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.
Friday, June 18, 2010
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.
Wednesday, May 26, 2010
A Spill Perspective
http://www.nytimes.com/2010/05/26/opinion/26dowd.html?emc=eta1
http://www.nytimes.com/2010/05/25/opinion/25herbert.html?emc=eta1
While we hope that BP's latest effort (scheduled today) to try to stop the oil tragedy in the Gulf works, T. Boone Pickens, in remarks published today, suggests that the spill might take 3 months before it is stopped.
Federal funding for oil spill research was cut in half between 1993 and 2008, falling to $7.7 million.
Geoffrey Orsak (Dean of the Lyle School of Engineering at SMU) sits on the National Petroleum Council (NPC) which advises the U.S. Secretary of Energy on oil and gas issues. The NPC produced what Ray Hunt (CEO of Hunt Consolidated) calls the definitive report (Hard Truths About Energy) on where we stand on the future of energy supplies in the world (oil, gas, renewables, etc.). Orsak's perspective is that most of the industry's research investment has been on extracting value, not on the unlikely but catastrophic problems that come about from poor maintenance, human error and random acts.
Twenty one days into the catastrophe, BP said it was contemplating shooting rubber tire shards, golf balls and other debris to clog the hole and stem the flow. This is when Orsak realized that "... these people were seriously out of their realm. If golf balls are your contingency plan, you have not thought this through at all."
Borrowing from Bob Herbert's 5/24 article attached: "On October 25, 2007, the U.S. Department of Justice issued the following announcement: British Petroleum and several of its subsidiaries have agreed to pay $373 million in fines and restitution for environmental violations stemming from a fatal explosion at a Texas refinery in March, 2005, leaks of crude oil from pipelines in Alaska, and fraud for conspiring to corner the market and manipulate the price of propane carried through Texas pipelines." Does this look like a well managed company?
Maureen Dowd (5/25 article attached), just having fought her way thru all of the "acronyms" of the worldwide financial crisis, now finds herself doing the same for this situation. She points out that the Interior Department's Minerals Management Service (MMS) is charged with collecting royalties from Big Oil even as it regulates it - an "... absurd conflict right there." She recounts a Washington Post report on Tuesday that there is a growing suspicion that the money concerns of the companies involved with the well created "an atmosphere of haste" that may have spurred the spill." We would point out that anyone watching a "60 Minutes" interview two weekends ago with one of the survivors of the BP explosion and fire on that platform could not help but agree with that perspective.
Dowd goes on to point out that Mary Kendall, acting Inspector General of the Department of the Interior, described in a report released this week an agency that followed Dick Chaney's lead in letting the oil industry write the rules.
Quoting Dowd: "Just like those SEC employees who were watching porn and ignoring warning signs while Wall Street punks created financial Frankensteins, some MMS employees were watching porn, using coke and crystal meth and accepting gifts like trips to the Peach Bowl game from oil and gas companies, the report said." Again from Dowd: "As we watch a self-inflicted contamination that has no end in sight, consider this chilling arithmetic: one oil industry reporter reckoned that the 5,000 barrels a day (a conservative estimate) spewing 5,000 feet down in the gulf counts for only 2 minutes of oil consumption in the state of Texas."
We wish everyone involved in trying to stop the spill well and we hope a way is found to end it soon.
http://www.nytimes.com/2010/05/25/opinion/25herbert.html?emc=eta1
While we hope that BP's latest effort (scheduled today) to try to stop the oil tragedy in the Gulf works, T. Boone Pickens, in remarks published today, suggests that the spill might take 3 months before it is stopped.
Federal funding for oil spill research was cut in half between 1993 and 2008, falling to $7.7 million.
Geoffrey Orsak (Dean of the Lyle School of Engineering at SMU) sits on the National Petroleum Council (NPC) which advises the U.S. Secretary of Energy on oil and gas issues. The NPC produced what Ray Hunt (CEO of Hunt Consolidated) calls the definitive report (Hard Truths About Energy) on where we stand on the future of energy supplies in the world (oil, gas, renewables, etc.). Orsak's perspective is that most of the industry's research investment has been on extracting value, not on the unlikely but catastrophic problems that come about from poor maintenance, human error and random acts.
Twenty one days into the catastrophe, BP said it was contemplating shooting rubber tire shards, golf balls and other debris to clog the hole and stem the flow. This is when Orsak realized that "... these people were seriously out of their realm. If golf balls are your contingency plan, you have not thought this through at all."
Borrowing from Bob Herbert's 5/24 article attached: "On October 25, 2007, the U.S. Department of Justice issued the following announcement: British Petroleum and several of its subsidiaries have agreed to pay $373 million in fines and restitution for environmental violations stemming from a fatal explosion at a Texas refinery in March, 2005, leaks of crude oil from pipelines in Alaska, and fraud for conspiring to corner the market and manipulate the price of propane carried through Texas pipelines." Does this look like a well managed company?
Maureen Dowd (5/25 article attached), just having fought her way thru all of the "acronyms" of the worldwide financial crisis, now finds herself doing the same for this situation. She points out that the Interior Department's Minerals Management Service (MMS) is charged with collecting royalties from Big Oil even as it regulates it - an "... absurd conflict right there." She recounts a Washington Post report on Tuesday that there is a growing suspicion that the money concerns of the companies involved with the well created "an atmosphere of haste" that may have spurred the spill." We would point out that anyone watching a "60 Minutes" interview two weekends ago with one of the survivors of the BP explosion and fire on that platform could not help but agree with that perspective.
Dowd goes on to point out that Mary Kendall, acting Inspector General of the Department of the Interior, described in a report released this week an agency that followed Dick Chaney's lead in letting the oil industry write the rules.
Quoting Dowd: "Just like those SEC employees who were watching porn and ignoring warning signs while Wall Street punks created financial Frankensteins, some MMS employees were watching porn, using coke and crystal meth and accepting gifts like trips to the Peach Bowl game from oil and gas companies, the report said." Again from Dowd: "As we watch a self-inflicted contamination that has no end in sight, consider this chilling arithmetic: one oil industry reporter reckoned that the 5,000 barrels a day (a conservative estimate) spewing 5,000 feet down in the gulf counts for only 2 minutes of oil consumption in the state of Texas."
We wish everyone involved in trying to stop the spill well and we hope a way is found to end it soon.
Monday, May 24, 2010
What's In A Moratorium?
http://www.nytimes.com/2010/05/24/us/24moratorium.html?emc=eta1
We were surprised to find this morning that we did not understand the meaning of "moratorium" as it relates to regulatory agencies. We are joined by members of Congress who appear to be equally confused.
In the days since President Obama announced a moratorium on permits for drilling new offshore oil wells and a halt to a controversial type of environmental waiver that was given to the Deepwater Horizon rig, at least 7 new permits for various types of drilling and 5 environmental waivers have been granted.
Department of the Interior officials said in a statement that the "moratorium" was meant only to halt permits for the drilling of new wells. It was not meant to stop permits for new work on existing drilling projects like the Deepwater Horizon. SERIOUSLY!
So, our interpretation of this latest incompetence is: if you have a rig currently being run as incompetently as Deepwater was, you're fine to get new drilling permits or environmental waivers. What a concept! Here's a thought: if BP is applying don't grant it. While we might be off on the name and the size, we believe that the largest deepwater platform in the Gulf of Mexico is BP's "Thunder Horse". Do we think it's possible that the same process safety issues that occurred on Deepwater could be present there? It's the same management!
Since the explosion, federal regulators have been harshly criticized for giving BP's Deepwater and hundreds of other drilling projects waivers from full environmental review and for failing to provide rigorous oversight to these projects. In testifying before Congress on May 18th, Interior Secretary Salazar and officials from his agency said they recognize the problems with the waivers and they intended to rein them in. Salazar also said that he was limited by a statutory requirement that he said obligated his agency to process drilling requests within 30 days after they have been submitted. So what.
At least six of the drilling projects that have been given waivers in the past four weeks are for waters that are deeper - and therefore more difficult and dangerous - than where Deepwater was operating. While that rig, which was drilling at a depth just shy of 5,000 feet, was classified as a deep-water operation, many of the wells in the six projects are classified as "ultra deep" water, including four new wells at over 9,100 feet.
Under the well known government bureaucratic category of "one hand not knowing what the other is doing", the Occupational Health and Safety Administration (OSHA) has classified some of the types of drilling that have been allowed to continue as being hazardous as new well drilling.
Given all of this, we would suggest that BP's operations in the Gulf of Mexico be taken over by the US Government and that no new drilling of any kind be done at any BP site unless deemed necessary for process safety reasons. Now that the oil is reaching the shores of Louisiana, perhaps BP can finance an all out effort to build sand berms and whatever else the governor of that state thinks he needs. BP needs to concentrate on something simple enough to help people and leave the complexities of management and process safety to people who know what they are doing. Oh, and while the US Government has experts, it would be helpful if they talked to each other, prioritized and came to Congress with a sophisticated evaluation of the situation and an action plan.
Here's an example: you don't get to continue drilling in the Gulf of Mexico until you install an "acoustic switch" at every well site. This is simple and hard to misinterpret. The acoustic switch is required in Brazil and Norway and the Norwegian government has indicated that it works.
In the meantime, we will continue to struggle with what "moratorium" means.
We were surprised to find this morning that we did not understand the meaning of "moratorium" as it relates to regulatory agencies. We are joined by members of Congress who appear to be equally confused.
In the days since President Obama announced a moratorium on permits for drilling new offshore oil wells and a halt to a controversial type of environmental waiver that was given to the Deepwater Horizon rig, at least 7 new permits for various types of drilling and 5 environmental waivers have been granted.
Department of the Interior officials said in a statement that the "moratorium" was meant only to halt permits for the drilling of new wells. It was not meant to stop permits for new work on existing drilling projects like the Deepwater Horizon. SERIOUSLY!
So, our interpretation of this latest incompetence is: if you have a rig currently being run as incompetently as Deepwater was, you're fine to get new drilling permits or environmental waivers. What a concept! Here's a thought: if BP is applying don't grant it. While we might be off on the name and the size, we believe that the largest deepwater platform in the Gulf of Mexico is BP's "Thunder Horse". Do we think it's possible that the same process safety issues that occurred on Deepwater could be present there? It's the same management!
Since the explosion, federal regulators have been harshly criticized for giving BP's Deepwater and hundreds of other drilling projects waivers from full environmental review and for failing to provide rigorous oversight to these projects. In testifying before Congress on May 18th, Interior Secretary Salazar and officials from his agency said they recognize the problems with the waivers and they intended to rein them in. Salazar also said that he was limited by a statutory requirement that he said obligated his agency to process drilling requests within 30 days after they have been submitted. So what.
At least six of the drilling projects that have been given waivers in the past four weeks are for waters that are deeper - and therefore more difficult and dangerous - than where Deepwater was operating. While that rig, which was drilling at a depth just shy of 5,000 feet, was classified as a deep-water operation, many of the wells in the six projects are classified as "ultra deep" water, including four new wells at over 9,100 feet.
Under the well known government bureaucratic category of "one hand not knowing what the other is doing", the Occupational Health and Safety Administration (OSHA) has classified some of the types of drilling that have been allowed to continue as being hazardous as new well drilling.
Given all of this, we would suggest that BP's operations in the Gulf of Mexico be taken over by the US Government and that no new drilling of any kind be done at any BP site unless deemed necessary for process safety reasons. Now that the oil is reaching the shores of Louisiana, perhaps BP can finance an all out effort to build sand berms and whatever else the governor of that state thinks he needs. BP needs to concentrate on something simple enough to help people and leave the complexities of management and process safety to people who know what they are doing. Oh, and while the US Government has experts, it would be helpful if they talked to each other, prioritized and came to Congress with a sophisticated evaluation of the situation and an action plan.
Here's an example: you don't get to continue drilling in the Gulf of Mexico until you install an "acoustic switch" at every well site. This is simple and hard to misinterpret. The acoustic switch is required in Brazil and Norway and the Norwegian government has indicated that it works.
In the meantime, we will continue to struggle with what "moratorium" means.
Monday, May 17, 2010
Shiller's Double Dip
http://www.nytimes.com/2010/05/16/business/16view.html?emc=eta1
Nouriel Roubini mentioned recently that, as he sees things (thru his own personal dark cloud), there's still a 20% chance of a double dip recession. Of course, this was just an aside to a Financial Times editor when he was on his way to "Cannes" to see "himself" in two movies.
Now comes Robert Shiller - he of the Case-Shiller Home Price Index he co-created - to say that, just because Europe has done a trillion dollar bailout in response to the Greek (and other weak countries) debt crisis, isn't to say that there won't be a double dip recession worldwide: "World markets soared initially on the announcement of the rescue plan, and then declined. But, as the economist John Maynard Keynes cautioned long ago, such market reactions are basically a "beauty contest" - with the investors trying to predict the short-term reaction that other investors think still other investors will have."
"In other words, don't view these beauty contests as a heartfelt response to a fundamental change in the economy."
Shiller has in the back of his mind the large housing overhang here in the U.S. that we've seen no major improvement in thus far. To quote the Texas A&M Real Estate Center, "Everyone should be cautious in declaring the housing market to have bottomed. So much of the data just don't support it - foreclosures, the shadow inventory, new home sales running at half the long-term norm, expected sales declines after the tax credit expires."
Shiller's "real risk" (of a double dip recession) perspective comes from something that he feels cannot be quantified by statistical models. His perspective leans toward a "vulnerability of confidence" where a decline could bring markets down, cause cuts in consumption, investment, and local government expenditures. Ultimately, the risk resides largely in "Social Psychology", the old Roosevelt "fear of fear itself."
Our first thought here is that 3 consecutive quarters of real GDP growth argues pretty strongly against a fall back into recession. Shiller addresses that: his definition of a double-dip recession doesn't emphasize the short term. His "recession" begins with unemployment rising to a high level and then falling at a disappointingly slow rate. Before employment returns to normal, there is a second recession. Shiller again: "As long as economic recovery isn't complete, that's a double-dip recession, even if there are years between the declines." By that definition, there was a recession between 1929 and 1933 which was followed by a recession in 1937-38. Between those two declines, the unemployment rate never moved below 12.2%. Those two recessions, four years apart, are now typically lumped together as one event: The Great Depression.
Shiller's whole point is that the May 6 drop of 1,000 points in the Dow could be the first of many "aftershocks" similar to the 20.5% drop in the S&P 500 on 10/19/87. While we may think Shiller is "reaching," he's right about the unemployment rate - always a lagging indicator, it's not coming down at a very rapid rate (give it time? OK, how much?).
We should all be heartened that the great U.S. job creation machine gave us 290,000 jobs in the most recent data. But, we should also be asking ourselves whether the economy looks like it can produce 300,000 jobs per month for the next 5 years, which is about where, as we've said before, Krugman says we need to be to get back to where we were. We should also be asking where small businesses are with short term borrowing and their banks. Why, because most of the jobs in this economy come from small businesses.
Shiller and Roubini: we probably didn't have them together on our dance card, but they appear to have similar concerns.
Nouriel Roubini mentioned recently that, as he sees things (thru his own personal dark cloud), there's still a 20% chance of a double dip recession. Of course, this was just an aside to a Financial Times editor when he was on his way to "Cannes" to see "himself" in two movies.
Now comes Robert Shiller - he of the Case-Shiller Home Price Index he co-created - to say that, just because Europe has done a trillion dollar bailout in response to the Greek (and other weak countries) debt crisis, isn't to say that there won't be a double dip recession worldwide: "World markets soared initially on the announcement of the rescue plan, and then declined. But, as the economist John Maynard Keynes cautioned long ago, such market reactions are basically a "beauty contest" - with the investors trying to predict the short-term reaction that other investors think still other investors will have."
"In other words, don't view these beauty contests as a heartfelt response to a fundamental change in the economy."
Shiller has in the back of his mind the large housing overhang here in the U.S. that we've seen no major improvement in thus far. To quote the Texas A&M Real Estate Center, "Everyone should be cautious in declaring the housing market to have bottomed. So much of the data just don't support it - foreclosures, the shadow inventory, new home sales running at half the long-term norm, expected sales declines after the tax credit expires."
Shiller's "real risk" (of a double dip recession) perspective comes from something that he feels cannot be quantified by statistical models. His perspective leans toward a "vulnerability of confidence" where a decline could bring markets down, cause cuts in consumption, investment, and local government expenditures. Ultimately, the risk resides largely in "Social Psychology", the old Roosevelt "fear of fear itself."
Our first thought here is that 3 consecutive quarters of real GDP growth argues pretty strongly against a fall back into recession. Shiller addresses that: his definition of a double-dip recession doesn't emphasize the short term. His "recession" begins with unemployment rising to a high level and then falling at a disappointingly slow rate. Before employment returns to normal, there is a second recession. Shiller again: "As long as economic recovery isn't complete, that's a double-dip recession, even if there are years between the declines." By that definition, there was a recession between 1929 and 1933 which was followed by a recession in 1937-38. Between those two declines, the unemployment rate never moved below 12.2%. Those two recessions, four years apart, are now typically lumped together as one event: The Great Depression.
Shiller's whole point is that the May 6 drop of 1,000 points in the Dow could be the first of many "aftershocks" similar to the 20.5% drop in the S&P 500 on 10/19/87. While we may think Shiller is "reaching," he's right about the unemployment rate - always a lagging indicator, it's not coming down at a very rapid rate (give it time? OK, how much?).
We should all be heartened that the great U.S. job creation machine gave us 290,000 jobs in the most recent data. But, we should also be asking ourselves whether the economy looks like it can produce 300,000 jobs per month for the next 5 years, which is about where, as we've said before, Krugman says we need to be to get back to where we were. We should also be asking where small businesses are with short term borrowing and their banks. Why, because most of the jobs in this economy come from small businesses.
Shiller and Roubini: we probably didn't have them together on our dance card, but they appear to have similar concerns.
Subscribe to:
Posts (Atom)