bizzXceleration: Performance, Value and Profit

My what a funny market - clearly the worst is over...again. All the writeoffs have been taken, banks are repairing their balance sheets and the "recession" isn't really here. Or so one would believe from the last few days of market action. The sudden uptick - which we plan on discussing in more depth this coming weekend - has been driven by surges in Finance and Consumer Discretionary, including huge jumps in GM and F. Of all people. Just to wrap a little perspective on it check out the graphic which is a 10-day snapshot of the SP500 major sectors. Who's read and who's green - all the folks who've done well are now reddish to glaring crimson while the converse is true of the ones who've been taking it in the kister. We won't wax on too much about whether or not this all makes sense per se.

But you likely recognize the Buffett quote about finding out who's been swimming naked when things get tough and the rising tide starts receding. As you no doubt know by now we think the tide is really just starting to ebb and there are going to be a lot of stranded players. Many of whom have been swimming more naked than they've admitted and, sadly, than they may know themselves. Interestingly despite the "good" earnings news from financials and others in fact this is more a case of severely lowered expectations being satisfied. Not the delivery of good news. From ORCL's poor outlook a couple of weeks ago to Apple and MSFT's not-so-good outlook we come to today's news where, for example, Costco's poor but honest outlook has tanked the stock. Now we ask you if one of the better run retailers in the world is getting nailed by rising costs, falling demand and tighter spending who else is going to catch it ? The markets have shrugged off AmEx's warnings and increased negative outlook as well but it's even more of a harbinger. Which leads us to the topic and readings we do want to get to.

Finding a Wet Suit

 Just as refresher we've found that five major factors determine whether one is naked, wearing a swimsuit or is even better equipped. IOHO there are two things you should be thinking about right now. First, while this bounce may run for a while it's certainly been wishy-washy and seems to be largely on the back of the demand drops for oil. Not a positive sign. That would say this is more an opportunity to sell into the market rise and build up some dry powder. Second you ought to be looking for those companies that will be worthy of that powder...at some point in the future. And they may already be telling you who they are.

Virtuous Circle of Enterprise Performance

After the break you'll find another readings excerpt collection that walks nicely thru the five factors and then some. The immediately adjacent graphic is another way of thinking about things btw....no one factor by itself will make sure a company has a deluxe wetsuit. It takes all of them working together in a synergistic feedback loop. But those that've got it are going to really hammer those that don't. The readings include some good and bad stories... including those companies still squandering scarce capital on buybacks. In a time which we believe couldn't be worse, except for what's to come. A perfect contrast of strategies is the unraveling of Cold Stone Creamery's not-so-sound business model as compared to some very strong outfits that are using this downturn to turn up the pressure on their competitors - the usual suspects, e.g. HPQ, LUV, FDX. All of whom are companies with operational capabilities as excellent as it gets in their respective industries. Yet who's example is sadly neglected as the stories on Manufacturing and Logistics neglect illustrate. Just as a sidebar we've been talking about the need for manufacturing excellence since the Japanese started kicking our butts almost three decades ago - after having learned the howto from an American. Makes you wonder.

Largely it's a question of leadership, management and discipline. JNJ's discussion of how they run themselves is superb and contrasts with the bad stories from Dow and American Axle. It's also a story of good, strategic human resource development - in other words of making work worth an extra effort. And finally it's a story of tying it all together with the right kinds of measurements and controls - an integrated management system. Highlighted here by another discussion of the Moneyball approach to doing it right.

These are the folks you want to be hunting down - the experts at BizzBall ! Who aren't swimming naked but are going to stake out those who have on the beech for the crabs. 

Continue reading "Bad Times, Good Companies: Who's Swimming Naked" »

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

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

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

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

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

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

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

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

Or, instead of Redux, "wow, deja vu' all over again". All of a sudden the news from the world's economies are uniformly bad with, for example, both the BIS and IMF using the phrase "tipping point". The chart set pretty well captures and represents the situation with the top line being China and India, both of whom are facing slowing worldwide demand for their exports, rapidly rising inflation at home and their own unique domestic problems. On the other hand the next pair, Brazil and Russia, tell a different story that captures the whole. Both are suppliers of commodity goods that the rest of the world still wants, though Russia in particular is facing serious domestic problems. One ought to be asking then how long Brazil in particlar will hold up given slowdowns in al its' principle customers but that's not a question being widely asked yet. The final pair is Europe and Japan - and we shouldn't forget that they plus the US are still the dominant players & constituents of the world economy. In other words as both slow there will be a sigfniciant impact on worldwide trade flows which is already showing up in US exports and will likely impact the BRICs as well. Not to mention, ultimately, the Tech Industries.

Two of the excerpts that make particularly relevant points are Goldman-Sachs mea culpa regarding the de-coupling thesis, which they've now completely reversed with the customary "Oops, our bad", and the BIS (Bank for Int'l Settelemetns) suggesting that a severed slowdown may be in the offing as the impact of rising food, energy and commodity prices triggers a major worldwide price decline - deflation in other words. Consider their normal reluctance to speak out that's a little scary. In fact various sources are indicating that instead of de-coupling Europe, for example, is looking at a more serious recession outlook than is the US !

Demand Destruction and Oil

A key cause of all this pain was the sudden jump in oil prices but economics being what it is the reverse is now beginning to happen - at least in the short-run. Dropping demand is leading to less short-term pricing pressure on oil and as a result the speculative premium is beginning to come out along with "normal" price declines. Some of the talking heads are beginning to babble about $120/barrel oil or even double-digit prices. The Point and Figure chart shown here finds a recent pricing reversal and a bear price objective of $112 which is consistent with that.

The catch is that intermediate-term oil demand will still be riding right along the margin of world oil supply. Not least because of problems we've already discussed several times. To wit the exhaustion of old fields, the lack of investment in new exploration and production and the lack of investment in those old fields means that for the next several years prices are still going to remain elevated. As David Leonhardt pointed out (and we excerpted in the last Int'l news) the industry experienced decling prices thru the '90s which led to what now looks like severe under-investment. The catch of course is that when S>>D and prices look to be $20/barrel it was an economically rational choice. And may be again. New (Old ?) Frontiers in the Oil Markets: the Return of Geo-Politics

The final two excerpts kinda bookend the discussion with a review of some recent McKinsey work on the liklihood of continued growth in the developing world along with the rapidly esclation of protectionism as all the world's constituencies look for someone else to blame for their troubles. Not good. 

Continue reading "Economy (Int'l): Re-coupling Redux and Deterioration Accelerations" »

Posted by dblwyo at 11:22 AM | Permalink | Comments (0)

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

GDP Components and Outlook

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

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

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

Recognize the old saying ? "Red sky at night, sailors delight. Red sky in the morning, sailor take warning" ? It's actually grounded in science....as well as centuries of experience. Where the winds tended to be Easterlies a red morning sky meant the sun was being reflected off heavy cloud cover, i.e. storms. We seem to be in the process of alternately re-discovering red skies in the Finance Industry and panicing and then thinking the storms have missed us.

The next step after the Economy post was going to be looking at the Int'l situation but we're coming back and jumping on the Finance Industry instead because of the weekend bailout of Fannie and Freddie and the FDIC taking control of a failed CA thrift, Indy-Mac. BtW - sorry for the brief hiatus. Another warning sign. Every time a window opened up in my schedule to post my ISP/Hosting provider was having problems. Guess who - Yahung, that's who. Another red sky we'll pick up later. The chart's a pretty good red sky warning - in fact we'd view it more as a collection of major storm clouds. The real thing to ponder here is not how bad the storms are, or are going to get, but why everyone was/is surprised. There are a couple of really key lessons to think about IOHO. Really...really think about. First off the sky's been read for a long-time. Jim Jubak had a major column on regional bank problems in Jan this year, CalculatedRisk has been warning about commercial real estate problems and regionals for a couple of years now. And of course we've been beating the drum for so long we ended up with a whole dedicated archive. Another thing at a deeper level in the surprise is the follow-on question - if everybody's this surprised what else aren't they thinking about it ? What's not priced into the sector and the markets ? Yet a third thing at yet a deeper level is the problem with business models - when we say we think the business models are broken that means many of the major financial institutions are going to go thru a lot of pain and will never come back as they were in terms of growth and profitability. Let's consider some graphics we've discussed before.

 Bad Loan Tsunamis

 We won't dig thru this in detail but do want to remind everybody of this on-going set of bad loan tsunamis that are still to come. First off we're a long way from done with the Housing downturn - that means more foreclosures, more losses and writeoffs and tighter credit. Even if the economy doesn't get any worse than it is - not likely btw - this anemic environment still means that a lot of auto, credit card and other consumer loans will deteriorate. And ditto on the business side. How this will work out with the screwy debt instruments, excess leverage, etc. we've gone over several places (Markets and Financials:4 Year Crunch, Broken BizzMods) but it ain't gonna be pretty by any means.

Business Model Breakage

Now let's stop and think about the basic banking business model a little. A bank accepts deposits so people won't have to carry around cash thereby lubricating the wheels of commerce and consumption. Further it then turns around and loans out those deposits to folks who plan on spending more then they've got handy - serving as the intermediary between folks with spare funds and those with shortages. The former get paid interest and the latter pay it and the bank's revenue stream comes from the difference. Now the real magic happens when leverage enters the picture because the banks assets (the loans) can be some larger multiple of its' liabilities (the deposits). All it needs to have on hand is enough ready liquidity to meet the normal demands for cash. Over literally centuries the rule-of-thumb has developed that a bank needs to have around 6-8% of it's "assets" on hand - this its' capital requirement. Unless there's a sudden surge in demand, like when there's a run. But now you can see where multiplying your assets by 10X or so generates a much larger revenue stream. The problems come when folks loose confidence in getting their money back and they're made worse when that leverage is 20X or 30X or 70X - enormously worse. And we're not making those numbers up the Investment Banks were running at 30X leverage and by the time all the shenanigans with off-balance sheeting financings, synthetic instruments, etc. were in place they represented big X's ! Unfortunately when the bigs drop in value by a few percentage points it chews up much bigger chunks of capital. And there you have the reverse of the virtuous leverage cycle used to generate profits. The vicious cycle of capital writedowns leading to insolvency and bankruptcy. Now here's the business model problem for the industry - the more profitable segments weren't based so much on innovations and value-add for customers. They were based on leverage. Which means all the previously high-profit and risky strategies are going to get squeezed bad. It put BSC and Indy-Mac out of business, threatens Lehman and has caused $Bs in writedowns worldwide. With more to come for the known and acknowledged problems.

What we're suggesting with our little graphic on future tsunamis that a whole slew of other problems is hiding in the wordwork and coming out like maggots in a carcass. Which sectors are carcasses, candidates or survivors is, IOHO and inexpert opinion, suggested by the color coding. After the break you'll find our most recent collection of readings backup up these arguments. Bon Appetit'.

Continue reading "Red Sky Mornings, Investor Take Warning: More Finance Industry" »

Posted by dblwyo at 02:59 PM | Permalink | Comments (0)

We usually start with the economic news, proceed if there's a sufficiency to the international economy and then use it to  set up the discussion of markets. The prior post (So, What Kind of a Market Is This Anyway ?) reversed that because there was a punditry groundswell along the lines we last heard in March we needed to be "noted". And because we had so much fun with all the gyrations in the markets as things like the imminent bankruptcies of Fannie, Freddy and Lehman Bros. caused a bit of consternation. One of the things that got lost sight of big time was the real state of the economy - back to the "where's my recession dude ?" meme that's been making the talking heads rounds. While the major headline news was lite this last week and the biggest prior was -62K payroll jobs everybody was also excited that Retail Sales was up 1% ! Whoopee indeed...especially with the same anticipated again this coming week. Today's Bloomberg headline probably captures the sense of things: U.S. Retail Sales in June Probably Rose for a Fourth Month on Tax Rebates.

So that gives us an excuse to re-visit a couple of prior charts and remind everyone of the actual facts on the ground. After the break there's another bunch of serious folks excerpts that are also in the reminder camp as well. Dave Leonhardt of the NYT puts it very....very nicely in his recent survey of a few of the major problems when he distinguishes between acute (pain soon to be over) and chronic (pain going to go on for a long....g time) fundamentals. NONE of which is reflected in the current thinking of the analysts, the talking heads, and, sadly, market valuations and outlooks. YET ! Now about those retail sales let's re-vist this simple little chart.

Real Retail Sales

 Now by our standards this is a simple little chart (Seth Godin would still be upset with me but he's not likely to find any our our graphics that suite him :) ). Just for the record you won't actually be able to find a lot of this anywhere as we had to hand-construct some of the data. Retail and Real Retail Sales are standard of course as is Gasoline sales - but we had to do the inflation-adjusting and then back it out of Real Sales. So bear with us. Once you do that it's a very different story - real sales has been dropping for months but x-Gas it's a pronounced drop. And in spite of the rebate checks there wasn't much of an uptick. Instead Gas has absorbed everybody's budget - but notice it's also been slipping !

Money Base and Spreads

One of the other early warning indicators we like to look at is the real adjusted monetary base. Now there's been some talk that the money supply has been going up - though recently it's shifted the other way and been shrinking. But for a long time now what we've actually seen is that the YoY% change in the inflation-adjusted monetary base has been shrinking. That means that banks are really tightening down the lending screws and withdrawing the lubricant that keeps the economy going 'round. No big surprises given the state of the multiple credit markets, the write-downs and the on-coming tsunamis of other bad credits about to hit and start a new wave. NONETHELESS not good news either. In fact it's been negative since last August - gee wonder why ? Despite some short-term improvement that's reversed. Well guess what - yield spreads on 3Mos still indicate that folks are scared. And meanwhile the yield curve (10YR-FF) steepened as inflationary fears drove up longer-term rates. Recently those have come down quite a bit as inflation fears have dampened a bit. But more importantly the recognition of the likely extended slowmotion slowdown is getting more widespread in the credit markets - if not in the equities markets or among the talking heads.

We recommend you at least skim thru the readings and use these as background information to set the context. You might want to also revist the last two High-Frequency Indicator discussions for a fuller discussion of the data.

HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption

Continue reading "And What Kind of Economy ? Reality Reminders" »

Posted by dblwyo at 03:09 PM | Permalink | Comments (0)

A question that all of a sudden is beginning to re-occupy a lot of folks attention. Rather humorously in our humble opinion. Up until the last couple of days though what you were hearing was the revival of the worst is over chatter, and from such serious and respected people like Byron Wien. In a sense he and other have a point but also illustrate some of our main themes. Take a look at this busy little chart which compares the SPX to the NDX daily back to Dec and weekly back three years. All the charts also show the VIX volatility indicator, the RSI relative strength indicator and the MA Convergence-Divergence (MACD) momentum indicator. The Technical argument is that the RSI for the SPX was getting into over-sold territory which would argue a short-term bounce was being set up. While technically valid it also represents, IOHO again, continued dysfunctional delusions about the state, nature and timing of the economy. Barry Ritholz over at BigPicture has a great diagnosis which boils down to sell into any rally that appears we wholeheartedly agree with. Unlike our suggestions in March that one was facing a bear market rally to trade watch this one. More interesting on the longer-term sub-charts notice that the SPX is now back to where it was circa mid-'06 but the NDX has held on to a lot of it's fluffup run. Just to repeat - if the economy is slowing so will capex and tech spending...eventually. And guess what - all those techcos getting more than 50% of their revenue abroad - well if you've been reading along the rest-of-the-world is facing a slowdown, very serious inflation beyond ours and the threat of major socio-political disruptions here and there. Hmm....not promising we'd think.

You might consider this second little chart, kaleidoscopic as it is as interesting map to what's been going on.  It's a set of "Market Carpets" of the SP500 sector indexes that can be read clockwise starting in the upper left and working around. The UL shows five days in early May, the UR shows 20 days from May to June, the LR 20 days from June to now and the LL the last five days. At the top of the rally everything was largely hunky-dory in every sector, then things started deteriorating in Finance and Con Discretionary again (wow deja vu') and in the last 20 days almost everybody hoped into the hellbound handbasket together. It might pay you to check back in the GDP components dissections for some strong indicators as to whether or not green-tinged sectors are likely to hold up or not :).

After the break are an extended set of readings excerpts on the Market, including the occasional one predicting a market resurgence we recommend for compare & contrast and to indulge our terrible sense of humor. The more serious readings might be summarized as WTF ! The opening excerpt starts the game off by looking back at previous long-running bear markets since everybody's just noticed that inflation-adjusted returns are negative for almost the last ten years. There's even a meme emerging that the whole '03-'07 runup was merely an abberational interlude in a longer secular bear. For which topic we really recommend the two prior posts now that everybody's talking about the subject (Bears of the Apocalypse I: Long-term Market Performance Perspectives,Bears of the Apocalypse II (LT Econ): Who's Fault is this Mess ?).

Bon Appetit' ! 

Continue reading "So, What Kind of a Market Is This Anyway ?" »

Posted by dblwyo at 04:27 PM | Permalink | Comments (0)