to seeing a slowdown stretching thru at least '09. Compounded by accelerating inflation which'll make it difficult for the ECB to help out, as if it would, with interest rate cuts. Sooner or later though they'll have no choice...which'll help the dollar enormously.

Similarly Asia is beginning to experience it's own brand of turmoil. Only partly from the growing US slowdown, and benefiting from avoiding much impact from the credit crisis. Instead they're dealing with inflation, and surging oil and food prices. Oddly we're on the ten year anniversary of the last Asian crisis and another looks to be shaping up.

Japan has never managed, as we no doubt all know, from its' "Lost Decade" which is now on its' weigh to being the "Lost Two", but kept hoping for inflation to help pick up interest rates and prices and start the monetary machinery moving more naturally again. Well they've managed to start getting some inflation, but just like the rest of us it's for the wrong reasons. 

All of which doesn't bode well for either India or China. Both of which are experiencing all of these problems (slowing external demand combined with growing, disruptive internal problems) but now being exposed to deeper-rooted structural challenges. In India's case that means rising inflation and, a natural result of the growth adjustment process, a growing shortage of skilled labor. In the long-run that's self-correcting and a very good thing. In the short-run it maintains a low-quality and high-cost infrastructure.

China's the growing wild card in a way, sharing all these problems as it does. If it manages to keep the wheels on in a few short years GDP as measured by purchasing power partiy would make China the largest aggregate economy in the world, though not on a per capita basis. But aside from escaping from all these other problems it's facing major institutional adjustment and structural challenges.

Finally Turkey, also facing the general conditions, has rapidly shifted from poster child to not-wanted poster as internal debates over the future of the state and nation have started making investors very nervous. So much for ignoring geo-politics, eh ? 

Bottomline here is that it turns out nobody's immune. My how things changes...and how fast they change. 

Continue reading "WRFest 2May08(Int'l): Re-coupling, Slowdowns & Mal-Adjustment ?" »

Posted by dblwyo at 03:50 PM | Permalink | Comments (1)

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

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

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

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

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

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

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

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

Continue reading "WRFest 27Apr08(Tech Ind): Innovators, Survivors & Also-rans" »

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

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

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

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

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

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

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

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

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

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

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

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

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

Continue reading "WRFest 26Apr(Economy): Between the Gust Front and the Storm" »

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

Welll the arguement is running, on the one hand, that we're getting mixed messages on the earnings front(s). We're not so sure about that. Rather it might be that it's early in the downturn on the one hand. And on the other they aren't being parsed out very well. In fact that explains the headline because all too often analysts and other forget how these things work at their most basic. Earnings = Profits. And Profits = Revenue - Costs. The two things that aren't generally being asked are what's going on underneath that with currency translations and with sales. Consider Revenue = Price X Units. Now the few good earnings stories, so-called bearing in mind for example Intel's expectations adjusting manuvers beforehand, turn out on inspection to have more to do with foreign sales benefiting by the drop in the dollar. So the real questions are what are earnings quality when that's allowed for ? In other words what were unitl sales abroad and domestically ? What prices did you get in local currency terms ? And that also should lead one to ask how're costs doing ?

Below we provide some excerpts on general business conditions, including Goldman's very negative outlook and the rising risks of bankruptcies and then then look at the Materials and Manfucturing sectors. The themes we're seeing are that companies with significant foreign sales are getting major currency translation benefits but real sales are less clear. Those more domestically focused are experiencing the US downturn which is likely to catch up with the foreign revenues (units) in the future. At the same time everybody's experiencing rapidly rising costs which are difficult to pass along. So for example Aloca took a big hit. Unless of course you're in industries where demand > supply and you aren't subject to so much pricing pressure. Surprise, surprise that describes many of the materials companies. On the whole that all suggests that domestic earnings will continue down with the downturn while foreign earnings are exposed to the same factors in the future. And everybody's exposed to severe cost pressures.

The bottomlines are just that - few fancy manuvers left. Now it's about capabilities, good products, good management and execution. We're likely to see some severe sorting going on here between survivors, hangers on and the walking dead. The winners though, ah that's another question. Keep an eye out for those. (Performance Assessment Basics: Five Fundamental Factors)

Continue reading "WRFest 20Apr08(Business): Price X Units - Cost = Profit" »

Posted by dblwyo at 10:31 AM | Permalink | Comments (0)

Well the markets are just roaring ahead today, and really thruout the week, despite the fact that not only was there no good economic news it was uniformly bad. One possible interpretation is that we're so jaded that our awareness has gone numb. Another, of course, is that the recession is already priced in. A third would be that that there's a lack of grasp of how serious this is, how long it might go on and what the faultlines are that open us up to other risks. If you've been reading along you know we're in the third camp. The natural consequences of this is we view this uptick as a bear market sucker's rally. And that we haven't begun to price in what's coming. What we think is going on is that, despite an excess of R-word reporting there's a pretty complete lack of grasp of the structure, patterns and timing of how a recession plays out. As we pointed out in the prior economics post (Econ Indicator Update: Real Sales -2%, No Recession, Yet !) we're definitely not in a recession yet but real sales and other indicators have turned sharply....sharply down. In another context a friend asked me why the MSM media wasn't reporting on the facts as they are and interpreting the context. Aside from having no good answer we'd guess it's because reporters report not analyze; and they report on that day's simple news. The trick is to build a set of filters that sorts and aligns all this flood of raw data into a coherent whole so you get an idea of where everthing fits together. Taking a systemic view in other words and then being systematic about executing against that view in data collection, analysis and interpretation.

With that in fact, since there's no more major economic news below the break is our collection of excerpts for this week. As you'll guess there's continued weakening in the core economy (Beige Book, et.al.) particularly in real sales and in indicators of future demand (wages + employment). beyond that Housing indicators continue abysmal and worsening with more to come. In particular we point at CalculatedRisk's dissection of the March selling season which has gotten off to a worse than abysmal start. The excerpts end with three stories on strategic factors that you need to take a deep breath, step back and really think about. Commodities pressures will continue for years (and as we pointed out in the prior post on the In'tl Economy there are major cracks metastasizing around the world). Further it turns out that we're far from out of the woods on the credit crisis. And the NYT put up a great article on how we're already seeing severe reductions in hours in employment - the classic harbinger of doom to come.

Continue reading "WRFest 18Apr08(Economy): No Good News in Sight" »

Posted by dblwyo at 09:00 AM | Permalink | Comments (0)

As usual there's a lot of tech and related news so we've accumulate and sorted key stories and prior posts that span the suddenly exploding Yahoo Wars, the search wars, iPhone news and rippled effect changes in the telecom, media, entertainment and related distribution industries. It's kinda hard to sort it all out and put it into an organized context but we'll take our best shot. Ram Charan had an interesting article (When -- and How -- to Reposition Your Business) on one of the most fundamental strategic requirements of business - looking outside the business and re-thinking it when things change. And they're changing enormously and rapidly across multiple industires.

Telecommunications is seeing the bandwidth wars between cable and traditional providers with alternatives coming up fast. New "phonelike" platforms, e.g. the iPhone, are going gangbusters AND forcing major re-thinks of the traditional business model, at the heart of the Yahoo discussions are two things. First off, and let's not kid ourselves, was a profound lack of execution on a large and rich portfolio of sub-businesses. And second the fundamental debate over getting and monetizing eyeballs. Yahoo's model was create attractive content and then DISPLAY advertising. Google stumbled into the alternative of embedding advertising in search and the brilliant notion that they could collaborative with any and all content providers.

Meanwhile in the last week old media has finally really, truly been heard form. Not only did the Yahoo/Msft contretemps boil up and over but all of a sudden the promised disruptions of old media by new took on new life with Time-Warner's and Fox's entry into the bidding wars. This is a cusp-point SEE change that we've been waiting for since 1995 and the development and distribution of content will never be the same. Media is beginning to re-think itself.

And two of the major changes enabling and driving it are the sudden appearance of new platforms that are alternatives to the ones we're all used to. The iPhone being the preminent example but the gaming industry, which combines platforms with content, being another and bigger one. Which is also driving enormous changes in distribution. And in the entertainment business that means re-thinking and re-structuring the networks. In parallel the other form of distribution is the retail channel which is experiencing very hard times as the steady stream of profitable new consumer electronics drys up. So at the end of the day we have five major industries that are going thru huge disruptions with new value propositions, strategies and business models to be developed and established. And with a profound dearth of good operating execution on the old models, which contributed to the problems, and no apparant clues as to what the new operating models should be let alone examples.

These are not critiscisms per se, by the way. They're observations reflecting a natural state of affairs that ALWAYS results when new technologies, products and services emerge. Cast your mind back to when mass-market newspapers took off in the 1890's - how long did it take Hurst and Pulitzer to develop new models ? How 'bout when radio emerged in the '30s and the models had to be re-thought ? And again in the '50s in the early days of TV ? Everybody always started with adapting what they knew to the new formats and capabilities. And then slowly evolving more effective and efficient approaches.

We're in the first inning of what promises to be a long game. And an early season game in what will be a long...long season. Now that the bigs have emerged from their cocoons this'll get really interesting. 

Continue reading "WRFest 13Apr08(Telemedia, Entertonics): Let the Wars Begin" »

Posted by dblwyo at 07:44 AM | Permalink | Comments (0)

After the break you'll find an interesting set of compare and contrast stories over the week starting with the one suggesting we look beyond the recession for strong stocks and good companies that will hold up in a mild downturn. Double Oops ? Then there's the one surveying the Polyannas who think the credit crunch has started winding down. Maybe but not only is Citi selling $B of leveraged loans at distressed prices but an inside the finance industry trade journal mentioned, which the mainstream business press did not, another $17B writedown in Q1. And we have the problem that yet another obscure debt instrument is turning sour and the overall credit markets continued "challenged". You'll notice btw that all the Markets news this time is by and large about continuing disruptions and threats to the credit markets, not the markets per se.

Just in case you missed it we'd like to draw your attention to a little piece we worked our little hearts out on: Long-term Market Performance: It Sure Ain't What You Thought !. Start there for a real compare and contrast between real market performance and what the talking head outlooks are going to be.

Continue reading "WRFest 12Apr08(Markets): The Fat Lady Missed the High Notes ?" »

Posted by dblwyo at 08:31 PM | Permalink | Comments (0)

As the de-coupling myths further unravel we're starting to see a wide variety of consequences around the world and on many different levels and fronts. In an earlier post (WRFest 6Apr08(Economy III): International Ripples to Faultline Cracks) we used a conceptual chart on the four sets of inter-related geo-political factors that investors must always been aware of (we call it the 4-Quad Chart) but the "cartoon" at right from recent Pulitzer Prize winner Mike Ramirez puts that abstraction more simply, clearly and bluntly. Now to be fair that's not the only thing going on nor is it the primary driver. But rising worldwide inflation driven by a combination of growth in the developing countries, leading to highter commodity, energy and food prices, and these kinds of policy errors is putting enormouse and accelerating strains on countries around the globe. Which brings us full-circle back to geo-political problems. Put the Social, Economic, Political and Technical issues to watch together with the strains that Mr. Ramirez puts so bluntly and what do you have ?

Here's what we see so far.

Continue reading "WRFest 12Apr08(Int'l Econ): Decoupling Myths to Devolution Fautlines" »

Posted by dblwyo at 07:46 AM | Permalink | Comments (0)

Since I started this news clipping service the amount just keeps climbing from the original 4-6 pp/week for all topics to about 10+. Only this time there's so much it turned out to be 14pp. of clippings. Ouch. So it seemed like a good idea to get an early start and start putting up the chunks early. Not quite the plan but then life is what happens, right ? Though it was a great temptation to have a focused look at GE's earnings after yesterday's long post/readings analyzing the situation. You'd almost think we arranged it but Jeff and I never did so much thing. A couple of key observations though - GE operates across a lot of industries and geographies. If you take a look at the details you get a pretty good sense of where things are at. More importantly GE generally "manages" its' earnings very carefully so the surprise is even bigger than you know. Here's the real kicker though - GE was pretty sanguine last quarter despite various folks who were suggesting this was early days but you could hear it coming.

In other words if you don't think the performance of the economy and earnings are strongly linked we think our case just got a great real-world test. Go back and skim yesterday's post - why were analysts so optimistic ? Because they aren't paying attention to the train ? Why is executive management telling the analysts to be optimistic ? Because they're looking at this quarter's results rather than looking at the wind, waves, currents and storms warnings. Remember when Cisco was going to ride out the Tech bust ? If not look it up.

Continue reading "WRFest12Apr08(Economy): Here That Train aComin ?" »

Posted by dblwyo at 06:47 PM | Permalink | Comments (0)

My favorite pair of lines from the movie War Games is the closing and the key kickoff lines. The latter was, "let's play global thermonuclear war" and the closing was "how about a nice game of chess ?". Unforunately some of the latest news puts us closer to WldCon2 (for World Economic Condition Two, analogous to DefCon2 - a state of high alert with the bombers on the pad with hot engines) than to WldEcon4/5 where we'd like to be. The reason - well for one thing this last year has exposed some of the serious socio-political fault lines in the two big developing economies with China's winter storms and India's near-riots in the farming regions. Recent news is also not encouraging with the recent civil disorder in Tibet growing and spreading to other ethnic and sectarian minorities. The problem is that these sorts of things threaten the legitimacy of the state, which not being based on representation nor the "Mandate of Heaven" and having abandoned its' religion (Communism) is extremely vulnerable. Now however rising energy and food prices are beginning to threaten widespread civil disorder in many countries. While to us this may just be higher prices in the markets and pinched budgets these issues are still literally life-or-death for many. So we're re-posting an earlier chart to remind everyone that these geo-political forces define the ecology we all have to survive in. And for the first time in 20-30 years we're seeing serious structural faultlines get shaken fairly badly. And think about what we're implicitly comparing it with there.

Continue reading "WRFest 6Apr08(Economy III): International Ripples to Faultline Cracks" »

Posted by dblwyo at 08:00 AM | Permalink | Comments (0)

Another big piece of economic news from last week were the proposed changes, the most sweeping since the Great Depression, in the regulatory regime for the Finance Industry. In some senses this is both industry and markets news but the credit markets have moved to being the most urgent and important issue in overall economic performance since last summer. Hence we provide this seperate set of excerpts.

As usual we'll suggest that the punditocracy continues to miss some, though not all, of the implications. "Fortunately" enough folks have picked up on their versions of the 'collapse of Western Civilization" meme that the point is getting thru to folks who follow the economic and business news. We say fortuntaly advisedly of course - we doubt our neighbors are paying much attention. Let's hope they don't have to considering what that'd imply.

Up until St. Patrick's Day though none of the efforts of the Fed and the other central banks appear to have been working. Our view since then is that between the BSC buyout (forced liquidation) and the opening of the discount windown to the non-bank banks as well as the extremely rapid innovation and introduction of new policy instrments the Fed is starting to unkind and unplug the terribly clogged pipes of the economy Whew....the alternatives being as we said.

This'll take a while to sort out of course as we're going to have to go thru more writedowns, more bad credit problems are coming, there will be a massive de-leveraging of the markets and risk will have to start being priced correctly. All of that will be very painful.

But at least it's now possible for the great unraveling to beging instead of being locked up - or more correctly seized up. At least some of the early indicators are beginning to show signs of favorable responses. And oddly, for all the sturm und drang, it is the BSC liquidation that seems to have turned the trick. Though in our judgement the opening of the window is structurally more important. Whatever the case may be we appear to have avoided catastrophic disaster. Now we can enjoy the merely painful one that excesses and bad business practice have earned. 

Addendum: the excerpt below from John Mauldin's newsletter (thoughts on the continuing crisis) gives you just a flavor of the whole thing. It's probably the best, shortest, simplest but still accurate description of the risks we faced, who saved what and what's to come I've read. HIGHLY RECOMMENDED. 

Continue reading "WRFest 4Apr08(Economy II): Economy vs the Credit Markets" »

Posted by dblwyo at 08:00 PM | Permalink | Comments (0)

There was lots of economic news last week, none of it particularly good when you read over the excerpts, but two stand out. First off the job market dropped -80K in March, which continues the downtrend started in early '06 but accelerates it. And, if our analysis & charts are accurate, we're just beginning to see the beginnings of a serious downturn. The other almost equally important news was that the Fed Chair used the R-word in Congressional testimony.

Now you really need to put that in context. It's the Chair's responsibility to tell the truth in such a way that we can all grasp it but not scare either the horses or the peasants...meaning us. In pursuit of that noble goal you'll hear a lot of careful language and hedging, which may struck some as mealy-mouthed. Actually it's the right thing to do because the horses tend to stampede when somebody screams fire. But consider the chain of public commentators who've been fairly fore-sighted about all this (ourselves excluded of course). People like Roubini and Fleckstein were pretty negative over a year ago. Then last fall we began to hear from the grey eminances of the econ profession who were sounding the tocsin's because of the structural disruptions they could see emerging (Summers, Feldstein, Greenspan, et.al.). (NBER's Feldstein says U.S. sliding into recession) It doesn't get more eminant than that. Now in the last few weeks we've started seeing the Street's economic eminances speak out (Goldman, Merrill, et.al.) about a likely downturn. And now the Chairman.

When the Chair speaks you really....really need to listen. And understand. 

The other big new was of course jobs, which we covered in a seperate post and excerpt below. BUT...the talking heads still aren't getting that right either so may we suggest that you go back and review those charts ?  And as a final note - if you click thru to read only one link do so for CalculatedRisk's take on the likely duration of the Housing downturn. Here's the money quote:

If the Composite 20 bust takes a similar amount of time,
the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).

Continue reading "WRFest 4Apr08(Economy): the Chairman Said What ?!" »

Posted by dblwyo at 02:53 PM | Permalink | Comments (0)

Almost more than any industry the Telecom Industry has been the "beneficiary" of a series of perfect storms that have shaken and re-shaken it from the telecom bubble and bust to the displacement of wirelines by wireless to the VoIP shift to the fat pipe wars that are going on now. And as the underpinnings of the industry have changed so have the players - people still under-estimate for example how revolutionary the iPhone is for product development, commercial relationships and industry structure. But the realizations are growing.

There was a fair amount of news in the last two weeks which we've gathered up here which reflects a lot of this change as well as how the individual companies are coping. The first harbinger for example of weakness in the Tech outlook was Chamber's discussion of earnings last Fall which scared everybody. What everybody forgot is that when a tech company says everything's all right now they are capital goods and capex spending lags in downturns. Well that's beginning to be visible. Meanwhile on the coping front a lot of equipment suppliers are still failing to cope with this brave new world, for example Siemens and Sony/Ericsson. But the unfortunate poster child is Motorola which under pressure from Icahn is proposing to go thru yet another breakup. We think this is, at best, only a short-term financial good idea and is a terrible strategic choice. MOT's problems haven't been so much strategic focus as a total lack of execution on a sustainable basis. This'll be the third time in the last decade that they've broken off a chunk on the theory that this time we'll fix it. And each time failed and it failed because they couldn't figure out how to change the way the company operates.

Continue reading "WRFest 30Mar08(Telecom): More Perfect Storms a'Comin" »

Posted by dblwyo at 11:54 AM | Permalink | Comments (0)

In case noone's noticed the Technology Industry as a whole has reached the point where it is mature, which we define as being able to provide products and solutions who's capabilities exceed customer requirements. If that sounds a bit like Clayton Christiansen's arguments in the "Innovators Dilemma" it should because it is. In fact we're on record as arguing that the PC industry reached that point circa '98/'99 when speeds and feeds were adequate for the software, e.g. Word, who's functionalty was well beyond any reasonable cutoff point, say 60/40 and meandering around the 95/5 or worse. Unfortunately costs tend to go up non-linearly as you add bells and whistles.

The chart at right traces out this industry dynamic. It's kind of simple but hopefully it gets the point across. We show customer requirements slowly evolving over time along with two products which have high demand initially because the gap between requirements and capabilities is large and negative, that is customers want more than can be delivered. New products may have some special capability or vastly lower cost but not meet current requirements and have to be introduced in a niche. So does a company keep investing in old products or gamble on new and jeapordize the franchise and cash flow ? You have to apply this thinking to each major business segment in the stack as well because their history, status and outlook are all different. But for the bottom layers of the stack, by and large, capabilities vastly exceed requirements. The top layer, applications and business alignment are very different as the capabilities are vastly exceeded by requirements, especially in the SMB space. But NONE of the customers believes the industry can deliver value-enhancing, businss-driven solutions. As you go thru each of the readings below you might keep all this in mind because a lot is explained.

Continue reading "WRFest 30Mar08(Tech Industry): Commodization, Consolidation, Consequences" »

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

The alternate title was "Waiting for Armageddon" which happens to be the title of the Economist article looking at what increasing economic pressures will do to corporate performances and bankruptcies. Bear in mind that we're early days yet in the Business Cycle for the downturn and despite all the agita in the credit markets and financials the ripples haven't yet shown up in general business performance. But they will. And given the massive buybacks, re-leveraged balance sheets, and general lack of performance disciplines you can expect, shall we say, some distressed or under-valued buying opportunities. In fact we're not the only ones who see that. The same people who six months ago were sending me invites to new ways to find funny money just sent me their 3rd or 4th on distressed investing:

P.E. Investing in Distressed Companies MasterClass We figure that at any given moment, 5% to 10% of all middle-market companies in North America are either in distress or are significantly underperforming.  Every week we see 5 or 10 of them, and we turn most away.   Over the next 18 months, in this volatile market, we know it’s going to be hard work to make good decisions -- about choosing good companies, recruiting the right management teams, and actually fixing the companies we buy.  Making the right choices will mean the difference between earning just plain decent returns and really great returns.  These observations highlight two thoughts -- first, it’s obvious there are thousands of distressed investment opportunities we do not see.  And even if we saw everything, there just aren’t enough hours in the day, or dollars in our fund, to handle the avalanche of new situations stemming from the current recession and credit crunch. Second, if you have the skills and experience and resources to consider buying distressed private companies, now is the perfect time to jump in. The door is open, but the ride ain’t free (to quote an aging New Jersey rocker). 

Actually they've got a good idea. The trick in sorting the wheat from the chaff is timing, filtering and tools for understanding. So besides the Economist article we added pointers to earlier posts on the subject. In fact we added pointers to relevent posts where we thought they were appropriate. But as you wrestle with the sturn and drang and start looking around check out the readings which cover Materials (Pulp, Coal), Transportation (Trucking, Airlines), Manufacturing (Boeing - a special case we admit, Autos (Ford)) and Retailing (incuding a reprise of our enterprise framework for reference). As you read these don't just read them strictly for the story but also as indicators for their industries and the broader general business climate that's slowly emerging behind the financial rubble.

There will be opportunities here but there's a lot of pain between there and now. 

Continue reading "WRFest 30Mar08(Business): Days of Reckoning at Hand ! Repent Sinners ?" »

Posted by dblwyo at 04:29 PM | Permalink | Comments (0)

Here's our collection of story excerpts for the Finance Industry. With all the near-death experiences we were going thru we didn't get the excerpts for the week of 23Mar up so they've been combined with last week's in one kind of massive posting. Nonetheless they make interesting reading taken all together, particularly in light of the market's huge rally with the SP500 up almost 4% and the Dow up just short of 400 points. Of course we've seen a lot more days like that in the last couple of months than not. And, for our money and for several of the commentators in our stories, the writedowns are far from over, the downsizings have just begun and we've got a long way to go. And we assure you that these weren't selected to excerpt just because they agree with our views. They capture some of the better thinking. We'll especially call you attention to the stories by Michael Lewis (Mr. Liar's Poker) and Merdith Whitney (who'll soon be known as Mrs. Dr. Doom for telling it like it is) who both point to troubles to come.

Our title comes from a Fortune article which got re-covered but came to a similar conclusion this week as well. And just happens to coincide with our assessments about the future of the Finance Industry which we've been harping away at in all the related posts. Another story worth paying attention to is the one reporting estimates of 200,000 job losses on Wall St., which is an unprecedented number.

Now tell me - is the worst over for the industry and financial stocks ? Or are we just at the gust front of the storm as the artificially inflated profits and earnings of the last decade are destroyed, the share of industry profits in national income begins to reverse, a new regulatory regime that'll change the rules systematically and systemically goes into effect ? And most especially (cf our earlier comments about good business practices) as the basic business models, management systems and leadership development of the industry are re-thought !

Interesting times indeed. 

Continue reading "WRFest 30Mar08(Finance Industry): End of Wall St. as We Know It ?" »

Posted by dblwyo at 09:40 PM | Permalink | Comments (0)

Well too bad for me that the collection of bigpicture market news didn't go up earlier, especially my comprehensive assessment of the markets. In a certain sense my timing couldn't have been better since my tone was pessimistic and the markets just said in your face with a 3.5% rally. Whee. So much for not breaking the 50-day MA to the upside or getting out of the stairstep pattern. Well you'll have to decide for yourselves whether I was on target, or the target. What do you mean we kimosabe ?

Anyway just in case you missed it my earlier overview of the markets was here:Market Performance and Outlook: the Dance of the Stairsteps. Now for the last couple of weeks, actually for the last several months, market news had been broken up into market news and credit market news with the latter dominating as it should. Reflected in several running posts where we collected and analyzed things. Along with the reglar market news you'll find some of those listed in the readings section as well. But just as a reminder in the midst of today's euphoria let me point to this post which summarizes all the systemic threats we dealth with in the last two weeks: Five "Funny" Things on the Way to the Market.

Now with all that out of the way we start off with an interesting WSJ excerpt on the Market's "Lost Decade" which points out that over the last ten years it's returned 1.3%/yr and for the last eight it actually returned -1.4%/year ! We couple that with an earlier posting outling an approach for re-thinking your investming strategies in a low-return world. And a fascinating article on "sell while the selling's good" by Jon Markman, written before the Fed's rescue effort and which he's since backed down on. Nonetheless the logic and analysis are really worth your while to think thru. Relatively speaking the US Markets are doing better than most and CalculatedRisk's little riff on Shanghai "Cliff Diving" is amusing in light of the euphoria prior to Oct/Nov. Finally there's a couple of major excerpts talking about the writedowns still to come and the growing rise in junk bond losses and rising risk of corporate defaults. Oops...looks like another set of boulders is dropping into the pond.

So enjoy today - we may even get a nice bounce out of this where there'll be a good chance to re-position your portfolio. And there may be others but we think that increasingly unlikely. Of course we may be entirely wrong about all that. Presuming all the economic data we collected isn't pointing where we think it is.(WRFest 30Mar08(Economy): GDP, Housing, HF, Oh My !) Ironic that we get the biggest uptick in the markets on the day major banks announce huge new writeoffs that they promised us weren't coming because those same banks can raise the capital necessary to maintain their solvancy. Isn't it ? :)

Continue reading "WRFest 30Mar08(Markets): Boy, Talk About Timing" »

Posted by dblwyo at 03:34 PM | Permalink | Comments (0)

Well it's time to return to our regular programming having spent much of the last week or so focused on the minor distractions of collapse in the credit markets and the resultant collapse of Western Civilization as well know it. Despite widespread acknowledgement of the reality of that near-death experience and the Fed's miracle of financial engineering the other 90% of the the marketplace and economic news didn't get the attention it deserves. In the excerpts postings you'll find stories on GDP and its' near stall as well as all the other data (Home prices and sales, Consumer confidence and spending and factory orders among others). All of which was NOT, we repeat NOT, good. Meanwhile credit conditions continue to tighten and the economic contagion appears to keep spreading to Europe and Japan. In particular we'll call your attention to the excerpt on Housing where the headline and talking head coverage was almost malfeasantly misleading. We analyzed it earlier this week in a dedidcated post but you'll find more below, especially CalculatedRisk's comments on a recent John Mauldin newsletter that details how no bottom is in sight in Housing. This and similar deeper understandings about the business cycle, etc. should stand you in good stead - a) we're early days as yet in the downturn, b) none of this appears to be generally accepted and c) is not therefore reflected in stock prices. Just to pull the pieces all together here's the pieces we've put up in a sort of logical order.

•  The Great Circle: Where We're At in the Business Cyle Reviewing the nature and structure of business cycles and the specific data for this one.
• More Dialog: Facing Harsher Realities in Housing Deep dive on a comprehensive review of the situation in Housing which argues that we're at best approx. 1/4 of the way thru the total adjustment process at best. Depending on how you frame it with further sales and price declines, more huge waves of foreclosures and an extended bottoming process before price declines stop.
• Economic Dashboard: Current High-Frequency Indicators A comprehensive summary and analysis of our complete suite of monthly high-frequency indicators. Two in particular were "interesting" - the indicator of future consumption is combined growth in real wages and employment which has turned negaive. And YOY growth in the real money base continues to shrink because of the credit crisis.

So as you skim over the excerpts we'd suggest reviewing those three posts which provide as complete a framework and simple a toolkit for do-it-yourself economic analysis in easy-to-see graphic form as we can manage. And if you've got any questions about our hyperbolic summary of the troubles in the credit markets may we suggest reviewing the following:

•  A Dialog Concerning Three Systems: Real Economy, Finance & Credit
• Continuing the Dialog: Facing Realities in the Credit Market
• Five "Funny" Things on the Way to the Market
• Adult Supervision Re-emerges: Bush Proposal for Regulatory Overhaul

Now in the spirit of "seeing things as they are" we'll ask the semi-rhetorical question - would one of the most conservative and ideological administrations in post-war history be proposing the most sweeping, deep, structural and systematic regulatory reform if the situation wasn't forcing the deepest re-thinking of the financial systems. If you continue to doubt then our first post this morning was particuarly to your address:

• Sunday Morning Reflections: Learning to See Things as They Are
  

Continue reading "WRFest 30Mar08(Economy): GDP, Housing, HF, Oh My !" »

Posted by dblwyo at 04:44 PM | Permalink | Comments (0)

This has been an interesting, even bizzarre, market as those who feel that the kitchen sinks are accounted for and discounted in prices "debate" those who feel it hasn't been. As you might have gathered we're definitely in the latter camp. Along with such minor and inexperienced observers with names like Feldstein, Summers, Greenspan, Krugman and Volcker. In the long-run what we're seeing here is the beginnings of a "great unraveling" where the excesses in financial markets and the industry as whole are undone and then repaired. And when the unsustainable levels of Consumption that have been financed with debt-based funny money are also. In fact we're in the early stages of a reversal of over two decades and beginning to enter an entirely new and different regime for which noone is prepared, at least broadly speaking.

In the short-run we may get a bounce as optimism triumphs over both experience and the data.

Continue reading "WRFest 23Mar08(Markets): From Margin Call to Great Unraveling" »

Posted by dblwyo at 08:00 PM | Permalink | Comments (0)

In the midst of all the sturm und drang over the near collapse of the financial system there were stories aplenty about the economy which recieved little or no attention, at least in the sense of being reflected in the level of emotional investment in paying attention. Given the un-remitting run of bad news it seems to us that everyone's more than a little jaded (the other day Joe Kernan on CNBC even went so far as to say he's tired and wants to move on). And the meme is still widespread, prevalent and embedded that the full extent of an economic downturn has been "faded", that is incorporated into everyone's thinking, business plans, investment outlook and earnings and valuation estimates. UNSINN ! Or in English, nonsense. What the Fed did was get the machinery working again with a new set of tools so that we can in fact have an orderly unwinding of the excesses and a downturn won't bring about a major economic collapse. In yesterday's post (The Great Circle: Where We're At in the Business Cyle) on the Business Cycle we tried to intercept and filter what still appears to be the standard wisdom by reviewing how a cycle works, what the lag structures are, where we're at in the current cycle and what the data tell us. In our opinion we're still early days yet and the full extent of the downturn is not visible nor incorporated into much of the decision-making - despite being, we feel, readily visible in our simple charts.

Just to take one example the headline on Existing Home Sales was that they were up. Well guess what - Feb is always higher than Jan but when you look at the real data YOY sales were down ~ 24% ! Which is what the headline should have told you, in addition to the biggest price drop we've seen in years, rising cancellations, rapidly accelerating foreclosures and so on. Sorry to be the bearer of more bad tidings but when you review the excerpts you'll find that, almost without exception, none of it is good and ALL of it is following predictable paths consistent with our view of the business cycle. In fact we are early days and the downturn is just beginning to move into the Main St. heart of the economy.

Which BtW makes the recent market surge most likely a dead cat bounce ! 

Continue reading "WRFest 23Mar08(Economy): Jaded and Faded" »

Posted by dblwyo at 07:12 AM | Permalink | Comments (0)

DLS stands for "Dirty Little Secret" in case you didn't know and it refers to those "inside baseball" hidden characteristics that, once all the formal stuff is out of the way, actually determine how something works. The Technology Industry has two major ones, one of which we'll focus on. The first is that the cultural gap between business and technology continues to be wider than any other Mars/Venus split you can name. Men understand Women better than IT gets business and visa versa. That was sorta o.k. when all the bottom of the stack was new and obvious needs exceeded capabilities. Now it's a continuing disaster. We'll focus on that but just FYI is that the other DLS is that decisions are made on technology use by politics, not what best serves value and service. IT needs adult supervision but doesn't get it from the business side, which has abandoned it's responsiblities.

But when that gap is bridged the results can be truly magic. Unfortunately the small list of comanies that use IT strategically is largely the same small list it's been for almost 20 years. Until actively managing the "two-culture" gap becomes standard business practice companies won't use technology systematically, systemtically or correctly. Vendors will keep building the wrong things. And investment returns will still be commodity-like because the bottom 3/4 of the IT stack are commodities. It's what's hurting Dell and MSFT for example. On the other hand what Jobs and Apple has done is concieve and execute total technology solutions that start with customer value, translate it into high-value strategies and execute it comprehensively in total solutions. IF technology worked as well in general as Quicken did in managing your home finances a lot of money could be picked off the table. The graphic shows how it should be and isn't. Now here's an interesting fact - it dates from circa 1991 ! And is based on work, some from IBM's Business Institute dating back to the late '70s !! BUT when you find a tech company who can bridge that gap you've found a real winner. Or a company who runs its' own business by using technology truly strategically.

Continue reading "WRFest 16Mar08(Tech): DLS's, Two Cultures and the Breakdwon" »

Posted by dblwyo at 07:39 AM | Permalink | Comments (0)

While we've let the week's emergency news about the Credit Crisis swamp our regularly scheduled postings on the weekly news we've slowly been picking it up, piecemeal. Previously the week's collection of Finance Industry news went up and needless to say the implosions are continuing to ripple. Let's shift gears a bit and focus more mainstream traditional businesses now. After the break you'll find stories on the global Nucelear Power industry and Russia's re-entry, Chrysler's on-going recovery struggles and Delphi's much worse ones and the rapid re-sinking of the airline industry (Airline Merger Frenzies (II): Network Structure, Costs and Strategic Outlook). The excerpts end though with a positive story which is interesting for its' own sake as well as for what it tells us about arrest and recovery of a declining business by re-focusing on basics. operations and execution.

The story is about Lord & Taylor's recovery post it's buyout from the May/Federated chain which was almost its' deathknell. Implicit in the story is the role of forward-looking management, strategic re-construction and execution. These lessons are not only important for investors but also for anyone working for a company. You owe it to yourself to understand the basic dynamics of the economy, the situation of your industry and the long-term performance of your company or investment. We can't emphasize those learnings enough so we'll keep repeating them in the hopd that they'll sink in. But if you'd like an abject...whoops, we mean object...Freudian slip...lesson consider what Wall St. had gone thru and will be going thru with write-offs and layoffs. Or consider the exemplar case of Bear Sterns. Malfeasnt and complaisant management destroyed an 85 year company that survived the Great Depression, WW2 and the tumult since thru blind greed and technical incompetence. Consider where you're at.

Just to put a point on it consider this excerpt about the recovery, re-engineering and transformation of P&G in the last few years. A company that looks like it's set to survive well and be in an excellent position as we work thru the coming unpleasantness:

'The consumer is boss'  No question, P&G was struggling. We'd issued a big profit warning in March, and the business was still performing below expectations. We'd moved to a new global-business-unit-led strategy. We'd totally changed the organization structure. We were adjusting to more global competition, a faster-changing industry landscape, and the challenges of the Internet. In the midst of all this, we'd raised the company's goals to unprecedented levels. In hindsight, we were trying to change too much too fast. Job one was to determine the state of P&G's business. When I began digging into the numbers, I found that we were in worse shape than I had suspected. On June 8 we issued another profit warning, and the stock fell further. We had lost more than $50 billion in market capitalization in six months. I knew it would take another three to six months to know whether we had bottomed out. In the meantime, I had to retain key people. I talked one-on-one with each leader to come to a clear understanding of the business challenges and opportunities. I encouraged them to compete like hell externally but to collaborate like family internally. Just about everyone signed on to this vision. Proud P&Gers, we were embarrassed by recent results. To turn the company around, we focused on a few simple, powerful things.

You might want to re-examine a prior post where we set out our framework for what it takes to run a good business as a reference point as well: WRFest 2Mar08(Business): Paper, Auto and Retail News.

Continue reading "WRFest 16Mar08(Business): More News from the Frontlines" »

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

Let's pick up the thread of our weekly Readfest with last week's excerpts on the Finance Industry. Obviously THE major story was the sudden evaporation of Bear-Stearns as a going concern. There's a lot to say about that and the whole story is far...far from in. From various sources as late as Thur. executive mgt. hadn't a clue but, as in all sudden catasrophic events, there was a tipping point on Fri. Which led from a "we can make it thru" to "oh, my god we've got to bail". In some ways my hat's off to the BSC leadership team who had less than 24 hrs. to re-wrap their heads, to the Fed and to JPM and Jaime Dimon who responded with what, so far, appears to be style, grace, guts and knowledge. I'm sure as the story comes out they may have had a little more warning but it still isn't every day that an 88-year old legend that was worth $30-40B on Fri. afternoon gets sold for a paper price of $2/share or approx. $298M ! Astounding.

Continue reading "WRFest 16Mar08(Fin Ind):" »

Posted by dblwyo at 10:53 PM | Permalink | Comments (0)

If anybody's in doubt yesterday's emergency rescue of BearSterns, you know they who were entirely w/o trouble or credit problems just 48 hrs earlier, should go a long way toward double-underlining the seriousness of the credit crisis. We're presuming here that anybody reading this blog knows that Bear was rescured literally at the last moment from liquidation by the FED (!!) and J.P. Morgan. On the grounds that the whole house of cards might come tumbling down. The right thing to do IMHO but not the last chance to do it - very unfortunately. And who knows where the next shoe will topple. So the economy's not the only place where it's all about the credit, as you can see from the chart.

Below the break are the week's market related readings - most of which are related to spreading credit problems, e.g. Wilbur Ross's take that we're going to see serious bank failures. Wow deja vu all over again. There's a bunch more readings in the Credit vs Market section that strike that same theme and point to other weak spots. We'd suggest starting with a skim of the first two excerpts which are nice overviews of differring sorts. The first a review of the events and the 2nd a review of a recent book on the extent and magnitude of the crisis. As always you can click thru to the original article. There were actually very few strictly market related posts but two were G-S's advice to SELL the rally (here, here) except you didn't get much chance. And another from Prieur de Pleiss looking at the long-run correlations between buying at low PEs and long-term returns. THIS is the one to pay real attention to. Especially given what's likely to happen to earnings and PE compression.

Turning back to the chart we'll let you inspect it yourself but add three observations.

Continue reading "WRFest 15Mar08(Markets): Credit Crisis, Contagion & Market" »

Posted by dblwyo at 03:39 PM | Permalink | Comments (0)

When the retirng head of the NBER, Martin Feldstein, comes out and says it, that is we're in a recession, then it's getting pretty serious. That's not the only thing he had to say though, of course. The rest of it may sound strangely familiar to readers, at least we hope so. Something about the worst downturn since WW2. None of which is still reflected in the Street's thinking but as you'll in the excerpts both the public economics community AND the CFO's of major corporations are on-board. Furthermore their assessments pretty much mean our take on where we're at in the cycle are dead on. Feldstein's stance has been seconded by Larry Summers in a speech last week at Stamford and the URL pointers to the vidclips are posted below. It's becoming the Marty and Larry show ? Wonder if they have the same agent ?

Our opinions are pretty much a matter of record as well and have been for a long time. The two recent posts that we put up on a complete review of the High-Frequency (HF) indicators and the breakage on a deep structural level in the credit markets are really worth reviewing. Lots of charts in both and some might be a little "wonkish" (as Krugman terms the set we adapted from him) but the postings are still worth reading if you haven't. 

• He's Back: Retail Sales and other H.F. Scary Data
• Galt vs the Fed II: Credit Disequilibriums, Broken Markets and Economic Implosions

Continue reading "WRFest 15Mar08(Economy): O.K. It's (semi) Official" »

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

Decoupling ? Decoupling ? Anyone ? Anyone ? If there are any true believers the readings below should help correct your thinking. For the rest of us there are some interesting points about how the wave of the US slowdown is both spreading and exposing fault lines in foreign countries. For example in Japan who's non-recovery from the "Lost Decade" has a lot to do with weaknesses in it's political structure. Ones btw that are oddly reflected in the populist rhetoric of some of our campaigns.

SE Asia is also coming under increasing pressure and is now facing the need to find sources of internal stimulas, as are India and China. The latter in particular though is now finding itself an exporter of inflation, as was predictable and predicted, due to rising wage costs in the coastal cities.

We care about all this because it lessons demand for US exports, raises the cost-push inflation risks, and, as the dollar continues to weaken, reduces the carry trade which was a major prop to the stock market. Also if you've been an investor in these markets it's long past time to get out no matter what the talking heads have been saying. Don't say you weren't warned - AGAIN. 

Continue reading "WRFest 15Mar08(In'l Econ): De-coupling Hah !" »

Posted by dblwyo at 04:16 PM | Permalink | Comments (0)

Somehow or another all the business news is either finance or technology news these days. I'm sure that's not true but that's the net effect give my readings. The huge wave of finance industry news is, under the circumstances, not a surprise and we covered it yesterday. It's worth bearing in mind that the Industry was a whole appears to a) be as badly broken thru its' own self-inflicted wounds compounding and b) as the credit markets go thru an extensive de-leveraging process that the industry will be badly shaken up and re-structured. And perhaps c) we may have a long way to go.

The first two stories below are on Chrysler and Pfizer - both of which industries have backed themselves into similar corners. The Auto industry by getting stuck in its' own rigidities and denying the need for change for 3+ decades. As we've mentioned the core of the Pharma industry is their R&D activities and, very unfortunately for them, their core business model of chemistry-based drug development is broken by exhaustion. And the nextgen replacement (bio-chemical/biological) is not a near- or intermediate-term potential (though depending your horizon you should be lookin at systems biology and what's going on with "synthetic" life). Whic leaves us a bunch of Tech industry stories. Which in turn are stories about escalating pressures for cost control and change, companies failing to innovate and some succeeding.

In the latter class are Apple and TIVO both of whom have focused on defining and delivering value. Preceeding them is a story about one MS fantasy about Yahoo - that it'll help take them into the on-line software arena by combining Yhoo's on-line DNA and MS's software development DNA. Excuse me - their core strategic value propositions at which they've been failing miserably for years now ? Yahoo obviously but for those of you not enchanted with Longhorn, excuse me Vista the pitiflul remenants of a grand(iose) vision terribly executed and perhaps flawed in conception (btw do a search on Code Red and MS sometime for an understanding of how badly their supposed core competence in programming failed them). The other side of the coin is HPQ which is well on it's way to re-balanced and re-factoring itself, illustrated by a story on Hurd's moving to the next step by starting in on re-directing their R&D labs toward a stronger commercial focus (a step Gerstner took at IBM back around the mid-90s).

The first two tech-related stories are more general interest tech stories which define the ecology of the industry. One counseling IT departments to start putting pricing pressure on their vendors. The other on the topic of business vs technology alignment. We've all heard the stories about businesses able to change an industry thru the strategic use of technology. The problem is that for 20 years it's generally the same small handful of exemplary firms, e.g. WMT, FDX, Schwab, et.al. What you may not be aware of is that there's a huge gap between the MIS department and the operational business which the industry has been struggling with for decades. And despite the bottom of the "stack" becoming a commodity the top part where business solutions live is as much about magic, mis-communication and 70% failure to deliver rates as it ever has been.

As a friend of mine with almost 40 years in the business said:

La plus ca change, la plus ce meme chose.

Continue reading "WRFest 9Mar08(Business):Auto, Pharma & Tech News" »

Posted by dblwyo at 11:54 AM | Permalink | Comments (0)

The last post pretty well summarized the credit contagion crisis in it's title: WRFest 9Mar08(Economy): It's All About the Credit. And the results of being all about the credit is de-leveraging, magin calls and liquidation. The only real question left, aside from all thos messy...messy details, is how will this impact each of the players at the industry and company level. There's another one I guess - who'll be well-enough positioned to take advantage of this insanity by having the credit, cash and liquidiy to take advantage of what are really once-in-a-lifetime opportunities. Hopefully. After the break what we have are the week's business stories ranging from the beginning of hearings on finance industry CEO compensation (one of last week's potentially most interesting and important stories. Do the words de-regulation, Enron and SOX ring any bells. THINK about it). Almost all the rest of the stories can be summarized whether banks, LBO's, hedge funds, insurers, whatever is who survives and who doesn't. IF we're not being clear here this is going to be a real mess, take a lot to cleanup and is barely started. This is the Housing market ~ early '06 when everybody could see it coming who paid attention but the scope and breadth wasn't clear in the face of denials.

To put this in context this CNBC intereview with, among others, Wilbur Ross touches all these issues:  Equities Roundtable

Continue reading "WRFest 9Mar08(Finance Industry): De-leverage, Margin Call, KaBoom" »

Posted by dblwyo at 12:10 PM | Permalink | Comments (0)

It is indeed all about the credit markets. Over the last few weeks (months) wrestling with the credit contagion has migrated from being primarily a Business section topic as the financial industry dealth with life-threatening pressures. Then it become a major, almost, dominant topic in the Markets section readings as the disruption threatened to move from breaking the funamental mechanisms of the credit markets per se to all other markets to now it's one of the three dominant economics themes. So while this is primarily about the week's story excerpts on the Economy we've also included the few Markets postings plus a pointer to the large and earlier post on the multiple and multifarious (nefarious ? :) ) stories on breakages in many....many credit markets. As we've been warning the fundamental mechanisms are broken and this last week saw widespread margin calls which are leading to major liquidations. BUT for the economy that means that $T's of lending are being withdrawn - in other words loanable funds are being withdrawn from sustaining spending and investment faster than policy can help prop them up.

After the break you'll see various readings related to these themes and thesii as well as more on Housing, Employment, the cliff-diving Dollar (who's behavior is a natural result of interest rate gaps and the algebra of income accounting).

Continue reading "WRFest 9Mar08(Economy): It's All About the Credit" »

Posted by dblwyo at 07:47 PM | Permalink | Comments (0)

Odd as it might seem we're still, at the end of this week, just catching up with last week's news summaries. Here we want to focus on the Technology Industry with several interesting stories. In the process of several of these recent Tech focus summaries we've been wrapping the excepts with some charts that show how the industry is put together. Earlier we introduced a simple stack picture which showed all the elements from platform to middleware to application to interface that are necessary for any particular solution to be put in place. Think of that as the basic characterisitcs of the industry's ecology. Another dimenation that structures an ecology is the number of large and small players and what niches they go over. Which we try and capture with the accompanying chart.

Continue reading "WRFest 2Mar08(Technology): Small to Large - IT Industry Structure" »

Posted by dblwyo at 06:54 AM | Permalink | Comments (0)

We're still plowing thru last week's news in digestible chunks having split our weekly reader not only into Economy, Markets and Business but also split Business into this, the 3rd of 4 sections. Given the volume and importance of the various stories it seemed like a good idea and also allows us to wrap a little framing around them as well. A metaphor that captures the approach is that we try to take both an ecological view and a species specific view and look at the interactions. The Economy defines the longer-term geo-climatological context that everybody has to deal with while the markets capture the shorter- and intermediate-term cycles and behaviors. And the Industry/Company studies (Ganesh Filters III: Analyzing Businesses Blueprints) look at the status and outlook for key species. So far this round we've covered the Finance Industry, which at 30% of the market is important in its' own right but also heavily influences the flow of "energy", directly impacts the behavior of the Traditional and Technology businesses. And we specifcally broke out the LBO industry this round because it's on the cusp of what the industry is beginning to view as a major change in its' environment and what it will take to survive. To continue with the biological metaphor/model the LBO industry has contributed perhaps 20% to the rise in stock prices, perhaps more in the '07 over-trend "bubble" but is now facing a huge structural shift where different characteristics will be favored over agility and financial engineering genes. THERE WILL BE A SHIFT in the population as a result. Which will in turn impact all the other players.

Which sort of leads us to the old-line traditional industries in general and the Paper, Auto and Retail industries in particular. In each of these cases we'll return to a constant theme - what does it take to run a good business - in a new perspective. What are the functions, capabilities and processes required to execute a strategy and deliver value. And since several of the most interesting stories are about Retailers we'll frame the discussion using the chart at right (click to enlage) which shows the a complete, architected Retail enterprise. Hopefully you can imagine similar illustrations can be developed for other industries as well. Given a strategy and business model those must be EXECUTED by daily Operating efficiencies, managed by good Tactical planning and, over-time, adopted & adapted by Strategic changes. In the chart what you see is a complete, representative inventory of these capabilites structured to show, to some extent, how these all related to one another. As you evaluate an investment what you're really asking is how are these processes being performed at each of these three timeframes. And unfortunately the answer is all too often not particularly well.

Continue reading "WRFest 2Mar08(Business): Paper, Auto and Retail News" »

Posted by dblwyo at 04:14 PM | Permalink | Comments (0)

We've had several recent posts detailing the expanding crisis in the credit markets and the spreading turmoil and havoc it's creating. Including the increasing liklihood of the failures of major financial institutions (point: Ben Bernanke). And yesterday we noted Warren Buffett's comment on CNBC that he was being presented the opportunity buy loan portfolios for < 70% of their value or better (he of course was non-specific). In fact last Fri's big drop in the markets was partly due to the liquidation of an English hedge fund's (Pelaton) portfolio, or at least part of it. This post collects up some very interesting story exceprts on the continuing impacts on the LBO business. Now this is important not only for its' own sake but because buyouts were a major prop for market prices over the last two years. And THE major prop for the buyout feeding frenzy was the availability of cheap and easy credit for leveraged loans. Well lo and behold what should appear in our mail this morning but one of John Mauldin's occassional "Outside the Box" newsletters where some of his correspondents share their work with him and his readers.

Continue reading "WRFest 1Mar08(LBO Markets): Leveraged Loans, Liquidations and the LBO Bizz" »

Posted by dblwyo at 04:28 PM | Permalink | Comments (0)

The ripples in question refer of course to the ripples in the credit market pond from the various boulders that are toppling in. Which started with housing problems, spread to the various artificial debt created on housing mortgages and generated several waves that impacted other markets. At the time we predicted that other rocks, then boulders, etc. would topple in and that seems to be the case. In fact one could envision a whole set of ponds layered on top of one another, each being defined by the chain of asset classes and instruments that toppled and were impacted and so and so. We mention all that because Warren Buffet was bold enough to get on CNBC yesterday and tells us that we've reached 3rd/4th stage Ebolatization where many of the financial institutions are starting to be forced to sell off, or even liquidate, portfolios of these assets to protect their solvency. NONE of which is being talked about as yet. The readings below the break are all stories from last week regarding various ripple impacts on players in the Finance industry who are beginning to rock on their foundations.

Continue reading "WRFest 1Mar08(Finance Industry):Results of the Ripples" »

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

The title is of course a play on Dickens "Tale of Two Cities" about the French Revolution. While we hope ours wont' be that dramatic the markts started bumping up Fr. before last on rescue news on Ambac and the bond insurers, and kept going with IBM's buyback. Hiding under the covers are two, possibly three fantasies. First that the credit crisis was going to be resolved, instead of - as we've been arguing, continuing to metastasize. Second, that IBM's buyback represented any sort of statement about a "bottoming" process. And the third, most significant, that an economic downturn is already priced into valuations. As this immedate past Fr.'s results show economic news that has been constant on a trendline - again as keep harping about - was a WTF surprise for the markets. The WTF response here is you've got to be kidding. After the break is our usual collection of what we think are the most interesting market related story excerpts (having already broken out the credit market related ones). Too many of the titles IOHO focus on "sideways" or "time to buy" arguments.

It seems to us that one of the hardet things in the world is to adopt a new perspective when your history and inclinations have you locked into a view increasingly at risk of reality. By continuing to view this market thru the prism, NOTE: not lens prism, of simple market cycles instead of recognizing the myriad problems floating around Mr. Market is committing this error of perception. But even harder is adjusting your actions because the path isn't clear, it's brambled and you don't know where it's going. Easier to keep doing what you know even after you've figured out that adopting a new perspective is the better part of wisdom. 

Adapating new actions to go with the new view is the hardest thing. As part of helping us all take a look at the accompanying charts (click  to enlarge)

Continue reading "WRFest 1Mar08(Markets): a Tale of Three Fantasies" »

Posted by dblwyo at 07:44 AM | Permalink | Comments (0)

The elephant in the room is the fundamental breakdown in the structure of the credit markets which is leading to wave after wave off cross-instrument and cross-market disruptions. About the time we think that one set of ripples from a single rock toppling into the credit pond has died down or been contained another and bigger rock (or boulder or ...) topples into and the ripples get bigger and bigger. As you may have gathered it's my habit to softclip interesting stories and keep them around to buildup a timeline. In tracking the credit markets it was really only necessary to track a core, usually Treasuries and the yield curve, because the relationship of those markets was the engine that drove everything else. Now every instrument and every market has its' own unique characteristics depending on how much structure, synthesis, leverage and perversity is embodied in that market. While we don't know the size of the problem or the linkages the best we can project is that it will continue, and we don't have any real clues as to all the myriad inter-connects. Tech guys talk about network structure where everything links to everything else  talke about the N-squared problem. In other words it's not just about A <--> B links but A <--> C, C <--> Z, Z <--> who knows.

Continue reading "WRFest 1Mar08(Credit Markets): Credit Contagion, the Fed and Outlook" »

Posted by dblwyo at 10:48 AM | Permalink | Comments (0)

This week saw a whole slew of economic news, so much that we split the readfest into two posts. The previous one set the stage by looking at the bigger picture for the US and the World. The good news is that all the alarmists wailing about stagflation have faulty memories, weren't around then or are trying to sell advertising. The bad news is that the outlook isn't pretty - now we've been sounding alarms here for a long time about a slowing economy but ALSO pointing out the the real numbers have never been as good or bad as the headlines either. So again we're headed for a much slower economy, it will be painful and probably last longer than folks were expecting and policy makers are dancing around the problem of having it tip over into something really nasty.

Much of which is starting to be represented in the excerpt after the break. Another though that occurs to me - you need to keep in mind who someone is when they're quoted and where their dogs hunt. The lead article is that the economic consensus is admitting that we're likely at the beginings of a slowdown and it won't be over by mid-year. As Barry Ritholz says WTF -  most of that consensus are folks who work in the Finance industry. When you look at folks like Summers, Feldstein, etc. they're not to far off but far less sunny.

Continue reading "WRFest 1Mar08(Economy): Bad News and a Sputtering Engine" »

Posted by dblwyo at 12:07 PM | Permalink | Comments (0)

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

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

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

Continue reading "WRFest 1Mar08(Int' Business): Multi-Polar Problems vs ADD" »

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

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

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

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

Continue reading "WRFest 1Mar08(Int'l Econ): Let's Keep a Little Perspective" »

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

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

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

Thinking in "Stacks" 

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

Continue reading "WRFest 25Feb08(Tech):Dropping Outlook vs Climbing Competition" »

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

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

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

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

Continue reading "WRFest 25Feb08(Old Line Bizz): Back in the Real World" »

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

Have you ever stopped to really think about what makes a business work ? Obviously it's a central question here but have you really wondered ? Well it's intellectually fascinating - really few things are that complex, with so many moving parts and challenges. A mix of chess, poker and rock climbing because it takes brains, thought, discipline, skills, people judgement and ability to manage stress and risk. More clearly it really...really matters to people where things are going badly or poorly...just ask all those auto workers laid off, the Yhooites about to loose their jobs because of executive short-comings or all those folks in NYC about to suffer even worse. For every millionaire Ibanker laid off there's likely to be hundreds who feel the effects. But it's even more than that - big business has been the engine that's driven our economy and society since the late 19thC. Small businesses create more jobs but the repostitories of big change, for good or ill, or are when innovations are turned into US Steels, the Pennsylvania RR, Ford or GM, GE, Pfeizer, Intel, IBM, Microsoft,..., etc. etc. [If you're interested in exploring this more and understand how much the rise and fall of big business shapes the world around you we HIGHLY recommend two book:Big Business and the Wealth of Nations, Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Science Industries ]. Just as an analyst, investor, employee or other participant you'll learn a lot.

Continue reading "WRFest 23FEb08(Business Strategy): What the Future May Hold ?" »

Posted by dblwyo at 06:03 PM | Permalink | Comments (0)

The last Readfest boiled down the dilemma to the Street's apparant consensus being that it was time to go bottom-fishing verses the question of where we're at in what kind of a business cycle (we might also mention, again, that this has been a very different kind of cycle and NOBODY has factored in the consequences into their strategic thinking yet). Now that's the classic dilemma that's always with us of course but this time it's moved from background to foreground because of a widespread sense that we are at a cusp point where we're going to change from one regime to another.

A central and critical question we've taken two major passes at in the last week, both with our own postings and charts plus some key article excerpts. One that particularly got a lot of attention is Martin Feldstein's WSJ editorial warning that if this does tip it will likely because as bad or worse than anything we've seen since 1980 because of the differences in the Housing and Credit Market situations. Which is really a debate at which business cycle we're on, i.e. it's shape, and where we're at - which is discussed in an earlier post excepted below. Along with a post trying to summarize all the risks factors, their status and likely future course in one chart. If you look at nothing else read those.

In addition you'll find excerpts on the Fed's lowering of it's outlook, which was already low, and the Housing market, which is beginning to look like it's in a feedback loop where bad news triggers more problems leading to more bad news. There's also some interesting excerpts on the situation and consequences for parts of the Int'l Economy, particularly China and on the situation with supplies. In this case growing problems with finding oil that's readily accessible, affordably developable and not subject to the vagaries of ill-behaved governments (think Chavez or Nigeria). And with agricultural commodities which are beginning to enter their own boom and as a result are hurting the world's poor and beginning a shift from world-wide disinflation to inflation. 

Continue reading "WRFest 23Feb08(Economy): Bottoms Are Muddy, Is the Water Clear" »

Posted by dblwyo at 12:00 PM | Permalink | Comments (0)

No the headline isn't a mistake - this is indeed the news clippings intended for the weekend but the tsunamis of what we think are critical information just keep on coming. So we thought it best to get a jump ahead of what will be a large run of such postings. Just as a matter of fair disclosure not only may this suit your reading schedule but a good scotch would be appropriate as well.

First off walk, don't run, to watch this CNBC interview with Meredith Whitney who was the finance industry analyst who made the downgrade calls on the big banks and the mono-line bond insurers. Well unfortunately she's adding a bunch more bad news on earnings, write-downs, rising bad debt, the need for new capital & dilution and so forth. We'd suggest watching it at least twice and taking note the 2nd time. We'd provide them but haven't finished our scotches yet. 

The Readings section below starts off with a diagnosis of whey the rescue attempts for the credit market breakdowns are failing, coupled with several of our prior posts worth reviewing. Not least because they're turning out to be more right than we anticipated. Which naturall leads into another more recent post on the failures of securitization and the long-term outlook for the instruments and the industry. Coupled with several interesting stories not least of which is David Faber of CNBC arguing that the credit markets a) aren't recovering and b) are badly broken. THIS...on CNBC ???? Wow !

All of which ripples forward to pressures on corporate loans and related debt instruments which are facing rising risks of default and will likely also metastasize into big time down pressures on the many weak companies out there. Which is now spreading across the private equity markets and down to the mid-size deal. While that may not sound like much to you - who cares if they have to drink less expensive cigars after all ? - but is actually both a major symptom and diagnostic as well as indicator of accelerating future troubles. 

Continue reading "WRFest 24Feb08(Credit Markets): More Fear, Loathing & Writedowns" »

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

Here's a very recent set of stories on the widening of the credit mess, the impacts on the Finance industry and the whole strategic theory behind the Securitzation innovation. For example the metastasis of credit problems has reached the Student Loan market, is re-shaping the competitive landscape AND threatening a lot of loans, especially for poorer and/or dis-advantaged students. As Mohammad El-Arrian pointed out in a CNBC interview we posted a while back the whole process of securitization was a major new innovation with which the institutional and regulartory frameworks weren't prepared to cope. Worse the internal business practices and governence of the financial firms let short-term greed run ahead of themselves.

In other words they screwed up big time by chasing quarterly returns that were badly, as in not at all, priced for the risks they were presuming. On the theory that they could always bail out. Belowis a set of readings that cover the Economist's take on the industry future. Also covered are the further massive writedowns the major banks, et.al. will be taking on mortgage related debt, the exposures to lose of credit insurance, and corporate/buyout writedowns. In other words you ain't seen nuthin yet !

Which pretty confirms what we've been saying for what now amounts to a couple of months. But in particular we'll point out that yesterday's post (Filterring the Non-Linearities: Sorting the Risk Factors) trying to summarize the risk factors across the Economy, Markets, Consumers and Businesses argued a) we're early days, b) none of these risks is properly priced into valuations or accuately reflected in earnings estimates and c) business performance is going to be THE issue and very few firms are adquately prepared to cope.

So what does that mean for your investment planning ? Or your job, savings, etc. for that matter ? 

Continue reading "Fear and Loathing on Wall Street: Credit Mess, Securitzation & More" »

Posted by dblwyo at 07:31 AM | Permalink | Comments (0)

Well let's try and finish off the week's collection of newsclippings by putting up the excerpts from the business side of the house. There was, as usual, a host of interesting and relvent info for you to skim ranging over a large sample from the Finance industry to some major stories regarding some of the traditional industries undergoing their own huge changes to equally large currents building up in the Tech industries. Before we try and summarzie and explain those a little bit let's set the stage with the following excerpt which puts a context around all of the news.

'Headwind' Blows as CEOs Navigate Trouble America's captains of industry are starting to talk like, well, sailors. As the U.S. economy slows, chief executives and chief financial officers have taken to slinging around a word more commonly heard on the decks of ships. To hear executives tell it, headwinds are to blame for the weak sales of cars, tires, paint and books. Just what are these headwinds? Everything from high fuel prices to slow foot traffic in handbag stores to rising newsprint costs. Weather terms appeal to economists and corporate executives because the market sometimes seems to behave like a force of nature. These days, Mr. Lakoff says, citing headwinds seems to be a way to duck blame for all kinds of business problems related to the subprime mortgage crisis, the credit crunch, even simple bad business decisions. Some economists say the metaphorical wind only blows in one direction. Although executives are quick to blame headwinds for their woes, they are less likely to cite tailwinds for their good fortunes.

Continue reading "WRFest 17Feb08(Business):Finance, Traditional, & Tech" »

Posted by dblwyo at 04:39 PM | Permalink | Comments (0)

The title is a play on Gladwell's "Tipping Point" - which got a lot of attention that was puzzling since the concept and tools have been widespread in certain schools of analysis for decades but there it is. Stumbling Point because the economy has been visibly slowing since early '07, since consumer spending and jobs held up, proped up by MEW and borrowing and since - the threshold - it looks like consumer spending and employment are about to cross over the downturn line. At least when you look under the covers at real retail sales as we did earlier this week (HT - BigPicture).

On the continuation you'll find a lot of other interesting economic news which simply confirms what we've been excerpting and posting for a while. The domestic economy is slowing, sales and consumer spending are about to tip, the decoupling notion is being disproved in a rather ugly fashion with slowing apparant in Europe, Japan and Asis (China). And the fault lines in China continue to be exposed. Many of these problems have been exposed but are the result of structural problems that have accumulated over decades. Probably the key readings are on the accelerating problems in Housing where more and more homeowners are finding themselves under water along with Bernanke and Paulson's admission that we'ver really got a long way to go. We'd particuarly call attention though to the excerpts on Mexcio and Nigeria's accelerating breakdowns as oil suppliers. If that much supply continues to come off the market...well think about it.

Another very special prior post we'll draw attention to is the one on "Being Your Own Economist" because, for those of you who didn't read the whole thing, it carries a complete bibliography of five key books and discussions of business cycles and the economic policy wars that helped us into this mess. We'd say Bon Appetit' but it's not very appetizing - just something we have to consume. Sigh ! 

Continue reading "WRFest 17Feb08(Economy): Crossing the Stumbling Point" »

Posted by dblwyo at 09:17 AM | Permalink | Comments (0)

An interesting weekand one, forgive us, that was tackled in a somewhat non-linear fashion with fairly large daily news posts that were married to narrative analysis intros; and which usually covered 3-4 topics. We've spent some time this weekend trying to step back and see what's going. If you look back over those prior posts they do share a common theme however - the gap between the underlying realities and the way the market/talking heades/MSM covered them.

Now our preferred approach is to summarize the week in linear fashion around the Readfest and spend time in the week focused on a particular topic. Blogs are an interesting medium in that lots of approaches are possible - most tend to be somewhat stream of consciousness but casting a fairly wide net we prefer to try and structure the information flow. You'll judge the merits of that approach for yourselves of course but it serves our purposes as a way to gather and analyze the flow, test out themes and analysis and pilot approaches to business analysis.

Continue reading "WRFest 17Feb08(Markets): Bear Bounce(d) 2 ? Denial Again ?" »

Posted by dblwyo at 07:21 AM | Permalink | Comments (0)

Love some of the headlines today. Especially the ones on Prof Ben's testimony from Marketwatch and Fortune. You've really got to be kidding - the Oct. Fed notes, which we excerpted here pretty well laid it out almost four months ago. And there have plenty of folks doing first rate truth telling since, e.g. Paul Kasriel. We'll even include ourselves in that a bit (check the Economy archives, to much to re-link). But really - not just in the spirit of "told ya so" but also in trying to measure the gap between realities and what the pundits, MSM and the Street would like to believe, which is huge - will point everyone back at the last two day's posts that focus on the contrast. The one between what's going on and what's being said - you know that one.

Continue reading "Told Ya So: Reality Meets Denials with Ben and Spitzer" »

Posted by dblwyo at 05:57 PM | Permalink | Comments (0)

Following two of our long traditions we're going to a) post several links together rather than sepertately, unlike typical blog practice (a several months tradition now with our Readfests :) ) because these stories are valuable individually but more so IMHO taken all together, as William James puts it. And b) post them en passant during the week (a many (3 ?) weeks old tradition).

As you may have noticed the markets roared ahead today and it was all because of the outstanding Retail Sales numbers, not to mention momentum from yesterday when Buffett's offer to the bond insurers plus GM's earnings surprise got this 2nd Bear Bounce kicked off (and oh yeah, leave us not forget yesterday's look at earnings and the talking heads also: Grading the Takehome: Bottoms, Earnings & Outlooks).Setting the table here was Marketwatch's take on things:U.S. STOCKS RIDE HIGHER ON RETAIL SALES AND STIMULUS; NASDAQ CLOSES UP MORE THAN 2%

Tim Walker over at Hoover's Business started an interesting line of discussion with a post on asking simple questions about apparantly complex problems - btw, the comments are worthwhile, ahem.

Continue reading "Naive Questions: Taking the Next Step" »

Posted by dblwyo at 04:53 PM | Permalink | Comments (0)

Normally some of this would be saved for the weekend readfests but there were several breaking pieces of news today that were dead on recent major posts/readings and issues that we thought we'd collect up the morning's news and match them to the prior posts. But before diving into that we'd like to point you to the "inside-market" sentiment which is arguing that the last week put in a bottom. From Barton Biggs on Bloomberg to some "talking heads" on CNBC. The catch is that some of these talking heads are pretty good ones.

Continue reading "Top o' the News to Yar: Market Bottom vs Economy, Credit, Tech and Performance" »

Posted by dblwyo at 12:15 PM | Permalink | Comments (0)

This is the 2nd half our Readfest on Business news. Rather like the B2C/Tech news what we're seeing is major changes on both the secular fronts and deep structural changes. A friend commented on our little exposition of our framework and its' comparison to Buffett's approach by saying you also needed to look at the bigger picture. Exactly - the point our our mantra on Economy-Industry-Business is to combine those factors into an understanding of the context, the particulars and the consequences. Of which there are an enormous lot.

Continue reading "WRFest 10Feb08(Non-Tech Bizz): More Structural Adjustments" »

Posted by dblwyo at 08:18 AM | Permalink | Comments (0)

This has been a rich week for news and stories in the general business sector but particularly in the technology and related industries. On the continuation you'll find several interesting excerpts and links but we want to set the stage with our own post on the B2C Wars:

B2C Wars:Yhoo/MS Merger - Disaster in the Making ? Among the other big news, and there was sure a lot of it last week, was Fri's announcement of MSFT's semi-hostile offer for Yahoo. An offer which apparantly is the last item in almost two years of on-going discussions and failure to reach agreement. In our humble opinions this is a disaster in the making and they only possible beneficiary is Google. That conclusion is reached by a combination of familiarity with the Industry, with companies and technologies involved and applying our model of enterprise assessment (Masterclass: Buffett on Investing and Business Analysis). It's also a lesson in business history among other things. In any case how this plays out is important for Internet users, for investors and for employees as well as customers and suppliers of the companies involved. As a start on pulling the pieces together we used our framework to put together a preliminary analysis skeleton of the merger and wrapped it in a bit of industry analysis as well.

Not only for it's own sake, that is specific to the Yahoo/MS merger talks but also for the portrait of the B2C Industry, the illustration of the business analysis approach and also for a bit on the broader telecom industry. As you read 'em put the exceprts into the context - Google's continuing it's charge on network hosted apps - how much influence does that have on MS's thinking ? Meanwhile after all the $ they haven't figured out how to monetize social sites (maybe Murdock was lucky to miss out). What does that say about Google's strategic outlook (which is dissected in the B2C Wars post a bit). Meanwhile Time-Warner is about to spinoff part of AOL but has yet to come to grips with what the rest should be. Has the industry evolved beyond their ability to morph with it ?

Continue reading "WRFest 9Feb08(Business/Tech): B2C Wars, Telecom & Tech" »

Posted by dblwyo at 07:34 AM | Permalink | Comments (0)

As is getting to be, at least not unusual, we ended up splitting up the Weekly Reader Readfest as well as putting up some more specific posts on particular topics. But talking about how much is going on if you try to pay attention is not news anymore. There's a lot of events but not a lot of startling ones, changes in direction, structural shifts or what have you. The Bear Bounce seems to have run out of steam a little quickly but we'll see how things go. Meanwhile the economic news continues not good. We want to make a couple of key points but by and large this week's readings and links are consistent with last week's and some earlier posts of ours. So in the links and excerpts we're a bit self-referential. In particular the economic links tend to confirm some arguments we've made for some time and we post the links back to last week's analysis of GDP and Employment which puts them in context. Similarly for some of the information on the markets, credit, etc. etc.

Here are the two important points we think stand out after you step back and think about it for a while:

1. The markets in general and the analysts in particular haven't factored a recession into their outlooks. A point supported by the surprise of the ISM numbers and the market's reactions as well as the EPS outlook for the second half.
2. That we're in a slowdown and likely recession now is not being debated as much. That Housing problems will continue into 2010 is just now being acknolwedged and the spreading "ripples in the pond" of credit and derivatives are still not fully reflected. Yet those ripples are becoming widely apparant. 

Continue reading "WRFest 9Feb08(Econ/Mkt): the Adventure Continues" »

Posted by dblwyo at 07:44 AM | Permalink | Comments (0)

There was so much news last week we not only split up the normal major sections but split the Business readings into three - Finance Industry, B2C & the Yahoo/MS merger and this one with all the rest. Oddly enough there's quite a bit of serious and interesting "other" business news aside from the continuation of the Finance industry's self-inflicted implosion. Or from the emerging re-structuring of the entire Internet for consumers. And make no mistake - win, loose or draw MS's offer for Yahoo will trigger off a lot of changes. Ones that are going to ripple for a long, long time. Think of this the same way that the maturation of the software industry and the resulting acquisition frenzy set back after the Telecom/Internet bust set in. This is a SEE-change. But not the only one.

Below you'll find another bunch of readings that are equally impactful. An excellent WSJ interview with Carlos Ghosn who says what everybody's thinking about the death of Detroit. He's pretty blunt about it too. Not quite on the same level Eddie Lampert has finally admitted that running a hedge fund doesn't qualify him to re-engineer an old-line retailer and so he's going to flail in another direction. Meanwhile the Tech industries are facing, as we warned, slowing spending and continuing momentus changes of their own. Chipmakers for example are having to deal with a major new chip layout changeover which will take years, cost many $Bs and almost bankrupted the major players last time. MOT, the original icon of mobile communications, is talking about spinning off it's cell phone business - rather sad. The Telecomm wars continue with Comcast facing serious challenges as well (and judging by my weekend experience's with HDTV quality and audio bandwidth they're very serious). Finally there's an article about how good Pharma is likely to have it in '08, because the prior years were so bad so relative performance will be good. Without of course fixing their long-term structural problems we've talked about.

Continue reading "WRFest 3Fest(Business): Something Besides Finance !" »

Posted by dblwyo at 12:21 PM | Permalink | Comments (0)

Among the other big news, and there was sure a lot of it last week, was Fri's announcement of MSFT's semi-hostile offer for Yahoo. An offer which apparantly is the last item in almost two years of on-going discussions and failure to reach agreement. In our humble opinions this is a disaster in the making and they only possible beneficiary is Google. That conclusion is reached by a combination of familiarity with the Industry, with companies and technologies involved and applying our model of enterprise assessment (Masterclass: Buffett on Investing and Business Analysis). It's also a lesson in business history among other things. In any case how this plays out is important for Internet users, for investors and for employees as well as customers and suppliers of the companies involved. As a start on pulling the pieces together we used our framework to put together a preliminary analysis skeleton of the merger and wrapped it in a bit of industry analysis as well. Below the line you'll find some very interesting reading excerpts and linkages as well. In particular we highly recomment following thru the link on Nicholas Carr's article and using his discussion as a template for understanding what's going on here. To put another point on it btw - this is an excellent example to illustrate how one might begin to do deeper analysis on companies. Let's start with the skeleton in the table below:

 The emphasis here is on preliminary - a considerable amount of additional work would be needed to flesh out the details,especially at a company level. Nonetheless several key points stand out when one uses the template to think things thru a bit.

Continue reading "B2C Wars:Yhoo/MS Merger - Disaster in the Making ?" »

Posted by dblwyo at 08:33 AM | Permalink | Comments (0)

Now let's take a look at the reading and excerpts for business but, because there was so much, we're going to split it up even finer and up seperate posts on the Finance Industry. Oddly enough last week's rally was built on a major Finance sector spurt. Which given the history seems more than a little odd to us. Please note - having had so much of this sort of news we're just being polite. Also - at this point what else can you really say along the lines of "I can't believe they ate the whole thing".

The bad news continues across a reach and range of issues. From the basics - the economic slowdown is showing up in earnings, increases in bad debt and so forth - to structural issues. The top story was probably - pick your own - the continued drama at Societe' Generale' which continues to try and cope with rogue trader who's rapidly turning into a folk hero. Why escapes me at this time but if some explantion occurs we'll share it.

The other big story is the continued dicing with disaster of the monoline bond insurers who appear to have staved off a major downgrade of their credit only at the last minute but are still facing a real risk of corporate death. Unfortunately if they go they take a lot with them. And as expected and usual the extension of other downgrades continues, big banks are shifting assets from "yes we know what it's worth(Level I)" to "we have no idea but we have a model(Level III)" while skipping the intermediate stage of "yeah, we can trade some of this stuff every once in a while (Level II)".

And as a not in-directly related consequence VC's face increasing challenges IPOing their portfolio companies, the buyout guys are having troubles along with it and the beat goes on.

Continue reading "WRFest 3Feb08(Finance Ind): More Troubles Ahead" »

Posted by dblwyo at 12:43 PM | Permalink | Comments (0)

A funny thing's happening on the way to the bear market bounce - it doesn't seem to be bouncing very much. That may just be me but some of the folks I respect most (see the excerpts and links below) are pointing to some serious troubles ahead. An interesting, and new/subtle counter-argument is that this will either be very good or very bad according to Vinay Pande. His arguments are well-reasoned IMHO (as you'd expect of course), some of them, e.g. commodities l.t. outlook are entirely correct, but overall it strikes me more as a technician's "inside baseball" assessment. Correct as far as it goes but too dependent on economic and business outcomes external to the market to come true. And grossly under-estimating the cyclic weaknesses in the economy, the downside risks and the structural flaws we reviwed in the prior post.

Continue reading "WRFest 3Feb08(Markets): Bounce or Bloodbath ?" »

Posted by dblwyo at 10:09 AM | Permalink | Comments (0)

It's time to catch up with last week's interesting stories and data flow - a particularly rich week for the economy, markets and business. Ranging from another Fed cut on top of the prior week's "emergency" 75 point cut. BtW - the Fed has never cut that far that fast. And the market was certainly volatile enough to be interesting. The question on everybody's mind is where's the Recession ? Well we took a pass by looking at the GDP data in a rather data/chart-rich post as well as another on Payrolls. Both of which were rather bad according to the headlines. As we pointed out GDP wasn't good but not all that bad, though Consumption spending showed a marked deterioration. The chart at right traces out GDP and PCE from 1960 to now and then marks out the periods when growth was negative or when it was either positive but < 1% (a very weak growth recession) or between 1-2% (a growth recession). Notice that this decade didn't actually hit a sustained period of negative growth but has been full of weak quarters.

Which leads us back to an earlier assessment: 1) the economy is slowing as non-organic growth fades, 2) the twin Housing and Credit Market bubbles expose some major downside risks and 3) the over-leveraged balance sheets of Households, Banks and Businesses create major fault lines that could be put under severe pressure. Which we haven't seen emerge as yet but are about to as Residential Investment continues to weaken and will likely remain weak for the next several years, as Commerical real-estate investment follows it off the cliff and as the decline of Mortgage-Equity Withdrawls (MEW)/Home Equity financing (HELOC) etc. pull the major prop out from under consumer spending and as growth in Jobs and Wages (our favorite high-frequency indicator of future demand) continues to decline and shows a tendency to accelerate. (We'll try to re-visit the HF indicators later on this week but in the meantime for a review try ). As for the points about CRE and MEW/HELOC there's no better analysis than our blog-friend CalculatedRisk: Recession: CRE and PCE,Fitch Concerned about Borrowers 'Walking Away',Components of Residental Investment, or Shiller: Historic Housing Bust, Possible Severe Re....

Continue reading "WRFest 3Feb08(Economy): Recession Ho ?" »

Posted by dblwyo at 09:16 AM | Permalink | Comments (0)

Chant after me: Economy, Industry, Firm. Economy, Industry, Firm. Economy, Industry Firm. That's your new mantra. Understand what the real trends in the Economy are, understand how industries are facing those trends and reacting to them - in particular whether or not their fundamental business models and strategies are able to cope with the trends and then understand how individual firms are behaving. Running with the herd or different model. In Hinduism, at least according to Joseph Campbell, the purpose of chanting AUM is to serve as a mind-body mantra capturing the sounds of the Alpha to the Omega with a final silence indicating that one really can't. Well the chant of the Finance Industry has been Vaule at Risk (VaR) - otherwise known as we can model this. The originator of regression model was the Prince of Mathematicians, Karl Friendrich Gauss. He came up with the technique to correct survey sampling data when he was in charge of surveying for a small German principality (good maps were important for armies, tax collectors and commerce you see, so the 2nd greatest mathematician in known history put his mind to it). The catch is that he was trying to minimize data errors for a well known model - the Earth.

VaR presumes that the estimated parameters can be derived from past historical experience and that the underlying model is known and constant. Both of which presumptions are proving to be very presumptuous. The emerging narrative in the industry is that the sub-prime mess was a Black Swan event - predictable only in hindsight though naturally occurring. Well actually predictable in foresight, and several did though that's now ignored as this new narrative emerges and takes over the standard thinking. And not at all unusual - in fact the same breakdowns that led to LTCC's breakdowns, part of Enron's problems and in fact, going back to Tulip Bulb mania. Fortunately the new narrative is starting to include the idea of actually going back to good old fashioned due diligence instead of taking abstract and artifical models as gospel. 

This is important because a belief in models has been one of the key underpinnings of some major structural shifts in the Finance Industry over the last three decades and associted shifts in the US economy. As we learn to chant our new mantra and mediate on Due Diligence instead of models you might keep the chart in mind. It shows the shares of Profit by source, both in absolute and % terms, in the US Economy. The top sub-chart shows total profits (stacked btw !) and the bottom share %; don't know about you but our view is that the Finance Industry has moved front-n-center as a major driver. The question is was value created or destroyed ?

The weekly readings excerpts below are focused on business, business practices and individual firms. While there are some very interesting stories on Yahoo and MOT that need to be paid attention to the bulk of the stories have to do with problems in the Finance industry and the consequences thereof. Primarily the re-thinking of the business model, which is just barefly started. But also the consequences as bad judgement and poor modeling result in "unintended" consequences for the rest of the economy, e.g. credit is harder to get, the risk of defaults is rising and all those firms who re-leveraged themselves to buyback their stocks at the highest valuations in several years are now going to be struggling to keep themselves together.

This will sort itself out, and painfually. A lot of the buyout firms who helped us into this mess are already building up the stores of dry powder (new funds) to take advantage, i.e. they're going to be looking for buying distressed companies, distressed debt, etc. for $.50 on the $1 ! 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. 

Continue reading "WRFest 27Jan08(Business): VaR, AUM, & Black Swans" »

Posted by dblwyo at 07:24 AM | Permalink | Comments (0)

The Wild Hunt, this week's whimsy if you will, is supposed to be a hunt across the heavens by eldrich hunters (Odin, ancient kings, etc.) after their prey of choice. Those who see them or hear their horns are supposed to be facing some catastrophe. While things aren't that bad nonetheless for week where a bear market bounce of 8-12% was expected and we got a whimper instead that strikes me as close enough. For a more modern take with a similar message we appeal to Non Sequitar.

Unfortunately, we likely don't have the the option of going back to jail and escaping the storm the Hunt's horns are warning about, to really mix up some metaphors. As you'd expect the basic economic and market news isn't particularly encouraging. And there was enough of it we put up three earlier posts to point to three major areas of concern as well indulge our alleged sense of humor a bit. One area we commented on was the scope and risks associted with buybacks whose conspicuous lack during the turmoil this week indicates how much excess there already was. Another was an extended discussion and assessment of what we thought of the fiscal stimulus package with a collected set of readings,coupled with a vidclip of Rick Santelli calling Jim Cramer on his new pretensions to have been a bear. Preceeded by a summary of our views on the three layers of conern with the economy. We also put up a couple of posts on re-thinking your investment strategy in a possibly very serious bear market which are worth careful thought.

In addition to all those we want to particularly draw your attention to to major "ripples" in the credit market pond that are potentially very serious. One is the potential failure of the bond insurance under-writers and the consequent further huge write-down of bonds on the books of banks. The estimates are that it would take at least $200Bn to re-capitalize these guys but there might be $Ts at risk. The other area where $Ts are at risk is back where it started in the housing market. As more and more mortgages go underwater it's more and more tempting for the holders to just walk away. Which would be a historical first and could lead to massive ($1T, $2T ??) writeoffs in the mortgage market and severely damage the financial system. While many are lamenting this increasing risk it strikes as "turn about being fair play" when so many of those holders shouldn't have been in those houses on these terms; and aside from their own bad judgement and greed, which were rampant, the fraudulant practices of the financial community were and are a major factor. Unfortunately the scope of the damage is such that we need to prevent all that from happening.

When you think of it like this though the picture we posted of partiers in a pool with a floating electrical extension to power the music is not just funny - it's actually a model of self-imposed and potentially self-destructive behavior that captures it all. At least IMHO. Listen - can you hear the sounds of horn ?

Continue reading "WRFest 27Jan08(Mkts/Econ): the Horn of the Wild Hunt ?" »

Posted by dblwyo at 11:19 AM | Permalink | Comments (0)

This should be the last post for last week's stories and links. The primary focus is on traditional industries and companies. Continuing our theme of digging into enterprise performance are several key readings. Let's kick it off with a great story that, IMHO, encapsulates a lot of our notion of speak softly, run a good business, execute well now and lay the groundwork for the future at the same time.

Green Bay's Quiet Football Mastermind Before this season, fans were calling for Mr. Thompson's head. While the Packers had won just 12 of their last 32 games, he did not seem to care. No matter how loudly the fans complained, Mr. Thompson, who avoids publicity and rarely explains himself, continued sending away popular veterans and replacing them with untested college players, some of whom weren't highly regarded by other NFL teams. This year, led by a core of players that helped make Mr. Thompson a pariah, the Packers won 13 games and made the playoffs. What's more, the players he's brought into the league during his career are having an exceptional year -- as the playoffs resume Saturday, nearly 10% of the active players on the remaining eight teams were signed out of college by Mr. Thompson. While pro football is the nation's most popular sport, the brutal economic structure of the league -- where all 32 teams are effectively given the same resources -- has made winning and losing largely a function of management. Winning not only requires ruthless cost control, but it also seems to reward people who are able to make decisions in a hermetically sealed chamber without worrying about what the fans, the media or their own players will think. "I try to keep my eye on the ball, so to speak," Mr. Thompson says.

In addition there are some general business readings: one of those "smart" companies that moved ahead of the slowdown and are well positioned to ride it out and take advantage of the recovery if/when it comes. How many can say that ? Not many. A good example is what's going on in Retail specifically and the broader function of Customer Service - a major source of competitive differentiation that's little developed, invested in or exploited. The MSN article points to some earlier customer service stories you ought to backtrack, particularly since they point to Comcast, Sprint, ATT, et.al. as being terrible at it. Both for its' own sake but also because it's exemplary is the story further dissecting the mis-steps at Sears which are based on wrong-headed views of how to run a retailer. 

We also point to our own earlier posts on the SEEchanges coming in the Innovation(Tech) and Finance industries. Complemented by more readings on the Auto industry, Energy,  and Airlines.

Continue reading "WRFest 20Jan08(Business): Principles, Paradigms and Potzers" »

Posted by dblwyo at 01:18 PM | Permalink | Comments (0)

Now that our little side detour to look at the emerging bear is "over" - btw just kidding, from the futures today it's just really beginning - it's time to put up the interesting links and excerpts for the business stories of the week. There are enough we're going to split them into two. This one will focus on Innovation based industries and the next on general business issues and more traditional industries. In fact judging from today's open this is pretty timely :).

A constant theme we've been playing is the need to understand the drivers and characteristics of enterprise performance, which argument has been mightily reinforced these last few weeks. Not to mention these last few days. While all this sturm und drang is going on there are some major deep changes happening in the innovation-based industries. Which notion is itself a major one. Notice we didn't just say technology industries ! Innovation is something that all firms should be doing, most don't and will become increasingly important as a foundation for survival. But the innovation-based industries are the ones where product development in fact drives the whole rest of the firm.

As Josh Limon pointed out the first pill costs $10B while the 2nd costs $1 in the pharmaceutical industry. Similarly in the aerospace business Boeing and Airbus should really have a split P&L. One for the research, development and production behind the first new model. The second for the continued manufacturing, sales and support of the next 1,000. In comparison R&D and innovation do not, as a matter of fact, take up as much of the budget and aren't as critical to the traditional tech industries. Though it is still critically important. So we've collected readings on tech, telecomm, pharma, aerospace and alternative energy under this heading. 

But let's set the table with - why do you care ? Well if this carnage ends in six months as the standard expectation has it who'll you pick to get back in with ? If it keeps going same question, different dates ? On the other hand if you'd read Truth, Justic and the NDX Way and agreed with the conclusions you might have been out of Tech in time to save or short and make money. Consider this post a continuing part of our efforts to dive deeper into business evaluation and rubble sorting (Winners & Loosers: Rubble Sorting). Since we've a little space, and each link deserves it's own post - if not a series, let's try and expand on  the context a bit.

1. Telecomm - on it's 3rd or 4th Perfect Storm. The story below on the iPhone will help explain why the decade+ business model of the big telcos got blown up last year. Another major disruption is the "fat pipe to premise" war between the telcos and cable companies. The result of which is already upending the media & entertainment industries more than they've been since they were shaped at the end of the 19th C (hyperbole ?). Part of the next big storm is the growth of Unified Communications which should be a major innovation for the Telcos but which they're having trouble grasping. Meanwhile MSFT and IBM are going after it big time. Interesting. And then there's the GOOG vs YHOO war where the first's model may be aging while the latter let complacency and lack of innovation and adaptation depreciate its' user base value so severely. And who doesn't seem to be generating any new breakthru thinking either !

2. Technology - meanwhile IBM reported a 12% jump in EPS but when you look at the detailed investor presentation that was 24% YoY but 10% was in revenue growth and buybacks, each. But revenue growth would have been 4% without currancy benefits. And they told me that you buyback shares when they're under-valued not to catch a falling knife in a down market. Me, I'd rather have that cash as a dividend rather than see it go into buybacks and be depreciated completely. Similarly ORCL bought BEA (finally) but BEA has almost completely lost its' clout to IBM in the last few years in the Java arena and ORCL's not done well with its' own middleware strategies (FUSION). Can't say there are many indicators of organic revenue and profit growth let alone long-term innovation here. 

3. Pharma - it's finally dawning on investors that the R&D model which drives Big Pharma is broke as broke can be and no substitute is on the horizon for a long....long time. Which is why you hear a lot of analysts beginning to talk about major downsizings and further consolidations. Drug pipelines are 7-15 years long. Today's problems were laid down in the late 90s and the stock prices have increasingly reflected that.

4. Aerospace - Boeing's been taking it in the neck recently over continued delays in the B787 Dreamliner because of supply problems. That's in addition to market pressures of course. Yet the 787 represents major design and construction innovations that date back almost a decade, based on design innovations in CAD/CAM that go back to the mid-90s. For this plane they've undertaken a huge new operational innovation by outsourcing whole assemblies around the world. That's turning out to be a major headache but I'm pretty confident that they'll solve it. Meanwhile Airbus's big new thing is the A380 which is so big only a few airport can handle it and which is really only profitable on very long-haul int'l routes. Yet as technology advances it becomes more feasible to start flying more and more point-to-point city pairs. Which is perfect for the B787. When this is over, like Apple with its' string of sustained innovation, BA looks like a great investment for the future. 

5. Energy - alternative energy is going great guns but the fact of the matter is that it takes 20-30 years to migrate an energy infrastructure to a new foundation. All this does is nibble around the edges. And that's as long as you don't make silly mistakes like subsidizing ethanol production from corn thereby driving up food prices, not producting fuel at any cheaper prices and neglecting your real alternatives over the next several decades of coal and nuclear. Meanwhile of course these might still be good speculative investments. 

All in all there are going to be real winners and loosers in these industries. Sorting them out takes a bit of work but you'd probably spend that much time reading charts and financials. Why not invest a little in exploring the structure and fundamentals as well. We'll do our best to help. 

Continue reading "WRFest 20Jan08(Tech Bizz): Times They are Changing" »

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

Well just in case you were living in a cave, off on vacation or otherwise incommunicado last week pretty well saw the confirmation of a, shall we say, slightly negative outlook for the economy. When the Chair of the Fed and the President of the US both announce that they're going fullbore on fiscal stimulus it's probably time to buy gold, put up the emergency food & water rations and make sure the emergency generator at your cave in the mountains has plenty of fuel :). While it's actually early days yet it's also too late to stop what's coming. What it's not to late to do is arrest the full force of the tsunami and prevent it from creating serious long-term damage. Which is the proper thing to be doing BtW. Particularly since up until the last few weeks the better part of the prognosticating community was in denial (an observation we've been beating to death but aren't quite prepared to give up on just yet). And judging by worldwide markets today, as noted in the prior two posts, some of the other little myths, e.g. de-coupling seem to have bitten the big one as well.

In the links and excerpts below they'll mostly speak for themselves and skimming over them will pretty well give you a flavor for the outlook as well as last week's high-frequency data, e.g. housing starts. We'd like to particularly draw your attention to the two links in the General section and the first link (from today's WSJ no less) that starts the Economy section. Pointing to some recent academic work it highlights how the ripple effects of a bursting Housing bubble combined with a bursting Credit bubble are likely to see a downturn who's severity hasn't been seen for a while. In fact the chances of a downturn on a par with the 1980 downturn, or worse, are the comparisons that come to mind.

What the policy gurus are trying to avoid however is something far worse - something akin to what Japan worked its' way into. So if we get a recession, even a severe one, but manage to contain the worst damage of these bubbles then think of it as chemo-therapy. Painful, debilitating and dangerous. But far from being as bad as the alternatives. 

Continue reading "WRFest 20Jan08(Economy): Recession Anyone" »

Posted by dblwyo at 06:00 PM | Permalink | Comments (0)

In case closed markets have allowed you to not notice the worldwide headlines are pretty stark with all the major Asian and European markets down. Being lazy enough to not post over the holiday weekend allows us to savor yet another moment or more of schadenfreude but at these levels of pain it's not much fun. Hopefully you're in process, or better yet well along, in restructuring your portfolios for the likihood of some major downturns. BtW - while the world markets were open the futures on the DJIA were down 522, the SP500 was down 60 and the Nasdaq down 76; all in the neighborhood of 4.5%. While there's not a 1-1 match between futures and the actual markets it's close enough for horseshoes and hand-grenades.

Below you'll find the seperate market sections broke out for you reading "pleasure" but take a look at the SP500 charts at the right - which are "only" thru last Fri. Which even before today's actions pretty well ansers the "why do I care" question, big time ! Thru last week the bottom-limit on the four-year trend was busted. It looks to us as if reality is more than setting in, and setting in big time. You'll pretty much find that all confirmed in the readings below but we'd like to particularly point you to a link to a financial advice column on positioning your portfolio for a downturn. While normally our readfest links are things we think you should be aware of this time we'll go farther and endorse at least the general sense of the recommendations. It pretty closely parallels our own portfolio was is heavily weighted toward leveraged inverse funds. We'd also point you to last week's readfest and it's list of prior posts (WRFest 12Jan08 (Economy & Markets): the Non-Sanguine Outlook)

Continue reading "WRFest 20Jan08(Markets): Welcome to Crash Corner" »

Posted by dblwyo at 05:36 PM | Permalink | Comments (0)

Last week, actually the last several, were terrible for the markets. And judging by the carnage in Asia and Europe so far today we can anticipate more trouble as the markets re-open. While it's not clear how much farther we've got to go it looks like a major shift in outlook and sentiment is underway. One which, partly in a spirit of schadenfreude, we've been pointing to for quite a while now. There was so much last week in fact on the spreading credit contagion that we pulled those excerpts out into a seperate post (Ebolatization Contagion: Credit Mess II) to highlight them. A comment on that post asked an interesting and key question:

It's as if you are discriminating between financial sector growth, which I assume you measure in financial terms, and economic value, which I also assume you measure in in financial terms. That is, there is non-value adding financial growth. Am I close to correct here?If so, how do we distinguish between the value-adding financial growth and that which does not add value?

One could argue that any shift of resources into newer sectors helpe the overall economy become more efficient - in the case of the Finance Industry by helping to raise and create capital and more efficiently allocate it. The question we were asking that led to the comment was whether or not the shift of resources into the Finance Industry had gone too far and our implied answer was "hell yes". But it was an answer based on a fair amount of prior investigation on the rapidly rising share of the Financial sector in profits (The Heart of the Matter: Profits vs Earnings ?), on the buyback and buyout manias (Market Drivers 3 (Buybacks):Investment, Hiring, Nah...Bonus, Bonus, Bonus ! plus two prior posts) and on what's turning out to be alleged profits built on leverage and unaceptable risks (Rocks, Ponds, Perverse Incentives: More on Credit Contagion)

Continue reading "WRFest 20Jan08(FinInd): Re-thinking, Re-Thinking, Re-Thinking ?" »

Posted by dblwyo at 09:53 AM | Permalink | Comments (0)

As part two of the week's interesting stories we'll focus on the business outlook. Just to continue with our story of attending a panel on the LBO industry outlook, with a mid-market emphais, we'll mention that the panel concluded with a live case study. This was a small manufacturer and distributor of a branded set of healthcare cleaning supplies with about $80 of annual revenue and $11M of profits. Quite a tidy little business with low capex requirements, some reputation, low debt and some real adjacent market opportunities. It also helps to know that the founders were in their late 60s and most management was in the 55-65 range. In other words we have a small company with an excellent track record, superb financials and some interesting opportunities. The three panelists were sr. execs from a finance company, a PE buyout firm and a private hedge-like fund focused on alternative investments. The question is what would you pay and how much debt and, most especially, what key questions would you ask. Without reviewing them in detail the questions were very sound in terms of overall EBITDA multiples and debt ratios. There were two interesting things. First off the panelists, while fairly aggressive, were much more conservative than the winner LBO firm's bid which in turn was very aggressive on the debt side for the financing. The second nobody asked the key operational questions: 1) what drives the financials in terms of market, customers and operating capabilities, 2) what happens in a slowdown, how well will those numbers hold up in other words, 3) if you buy it and leverage it up how much does that increase the risk factors and 4) what are the capital requirements to go after the growth opportunities presented to justify the multiples suggested, let alone on offer from the actual acquirer. Now these guys are a lot better at their jobs than I'll ever learn to be. They quickly and efficiently analyzed (it was a short case study after all) the financials as presented. But nobody, and I repeat nobody, asked the fundamental strategic and operating questions. Which, for readers following along at home with this blog, will now know makes us extremely nervous in general and, given the fragilities we've discussed, more so in this case.

There's an interesting WSJ column in today's In the Lead which summarizes the 'run the company aspects' in a way:

Moving Ahead of a Slowdown  A look how some companies prepared for an economic slowdown. As U.S. jobless claims rise, manufacturing activity declines and consumer spending skids, many executives are beginning to acknowledge that the economy is slowing. But others, like Mr. Zollars, caught cooling signs early and have already trimmed labor costs and inventory levels and made other adjustments. "The best-performing companies plan in advance -- or at least ahead of many of their rivals -- for slowdowns," says Michael Mankins, a partner and consultant at Bain, which has studied which companies best weathered the last downturn in 2001 and why. "They take a bet early on which way the economy is going and quickly identify which costs they can manage aggressively and where they should use cost savings to fund new growth," he says.

As we mentioned the mid-markets have done better thru '07, which to put it in perspective was a great year overall, than the large buyout firms. But are they a lagging indicator ? There doesn't seem to be much awareness of nor commitment to the mantra of economy - industry - firm analysis we support. The real question here is how widespread is that attitude ? As opposed to the examples in the WSJ story. We suspect, so far, that it still represents the dominant thinking. 

Just for some perspective here are some key prior posts that bear on these issues:

We Can See Clearly Now: Retrospect/Prospect

• WRFest 30Dec07(Business): Fragilities, Exposures & Soundness 
  

Ganesh Filter II: Clear-seeing Algorithims for an '08 Plan

Ganesh Filters III: Analyzing Businesses Blueprints

Seeing thru Maya: Piercing the Veils of Delusion

Continue reading "WRFest 12Jan08(Business): Brave New Worlds, Painful Old Ones" »

Posted by dblwyo at 10:30 AM | Permalink | Comments (3)

Yesterday morning had the pleasure of hearing an '07 review and '08 preview on the mid-market buyout situation. Interesting on several fronts - '07 was generally good but the last half of the year not so and the end of the year looked like it started tanking. Lots more to be said but the thing that really struck me was a) again, how unanticipated the downturn was and b) how little anticipated and factored in foreseeable future pains are. Part of that of course is that panelists have to be conservative, let alone the audience. And to be fair everybody but everybody is seeing a tough year with tighter standards, less available financing, lower multiples, lower debt & more equity. A return of sense and sensiblity if you would.

All of which works if you believe in the U-shaped outlook for the economy and markets. With two caveats - what folks aren't factoring in is that the outside arm of the U is still going to be around 2% which will be pretty darn low and slow. For years if you believe the Fed. And the second thing they're ignoring is the fault lines of fragile consumers, banks and businessess. Where the longer we spend in a weak environment they more likely they are to fracture.

Bottomlines: 1) it's going to be a tough year, 2) the best outlook is still being under-estimated for its' foreseeable impacts and 3) the fragilities and fracture lines of downside risk are not being hedged. BtW - the first two excerpt/links are on denial and mistakes and seem to perfectly capture, IMHO, my sense of things past and things to come. With those notes let me also point you to three prior posts from this week that reinforce and take a deeper dive those themes.

• Seeing thru Maya: Piercing the Veils of Delusion
• Weally, Weally, Twuly Mr. Market: Consumers vs Denial Again
• Truth, Justice and the NDX Way: More Tech Outlook Reflections

 And, finally, this is OT but there's a wonderful campaign going on to increase our support for our service mean and women. OT for a blog on business, economics and markets but there's more to life:

GRATITUDE: the Gratitude Campaign

Continue reading "WRFest 12Jan08 (Economy & Markets): the Non-Sanguine Outlook" »

Posted by dblwyo at 10:08 AM | Permalink | Comments (0)

Now that we're moving beyond the holidays it's time to ask how businesses will react to the acclerating deterioration in the macro-environment. And the decline in the markets where implicit valuations are likely to take a big hit as a result. Rather sad in light of the amounts that have gone into buybacks and the damage to balance sheets that result from increased borrowing to support those buybacks. As things beging to work out it's likely that these mounting pressures will increase the level of bankruptcies, pressure profit margins and in general make things more difficult.

Earlier this week, just to test the waters, I posted a question on LinkedIn to see if there's any shared widespread concern with these issues. If you're on LI you can take a look over there though it's early days as yet. We'll see how the response go. But the gist of my inquiry was this:

As the economy continues to deteriorate what do you think the impacts on corporate performance will be ? And how well positioned do you think major companies and industries are ?

Later amplified by suggesting that a) most companies have weakened balance sheets and are therefore more fragile and b) haven't taken the opportunity of the last several years to revamp their strategies, improve their operations or otherwise better posiiton themselves.

If you have any opinions please feel free to chime in, either in the comments or on LI. On the topic, and to help set the background up some more, we'd refer you to our prior posts on the macro-environment (& the balance sheet situation) as well as the approaches and prior readings on business performance evaluation. After the continuation we provide our usual list of decent industry and business links to help contribute to your thinking :).

In our 'umble opinions enterprise performance will be an increasingly critical challenge in the next few years, though it always is. Now it could become critical. And, as we hope we've made clear, things don't look any too rosy ! 

Continue reading "WRFest 6Jan08(Business): Business Shock" »

Posted by dblwyo at 03:59 PM | Permalink | Comments (0)

If the employment numbers this last week were surprising and the market's response was simply shocking  the real shock and awe is what happens when you look at overall market performance. The first sub-chart shows the SP500 one year performance. Notice that, on a much fairer basis than a simple calander year, that it's flat at best. More importantly when you look at the second sub-chart something really interesting pops out - for the first time despite all the volatility this is the first time that the downturn has broken thru the upper bound of the long-term trend over the last four years. That tells us a couple of things. First, all the prior dipsy-doodles were gyrations caused by market repurcussions of credit problems or market internals. THIS time it's caused by economic fundamentals finally penetraing the event horizon of awareness and sentiment. It also might make one question how well grounded all the fluff has been since the rise of the market above the l.t. trend since earlier this year doesn't appear to have been grounded in economic realities.

Those same realities appear to be penetrating assessments of other markets as well. In the next chart take a look at the six-month and one year comparisons of Emerging Markets (EEM), Europe (IEV) and Asia (EPP) as well as the R2K and Nasdaq. Particularly notice that the mid-year speculative bubble in EM markets not only appears to be deflating but the way to have bet since the beginning of Nov. is down. Doesn't look like there are too many safe havens abroad any more does it ?

And on the other side of the house if we take a similar look at individual sectors, which are split into those doing worse than or better than the SP500 composite, a similar conclusion seems to be justified. At least on an overall basis. You will of course reach your own interpretations but, aside from energy (XLE) each of the other sectors that was fairly strong appears to be weakening, especially after this last week. That includes Technology (XLK) and Industrials (XLI), which we've been expecting by looking at economic fundamentals. Though Utilities (XLU) appears to be holding up alright as a combination of inflation hedge and income source.

We'll have to see how all this plays out of course but it looks to me as if we may begin to be hovering on the cusp of a SEE change in market outlook. One where sentiment begins to absorb and reflect more of the deeper problems in Structure and Fundamentals. Below the continuation you'll find our standard collection of interesting story links, including our own earlier post that was an end-of-year summary on the last year and the outlook.

Continue reading "WRFest 6Jan08(Markets): More Shock and Awe" »

Posted by dblwyo at 03:34 PM | Permalink | Comments (0)

And I am too. Shocked, simply shocked. Not that the reported Payroll job increase was only 18,000 when the consensus was for 70K, itself a very weak number. Moderately surprised at that. No I'm simply shocked that everybody, judging by incontrovertible and objective evidence in the form of a 2.5% drop in the SP500, 3.8% drop in the Nasdaq and a 4.3% drop in the NDX, was apparantly shocked. More decline in one day than a month long mild correction, eh ? And if you dig into the numbers private, non-gov't job creation was actually -13K to boot. Makes you wonder what's going to happen when the Census Bureau's Birth/Death small-business adjustment model is revised. Just for the record new jobs in '07 were over 80% accounted for by the B/D model. Which is necessary but misses turning points.

Let me explain why I'm shocked, though savoring the schadenfreude and the uptick in my investments. My shock is encapsulated in the chart on employment trends, which we've been discussing here since the beginning of the year, reporting on frequently and have always reached the same conclusions, repeated here. Job growth has been decelerating for some time, has been below the magic of 150K/month new jobs require to breakeven and non-organic job growth indicates a weak economy. NONE of which points has apparantly made it into ANY of the main financial or related economic research shops. Think about that very carefully indeed - the best minds in the business, paid much money and with $B's riding on their analysis has apparantly seriously investigated readily available data and used it to make investment decisions. What else might they have missed ? What's going to happen when rude, crude reality makes another undeniable appearance ? Likely to be even less pretty IMHO.

Consider yet another look at things that's potentially even more alarming in the chart at left. It shows the level of unemployment (r.h.s.) and YOY% change in the unemployment % (l.h.s.). Note by the way that the scales are inverted so that an increase in unemployment results in a drop in the graphs. 

Now we'll admit that this is a new indicator on this blog but it's consistent with the older ones. Just perhaps more revealing. The upper sub-chart shows the numbers since Jan00. Notice that the YOY% change is showing a sharp drop which in fact is yet another harbinger of recession.

The second sub-chart shows the same indicators back to 1980 so you can get a feel for how good an indicator of economic health it is. Notice also that the YOY% change in the rate is a leading indicator for actual increases in unemployment in general. Definitely doesn't bode well for the outlook either, does it ?

Below you'll find the usual collection of worthwhile story links to economic news. They cover the current macro-situation and observations therein plus specifics on employment, consumer debt, housing and the dollar. Also some interesting links on continued oil pressures. 

Continue reading "WRFest 6Jan08(Economy): I'm Shocked, Simply Shocked ! 18,000 ?!" »

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

Well here are the interesting stories on business for the week for industries and individual companies. Rather than summarize them, and there are worthwhile comments on the rising bankruptcy risks, the implosion risks as big banks and the finance industry being re-structuring (!), oil & energy, the wild world (literally) of the auto industry and more on tech, let's set the stage.

If it's not clear at this point we think the economy is slowing and seriously exposed to sudden & sharp disruptions as Housing and the Credit crisis worsen and it becomes more fragile. We also think that the Markets still haven't grasped this nor, definitely, is it reflected in pricing, earnings outlooks or valuations. Even on current course and speed with no major disruptions there's some serious re-thinking that needs to happen, at least IMHO. But if you start looking now and understand what's going on then there are going to be industries and enterprises that weather this storm, if not with style and grace. Finding them will be the trick and the trick to the trick starts with understanding the deeper structural fragilities that have been created by non-organic earnings and liquidity-driven buybacks. Well as is becoming a practice Paul Kasriel has already done the heavy lifting so we'll let his comments and charts speak for us. Here's the key point - on a macro level buybacks, real declines in profits and increased leverage indicate that business enterprises are very exposed to shocks if/when they come. In other words a hurricane will breach the dike and it'll take a well-founded company to manage the floods :). So pay careful attention to Paul's words and charts - think about 'em, 'cause they could be incredibly important.

Continue reading "WRFest 30Dec07(Business): Fragilities, Exposures & Soundness" »

Posted by dblwyo at 06:58 AM | Permalink | Comments (0)

Well another interesting week in the markets, to say the least. Not quite the end of the year rally everyone was planning is it ? This living in interesting times bit is getting very old indeed but, if you've read any of our prior posts on the Economy, Business Cycle or Credit Crisis, we've got a long way to go. And the normal stable of prognosticators is just beginning to acknowledge all that, at least to some limited extent. In fact the "standard model" so far of an '08 outlook is for a not-so-good first half with a 50/50 shot at recession if something tips us over with a recovery in the second half of a sorts. In fact apparantly analysts consensus is for 15.7% earnings growth ! Now how one gets an economy growing at, at best 2%, and then gets 15% EPS growth is not only beyond us but beyond even the stretch of good YOY comparables :) ! Or should be.

What we've got and had for some time now is a sideways market, as benchmarked by the SP500, with some wild swings around the central trend. Which you can see in the above chart. Notice in the sub-chart btw that the Euro/Yen spread which has driven the market thru the carry trade mechanism is beginning to break down a bit. Also notice that, looking at the 90Da/200Da MA's that the market is consolidating but has huge swings around that center unlike earlier consolidation periods this year. What we think is going on is that reality is slowly seeping into market valuations but the uncertainty in sentiment and outlook is so high and the economic future so "unclear" that nobody can make up their minds to go or stay (thank you Jimmy Durante).

Continue reading "WRFest30Dec07 (Markets): Up, Down & Around" »

Posted by dblwyo at 09:45 PM | Permalink | Comments (0)

After the continuation you'll find the "usual suspects" - our collection of the week's most interesting stories and data. Rather than summarizing them or point to key articles though we took advantage of the holidays (loosely speaking) to develop a bunch of deeper background postings on the nature and structure of the Business Cycle and high-frequency indicators so you can do your own regular spot checks. Or at least, at a minimum, have a better set of filters for collecting, collating and interpreting the flow of headlines and data. So we're going to point you to the four posts we made in the hopes that they'll be helpful and add to you toolkit.

To just dive into the high-frequency indicators and get a feel for just what the outlook is start with this one:WTWW Part 3: Jitterbugging - the High Frequency Indicators. And in particular we think Paul Kasriel captures the essence of things in this excerpt: 

Probing the Probabilities of a 2008 Recession What is the probability that the U.S. economy will fall into a recession in 2008? We would answer, 65.5%. We have been talking about the probability of a recession occurring without defining what a recession is. A popular misconception is that a recession occurs when real GDP contracts for two or more consecutive quarters. Although most, but not all, recessions do include two or more consecutive quarters of contracting real GDP, this is not the criterion for defining a recession used by the arbiters of such, the National Bureau of Economic Research (NBER). According to the NBER, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. It just so happens that these four variables are the same four variables in the Conference Board’s index of Coincident Economic Indicators. We are amused and you are confused by those talking heads on Bubblevision who claim that a recession is not imminent because payroll employment and/or personal income continue to increase. To repeat, these are coincident economic indicators and, thus, provide some information as to the current performance of the economy, not the future performance of it. I Have a Lot of Problems with You People!

Continue reading "WRFest 30Dec07(Economy): Review & Outlook" »

Posted by dblwyo at 01:24 PM | Permalink | Comments (0)

Well after yesterdy's Weekly ReadFest on the state of the economy and markets it's "almost" a shame to put up the business and company links that caught our eye this last week. Yet it's very much not and for several critical reasons. The central message of yesterday's stories, in our interpretation anyway, was that major storm flags were flying and the grasp on the depth of the risks and exposures is not good nor widespread. There are a bunch of things that can be and are being done. Nonetheless these are potentially very....very rough waters we're headed into. Aside from watching the weather and checking the charts to know where to sail THE question is, what ships to sail on ? With what crews and how handled ? In other words how do we find those companies that will do well in adverse circumstances ?

Let me move away from the metaphor a bit - the markets and the economic situation define the environment and ecology that we all have to live with, period, end of story. The question will be who're the most suited to prospering, surviving and taking advantage of the situation that's likely to be unfolding ? And who's going to take major damage and have trouble surviving ? Let's set the stage with the following excerpt:

Wall St. analysts still in fantasyland Despite years of reform, analysts are every bit as deluded and inaccurate as they ever were … Now, eight years after they were inflating the bubble, we again have to question whether analysts do retail investors any good. The latest evidence: Analysts have only just discovered that corporate profits in the fourth quarter aren't going to be nearly as strong as they had supposed a month or two ago. It has been obvious for many months that profit growth would have to slow way down simply because it couldn't continue at recent rates. To see the stubbornness of Wall Street's Pollyannas, look at new data from Merrill Lynch. The firm's chief North American economist, David Rosenberg, regularly and realistically forecasts S&P 500 profit growth. He cut his 2008 forecast sharply (to zero growth) in June, even before the credit crunch. He has since cut it twice more, and it's now -3 percent. But Merrill's analysts hold a far different view. Add up their 2008 profit growth forecasts for individual S&P companies, and you get 14 percent. In analyst-land, 2008 is going to be another knockout year, with profits yet again growing several times faster than the economy.

There are some good folks out there who understand their industries, how these environments are impacting them and know some good companies. You have to pick and choose. But by and large because analysts don't understand what makes a business really work you need to look to other information resources, including (& especially) at least some effort on your part. An excerpt we put up last week pointed out that recent headlines tell us where industries and companies are headed.

So as you skim over the links and excerpts below ask yourself - what does this tell me about the business conditions and surivival chances of the players ? 

In the business section, for example, you'll find articles on innovation (sadly neglected and under-executed but increasingly important), strategic employee development (ditto squared) and on major structural pressures in the finance, auto and telecomm industries. Each of which, and more, are reflected by linkable stories about specific companies, e.g. Goldman vs Morgan Stanley, JetBlue's major downturn, Chrysler's near bankruptcy, Circuit City's self-inflicted near death experiences and the same for AMD. More on the telecomm industry and key players and some key stories about big pharma players struggling to cope with the sudden emergence of the death of their business models. A disruption that was in fact long-predictable and predicted if you knew where to look.

Continue reading "WRFest 23Dec07(Business): Search for Performance ?" »

Posted by dblwyo at 08:21 AM | Permalink | Comments (1)

 Another interesting week, capped in the market by a nearly 4% surge in the NDX which drove a nearly 3% jump in the SP500, all driven by exceptionally strong earnings it would appear from ORCL and RIMM as well as news that the big banks failures to run their businessess are being offset by foreign capital.

Rather than provide more overview per se let me urge you to read the following pieces some from analysts and columnists who I greatly respect because they're thoughtful, analytical, clear and understandable and usually right. That last is pretty important as well. The rest are my own refreshed diagnosis of the credit problems and some backup readings. Taken together you get framework for understanding the state of the economy, the nature and structure of the credit crisis and the stratetgic outlook, which I find very credible, on the stock markets.

While you may not buy all of the arguments or even disagree with them completely they're all laid out so that you can see the tools and analysis and use them to reach your own judgements. Which we urge you to do in the strongest terms.

By way of setting the table let me also point you to an earlier post on whether or not it's possible to frame things so one can indeed see the future trends clearly. It reviews an economic/market assessment from about this time last winter and has turned out to be fairly accurate using simple tools: Looking Ahead: Seeing the Avalanche Before It Lands

Continue reading "WRFest 22Dec07(Econ & Mkts): Storm Warning Flags Are UP" »

Posted by dblwyo at 09:13 AM | Permalink | Comments (0)

We've deferred posting last week's Business and Company stories of interest because off all the turmoil in the credit and other markets and the need to focus on better understanding that. HOWEVER, if there's any lesson we'd like to point to from prior posts and/or these readings, it's that at the end of the day competent business management is the essential requirement for sound investment and long-term economic performance. Conversely when that's lacking you get many, if not most of the problems, we're facing today. Just as a case in point today Goldman's stock dropped 5% on a luckwarm outlook for '08 - an outlook which is entirely consistent with many of the posts and readings here. Yet G-S started thinking thru a FORESEEABLE credit crisis at this time last year and convened a strategic task force to toughen up it's risk management and think thru it's credit positioning. Wilbur Ross had his funds and companies moving toward long-term finanancing early this year. It IS possible to look ahead and translate storm clouds into storms and start trimming up the sails, checking the charts and battening down the hatches.

To put a major point on it all of the postings here that provide economic, market, industry or firm outlooks plus all the readings provide some indicator of where you should be looking at for next year. We'll try to say some more about that whole thesis between now and the end of the year but the article excerpted below captures the basics in a nutshell. While it talks about job opportunities any reader of this blog should be thinking about business outlook and investment strategies as well. 

What '07 Headlines Say About '08 Job Market Today's top news stories could lead to tomorrow's jobs -- or tomorrow's layoffs. Here's a look at some of the biggest news stories of 2007 and their expected jobs-related impact in 2008. If you're wondering what jobs will be hot in 2008, take a second look at the past year's news. Major events and trends often set the stage for dramatic changes in recruiting, and this year is no exception. Headlines about soaring oil prices and the iPhone's introduction signal that more jobs will be created in such areas as alternative energy, online networking and mobile technology, say recruiters. Not surprisingly, though, some big stories are likely to be followed by substantial job cuts. Case in point: The lingering mortgage crisis has already resulted in mass layoffs for workers at many lending institutions, banks and real-estate companies. The jobs outlook for these concerns is expected to be even gloomier in 2008, say recruiters. Away from the headlines, recruiters say demand should continue strong in health care and retirement planning as the baby-boomer population continues to age. And the Sarbanes-Oxley Act of 2002 will continue to drive hiring at accounting firms.

 Please do both of us a favor and take the suggest model as that and apply it to at least the excerpts below and ask THE critical question - what does this mean for '08 and what can/should I do about it.

Continue reading "WRFest 16Dec07(Business): Headlines, Outlooks and Quality" »

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

Well, that was an interesting week indeed. So much so that we put up several readings collections and analysis posts on the Fed, credit markets and the outlook. Rather than review the broad readings per se we'll just list them below the line and point you to the week's earlier postings for your review as well. One other quick word though - the first three links in the general section rather nicely sum up what we think is a balanced perspective on the end of the year and looking ahead to the next. Without further ado here are our posts which provide a combination of analysis, overview and readings that we think are worth looking at, at the end of the week :).

Markets

Bubble, Bubble, Toil & Trouble:Markets Review

Credit Crisis and the Fed 

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

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

Credit Mess and the Fed: Understanding the Strategic Posture

Economy

Reality Bites: Real Retail Sales and Consumption

More Reality Bites: Inflation Trends and Outlook

Some earlier posts on the economic overview:

• Slowmotion Slowdown in Review: Wessel Takes Notice
• Pieces of Change: GDP Components

Continue reading "WRFest (Markets, Economy)" »

Posted by dblwyo at 06:26 AM | Permalink | Comments (0)

Well the flow of news in the last 24 hours is significant - one is tempted to say astounding. After a "disappointing" 1/4-pt cut in the Fed and Fed Funds rates the Fed yesterday announced a whole slew of policy initiatives designed to attack the freeze in the credit markets, especially the short-term and bank lending markets, directly.Make no mistake about it,

this is not only a serious problem in its' own right but thru freezing up the credit markets threatens to trigger a major economic downturn, potentially on a worldwide basis.

The Fed's announcement of upto $40B of short-term lending using these new, or newly applied, policy tools and the massive worldwide coordination efforts (not seen since the 911 crisis) are measures of how seriously they are taking this. Today's WSJ has a great summary article - if you've no subscription we've excerpted key portions below but get a copy however you can. And to add some spice to the sauce check out David Wessel's brief video commentary at right. In fact start there. Meanwhile the WSJ excerpts are below coupled with more readings below the line extending yesterday's post of readings and resources.

(WSJ) Fed Tries to Free Up Credit  The Fed said it will provide banks up to $40 billion in the next eight days as part of a coordinated effort with four other central banks aimed at reviving lending.

Continue reading "The Fed & the Credit Mess: Readings II" »

Posted by dblwyo at 11:20 AM | Permalink | Comments (2)

Just to pick up with last week's interesting links on general business and specific companies let's re-grab theme #2 from this "symphony" that we appear to be developing:

 the pressures for crystalline focus on corporate performance will increase exponentially over the next several years; and put a premium on superb execution of good strategies and business models as well as good leadership.

The question then becomes who's doing well, who's not and what are the specific circumstances that will define their environment and their individual outlooks. Below you'll find collections of links to some answers for those questions for the Banking & Finance industries, Homebuilders, Retailers, Airlines, Pharma and Technology as well. We start off though with a look at how the continued problems with short-term interest rates are persisting and how & why it's damaging the outlook for the Finance and Banking industry. Which then raises acute questions of just what is a good Finance firm and how do you build one.

That ripples forward to looking at Homebuilders and in particular a wonderful long-term strategic assessment for their marketspace by our friend CalculatedRisk. His analysis from many priors shows that we have a much bigger bust as the Housing markets adjust back to "normalcy". This startling piece of work lays out the long-term definition of what normalcy might be. You won't like it but you should read it. It'll be good for you.

Another major ripple of credit market problems that hasn't been incorporated into everybody's thinking just yet is the pressure it will put on cash flow and corporate balance sheets. Which is beginning to creep up on various companies but is likely to worsen dramatically next year. Needless to say those companies who didn't re-leverage to do buybacks and maintained their credit capacities and ratings will have an enormous and appreciating competitive advantage. This last point is really important so let me reiterate it -

....those companies who have financial strength are going to be able to beat the crap out of the companies that don't over the next five years or more because of the emerging financial and economic climate. 

Meanwhile retailers are pulling back after decades of over-building, the airlines are reducing their routes and fleets again having failed to find a new and sustainable business model and the Pharmaceutical industry is facing its' biggest challenges since post-WW2 with the failures of it's historic development paradigm, a lack of new approaches and the resulting breakage in strategies, business models and performance. Not to be too harsh on them of course. And to continue another point we've made but is now widely reported on the outlook for Tech spending is slowing fairly rapidly in the US and decreasing worldwide. With all the same competitive pressures about to begin in that industry as well. Which is more problematical because they've really never regained their footing after the post-2000 bust.

Continue reading "WRFest 9Dec07(Business):Performance, Performance, Performance" »

Posted by dblwyo at 06:37 PM | Permalink | Comments (1)

Here's the weekly readfest of link postings for the General overview, Markets and the Economy all of which highlight several of the major themes and arguments we've been accumulating over the last several weeks and which are reflected in various posting series of our own, e.g. the "non-organic" nature of earnings, the slowmotion slowdown, the role of leverage & liqudity in market performance and so on. We'd like to suggest that those themes are NOT something we've crafted, though there's more than a bit of machinery and analysis that went into finding them, but rather they result from and emerge out of what's going on around is. In other words we think this is what's really going on, not something our own mistakes and biases have created. But, please, argue with us. In that process you'll reach your own conclusions, maybe even using some our tooks, ideas and arguments :) !

Several of our major posts since last Fri., if you didn't happen to catch them, are worth looking IOHO. Those postings are:

 Economic Outlook

• More on Payroll Numbers: Employment vs Employment
• Talking Heads: Mark Zandi on Payrolls, Economy & Recession
• Pieces of Change: GDP Components
• Slowmotion Slowdown in Review: Wessel Takes Notice

Market Outlook

• Market Assessment: Running of the Bulls or Cusp Points ?
  

Interestingly we've found a series of articles to point in the General section that taken as a whole, all together and in order pretty well encapsulate what we've argued (found ? :)  to be the trends and structures taking shape around us which will shape the outlook for '08.

If there's a central theme that ties this whole "symphony" together it's that we are on the verge of a major, albeit slow and hidden, cusp point shift to a new regime.

The General section starts with a financial column we intend as a strawman to shoot rather than posting it because we necessarily concur - but the arguements are cogent and grounded so it makes some sense to walk thru point by point and see whether you agree or not. Which in many ways the rests of the links do. David Wessel of the WSJ has a wonderful column we've excerpted on the deteroriating state of the economy and the role of leverage followed by an interesting article where the long....long path to credit recovery is beginning to make it into a broader awareness. The column from Bill Gross is especially worthy of your thoughtful attention.

That's followed by something we've been warning about for some time, both in the context of general economic analysis, earnings analysis and the buyback & liquidity series - to wit a "recession" is already here for Corporate Profits and it's likely to get worse before it gets better. Which is not something the Street analyst community is prepared to admit just yet btw. That's coupled with a perfect companion article on how buybacks will increasingly haunt corporations and make those decisions more painful. Which naturally leads to questions of how all this impacts valuations, deals and the Private Equity community - using the latter as proxy for all the other forces and actors that have been in this play.

The bottomline here is perhaps our second major theme with all this swirling around us (major theme 1)

the pressures for crystalline focus on corporate performance will increase exponentially over the next several years; and put a premium on superb execution of good strategies and business models as well as good leadership.

Those companies and industries who can perform are who you should be looking for because there's going to be more and more fecal matter hitting the rotary impeller device. 

Continue reading "WRFest 9Dec07: the Dance Goes On, or the Emerging Cusppoint Shift" »

Posted by dblwyo at 06:02 PM | Permalink | Comments (0)

Have you ever wondered why Shakespeare still continues to be a big draw ? Or Shaw or the great Greek playwrights equally as well ? My theory is that it's not just because it's all great literature, fantastically well-written, stunningly insightful portraits of humanity or all those English Dept. reasons. In fact I'd argue that these guys are all wasted on the English dept. who's relationships to the real world, other than petty academic politics, seems pretty tenuous oftentimes. No, it's because they capture great human drama that reflects the world we live in. After all what is King Lear but the story of a major succession crisis at a large but dysfunctional family firm. Stop me whenever the names of Citi or Merrill come to mind. Aside from Homer, who wrote about a world we only faintly grasp of warrior heroes, tribes, and endemic violence, the first to get it all down in ways we still recognize were the Greeks.

And there are a bunch of general business and company stories playing out in front of our eyes that are worthy of a Sophocles, a Europides or, shudder, an Aristophenes. Consider the links below and test them against that thought.

With the still unfolding credit crisis the banks and all financial companies have destroyed most of the profits since the last downturn, threaten their capital adequacies and are trapped in sucession crisis. And why ? Surely hubris, arrogance and "making water" on the gifts of the gods are the major part of the blame. Unfortunately as the layoffs ripple across the Finance industry it's we peasants who'l suffer for the failure of our princes.

On the other hand there's a whole series of great compare and contrast stories below - the good daughter vs the bad daughters for you Lear fans. Tesco has turned itself into the dominant UK retailer and is entering the US with a great new store concept based on adapting the mix in its' stores to local demand. Well Kroger, after ten years is learning to do the same but Fast Eddy Lampert has run out his string of cost cutting, financial engineering and under-investment and faces a dilemma worthy of the Greeks. Cut and run or hold and invest - what a decision.

Another set of inter-related stories is Apple's resurrection as a customer-value focused manufacturing with a long string of product innovations carried thru from concept to design to manfuacturing to distribution and delivery. Their success in consumer electronics has spilled over into increased Mac sales and a gangbuster retail year. And the contrasting story is Dell which has lost its' mojo thru arrogant commitment to an old business model, a failure to face reality and a bunch of doubletalk.

Apple's ground-breaking iPhone does several things - not least of which is breaking open the tight monopoly and control of the wireless networks the operating companies have protected and absued for so many years. With Google coming out with its' Android software platform the trend will accelerate and break that marketspace wide open. In response and all of a sudden the big phone companies are starting to open up their networks - or so they say. Now there's a whole industry, along with the associated manufacturers and the Media & Entertainment industries going thru their own little Trojan War. And at the end of the day the casualties are likely to be as large and serious.

Another industry whose fundamental business model is badly broken is Pharma and each of the majors is wrestling with how to repaid its' existing R&D model while finding new sources of drug discovery.

So anybody out there lamenting our staid, uneventful and un-exciting business environment I give you the following pointers to what's really going on. 

Continue reading "WRFest 2Dec07: Oedipus in NYC - the Greek Dramas Around Us" »

Posted by dblwyo at 04:39 PM | Permalink | Comments (0)

Continuing the multi-part split this posting points to interesting and valuable links on the general market situation and the widening credit crisis. In particular CalculatedRisk's partner in crime the Great Tanta does as good a job walking thru SIV accounting and the implications as anything I'm familiar with. While it's not clear that it all sunk in it's well worth your reviewing and re-reviewing and re-...well you take the point.

Other postings reinforce the basis point she makes and our general theme by pointing to the huge haircture that E-Trade took when it sold it's mortgage-based assets to a hedge fund (Citadel) for $.27 on the $1 ! Now if you take that as a baseline metric for all the yet un-valued assets on various bank, investor's and hedge fund books look out below. Scary ain't the word. 

We'd also point to the article on the earnings outlook which is still weigh too sanguine on the part of Wall St. and the analyst communities, e.g. S&P. Sanguine btw is also related to the word sanguinary - which can also mean bloody ! 

Continue reading "WRFest 2Dec07 Markets: Widening Credit Crisis" »

Posted by dblwyo at 04:28 PM | Permalink | Comments (0)

Below are some very interesting excerpts digging deeper into the economic situation, which continues to deteriorate for a variety of reasons (discussed below). At the end you'll find two fascinating links to an assessment of India and the rise of it's middle class and the cultural changes that go with it; and another on China's rapidly growing shorter-term economic problems.

With the Fed's change in reporting policy to provide more frequent updates along with a view of it's general outlook a key fact has emerged - which is NOT getting anywhere near the attention it deserves. The Fed is expecting below potential growth for the next 2-3 years; though contrawise it's also expecting/hoping that slow growth will reduced inflationary pressures. 

You'll also find pointers to some good coverage of slowing consumer spending and, my goto guy, a series of superb analysis on the Housing situation from CalculatedRisk. This is a set of postings by the best extant source of housing/economic analysis around. Highly recommended for at least minimal review. 

Continue reading "WRFest 2Dec07: Economy Under Pressure" »

Posted by dblwyo at 04:15 PM | Permalink | Comments (0)

Well I'm finally getting dug out from a very nice Thanksgiving vaction and prepared to catch up with the posting activity. As it happens though, while again collecting quite a few interesting pointers and links none of the arguments and themes we've built up in prior posts has been anything but re-inforced. In fact, if anything, not only are the analysis holding up but there's wider spread recognition by much more serious players in broader venues. So we're going to split last week's Weekly Readfest across four seperate postings, starting with this Overview and walking thru the links on the Economy, Markets and Business in subsequent postings. We'll also try to point to prior postings that backup the links with our own stuff.

But before diving in let us offer up a few summary arguments - which we urge you to review and think thru for yourselves:

1. Economy - the slowdown is accelerating as consumer spending comes under increasing pressure but the full magnitude of the risks is still under-estimated and not reflected in outlooks or valuations.
2. Markets - this has been a financially driven market with excess liquidities fueling a leveraged structured debt bonfire which is still only faintly visible on the horizon.
3. Business - again business operational performance is everything and the the arguments of int'l demand and/or technology immunity aren't holding up as CAT, CSCO and DELL illustrate. 

1. Economy - Larry Summers chimes in first with an astute but alarming assessment of the economic outlook. And finds that our theme of a slowmotion slowdown not only has merit but that a) the risks of recession are rising, that b) the credit crisis is worse than anticipated or imagined and is going to have more of a worldwide impact than thought and c) the other major world economies are also showing more signs of slowdown than looked for, only partly due to these factors. Themes we've struck in prior WRFests (WRFest 25Nov07(Mkts/Econ): The Bell Tolls for Thee) as well as dove into in some detail in dedicated posts on the nature and structure of the slowdown, which we again refer you to as recent GDP numbers haven't changed it at ALL: Slowmotion Slowdown: More On GDP.

2. Markets - Bill Gross has a very simple and clear Fortune article which re-iterates what he's been saying in his monthly newsletters for some time. To wit - our banking/finance system is soaked thru with structured debt built on leverage and nobody knows the extent. We only know how widespread it is, the amount of damage we've seen and how badly under-estimated it's been. Our prior posts worth reviewing are: Tremors: Assessing the Markets, WRfest 11Nov07: SEE changes and Cusp Points(Markets).

Gross's analysis is complemented by an excellent Fortune article pointing out that market valuations do not, at all, reflect any of these risk factors. For PE and related risk pricing to accuately reflect the known levels of risk PEs will need to compress much farther; or put another way the market will have to decline significantly. 

3. Business -  we'll cover this in more depth in a seperate posting and for now will simply point you to a prior WRFest that in turn points you to some earlier dedicated analysis of company performance evaluation:WRFest 11Nov07(Business): ....performance is reality. It may seem like we're beating the same drum with the same old argument, and it's true, we are. Only the timing is speeding up considerably. Now would be a good time to start thinking about which sectors, industries and companies are well-positioned using the tools we've outlined.

4. Fed Policy - after several key Fed players spoke up last week the markets took a big jump. The question is, is it justified ? My favorite finanical columnist Jim Jubak has a very good column which is excerpted below. But basically the Fed finds it's iteself not only between a rock (a slowing economy) and a hard place (rising inlfation and dollar pressures) but there's an landtrain bearing down on the space between them as the credit crunch returns, with renewed force.

If you read nothing else of the links we post at least skim the summaries of these articles, think about what we're saying and evaluate your own decisions and plans. A friend made a very astute observation one time that reacting to these sorts of events when they suddenly appear requires a fighter pilots mentality - the ability to react and analyze instantaneoulsy and clear-headedly while everything's going to crap around you. After considerable relfection I'd agree but extent it by pointing out that fighter pilots train, train and train again. That is they think thru the likely events and react according to that training.

NONE of the currents creating what could be a perfect storm of multiple tsuanmies is a "black swan" in the true sense. Appropriate skilled analysts have been pointing out these structural risks for months and years - many of whom we've cited here. Now it's time for us all to use their insights for our own mental training !! 

Continue reading "WRFest 2Dec07 Overview - Cusp Points ?" »

Posted by dblwyo at 03:36 PM | Permalink | Comments (0)

And while we're on the subject of tolling bells, Thanksgiving and all the little details that make life interesting this collection of business related readings has some real highlights. The prior WRFest posting sketched the general environment - not positive and lots of supposed "suprises" coming out of the woodwork. So the question remains who's going to do what ? In particular all those companies that though the good times would roll and bought back their shares are now experiencing a rapidly growing exposure to profit and cash flow problems. If you read nothing else read the excerpt from the WSJ on that (and also it's worth going back to review a prior post on the flood of liquidity and buybacks -Market Drivers 3 (Buybacks):Investment, Hiring, Nah...Bonus, Bonus, Bonus !.

Accompanying that is a little something pointing out that YoY earnings flipped negative for the first time in a long time. Several companies caught our eye for one reason or another from Cerberus to GM to Chipotle to Airbus, who continues to experience really rocky times. But the two links we'd really like to draw your attention to are the one on HP and the other on the application software market. In case you haven't noticed app software is a) where the value of computer systems resides - the rest if plumbing. And b) without ever having really delivered on it's hyped-up promises reached saturation and maturity so that c) there's been a lot of consolidation going on. Unfortunately that consolidation hasn't meant any benefits for customers....whoopsie ! If anybody thinks Tech has a rosy future they first need to work thru that little conundrum - how to get the APP S/W industry to actually deliver value. We're all open to suggestions.

On the other hand one of THE drums we beat around here is that a good strategy & business model are essential, a good management system vital but where the rubber meets the road is making it happen - execution, execution, execution. HP turned in a quarterly earnings report that was just sterling - firing acrosss the lines of business and geographies though interestingly it was servers that were beginning to take off while printers are experiencing continued profit pressures. And HP is certainly back in PC's as well.

At the end of the day this is about Hurd coming in and putting an operating plan in place, communicating, making sure it was executable and then establishing accountability for performance. Hopefully we'll get a chance to dig into this further and see what the details are but it's worth carefully reviewing the HP link and then ask yourself two key questions:

1. How did they make it work and can they keep it up ?
2. How does everybody else compare ?

Continue reading "WRFest 25Nov07(Business): ...and We" »

Posted by dblwyo at 12:18 PM | Permalink | Comments (0)

Welcome back - hope you had an excellent Thanksgiving. Mine was and thanks for asking. Oh, yeah while last Fri. may have got our hopes up one would have to say today's markets take the edge off. As the quote goes, "Ask not for whom the Bell tolls, it tolls for thee". And there were quite a few tolling last week, some in such interesting keys that we may have crossed some thresholds. Below is our regular summary of the Markets and Economic news with several key themes serendipitously highlighted in the General section.

Before commenting on those we'd like to draw your attention to some markets and economic news which continues and expands several themes we've been playing (to wit an already slowing economy IN a growth recession with a long way to go in Housing and accelerating problems in the Credit Markets as the vast sets of structured instruments unravel).

The biggest shots across the bows were the announcements last week from Freddie and Fannie after they post multi-$B losses AND told us that they'd need to raise new capital. The first was very definitely not good but the latter is really scary. To which one needs to add in a couple of pieces of int'l news. For one thing the credit contagion appears to be spreading to some of the Asian countries, seperately from any economic linkages. And the spreads in the European commercial paper markets are widening back out, indicating rising risks and increased chances of yet another seizure in the worldwide credit markets. The central characteristic of all this that's still underplayed is that breakdowns in the credit markets are NOT limited to sub-prime and are more due to leverage and structure combined with bad under-writing diligence than the latter alone. Again we'd refer you to our post on the "rocks in the pool" model of spreading credit problems:Stages of Denial: Acceptence ? Not Yet .

The other big shot, in its' own way as significant, is the Fed's move to change its' reporting from 2 to 4X/year and also to include more information, including a 2-year economic outlook plus the ranges around that outllook. As we've discussed before the natural speed limit of the economy is 3% or north, and anything less is actually a growth recession. Well the Fed (!) is now telling us their outlook thru 2010 is for less than 3% growth.

Which brings us to the General section which nicely summarizes and re-presents/represents our themes. First is a great FT column explaining why a growth recession is a problem and then how it's spreading around the world. Followed by two interesting posts, one from the BigPicture and the other from the WSJ, commenting on the markets' YTD performance and how certain key bellweather companies are getting badly hurt (BP's example are Citi and HD - in the latter case we could say we told you so but our intent was to focus on performance improvement and understanding the problems, not critisizing where it wasn't merited. Citi though is another thing entirely). Which nicely sets up the Journal's point about needing to focus on company performance (also buttressed by the postings on buybacks to be covered in the next posting on Business). The final link is to a WSJ editorial on improving enterprise performance by using the PE mantra by Robert Pozen. While he makes some very good points our argument is that there's too much attention to financial engineering and not enough to improving the business. A point we made a couple of weeks ago and which is co-listed with the link.

In the midst of all these things to not be thankful for we'd still urge you to stop and consider what you have to be grateful for. If nothing else that you have the time, wherewithal and capabilities to worry about these sorts of things puts you in a better position than 90% of the human race in terms of well-being. As Warren Buffett put it's the birth lottery. 

Continue reading "WRFest 25Nov07(Mkts/Econ): The Bell Tolls for Thee" »

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

Peter Drucker had a saying, "...change the people or change the people" and we've been seeing a lot of that and will be seeing more and more of it as the problems in the Finance industry are worked out. If you'll skim the readings below, as well as the prior post, one theme stands out to me - at the heart of all these problems was a major breakdown in the asset securitization "technology" cause by a combination of profound lack of understanding, a set of incentives that made pumping any business instead of good business the road to greedy gains (& everybody knew it and knows it who's involved) and the joint failures of competence, governance and execution on fundamentals, e.g. Risk Management, that were supposed to lie at the core of the executives capabilities. Change the people indeed. Like the prior post we'd have to say the extensive discussions and analysis from last week's WRfest still applies (WRFest 11Nov07(Business): ....performance is reality) and will be THE theme for a long time to come. 

The three listings in the General section bear this out and are specially recommended. One is a Bloomberg interview with John Thain where he reminds us of nothing so much as Mark Hurd as the latter was taking the reigns at HP. Let's hope he has similar success 'cause MER sure could use a dose of hardnosed execution these days. Along with the whole rest of the Finance industry.

They're not the only ones facing Ch...ch...changes though and below you'll find pointers to challenges in the Auto industry (including the big ones popping up at Chrysler so far), retailing facing the accelerating slowdown (there's a particular fun piece on HD in case you read our earlier post: Performance Re-visited: Another Trip to HD's Woodshed) and the continued emerging challenges in the Tech industry, in general and specifically. For example Starbucks is making some of the biggest changes in its' history by planning a major marketing campaign as it faces slowing growth, maturity of it's business model and increased competition, e.g. MickeyD's. Similarly Apple has gone gang-busters with the iPhone but ATT hasn't backed it up with a network that provides the proper level of support. The iPhone and Google's new open-source phone software platform are huge shots across the bow.

We recently heard Richard Armitrage, ex-Deput Secretary of State, outline what it takes to make something go: 1) a workable vision that you communicate to everyone, 2) execution and 3) accountability. He was, of course, speaking in a different context (US foreign policy) but put the essence of good management and govenence in one pithy sentence.

We went on a little longer but, again, we'll point to the introduction to our framework and suggest that the times are going to sort companies out into two buckets. Those that do and survive and those that don't.(Think Like a Private Equity Guy ? No, Think Like An Owner !)

Meanwhile have a great holiday ! 

Continue reading "WRFest 20Nov07(Business): Ch, ch, changes....." »

Posted by dblwyo at 04:48 PM | Permalink | Comments (0)

We've taken the weekend Readfest and pushed it out a couple of days because last week's listings and discussions were so extensive. And also because of the holiday - let me wish everyone a Happy Thanksgiving. While you may not think so if you're reading this you've probably got a lot to be thankful for compared to many in the world, or even this country.

The markets continue to gyrate, today in particular. But by and large we'll stand by our assessment and summary from the last go 'round: WRfest 11Nov07: SEE changes and Cusp Points(Markets) on the market situation. There's been a lite menu of economic news but wider spread recognition of the slowing economy and rising risks. Again we'll go with last week's summary of the situation on the economic front: WRFest 11Nov07: Paging Cinderella..Your Coach is Here(Economy) . The charts and discussions in both those posts are worth reviewing IMHO.

What added fuel to the fires last week and so far this is the growing recognition that the problems in the credit markets are not just sub-prime but do in fact represent a major breakdown in the new "technologies" of securitization. Which we are far from understanding. Jan Hartzius of Goldman traces thru some of the consequences when he points out that with potential losses of $200B in write-offs that the leverage built into the derivatives means something like $2 Trillion, yes that's Trillion with a T, will likely be pulled out of the credit markets. The one thing I think everybody's still missing is that more than one asset classs was bathed in the waters of securitization and baptized with multiple layers of leverage on it's way down the chain of players. NOBODY is talking about those risks as yet - at least in public. For a refresher try these: Stages of Denial: Acceptence ? Not Yet, The Sound of the Next Shoe: Corporate Debt.

As usual the MSM reported the monthly numbers and made headlines out of the core but in fact inflation is picking up rather rapidly and economic growth continues to slow, and the pace may be picking up judging by industrial production and retail sales. Given that there's a big meme running around about de-coupling saving us all the warnings signs of slowdown in Europe and Japan are important to pay attention to. Which is not to say that the developing countries aren't in fact beginning to lead independent existences.

The stand-alone development of the world's other economies will be the dominant feature of the world scene for the next few decades and has produced more real gains in the last two for the world's poor than at any time in history. A great deal of that is due to the growth of sound institutional foundations in various countries, for example Turkey. China and India are re-enterring the world economy at a level they haven't been at, relatively speaking, since the early 19th century when they were the two largest, most productive and most prosperous places in the world.

The other analogy to keep in mind, and this is important whether your an investor, employee, PE guy or what, is that the other closest analogy to what's going on is the rise of the US in the late 19th C. Eventually everyone was, and is, better off. But if you were in the "old world" the adjustment processes were pretty rocky.

Now, all that said, demand from the BRICs et.al. for our exports is still not sufficient to offset what's coming. Nobody bothers to look at the numbers. All decouplings really means is that they're getting more self-supporting. So for a review of what's coming you might want to go back to Slowmotion Slowdown: More On GDP .

Meanwhile have a great holiday. Bon Appetit' ! 

Continue reading "WRFest 20Nov07(Markets/Economy): Credit Breakage to Economic Slowdown" »

Posted by dblwyo at 04:01 PM | Permalink | Comments (0)

The title comes from a hard-nosed saying of Harold Geneen's, quoted in Jim Kilts new book "Doing What Matters", reviewed in the WSJ(The Man Who Sharpened Gillette) and pointed out by one of the few business-focused blogs(The importance of execution.) around and it's worth quoting from the review at greater length. Especially since it's a central, perhaps THE central thesis, of this blog.

When the hard-nosed Harold Geneen was driving the growth of ITT in its heyday in the 1960s and '70s from a $760 million company to a $17 billion conglomerate, his management philosophy was blunt: "In business, words are words, explanations are explanations, promises are promises, but only performance is reality."

When Jim Kilts showed up at Gillette in 2001, the first outsider to run the Boston-based company in more than 70 years, he found a business with great brands losing market share. Its acquisitions of Duracell and Braun were not delivering. Sales and earnings were flat, the company had missed its earnings estimates for 15 straight quarters, the stock had plummeted, and Wall Street had lost patience. Yet two-thirds of the top managers were getting top ratings. People were being rewarded for effort; performance, under Mr. Kilts's regime, became the new measure.

As Bank Profits Grew, Warning Signs Went Unheeded We should have known something was strange. The banks were doing a lot better than they should have been doing. When the history of the financial excesses of this decade is written, that will be a verdict of financial historians. There were signs that banks were either lying about their results or were taking large risks that were not fully disclosed, but investors were oblivious. What were the signs? Consider how banks make money. They pay low rates on short-term deposits and charge higher rates on long-term loans. So they love what are known as positively sloped yield curves. And they like to see big credit spreads, where risky borrowers are charged much more than safe ones. Put them together, and banks should clean up. By that light, nothing was going right in 2006 and early this year. The yield curve was inverted, or at best flat. And credit spreads were at historic lows. Risky loans, whether to subprime mortgage borrowers or junk-rated corporations, were readily available at rates that seemed to assume there was only the slightest risk of default. And yet the bank stocks were buoyant, and so were reported profits.

There are a couple of CNBC clips worth watching(Financial Analysts Over-reacting ?,Bo's Rules)which also reinforce the argument.(). The key here is that however the economy and markets are running at the end of the day "performance is reality" and it's up to you whether as investor, employee or other stakeholder to dig into and understand the underlying characteristics of a particular business and the industry in which it operates. It's a point that we've hammered on a few times here as well. The way to do we've sketched in some of these prior posts.

•  Think Like a Private Equity Guy ? No, Think Like An Owner !
•  Performance Re-visited: Another Trip to HD's Woodshed
• Review the Bidding, Count the Cards: EPS Growth Rates
  

At the end of the day our point is that performance matters, performance matters, performance matters !

AND as the artificial impacts of excess liqidities dry up we're going to be more and more in what we like to think of as Warren's economy where understanding the roots of enterprise performance, which has always been important no matter what the level of neglect, will be increasingly critical on many levels. As you sort thru and review the following links please look at them with this in mind. 

Continue reading "WRFest 11Nov07(Business): ....performance is reality" »

Posted by dblwyo at 02:11 PM | Permalink | Comments (0)

Speaking of fundamentals it doesn't get more so than economic trends. For the last several months it's been Goldilocks 2.0, as treated by Dr. Ben Pangloss, but it's beginning to look as if it was still Cinderella's economy, the clock is closer to midnight and the pages have announced her carriage. Some of the evolving trends have been visible for some time now, despite the recent quarterly numbers - which were not anywhere near as good as the headlines would have had, as usual.(So, Dearie, What Time IS It, Anyway ?,Reality Checks: the Latest GDP Report and Outlack ?,QR Mary: a Little High-Frequency Data and the Outlook).

Our major look at the recent GDP numbers(Slowmotion Slowdown: More On GDP) found real GDP growth was closer to 2.6% instead of the 3.9% reported headline number. The number is the difference between YoY comparisons and annualizing one quarter's data. We also found that consumption was running about 2.9%, not bad, and the outlook based on employment and real wage growth was holding up reasonably well. That's the good news and you can see some of it is reflected in the accompanying chart. For more discussion and analysis please see the earlier post on the Slowmotion Slowdown. The bad news is:

1. Housing is turning out to be much worse than anticipted or is still being anticipated.
2. The employment impacts of Housing and the slowdown in general are still muted because of the lags between when things slow and when the in-direct impacts turn up.
3. Consumption is still getting support from MEW and that should be turning down.
4. Capex spending is slowing as well but again the lag structure has a ways to go to impact things.
5. Inflation is begninning to rear its ugly head and the huge gap in PPI over CPI is beginning to go away as companies are seeing much worse input pressures which they are increasingly passing on. And this time around Food & Energy increases look increasingly as if they're due to structural shifts in long-term energy supply/demand imbalances.
6. The infamous de-coupling argument where foreign economies will make up for the slowing of the US economy may be right in the very long-run but, something that's widely ignored, those economies are not big enough to make up for the slowing of the developed economies. Nor do they buy enough of our imports.
7. Japan and Europe are beginning to show signs of the typical 1-2 quarter lag slowdown, and they do buy most of our exports.

So the bottomline the US is teetering on, or is in, a growth recession with an outlook for less than 2% growth, perhaps thru '08. It is also increasingly sensitive to the accumulation of shocks (Oil prices, credit market, housing) and the risks to the downside are increasing as a result. While the odds of a recession are still in the neighborhood of 40% the chances of totterring over the edge are going up. In any case the difference between a growth recession and a real R-word one are pretty small in terms of job creation, increased demand or investment spending.

Interestingly, and finally - read at last, at long last - the general MSM reporting is beginning to recognize all this as reflected in the articles listed in the General section below. Other articles trace out the other various factors we've just summarized.

I'd wish you Bon Appetit' but that hardly seems appropriate. Nonetheless my hope is that forwarned is forearmed at least. 

Oh, btw, the dollar is in freefall, the world oil industry is undergoing a vast re-structuring where most reserves are in unstable areas and foreign governments are taking control of those reserves. And to add icing to the cake China is beginning to export inflation instead of deflation. OOPs. 

UPDATE: Calculated Risk draws our attention to Recession estimates from Roubini and Hussman as well as more on MEW and Consumption from Roubini and himself:Hussman, Roubini: Recession Coming,Roubini on Home Equity Extraction.

Both very well worth reading as well as extending our comments and analysis. 

Continue reading "WRFest 11Nov07: Paging Cinderella..Your Coach is Here(Economy)" »

Posted by dblwyo at 05:23 PM | Permalink | Comments (0)

Now we get down to putting some rubber on the road - what have the businesses who generate a lot of this news actually been doing. And again it's been an interesting week. Before reviewing the news let me point to some prior postings that should be interesting and define the filter we use to select and analyze these folks.

1. First, as a reminder of why business performance is critically important we'll point to the multi-part set of postings on Earnings and outlooks, which starts with Review the Bidding, Count the Cards: EPS Growth Rates
2.  Then we'll point to what we think is an interesting and valuable little piece of work on how one might go about analyzing a company, or an industry for that matter. A general set of questions to investigate if you like:Think Like a Private Equity Guy ? No, Think Like An Owner !
3. And also point to the last entry in a longer-running set of posts on Home Depot that builds up a picture and ends up being a pretty good test case for the approach: Performance Re-visited: Another Trip to HD's Woodshed

With those tools in mind let's talk about the listings in our ReadFest below. First we've brought up to the front two very interesting articles that nicely complement our approach. One is TheStreet's look at the correlation between payroll and performance in MLB - which by and large turns out to be none. It turns out that working harder and harder but not very smart doesn't yield a very good payoff. On the other hand if you're a big team in a wealthy market who runs both a smart team AND a smart business then things can get pretty rosey indeed (if you think I'm thinking of the SOX you'd be right). Another view that kinda converges on a similar conclusion is an interesting column from Jim Jubak pointing that there's no corner of the market that's currently under-valued and many that are very much over-valued, e.g. emerging markets which are definitely bubblicious. He suggests that the only pockets of mis-priced opportunity are companies with good growth prospects beyond the next 12-18 months, i.e. over the event-horizon of the m