bizzXceleration: Performance, Value and Profit

With the refresh on current Economic and Market news in place it's time to dive into applying the ecology to evaluating the outlook for business. We have an interesting choice here - continue topdown by sharing some recent stuff we've found on top-down principles, which would continue our approach. Or take it more bottom-up. We're going to do that because there's so much stuff floating around we'll end up with three separate postings on traditional businesses, technology and Finance. Which'll give us a chance to take a deeper dive on various aspects of each domain. But before we dive in let's add in some more economic and market news update, at last a tad. You'll find some more in the readings but AP just updated its economic stress map (which if you'll click thru will take you to the interactive, online version). You might also want to listen to this morning's PBS interview with David Wessel of the WSJ:Businesses Reluctant To Hire New Workers.

We've sampled the stress map monthly at four points from Dec07 to now(which would be Dec09) and you can read it clockwise. The point AP makes is that the stress is HIGHER than it was, which is a natural cyclic timepath and explains all the sturm und drang in the political arena. We also had multiple conversations with friends and neighbors over the weekend and the general take is that people are worried about jobs, cutting back their spending, thinking about selling their houses and facing major credit/debt problems. The things that are not in the data are a likely next wave of foreclosures, increasing debt problems, major problems with small businesses and worse problems with state and local budgets that are offsetting federal stimulus spending. Not to mention a whole host of international problems giving the markets big time jitters, as detailed in the readings (including a much more detailed YouTube of Jim Chanos assessment of China!).

Business Outlook: the Retail Industry

Our constantly harped on theme is that businesses need to adapt to the new normal, adopt new operational and innovation strategies and improve their performance mangement and governance. We've also argued that most businesses are lagging in their responses. Let's put that another way - every business is facing major structural changes at every level from the firm to the Industry to the global economy to geo-poitics and doesn't appear, on the best available evidence that we've seen, to be doing what needs to be done. Let's take the Retail Industry as the exemplarly case in point (exemplar in the sense of example not in the sense of ideal!). Bloomberg did us the favor of taking an outstanding look at the elephant in the room for the last decade - the fact that Retail is grossly over-stored. If you'll click on thru the graphic you'll be taken to another interactive graphic that will allow you to play with their model. Given the economic context of extended weakness PLUS the hidden anectoral evidence the outlook has to be judged as very poor.

Value-investing, the PFE Case and Investing Strategy

In the readings you'll find a bunch of other stories and cases from Harley's struggles with financing, to a slew of stuff on Toyota (wow, can you imagine - the poster child of well-managed company!), Hershey's continued struggles with dysfunctional executive leadership, a bunch of stuff on major shakeups and shakeouts in the Healthcare Industry and the really good story of the Fung brothers of Li and Fung who have managed to not only roll with the punch and more. How they've managed that is well worth studying - especially if you know that Li and Fung have been worldwide poster children for adaptive innovation for decades. You'll also find a link to the FT's "View From the Top" interview with Indra Nooyi of PepsiCo and a set of TechTicker interviews with a friend of our Vitality Katsenelsen, of Active Value Investing fame, discussing the market outlook, China and especially value investing in a range-bound market and taking PFE as his exemplar. We've seen Vitaliy's analysis and it's about as thoughtful and long-range a piece of fundamental analysis as we've ever read. The catch is that he argues that PFE is worth investing in because the PE's discount a total lack of effectiveness in drug development and they have great cash flow. So if anything pops on their huge R&D investments it's all gravy. Our problem - having looked at how badly broken the big pharma development methods are and knowing some folks in the Industry, we're not so sure that revenue is sustainable in the future. On the one hand you ought to look into both views, on another you ought to consider the tradeoffs and on the gripping hand we can split the difference. In the intermediate term Vitaliy's value-analysis probably has a lot of merit but in the long-term we think our breakage assessment will eventually triumph (the analogy that comes to mind is a few years back when we poopoohed Lamberts real estate-base financial engineering at Sears; a view since born out big time but one that took a few years to ripple on thru).

So let's consider PFE as investors via some longer-term stock charts. The 10Yr chart is here while the 5Yr chart is shown. You need to look at the 10Yr to see how bad the overall performance is while some mid-term distortions make the PEs hard to read so look at the 5yr here. And consider that each and every case study could/should be considered the same way. Now given volatile but flat earnings a PE of 10 is indeed still cheap but the question is, is it cheap enough? On the whole, once the market sorts out we'd have to say it might be well worth while putting PFE on your watch list for the next 18 months to 5 years. In the readings you'll find some other stuff on Healthcare, the Steel Industry and Oil. We've pointed out that Oil is going thru a major structural shakeup but, in the book of unintended consequences, the stillbirth of Healthcare Reform looks to provide a major and bigger shift in the HC Industry as well! We think that the Industry, and business in general, are going to bitterly regret not getting behind reform and really pushing.

A Final Word from Indra

And just to end on a slightly cheerful note we'll point you to Indra's interview where she discusses Pepsico's strategic outlook, globalization and corporate social responsibility as well as her impressions of Davos. We were delighted and relieved to hear that her views on Davos are nearly identical to our take and even more delighted that her views on how corporations should deal with the body public are entirely in line with our channeling of Drucker's Principles. On the operational, strategic, innovation and public/geo-political fronts we'd have to judge that Pepsi gets a 5 on our performance assessment ranking (that's another hint btw!).

Continue reading "Stories From the Front: Stories and Cases in Business Performance" »

Posted by dblwyo at 07:51 PM | Permalink | Comments (0)

With the last two posts under belts we should have a baseline on how the "New Normal" is going to play out, frankly, for the next decade and how widely our perceptions are shared or reflected among some of the world's most influential decision-makers (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance, The Cusp Point is Here: Lessons From Davos). Now it's time to look at the consequences for markets and the economy. If you'll recall we've said the economy is policy-dependent while the markets were afloat, likewise, on a policy-funded carry trade and complacency. Which means that the major factors we see in the NN (jobless recovery, weak demand, deleveraging, slow sub-potential growth, re-balancing = trade wars, worldwide over-capacity) were not reflected in an arguably over-valued Market which was pricing an immaculate V and ignoring all the fragilities, risks and turbulence that we're facing. Something we've been saying since the Summer but hammering on since the early Fall. In the readings we've provided earlier links to previous posts as well as white paper collections on the markets, the economy and investment strategy that not only go thru all that but provide a lot of tools and machinery for analyzing it and investment management. So let's dig into the state of things.

Markets Re-discover Reality

In case you haven't noticed the markets are still marching in lockstep and those have been down (EM's down over 5% and developed markets down over 4% in Jan to date). The proximate triggers were a minuscule, almost meaningless tightening in Chinese monetary policy, the re-discovery of sovereign debt risks in Europe (causing a renewed flight to the $ and re-invoking $Down, Markets Up dynamic) and a growing awareness of a weak recovery. Combined with being 1/2-way thru earnings season and suddenly realizing profit growth was still largely cost-cutting (wow, deja vu') and not on organic revenue growth (Technology is a separate issue but we did cover that previously:Talking Business: the Outlook vs. the Preparations).

Because the markets are all still moving in lockstep (again a hallmark of being driven by internals and not fundamentals) we don't really need to put up the charts on each of the separate pieces but you can see Sectors & World Markets, Finance/Rates/Commodities(Oil) and Gold/Dollar Markets by clicking thru on the highlights to take you to the various composite chart sets. The composite at right compares and contrasts the short-term vs. the long-term but some complementary views of the intermediate term are here and here.

Those are actually pretty amusing, especially since this round's intermediate chart shows almost exactly the same things: the market bubbled up briefly over the upper bound of the downtrend which coincided almost exactly with a Fib limit. At the same we said if you were in the Markets you were trading or speculating and betting on a very fragile continued speculative bubble carrying up over those lines of resistance into a new Fib-box. It turns out being a sceptic was the right call, so far. The question is, having failed at those points, how much farther might the markets fall - bearing in mind the current outrageous long-term PE valuations? We won't read off the Fib limit resistance lines since you can do that but notice the congruences between short-term and long-term again. Yet S&P sees the markets finishing around 1215 for the year! Which is not much of a rebound but at minimum tells us that we're facing a lot of volatility and no fundamentals. At least IOHO!

Economic Fundamentals

With the first release of Q409 GDP just behind us, the new employment numbers just out, coupled with a massive re-basing of the employment data that increased total jobs lost from 7+ million to 8+ million we should ask where are we at? And what's going on? An earlier chart on GDP, Consumption and Employment is here, and as you can see by clicking thru, things have indeed turned the corner. We'll embed more on GDP and Consumption in the charts we will look at but our primary focus is going to be on Employment and Demand. The thing that the Markets, and decision-makers for that matter, seem to have so much trouble wrapping their heads around.

As the top sub-chart shows three different measures of Employment have all turned up but are still in seriously negative territory. The really important point is the second sub-chart which contrasts GDP and cumulative job losses. With the data revisions we went from being ~13 million jobs in the hole to being 14.2 million in the hole. Something we've discussed previously is that we'll need 20 million new jobs to get back to breakeven and offset labor force growth. At a likely 2.5% GDP growth rate it'll take about SEVEN years to get Unemployment back down in the 5% range. Talk about your weak recoveries!

Job Growth Realities: Negative Job Growth

Bearing in mind that even with the improvement in decreasing losses we still lost jobs, particularly in the private sector. So let's remind ourselves of what that means by looking at Private job creation over the last decade+.

In some ways the important chart here is the bottom one, which shows private jobs in total. It also shows that no new jobs have been created since Q498! In other words in eleven years the US economy has created NO new jobs! How abysmal is that?

The top chart is a repeat but let's take a closer look. We've been beating our and your chops about the last "recovery" not being organic, that is it never reached a point of self-sustaining growth where new consumption created new investment created new jobs and so forth. If you look at the top chart you can see where ALL the employment indicators reached a peak in Q106 and started dropping and then started falling off a cliff in Q407/Q108, which is exactly when the NBER called the start of the recession. Yet as late as the early Fall08 we were still arguing with people about whether or not we were in a downturn, let alone how serious it was going to be. What kept things up at all last time was the Housing bubble and home equity ATM - what're the chances for that coming back do you think? De Nada we'd say.

Demand and LT Issues: Policy, Politics and Unintended Consequences

The two poles of the economic field in the NN are the poor recovery picture in the developed world and the resulting re-balancing of the global economy. Meaning, as we argued thruout the last two posts, that the export-led economies in the rapidly emerging world would have to undergo major shifts from an external dependency to an internally-driven economy. Something which they acknowledge, claim to be working on but are not working hard or fast enough to address. Yet adjustment to the NN is NOT voluntary. Right now the geo-political pressures on China to adjust its exchange rate and growing pushback on trade are symptoms of this on-coming tsunami.

The other thing that's going on is that this is a VERY policy-dependent economy. Part of the fragility and turbulence, which the markets allowed themselves to ignore or neglect, is that meant that low rates, quantitative easing to subsidize l.t. rates and help banks re-build balance sheets (which btw they haven't but instead are paying themselves bonuses, doing the grossly inprudential thing in the jargon) and stimulus spending. Now to make it even more fun various political actors have been raising the specter of excessive deficits and debts at precisely the wrong time. That's a 3-phase problem. In the emergency massive stimulus, in the intermediate term the total debt levels in the US are manageable and the economy is still vulnerable and in the long-term (beyond 2016) and after recovery is back on its feet would be the time. Instead government is being forced to rein in stimulus. Managing all the moving parts of this transition is going to be, in a different way, as difficult and challenging as saving the world in the first place. Made more complicated by all the conflicting political partisans.

Which sets up this next chart. Our favorite indicator of future demand is the sum of the growth in Employment and Real Wages. The downturn caused a major drop in inflationary pressures, particularly as Oil prices dropped, which created a surge in real wages. Now Employment pressures are having the opposite effect. So in the bottom sub-chart you can see GDP and Employment turning up but Wages+Employment not only turning down, we're past that. Instead it's dropping and getting pretty negative. In fact about as bad as it's been for thirty years! Though not quite in the same range as it was during the brief but serious downturn in the 1980 downturn. But then we had a pretty good idea it was temporary. This time?

So there you have it. Market's delusions being stripped away a tiny bit, policy realities setting in and the prospects for demand growth rather poor on the evidence to date. And with mounting political pressures to tighten budgets - which is the same recipe that destroyed the nascent recovery from the GD in 1937. Ought to make you wonder where we'll end up, eh? But, just for the record, we're hardly alone in our views on the influences of policy on the markets and economy. For one thing you can re-review the post on Davos. Or watch this edition of Wealthtrack which digs into all the sudden structural shifts that are on transitional cusp points.

Continue reading "Policy-dependence, Transitions and Turbulence: Market and Economy in the New Normal" »

Posted by dblwyo at 08:06 AM | Permalink | Comments (0)

The primary concern of the last post was defining the "new normal" and adding on the strong suggestion that each and every business needs to be constantly monitoring external events and not keep getting blindsided by them (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance).

As it happens almost everything we've had to say about the nature of the new normal, the pressures on governance and performance, etc. almost ad nauseum were discussed at last week's Davos sessions. Over the weekend we had a chance to sample many of the major presentations and 99% of the readings this time are the links to the ones we think you need to pay attention to. The real reason is that the WEF and the Davos participants have largely done your work for you in terms of assessing the multiplicity of risk factors and outlining the likely paths things will follow over the next several years. So between our work on the economy and business and theirs on the big picture environment most of what you need to populate your own dashboard is readily available. We start with a session that Bill George (Harvard, Medtronics) led on re-thinking global capitalism which gives you a pretty good flavor of the pressures that will be mounting and mounting over the rest of this decade (it's an hour+ but just the first few minutes tell you what you need to get started about trust in Business!).

Continue reading "The Cusp Point is Here: Lessons From Davos" »

Posted by dblwyo at 09:25 PM | Permalink | Comments (0)

A few interesting things happened in this last week that define the things we want to address here. In an exchange with a friend on business performance in the new normal, despite several months of back and forth, most of what we'd been saying about the next decade hadn't really sunk home but we finally managed to get the other shoe to drop. His reaction was somewhere between Wow and OMG! What that exchange makes clear to us is that, in line with our expectations, most businesses haven't a clue as to what's coming at them. So those issues (defining the New Normal benchmark and assessing business preparation and performance outlook) define our endpoints. At the same time we had an amazing, in many senses State of the Union and Davos 2010 kicked off. This environment has moved from Chaos to Turbulence and is still very Fragile - and will remain both Turbulent and Fragile for the decade as deep structural adjustments in the global economy, governance (corporate and public) and geo-politics that will radically alter the deep foundations we've taken for granted for the last three decades are changed in response to the crisis and governance and performance failures. Those changes are a central theme of this year's conference.

Taken all together the economic outlook, the implications for investment and asset performance and business governance define the touchpoints of our highly selected readings section after the break, including several critical vidclips from Davos as some from the FT on emerging markets. There's nothing there that we're putting up just for fun. But the central questions are what will the New Normal look like and how are businesses prepared for it? And how will public authorities deal with restoring a fragile world economy. To set the stage you might want to listen to this brief round table from McKinsey. But we'll let a much wiser man define the situation in words we hope you recognize and take to heart:

"The dogmas of the quiet past, are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall our selves, and then we shall save our country. Fellow-citizens, we cannot escape history. We of this Congress and this administration, will be remembered in spite of ourselves. No personal significance, or insignificance, can spare one or another of us. The fiery trial through which we pass, will light us down, in honor or dishonor, to the latest generation."

Annual Message to Congress (1 December 1862) – A. Lincoln

Continue reading "Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance" »

Posted by dblwyo at 02:58 PM | Permalink | Comments (0)

We're going to tunnel down on the Private Equity business, its past performance, reactions to the crisis and its strategic outlook. This is important for its own sake because the PE Industry heavily influence prices, values and capital allocations - furthermore, it will remain a major force into the future. But not as it was - the Industry needs to go thru a major re-think and shift from a financial engineering driven approach to an integration of financial plus operational engineering. Widespread studies indicate that something like 20-40% of the Industry might be shaken out in the aftermath of the crisis, let alone adapting to the turubulences of the "New Normal". Who survives and prospers will be those firms which make this transition.

But the Industry is important not just for its own sake (it is), its role and influence on Finance as a whole (that too) but also for what it tells us as investors about the likely evolution of alternative investments. Even without direct access to PE investing everybody has been influenced by the big deals, the leverage used and the prices paid. That world is gone and isn't coming back in anything like its old form. A good way to put this in context is this recent debate at the Economist's Buttonwood forum on Financial Innovation where the Cons were Jeremy Grantham and Richard Bookstaber. There's a very extensive readings section after the break that reviews how deals have (not) performed, how the firms and the investors are reacting, what the trends are for the future and changes in the external environment. Perhaps one of the most telling readings is the Business Week lead story on how KKR, one of the founders, is completely re-doing its business model - and the other firm they want to emulate is Buffett and Berkshire! Now there's a fundamental SEE change for you.

Continue reading "Alternative Investments, Strategic Futures of PE and Lessons?" »

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

The Markets have been tanking most of this week and have given up most of mini-bubble beyond 1100, which if you recall was our upper resistance limit in previous posts. It's doing so because a bunch of things have come together, though semi-predictably there's a chorus of voices blaming the President's announcements of a major reform to restructure the Finance Industry and change what it's allowed to do and how it functions. Given the poor quality of earnings since last March, recent reports showing how weak the core businesses are and Industry behavior over the year with regard to reform that announcement was, at best, a trigger that crystallized an already saturated solution. What really saturated things and put them on the cusp point of teetering over an edge was a slew of disappointing earnings, an improved grasp on the real economic outlook and China's major changes in policy. ALL of which we've been discussing for months.

Rather than reviewing all that it's collected in the readings but we're going to use it as our fulcrum to focus on the salvo across the bow fired on reform, and ask you to start with investing eight minutes in listening the President's announcement. This is not just political theater, though there's some of that, it's to the point, substantive, grounded and a sensible reaction to being stone-walled by the industry for one year (bear in mind the Administration reached out to the Industry within days of taking office and has been trying to reach out for months).

Continue reading "Comes 'round, Goes 'round: Hastening Forward Slowly to Finance Reform" »

Posted by dblwyo at 10:15 AM | Permalink | Comments (0)

The fundamental messages we've been trying to drive home are that the next decade will be one of the most challenging in at least four, if not since the Great Depression, that the new realities have not sunk into investors, management and stakeholder consciousness and the single biggest challenge will be to improve enterprise performance. Performance improvement will either be led by the enterprises or imposed from the outside, less effectively, by a high level of distrust and justified anger at near-disasters brought on by malfeasance. And this is not just restricted to the Finance Industry. It is in enterprises own best interests to improve their governance, management systems and performance to make sure it's done well, adapted to their needs and, most importantly, they actually improve their performance.

Backing up those assertions you'll find an extensive readings collection on each of the major issues involved after the break; here we want to review the evidence and explore the core concepts of performance improvement and management systems. But start with the BNN clip of Don Coxe both laying out the situation and the level of reality denial currently prevalent in the markets. A reality, judging by the week's reactions to earnings in the markets, that might just be sinking in the general consciousness.

Continue reading "Renewing the Enterprise 2: Governance, Measurement & Performance" »

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

Well with the second day of FCIC hearings behind us and the agita reactions we could easily pick up on that thread and continue the conversation. Especially because we think almost all commentators are misjudging what they're hearing. Of course to better judge it you'd actually have to a) listen to the whole thing, b) know what you're hearing and c) know some of the background. We still think the three most important things we heard were 1) we really screwed up, 2) it was fundamentally bad management and leadership and we're responsible and 3) we apologize but we're not really sorry (especially Blankfein and GS!). The Street's grasp on the tsunami that will build up over the next two years is abysmal and they don't know how to deal with it, but dealing with public responsibilities is as much a part of an executive's responsibilities as is day-to-day decision making. But, God being just, JPM's lackluster earnings which are bringing down the market as we speak for all the problems we've been warning about for 18 months at least (literally) will do for now (that'll do Donkey, that'll do). Blankfein's major defense for drinking the koolaid was that nobody could have seen it coming - which is just flat not true, and is being repeated. CalculatedRisk was warning about this problems in 2005 and we were warning about a slowing economy in early 2006.

Here's where those all come together - our fundamental question. Are businesses properly preparing for the next decade of slow growth? Just to put up some new charts on that point of forewarnings this one shows monthly retail sales, quarterly back to 1960 compared to Consumption and GDP and the determinants of future demand. The sum of changes in Employment and real Wages continues to weaken. Now if you don't believe things aren't very rosy you're probably done here. If on the other hand you think business performance is a critical factor in how things will go please continue on.

Continue reading "Talking Business: the Outlook vs. the Preparations" »

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

The Financial Crisis Inquiry Commission (FCIC), or Pecora 2, kicked off its hearings this morning with quick statements from the chair and vice, testimony from the heads of 4 of 5 of the big banks, a second panel from several investment banker/analysts with strong criticisms and an afternoon panel from four banking/economic/housing experts.

Frankly the hearings so far are stunning - intelligent, polite, informed, limited axe-grinding by the commissioners (with some exceptions), almost no ideology and a strong bi-partisan spirit of inquiry, digging into the data and understanding. In just today's hearings (which we intended to listen to only for the kickoff but ended up getting sucked into for the whole day mostly) we heard the entire crisis reviewed, most of the major root causes id'd and the last two years of back and forth raised, reviewed and either put too bed or confirmed. By and large the preliminary indicators are that our assessments align with the Commission's and the witnesses.

Just to set the stage however we'll start you off with a recent show from Bill Moyer's Journal on PBS where an editor and a report for Mother Jones discuss their findings for why there's been such a delay in moving forward with reform and how the Industry has influenced things. If you find your blood pressure rising that was and is the intent. Perhaps the most interesting thing was that all the big bankers started off, stayed with and finished up with Mea Culpas and fairly forthright discussions of what went wrong (the most intransigent and argumentative being Blankfein of GS, who more than got into it with the Chair).

Continue reading "Pecora 2 Hearings, Malfeasances, Your Future & Cusp Points" »

Posted by dblwyo at 06:21 PM | Permalink | Comments (0)

Hopefully the last post was useful - in case you didn't know it we had several objectives and key points. The first thing was that we directly challenged the intellectual foundations that lies behind 95% of the investment management principles people have been recommending for three decades (the EMH), which includes much of the misused Wall St. math, much of the theory behind index funds (to a limited extent) and definitely Buy-N-Hold. We hope you took away the fundamental lesson that BnH is so much quackery. At the same time that "indictment" was also not support for much of the arm-waving that passes for "active" investment advice - it's still hard to beat the market and it takes some work and, especially some thought. What we did was lay down the foundations for two Principles and Two Guidelines.

Principle #1 - you need to actively managed your investments.

Principle #2 - you need to invest in those assets where you clearly understand the performance factors.

Guideline #1 - invest in those assets where you are pretty sure that the margin of value over price gives you a margin of safety and a good probability of a decent return.

Guideline #2 - you're going to have to spend some time working at this. Buy and forget will kill you. There's a tradeoff between the amount of risk, the amount of work. NB: we actually did a lot of the work for you by providing a strategic assessment of the Economy, Markets and Business Performance. And by updating and discussing our Four Factor Model.

So the next question is, what do we mean by active and how do you go about? Well you can start by listening to the most recent WealthTrack interview on the outlook for one thing. (WT is one of three goto information sources we're going to suggest you need to monitor frequently).

Continue reading "Active Allocation, Active Investing: Investing Guidelines for Lost Decade #2" »

Posted by dblwyo at 05:46 PM | Permalink | Comments (0)