http://www.nytimes.com/2010/06/20/business/20view.html?emc=eta1
Robert J. Shiller (the Yale professor and co-founder of the Case-Shiller home price index), a noted financial economist and a supporter of the behavioral finance school of thought, noted in the NY Times on 6/18 that Congress will not be addressing the underlying financial crisis issues when a House/Senate compromise reform bill is passed. The versions of the current efforts to get a bill out wouldn't "... prevent a repeat of this mess."
As Shiller says, he's been working with a nationwide group of 15 professors of financial economics on recommendations that might improve our chances of better regulation. Named for the New Hampshire lake where the group first got together in 2008, the group looked to pool their expertise.
The group made extensive use of what they considered to be an important economic theory: people respond to incentives, but the incentives embedded in government regulations often don't have the desired effects. They presented their findings on June 16th at Columbia University where Ben Bernanke introduced their book: "The Squam Lake Report: Fixing the Financial System (Princeton University Press). He said he agreed with the principle that "the stakeholders in financial firms - including shareholders, managers, creditors and counterparties - must bear the costs of excessive risk-taking or poor business decisions, not the public."
The article's attachment does a nice job of outlining the various categories where the group feels a better focus could be made on issues that would impact a better result. One of our favorites is executive compensation. There's no question that the wrong incentives were in place at all levels but, then, what are the right ones? The Working Paper argues that governments should generally not regulate the level of executive compensation at financial firms. Instead, a fraction of compensation should be held back for several years to reduce employees' incentives to take extra risk. The "say on pay" provision in the proposed legislation gives stockholders a chance to whine about pay levels being too high, but so what. Good point for the Squam Lake Group.
The Senate bill does have "clawback provisions" that might take back an executive's compensation at a later date, under special circumstances. But, these provisions wouldn't have the likely effect of a "holdback."
This group has done good work on all aspects of financial regulation. It's worth reading.
Thursday, June 24, 2010
Wednesday, June 23, 2010
MacArthur and McChrystal
http://www.nytimes.com/2010/06/23/opinion/23friedman.html?e
http://www.nytimes.com/2010/06/23/opinion/23dowd.html?emc=eta1
One of our favorite things to post about is effective management. That can sometimes be defined by examining ineffective management. "Don't do this" is sometimes just as instructive as "Do this!"
Two of our favorite writers are Dowd and Friedman. Both get too extreme at times but both make compelling and effective points. Friedman (and his three Pulitzers) can define the Middle East like no one else and make the political situation there sound like there is, indeed, a solution available. Dowd understands management and politics.
We're guessing here that General Stanley McChrystal knows who General Douglas MacArthur was. We're betting he studied that at West Point (if not before that). General MacArthur was fired by Harry Truman during the Korean War when he refused to stop his troops at, roughly, the current line of demarcation between North and South Korea. General MacArthur was a hero of World War II who had come back to win in Korea. If there had been public opinion polls similar to those done today back then, Harry Truman would have been an "also ran" and MacArthur would have been somebody who could have beaten Truman if he'd wanted to run for President. But, Truman was the boss.
Mike Martin, one of the great college head baseball coaches of all time (Florida State), has a favorite saying: "Sometimes you're the windshield, and sometimes you're the bug." Truman was the windshield.
We're guessing here that McChrystal didn't learn the MacArthur lesson. We're also guessing that McChrystal's attitude was about the same as MacArthur's. And, it got him the same result. And, might we add, McChrystal had nowhere near the stature of MacArthur.
The "Rolling Stone" article on this situation is an instant classic. It should be required reading in business schools. Whether or not you respect the person, respect the position.
Jim Collins (he of "Good to Great" and, more recently, "How the Mighty Fall") on what one single trait is the most important to management success: "HUMILITY". To Collins, CEOs who don't have it, fail sooner or later. To quote 'Rolling Stone': "Although McChrystal has been in charge of the war for only a year, in that short time he has managed to piss off almost everyone with a stake in the conflict." Reading about McChrystal's behavior, he actually put himself in a position where President Obama had no choice but to fire him - again, instructive from a management point of view.
We wonder here whether McChrystal had any clue that allowing a "Rolling Stone" reporter access to everything he and his staff thought and said was possibly NOT a good idea. We can only conclude that his ego saw it as inconsequential.
Again, we have attached Friedman on the Afghan situation because he makes the "unclear" clearer. We have attached Dowd because she adds some class and perspective to a classless and sad situation.
http://www.nytimes.com/2010/06/23/opinion/23dowd.html?emc=eta1
One of our favorite things to post about is effective management. That can sometimes be defined by examining ineffective management. "Don't do this" is sometimes just as instructive as "Do this!"
Two of our favorite writers are Dowd and Friedman. Both get too extreme at times but both make compelling and effective points. Friedman (and his three Pulitzers) can define the Middle East like no one else and make the political situation there sound like there is, indeed, a solution available. Dowd understands management and politics.
We're guessing here that General Stanley McChrystal knows who General Douglas MacArthur was. We're betting he studied that at West Point (if not before that). General MacArthur was fired by Harry Truman during the Korean War when he refused to stop his troops at, roughly, the current line of demarcation between North and South Korea. General MacArthur was a hero of World War II who had come back to win in Korea. If there had been public opinion polls similar to those done today back then, Harry Truman would have been an "also ran" and MacArthur would have been somebody who could have beaten Truman if he'd wanted to run for President. But, Truman was the boss.
Mike Martin, one of the great college head baseball coaches of all time (Florida State), has a favorite saying: "Sometimes you're the windshield, and sometimes you're the bug." Truman was the windshield.
We're guessing here that McChrystal didn't learn the MacArthur lesson. We're also guessing that McChrystal's attitude was about the same as MacArthur's. And, it got him the same result. And, might we add, McChrystal had nowhere near the stature of MacArthur.
The "Rolling Stone" article on this situation is an instant classic. It should be required reading in business schools. Whether or not you respect the person, respect the position.
Jim Collins (he of "Good to Great" and, more recently, "How the Mighty Fall") on what one single trait is the most important to management success: "HUMILITY". To Collins, CEOs who don't have it, fail sooner or later. To quote 'Rolling Stone': "Although McChrystal has been in charge of the war for only a year, in that short time he has managed to piss off almost everyone with a stake in the conflict." Reading about McChrystal's behavior, he actually put himself in a position where President Obama had no choice but to fire him - again, instructive from a management point of view.
We wonder here whether McChrystal had any clue that allowing a "Rolling Stone" reporter access to everything he and his staff thought and said was possibly NOT a good idea. We can only conclude that his ego saw it as inconsequential.
Again, we have attached Friedman on the Afghan situation because he makes the "unclear" clearer. We have attached Dowd because she adds some class and perspective to a classless and sad situation.
Tuesday, June 22, 2010
Spend Now/Save Later
http://www.nytimes.com/2010/06/21/opinion/21krugman.html?emc=eta1
"A 'Genius' is just a talented person who does his (or her) homework." (Thomas Edison)
Someone once said that if we ignore the lessons of history, we are doomed to repeat our mistakes. If that wasn't it exactly, we're close.
We were reminded of that phrase when we read Krugman's June 20 "Now and Later" (attached). As Krugman says, "Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?"
Krugman answers his own question: "Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They're eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems."
Returning to our reference above on "history", it is a plus for the U.S. that the current Fed Chairman did his PhD on the Great Depression. While he does not control all the levers of power relating to the economy, his opinions are listened to.
That's the plus. The minus is that 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, Krugman included, regard this turn to austerity as a major mistake. It raises memories of 1937, when F.D.R.'s premature attempt to balance the budget helped a recovering economy fall back into a severe recession.
While America has a long-term budget problem, there are solutions. Krugman's suggestion of a modest "value-added tax" (5%) could be helpful.
But Krugman's point is that our currently depressed economy is inflicting long run damage: every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are 5 times as many people seeking work as there are job openings means there are hundreds of thousands of Americans graduating from school that are denied the chance to get started on a career. And, with each passing month we drift closer to a Japanese-style deflationary trap: "Penny pinching at a time like this isn't just cruel; it endangers the nation's future. And it doesn't even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope of rising revenues."
We are reminded here of the position that Warren Buffet and Krugman took two years ago when they said (along with others) that the "economic stimulus" spending level was "not enough."
There is no "inflation" to worry about. Most economists feel that, under the best of circumstances, we will be in a very low inflationary cycle for a log time. Consumer prices (as measured by the CPI and excluding the food and energy components) rose .6% in the first quarter of 2010: the smallest quarterly increase in prices since 1959.
There are a growing number of economists who fear the bigger danger may be "DEFLATION." Basic economics informs that, when consumer demand is falling, and there is extensive excess capacity, we are in danger of deflation.
As we have said here before, the key lagging indicator in any economic recovery is the unemployment rate. And, that indicator hasn't improved much. When companies are hording cash (some measures put cash levels at the Top 500 companies at the highest levels ever) and not spending it on capital improvements, there is no economic "push". The only thing most companies are doing with their cash (while they wait and evaluate) is buying back stock.
So, while spending now may not be politically in, something is needed. Once unemployment has dropped below 7% on a downward path, budget deficits can be addressed.
Krugman wants to spend now and save later. We agree.
"A 'Genius' is just a talented person who does his (or her) homework." (Thomas Edison)
Someone once said that if we ignore the lessons of history, we are doomed to repeat our mistakes. If that wasn't it exactly, we're close.
We were reminded of that phrase when we read Krugman's June 20 "Now and Later" (attached). As Krugman says, "Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?"
Krugman answers his own question: "Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They're eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems."
Returning to our reference above on "history", it is a plus for the U.S. that the current Fed Chairman did his PhD on the Great Depression. While he does not control all the levers of power relating to the economy, his opinions are listened to.
That's the plus. The minus is that 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, Krugman included, regard this turn to austerity as a major mistake. It raises memories of 1937, when F.D.R.'s premature attempt to balance the budget helped a recovering economy fall back into a severe recession.
While America has a long-term budget problem, there are solutions. Krugman's suggestion of a modest "value-added tax" (5%) could be helpful.
But Krugman's point is that our currently depressed economy is inflicting long run damage: every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are 5 times as many people seeking work as there are job openings means there are hundreds of thousands of Americans graduating from school that are denied the chance to get started on a career. And, with each passing month we drift closer to a Japanese-style deflationary trap: "Penny pinching at a time like this isn't just cruel; it endangers the nation's future. And it doesn't even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope of rising revenues."
We are reminded here of the position that Warren Buffet and Krugman took two years ago when they said (along with others) that the "economic stimulus" spending level was "not enough."
There is no "inflation" to worry about. Most economists feel that, under the best of circumstances, we will be in a very low inflationary cycle for a log time. Consumer prices (as measured by the CPI and excluding the food and energy components) rose .6% in the first quarter of 2010: the smallest quarterly increase in prices since 1959.
There are a growing number of economists who fear the bigger danger may be "DEFLATION." Basic economics informs that, when consumer demand is falling, and there is extensive excess capacity, we are in danger of deflation.
As we have said here before, the key lagging indicator in any economic recovery is the unemployment rate. And, that indicator hasn't improved much. When companies are hording cash (some measures put cash levels at the Top 500 companies at the highest levels ever) and not spending it on capital improvements, there is no economic "push". The only thing most companies are doing with their cash (while they wait and evaluate) is buying back stock.
So, while spending now may not be politically in, something is needed. Once unemployment has dropped below 7% on a downward path, budget deficits can be addressed.
Krugman wants to spend now and save later. We agree.
Monday, June 21, 2010
The "Volcker Rule"
http://www.nytimes.com/2010/06/21/business/21volcker.html?emc=eta1
Our short test to see if the final Congressional effort to put through a financial reform law that was going to be relevant was whether the "Volcker Rule" was kept in as part of House/Senate negotiations. As we understand it, the goal in Congress is to get the overall compromise bill in a position to be voted on by Thursday of this week. That would put the Obama Administration in a positive position for the G-20 meetings which are beginning in Toronto this coming weekend. We guess that would be a similar political move to China's announcement last week that it will begin to allow the yuan to "float."
We also note with interest that this week began a final push by the (for want of a better word) banking lobby to (again, for want of a better word) water down the Volcker portion of the final legislation. Both Senator Dodd and Congressman Frank have already agreed to compromises in the hope that they will get enough votes to pass the legislation. Evidently, use of the term "Volcker Rule" will be kept but some of the "teeth" will be removed. We're not sure that Paul Volcker has agreed to that dental work and we know that he is continuing to lobby for most aspects of his proposal.
Insiders report that one key provision will be kept: a restriction on banks' ability to make speculative bets using their own capital (what Volcker calls "proprietary trading"). The rest ...
We'll see what develops this week.
Our short test to see if the final Congressional effort to put through a financial reform law that was going to be relevant was whether the "Volcker Rule" was kept in as part of House/Senate negotiations. As we understand it, the goal in Congress is to get the overall compromise bill in a position to be voted on by Thursday of this week. That would put the Obama Administration in a positive position for the G-20 meetings which are beginning in Toronto this coming weekend. We guess that would be a similar political move to China's announcement last week that it will begin to allow the yuan to "float."
We also note with interest that this week began a final push by the (for want of a better word) banking lobby to (again, for want of a better word) water down the Volcker portion of the final legislation. Both Senator Dodd and Congressman Frank have already agreed to compromises in the hope that they will get enough votes to pass the legislation. Evidently, use of the term "Volcker Rule" will be kept but some of the "teeth" will be removed. We're not sure that Paul Volcker has agreed to that dental work and we know that he is continuing to lobby for most aspects of his proposal.
Insiders report that one key provision will be kept: a restriction on banks' ability to make speculative bets using their own capital (what Volcker calls "proprietary trading"). The rest ...
We'll see what develops this week.
Saturday, June 19, 2010
The 6 Month "Moratorium"
http://www.nytimes.com/2010/06/18/business/18rig.html?adxnnl=1&emc=eta1&adxnnlx=1276966976-UjZ7I5GHbtNTmg7wOZLWTg
Watching the "Today Show" this morning, we were impressed with a local New Orleans reporter who reminded us that the cost in jobs of the oil spill is increasing with each passing day. Yesterday, one of the most prominent oyster suppliers in the U.S. (supplies all Red Lobster restaurants) had to close its doors. Ironically, aside from unemployment benefits, the only chance these people had to find work would be to help with oil spill "clean up."
That reporter went on to say that there are 16 Federal Government Departments (including the Coast Guard) at the spill sites and none of them are "coordinated." Obviously, this has meant that various "permissions" to take actions have been stop and go. There's no excuse for that level of incompetence.
Tom Zeller Jr. (NY Times article attached) refers to the numbers involved relative to the oil rigs shut down. The moratorium idles approximately 33 oil rigs that were drilling in water depths of 500 feet or more. Many of the rig's owners are seeking customers in other parts of the world. That's immediate unemployment for the motormen, roughnecks and roustabouts who were making $3,500 to $4,000 per month typical for such jobs.
On Wednesday of this week, President Obama and BP announced that the company had voluntarily agreed to create a $100 million fund to compensate such rig workers. PROBABLY NOT ENOUGH! Each rig job supports roughly 4 additional jobs for cooks, supply ship operators and others servicing the industry. Together, they represent total "MONTHLY" wages of $165 million.
The Louisiana Mid-Continent Oil and Gas Association estimates that, for every rig that leaves the Gulf, 800 to 1,400 jobs will be lost, including 3rd party personnel. Raymond James & Associates predicts that the "moratorium" could last well into 2011, directly jeopardizing 50,000 jobs.
Here's a thought: BP opens up its $100 million fund to pay the wages of every person directly or indirectly without employment because of the spill. Since there would appear to be some early success in capturing oil leaking out of the well this week, that oil can be sold in partial support of such an expanded fund. However BP gets the money, they pay.
As for the U.S. Government, appointing somebody to coordinate all the departments involved would seem to make a lot of sense. We're sure Governor Bobby Jindal would agree. As he said this week: "We are not winning this war."
Watching the "Today Show" this morning, we were impressed with a local New Orleans reporter who reminded us that the cost in jobs of the oil spill is increasing with each passing day. Yesterday, one of the most prominent oyster suppliers in the U.S. (supplies all Red Lobster restaurants) had to close its doors. Ironically, aside from unemployment benefits, the only chance these people had to find work would be to help with oil spill "clean up."
That reporter went on to say that there are 16 Federal Government Departments (including the Coast Guard) at the spill sites and none of them are "coordinated." Obviously, this has meant that various "permissions" to take actions have been stop and go. There's no excuse for that level of incompetence.
Tom Zeller Jr. (NY Times article attached) refers to the numbers involved relative to the oil rigs shut down. The moratorium idles approximately 33 oil rigs that were drilling in water depths of 500 feet or more. Many of the rig's owners are seeking customers in other parts of the world. That's immediate unemployment for the motormen, roughnecks and roustabouts who were making $3,500 to $4,000 per month typical for such jobs.
On Wednesday of this week, President Obama and BP announced that the company had voluntarily agreed to create a $100 million fund to compensate such rig workers. PROBABLY NOT ENOUGH! Each rig job supports roughly 4 additional jobs for cooks, supply ship operators and others servicing the industry. Together, they represent total "MONTHLY" wages of $165 million.
The Louisiana Mid-Continent Oil and Gas Association estimates that, for every rig that leaves the Gulf, 800 to 1,400 jobs will be lost, including 3rd party personnel. Raymond James & Associates predicts that the "moratorium" could last well into 2011, directly jeopardizing 50,000 jobs.
Here's a thought: BP opens up its $100 million fund to pay the wages of every person directly or indirectly without employment because of the spill. Since there would appear to be some early success in capturing oil leaking out of the well this week, that oil can be sold in partial support of such an expanded fund. However BP gets the money, they pay.
As for the U.S. Government, appointing somebody to coordinate all the departments involved would seem to make a lot of sense. We're sure Governor Bobby Jindal would agree. As he said this week: "We are not winning this war."
Friday, June 18, 2010
2010 Initial Quality Survey
http://wheels.blogs.nytimes.com/2010/06/17/toyota-takes-tumbles-in-initial-quality-survey/?emc=eta1
As most people who follow the auto industry know, the J. D. Power & Associates Initial Quality Study is published each year as one of the most critical studies on auto brand ratings. This year's study looks at 2010 vehicles during the first 90 days of ownership.
Toyota dropped to 21st this year (out of 33 brands) from sixth in 2009. Toyota's problems per 100 vehicles went up to 117 versus this year's industry average: 109. The study reflects problems related to vehicle design, as well as those stemming from defects.
Number 1, with 83 problems per 100 vehicles, was Porsche. Ford improved from 8th place last year to fifth place this year (93 problems per 100 vehicles). Ford's progress has been consistent and nothing short of exceptional. It reflects the efforts of Alan Mulally who has turned around the culture within that company with his "One Ford" management credo and his commitment to quality brands whether that's resurrecting the Taurus or creating the Ford Fusion Hybrid which is critically acclaimed.
Ford is now sitting in the Top 5 brands of the Power Survey competing against the "luxury divisions" of other companies: Porsche is a luxury division of Volkswagen which ranks 31st (135 problems per 100 vehicles). Lexus (ranked 4th) is, of course, the luxury division of Toyota(ranked 21st, as we reported above). Mercedes-Benz, after a very bad 10 years between 1995 and 2005, has come back up to where they should be at third place (87 problems per 100 vehicles). While Mercedes now sells cars at almost all price points, it is, and always will be, a luxury brand.
Ford's own "luxury brand" (Lincoln) is greatly improved and ranked 8th. Ford has finally made the right decision and announced the end of its Mercury brand (ranked 16th). The two brands that Ford managed to unload (another excellent decision) to the Tata Group, Jaguar (28th) and Land Rover (33rd and last), are better off elsewhere because Ford could not manage them or devote the capital to them that those units needed. As we pointed out in our prior post, Tata appears to be doing something right with those brands because sales are up dramatically. Let us hope that "quality" follows that same trajectory.
Ford's Volvo brand is ranked 10th, so it is "Top 10." It should be first, or at least in that neighborhood. Volvo's number 10 ranking puts it right on the "average" (109 problems per 100 vehicles) for the J. D. Power Study. Within Ford, Volvo has suffered from a similar cultural fate to that of Jaguar and Land Rover. In addition, the issue of whether Ford can sell Volvo or otherwise spin it out of Ford's ownership, has been an ongoing soap opera over recent years. Volvo officially announced at the 2010 New York Auto Show that it will become an independently operating entity of another company as of the 3rd quarter of this year. This announcement was made simultaneously with the introduction of the "All-New Naughty Volvo S 60" which appears to have the goods (a 300 hp AWD 4 door coup that performs) to put that brand out there in a less staid image market.
Overall, the Power Survey is a service that is closely watched and one that has fairly accurately reflected the market's reaction to the quality efforts and market share dynamics of the major players in the auto industry.
As most people who follow the auto industry know, the J. D. Power & Associates Initial Quality Study is published each year as one of the most critical studies on auto brand ratings. This year's study looks at 2010 vehicles during the first 90 days of ownership.
Toyota dropped to 21st this year (out of 33 brands) from sixth in 2009. Toyota's problems per 100 vehicles went up to 117 versus this year's industry average: 109. The study reflects problems related to vehicle design, as well as those stemming from defects.
Number 1, with 83 problems per 100 vehicles, was Porsche. Ford improved from 8th place last year to fifth place this year (93 problems per 100 vehicles). Ford's progress has been consistent and nothing short of exceptional. It reflects the efforts of Alan Mulally who has turned around the culture within that company with his "One Ford" management credo and his commitment to quality brands whether that's resurrecting the Taurus or creating the Ford Fusion Hybrid which is critically acclaimed.
Ford is now sitting in the Top 5 brands of the Power Survey competing against the "luxury divisions" of other companies: Porsche is a luxury division of Volkswagen which ranks 31st (135 problems per 100 vehicles). Lexus (ranked 4th) is, of course, the luxury division of Toyota(ranked 21st, as we reported above). Mercedes-Benz, after a very bad 10 years between 1995 and 2005, has come back up to where they should be at third place (87 problems per 100 vehicles). While Mercedes now sells cars at almost all price points, it is, and always will be, a luxury brand.
Ford's own "luxury brand" (Lincoln) is greatly improved and ranked 8th. Ford has finally made the right decision and announced the end of its Mercury brand (ranked 16th). The two brands that Ford managed to unload (another excellent decision) to the Tata Group, Jaguar (28th) and Land Rover (33rd and last), are better off elsewhere because Ford could not manage them or devote the capital to them that those units needed. As we pointed out in our prior post, Tata appears to be doing something right with those brands because sales are up dramatically. Let us hope that "quality" follows that same trajectory.
Ford's Volvo brand is ranked 10th, so it is "Top 10." It should be first, or at least in that neighborhood. Volvo's number 10 ranking puts it right on the "average" (109 problems per 100 vehicles) for the J. D. Power Study. Within Ford, Volvo has suffered from a similar cultural fate to that of Jaguar and Land Rover. In addition, the issue of whether Ford can sell Volvo or otherwise spin it out of Ford's ownership, has been an ongoing soap opera over recent years. Volvo officially announced at the 2010 New York Auto Show that it will become an independently operating entity of another company as of the 3rd quarter of this year. This announcement was made simultaneously with the introduction of the "All-New Naughty Volvo S 60" which appears to have the goods (a 300 hp AWD 4 door coup that performs) to put that brand out there in a less staid image market.
Overall, the Power Survey is a service that is closely watched and one that has fairly accurately reflected the market's reaction to the quality efforts and market share dynamics of the major players in the auto industry.
Thursday, June 17, 2010
Current Business Indicators
http://online.wsj.com/article/SB10001424052748704198004575310320477151144.html
Ford Chairman, Bill Ford Jr., speaking today as part of the WSJ Viewpoints Executive Breakfast series, indicated that his company expects increased profitability as auto sales return to normal levels. Obviously, his words carry weight because the company which bears his name turned around without government money. He's implying the return of a much larger market to the U.S. than many economists can see. "Normal" used to mean sales of 16 million units per year. Current projections are way below that at, roughly, 12 million units.
China has passed the U.S. market for volume of cars and light trucks sold. Ford also pointed out that he sees greater opportunity in the China markets versus India because of China's well-developed national infrastructure.
Part of Ford's massive turnaround was to sell Jaguar and Land Rover to the Tata Group in India. Ford could not make money with those brands as part of its Luxury Group. That deal looks like a "win/win" now because Tata has anounced this week brisk sales for both brands, especially in England.
Switching industries, another closely watched economic indicator is "business travel". The top airlines reported this week at an investor conference that business travel is back. Southwest Airlines expects to post increased revenue per seat mile of better than 20%. So, while business travel is nowhere near pre-recession levels, it has increased substantially lately. American Airlines reported an increase of about 17% over last year. The business traveler pays more because most of that volume is last minute - again a higher net per seat mile. The other airlines reported substantially the same thing.
So, while a smattering of news on autos and airlines "does not an economic comeback make", it is a smattering of good news. And, that beats bad news.
Ford Chairman, Bill Ford Jr., speaking today as part of the WSJ Viewpoints Executive Breakfast series, indicated that his company expects increased profitability as auto sales return to normal levels. Obviously, his words carry weight because the company which bears his name turned around without government money. He's implying the return of a much larger market to the U.S. than many economists can see. "Normal" used to mean sales of 16 million units per year. Current projections are way below that at, roughly, 12 million units.
China has passed the U.S. market for volume of cars and light trucks sold. Ford also pointed out that he sees greater opportunity in the China markets versus India because of China's well-developed national infrastructure.
Part of Ford's massive turnaround was to sell Jaguar and Land Rover to the Tata Group in India. Ford could not make money with those brands as part of its Luxury Group. That deal looks like a "win/win" now because Tata has anounced this week brisk sales for both brands, especially in England.
Switching industries, another closely watched economic indicator is "business travel". The top airlines reported this week at an investor conference that business travel is back. Southwest Airlines expects to post increased revenue per seat mile of better than 20%. So, while business travel is nowhere near pre-recession levels, it has increased substantially lately. American Airlines reported an increase of about 17% over last year. The business traveler pays more because most of that volume is last minute - again a higher net per seat mile. The other airlines reported substantially the same thing.
So, while a smattering of news on autos and airlines "does not an economic comeback make", it is a smattering of good news. And, that beats bad news.
Wednesday, June 16, 2010
A Financial Reform Perspective
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2516
Whether or not we accept that the Wharton School @ UPENN is the best business school (if it's not number 1, it's usually in the Top 3), there is no question that it has the best Finance faculty in the world. We have attached the current K@W summary of how the Wharton faculty sees the House and Senate financial reform bills evolving.
Overall, we would agree with Susan Wachter that the compromise bill is not, ultimately, a "game changer" in terms of preventing a crisis. As she says, "a lot is left to the discretion of regulators." Isn't that where we were before? Again, to quote Wachter, "... it is not certain regulators would spot a brewing crisis in time or have the political will to deal with it."
Or, as Michael Blume puts it, "Had the reforms most likely to be implemented, such as centralized trading of derivatives, been in place years ago, the recent financial crisis would have been minimized ... the real issue is: how do you regulate what we don't yet know is going to happen?"
Wachter, Blume and other Wharton faculty say the House and Senate measures could have been much worse and much better. Under the provisions most likely to emerge from the House and Senate conferences are new systems for spotting risk before it mushrooms, and for shutting down financial institutions before the need for taxpayer bailouts. The derivative situation will become more transparent but, perhaps, not optimally. There will be stricter standards for credit rating agencies but we're not sure if they will be strict enough. Last, and quoting K@W, "There also will be some form of national consumer protection agency." We're not sure Elizabeth Warren will be real excited about "some form of" consumer protection agency.
Among the Wharton faculty, the most popular reform is the move to centralize the trading of derivatives, including hard-to-value mortgage-backed securities.
The bad news is that the Wharton faculty worries that the reform bills fail to resolve the problems inherent in credit-default swaps: so speculators can still bet on the ups and downs of securities they don't own (does AIG come to mind?).
The "Volcker Rule" has survived all of the compromising that inevitably goes on and that's a good thing. Generally, it would bar Wall Street firms from trading in their own accounts. The Senate bill takes a tougher stance on barring speculative trading, while the House bill would give the oversight council power to prohibit such trades if it finds they threaten the system.
Last, Richard Marston points out that the final bill will not make a lot of progress on how we get to good regulation. As he says, it's hard to legislate regulatory vigilance. Alan Greenspan was, by all accounts, the best Fed Chairman ever, and he was asleep at the switch.
Whatever the final bill, we will be real ineterested in what Elizabeth Warren's opinion is of it. We will be listening for that.
Whether or not we accept that the Wharton School @ UPENN is the best business school (if it's not number 1, it's usually in the Top 3), there is no question that it has the best Finance faculty in the world. We have attached the current K@W summary of how the Wharton faculty sees the House and Senate financial reform bills evolving.
Overall, we would agree with Susan Wachter that the compromise bill is not, ultimately, a "game changer" in terms of preventing a crisis. As she says, "a lot is left to the discretion of regulators." Isn't that where we were before? Again, to quote Wachter, "... it is not certain regulators would spot a brewing crisis in time or have the political will to deal with it."
Or, as Michael Blume puts it, "Had the reforms most likely to be implemented, such as centralized trading of derivatives, been in place years ago, the recent financial crisis would have been minimized ... the real issue is: how do you regulate what we don't yet know is going to happen?"
Wachter, Blume and other Wharton faculty say the House and Senate measures could have been much worse and much better. Under the provisions most likely to emerge from the House and Senate conferences are new systems for spotting risk before it mushrooms, and for shutting down financial institutions before the need for taxpayer bailouts. The derivative situation will become more transparent but, perhaps, not optimally. There will be stricter standards for credit rating agencies but we're not sure if they will be strict enough. Last, and quoting K@W, "There also will be some form of national consumer protection agency." We're not sure Elizabeth Warren will be real excited about "some form of" consumer protection agency.
Among the Wharton faculty, the most popular reform is the move to centralize the trading of derivatives, including hard-to-value mortgage-backed securities.
The bad news is that the Wharton faculty worries that the reform bills fail to resolve the problems inherent in credit-default swaps: so speculators can still bet on the ups and downs of securities they don't own (does AIG come to mind?).
The "Volcker Rule" has survived all of the compromising that inevitably goes on and that's a good thing. Generally, it would bar Wall Street firms from trading in their own accounts. The Senate bill takes a tougher stance on barring speculative trading, while the House bill would give the oversight council power to prohibit such trades if it finds they threaten the system.
Last, Richard Marston points out that the final bill will not make a lot of progress on how we get to good regulation. As he says, it's hard to legislate regulatory vigilance. Alan Greenspan was, by all accounts, the best Fed Chairman ever, and he was asleep at the switch.
Whatever the final bill, we will be real ineterested in what Elizabeth Warren's opinion is of it. We will be listening for that.
Tuesday, June 15, 2010
A Southern California Perspective
http://www.latimes.com/business/la-fi-ports-20100612,0,2315402.story
Two things happen when you get away from where you are for a while: you get a better perspective on where you're from and you get a new perspective about the place where you temporarily reside. Our time in Southern California gave us a first hand look at the business and consumer markets in a key "sand state".
The volume of trade at the ports of Los Angeles and Long Beach, the busiest American seaport complex, was up sharply for the month of May. For Los Angeles, which ranks first in cargo container traffic, it was the port's second-best May ever! This is the type of economic news that bodes well for continued economic growth. It correlates with the expectations of the Fed and the rationale for Warren Buffet's purchase of the BNSF Railroad system. Buffet, in turn, has observed the increased traffic on his rail system which he sees as reflective of capital investment and demand. This would be in accord also with the economists at IHS Global Insight who feel that retailers have cut their inventories drastically and are reordering because they feel sales are, or will, pick up.
More than 40% of U.S. imported products come thru the ports of Los Angeles/Long Beach which makes the "Southland" an important predictor of what is to come.
OK, great! Now, California is bankrupt because they don't have the tax receipts to support their "got to be first at everything mentality". And, they tax too much (which is why everybody from their retires to Nevada).
And, of course, there is the real estate situation which basically connects with the unemployment situation. Let's start with real estate: the listings in Orange County look to be very brisk at the $500,000 home level and above. This would appear to be the break point for houses that are moving versus houses where there is a glut. Interestingly, the key listing agents for towns like Dana Point, Laguna Beach, Laguna Niguel and Newport Beach use a $500K example to point out that interest rate lows have created the equivalent of a $448K home: "... the reduction of interest has brought the payment equal to buying the ($500K) home for $448K ..." There is a very brisk market in those areas for homes between $500K and $17 plus million. That's a nice neighborhood. But, the majority of people don't live in those houses.
The national data on homes is like politics: all "politics" is "local". So, while there are national "averages", it's where you live that matters. The current Case-Shiller data once again support that the Dallas metropolitan area never went up spectacularly, nor did it drop spectacularly: so far in 2010, home prices in North Texas are up almost 4% from a year ago. During that same period, pre-owned home sales have increased almost 12%. Unfortunately, the Case-Shiller projections are that housing markets will sink again post "first time home buyer tax credit" and other government backed market supplements. So, markets with recent price increases may see small price declines before prices finally stabilize at the end of this year or early in 2011. The Case-Shiller people see this as part of a "double dip" in nationwide residential prices.
The Case-Shiller forecast for 2010/2011 (annual change in median home prices) is:
Nationwide -- Down 3.1% for 2010 and Down 1.1% for 2011
Dallas -- Down 1.8% for 2010 and Up .8% for 2011
Los Angeles -- Down 9.6% for 2010 and Up 2.7% for 2011
Getting back to "California Dreaming", the Southern California housing market we described above is nice but it's not where the average home price sits today. The current U.S. median home price is: $170,300. In addition, it is a pretty much accepted economic principle that the majority of the average U.S. citizen's "net worth" is wrapped up in their home equity. If the majority of U.S. home markets are not coming back quickly, then it is difficult to see where the consumer demand that supports the positive trade figures we referred to at the outset of this post is going to be coming from. This position would be backed up by the latest employment figures where the 411,000 jobs added last month really only included about 41,000 jobs that weren't "Census Temporary".
It's always good to hear that the consensus economic forecasts exclude the possibility of a "double dip" recession but it's difficult to reconcile that with the actual use of that term by the Case-Shiller people as it applies to the U.S. housing market. When you put that with current "employment" figures, it's difficult to see consumer demand coming back anytime soon.
We're about to read Nouriel Roubini's new book, "Crisis Economics", which will help us to define what it is that he watches. Roubini would probably be the first to agree with the perspective we have provided in this post. He would probably add that "consensus economic forecasts" mistake the eye of the storm for the end of a crisis. We would probably agree.
Two things happen when you get away from where you are for a while: you get a better perspective on where you're from and you get a new perspective about the place where you temporarily reside. Our time in Southern California gave us a first hand look at the business and consumer markets in a key "sand state".
The volume of trade at the ports of Los Angeles and Long Beach, the busiest American seaport complex, was up sharply for the month of May. For Los Angeles, which ranks first in cargo container traffic, it was the port's second-best May ever! This is the type of economic news that bodes well for continued economic growth. It correlates with the expectations of the Fed and the rationale for Warren Buffet's purchase of the BNSF Railroad system. Buffet, in turn, has observed the increased traffic on his rail system which he sees as reflective of capital investment and demand. This would be in accord also with the economists at IHS Global Insight who feel that retailers have cut their inventories drastically and are reordering because they feel sales are, or will, pick up.
More than 40% of U.S. imported products come thru the ports of Los Angeles/Long Beach which makes the "Southland" an important predictor of what is to come.
OK, great! Now, California is bankrupt because they don't have the tax receipts to support their "got to be first at everything mentality". And, they tax too much (which is why everybody from their retires to Nevada).
And, of course, there is the real estate situation which basically connects with the unemployment situation. Let's start with real estate: the listings in Orange County look to be very brisk at the $500,000 home level and above. This would appear to be the break point for houses that are moving versus houses where there is a glut. Interestingly, the key listing agents for towns like Dana Point, Laguna Beach, Laguna Niguel and Newport Beach use a $500K example to point out that interest rate lows have created the equivalent of a $448K home: "... the reduction of interest has brought the payment equal to buying the ($500K) home for $448K ..." There is a very brisk market in those areas for homes between $500K and $17 plus million. That's a nice neighborhood. But, the majority of people don't live in those houses.
The national data on homes is like politics: all "politics" is "local". So, while there are national "averages", it's where you live that matters. The current Case-Shiller data once again support that the Dallas metropolitan area never went up spectacularly, nor did it drop spectacularly: so far in 2010, home prices in North Texas are up almost 4% from a year ago. During that same period, pre-owned home sales have increased almost 12%. Unfortunately, the Case-Shiller projections are that housing markets will sink again post "first time home buyer tax credit" and other government backed market supplements. So, markets with recent price increases may see small price declines before prices finally stabilize at the end of this year or early in 2011. The Case-Shiller people see this as part of a "double dip" in nationwide residential prices.
The Case-Shiller forecast for 2010/2011 (annual change in median home prices) is:
Nationwide -- Down 3.1% for 2010 and Down 1.1% for 2011
Dallas -- Down 1.8% for 2010 and Up .8% for 2011
Los Angeles -- Down 9.6% for 2010 and Up 2.7% for 2011
Getting back to "California Dreaming", the Southern California housing market we described above is nice but it's not where the average home price sits today. The current U.S. median home price is: $170,300. In addition, it is a pretty much accepted economic principle that the majority of the average U.S. citizen's "net worth" is wrapped up in their home equity. If the majority of U.S. home markets are not coming back quickly, then it is difficult to see where the consumer demand that supports the positive trade figures we referred to at the outset of this post is going to be coming from. This position would be backed up by the latest employment figures where the 411,000 jobs added last month really only included about 41,000 jobs that weren't "Census Temporary".
It's always good to hear that the consensus economic forecasts exclude the possibility of a "double dip" recession but it's difficult to reconcile that with the actual use of that term by the Case-Shiller people as it applies to the U.S. housing market. When you put that with current "employment" figures, it's difficult to see consumer demand coming back anytime soon.
We're about to read Nouriel Roubini's new book, "Crisis Economics", which will help us to define what it is that he watches. Roubini would probably be the first to agree with the perspective we have provided in this post. He would probably add that "consensus economic forecasts" mistake the eye of the storm for the end of a crisis. We would probably agree.
Subscribe to:
Posts (Atom)